PCU 2018 Mercantile Law Reviewer

Subject Head: Jan Niño R.
Sison
Members: Jillian Fatima Asdala
Jorel Flauta
Rosario Audris Gabunilas
Jonah Li
Ralph Rienz Mayo
Juan Miguel Mercader
Joanna Andrea Yasay
with contributions from:
Janice Cabalag
Benst Marie Manalo
ACADS Head: Malyn Gonzales

Subject Adviser: Atty. Kayzer Saba
ACADS Advisers: Atty. Ismael Sarangaya, Jr. and Atty. Jude Itutud
PCU Bar Operations 2018
PRE–WEEK NOTES (MERCANTILE LAW)
LETTERS OF CREDIT and delivers the documents of title and draft
to the issuing bank to recover payment.
Laws Governing Letters of Credit (LC)
What are the Basic Principles of Letter of
It is the Uniform Customs and Practice (UCP) for Credit?
documentary Credits for International Chamber of a. DOCTRINE OF INDEPENDENCE
Commerce governs the Letters of credit It is important to emphasize in this connection
(Metropolitan Waterworks vs. Daway, G.R. No. that few things are more clearly settled in law
160723, July 21, 2004). than that the three contracts which make up
the letter of credit arrangement are to be
Articles 567 to 572 of the Code of Commerce on maintained in a state of perpetual
Letters of Credit are obsolete. However, in the separation. The undertaking of the bank to
absence of any provision in the Code of pay, accept and pay drafts or negotiate and/or
Commerce, commercial transaction shall be fulfil any obligation under the Credit is not
governed by the usages and customs generally subject to claims or defenses by the Applicant
observed (Sec. 2, Code of Commerce). resulting from his relationship with the issuing
bank or the beneficiary. In the same manner,
What is a letter of credit? the beneficiary can, in no case, avail himself of
A letter of credit is a financial device the contractual relationships existing between
developed by merchants as a convenient and the banks or between the applicant and the
relatively safe mode of dealing with sales of goods issuing bank.(Keng Hua Paper Products v. CA,
to satisfy the seemingly irreconcilable interests of ibid.)
the seller, who refuses to part with his goods
before he is paid, and a buyer, who wants to b. FRAUD EXCEPTION PRINCIPLE
have control of the goods before paying, thereby
serving to reduce the risk of non-payment of the Fraud is an exception to the independence
purchase price under the contract for the sale of principle. For instance, if the beneficiary
goods. (Bank of America v. CA, G.R. No. 105395, fraudulently presents to the issuing or
December 10, 1993). confirming bank documents that contain
material facts that, to his knowledge, are untrue,
Who are parties to a Letter of Credit? then payment under the letter of credit may be
There are at least three (3) parties in a Letter of prevented through court injunction. (Transfield
Credit Transaction: Philippines, Inc. v. Luzon Hydro Corporation,
a. The BUYER, who procured the letter of 443 SCRA 307 (2004), Bar2010)
credit and obliges himself to reimburse the
issuing bank upon receipt of the documents of c. DOCTRINE OF STRICT COMPLIANCE
title, It is a settled rule in commercial transactions
b. The bank issuing the letter of credit known involving letters of credit that the documents
as “Issuing Bank” which undertakes to pay tendered must strictly conform to the terms of
the seller upon receipt of the draft and proper the letter of credit. The tender of documents by
documents of titles and to surrender the the beneficiary (seller) must include all
documents to the buyer upon reimbursement; documents required by the letter. A
and correspondent bank which departs from what
c. The Seller, who in compliance with the has been stipulated under the letter of credit, as
contract of sale ships the goods to the buyer when it accepts a faulty tender, acts on its own
risks and it may not thereafter be able to
PHILIPPINE CHRISTIAN UNIVERSITY COLLEGE OF LAW [Page 2 | 76]

CONFIDENTIALITY NOTICE: The contents of this document and any attachments herewith are intended solely for the PCU College of Law Alumni who are taking the bar
Examinations this November 2018 and may contain confidential and/or privileged information and may be legally protected from disclosure.
recover from the buyer or the issuing bank, as case of non-sale, and to the enforcement of all
the case may be, the money thus paid to the other rights conferred on him in the trust receipt
beneficiary. These letters of credit are to be provided such are not contrary to the provisions of
strictly complied with which documents, and this Decree (Section 7, PD115).
shipping documents must be followed as stated
in the letter. There is no discretion in the bank Who bears the risk in a Trust Receipt
or trust company to waive any requirements. transaction?
The tender documents must not only be The risk of loss shall be borne by the entrustee.
complete but they must on their faces be in Loss of goods, documents or instruments which are
compliance with the terms of the credit. the subject of a trust receipt, pending their
Documents that are not stipulated as tender disposition, irrespective of whether or not it was
documents will not be examined (Feati Bank & due to the fault or negligence of the entrustee, shall
Trust Co. v. CA, G.R. No. 94209, April 30, not extinguish his obligation to the entruster for the
1991). value thereof. (Section 10, PD115).
TRUST RECEIPTS LAW What are the remedies available of the

Entruster?
What is a trust receipt? a. Cancellation of the trust;
b. Taking possession of the goods, documents
A Trust Receipt is a written or printed document or instruments subject of the trust or of the
signed by the entrustee in favor of the entrustor proceeds realized therefrom at any time;
containing terms and conditions substantially c. While in possession of the goods,
complying with the provisions of the Trust Receipts documents or instruments may, on or after
law, whereby the bank as entruster releases the default, give notice to the entrustee of the
goods to the possession of the entrustee but intention to sell, and may, not less than five
retains ownership thereof while the entrustee may days after serving or sending of such notice,
sell the goods and apply the proceeds for the full sell the goods, documents or instruments at
payment of his liability to the bank. (Sec. 3, PD115) public or private sale, and the entruster
may, at a public sale, become a purchaser.
LOAN / SECURITY FEATURE
In a trust receipt transaction, the goods are Under Section 13 of Trust Receipt Law, if the
released by the entruster (who owns or holds violation or offense is committed by a corporation,
absolute title or security interests over the said partnership or association or other juridical entities,
goods) to the entrustee on the latter‘s execution the penalty provided for the shall be imposed upon
and delivery to the former of a trust receipt. The the directors, officers, employees or other official or
trust receipt evidences the absolute title or security persons thereon responsible for the offense,
interest of the entruster over the goods. without prejudice to the civil liabilities arising from
the criminal offense.
OWNERSHIP OF THE GOODS, DOCUMENTS
AND INSTRUMENTS under a TRUST RECEIPT Failure of a person to turn over the proceeds of the
The entruster shall be entitled to the proceeds sale of the goods covered by a trust receipt or to
from the sale of the goods, documents or return said goods, if not sold, is a public nuisance
instruments released under a trust receipt to the to be abated by the imposition of penal sanctions.
entrustee to the extent of the amount owing to the
entruster or as appears in the trust receipt, or to the The non-payment of the amount covered by the
return of the goods, documents or instruments in trust receipts or the non-return of the goods

covered by the trust receipts, if not sold or What may be included as warehouseman's lien?
otherwise not disposed of, violate the entrustee‘s (Sec. 27, WRL)
obligation to pay the amount or to return the goods a. goods deposited or on the proceeds thereof
to the entruster. Such failure is a crime, without in his hands, for all lawful charges for
need of proving intent to fraud. storage and preservation of the goods;
b. all lawful claims for money advanced,
The law punishes dishonesty and abuse of c. interest, insurance, transportation, labor,
confidence in the handling of money or goods to weighing, coopering and other charges and
the prejudice of the entruster regardless of whether expenses in relation to such goods,
the latter is the true owner or not. d. all reasonable charges and expenses for
notice, and advertisements of sale, and for
A mere failure to deliver the proceeds of the sale of sale of the goods where default had been
goods, if not sold, constitutes a criminal offense made in satisfying the warehouseman's lien.
that causes prejudice, not only to another, but more
to the public interest. (Ching vs Secretary of Upon which may the warehouseman’s lien be
Justice, G.R. No. 164317, February 6, 2006) enforced? (Sec. 28, WRL)
a. Against all goods, whenever deposited,
Warehouse Receipts Law belonging to the person who is liable as
Essential Terms of Warehouse Receipts debtor for the claims in regard to which the
a. The location of the warehouse where the lien is asserted, and,
goods are stored, b. Against all goods belonging to others which
b. The date of the issue of the receipt, have been deposited at any time by the
c. The consecutive number of the receipt, person who is liable as debtor for the claims
d. A statement whether the goods received in regard to which the lien is asserted if
will be delivered to the bearer, to a specified such person had been so entrusted with the
person or to a specified person or his order, possession of goods that a pledge of the
e. The rate of storage charges, same by him at the time of the deposit to
f. A description of the goods or of the one who took the goods in good faith for
packages containing them, value would have been valid.
g. The signature of the warehouseman which
may be made by his authorized agent, NEGOTIABLE INSTRUMENTS LAW
h. If the receipt is issued for goods of which
the warehouseman is owner, either solely or What are the requisites of negotiability?
jointly or in common with others, the fact of a. It must be in WRITING;
such ownership, and, b. It must be SIGNED BY MAKER OR DRAWER;
i. A statement of the amount of advances c. It must contain an UNCONDITIONAL
made and of liabilities incurred for which the PROMISE OR ORDER TO PAY A SUM
warehouseman claims a lien. If the precise CERTAIN IN MONEY;
amount of such advances made or of such d. IT must be PAYABLE TO ORDER OR
liabilities incurred is, at the time of the issue BEARER; and
of, unknown to the warehouseman or to his e. Where it is a bill of exchange, drawee must be
agent who issues it, a statement of the fact NAMED or otherwise indicated therein with
that advances have been made or liabilities reasonable certainty (Sec. 1, NIL).
incurred and the purpose thereof is
sufficient. (Sec. 2, WRL)

Guiding Principle: Instrument need not follow the
exact language of the NIL, but terms which clearly As Against a Holder in Due Course: instrument is
indicate an intention to conform to the requirements always valid and enforceable to the full extent. The
of the law are sufficient (Sec. 10). defense of filling-up contrary to authorization is a
mere personal or equitable defense.
Is there a promissory note wherein the maker
promises to pay “as soon as his means permit As Against a Holder NOT in Due Course:
him to do so” negotiable? To the Maker or Drawer:
Three (3) schools of thought:
No. The phrase ‗as soon as his means permit him 1. Invalid on its entirety;
to do so‖ renders the promise conditional, which 2. VALID TO EXTENT OF AMOUNT
in effect, does not satisfy the requisite on AUTHORIZED;
unconditionality. 3. Valid in whole as against parties who
became such AFTER COMPLETION of
What are the kinds of negotiable instruments? instrument.
a. Promissory Note (Sec. 184)
b. Bill of Exchange (Sec. 126) NOTE: In all the above cases, there is an intention
c. Check (Sec. 185) to issue a negotiable instrument. But if a signature
on a paper is given only for autograph
What is insertion of date and its effects? purposes and the same is converted into a
 As to a Subsequent Holder in Due Course- negotiable instrument, this will amount to
The insertion of the wrong date does not forgery, constituting thus a valid defense even
avoid the instrument in the hands of a against a holder in due course. Whether or not
subsequent holder in due course, but as to the instrument is filled-up in accordance with the
him, the date so inserted is to be regarded authority given, remember that endorsers are liable
as the true date. (Sec. 13, NIL) on their warranties.
 As to the person who made such insertion-
Insertion of the wrong date avoid instrument What is an incomplete and undelivered
as to the person making such insertion Instrument?
(Bank of Houston v. Day, 145 Mo. Appl. Where an incomplete instrument has not been
410, 122 SW 756). delivered, it will not, if completed and negotiated,
without authority, be a valid contract in the hands of
What is the governing section regarding the any holder, as against any person whose signature
completion of blanks under the Negotiable was placed thereon before delivery (Sec. 15).
Instruments Law?
With regards to parties whose signature appeared
Where the instrument is lacking in any material prior to delivery, the non-delivery of an incomplete
particular, the person in possession thereof has instrument is a valid defense, not only between the
prima facie authority to complete it by filling-up the original parties but also against a holder in due
blanks therein (ex. Date, payee, amount) (Sec. 14). course. It is therefore a real defense, available
even against a holder in due course.
The signature on a blank paper delivered by a
person making the signature in order that paper With regards to parties whose signature appeared
may be converted into a negotiable instrument after delivery, the instrument is valid and
operates as prima facie authority to fill it up as such enforceable.
for any amount.

The maker or drawer may be estopped from return the checks. After being ignored, Sick
claiming the above defense if there should be Toys filed a criminal complaint for theft, which
negligence on his part. was dismissed by on the ground that the non-
payment of a debt cannot give rise to a criminal
What is a complete but undelivered instrument? case. The ruling also provided that a creditor-
Every contract on a negotiable instrument is debtor relationship existed between the two. On
incomplete and revocable until delivery of the appeal, it was found that the checks issued
instrument for the purpose of giving effect thereto. were merely as a security of his purchases and
not intended to be encashed. It concluded that
As between immediate parties, and as regards a the petitioner did not acquire ownership of the
remote party other than a holder in due course, the checks. Sick Toys argues that the checks’
delivery in order to be effectual, must be made ownership was transferred to it because they
either by or under the authority of the party making, were issued in payment of the purchases and
drawing, accepting or indorsing, as the case may not merely for security. Is the contention of Sick
be. Toys tenable?
Delivery may be shown to have been conditional, or The contention is not tenable. Mere delivery of the
for a special purpose only, and not for the purpose check did not make the creditor the owner thereof.
of transferring the property (title) in the instrument. The check was not given as payment, there being
no intent to give effect to the instrument.
Where the instrument is in the hands of a holder in
due course, a valid delivery thereof by all parties ―Delivery‖ as a term used in Sec. 12 means that the
prior to him so as to make them liable to him is party delivering did so for the purpose of giving
conclusively presumed. effect thereto. Otherwise, it cannot be said that
there has been delivery of the negotiable
Where the instrument is no longer in possession of instrument. Once there is delivery, the person to
the party whose signature appears thereon, a valid whom the instrument is delivered gets the title to
and intentional delivery by him is presumed until the instrument completely and irrevocably. The
the contrary is proved. (Sec. 16, NIL) purpose of the delivery will determine if ownership
is transferred:
Pulong was a dealer of marital aid devices and
purchases such items on credit. As a means to 1. If the purpose is the give effect to the
ensure payment, and as a business practice, instrument, title or ownership transfers upon
Sick Toys required Pulong to issue post-dated delivery.
checks equivalent to the value of the products 2. If the intent to give effect is missing,
purchased on credit. The checks are then ownership is retained by the person who
returned after full payment of the value of the delivered.
transaction. Under this arrangement, Pulong
purchased products to which he issued two The check was only meant to cover the
checks to cover the transaction. A month later, transactions in the meantime, and Puzon was to
Pulong visited the sales office of Sick Toys to pay for the transaction by some other means other
reconcile his account. Pulong requested to see than the check (San Miguel Corporation v.
the checks (attached to a sheet of paper), which Bartolome Puzon, Jr., G.R. No. 167567, September
was granted, and thereupon immediately left 22, 2010).
the office, bringing the checks with him. Sick
Toys then sent a demand letter to Pulong to

What is the significance of a signature in a
negotiable instrument? a. Contract of endorsement of an infant is not
void, and that his endorsee has the right to
General Rule: No person is liable upon an enforce payment from all parties prior to the
instrument whose signature does not appear infant endorser; the incapacity of the infant
thereon (Sec. 18). cannot be availed of by prior parties.
However, it does not destroy the right of
Exceptions: such an infant endorser to disaffirm under
a. Section 23 – A person whose signature was rules of infancy (Murray v. Thompson, LRA
forged but is precluded from setting-up 1917B 1172, 188 SW 578).
forgery as a defense.
b. Section 134 – Acceptance of a bill of b. In both instances, endorsements are
exchange on a separate piece of paper. voidable – valid until annulled – so that
c. Section 135 – Unconditional promise in good title passed. Parties prior to the
advance to accept a bill of exchange before corporation or minor cannot escape liability
it is drawn; the promise must be in writing. by setting up as defense the incapacity of
one of the endorsers.
Define: Signing in Trade Name
One who signs using a trade or assumed name will What is Forgery and its effects?
be liable as if he had signed in his own name (Sec.
18). General Rule: When signature is forged or made
without the authority of the person whose signature
Define: Signature of Agent it purports to be, renders it wholly inoperative
1. Signature of any party may be made by a (Sec. 23).
duly authorized agent. No special form of
agency is required (Sec. 19). Effects of Forgery: It is inoperative, hence there is
no right to:
2. A person who signs and indicates in the a. Retain the instrument;
instrument that he does so in a b. Give discharge therefore; or
representative capacity, is not liable if duly c. Enforce payment thereof against any party
authorized (Sec. 20). thereto can be acquired through or under
a. By procuration ex. ―Juan de la Cruz, per such signature.
procuration: Pedro de la Cruz‖
b. B by X Exceptions: Unless the party against whom it is
c. By X sought to enforce such right is precluded from
d. B pp X setting up the forgery or want of authority, namely:
a. Contrary to Warranty – Those who warrant
3. But mere use of words describing him as an or admit the genuineness of the signature in
agent, without disclosing his principal, does question (i.e., endorsers, persons
not exempt the agent from personal liability negotiating by delivery, and acceptors of
(Sec. 20). bills of exchange);
b. Guilty of Negligence – Those who by their
Define: Indorsement by Minor or Corporation acts, silence or negligence are estopped
It passes the property therein, notwithstanding that from setting up the defense of forgery
from want of capacity, the corporation or infant may (estoppel);
incur no liability thereon. c. Forged Signature Unnecessary – When

forged signature is unnecessary to the title drawer.
of the holder as when the endorsement is
forged on an instrument payable to bearer. Without Acceptance of Drawee – Drawee bears
the loss unless the forgery or alteration is
Forgery in General – A document formally attributable to the fault of negligence of the drawer
presented is presumed to be genuine until it is himself, the remedy of the drawee-bank that
proved to be fraudulent. negligently clears a forged and/or altered check for
payment is against the party responsible for the
Forgery of an Indorsement forgery or alteration (BPI Family Bank vs.
Payable to Order – Party whose signature is forged Buenaventura, 471 SCRA 431, 2005).
and parties prior to him, including the maker,
cannot be held liable by any holder. What is the presumption about consideration
and its importance?
Payable to Bearer Originally – Party whose
signature was forged and parties prior to and Presumption: Every negotiable instrument is
subsequent to him, including the maker, may be deemed prima facie to have been issued for
held liable by a holder in due course, but not one valuable consideration; and every person whose
who is not a holder in due course, provided that the signature appears thereon to have become a party
note was mechanically complete before the forgery thereto for value (Sec. 24, NIL; Lee vs. Court of
Appeals, 375 SCRA 579; 2002).
Forgery in Promissory Notes a. The presumption is rebuttable and he who
Forgery of Maker‘s Signature – Maker cannot be posits the contrary position is obliged to
held liable by any holder, even a holder in due present convincing evidence to overthrow
course. the presumption.
b. Any consideration sufficient to support a
Forgery of Indorsement – Note Payable to Order – simple contract is ―value.‖
Party whose indorsement is forged and parties prior c. An antecedent or pre-existing debt
to him, including the maker, cannot be held liable constitute value, and is deemed such
by the holder, whether he be in due course or not. whether the instrument is payable on
Forged signature which is inoperative is the only demand or at a future time. (Sec. 25)
means by which title is acquired. d. Absence of consideration includes
situations when the consideration is
Note Payable to Bearer – Party whose indorsement contrary to law, morals, or public policy.
is forged and parties prior to him including maker e. Section 28 provides for cases where there
may be held liable by holder in due course but not is lack of or no consideration at all. Such
by one who is not a holder in due course, provided want of consideration is a defense against
the note was mechanically complete before the immediate parties but not against a holder
forgery. in due course (i.e., personal defense).
Forgery in Bills of Exchange / Checks Importance of Consideration – The general rule

is that each of the four (4) fundamental contracts of
Forgery of Drawer’s Signature: making, drawing, accepting, and indorsing, must be
With Acceptance of Drawee – Drawee by supported by a valuable consideration. (Sec. 24 to
accepting cannot set up the defense of forgery 28).
because when the drawee accepted the instrument,
he admitted the genuineness of the signature of the Except : Accommodation Party

Negotiation Assignment
A mode of transfer Negotiation and Assignment
negotiable non-negotiable
instrument instrument What are the modes of negotiation?
transferee becomes assignee is merely Under the NIL, negotiation can be done legally as
the holder of the placed in the position follows:
instrument. of assignor
The holder may acquires the Instruments Payable “to Order” and “to
avail of defenses, instrument subject to Bearer”:
real or personal, all the defenses that a. Instrument Payable to Order: By
depending on might have been set indorsement and delivery.
whether he is a up against the original b. Instrument Payable to Bearer: By delivery
holder in due course payee. alone.
or not
What are the kinds of indorsements?
Who is an accommodation party and what is his
liability? a. Special Indorsement (Sec. 34, NIL)
A person who has signed the instrument as a b. Blank Indorsement (Sec. 34, NIL)
maker, drawer, acceptor or indorser without c. Absolute Indorsement
receiving value therefore and for the purpose of d. Conditional Indorsement (Sec. 39, NIL)
lending his name to some other person (Sec. 29). e. Restrictive Indorsement (Sec. 36, NIL)
f. Qualified (Sec. 38, NIL)
Liability of Accommodation Party: Such a person g. Joint Indorsement (Sec. 41, NIL)
is liable on the instrument to a holder for value, h. Irregular Indorsement (Sec. 64, NIL)
notwithstanding such holder at the time of taking
the instrument knew him to be only an Who is a Holder in Due Course?
accommodation party.
Under Section 52, a holder in due course is a
An accommodation party, although like a surety is holder who has taken the instrument under the
more than a surety since he is primarily and following conditions:
unconditionally liable on the instrument and cannot
excuse itself as such by the fact that the creditor a. That it is complete and regular upon its
extended the time for payment without its face.
knowledge or consent. (Prudencio vs. Court of b. He became holder before it was overdue,
Appeals, 143 SCRA 7, 1966). and without notice that it had been
previously dishonored, if such was the fact.
What is negotiation? c. He took it in good faith and for value.
It is the transfer of a negotiable instrument from one d. At the time it was negotiated to him he had
person to another in such a manner as to constitute no notice of any infirmity in the instrument or
the transferee the holder of the instrument (Sec. defect in the title of the person negotiating it.
30).
All four conditions enumerated in Section 52 must
Who is a holder? concur before a holder can be considered as a
A holder is the payee or endorsee of a bill or note holder in due course (Atlantico vs. Auditor General,
who is in possession of it or the bearer thereof. 81 SCRA 335, 1978).
(Sec. 191).

Presumption: Every holder is generally deemed Consequently, the highest degree of diligence is
prima facie to be a holder in due course. He who expected, and high standards of integrity and
claims otherwise would have the burden of proof. performance are required of it (Equitable Banking
Corporation, Inc. v. Special Steel Products and
What are the defenses against the holder? Augusto L. Prado, G.R. No. 175350, 13 June
A holder in due course receives the instrument free 2012).
from any defect which it may have had in the past.
Only real defenses may be set-up against a holder Real Defenses and Personal Defenses
in due course. Personal defense may not be set-up
against such a holder. Real Defenses Personal Defenses
(FIADIFII) (DIDAFIN)
Is a bank grossly negligent when it allowed the Forgery Duress (intimidation)
demand of a manager of its client in having Illegality (if law so Illegality
crossed checks (with annotation “account provides)
payee only”) deposited to his personal Alteration (deliberate)Discharge before
account? May the bank assert that it is not maturity
liable on the ground that the acceptance was Discharge after Alternation
done in good faith? maturity (unintentional)
Incompleteness Fraud in inducement
Yes, banks have the duty to scrutinize the checks Fraud in factum Incompleteness
deposited with it, for a determination of their (delivered)
genuineness and regularity. The law holds banks to Incapacity No consideration
a high standard because banks hold themselves Insolvency Set-off
out to the public as experts in the field.
Real Defenses – are those available against all
The checks that Interco issued in favor of SSP holders; they attach to the res regardless of the
were all crossed, made payable to SSP‘s order, merits or demerits of the holder. Real defenses do
and contained the notation ―account payee only.‖ not render the instrument valueless; with real
This creates a reasonable expectation that the defenses, the instrument is unenforceable only
payee alone would receive the proceeds of the against the party entitled to set up the defense but
checks and that diversion of the checks would be not against whom such a defense is not available
averted. This expectation arises from the accepted as such, as in the case of forgery which is not
banking practice that crossed checks are intended available to persons estopped (Sec. 23, NIL).
for deposit in the named payee‘s account only and
no other. What is the necessity of Presentment for
Payment?
At the very least, the nature of crossed checks Present for payment is necessary to charge the
should place a bank on notice that it should drawer and endorsers (Sec. 70). Without
exercise more caution or expend more than a presentment, the person secondarily liable are
cursory inquiry, to ascertain whether the payee on discharged.
the check has authorized the holder to deposit the
same in a different account. Who are the parties to whom Presentment for
Payment should be made?
Since the banking business is impressed with The following are the person to whom presentment
public interest, the trust and confidence of the for payment should be made:
public in it is of paramount importance. a.) Promissory Note : Maker

b.) Bill of Exchange : Drawee / Acceptor
How is discharge of parties secondarily liable
When is Presentment for Payment dispensed done?
with? A negotiable instrument is discharged by parties
The following are the conditions when presentment secondarily liable in the following cases: (Sec. 120)
for payment is dispensed with: (Sec. 82)
a. Where after the exercise of reasonable a. By any act which discharges the instrument.
diligence presentment as required by law b. By the intentional cancellation of his
cannot be made; signature by the holder. No consideration is
b. Where the drawee is a fictitious person; necessary to support a discharge by
c. By waiver of presentment, express or intentional cancellation of an endorser‘s
implied. signature by the holder.
c. By discharge of a prior party.
When is there Dishonor by Non-Payment? d. By a valid tender of payment made by a
Dishonor by non-payment occurs:(Sec. 83) prior party.
a. When the instrument is presented and e. By a release of the principal debtor, unless
payment is refused. the holder‘s right of recourse against the
b. When presentment is excuse or dispensed party secondarily liable is expressly
with and the instrument is overdue and reserved.
unpaid. f. By any agreement binding upon the holder
to extend the time of payment or to
Who are the parties to be notified? postpone the holder‘s right to enforce the
Except when otherwise provided by law, when a instrument.
negotiable instrument has been dishonored by non- Except:
acceptance or non-payment, notice of dishonor a. When made with consent of the party
must be given to the drawer and to each secondarily liable;
endorser, and any drawer or endorser to whom b. unless the right of recourse against such
such notice is not given is discharged (Sec. 89). party is expressly reserved.
Notice of dishonor may be given either to the What is a material alteration?

party himself or to his agent in that behalf (Sec. Material alterations constitute change in:
97). a. Date.
b. Sum payable, either for principal or interest.
What is the form of the notice? c. Time or place of payment.
It may be in writing or merely oral and may be d. Medium or currency in which payment is to
given in any term which sufficiently identifies the be made.
instrument and indicate that it has been dishonored e. Number or relations of the parties.
by non-acceptance or non-payment. It may in all f. Which adds a place of payment where no
cases be given by personal delivery or by mails place of payment is specified.
(Sec. 96). g. Any other change or addition which alters
the effect of the instrument in any respect
What is Discharge of Negotiable Instrument? (Sec. 125).
“Discharge” is the release of all parties, whether
primary of secondary, from the obligation on the What is the effect of Material Alteration?
instrument; discharge renders the instrument non- The following are the effects of material alterations:
negotiable.

a. Material alterations made without the assent 1. Marine
of all parties liable thereon- avoided except Marine Insurance is that insurance against
as against a party who has himself made, loss of or damage to:
authorized or assented to the alteration and a. Vessels, craft, aircraft, vehicles,
subsequent endorsers. goods, freights, cargoes,
b. Material alteration in the hands of a holder merchandise, effects,
in due course not a party to the alteration- disbursements, profits, moneys,
he may enforce payment thereof according securities, choses in action,
to its original tenor. instruments of debts, valuable
papers, bottomry, and respondentia
INSURANCE CODE interests and all other kinds of
property and interests therein, in
Concept of Insurance respect to, appertaining to or in
What is an Insurance Contract? connection with any and all risks or
It is an agreement whereby one undertakes for a perils of navigation, transit or
consideration to indemnify another against the loss, transportation, or while being
damage or liability arising from an unknown or assembled, packed, crated, baled,
contingent event. (Section 2) compressed or similarly prepared for
shipment or while awaiting shipment,
A contract of insurance, to be binding from the date or during any delays, storage,
of application, must have been a completed transhipment, or reshipment incident
contract (Perez vs. CA, GR No. 112329, January thereto, including war risks, marine
28, 2000). builder‘s risks, and all personal
property floater risks;
What are the characteristics or nature of b. Person or property in connection
insurance contracts? with or appertaining to a marine, inland
1.) It is consensual because it is perfected by marine, transit or transportation insurance,
the meeting of the minds of the parties including liability for loss of or damage
2.) It is voluntary because the parties may arising out of or in connection with the
incorporate such terms and conditions as construction, repair, operation, maintenance
they may deem convenient or use of the subject matter of such
3.) It is aleatory because it depends upon insurance (but not including life insurance or
some contingent event surety bonds nor insurance against loss by
4.) It is unilateral because it imposes legal reason of bodily injury to any person arising
duties only on the insurer who promises to out of ownership, maintenance, or use of
indemnify in case of loss automobiles);
5.) It is conditional because it is subject to c. Precious stones, jewels, jewelry,
conditions the principal one of which is the precious metals, whether in course of
happening of the event insured against transportation or otherwise; and
6.) It is a contract of indemnity because d. Bridges, tunnels and other
except in life and accident insurance, a instrumentalities of transportation and
contract of insurance is a contract of communication (excluding buildings, their
indemnity whereby the insurer promises to furniture and furnishings, fixed contents and
make good only the loss of the insured. supplies held in storage); piers, wharves,
docks and slips, and other aids to
Classes of Insurance navigation and transportation, including dry

docks and marine railways, dams and which by law or custom are considered as
appurtenant facilities for the control of falling exclusively within the scope of other
waterways. types of insurance. It includes, but is not
It shall likewise include marine protection limited to, employer‘s liability insurance,
and indemnity insurance, meaning motor vehicle liability insurance, plate glass
insurance against, or against legal liability of insurance, burglary and theft insurance,
the insured for loss, damage, or expense personal accident and health insurance as
incident to ownership, operation, chartering, written by non-life insurance companies,
maintenance, use, repair, or construction of and other substantially similar kinds of
any vessel, craft or instrumentality in use of insurance (Section 176, Insurance Code).
ocean or inland waterways, including liability
of the insured for personal injury, illness or 4. Suretyship
death or for loss of or damage to the A contract of suretyship is an agreement
property of another person (Section 101). whereby a party called the surety
guarantees the performance by another
2. Fire Insurance party called the principal or obligor of an
Fire insurance is that insurance which obligation or undertaking in favor of a third
includes indemnity against loss by fire, party called the obligee. It includes official
lightning, windstorm, tornado or earthquake recognizances, stipulations, bonds or
and other allied risks, when such risks are undertakings issued by any company
covered by extension to fire insurance (Section 177, Insurance Code).
policies or under separate policies.
5. Life Insurance
Kinds of Fire: Life insurance is insurance on human lives
a. Friendly which burns in a place where it and insurance appertaining thereto or
is intend to burn and employed for the connected therewith.
ordinary purpose of lighting, heating or
manufacturing. Every contract or undertaking for the
b. Hostile which: payment of annuities including contracts for
1. Burns at a place where it is not the payment of lump sums under a
intended to burn; retirement program where a life insurance
2. Starts as a friendly fire but becomes company manages or acts as a trustee for
hostile if it should escape from the such retirement program shall be
place where it is intended to be and considered a life insurance contract for
becomes uncontrollable; or, purposes of this Code (Section 181,
3. Is friendly fire which become hostile Insurance Code).
not be escaping from its proper
place but because of unsuitable 6. Compulsory Motor Vehicle Insurance
material used to light it and it An insurance against passenger and third-
becomes inherently dangerous and party liability for death or bodily injuries and
uncontrollable. damage to property arising from motor
vehicle accidents, necessary to be availed
3. Casualty Insurance of prior to the operation of a motor vehicle in
Casualty insurance is insurance covering public highways (Insurance Code).
loss or liability arising from accident or
mishap, excluding certain types of loss

When does a person have an insurable As to the The beneficiary The beneficiary
interest? insurable need not have must have
A person has an insurable interest in the subject interest of the an insurable insurable
matter if he is so connected, so situated, so beneficiary. interest over interest over the
circumstanced, so related, that by the preservation the life of the thing insured.
of the same he shall derive pecuniary benefit and insured if the
by its destruction he shall suffer pecuniary loss, insured himself
damage or prejudice. secured the
policy.
Uberrima Fides Contract However, if the
The contract of insurance is one of perfect good life insurance
faith not for the insured alone, but equally so for the was obtained
insurer. It requires the parties to the contract to by the
disclose conditions affecting the risk of which he is beneficiary, the
aware, or material fact, which the applicant knows, latter must
and those, which he ought to know. have insurable
interest over
Insurable Insurable the life of the
interest in interest in insured.
LIFE PROPERTY
As to its It must exist Must exist at the When is an insurance contract perfected?
effectivity only at the time time the policy An insurance contract is a consensual contract and
the policy takes takes effect and is therefore perfected the moment there is meeting
effect and need when the loss of the minds with respect to the object and the
not exist at the occurs. cause or consideration. What is being followed in
time of loss. insurance contracts is known as the ―cognition
As to its limit Unlimited Limited to actual theory‖. Thus, an acceptance made by letter shall
except in life value of interest not bind the person making the offer except from
insurance in property the time it came to his knowledge.
effected by insured.
creditor on the What are premium payments?
life of the It is the consideration paid an insurer for
debtor. undertaking to indemnify the insured against a
As to the The An expectation specific peril. The basis of the right of the insurer to
expectation of expectation of of benefit to be collect premiums is the assumption of risk.
benefit benefit to be derived from the
derived from continued General Rule: No policy issued by an insurance
the continued existence of the company is valid and binding until the actual
existence of life property insured payment of premium. Any agreement to the
need not have must have a contrary is void.
any legal basis legal basis. Exceptions:
whatever. A 1. In case of industrial life insurance, when the
reasonable grace period applies;
probability is 2. When the insurer makes a written
sufficient acknowledgment of the receipt premium;
without more.

3. If the parties have agreed to the payment of the Haulers unloaded the shipment and brought
premium in instalments and partial payment has them to an open storage area for temporary
been made at the time of the loss; storage and safekeeping pending clearance
4. Where a credit term has been agreed upon; from the Bureau of Customs.
5. Where the parties are barred by estoppel.
When clearance was secured, around 2,702
Incontestability Clause bags were found to be in bad order condition,
An "Incontestability Clause" in a Life Insurance yet the stevedores of petitioner began loading
Policy means that two (2) years after date of the bags in the trucks of Kerr Bros Brokerage
issuance or reinstatement of the life insurance for transport and delivery to the consignee,
policy, the insurer cannot anymore prove that the using unsuitable methods like steel hooks
policy is void ab initio or rescindable by reason of which caused piercing of the bags. After
fraudulent concealment or misrepresentation of the unloading all articles, 2,881 sacks were in bad
insured (2012 Bar Exam) condition due to spillage, caking, and
hardening of the contents.
Distinguish Concealment from
Misrepresentation Segurados, as insurer, paid the value of the
lost/damaged goods to the consignee in the
Concealment Misrepresentation amount of PhP 643,600.25. Segurados filed a
The insured withholds The insured makes complaint for damages against the shipper,
information of material erroneous statements of Kerr Bros, and Uber Haulers. Uber Haulers
facts from the insurer facts with the intent of contends that Segurados has no cause of
inducing the insurer to action because it failed to present the insurance
enter into insurance contract or policy covering the subject
contract shipment.
Materiality is determined by the same rules applied
in cases of misrepresentation. Would non-presentation of the marine
Concealment on the part of the insured has the insurance policy be fatal in recovering the value
same effect as a misrepresentation and gives the under the policy?
insurer the right to rescind the contract.
Whether intentional or unintentional, the injured No, the non-presentation of the insurance contract
party is entitled to rescind the contract of insurance or policy does not render such as fatal; the
on the ground of concealment or false subrogation receipt is sufficient to establish a
representation relationship.
Rules on concealment and representation apply
likewise to the insurer since the contracts of As ruled in prior jurisprudence, the presentation in
insurance is said to be one of utmost good faith on evidence of the marine insurance policy is not
part of both parties to the agreement. indispensable before the insurer may recover from
the common carrier the insured value of the lost
Shah Budealer shipped 60,000 sacks of rice cargo in the exercise of its subrogatory right. The
(each bag weighing 50 kg) from Hong Kong to subrogation receipt, by itself, is sufficient to
Manila on board the vessel M/V Yao Ming. The establish not only the relationship of herein private
shipment had an invoice value of US$456,000, respondent as insurer and the assured shipper of
and was insured by Segurados Insurance the lost cargo, but also the amount paid to settle
Company under a marine policy. Upon arrival of the insurance claim. The right of subrogation
the shipment at Manila, the stevedores of Uber accrues simply upon by the insurance company of

the insurance claim. (Asian Terminals, Inc. v. the husband the insured. The wife is the owner of
Malayan Insurance Co., Inc., G.R. No. 171406, the policy but she is not the insured.
April 4, 2011, Del Castillo)
In property insurance, like fire insurance, the insure
Is a reinstated life insurance policy already is also the assured where the proceeds are payable
considered incontestable at the time of death? to him.
Yes. A reinstated insurance contract is considered
to have been incontestable. The reinstatement of Assured is also used sometimes as a synonym of
an insurance contract should be reckoned from the ―beneficiary.‖ The beneficiary is the person
date when the same was approved by the insurer. designated by the terms of the policy as the one to
The date of last reinstatement mentioned in Sec. 48 receive the proceeds of the insurance. He is the
of the Insurance Code pertains to the date that the third party in a contract of life insurance, whose
insurer approved the application for reinstatement. benefit the policy is issued and to whom the loss is
Therefore, an insurance contract was deemed to be payable.
reinstated on June 22, 1999 and considered as
incontestable at the time of Felipe‘s death on Sept. What does doing business in the Philippines
22, 2001 (Insular Life Assurance Co., Ltd. v. Paz Y. mean?
Khu, G.R. No. 195176, April 18, 2016, Del Castillo). Under the Insurance Code of the Philippines, a
person is doing or transacting an insurance
Security Deposit business if he performs any of the following :
The right to claim against the security deposit is a. Making or proposing to make as insurer, any
dependent on the solvency of the insurance insurance contract;
company, and is subject to all other obligations of b. Making or proposing to make, as surety any
the insurance company arising from its insurance contract of suretyship as a vocation, not as a
contracts. The Security Deposit is exempt from levy mere incident to any other legitimate
by a judgment creditor whose interest is only business of a surety;
inchoate or mere expectancy. (Capital Insurance c. Doing any insurance business like
and Surety Co., Inc. vs. Del Monte Motor Works, reinsurance and similar acts; and,
Inc., G.R. No. 159979, December 09, 2015) d. Doing or proposing to do any business
equivalent to the above (Sec. 2(4),ICP)
How are the terms assurer, insured and assured
used in insurance? Under the Foreign Investment Act of 1991
According to Black‘s Law Dictionary, ―insurer‖ is a. Soliciting others;
synonymous with the term ―assurer‖ or b. Service contracts;
―underwriter‖. c. Opening offices whether called liaison office
or branches.
The terms ―insured‖ and ―assured‖ are generally d. Appointing representatives or distributors
used interchangeably; but strictly speaking, the domiciled in the Philippines or who in any
term “insured” refers to the owner of the property calendar day stay in the country or for a
insured or the person whose life is the subject of period or periods totalling 180 days or more;
the contract of insurance, while ―assured‖ refers to e. Participating in the management,
the person for whose benefit the insurance is supervision or control of any domestic
granted. business, firm, entity or corporation in the
Philippines;
For example: A wife insures the life of her husband f. Any other act or acts that imply continuity of
for her own benefit. The wife is the assured, and commercial dealings or arrangements, and

contemplate to that extent the performance Generally, the insured is the one making the offer
of acts or works; by submitting an application to the insurer and the
g. Exercise of some of the functions normally latter accepts the offer by approving the
incident to and in progressive prosecution of application. This, mere, submission of the
commercial gain or of the purpose or object application without the corresponding approval of
of the business organization (2016 Bar the policy does not result in the perfection of the
Exams). contract of insurance (Great Pacific Life Assurance
Corp. v. CA, 89 SCRA 543)
Mutual Insurance Companies
An entity owned by the policyholders that caters EXCEPTION: Upon a party‘s purchase of a
only to the insurance needs of the same memorial lot on instalment from Eternal, an
policyholders/members is still engaged in insurance insurance contract covering the lot purchaser is
business. These entities are mutual insurance created and the same is effective, valid, and
companies which have no capital stock and the binding until terminated by Philamlife by
contributions of members are the only sources of disapproving the insurance application Moreover,
funds to meet losses and expenses (Republic vs the mere inaction of the insurer on the insurance
Sun Life Ins. Co., GR No. 158085, October 14, application must not work to prejudice the insured.
2005; White Gold Marines Services vs. Pioneer
Ins., GR No. 154514, July 28, 2005) The termination of the insurance contract by the
insurer must be explicit and unambiguous (Eternal
Banc assurance Gardens Memorial Park v. PhilAm Life, G.R. No.
The presentation and sale to bank customers by an 166245, April 9, 2008)
insurance company of its insurance products within
the premises of the head office of such bank duly Delivery of Policy
licensed by the BSP or any of its branches (Sec. Since the contract of insurance is consensual (and
375, ICP). not a formal or real contract), delivery of the policy
is not necessary for its perfection.
The bank itself will not engage in insurance
business because it is prohibited under the General Note that the delivery of the policy is necessary to
Banking Law to engage in insurance business. make the policy binding. However, this requirement
of delivery is satisfied if the parties‘ intention is to
Perfection of Insurance Contract be bound by the insurance. In effect, under this
An insurance contract is a consensual contract and view, mere consent is enough to bind the parties
is therefore perfected the moment there is a (Prof. Agbayani)
meeting of the minds with respect to the object and
the cause or consideration (Arts. 1315, 1318 and Delay in Approval of Policy
1319, Civil Code of the Philippines). Mere delay in acceptance of the insurance
application will not result in a binding contract.
What followed in insurance contract s is what is Court cannot impose upon the parties a contract if
known as the ―cognition theory‖. they did not consent. However, in proper cases, the
insurer may be liable for tort.
Cognition Theory -whereby the insurance contract
is perfected only from the time the applicant came Insurable Interest
to know of the acceptance of the offer by the May a person insure –
insurer. a. The life of his married children?

Yes, a person may insure the life of his Other than one‘s own life, spouse or
married children. The law, in providing that children, a person would have an insurable
a person has an insurable interest on the interest on the life of others only when the
life of his children, did not make any applicant therefor has a pecuniary interest
qualification on whether such children are involved in the life of the person to be
married or single or whether they are still insured.
under parental authority or not.
f. The life of his creditor?
b. The life of his wife from whom he is No, a person may not insure the life of his
legally separated? creditor, there being no pecuniary interest
Yes, a person may insure the life of his wife that one normally would have on such life;
from whom he is legally separated. Here, one may insure, however, the life of his
again, the law did not make any proviso in debtor to the extent of his pecuniary interest
stating that a person has an insurable in said debtor.
interest on the life of his or her spouse.
Legal separation does not sever the g. A piece of property under the usufruct of
vinculum juris. It should be noted, however, which he is the usufructuary?
that in insurance contracts utmost good faith A person may insure the property of which
is primordial; accordingly, if circumstances he is a usufructuary, since he has an
should exist that may indicate some existing interest (beneficial title) on such but
adverse ulterior motives on the part of the only to the extent of his usufructuary
person obtaining the insurance coverage, interest.
recovery thereunder may rightfully be
denied. h. A piece of property under usufruct of
which he the naked title?
c. The life of his son who is no longer a Yes, a person may insure his property
minor and who is now married? under usufruct, he has an interest (naked
Yes. Section 10 of the Insurance Code of title) on such, as well as an inchoate interest
the Philippines provides that one has on the beneficial title (coupled with his
insurable interest over the life of his existing interest on the naked title).
children. The law does not distinguish
between a married child or a minor child. i. A piece of property he has mortgaged for
a loan in an amount equal to the value of
d. The life of his/her girlfriend/boyfriend? the property?
No. A person has insurable interest over the Yes, a person may insure the property that
life of another only if he has pecuniary he has mortgaged equal to the value of the
interest over the life of such person, except property, since the mortgagee does not
the person insured is his spouse or child. deprive him of either the naked or the
Friendship alone is not the insurable interest beneficial title thereto.
contemplated in life insurance.
j. A piece of property mortgaged to him?
e. The life of his household help? Yes, a person may ensure a piece of
No, a person may not insure the life of his property mortgaged to him because of his
household help; he has no pecuniary pecuniary interest thereon equivalent, but
interests, arising from that relationship not more than, the value of the obligation
alone, on the life of said household help. thus secured.

policy by the person who cannot make any
Is the insured obligated to disclose – or donation to him (Arts. 2012 & 739, Civil Code)
otherwise be considered guilty of concealment (1998 Bar Exams)
by non-disclosure of a material fact acquired by
him after the policy had become effective? Period of Prescription
Why? The period for commencing an action under a
A non-disclosure of a material fact acquired after policy of insurance under Sec. 63 is to be
the policy had already become effective will not computed not from the time when the loss actually
adversely affect the insurance contract. The test on occurs but from the time when the insured has a
concealment is reckoned at any time before the right to bring an action against the insurer.
policy becomes effective.
Authorized Driver Clause
Does a fraudulent overstatement of the extent The requirement under the ―authorized driver
of the loss by the insured adversely affect his clause‖ that the driver be ―permitted in accordance
right to recover totally under the policy? with the licensing or other laws or regulations to
A fraudulent overstatement of the extent of the loss drive the Motor Vehicle and is not disqualified from
by the insured will adversely affect his ability to driving such motor vehicle by order of a Court of
recover under the policy. Insurance is characterized Law or by reason of any enactment or regulation in
by utmost good faith, and this consideration must that behalf,‖ applies only when the driver ―is driving
be ever present and observed by the parties. on the insured‘s order or with his permission.‖ It
does not apply when the person driving is the
Harry took a life insurance policy on the life of insured himself. (Andrew Palermo vs. Pyramid
his wife Wanda, designating himself as the Insurance Co., Inc., G.R. No. L-36480. May 31,
beneficiary. A few months later, Wanda 1988)
succeeded in having their marriage annulled. A
week after the annulment became final, Wanda Warranty
died of a heart attack. The insurance policy was Warranty is a statement or promise set forth in the
for a year period during which all the above policy or by reference incorporated therein, the
incidents occurred. Can Harry recover under untruth or non-fulfilment of which in any respect,
the policy? and without reference to whether the insurer was in
Harry can recover under the insurance policy. fact prejudiced by such untruth or nonfulfillment,
Insurable interest in life insurance needs to exist renders the policy voidable.
only at the time the insurance is taken; that interest
need not exist at the time the loss occurs. General Rule:
Breach of warranty gives the insurer the right to
Designation of Beneficiary rescind.
GR: A person may take out a policy of insurance
in his own life and make it payable to whomever he Exceptions:
pleases, irrespective of the beneficiary‘s lack of 1. Loss occurs before the time of performance of
insurable interest, provided he acts in good faith the warranty;
and without intent to make the transaction merely a 2. The performance becomes unlawful;
cover for a forbidden wagering contract. 3. Performance becomes impossible. (Sec. 73)
XPN: Any person who is forbidden from receiving

any donation, such as a common-law-spouses,
cannot be named beneficiary of a life insurance

Immaterial Provisions ―the undernoted appliances for the extinction of fire
Not all breach of the provisions in the policy may being kept on the premises insured hereby..‖
give the right to rescind the policy. Immaterial admits of the interpretation as an admission of the
provisions do not avoid the policy. (Sec. 75, ICP) existence of such appliances which insurer cannot
now contradict, should the parole evidence apply.
If fraud intervenes in the breach, the insurer is freed
from liability from the start, as the contract is void (2) Whether or not the insured violated the hemp
ab initio. warranty provision against the storage of gasoline
since insured admitted there were 36 cans of
If there is no fraud in the breach, the insurer is gasoline in Bodega 2 which was a separate
freed from, the contract the moment the breach structure and not affected by the fire.
occurs, and is entitled to retain the premiums
corresponding to the period up to the time of the It is well to note that gasoline is not specifically
breach. mentioned among the prohibited articles listed in
the so-called hemp warranty. The clause relied
Breach of Warranty upon by the insurer speaks of ―oils‖. Ordinarily, oils
mean lubricants and not gasoline or kerosene.
Qua Chee Gan v. Law Union Rock, 98 Phil. 85 Here again, by reason of the exclusive control of
(1) Whether or not the policies should be avoided the insurance company over the terms of the
for the reason that there was a breach of warranty. contract, the ambiguity must be held strictly against
It is a well-settled rule that the insurer at the time of the insurer and liberally in favor of the insured,
the issuance of a policy has the knowledge of specially to avoid a forfeiture.
existing facts, which if insisted on, would invalidate
the contract from its very inception, such Furthermore, the gasoline kept was only incidental
knowledge constitutes a waiver of conditions in the to the insured‘s business. It is a well settled rule
contract inconsistent with known facts, and the that keeping of inflammable oils in the premises
insurer is stopped thereafter from asserting the though prohibited by the policy does NOT void it if
breach of such conditions. such keeping is incidental to the business. Also,
the hemp warranty forbade the storage only in the
Ratio: building to which the insurance applies, and/or in
To allow a company to accept one‘s money for a any building communicating therewith; and it is
policy of insurance which it knows to be void and of undisputed that no gasoline was stored in the burnt
no effect, though it knows as it must that the bodegas and that Bodega No. 2 which was where
insured believes it to be valid and binding is so the gasoline was found stood isolated from the
contrary to the dictates of honesty and fair dealing, other bodegas.
as so closely related to positive fraud, as to be
abhorrent to fair-minded men. It would be to allow For a valid cancellation of the policy, the following
the company to treat the policy as valid long requisites must concur:
enough to get the premium on it, and leave it at 1. There must be prior notice of cancellation to
liberty to repudiate it the next moment. the insured;
Moreover, taking into account the well-known rule 2. The notice must be based on the
that ambiguities or obscurities must strictly be occurrence, after the effective date of the
interpreted against the party that cause them, the policy, of one or more of the grounds
memorandum of warranty invoked by the insurer mentioned;
bars the latter from questioning the existence of the 3. The notice must be:
appliances called for, since its initial expression b. in writing;

c. mailed, or delivered to the named The second is that covered by Section 78 of the
insured; Insurance Code, which provides that any
d. at the address shown in the policy; acknowledgment in a policy or contract of
4. It must state: insurance of the receipt of premium is conclusive
a. which of the grounds mentioned in evidence of its payment, so far as to make the
Section 64 is relied upon; and, policy binding, notwithstanding any stipulation
b. that upon written request of the insured, therein that it shall not be binding until premium is
the insurer will furnish the facts on which actually paid.
the cancellation is based. (Malayan
Insurance Co., Inc. vs. Gregoria Cruz A third exception was laid down in Makati Tuscany
Arnaldo, in her capacity as the Condominium Corporation vs. Court of Appeals,
Insurance Commissioner, et al., G.R. wherein the Court ruled that Section 77 may not
No. L-67835, October 12, 1987) apply if the parties have agreed to the payment in
instalments of the premium and partial payment
Premium payments has been made at the time of loss. Tuscany has
It is the consideration paid an insurer for also provided a fourth exception, namely, that the
undertaking to indemnify the insured against a insurer may grant credit extension for the payment
specific peril. The basis of the right of the insurer to of the premium. This simply means that if the
collect premiums is the assumption of risk. insurer has granted the insured a credit term for the
payment of the premium and loss occurs before the
General Rule: No policy issued by an insurance expiration of the term, recovery on the policy should
company is valid and binding until the actual be allowed even though the premium is paid after
payment of premium. Any agreement to the the loss but within the credit term. Moreover, as a
contrary is void. fifth exception, estoppel bars it from taking refuge
Exceptions: under said Section, since Masagana relied in good
1. In case of industrial life insurance, when the faith on such practice.(UCPB General Insurance
grace period applies. Co. Inc., vs. Masagana Telemart, Inc., G.R. No.
2. When the insurer makes a written 137172, April 4, 2001.)
acknowledgment of the receipt premium.
3. If the parties have agreed to the payment of Guidelines on Claims Settlement
the premium in instalments and partial
payment has been made at the time of the 1. Life Insurance (Art. 248, ICP)
loss. a. The proceeds shall be paid immediately
4. Where a credit term has been agreed upon upon the maturity of the policy if there is
5. Where the parties are barred by estoppel such a maturity date;
b. If the policy matures by the death of the
§ection 77 of the Insurance Code of 1978 provides insured, within 60 days after presentation of
that an insurer is entitled to payment of the the claim and filing of the proof of the death
premium as soon as the thing insured is exposed to of the insured.
the peril insured against.
2. Property Insurance (Sec. 249, ICP)
The first exception is provided by Section 77 itself, a. proceeds shall be paid within 30 days after
and that is, in case of a life or industrial life policy proof of loss is received by the insurer and
whenever the grace period provision applies. ascertainment of the loss or damage is
made wither by agreement or by arbitration;

b. if no ascertainment is made within 60 days Double Insurance vs. Over Insurance
after receipt of proof of loss, the loss shall Double Insurance Over Insurance
be paid within 90 days after such receipt. There are two or There may be only
more insurers one insurer, with
Subrogation Number insuring the same whom the insured
No need for a formal assignment or an express of subject matter. takes insurance
stipulation in the policy. It is a legal effect of Insurers beyond the value
payment. of his insurable
interest.
The insurer can only recover from the third person There may be no When the amount
what the insured could have recovered. Thus, there over insurance as of the insurance is
can be no recovery if the insurer voluntarily paid when the sum total beyond the value
even if the loss is not covered by the policy. of the amounts of of the insured‘s
Effects the policies issued insurable interest.
The insured can no longer be recovered. does not exceed
the insurable
Double Insurance interest of the
insured.
Double insurance exists where the same person is
insured by several insurers separately, in respect to
TRANSPORTATION LAWS
the same subject and interest. (Sec. 95, ibid)
What are common carriers?
Requisites of double insurance (PIRST)
1. The insured Person is the same
Common carriers are persons, corporations, firms
2. Interest insured is the same
or associations engaged in the business of carrying
3. Risk or peril insured against is the same
or transporting passengers or goods or both, by
4. Subject matter is the same
land, water, air; for compensation, offering their
5. Two or more insurers insuring separately
service to the public. (Art. 1732, Civil Code)
There is no double insurance even though two
What is the test to determine a common
policies were both issued over the same subject
carrier?
matter and both covered the same peril insured
against if the two policies were issued to two
The test to determine a common carrier is whether
different entities. (Malayan Insurance Co. vs.
the given undertaking is part of the business
Philippine First Insurance Co., G.R. No. 184300,
engaged in by the carrier which he has held out to
July 11, 2012)
the general public as his occupation rather than
the quantity or extent of the business
Is double insurance prohibited?
transacted.
GR: No. In case of double insurance, the insurers
may still be made liable up to the extent of the
The true test for a common carrier is not the
value of the thing insured but not to exceed the
quantity or extent of the business actually
amount of the policies issued.
transacted, or the number and character of the
conveyances used in the activity, but whether the
Xpn: If there is a provision in at least one of the
undertaking is a part of the activity engaged in by
policies prohibiting it.
the carrier that he has held out to the general public
as his business or occupation. If the undertaking
is a single transaction, not a part of the general common carrier arises from breach of contract of
business or occupation engaged in, as carriage and from its negligence in selection and
advertised and held out to the general public, supervision of employees. Acquittal of the driver in
the individual or the entity rendering such a criminal case is not acquittal of the employer in a
service is a private, not a common, carrier. (Sps. civil case for damages (Heirs of Jose Marcial K.
Perena v. Sps. Nicolas, G.R. No. 157917, August Ochoa v. G & S Transport Corporation, G.R. No.
29, 2012) 170071, March 9, 2011).
What is the kind of diligence required of Ten (10) container vans of soft wheat flour were
common carriers? (Art. 1733, Civil Code) insured against all risks by Alanganin
Insurance Company and consigned to
Article 1733. Common carriers, from the nature of DeLicados Distributors. The shipment was
their business and for reasons of public policy, are discharged in good and complete order
bound to observe extraordinary diligence in the condition with arrastre operator, Harris Porters.
vigilance over the goods and for the safety of After breaking the seals and examining the
the passengers transported by them, according shipment for tax evaluation purposes by the
to all the circumstances of each case. Bureau of Customs, Harris Porters issued gate
passes to Ang Lagay Customs Services for the
The diligence required of a private carrier is turnover of five (5) container vans. When it was
only ordinary, that is, the diligence of a good delivered to DeLicados, the latter discovered
father of the family. In contrast, a common carrier is substantial shortages in the number of bags of
a person, corporation, firm or association engaged flour delivered. DeLicados then filed a formal
in the business of carrying or transporting claim for loss with Harris Porters. The trial court
passengers or goods or both, by land, water, or air, dismissed the complaint on the failure to clearly
for compensation, offering such services to the show that the loss happened while the subject
public. shipment was still under Harris Porter's
responsibility. The appellate court held that the
Common carriers are obliged to observe burden of proof to show due compliance with
extraordinary diligence in the vigilance over the the obligation to deliver the goods to the
goods transported by them. (Bascos vs. CA, G.R. appropriate party devolves upon the arrastre
No. 101089, April 7, 1993) operator, and that there is presumption of fault
or negligence for the loss of the goods against
Does the acquittal of the employee in a criminal the arrastre operator pursuant to Arts. 1265 and
case excuse the employer-common carrier from 1981 of the Civil Code. Hence, Harris Porters
being civilly liable? failed to discharge such burden and to rebut
No, in a contract of carriage, it is presumed that the the aforementioned presumption. Is the
common carrier is at fault or is negligent when a appellate court correct in holding Harris Porters
passenger dies or is injured. In fact, there is even liable?
no need for the court to make an express finding of
fault or negligence on the part of the common No, the arrastre operator is not liable when it was
carrier. This statutory presumption may only be able to prove delivery of shipment in good and
overcome by evidence that the carrier exercised complete condition. The insurer presented 10 gate
extraordinary diligence. Unfortunately, G&S passes signed by ACS which serves as evidence of
miserably failed to overcome this presumption. The receipt of shipment in good order and condition.
civil liability of a common carrier is separate and The testimonies of the employees of respondent
distinct from the criminal case. The liability of a who were directly involved in the processing of the

subject shipment established that the shipment to Bus Lines, Inc., et. al., G.R. No. 203902, July 19,
ACS was in good and complete condition and with 2017).
lock and seals intact. Further, ACS accepted the
container vans on behalf of MSC without any In an action for breach of contract of carriage,
qualification. There was no other competent may moral damages be recovered?
evidence that the container vans were reopened or In an action for breach of contract of carriage,
that their locks and seals were broken for the moral damages may be recovered only when it
second time, thus MPSI cannot be held liable for results into death of a passenger or when the
damages. Hence, the required diligence in handling carrier was guilty of fraud and bad faith even if
the shipment was observed (Marina Port Services, death does not result (Judith D. Darines, et. al. v.
Inc. v. American Home Assurance Corporation, Eduardo Quiñones, et. al., G.R. No. 206468,
G.R. No. 201822, 12 August 2015). August 2, 2017).
Proof of Observance of Required Diligence Bill of Lading

When there is claim for loss filed by the consignee Is a consignee which is not a signatory to the
or the insurer as subrogee, the arrastre operator bill of lading bound by the stipulations thereof?
must establish that it observed the required Are there exceptions to the rule?
diligence in handling the shipment (Ibid.)
No. As a general rule, a consignee is not privy to
Safety of Passengers the Bill of Lading unless any of the following
May an award of moral damages and actual instances occur:
damages be recovered in an action for damages 1. There is an agency relationship between
predicated on breach of contract of carriage the shipper and the consignee;
even if it failed to prove fraud and bad faith? 2. When the consignee demands the
No, petitioner cannot recover moral damages fulfilment of the stipulation of the bill
because it failed to prove fraud and bad faith on the drawn up in its favor;
part of Philippine Rabbit Bus. Actual damages 3. Unequivocal acceptance of the bill of
cannot likewise be claimed because they failed to lading delivered to the consignee with
present evidence based on loss or impairment of full knowledge of its contents.
earning capacity.
A bill of lading is drawn up by the shipper/consignor
As to moral damages, they are not recoverable in and the carrier without intervention of consignee.
an action for damages predicated on breach of However, it does not necessarily mean that the
contract of carriage. The exceptions to that would consignee could not be bound thereof.
be in cases of mishap which resulted to death of
passenger, or when the carrier is guilty of fraud or In this case, Shin Yang denied in all its pleadings
bad faith. This case however did not fall under any that it is the consignee of the goods and the
of the exceptions since no proof was presented to instances mentioned were not present. Therefore,
that effect. On actual damages, documentary the burden to prove that Shin Yang is bound by the
evidence is necessary to substantiate the claim for Bill of Lading is upon petitioner. However, petitioner
damages for loss of earning capacity. The failed to prove the same. Hence, Shin Yang could
exception to this rule is when the deceased was not be ordered to pay the obligation of a consignee
earning less than minimum wage, either through as required in the Bill (MOF Company v. Shin Yang
self-employment or as daily worker. In this case, Brokerage, G.R. No. 172822, December 18, 2009).
the petitioner failed to present evidence to prove
their claim (Spouses Estrada v. Philippine Rabbit

Carriage of Goods by Sea Act (COGSA)
What is loss?
What are the important features of COGSA? Loss is merely a situation where no delivery at all
The following are important features of the Carriage was made by the shipper of the goods because the
of Goods by Sea Act: same had perished, gone out of commerce, or
disappeared in such a way that their existence is
1. It acts as a supplement to the Civil Code unknown or they cannot be recovered (Art. 1189,
and applies to all contracts of carriage of Civil Code; Sec. 3 (6), par. 4, COGSA). It does not
goods coming to or from Philippine ports in include a situation where there was indeed
foreign trade. delivery—but delivery to the wrong person, or a
2. When there is damage to the goods, notice misdelivery. Non delivery should be distinguished
must be given by the recipient to the carrier from misdelivery (Tan Pho vs. Hassamal Dalamal,
or his agent upon receipt of the goods. But if 67 Phil. 555, 557; Ang vs. American Steamship
the damage is apparent/externally visible, Agencies, Inc., 19 SCRA 123, No. L-22491 January
notice must be given within 3 days from 27, 1967).
receipt of the goods.
3. Failure of the recipient to notify the carrier One-year period of prescription in Carriage of
will not prevent the filing of a suit for the Goods by Sea Act does not apply to misdelivery. —
loss/damage of the goods. Where the imported goods were delivered to the
4. The maximum liability is US$500.00 per wrong person, the one-year time bar in paragraph
package/customary freight unit unless the 4, section 3(6) of the Carriage of Goods by Sea
shipper or owner of the goods declares a Act, which refers to ―loss or damage‖, does not
higher value. It may be lowered by apply. Said one-year period of limitation is designed
agreement put down in the bill of lading. to meet the exigencies of maritime hazards. In a
case where the goods shipped were neither lost nor
The purpose of limiting the common carrier's damaged in transit but were, on the contrary,
liability is to protect it from fraud, such as by delivered in part to someone who claimed to be
allowing it to take insurance to protect itself. If, for entitled thereto, the situation is different, and the
example, the shipper or consignee/recipient special need for the short period of limitation in
understated the value of the goods, it not only cases of loss or damage caused by maritime perils
violates a valid contractual stipulation; it has also does not obtain.
committed fraud against the common carrier by
trying to make it liable for an amount greater that Warsaw Convention
what was stipulated in the bill of lading (Cokaliong
Shipping Lines vs. UCPB General Insurance Co., When is the Warsaw Convention applicable?
GR 146018, June 25, 2003.) This Convention applies to all international carriage
of persons, luggage or goods performed by aircraft
Prescriptive Period for reward. It applies equally to gratuitous carriage
The prescriptive period is 1 year from date of by aircraft performed by an air transport
delivery or the date when they should have been undertaking (Art. 1 (1), Warsaw Convention).
delivered.
What are the liabilities under the Warsaw
If the goods were delivered to the wrong person, Convention?
the recipient of the goods has 10 years to file an
action (for breach of contract) or 4 years (for a 1. Liability to Passengers
quasi-delict.)

Common carrier is liable for damage sustained in What are the Limitations of Liability (Article 22);
the event of the death or wounding of a passenger
or any other bodily injury suffered by a passenger, 1. Liability to Passengers:
IF the accident causing the damage sustained took Liability of the carrier for each passenger is limited
place on the aircraft or in the course of any of the to the equivalent of 4694 Special Drawing Rights
operations of embarking or disembarking (Art. 17). (XDR), payable either in full or in periodic
instalments, UNLESS a higher limit of liability is
2. Liability for Baggage agreed upon by the carrier and the passenger
a. The carrier is liable for damage sustained in the through a special contract.
event of the destruction or loss of, or of damage
to, any registered luggage or any goods, if the 2. Liability for Checked Baggages:
occurrence which caused the damage so GR: Liability of the carrier of registered luggage
sustained took place during the carriage by air. and of goods is limited to the equivalent of 19 XDR
b. The carriage by air within the meaning of the per kilogram.
preceding paragraph comprises the period
during which the luggage or goods are in XPN:
charge of the carrier, whether in an aerodrome a. special declaration of the value at delivery was
or on board an aircraft, or, in the case of a made, at the time when package was handed
landing outside an aerodrome, in any place over to the carrier, and
whatsoever. b. payment of a supplementary sum if required.
c. The period of the carriage by air does not
extend to any carriage by land, by sea or by In such case, the carrier will be liable to pay a
river performed outside an aerodrome. If, sum not exceeding the declared sum.
however, such a carriage takes place in the
performance of a contract for carriage by air, for XPN to XPN:
the purpose of loading, delivery or If proven that that sum is greater than the
transhipment, any damage is presumed, subject actual value to the consignor at delivery.
to proof to the contrary, to have been the result
of an event which took place during the carriage 3. Liability for Hand-carried Baggages:
by air. Limited to the equivalent of 1131 XDR per
d. The carrier is liable for damage occasioned by passenger.
delay in the carriage by air of passengers,
luggage or goods (Articles 18 and 19, WC).
NOTA BENE: The Montreal Convention and the subsequent Guatemala Protocol have amended and substantially increased the
limitations set by the Warsaw Convention. However, only the Montreal Convention has been ratified by the Senate of the Philippines
(August 10, 2015). The Montreal Convention observes Special Drawing Rights (XDR) as reference for the amount of claims instead of
usual currencies. However, XDRs may be converted into local currencies. For purposes of reference, the three agreements are
compared as follows:
Liability per PASSENGER BAGGAGE / CARGO

Agreement Death / Injury Hand-carry Checked-in
Warsaw 250,000 francs 5,000 francs (per passenger) 250 francs (per kilogram)
Montreal 100,000 XDR 1,000 XDR 4,150 XDR (per passenger)
Guatemala USD 100,000 USD 1,000 USD 1,000

May airline be bound even if passenger did articles of incorporation, and those that are
not sign the ticket? necessary or incidental to the exercise of the
While it may be true that petitioner had not express powers so conferred (Ultra Vires doctrine,
signed the plane ticket, he is nevertheless Sec. 45, B.P. 68).
bound by the provisions thereof. ―Such
provisions have been held to be a part of the What are the attributes of a corporation?
contract of carriage and valid and binding The attributes of a corporation are as follows:
upon the passenger regardless of the latter‘s
lack of knowledge or assent to the regulation.‖ 1. An artificial being – “Juridical Capacity to
[Tannebaum v. National Airline, Inc., 13 Misc. Contact and to Transact Business”
2d 450, 176 N.Y.S. 2d 400; Lichten v. Eastern 2. Created by operation of law – “Creature of the
Airlines, 87 Fed. Supp. 691; Migoski v. Law”
Eastern Air Lines, Inc., Fla., 63 So. 2d 634.] 3. With right of succession – “Strong Juridical
Personality” – capacity to have continuity of
It is what is known as a contract of ―adhesion,‖ existence despite the changes on the persons
wherein one party imposes a ready-made form who compose it. Thus, the personality
of contract on the other, as the plane ticket in continues despite the change of stockholders,
the case at bar, are contracts not entirely members, board members or officers.
prohibited, the one who adheres to the 4. Having only such powers, attributes and
contract is in reality free to reject it entirely; if properties expressly authorized by law or
he adheres, he gives his consent [Tolentino, incident to its existence – “A Creature of Limited
Civil Code, Vol IV, 1962 ed., p. 462, citing Mr. Powers”
Justice J.B.L. Reyes, Lawyer’s Journal, Jan.
31, 1951, p. 49]. And as held in Randolph v. What are the classes of corporations?
American Airlines, 103 Ohio App. 172, 144 The following are the classes of corporations:
N.E. 2d 878; Rosenchein v. Trans World
Airlines, Inc., 349 S.W. 2d 483 1. Stock Corporation - One which has a capital
stock divided into shares and is authorized to
―A contract limiting liability upon an agreed distribute to the holders of such shares
valuation does not offend against the policy of dividends or allotments of the surplus profits
the law forbidding one from contracting against (i.e., retained earnings) on the basis of the
his own negligence.‖ Pan American World shares held; is organized for profit; the
Airways, Inc. vs. IAC, 164 SCRA 268, G.R. governing body is the Board of Directors (Sec.
No. L-70462, August 11, 1988 3, B.P. 68).
CORPORATION CODE 2. Non-Stock Corporation; One expressly

organized for eleemosynary purpose and no
What is a corporation? part of its income is distributable as dividends to
It is an artificial being created by operation of law, its members, trustees, or officers, subject to the
having the right of succession, and the powers, provisions of the Code on dissolution; Not
attributes and properties expressly authorized by organized for profit; the governing body is the
law or incident to its existence (Sec. 2). Board of Trustees
A corporation is a creature of the law granted with 3. Corporation De Jure – A corporation

limited powers, and thereby possesses only such organized in accordance with the requirements
powers as those conferred by the Code or by its of law.

Sec. 111(2). It has no nationality. Roman
4. De Facto Corporation – A corporation where Catholic Apostolic, etc. vs. Register of Deeds of
there exists a flaw (ex. Failure to submit its by- Davao City, 102 Phil. 596 (1957); Republic vs.
laws on time. (Sawadjaan vs. Court of Appeals, Villanueva, 114 SCRA 875 (1982).
459 SCRA, 2005)
10. Domestic Corporation – a corporation formed,
5. Corporation by Estoppel (Sec. 21) - organized or existing under the laws of the
Requisites of De Facto Corporation: Organized Philippines.
under a valid law; Bona fide compliance with
formalities of law; User of corporate powers; 11. Foreign Corporation (Sec. 123) – a
SEC issuance of certificate of incorporation. corporation formed, organized or existing under
Arnold Hall vs. Piccio, 86 Phil. 603 (1950) any laws other than those of the Philippines and
whose laws allows Filipino citizens and
6. Corporation by Estoppel (Sec. 21) All corporations to do business in its own country
persons who assume to act as a corporation or state.
knowing it to be without authority to do so shall
be liable as general partners for al debts, How is the nationality of a corporation
liabilities and damages incurred or arising as a determined?
result thereof. Where a group of persons The following are the tests used to determine the
misrepresent themselves as a corporation, they nationality of a corporation:
are subsequently estopped from claiming lack
of corporate life in order to avoid liability. 1. Place of Incorporation Test - The corporation
One who assumes an obligation to an is a national of the country under whose laws it
ostensible corporation as such, cannot resist is organized or incorporated.
performance thereof on the ground that there 2. Control Test - The nationality of the
was in fact no corporation. corporation is determined by the nationality of
the ―controlling‖ stockholders. A corporation
7. Public Corporation (Sec. 3, Act 1456) One shall be considered a Filipino corporation if the
formed or organized for the government of a Filipino ownership of its capital stock is at least
portion of the State for the general good and 60%, and where the 60-40 Filipino-alien equity
welfare. ownership is NOT in doubt (SEC Opinion dated
6 November 1989; DOJ Opinion No. 18, s.
8. Private Corporation (Sec. 3, Act 1456) One 1989).
formed for some private purpose, benefit, aim 3. Grandfather Rule - Method used to determine
or end. the nationality of a corporation, in cases where
corporate shareholders are present in the
9. Corporation Sole - The purpose is situation, by which the percentage of Filipino
administering and managing, as trustee, the equity in a corporation engaged in nationalized
affairs, property and temporalities of any and/or partly nationalized areas of activities, is
religious denomination, sect or church, by the computed by attributing the nationality of
chief archbishop, bishop, priest, minister, rabbi second or even subsequent tier ownership to
or other presiding elder of such religious determine the nationality of the corporate
denomination, sect or church (Sec. 110). It is an shareholder.
exception to the general rule that at least five
(5) members are required for a corporation to
exist. Here there is only one (1) incorporator.

Example: May a complaint for illegal dismissal of a
MV Corporation and AC Corporation have equal company manager constitute an intra-corporate
interest in XYZ Company. MV Corporation is controversy and be beyond the jurisdiction of
60% owned by Filipinos, while AC Corporation the Labor Arbiter?
is 50% owned by Filipinos. By the grandfather No, such dismissal is a clear case of termination of
rule, MV Corporation would have a 30% Filipino employment which is a labor controversy and not
interest in XYZ Company (60% of 50%), while an intra-corporate dispute. To determine whether a
AC Corporation would have a 25% Filipino dispute is intra-corporate or of a labor case, a
interest in XYZ Company (50% of 50%). Hence, Relationship Test must be applied.
the total Filipino interest is only 55%
Under the Corporation Code, the number of
The application of the test is limited however to corporate officers is limited by law and by the
resolving issues on investments. By the Foreign corporation‘s by-laws. In this case, there is no proof
Investments Act, the grandfather rule is merely an that the appointment was made pursuant to the by-
ancillary rule to the main method of determining laws of the respondent. No copy of board resolution
nationality, wherein corporations that are 60% appointing him as Manager or any other document
owned by Filipinos are automatically considered as showing that he was appointed to said position by
100% Filipino-owned. Only when a corporation is action of the board was submitted by respondent.
less than 60% owned shall the grandfather rule be While it repeatedly claims that petitioner was
applied. appointed as Manager pursuant to the corporation
By-Laws, there are inconsistencies in their
Example: allegations as to how petitioner was placed in said
Using the same facts as the example supra, position, coupled by the fact that they failed to
since MV Corporation is 60% Filipino owned produce any documentary evidence to prove that
then it is considered as 100% Filipino. Hence, petitioner was appointed thereto by action or with
the total Filipino interest in XYZ Company would approval of the board. It has been consistently held
now by 75% (100% of 50% from the MV that an office is created by the charter of the
Corporation plus 50% of 50% from the AC corporation and the officer is elected (or appointed)
Corporation). by the directors or stockholders.
What is the Doctrine of Separate Juridical Applying the Nature of Controversy Test, the
Personality? continuous absences in his post relates to the
A corporation has a personality separate and performance as Manager. Second, the loss of trust
distinct from its individual stockholders or members and confidence stemmed from the alleged acts of
composing it, and the directors, trustees, and establishing a company engaged in the same line
officers that represent it (Art. 44[3], Civil Code). of business and submitting proposals to the clients
of respondent while still serving as its Manager.
Tests to Determine Intra–Corporate Third, when reinstatement was sought, what was
Controversy wanted to be recovered is the position as Manager,
To determine whether a case involves an intra- a position which is declared to be not a corporate
corporate controversy, two elements must concur: position. There was no intent to recover a seat in
(a) the status or relationship of the parties; and, the board of directors or to any appointive or
(b) the nature of the question that is the subject elective corporate position which has been
of their controversy. declared vacant by the board (Renato Real v.
Sangu Philippines, Inc. et. al., G.R. No. 168757,
January 19, 2011).

May an individual, serving in the capacity of What is the liability for torts and crimes of a
company President and CEO be held solidarily corporation?
liable with the corporation? Are there The following illustrates the liability of a corporation
exceptions? for torts and crimes:
No. Obligations incurred by corporate officers,
acting as such corporate agents, are not theirs but Liability for Torts Liability for Crimes
the direct accountabilities of the corporation they A corporation can be It cannot be held liable
represent. As such, they should not be generally held liable for torts for a crime committed by
held jointly and solidarily liable with the corporation. committed by its officers its officers, since it does
for corporate purpose. not have the essential
However, in the exceptional circumstances, PNB vs. Court of element of malice; in
solidary liabilities may be imposed: Appeals, 83 SCRA 237 such case the
1. When directors and trustees or, in (1978). responsible officers
appropriate cases, the officers of a would be criminally
corporation liable. People vs. Tan
a. vote for or assent to [patently] unlawful Boon Kong, 54 Phil. 607
acts of the corporation; (1930).
b. act in bad faith or with gross negligence
in directing the corporate affairs; Recovery of Moral Damages – Non-entitlement to
c. are guilty of conflict of interest to the moral damages.
prejudice of the corporation, its
stockholders, or members, and other A corporation, being an artificial person which has
persons. no feelings, emotions or senses, and which cannot
2. When the director or officer has consented experience physical suffering or mental anguish, is
to the issuance of watered stock or who, not entitled to moral damages. (Solid Homes, Inc.
having knowledge thereof, did not forthwith vs. Court of Appeals, 275 SCRA 267, 1997).
file with the corporate secretary his written
objection thereto. What is the Doctrine of Piercing the Corporate
3. When a director, trustee or officer has Veil?
contractually agreed or stipulated to hold General Rule: A corporation will be looked upon
himself personally and solidarily liable with as a separate legal entity, unless and until sufficient
the corporation. reason to the contrary appears. (Secosa vs. Heirs
4. When a director, trustee or officer is made, of Erwin Suarez Francisco, 433 SCRA 273, 2004).
by specific provision of law, personally liable 1. It is only an equitable remedy.
for his corporate action. 2. It cannot be employed to allow fraud.
3. It applies only when the corporate fiction
The general rule is grounded on the theory that a was the very tool used to commit fraud or
corporation has a legal personality separate and evade obligations.
distinct from the persons comprising it. To warrant 4. It is not available to establish a right for the
the piercing of the veil of corporate fiction, the first time or to theorize.
officers‘ bad faith or wrongdoing must be 5. It is a judicial power and cannot be
established clearly and convincing as bad faith is assumed improvidently by a sheriff.
never presumed (Harpoon Marine Services, Inc.,
et. al. v. Fernan H. Francisco, G.R. No. 167751,
March 2, 2011).

What are the grounds for application of the 6. Parent corporation uses the property of the
Doctrine of Piercing the Corporate Veil? subsidiary as its own;
Piercing the Corporate Veil may be applied on a 7. The directors or executives of the subsidiary
corporation to not act independently in the interest of
1. If done to defraud the government of taxes the subsidiary but take their orders from
due it. parent corporation;
2. If done to evade payment of civil liability. 8. Formal legal requirements of the subsidiary
3. If done by a corporation which is merely a are not observed.
conduit or alter ego of another corporation.
4. If done to evade compliance with Berto was employed as a truck driver of Leepat
contractual obligations. Bahai, Inc., where spouses Mandy and Rose
5. If done to evade financial obligation to its Rogas are alleged President/Owner, and
employees. Manager, respectively. In 2015, Mandy Rogas
informed them that the company would cease
What is the test in determining the applicability its hauling operation for no reason. Berto
of the Doctrine of Piercing the Corporate Veil? requested their employer to issue a formal
General rule: notice regarding the matter but to no avail.
The mere fact that a corporation owns all or Berto proceeded to the Department of Labor
substantially all of the stocks of another corporation and Employment and got a certification
is NOT sufficient to justify their being treated as one therefrom that Leepat Bahai did not file any
entity. notice of business closure. Thereupon, he filed
Exception: an illegal dismissal complaint with the NLRC,
The subsidiary is a mere instrumentality of the which held DMI liable for, Berto then filed a
parent corporation. Motion for Writ of Execution but they
discovered that DMI no longer operates. The
Factors that will justify the application of Piercing of Articles of Incorporation of DMI ironically did
the Corporate Veil. (PNB vs. Ritratto Group, Inc., not include the spouses as its directors or
362 SCRA 216, 2001). officers and those named directors and officers
were persons unknown to them. DMI did not file
1. Parent corporation owns all or most of any notice of business closure, and the creation
subsidiary‘s capital stock; and operation of DMI was attended with fraud
2. The corporations have common directors or making it convenient for the Lees to evade their
officers; legal obligations. As a result, it was prayed that
3. Parent corporation finances the subsidiary; the Lees and the officers named in the
or subsidiary has grossly inadequate incorporation documents be impleaded and be
capital; held solidarily liable with DMI in paying the
4. Subsidiary has substantially no business judgment awards. Is there legal basis to pierce
except with the parent corporation or no the veil of corporate fiction of DMI and hold the
assets except those conveyed to or by the individual managers thereof liable?
parent corporation; Yes, the veil of corporate fiction may be pierced
5. In the papers of the parent corporation or in attaching personal liability against responsible
the statements of its officers, the subsidiary person if the corporation's personality "is used to
is described as a department or division of defeat public convenience, justify wrong, protect
the parent corporation, or its business or fraud or defend crime, or is used as a device to
financial responsibility is referred to as the defeat the labor laws. Piercing the veil of corporate
parent corporation‘s own; fiction is allowed where a corporation is a mere

alter ego or a conduit of a person, or another The articles of incorporation is in the nature of a
corporation‖. contract between the corporation and the
Government, and both sides are bound by its valid
Here, the veil of corporate fiction must be pierced provisions. (Government of P.I. vs. Manila Railroad
because the peculiarity of the situation shows that Co., 52 Phil. 699, 1929). It is described as one that
the Lees controlled DMI and they actively defines the charter of the corporation and the
participated in its operation such that DMI existed contractual relationship between the State and the
not as a separate entity but only as business corporation, stockholders and the State, and
conduit of the Lees. They controlled DMI by making between the corporation and its stockholders.
it appear to have no mind of its own and used DMI (Lanuza vs. Court of Appeals, 454 SCRA 54,
as shield in evading legal liabilities, including 2005).
payment of the judgment awards in favor of
respondents (Dutch Movers, Inc. v. Edilberto What is the procedure for the amendment of the
Lequin, G.R. No. 210032, April 25, 2017). articles of incorporation?
The procedure for amendment of articles of
What is the composition and qualifications of incorporation is as follows:
incorporators? 1. Majority vote of the Board; AND,
The composition and qualifications of incorporators 2. Vote (in a meeting) or mere written assent (no
are as follows: meeting) of 2/3 of the outstanding capital stock,
a. Natural persons; or in case of non-stock corporation, by the
b. Any number from 5-15; members.
c. Majority are residents of the Philippines; and,
d. Each incorporator must own or be a Once approved, dissenting stockholders may
subscriber to at least 1 share of the capital exercise their right of appraisal BUT ONLY IF it
stock of the corporation (Sec.10) involved diminishing of substantial rights previously
granted or creating a new set of share with priority
In addition, their names, nationalities, and rights (Sec. 81).
residences must be provided (Sec. 14(5))
Right of appraisal is the right to withdraw from
What is the rule on corporate term? the corporation and demand payment of the fair
General Rule: A corporation shall exist for a period value of his shares after dissenting from certain
not exceeding 50 years from the date of corporate acts involving fundamental changes in
incorporation. corporate structure.
Exceptions:
a. Sooner dissolved; or, Effectivity: upon approval of the SEC BUT if the
b. Period extended. SEC does not take action within 6 months from
For periods not exceeding 50 years in any single date of filing, the amendment is AUTOMATICALLY
instance by an amendment of the AOI; Extensions EFFECTIVE provided that the delay is not
may not be made earlier than 5 years prior to attributable to the corporation.
the original or subsequent expiry date(s)
EXCEPT if the SEC determines that there are What is the nature and functions of By-Laws?
justifiable reasons for an earlier extension. By-laws have traditionally been defined as
regulations, ordinances, rules or laws adopted by
What is the nature and function of the articles an association or corporation or the like for its
of incorporation? internal governance, including rules for routine
matters such as calling meetings and the like. (San

Miguel Corp. vs. Mandaue Packing Products Plants aid of any political party or candidate or for
Union, 467 SCRA 107, 2005). purposes of partisan political activity;
10. Establish pension, retirement, and other
What are the requisites of valid By-Laws? plans for the benefit of its directors,
It must be approved by the affirmative vote of the trustees, officers and employees; and
stockholders representing MAJORITY of the 11. Exercise such other powers as may be
outstanding capital stock or majority of members (If essential or necessary to carry out its
filed pre-incorporation: must be approved and purposes
signed by all incorporators) and it must be kept in 12. Section 45 recognizes implied powers of
the principal office of the corporation, subject to every corporate entity emanating from its
inspection of stockholders or members during office express powers.
hours (Sec. 74).
What are the Specific Powers (Theory of
What are the binding effects of By-Laws? Specific Capacity)?
By-laws are valid ONLY from date of issuance of
SEC of certification that by-laws are not SPECIFIC
SHAREHOLDERS
inconsistent with the Code. POWERS
Power to Ratified at a meeting by 2/3 of
As to third persons, the general rule is that they are Extend or SH representing the
not bound by the by-laws, except when they have Shorten outstanding capital stock or 2/3
knowledge of the provisions thereof (China Banking Corporate of members of non-stock
Corp. vs. Court of Appeals, 270 SCRA 503, 1997). Term corporations
What are the general powers of a corporation In case of extension of

(Theory of General Capacity)? corporate term, appraisal right
The general powers of a corporation are as follows: may be exercised by the
1. Sue and be sued in its corporate name; dissenting stockholder
2. Succession;
3. Adopt and use a corporate seal; Power to Ratified at a meeting by 2/3 of
4. Amend its Articles of Incorporation; Increase or SH representing the
5. Adopt by-laws; Decrease outstanding capital stock or 2/3
6. For stock corporations - issue or sell stocks Capital Stock of members of non-stock
to subscribers and sell treasury stocks; for or Incur, corporations
non-stock corporation - admit members to Create,
the corporation; Increase
7. Purchase, receive, take or grant, hold, Bonded
convey, sell, lease, pledge, mortgage and Indebtedness
otherwise deal with such real and personal Power to All shareholders of a Stock
property, pursuant to its lawful business; Deny Pre- Corporation have preemptive
8. Enter into merger or consolidation with other Emptive right to subscribe to all issues
corporations as provided in the Code; Rights or disposition of shares of any
9. Make reasonable donations, including those class, in proportion to their
for the public welfare or for hospital, respective shareholdings
charitable, cultural, scientific, civic, or similar Except if such right is denied
purposes: Provided, no corporation, by the articles of incorporation
domestic or foreign, shall give donations in or an amendment thereto

Power to Sell Ratified at a meeting by 2/3 of Contract outstanding capital stock or at
or Dispose of SH representing the least a majority of the
Corporate outstanding capital stock or 2/3 members of both the
Assets of members of non-stock managing and the managed
corporations corporation at a meeting duly
called for that purpose
Grants authorization to the
BOT/BOD for the sale or Should be approved by the 2/3
disposal of corporate assets of stockholders owning
Any dissenting shareholder outstanding capital
may exercise his appraisal stock/members of the
right managed corporation when:
(a)A stockholder or
Power to Dissenting stockholders may stockholders representing the
Acquire Own exercise their right of appraisal same interest of both the
Shares managing and managed
Power to Ratified at a meeting by 2/3 of corporations own more than
Invest SH representing the 1/3 of the total outstanding
Corporate outstanding capital stock or 2/3 capital stock entitled to vote of
Funds in of members of non-stock the managing corporation; or
Another corporations (b) A majority of the members
Corporation of the BOD of the managing
or Business Dissenting stockholders may corporation also constitute a
exercise their right of appraisal majority of the BOD of the
No approval needed if the managed corporation
investment is reasonably
necessary to accomplish the
primary purpose of the Required Number of Votes in the Board
corporation – no appraisal General Rule:
right. The powers of the corporation to be effected
requires a simple majority of the members of the
Investment is in another Board of Directors.
corporation of different
business or purpose BUT in Exceptions:
pursuance of the 1. Majority of Quorum of the Board:
SECONDARY purpose, a. entering into management contracts;
Shareholders or members b. issuance of stock dividends.
consent is required 2. Approval by entire Board:
Power to Should be approved by 2/3 of Grant of compensation to directors
Declare SH representing the
Dividends outstanding capital stock at a
regular/special meeting called
for that purpose
Power to Should be approved by the
Enter Into BOD and by SH owning at
Management least the majority of the

SPECIFIC POWERS OFFICERS requiring (Doctrine of Corporate
Power to Increase or The certificate in approval of Centralized Officers
Decrease Capital duplicate shall be stockholders or Management): A person
Stock or Incur, Create, countersigned by the members The corporate dealing with
Increase Bonded Chairman and the (voting and powers of the a corporate
Indebtedness Secretary in the SH non-voting corporation shall officer is put
meeting shares) be exercised, all on inquiry as
General rule: business to the scope
What are Ultra Vires Acts? Vote necessary conducted and of the latter‘s
Ultra vires acts are those acts which a corporation to approve a all property of authority but
is not empowered to do or perform because they particular such corporation an innocent
are not conferred by its AOI or by the Corporation corporate act as controlled and person
Code, or not necessary or incidental to the exercise provided in this held by the cannot be
of the powers so conferred (Sec. 45). Code shall be board of prejudiced if
deemed to refer directors or he had the
What is the applicability of Ultra Vires Doctrine? only to stocks trustees. right to
The plea of “ultra vires” will not be allowed to with voting rights (Sec. 23) presume
prevail, whether interposed for or against a (Sec. 6) under the
corporation, when it will not advance justice but, on Exceptions: circumstanc
the contrary, will accomplish a legal wrong to the Exceptions (Sec. (1) Executive es the
prejudice of another who acted in good faith. 6): Voting and Committee duly authority of
(Zomer Dev. Corp. vs. International Exchange non-voting authorized in the the acting
Bank, 581 SCRA 115, 2009). shares shall be by-laws (Sec. officers.
entitled to vote in 35);
What are the consequences of Ultra Vires Acts? the following (2) A contracted
The consequences are as follows (Pirovano vs. cases: manager which
Dela Rama Steamship, 96 Phil. 335, 1954): (1) Amendment may be an
of AOI individual, a
1. Wholly executory contract or act – cannot be (2) Adoption, partnership, or
enforced nor can damages be recovered; Amendment and another
2. Wholly executed contracts or act – shall not be Repeal of By- corporation.
interfered with as between the parties or Laws (Sec. 48) (3) In case of
persons whose rights are derived therefrom (3) Sale, Lease, close
BUT the State can always question said Mortgage or corporations,
contract or act; Other Disposition the stockholders
3. Partly executed and partly executory or on the of Substantially may manage
other side who received benefits –recovery all corporate the business of
4. Executory contracts apparently authorized but assets (Sec. 40) the corporation
ultra vires– the principle of estoppel shall apply. (4) Incurring, rather than by a
Creating or board of
How is corporate power exercised by the Increasing directors, if the
following shareholders, board of director, and Bonded AOI so provide
officer? Indebtedness (Sec. 97)
Shareholders Board of Officers (Sec. 38)
Directors (5) Increase or
Corporate acts General rule Authority of Decrease of

Capital Stock majority of ALL
(Sec. 38) the members of
(6) Merger and the board)
Consolidation(Se (4) The act must
c. 76-80) be within the
(7) Investment of powers
funds in another conferred to the
corporation or Board.
business or for
any purpose What is the Trust Fund Doctrine?
other than the Section 122 provides that no corporation shall
primary purpose distribute any of its assets or property except upon
for which it was lawful dissolution and after payment of all its debts
organized (Sec. and liabilities. This means that the ―subscription to
42) the capital of a corporation constitute a fund to
Corporate acts Requisites of a which creditors have a right to look for satisfaction
requiring valid corporate of their claims.‖ (Philippine Trust Co. vs. Rivera, 44
approval of act by the Board Phil. 469, 1923).
stockholders or of Directors
members (Sec. 25) What is the tenure of the directors or trustees?
(voting shares (1) The Board Directors shall hold office for one (1) year until their
only) must act as a successors are elected and qualified (Sec. 23). For
(1) Declaration of BODY in a a term of 1 year within which the director actually
Stock Dividends meeting. (Note: holds office, including the holdover period after the
(Sec. 43) Current SEC end of his term.
(2) Management regulations
Contracts (Sec. allow BOD What are the qualifications and
44) meetings by disqualifications of the directors or trustees?
(3) Fixing the teleconferencing The qualifications are:
Consideration of or 1. If STOCK, director must own at least 1 share of
No-Par shares videoconferenci the capital stock, which stock shall stand in his
(Sec. 62) ng own name (Sec. 23).
(4) Fixing the (2) There must Exception: Trustee in a voting trust may be
Compensation of be a VALIDLY elected director/trustee.
Directors (Sec. constituted 2. If NON-STOCK, trustee must be a member.
30) meeting. 3. Majority of the directors/trustees must be
(3) Their act residents of the Philippines.
must be 4. Must be a natural person
supported by a 5. Of legal age
MAJORITY OF 6. Other qualifications as the by-laws of the
THE QUORUM corporation may provide.
duly assembled
(Exception: The disqualifications are as follows:
Election of 1. Convicted by final judgment of an offense
officers requires punishable by imprisonment for a period
a vote of exceeding 6 years; or

2. A violation of the Corporation Code, committed What is the responsibility of directors, trustees
within five years from the date of his election. and officers for crimes?
This includes violations of rules and regulations As held in the case of Tramat Mercantile vs. Court
issued by the SEC to implement the provisions of Appeals, 238 SCRA 14, 1994, as general rule,
of the Corporation Code (Sec. 27). personal liability of a corporate director, trustee or
officer along (although not necessarily) with the
What is Cumulative Voting/Straight Voting? corporation may so validly attach only when:
It is a device used to enable the minority, by 1. He assents to a patently unlawful act of the
concentrating their cumulative votes on at least one corporation of for bad faith or gross
candidate, to have a representative in the Board of negligence in directing its affairs, or for
Directors. In the election of BOD, a stockholder conflict of interest resulting in damage to the
shall have as many votes as he has number of corporation, its stockholders or other persons
shares times the number of directors up for (Sec. 31, B.P. 68) ;
election. 2. He consents to the issuance of watered
stocks or who, having knowledge thereof,
What is Quorum in the election of Board of does not forthwith file with the corporate
Directors? secretary his written objection thereto (Sec.
It refers to the owners of majority of the outstanding 65, B.P. 68);
capital stock or majority of the members entitled to 3. He agrees to hold himself personally and
vote in a meeting. They must be present, in person solidarily liable with the corporation (De Asis
or by representative authorized to act by written and Co., Inc. vs. Court of Appeals, 136 SCRA
proxy. 599, 1985);
4. He is made by a specific provision of law, to
What are the conditions for removal of a BOD or personally answer for his corporate action
BOT? (Sec. 144, B.P. 68; Sec. 13, TRL).
GR: Any Director or Trustee of a corporation may
be removed from office, with or without cause. Is the Board of Directors of a corporation
(Sec. 28) rendered as functus officio after dissolution?
No. A corporation‘s board of directors is not
XPN: Directors who have been elected by minority rendered functus officio by its dissolution. Sec.122
stockholders exercising cumulative voting can only of the Corporation Code allows a corporation to
be removed for cause. Removal without cause may continue its existence for a limited purpose,
not be used to deprive minority stockholders or necessarily there must be a board that will continue
members of the right of representation to which acting for and on behalf of the dissolved
they may be entitled under Section 24. corporation for that purpose. The board of directors
still has actual legal authority to direct the affairs of
Other requisites: the corporation with respect to the winding up and
1. by a vote of the stockholders holding or liquidation of corporate affairs.
representing 2/3 of the outstanding capital
stock, or if the corporation be a non-stock Sec. 122 of the Corporation Code prohibits a
corporation, by a vote of 2/3 of the members dissolved corporation from continuing its business,
entitled to vote but allows it to continue with a limited personality in
2. at a regular or special meeting after proper order to settle and close its affairs, including its
notice is given complete liquidation. The same provision of law
authorizes the dissolved corporation‘s board of
directors to conduct its liquidation within 3 years

from its dissolution. Jurisprudence recognizes the violations of the said law (Federated LPG Dealers
board‘s authority to act as trustee for persons in Association v. Ma. Cristina L. Del Rosario, G.R. No.
interest beyond the said period (Vitalliano N. 202639, November 9, 2016).
Aguirre II, et. al. v. FQB+7, Inc., et. al., G.R. No.
170770, January 9, 2013). What is the rule on self-dealing directors with
the corporation?
Board of Directors General rule: A contract of the corporation with
The Board of Directors of a corporation is generally one or more of its directors or trustees is
a policy making body, and it is of common VOIDABLE, at the option of such corporation. (Sec.
knowledge and practice that the board of directors 32)
is not directly engaged or charged with the running
of the recurring business affairs of the corporation. Exception: Such contract is VALID if all of the
following conditions are present:
May individuals who are serving as members of 1. That the presence of such director or trustee
the Board of Directors of a corporation, be in the board meeting in which the contract
criminally prosecuted for the violating was approved was not necessary to constitute
provisions of B.P. Blg. 33? a quorum for such meeting;
No, a member of the Board of Directors of a 2. That the vote of such director or trustee was
corporation, cannot, by mere reason of such not necessary for the approval of the contract
membership, be held liable for the corporation‘s 3. That the contract is fair and reasonable under
probable violation of BP 33. Section 4(3) of BP 33, the circumstances; and
as amended provides that: 4. That in case of an officer, the contract has
―When the offender is a corporation, been previously authorized by the board of
partnership, or other juridical person, the directors.
president, the general manager, managing
partner, or such other officer charged with Ratification: In case of absence of the first two
the management of the business affairs conditions above, contract may be ratified if:
thereof, or employee responsible for the 1. Stockholders representing at least
violation shall be criminally liable.‖ 2/3 of the outstanding capital stock or at
least 2/3 of the members in a meeting called
As ruled in prior jurisprudence, a member of the for the purpose voted to ratify the contract.
Board of Directors of a corporation, cannot, by 2. Full disclosure of the adverse
mere reason of such membership, be held liable for interest of the directors or trustees involved
the corporation‘s probable violation of BP 33. If one is made at such meeting.
is not the President, General Manager or Managing 3. Contract is fair and reasonable
Partner, it is imperative that it first be shown that under the circumstances.
he/she falls under the catch-all "such other officer What is the rule between corporations with
charged with the management of the business interlocking directors?
affairs," before he / she can prosecuted. However, The rule is contracts between corporations with
it must be stressed, that the matter of being an interlocking directorates are valid so long as there
officer charged with the management of the is no fraud and the contract is fair and reasonable
business affairs is a factual issue which must be under the existing facts.
alleged and supported by evidence. Clearly, it is
only the General Manager - a position among those Limit: If the director‘s interest is nominal in one of
expressly mentioned as criminally liable under the the contracting corporations (i.e., not exceeding
law - can be prosecuted for ACCS' perceived 20% of outstanding capital stock), then the contract

must comply with the requisites provided under Where Anywhere in or outside of the
Section 32, otherwise, the contract is voidable at Philippines, unless the by-laws
the option of the corporation. provide otherwise
Notice Must be sent to every director or
The rule under Section 33 allowing annulment of trustee at least 1 day prior to
contracts between corporations with interlocking the scheduled meeting, unless
directors resulting in the prejudice to one of the by-laws provide otherwise.
corporation, has no application to cases where
fraud is alleged to have been committed to third May be waived expressly or
parties (DBP vs. Court of Appeals, 363 SCRA 307, impliedly
2001). Who presides The president presides, unless
the by-laws provide otherwise
What is the rule on management contracts? (Sec. 54).
The rule is that such management contracts need Quorum Majority of the number of
to be approved by the board of directors and by directors or trustees as fixed in
stockholders owning at least majority of the OCS or the AOI, unless there is a
by at least a majority of the members in case of stipulation in the by-laws as to
non-stock corporation, of both the managing and quorum.
the managed corporation before concluding the Rule on A vote of abstention is
management contract. Abstention considered to be a vote in itself.
Abstentions will not be counted
What is an executive committee? towards the affirmative and such
It is a committee that may be created according to refusal to vote does not indicate
the by-laws of a corporation composed of not less acquiescence in the action of
than 3 members of the board to be appointed by those who vote.
the Board. The committee may act, by majority vote
of all its members, on such specific matters within What is the Doctrine of Equality of Shares?
the competence of the board, as may be delegated It states that each share shall be EQUAL in ALL
to it by the by-laws, or on a majority vote of the respects to every other share, except as otherwise
board: Except with respect to: provided in the AOI and stated in the certificate of
1. Approval of any action for which stock (Sec. 6).
shareholder‘s approval is also required;
2. Filling of vacancies in the Board; What is voting by proxy?
3. Amendment or repeal of any resolution of Voting by proxy occurs when a stockholder or
the Board which by its express terms is not member does not vote in person in the meetings.
so amendable or may be repealed; and Proxy must be in writing, signed by the stockholder
4. Distribution of cash dividends. or member, and filed with the corporate secretary
before the scheduled meeting. It is valid only for the
What are the rules on Board of Directors meeting for which it is intended which shall not be
meetings? longer than 5 years at any one time (Sec. 58).
Meetings Regular Special
When Monthly, At any time What is a Voting Trust?
unless by-laws upon call of A voting trust is created by one or more
provide the President stockholders of a stock corporation for the purpose
otherwise or as provided of conferring upon a trustee or trustees the right to
in by-laws vote and other rights pertaining to the shares for a

period not exceeding 5 years at any time. NOTE: The Interim Rules on Intra-Corporate
However, in the case of a voting trust specifically Controversies provides for the following are
require as a condition in a loan agreement, said additional rules pertaining to derivative suits:
voting trust may be for a period exceeding 5 years 1. Allows the courts as an incident to the suit
but shall automatically expire upon full payment of to create a management committee or to
the loan. appoint a receiver;
2. A ―derivative action shall not be
What is an individual suit? discontinued, compromised or settled
A suit brought by the shareholder in his own name without the approval of the court;‖
against the corporation when a wrong is directly 3. ―During the pendency of the action, any sale
inflicted against him. of shares of the complaining stockholders
shall be approved by the court;‖
What is a representative suit? 4. ―If the court determines that the interest of
A suit brought by the stockholder in behalf of the stockholders or members will be
himself and all other stockholders similarly situated substantially affected by the discontinuance,
when a wrong is committed against a group of compromise or settlement, the court may
stockholders. direct that notice, by publication or
otherwise, be given to the stockholder or
What is a derivative suit? members whose interest it determines will
A derivative action is a suit by a shareholder to be so affected.‖
enforce a corporate cause of action. The
corporation is a necessary party to the suit, and the Hi-Yield Realty, Inc. vs. CA (590 SCRA 548, 2009)
relief which is granted is a judgment against a third
person in favor of the corporation. Similarly, if a Respondent corporation and Roberto Torres filed a
corporation has a defense to an action against it petition for annulment of real estate mortgage and
and is not asserting it, a stockholder may intervene foreclosure over two lots against petitioners Torres
and defend on behalf of the corporation (Chua vs. and Hi-Yield corporation in the RTC of Makati.
Court of Appeals, 443, SCRA 259, 2004). Petitioner moved to dismiss on the ground of
improper venue and payment of insufficient docket
Requisites for filing a derivative suit: fees. The RTC denied the motion and held that the
1. That he was a stockholder or member at the case is a real action in the form of a derivative suit
time the acts or transactions subject of the cognizable by a special commercial court. The CA
action occurred and at the time the action agreed with the RTC that the case is a derivative
was filed; suit. Is there exhaustion of administrative remedies
2. That he exerted all reasonable efforts to before the filing of the case and is the venue
exhaust all remedies available under the proper?
AOI, by-laws, laws or rules governing the
corporation to obtain the relief he desires, Held: Exhaustion of Intra-Corporate Remedies. –
and alleges the same with particularity in Further, while it is true that the complaining
the complaint; stockholder must satisfactorily show that he has
3. No appraisal rights are available for the act exhausted all means to redress his grievances
or acts complained of; and within the corporation; such remedy is complete
4. The suit is not a nuisance or harassment control or the person against whom the suit is being
suit (Yu vs. Yukayguan, 589 SCRA 588, filed. The reason is obvious: a demand upon the
2009). board to institute an action and prosecute the same
effectively would have been useless and an

exercise in futility. In this case, Roberto alleged in
his petition that earnest efforts were made to reach What is notice of sale?
a compromise among family members/stockholders If the BOD resolves to proceed with the sale:(1)
before he filed the case. Notice of sale and a copy of the resolution shall be
sent to every delinquent stockholder either
Jurisdiction and Venue for Derivative Suits. personally or by registered mail; (2) Notice of sale
Under Sec. 5, Rule 1 of the Interim Rules, the shall furthermore be published once a week for two
proper venue of derivative suit would be in the RTC (2) consecutive weeks in a newspaper of general
which has jurisdiction over the principal office of the circulation in the province or city where the principal
corporation. office of the corporation is located.
Where is the proper venue when there is no What happens in an auction sale and who is
Regional Trial Court branch designated as a considered the highest bidder?
Special Commercial Court to file a derivative In a public auction, the highest bidder is the one
suit or intra-corporate dispute? who is willing to pay the amount of the balance of
If the Regional Trial Court has no internal branch the subscription for the least number of shares.
designated as a Special Commercial Court, the After the bidding, the corporation will give the
proper recourse is to refer the case to the nearest highest bidder the certificate of stock in the number
Regional Trial Court with a designated Special of his bid, the remaining number if any will be
Commercial Court branch within the judicial region. issued a certificate of stock in favor of the original
Upon referral, the Regional Trial Court to which the subscriber as fully paid.
case was referred to should re-docket the case as
a commercial case. And if the said Regional Trial If there are no bidders, then the corporation must
Court has only one branch designated as a Special bid for the whole number of shares (regardless of
Commercial Court, it should assign the case to the how much the stockholder has paid), which shall
sole special branch (Forest Hills Golf and Country then pertain to the corporation as fully paid treasury
Club v. Fil-Estate Properties, Inc., G.R. No. stocks.
206649, 20 July 2016).
A literal compliance with the requisites laid down by
Sale of Delinquent Shares law is necessary because it is equivalent to
What are the effects of delinquency? deprivation of property (Lingayen Gulf Electric
A stock declared delinquent shall be denied the Power Co. vs. Baltazar, 93 Phil. 404, 1953).
right to vote, or be represented in meetings, the
right to examine books, pre-emptive right or any Dissolution and Liquidation
other right EXCEPT the right to dividends in the How is voluntary mode of dissolution of a
manner authorized by the Code, which under corporation effected where no creditors are
Section 43 shall be applied to the payment of this affected?
subscription (Sec. 71). By administrative proceedings through:
1. Majority vote of the Board, by resolution;
What is “Call by Resolution of the Board of 2. Affirmative vote of 2/3 of the outstanding
Directors”? capital stock or 2/3 of the members, as the
The BOD must make a call by resolution case may be;
demanding the payment of the balance of the Provided: Notice of such meeting was
subscription. The notice of call shall be served on published in principal office; if none, then in
each stockholder either personally or by registered a newspaper of general circulation in the
mail (now there is no need for publication). Philippines, with notice sent to each

stockholder or member at least 30 days amended reflecting the shortened term. The SEC
prior to meeting internal rules require the following:
3. Copy of resolution certified by majority of 1. Notice of the dissolution to be published
the directors of trustees and countersigned in a newspaper of general circulation for
by secretary and filed with SEC; 3 consecutive weeks;
4. SEC must issue certificate of dissolution. 2. List of corporate creditors, with their
consent to the shortening of corporate
How is voluntary dissolution of a corporation term;
effected where creditors are affected? 3. Submission by majority
By quasi-judicial proceedings through: stockholder/principal officers an
1. Formal petition filed with SEC Undertaking to personally answer for
 Signed by majority of the any outstanding corporate obligations of
directors/trustees or officers having the corporation;
management of its affairs, verified by 4. Latest audited financial statements
president or secretary or one which must not be earlier than the date
director/trustee; of the stockholders‘ meeting approving
 Set forth all claims and demands against amendment to the AOI, and a BIR
it; clearance on the tax liabilities of the
 Set forth that dissolution was resolved corporation; and
upon affirmative vote of 2/3 of the 5. Under Section 120 of the Corporation
outstanding capital stock or 2/3 vote of Code, it is only upon approval of the
the members, as the case may be amended AOI by the SEC that the
2. SEC shall issue order reciting purpose of corporation shall be deemed dissolved.
petition and shall fix date before which
objections may be filed, which shall not be What are the involuntary modes of dissolution
less than 30 days nor more than 60 days of a corporation?
after entry of order; The involuntary modes of dissolution are as follows:
3. Order shall be published once a week for 3 1. By Expiration of Corporate Term - Once the
consecutive weeks in a newspaper period expires, the corporation is
published in the municipality or city where automatically dissolved without any other
the principal office of the corporation is proceeding and it cannot thereafter be
situated; if none, in a newspaper of general considered a de facto corporation.
circulation in the Philippines, and a copy is 2. Failure to Organize and Commence
to be posted for 3 consecutive weeks in 3 Business Within 2 Years from
public places in such municipality; Incorporation - Failure to formally organize
4. After 5 days‘ notice from expiry date, SEC and commence the transaction of its business
shall hear the petition and the objections or construction of its works within two years -
thereto; its corporate powers shall cease and the
5. If lawful, it shall order the corporation corporation shall be deemed dissolved (Sec.
dissolved, provide for the disposition of 22).
properties, and may appoint a receiver. 3. Legislative Dissolution - The inherent power
of Congress to make laws carries with it the
How is dissolution of a corporation effected by power to amend or repeal them. Involuntary
shortening of corporate term? corporate dissolution may be effected through
By 2/3 vote of the outstanding shares or 2/3 of the the amendment or repeal of the Code.
members, the Articles of Incorporation shall be (implied from Section 145, De Leon)

any corporation, its stockholders, members,
4. Dissolution by the SEC on Grounds under directors, trustees, or officers, nor any liability
Existing Laws - A corporation may be incurred by any such corporation, stockholders,
dissolved by the SEC, upon a verified members, directors, trustees, or officers, shall be
complaint and after proper notice and hearing, removed or impaired either by the subsequent
on the following grounds (Sec. 6, par. i, PD dissolution of said corporation or by any
902-A): subsequent amendment or repeal of this Code
a. Fraud in procuring its certificate of or of any part thereof‖;
registration
b. Serious misrepresentation as to what While Congress may provide for the dissolution
the corporation can or is doing to the of a corporation, it cannot impair the obligation of
great prejudice of or damage to the existing contracts between the corporation and
general public third persons, or take away the vested rights of
c. Refusal to comply or defiance of any its creditors. (De Leon)
lawful order of the Commission
restraining commission of acts which What is liquidation?
would amount to a grave violation of its It connotes a winding up or settling with creditors
franchise and debtors so that assets are distributed to those
d. Continuous in operation for a period of entitled to receive them. It is the process of
at least five years reducing assets to cash, discharging liabilities, and
e. Failure to file by-laws within the required dividing surplus or loss (PVBank Employees Union
period – NUBE vs. Vega, 360 SCRA 33, 2001).
f. Failure to file required reports in
appropriate forms as determined by the What occurs when liquidation is by the
Commission within the prescribed period corporation itself?
g. Other grounds deemed as violation by After the dissolution of the corporation, it shall
the corporation of any provision of the nevertheless be continued as a body corporate
Corporation Code (Sec. 144, BP 68) for 3 years after the time when it would have been
so dissolved but not for the purpose of continuing
Note: the business for which it was established. (Sec.
In case of a deadlock in a close corporation, and 122)
the SEC deems it proper to order the dissolution
of the corporation as the only practical solution What occurs when liquidation is by conveyance
to the dispute (Sec. 104, BP 68) to a trustee within a three-year period?
Within those 3 years, the corporation may appoint a
The limitations on the power to dissolve trustee or receiver who shall carry out the purposes
corporations by legislative enactment are as of liquidation beyond the 3 year winding-up period
follows: (Metropolitan Bank vs. Board of Trustees of
Riverside Mills Provident and Retirement Fund, 630
Under the Constitution, the amendment, SCRA 350, 2010).
alteration, or repeal of the corporate franchise of
a public utility shall be made only ―when the If the 3 year extended life has expired without a
common good so requires‖; trustee or receiver having been expressly
designated by the corporation within that period,
Under Section 145 of the Code, it is provided the BOD / BOT itself, may be permitted to continue
that: ―No right or remedy in favor of or against as ―trustees‖ by legal implication to complete the

corporate liquidation (Pepsi-Cola Products Phils., What are Close Corporations?
Inc. vs. Court of Appeals, 443 SCRA 571, 2004). Close Corporations are those whose articles of
incorporation provide the following: a. number of
What occurs when liquidation is by stockholders not exceeding 20; b. restriction: right
management committee or rehabilitation of first refusal in favor of the stockholder or the
receiver? corporation; and c. The stocks cannot be listed in
However, the mere appointment of a receiver, the stock exchange nor should they be publicly
without anything more does not result in the offered.
dissolution of the corporation nor bar it from the
existence of its corporate rights (Leyte Asphalt & The concept of a close corporation organized for
Mineral Oil Co. Ltd., v. Block Johnston & the purpose of running a family business or
Breenbrawn, 1928). managing family property has formed the backbone
of Philippine commerce and industry. (Gala vs.
Upon five (5) days‘ notice, given after the date on Ellice Agro-Industrial Corp., 418 SCRA 431, 2003).
which the right to file objections as fixed in the
order has expired, the Commission shall proceed to What are non-stock corporations?
hear the petition and try any issue made by the One organized for an eleemosynary purpose and
objections filed; and if no such objection is where no part of its income is distributable to its
sufficient, and the material allegations of the members, trustees, or officers, subject to the
petition are true, it shall render judgment dissolving provision on dissolution. Provided, that any profit
the corporation and directing such disposition of its which a non-stock corporation may obtain as an
assets as justice requires, and may appoint a incident to its operations shall, whenever necessary
receiver to collect such assets and pay the debts of or proper, be used for the furtherance of the
the corporation (Sec. 119, B.P.68) purpose or purposes for which the corporation was
organized (Sec. 87).
May Intervention be allowed as a remedy of an
unsecured creditor under the Rules of What are the purposes of non-stock
Procedure of Corporate Rehabilitation? corporations?
GR: No, intervention is not a proper remedy as it is The purposes for which non-stock corporations are
not allowed under the Rules of Procedure on organized are as follows (Sec. 88):
Corporate Rehabilitation.
Purposes of Non-Stock Corporation
XPN: When a creditor‘s standing or status would be Charitable Scientific
somewhat downgraded, they should be given the Religious Social
opportunity to be heard by way of comment or Educational Civic Service
opposition to afford them due process. (Robinson's Professional Trade
Bank Corporation v. Hon. Samuel H. Gaerlan, et. Cultural Industry
al., G.R. No. 195289, September 24, 2014). Recreational Agriculture
Fraternal Or any combination
What occurs when liquidation is not over after Literacy
the three-year period?
There is nothing in Sec. 122 which bars an action What is the principle of consent in relation to
for the recovery of the debts of the corporation foreign corporations?
against the liquidator thereof, after the lapse of the As a rule, a foreign corporation can have no legal
said three-year period (Republic vs. Marman Dev. existence or status beyond the bounds of the State
Co., 44 SCRA 418, 1972). or sovereignty by which it is created or incorporated

and organized. It exists only in contemplation of law (South African Airways vs. BIR, 612 SCRA
and by force of the law and where that law ceases 665, 2010).
to operate, the corporation can have no existence.
This principle, however, does not prevent a Provided: The following SHALL NOT be
corporation from acting in another State or country deemed ―doing business‖.
with the latter‘s express or implied consent. This is a. Investment as a shareholder in
the ―consent doctrine‖ which is provided in Sections domestic corporations and/or the exercise
125 (Application for a license) and 126 (Issuance of of rights as such investor;
a license). But every power which a corporation b. Having a nominee director or officer
exercises as such in another State depends for its to represent its interests in such
validity upon the laws of the sovereignty in which it corporation; and
is exercised. A corporation can exercise none of c. Appointing a representative or distributor in
the functions and privileges conferred by its charter the Philippines who transacts business in its
in another State or country except by the comity own name and for its own account.
and consent of such State or country (De Leon). d. Mere ownership by a foreign
corporation of a property in a certain state,
What is the Doctrine of “Doing Business” unaccompanied by its active use in
(related to definition under the Foreign furtherance of the business for which it was
Investments Act, R.A. No. 7042)? formed, is insufficient in itself to constitute
Section 3(d) of FIA ‘91 enumerate what ―doing doing business (MR Holdings, Ltd. Vs.
business in the Philippines‖ covers: Bajar, 380 SCRA 617, 2002).
a. Soliciting orders; e. Reinsurance does not per se
b. Service contracts; constitute doing business (Avon Insurance
c. Opening offices, whether called ―liaison‖ PLC vs. Court of Appeals, 278 SCRA 312,
offices or branches; 1997).
d. Appointing representatives or distributors in
the Philippines or who in any calendar year What are the rules on a foreign corporation’s
stay in the country for a period of 180 days or personality to sue?
more; Section 133 of the Code provides that a foreign
e. Participating in the management, supervision corporation doing business in the Philippines
or control of any domestic business, firm, without first obtaining the license to do business
entity or corporation in the Philippines; shall not be permitted to maintain or intervene in
f. Any other act(s) implying a continuity of any action, suit or proceeding in any court or
commercial dealings or arrangements, administrative agency of the Philippines; but such
contemplating to that extent, performance foreign corporation may be sued or proceeded
normally incident to, and in progressive against before Philippine courts or administrative
prosecution of, commercial gain or of the tribunals on any valid cause of action recognized
purpose and object of its business. under Philippine laws.
g. Off-line carriers having general sales agents
in the Philippines are engaged in or doing A foreign corporation has a right to maintain an
business in the Philippines and that their action in Philippine courts even if it is not licensed
income from sales of passage documents to do business and is not actually doing business
here is income from within the Philippines. In on its own to protect its corporate and trade names,
other words, as long as the uplifts of since it is a property right in rem, which it may
passengers and cargo occur to or from the assert to protect against all the world (Converse
Philippines, income is included in the GPB Rubber vs. Universal Rubber Products, 147 SCRA

154, 1987). What is the concept of merger and
consolidation?
A foreign corporation although not doing business Merger occurs when two or more corporations
in the Philippines has a personality to sue to merge into a single corporation which shall be one
oppose the registration of trademark when it is of the constituent corporation (Sec. 76). One
shown that its products using such trademark are corporation survives and continues the combined
being imported and sold in the Philippines, business, while the rest are dissolved and all their
pursuant to the terms of Sec. 21-A or R.A. 166 rights, properties, and liabilities are acquired by the
(General Garments vs. Directors of Patents, 41 surviving corporation (Mindanao Savings and Loan
SCRA 50, 1971). Association vs. Willkom, 634 SCRA 291, 2010).
What is the concept of suability of foreign Consolidation occurs when two or more
corporations? corporations may consolidate into a new single
Section 133 of the Code provides that no foreign corporation which shall be the consolidate
corporation transacting business in the Philippines corporation (Sec. 76).
without a license, shall be permitted to maintain or
intervene in any action, suit or proceeding in any What are the effects of merger or
court of administrative agency of the Philippines. consolidation?
Nevertheless, such foreign corporation may be Section 80 provides that the effects are as follows:
sued or proceeded against before Philippine courts 1. The constituent corporations shall become a
or administrative tribunal on any valid cause of single corporation-for merger: the surviving
action recognized under Philippine laws. corporation; for consolidation-the consolidated
corporation
What are the instances when unlicensed foreign 2. The separate existence of the constituent
corporations may be allowed to sue on isolated corporations shall cease, except that of the
transactions? surviving or consolidated corporations.
Instances of isolated transactions are as follows: 3. The surviving or consolidated corporations shall
Making of a single contract, sale, sale with the possess all the rights, privileges, immunities
taking of a note and mortgage in the state to and powers and subject to the duties and
secure payment thereof, purchase, or note or liabilities of a corporation organized under the
the mere commission of a tort (MR Holdings, Code.
Ltd. vs. Bajar, 380 SCRA 617, 2002). 4. The surviving or consolidated corporations shall
possess all rights, privileges, immunities and
The law does not prohibit foreign corporations franchises of each constituent corporation and
from performing single acts of business. A the properties shall be deemed transferred to
foreign corporation needs no license to sue and vested in the surviving or consolidated
before Philippine courts on an isolated corporation without further act or deed.
transactions. Even a series of transactions 5. All liabilities of the constituents shall pertain to
which are occasional, incidental and casual – the surviving or the consolidated corporation.
not of a character to indicate a purpose to 6. Any pending claim, action or proceeding
engage in business-do not constitute the doing brought by or against any of such constituent
or engaging in business as contemplated by law corporations may be prosecuted by or against
(Lorenzo Shipping vs. Chubb and Sons, Inc., the surviving or consolidated corporation.
431 SCRA 266, 2004). 7. The rights of creditors or liens upon the property
of any such constituent corporations shall not
be impaired by the merger or consolidation.

by the owner therefore, or by his representative
SECURITIES REGULATION CODE for the owner‘s account, such sale or offer for
sale or offer for sale, subscription or delivery not
What securities are exempt from the being made in the course of repeated and
requirement of registration? successive transaction of a like character by
such owner, or on his account by such
1. Any security issued or guaranteed by the representative and such owner or
Government of the Philippines, or by any representative not being the underwriter of such
political subdivision or agency thereof, or by any security;
person controlled or supervised by, and acting 4. The distribution by a corporation actively
as an instrumentality of said Government; engaged in the business authorized by its
2. Any security issued or guaranteed by the articles of incorporation, of securities to its
government of any country with which the stockholders or other security holders as a
Philippines maintains diplomatic relations, stock dividend or other distribution out of
or by any state, province or political subdivision surplus;
thereof on the basis of reciprocity: Provided, 5. The sale of capital stock of a corporation to
That the Commission may require compliance its own stockholders exclusively, where no
with the form and content for disclosures the commission or other remuneration is paid or
Commission may prescribe; given directly or indirectly in connection with the
3. Certificates issued by a receiver or by a sale of such capital stock;
trustee in bankruptcy duly approved by the 6. The issuance of bonds or notes secured by
proper adjudicatory body; mortgage upon real estate or tangible personal
4. Any security or its derivatives the sale or property, when the entire mortgage together
transfer of which, by law, is under the with all the bonds or notes secured thereby are
supervision and regulation of the Office of sold to a single purchaser at a single sale;
the Insurance Commission, Housing and 7. The issue and delivery of any security in
Land Use Rule Regulatory Board, or the exchange for any other security of the same
Bureau of Internal Revenue; issuer pursuant to a right of conversion entitling
5. Any security issued by a bank except its own the holder of the security surrendered in
shares of stock. exchange to make such conversion: Provided,
That the security so surrendered has been
What transactions are exempt from the registered under this Code or was, when sold,
registration requirement under SRC? exempt from the provision of this Code, and that
the security issued and delivered in exchange, if
1. At any judicial sale, or sale by an executor, sold at the conversion price, would at the time
administrator, guardian or receiver or trustee in of such conversion fall within the class of
insolvency or bankruptcy; securities entitled to registration under this
2. By or for the account of a pledge holder, or Code. Upon such conversion the par value of
mortgagee or any of a pledge lien holder the security surrendered in such exchange shall
selling of offering for sale or delivery in the be deemed the price at which the securities
ordinary course of business and not for the issued and delivered in such exchange are
purpose of avoiding the provision of this Code, sold;
to liquidate a bona fide debt, a security pledged 8. Broker’s transaction, executed upon
in good faith as security for such debt; customer‘s orders, on any registered Exchange
3. An isolated transaction in which any security or other trading market;
is sold, offered for sale, subscription or delivery 9. Subscriptions for shares of the capitals

stocks of a corporation prior to the reason of the small amount involved or the limited
incorporation thereof or in pursuance of an character of the public offering.
increase in its authorized capital stocks under
the Corporation Code, when no expense is Any person applying for an exemption under this
incurred, or no commission, compensation or Section, shall file with the Commission a notice
remuneration is paid or given in connection with identifying the exemption relied upon on such form
the sale or disposition of such securities, and and at such time as the Commission by the rule
only when the purpose for soliciting, giving or may prescribe and with such notice shall pay to the
taking of such subscription is to comply with the Commission fee equivalent to one-tenth (1/10) of
requirements of such law as to the percentage one percent (1%) of the maximum value aggregate
of the capital stock of a corporation which price or issued value of the securities.
should be subscribed before it can be
registered and duly incorporated, or its Why the Securities Regulation Code is called a
authorized, capital increase; “truth in securities law”?
10. The exchange of securities by the issuer The Securities Regulation Code is called a ― truth in
with the existing security holders securities law ― because it requires the issuer to
exclusively, where no commission or other make full and fair disclosure of information about
remuneration is paid or given directly or securities being sold or offered to be sold within the
indirectly for soliciting such exchange; Philippines and penalizes manipulative and
11. The sale of securities by an issuer to fewer fraudulent acts, devices and schemes.(2015 Bar)
than twenty (20) persons in the Philippines
during any twelve-month period; and, What is “watered stock” and what is the legal
12. The sale of securities to any number of the consequence of the issuance of such stock?
following qualified buyers:
a. Banks; Watered stocks are stocks issued for a
b. Registered investment houses; consideration less than its par or issued value
c. Insurance companies; or for a consideration in any form other than
d. Pension funds or retirement plans cash, valued in excess of its fair value. Any
maintained by the Government of the director or officer of a corporation consenting to the
Philippines or any political subdivision issuance of watered stocks or who, having
thereof or manage by a bank or other knowledge thereof, does not forthwith express his
persons authorized by the Bangko Sentral objection in writing and file the same with the
to engage in trust functions; corporate secretary shall be solidarily liable with the
e. Investment companies; or, stockholder concerned to the corporation and its
f. Such other persons as the Commission may creditors for the difference between the fair value
rule by determine as qualified buyers, on received at the time of issuance of the stock and
the basis of such factors as financial the par or issued value of the same. (Section 65 of
sophistication, net worth, knowledge, and the Corporation Code).
experience in financial and business
matters, or amount of assets under Insider Trading
management. Who is an insider?
An insider is any person whose position or
The Commission may exempt other transactions, if relationship gives him access to material
it finds that the requirements of registration under information which is not generally available to the
this Code is not necessary in the public interest or public
for the protection of the investors such as by the

What is insider trading? invitation, except as the Commission may
Insider trading is a fraudulent transaction involving otherwise prescribe.
securities perpetrated by a person in possession of
material information not generally available to the (c) Where the securities offered exceed that
public (Sec. 27, SRC; 2015 Bar). which person or group of persons is bound
or willing to take up and pay for, the
Tender Offer Rule securities that are subject of the tender
Any person or group of persons acting in concert offers shall be taken up us nearly as may be
who intends to acquire at least 15% of any class of pro data, disregarding fractions, according
any equity security of a listed corporation of any to the number of securities deposited to
class of any equity security of a corporation with each depositor. The provision of this subject
assets of at least fifty million pesos (50,000,000.00) shall also apply to securities deposited
and having two hundred(200) or more stockholders within ten (10) days after notice of increase
at least one hundred shares each or who intends to in the consideration offered to security
acquire at least thirty percent(30%) of such equity holders, as described in paragraph (e) of
over a period of twelve months(12) shall make a this subsection, is first published or sent or
tender offer to stockholders by filling with the given to security holders.
Commission a declaration to that effect; and furnish
the issuer, a statement containing such of the (d) Where any person varies the terms of a
information required in Section 17 of this Code as tender offer or request or invitation for
the Commission may prescribe. Such person or tenders before the expiration thereof by
group of persons shall publish all request or increasing the consideration offered to
invitations or tender offer or requesting such tender holders of such securities, such person shall
offers subsequent to the initial solicitation or pay the increased consideration to each
request shall contain such information as the security holder whose securities are taken
Commission may prescribe, and shall be filed with up and paid for whether or not such
the Commission and sent to the issuer not alter securities have been taken up by such
than the time copies of such materials are first person before the variation of the tender
published or sent or given to security holders. offer or request or invitation.
(a) Any solicitation or recommendation to 19.2. It shall be lawful for any person to make any
the holders of such a security to accept or untrue statement of a material fact or omit to state
reject a tender offer or request or invitation any material fact necessary in order to make the
for tenders shall be made in accordance statements made in the light of the circumstances
with such rules and regulations as may be under which they are made, not misleading, or to
prescribed. engaged to any fraudulent, deceptive or
manipulative acts or practices, in connection with
(b) Securities deposited pursuant to a any tender offer or request or invitation for tenders,
tender offer or request or invitation for or any solicitation for any security holders in
tenders may be withdrawn by or on behalf opposition to or in favor of any such favor of any
of the depositor at any time throughout the such offer, request, or invitation. The Commission
period that tender offer remains open and if shall, for the purposes of this subsection, define
the securities deposited have not been and prescribe means reasonably designed to
previously accepted for payment, and at any prevent, such acts and practices as are fraudulent,
time after sixty (60) days from the date of deceptive and manipulative.
the original tender offer to request or

Disclosure Rule the operation of the business and financial
When is Disclosure Required to be given? condition of the issuer. (SRC, Sec. 17)
It begins at registration and continues periodically
through the regular filing of periodic report. Types of issuers required to file reports:
1. Those who sold a class of its securities
May Disclosure be suspended? pursuant to a registration statement under
Yes. It may be suspended for any fiscal year after Section 12 of the SRC;
the year such registration became effective if such 2. Those with a class of securities listed for
issuer as of the first day of any such fiscal year, has trading in an Exchange;
less than 100 shareholders of such class of 3. Those with assets of at least PHP 50M and
securities and it notifies the Commission of such. having 200 or more holders each holding at
(SRC IRR, Rule 17.1) least 100 shares;
May a company end performing its duties to Persons acquiring securities

disclosure? If the issuer is one that has to make a report, any
person who acquires directly or indirectly the
General Rule: beneficial ownership of more than 5% of such
Disclosure does not end. Once an issuer becomes class, or in excess of such lesser per centum as the
a reporting company, it remains as such even when Commission by rule may prescribe, shall, within 10
the registration of securities has been revoked. days after such acquisition or such reasonable time
(SRC IRR, Rule 13) as fixed by the Commission, submit to the issuer of
the security, to the Exchange where the security is
XPN: If the primary license is revoked. traded, and to the Commission a sworn statement
containing:
XPN to the XPN: In the case of hospitals and a. His personal circumstances;
educational institutions if the primary license is b. The nature of such beneficial ownership;
revoked, the disclosure requirement still continues c. Any plans the recipient may have affecting a
because of public interest. major change in the business, IF the
purpose was to acquire control of the
Reportorial Requirements business;
Issuers d. The number of shares beneficially owned,
1. Shall file with the Commission within 135 and the number of shares for which there is
days, after the end of the issuer‘s fiscal a right to acquire;
year, or such other time as the Commission e. Granted to such person or his associates;
may prescribe, an annual report which shall f. Information as to any agreement with a third
include among others, a balance sheet, person regarding the securities (SRC, Sec.
profit and loss statement and statement of 18)
cash flows, for such last fiscal year, certified
by an independent certified public Persons with beneficial ownership of 10% or
accountant, and a management discussion more
and analysis of results of operations; and Every person who is directly or indirectly the
2. Such other periodical reports for interim beneficial owner of more than 10% of any class
fiscal periods and current reports on of any equity security, or who is director or an
significant developments of the issuer as officer of the issuer of such security, shall file:
the Commission may prescribe as a. Statement with the SEC and, if such
necessary to keep current information on security is listed for trading on an Exchange,

also with the Exchange, of the amount of all of the Philippines v. SEC, G.R. No. 138949, June 6,
equity securities of such issuer of which he 2001)
is the beneficial owner;
b. Within 10 days after the close of each Is “Short Selling” a prohibited practice?
calendar month, if there is a change in No. However, no short selling of stocks may be
ownership during such month, a statement effected in connection with the purchase or sale of
indicating his ownership at the close of the any security except in accordance with such rules
calendar month and such changes in his and regulations as the Commission may prescribe
ownership as have occurred during such as necessary or appropriate in the public interest
calendar month. (SRC, Sec. 23) for the protection of investors (Sec. 24.2, SRC)
Bangko Sibuyas, through its General Counsel Call, Put and Option Rule
and Corporate Secretary, sought the opinion of No member of an Exchange shall, directly or
the SEC as to the applicability and coverage of indirectly endorse or guarantee the performance of
the Full Material Disclosure Rule on banks, any put, call, straddle, option or privilege in relation
contending that said rules, in effect, amend to any security registered on a securities exchange.
Section 5 (a) (3) of the Revised Securities Act The terms "put", "call", "straddle", "option", or
which exempts securities issued or guaranteed "privilege" shall not include any registered warrant,
by banking institutions from the registration right or convertible security (Sec.25, SRC).
requirement. The SEC, in reply, informed
Bangko Sibuyas that while the requirements of BANKING LAWS
registration do not apply to securities of banks
which are exempt under Section 5(a) (3) of the A.THE NEW CENTRAL BANK ACT (RA 7653)
Revised Securities Act, however, banks with a What is the Bangko Sentral ng Pilipinas (BSP)?
class of securities listed for trading on the The state‘s central monetary authority; it is the
Philippine Stock Exchange, Inc. are covered by government agency charged with the responsibility
certain Revised Securities Act Rules governing of administering the monetary, banking and credit
the filing of various reports with SEC. The CA system of the country and is granted the power of
affirmed the SEC. Is Bangko Sibuyas required supervision and examination over bank and
to comply with SEC’s full disclosure rules? non‐bank financial institutions performing
Yes. Bangko Sibuyas is required to comply with quasi‐banking functions, including savings and loan
SEC‘s full disclosure rule. The exemption from the associations. (Busuego vs. CA, G.R. No. L‐48955,
registration requirement which it enjoys does not June 30, 1987)
necessarily connote that it is exempted from the
other reportorial requirements. Having confined the Distinguish between the grounds for
exemption enjoyed by the bank merely to the initial conservatorship, receivership and liquidation
requirement of registration of securities for public and their effects.
offering, and not to the subsequent filing of various
periodic reports, the SEC, as the regulatory a. CONSERVATORSHIP
agency, is able to exercise its power of supervision Who is a conservator?
and control over corporations and over the One appointed if the bank is in the state of
securities market as a whole. Otherwise, the illiquidity or the bank fails or refuses to maintain
objectives of the `Full Material Disclosure‘ policy a state of liquidity adequate to protect its
would be defeated since the bank and its dealings depositors and creditors. The bank still has
would be totally beyond the reach of respondent more assets than its liabilities but its assets are
Commission and the investing public. (Union Bank not liquid or not in cash thus it cannot pay its

obligation when it falls due. The bank, not the the bank‘s assets and as a valid exercise of police
Central Bank, pays for fees. power to protect the depositors, creditors,
stockholders and the general public. (Central Bank
What are the powers of a conservator? of the Philippines v. CA, G.R. No. 76118 Mar. 30,
1. To take charge of the assets, liabilities, and 1993)
the management thereof;
2. Recognize the management; Can the closure and liquidation of a bank,
3. Collect all monies and debts due said bank; which is considered an exercise of police
4. Exercise all powers necessary to restore its power, be the subject of judicial inquiry?
viability with the power to overrule or revoke Yes. While the closure and liquidation of a bank
the actions of the previous management may be considered an exercise of police power, the
and board of directors of the bank or validity of such exercise of police power is subject
quasi‐bank (First Philippine International to judicial inquiry and could be set aside if it is
Bank vs. CA, G.R. No. 115849, Jan. 24, either capricious, discriminatory, whimsical,
1996). arbitrary, unjust or a denial or due process and
equal protection clauses of the Constitution
Note: Such powers cannot extend to post (Central Bank v. CA, G.R. No. L‐ 50031‐32, July
facto repudiation of perfected transactions. 27, 1981).
Thus, the law merely gives the conservator
power to revoke contracts that are deemed Upon maturity of the time deposit, the bank
to be defective‐ void, voidable, failed to remit. By reason of punitive action
unenforceable or rescissible. Hence, the taken by Central Bank, the bank has been
conservator merely takes the place of the prevented from performing banking operations.
bank’s board. Is the bank still obligated to pay the time
deposits despite the fact that its operations
5. To bring court actions to assail or repudiate were suspended by the Central Bank?
contracts entered into by the bank The suspension of operations of a bank cannot
excuse non‐compliance with the obligation to remit
When is conservatorship terminated? the time deposits of depositors which matured
When Monetary Board is satisfied that the before the bank‘s closure. (Overseas Bank of
institution can continue to operate on its own Manila v. CA, G.R. No. 45886, Apr. 19, 1989)
and the conservatorship is no longer necessary.
b. RECEIVERSHIP
Note: When the Monetary Board, on the Who is a receiver?
basis of the report of the conservator or of One appointed if bank is already insolvent which
its own findings, determine that the means that its liabilities are greater than its
continuance in business of the institution assets.
would involve probable losses to its
depositors or creditors, the bank will go What are the duties of a receiver?
under receivership. 1. The receiver shall immediately gather and take
charge of all the assets and liabilities of the
What is the “Close Now, hear later doctrine? institution.
The law does not contemplate prior notice and 2. Administer the same for the benefit of the
hearing before the bank may be directed to stop creditors, and exercise the general powers of
operations and placed under receivership. The a receiver under the Revised Rules of Court
purpose is to prevent unwarranted dissipation of

3. Shall not, with the exception of administrative What is the rule of promissory estoppel?
expenditures, pay or commit any act that will The doctrine was applied in one case where the SC
involve the transfer or disposition of any asset held that the CB may not thereafter renege on its
of the institution: Provided that the receiver representation and liquidate the bank after majority
may deposit or place the funds of the stockholders of the bank complied with the
institution in non‐speculative investments conditions and parted with value to the profit of CB,
(Sec 30, NCBA). which thus acquired additional security for its own
advances, to the detriment of the bank‘s
Is the receiver authorized to transact business stockholders, depositors and other creditors.
in connection with the bank’s assets and (Ramos v. Central Bank of the Philippines, G.R.
property? No. L‐29352, Oct. 4, 1971)
No, the receiver only has authority to administer
the same for the benefit of its creditors. (Abacus Can a final and executory judgment against an
Real Estate Development Center, Inc. v. Manila insolvent bank be stayed?
Banking Corp, G.R. No. 162270, Apr. 6, 2005) Yes. After the Monetary Bank has declared that a
bank is insolvent and has ordered it to cease
c. LIQUIDATION operations, the assets of the insolvent bank are
What is liquidation? held in trust for the equal benefit of all creditors.
It is an act of settling a debt by payment or One cannot obtain an advantage or preference
other satisfaction. It is also the act or process over another by attachment, execution or
of converting assets into cash especially to otherwise. The final judgment against the bank
settle debts (Black’s Law Dictionary). should be stayed as to execute the judgment would
unduly deplete the assets of the banks to the
Can the liquidator of a distressed bank obvious prejudice of other depositors and creditors.
prosecute and defend suits against the (Lipana v. Development Bank of Rizal, G.R. No.
bank and foreclose mortgages for and in L‐73884, Sept. 24, 1987)
behalf of the bank while the issue on
receivership and liquidation is still HOW BSP HANDLES EXCHANGE CRISIS
pending? What is Legal Tender?
Yes. The Central Bank is vested with the All notes and coins issued by the Bangko Sentral
authority to take charge and administer the are fully guaranteed by the Republic and shall be
monetary and banking systems of the country legal tender in the Philippines for all debts, both
and this authority includes the power to public and private (Sec. 52)
examine and determine the financial
conditions of banks for the purpose of closure What is the legal tender power of coins?
on the ground of insolvency. Even if the bank 1. 1‐Peso, 5‐Peso and 10‐Peso coins:
is questioning the validity of its closure, during In amounts not exceeding P1,000.00;
the pendency of the case the liquidator can 2. 25 centavo coin or less: In amounts not
continue prosecution suits for collection and exceeding P100.00 (Circular No. 537, 2006)
foreclosure of mortgages, as they are acts
done in the usual course of administration of Note: Checks representing demand
the bank. (Banco Filipino v. Central Bank, deposits do not have legal tender power
G.R. No. 70054, Dec. 11, 1991) and their acceptance in the payment of
debts, both public and private, is at the
option of the creditor. However, a check
which has been cleared and credited to the

account of the creditor shall be equivalent to 4 .EXCEPTIONS
a delivery to the creditor of cash in an
amount equal to the amount credited to his What are the instances where examination or
account (Sec. 60). disclosure of information about deposits can be
allowed?
B. SECRECY IN BANK DEPOSITS (R.A. 1405) 1. Upon written consent of the depositor. (Sec. 2);
2. In cases of impeachment. (Sec. 2);
What are the purposes of Secrecy in Bank 3. Upon order of competent court in cases of
Deposits? bribery or dereliction of duty of public officials.
1.To encourage deposit in banking institutions; (Sec. 2);
and 4. In cases where the money deposited or
2.To discourage private hoarding so that banks invested is the subject matter of the litigation.
may lend such funds and assist in the economic (Sec. 2);
development of the country. 5. Upon order of the Commissioner of Internal
Revenue in respect of the bank deposits of a
What are the prohibited acts under the law? decedent for the purpose of determining such
1. Examination/inquiry/looking into all deposits of decedent‘s gross estate. (Sec. 6[F][1], NIRC);
whatever nature with banks or banking 6. Upon the order of the Commissioner of Internal
institutions in the Philippines (including Revenue in respect of bank deposits of a
investment in bonds issued by the government) taxpayer who has filed an application for
by any person, government official or office compromise of his tax liability by reason of
(Sec. 2) financial incapacity to pay his tax liability. (Sec.
2. Disclosure by any official or employee of any 6[f][1],NIRC);
banking institution to any authorized person of 7. In case of dormant accounts/deposits for at
any information concerning said deposit (Sec. least 10 years under the Unclaimed Balances
3). Act. (Sec. 2, Act No. 3936);
8. When the examination is made by the BSP to
What are the kinds of deposits covered? insure compliance with the AML Law in the
1. All deposits of whatever nature with banks or course of a periodic or special examination;
banking institutions found in the Philippines; or 9. With court order:
2. Investments in bonds issued by the Philippine a. In cases of unexplained wealth under Sec. 8
government, its branches, and institutions. of the Anti‐Graft and Corrupt Practices Act
(Sec. 2, R.A. 1405) (PNB v. Gancayco, L‐18343, Sept. 30,
1965);
Are foreign currency deposits covered by the b. In cases filed by the Ombudsman and upon
Secrecy in Bank Deposits (R.A. 1405)? the latter‘s authority to examine and have
No. Foreign currency deposits are covered by R.A. access to bank accounts and records
6426 otherwise known as the Foreign Currency (Marquez v. Desierto, GR 138569, Sept. 11,
Act. Under the same law, all authorized foreign 2003).
currency deposits are considered of an absolutely 10. Without court order:
confidential nature and, except upon the written If the AMLC determines that a particular deposit
permission of the depositors, in no instance shall or investment with any banking institution is
be examined, inquired or looked into by any related to the following:
person, government official, bureau or office a. Hijacking;
whether judicial or administrative private. b. Kidnapping;
c. Murder;

d. Destructive Arson; and, amount extends to whatever is concealed by being
e. Violation of the Dangerous Drugs Act. held or recorded in the name of the persons other
(2004, 2006 Bar Question) than the one responsible for the illegal acquisition.
(Mellon Bank, N.A. v. Magsino, G.R. No. 71479,
What are the requisites before the Ombudsman Oct. 18, 1990)
may examine deposits?
1. There is a pending case before court of The Law on Secrecy of Bank Deposits provides
competent jurisdiction; that all deposits of whatever nature with banks or
2. The account must be clearly identified; banking institutions are absolutely confidential in
3. There is notice upon the account holder and nature and may not be examined, inquired or
bank personnel of their presence during looked into by any person, governmental official,
inspection. bureau or office, unless:
1. in cases of impeachment;
Note: The inspection must cover only the 2. in cases involving bribery;
account identified in the pending case. 3. in cases where the money involved is the
(Marquez v. Desierto, G.R. No. 138569, subject of litigation.
Sept. 11, 2003)
May the Commissioner of Internal Revenue
Can a bank be compelled to disclose the inquire into bank deposits?
records of the accounts of a depositor under Under Section 6(F) of the National Internal
the investigation for unexplained wealth? Revenue Code, the Commissioner of Internal
Since cases of unexplained wealth are similar to Revenue can inquire into the deposits of a
cases of bribery, dereliction of duty, no reason is decedent only for the purpose of determining
seen why it cannot be exempted from the rule the gross estate of such decedent. Apart from
making bank deposits confidential. In this this case, a BIR inquiry into bank deposits cannot
connection, inquiry into illegally acquired property in be made on the basis of the Law on Secrecy of
anti‐graft cases extends to cases where such Bank Deposits.
property is concealed by being held or recorded in
the name of other persons. This is also because May any person, governmental official, bureau
the Anti‐Graft and Corrupt Practices Act, bank or office inquire into bank deposits in cases of
deposits shall be taken into consideration in anti‐graft and corrupt practices?
determining whether or not a public officer has An inquiry into bank deposits is possible only in
acquired property manifestly out of proportion with prosecutions for unexplained wealth under the
his lawful income. (PNB v. Gancayco, G.R. No. Anti‐Graft and Corrupt Practices Act. However,
L‐18343, Sept. 30, 1965) all other cases of anti‐graft and corrupt practices
will not warrant an inquiry into bank deposits (2004
In an action filed by the bank to recover the Bar).
money transmitted by mistake, can the bank be
allowed to present the accounts which it GARNISHMENT OF DEPOSITS, INCLUDING
believed were responsible for the acquisition of FOREIGN DEPOSITS
the money?
Yes, R.A. 1405 allows the disclosure of bank Does garnishment of a bank deposit violate the
deposits in cases where the money deposited is the law?
subject matter of litigation. In an action filed by the No, the prohibition against examination does not
bank to recover the money transmitted by mistake, preclude its being garnished for satisfaction of
necessarily, an inquiry into the whereabouts of the judgment. The disclosure is purely incidental to the

execution process and it was not the intention of personal foreign currency savings account with
the legislature to place bank deposits beyond the Eastern Bank. The partnership instituted an
reach of judgment creditor. (PCIB v. CA, G.R. No. action in court against Michael, Prosperity, and
84526, Jan. 28, 1991) Eastern to compel Michael to return the subject
funds to the partnership and pending litigation
How about foreign currency deposits, can they to order both banks to disallow any withdrawal
be subject to garnishment? from his accounts. At the initial hearing of the
case, the court ordered Prosperity to produce
GR: Foreign currency deposits shall be exempt the records of his Michael’s peso current
from attachment, garnishment, or any other order account and Eastern to produce the records of
or process of any court, legislative body, his foreign currency savings account. Can the
government agency or any administrative body court compel Prosperity and Eastern to
whatsoever. (Sec 8. R.A. 6426) disclose the bank deposits of Michael? Discuss
fully. (1995 Bar)
XPN: The application of Section 8 of R.A. 6426 Yes, but only to Michael‘s peso current account.
depends on the extent of its justice. The This is pursuant to Section 2 of RA 1405 which
garnishment of a foreign currency deposit should allows the disclosure of bank deposits in case
be allowed to prevent injustice and for equitable where the money deposited is the subject matter of
grounds, otherwise, it would negate Article 10 of litigation. However with regard to his foreign
the New Civil Code which provides that ―in case of currency savings account, the disclosure cannot be
doubt in the interpretation or application of laws, it allowed. Pursuant to the Foreign Currency Law, the
is presumed that the lawmaking body intended right exemption to the prohibition against disclosure of
and justice to prevail. (Salvacion vs. Central Bank information concerning foreign bank deposits is to
of the Philippines, G.R. 94723, August 21, 1997) acquire the written consent of the depositor.
Can the foreign currency deposit of a transient Ms. Dette Tor secured a loan from XYZ
foreigner who illegally detained and raped a Company. Casa Seguro, a surety company,
minor Filipina, be garnished to satisfy the issued a bond to further secure the obligation.
award for damages to the victim? Ms. Dette Tor has dollar deposits with Alinganin
The exemption from garnishment of foreign Bank. Can Casa Seguro inquire from Alinganin
currency deposits under R.A. 6426 cannot be Bank about the foreign currency deposits of
invoked to escape liability for the damages to the Dette Tor to determine whether or not the loan
victim. The garnishment of the transient foreigner‘s proceeds were used for the purpose specified
foreign currency deposit should be allowed to in their surety agreement?
prevent injustice and for equitable grounds. The law The surety company which issued the bond cannot
was enacted to encourage foreign currency deposit inquire into the foreign currency deposits. It cannot
and not to benefit a wrongdoer. (Salvacion vs. be examined without the consent of the depositor
Central Bank of the Philippines, G.R. 94723, except in certain situations like violation of anti-
August 21, 1997) money laundering law (GSIS v. CA, G.R. No.
189206, June 8, 2011).
Michael withdrew without authority funds of the
partnership in the amounts of P500th and X, a private individual, maintains a dollar
US$50th for services he claims rendered for the deposit with ABC Bank. X is suspected to be
benefit of the partnership. He deposited the P the leader of a Kidnap for Ransom Gang and he
500th in his personal peso current account with is suspected of depositing all ransom money in
Prosperity Bank and the US$50th in his said deposit account which is all in US Dollars.

The police want to open said account to know if amount extends to whatever is concealed by being
there are really deposits in big amounts. Which held or recorded in the name of the persons other
statement is most accurate? than the one responsible for the illegal acquisition.
a. The same rules under Secrecy of Bank
Deposit Act will apply. Socorro received $10,000 from a foreign bank
b. An approval from the Monetary Board is although she was entitled only to $1,000. In an
necessary to open the account. apparent plan to conceal erroneously sent
c. Because the deposit is in US Dollars, it is amount, she opened a dollar account with her
covered by the Foreign Currency Deposit local bank, deposited $ 10,000 and issued 4
Act which allows disclosure only upon checks in the amount of $2,000 and 1 check for
the written permission of the depositor. $1,000 each payable to different individuals who
d. Approval from the Court is necessary to deposited the same in their respective dollar
order disclosure of the account (2012 accounts with different local banks. The sender
Bar). bank then brought a civil suit before the RTC
for the recovery of erroneously send amount. In
Suggested Answer: the course of trial, the sender presented
C. The deposit, being in US Dollars, is covered by testimonies of bank officials to show that the
the Foreign Currency Deposit Act which allows funds were, in fact, deposited in a bank by
disclosure only upon the written permission of the Socorro and paid out to several persons, who
depositor. A bank can be compelled to disclose the participated in the concealment and dissipation
records of the accounts of a depositor under the of the amount that Socorro had erroneously
investigation for unexplained wealth since cases of received. Socorro moved to strike out the
unexplained wealth are similar to cases of bribery testimonies from the record invoking the law on
and dereliction of duty, no reason is seen why it secrecy of bank deposits. If you were the
cannot be excepted from the rule making bank Judge, would you issue and order to strike
deposits confidential. In this connection, inquiry into them out? Why? (1992 Bar)
illegally acquired property in anti-graft cases If I were the judge, I would deny the motion to strike
extends to cases where such property is concealed them out. The testimonies of the bank officials
by being held or recorded in the name of other showing that the funds were in fact deposited in a
persons. This is also because the Anti-Graft and bank by Socorro and paid out to several persons,
Corrupt Practices Act, bank deposits shall be taken who participated in the concealment and dissipation
into consideration in determining whether or not a of the amount that Socorro had erroneously
public officer has acquired property manifestly out received, were presented in the course of the trial.
of proportion with his lawful income (PNB v. Therefore, the said testimonies must be considered
Gancayco, G.R. No. L-18343, September 30, as involved in the litigation. In the case of, it was
1965). held that R.A. 1405 allows the disclosure of bank
deposits in cases where the money deposited is the
In an action filed by the bank to recover the money subject matter of litigation. In an action filed by a
transmitted by mistake, the bank is allowed to bank to recover money it transmitted by mistake,
present the accounts which it believed were necessarily, an inquiry to its whereabouts of the
responsible for the acquisition of the money. RA amount extends to whatever concealed by, being
1405 allows the disclosure of bank deposits in held or recorded in the name of the persons other
cases where the money deposited is the subject than the one responsible for illegal acquisition.
matter of litigation. In an action filed by the bank to Hence, in the case at bar, the disclosure should be
recover the money transmitted by mistake, allowed and it should not be subject to an order to
necessarily, an inquiry into the whereabouts of the

strike out. (Mellon Bank v. Magsino, G.R. No. possession or name of persons other than their
71479, October 18, 1990). spouse and unmarried children. This is an absurdity
that we will not ascribe to the lawmakers.
Drew Agile, a special customs agent is charged
before the Ombudsman with having acquired Garnishment of bank deposit is not prohibited
property out of proportion to his salary, in The prohibition against examination or inquiry does
violation of the Anti-Graft and Corrupt Practices not preclude its being garnished for satisfaction of
Act. The Ombudsman issued a subpoena duces judgment. The disclosure is purely incidental to the
tecum to the Banco De Acsaya commanding its execution process and it was not the intention of
representative to furnish the Ombudsman the legislature to place bank deposits beyond the
records of transactions by or in the name of reach of judgment creditor (PCIB v. CA, G.R. No.
Drew Agile, his wife and children. A second 84526, January 28, 1991).
subpoena was issued expanding the first by
including the production of records of friends Garnishment of foreign currency deposits
of Drew in said bank and in all its branches and GR: Foreign currency deposits shall be exempt
extension offices, specifically naming them, from attachment, garnishment, or any other order
Drew moved to quash the subpoenas arguing or process of any court, legislative body,
that they violate the Secrecy of Bank Deposits government agency or any administrative body
Law. In addition, he contends that the whatsoever (RA 6426, Sec 8).
subpoenas are in the nature of - fishing
expedition or general warrants and are XPN: The application of Sec. 8 of RA 6426
constitutionally impermissible with respect to depends on the extent of its justice. The
private individuals who are not under garnishment of a foreign currency deposit should
investigation. Is Drew’s contention tenable? be allowed to prevent injustice and for equitable
The contention is not tenable. Jurisprudence holds grounds, otherwise, it would negate Article 10 of
that the inquiry into illegally acquired property-or the New Civil Code which provides that ―in case of
property not legitimately acquired- extends to cases doubt in the interpretation or application of laws, it
where such property is concealed by being held or is presumed that the lawmaking body intended right
recovered in the name of other persons. This and justice to prevail (Salvacion v. Central Bank of
proposition is made clear by RA 3019 which quite the Philippines, G.R. 94723, August 21, 1997). The
categorically states that the term ―legitimately foreign currency deposit of a transient foreigner
acquired property of a public officer or employee who illegally detained and raped a minor Filipina
shall not include property unlawfully acquired by the can be garnished to satisfy the award for damages
respondent, but its ownership is concealed by its to the victim. The exemption from garnishment of
being recorded in the name of, or held by, foreign currency deposits under R.A. 6426 cannot
respondent‘s spouse, ascendants, descendants, be invoked to escape liability for the damages to
relatives or any other persons. To sustain the the victim. The garnishment of the transient
petitioner‘s theory, and restrict the inquiry only to foreigner‘s foreign currency deposit should be
property held by or in the name of the government allowed to prevent injustice and for equitable
official or employee, or his spouse and unmarried grounds. The law was enacted to encourage
children is unwarranted in the light of the provisions foreign currency deposit and not to benefit a
of the statutes in question, and would make wrongdoer (Salvacion v. Central Bank of the
available to persons in government who illegally Philippines, G.R. 94723, August 21, 1997).
acquire property an easy and fool-proof means of
evading investigation and prosecution; all they have
to do would be to simply place the property in

R.A. 6832 creating a Commission to conduct a powers of an investment house and invest in
Thorough Fact-Finding Investigation of the non‐allied enterprises and have the highest
failed coup d’etat of December 1989, capitalization requirement.
recommend measures to prevent the 2. Commercial banks‐ Ordinary banks governed
occurrence of similar attempts at a violent by the GBL which have a lower capitalization
seizure of power and for other purposes, requirement than universal banks and can
provides that the Commission may ask the neither exercise the powers of an investment
Monetary Board to disclose information on house nor invest in non‐allied enterprises.
and/or to grant authority to examine any bank 3. Thrift banks – These are:
deposits, trust or investment funds, or banking a) Savings and mortgage banks;
transactions in the name of and/or utilized by a b) Stock savings and loan associations;
persons, natural or juridical, under c) Private development banks, which are
investigation by the Commission, in any bank primarily governed by the Thrift Banks Act
or banking institution in the Philippines, when (R.A. 7906).
the Commission has reasonable ground to 4. Rural banks – Mandated to make needed credit
believe that said deposits, trust or investment available and readily accessible in the rural
funds, or banking transactions have been used areas on reasonable terms and which are
in support or in furtherance of the objectives of primarily governed by the Rural Banks Act of
the said coup d’etat. Does the above provision 1992 (RA 7353).
not violate the Law on Secrecy of Bank 5. Cooperative banks – Those banks organized
Deposits (R.A. 1405)? (1991 Bar) whose majority shares are owned and controlled
by cooperatives primarily to provide financial and
Suggested Answer: credit services to cooperatives. It shall include
The above provision does not violate RA 1405 cooperative rural banks. They are governed
because the enactment of RA 6832 is valid primarily by the Cooperative Code (RA 6938).
exercise of police power. RA 1405 is in itself a 6. Islamic banks – Banks whose business
statutory enactment which can be validly modified, dealings and activities are subject to the basic
amended or repealed by a subsequent law. The principles and rulings of Islamic Shari‘ a, such
Secrecy of Bank Deposits Act did not amount to a as the Al Amanah Islamic Investment Bank of
contract between the depositors and depository the Philippines which was created by RA 6848.
banks within the meaning of the non-impairment 7. Other classification of banks as determined by
clause of the Constitution. Even if it did, the police the Monetary Board of the Bangko Sentral ng
power of the State is superior to the non- Pilipinas.
impairment clause.
DISTINCTION OF BANKS FROM QUASI‐BANKS
C. GENERAL BANKING ACT (R.A. 8791) AND TRUST ENTITIES
DEFINITION AND CLASSIFICATION OF BANKS What is a quasi‐bank?

What are banks? These are entities engaged in the borrowing of
Entities engaged in the lending of funds obtained funds through the issuance, endorsement or
through deposits from public. assignment with recourse or acceptance of deposit
substitutes for purposes of re‐lending or purchasing
Give the classifications of banks and their of receivables and other obligations (Sec 4). Unlike
definition. banks, quasi‐banks do not accept deposits.
1. Universal banks‐ Primarily governed by the
General Banking Law (GBL), can exercise the

What are trust entities? depositors is concerned, that is, depositary of
These are entities engaged in trust business that deposits. But the same higher degree of diligence
act as a trustee or administer any trust or hold is not expected to be exerted by banks in
property in trust or on deposit for the use, benefit, commercial transactions that do not involve their
or be hoof of others (Sec. 79). A bank does not act fiduciary relationship with their depositors, such as
as a trustee. sale and issuance of foreign exchange demand
draft. (Reyes v. CA, G.R. No. 118492, Aug. 15,
What are financial intermediaries? 2001)
Persons or entities whose principal functions
include the lending, investing, or placement of What is the effect when the teller gave the
funds on pieces of evidence of indebtedness or passbook to a wrong person?
equity deposited with them, acquired by them or If the teller gives the passbook to the wrong person,
otherwise coursed through them, either for their they would be clothing that person presumptive
own account or for the account of others. Q: What ownership of the passbook, facilitating
are deposit substitutes? A: It is an alternative form unauthorized withdrawals by that person. For failing
of obtaining funds from the public, other than to return the passbook to authorized representative
deposits, through the issuance, endorsement, or of the depositor, the bank presumptively failed to
acceptance of debt instruments, for the borrower's observe such high degree of diligence in
own account, for the purpose of relending or safeguarding the passbook and insuring its return
purchasing of receivables and other obligations. to the party authorized to receive the same. The
These instruments may include, but need not be bank‘s liability, however, is mitigated by the
limited to, banker‘s acceptances, promissory notes, depositor‘s contributory negligence in allowing a
participations, certificates of assignment and similar withdrawal slip signed by authorized signatories to
instruments with recourse, and repurchase fall into the hands of an impostor. (Consolidated
agreements Bank and Trust Corporation vs. CA, GR No,
138569, September 11, 2003).
DILIGENCE REQUIRED BY BANKS
Did a bank exercise the diligence required when
What is the degree of diligence required of the pre-termination of the account is allowed
banks in handling deposits? despite discrepancies in the signature and
Extraordinary diligence. The appropriate standard photograph of the person claiming to be the
of diligence must be very high, if not the highest, depositor and failure to surrender the original
degree of diligence; highest degree of care (PCI certificate of time deposit?
Bank vs. CA, 350 SCRA 446, PBCom vs. CA, G.R. No. The bank is negligent because the depositor
No. 121413, 29 Jan. 2001) did not present the certificate of deposit (Citybank,
N.A., vs. Sps. Cabamongan, G.R. No. 146918, May
This applies only to cases where banks are acting 2, 2006).
in their fiduciary capacity, that is, as depository
of the deposits of their depositors. (Reyes v. CA, Is the bank liable when an employee encashed
G.R. No. 118492, Aug. 15, 2001) a check without the requisite of endorsement?
Yes. The fiduciary nature of the relationship
Does the bank need to exercise extra‐ ordinary between the bank and the depositors must always
diligence in all commercial transactions? be of paramount concern. (Philippine Savings Bank
No, the degree of diligence required of banks, is vs. Chowking, G.R. No. 177526, July 04, 2008).
more than that of a good father of the family where
the fiduciary nature of their relationship with their

Is the bank liable when an employee failed to or a good father of a family. The highest degree of
detect a forgery in an application for manager’s diligence is expected. The disregard of its own
check? banking policy amounts to gross negligence, which
Yes, failure to detect the forgeries in the subject the law defines as negligence characterized by the
applications for manager‘s check which could have want of even slight care, acting or omitting to act in
prevented the loss makes a bank liable for loss. a situation where there is duty to act, not
(Philippine National Bank vs. F.F. Cruz and Co., inadvertently but willfully and intentionally with a
Inc., G.R. No. 173259, July 25, 2011, Del Castillo, conscious indifference to consequences in so far as
J.). other persons may be affected. With regard to
collection or encashment of checks, suffice it to say
Mandy Rogas told Mae and Joe Tenga that she that the law imposes on the collecting bank the duty
was expecting a remittance from the US but she to scrutinize diligently the checks deposited with it
does not have a bank account. Out of for the purpose of determining their genuineness
generosity, Mae and Joe Tenga had authorized and regularity. The collecting bank, being primarily
the deposit of a check supposedly issued by engaged in banking, holds itself out to the public as
the US-based Pila Bank to her account in Banco the expert on this field, and the law thus holds it to
De Eli – Buendia branch. Upon learning that the a high standard of conduct. A bank is expected to
amount had been remitted to the bank, Mae and be an expert in banking procedures and it has the
Joe withdrew the money equivalent to the necessary means to ascertain whether a check,
supposed fund of Mandy. Two days later, Pila local or foreign, is sufficiently funded (Philippine
Bank sent a SWIFT message to Banco de Eli, National Bank v. Spouses Cheah, G.R. No.
informing them that the account from which the 170865, April 25, 2012).
check was drawn had insufficient funds. In an
effort to recover the sum of money it lost, NATURE OF BANK FUNDS AND BANK
Banco de Eli sued the Tenga couple. They DEPOSITS
argued that the couple was imprudent in What is the deposit function of banks?
allowing themselves to be used as an The function of the bank to receive a thing,
accommodation party of scammers. May a bank primarily money, from depositors with the obligation
recover the proceeds and excuse itself from of safely keeping it and returning the same.
suffering complete loss by invoking
contributory negligence of its depositor with What are the kinds of deposits between a bank
respect to the clearance of a check? and its depositors?
1. As debtor‐creditor:
No, a bank cannot recover the proceeds of the a. Demand deposits – all those liabilities of
check under the principle it invokes. In the first banks which are denominated in the
place, the gross negligence of PNB, as earlier Philippine currency and are subject to
discussed, can never be equated with a mere payment in legal tender upon demand by
mistake of fact, which must be something representation of checks;
excusable and which requires the exercise of b. Savings deposits – the most common type of
prudence. No recovery is due if the mistake done is deposit and is usually evidenced by a
one of gross negligence. It also failed to do its duty passbook.
of exercising extraordinary diligence and Note: The requirement of presentation of
reasonable business prudence. passbooks is usually included in the terms
and conditions printed in the passbooks. A
It bears stressing that the diligence required of bank is negligent if it allows the withdrawal
banks is more than that of a Roman paterfamilias without requiring the presentation of

passbook (BPI v. CA, GR No. 112392, Feb. Tiong Tick v. American Apothecaries, G.R. No.
29, 2000). 43682, Mar. 31, 1938)
c. Negotiable order of withdrawal account
(NOWA) – Interest‐bearing deposit accounts Is a safety deposit box a form of deposit or
that combine he payable on demand feature of lease?
checks and investment feature of saving The contract for the use of a safe deposit box
accounts; should be governed by the law on lease. Under
d. Time deposit – an account with fixed term; the old banking law, a safety deposit box is a
payment of which cannot be legally required special deposit. However, the new General Banking
within such a specified number of days. Law, while retaining the renting of safe deposit box
2. As trustee‐trustor: Trust account – a savings as one of the services that the bank may render,
account, established under a trust agreement deleted reference to depository function. (Divina,
containing funds administered by the bank for Handbook on Philippine Commercial Law)
the benefit of the trustor or another person or
persons. STIPULATION ON INTERESTS
3. As agent‐principal:
a. Deposit of checks for collection; What are the rules on stipulation of interests?
b. Deposit for specific purpose; 1. Central Bank Circular 416 – 12% per annum in
c. Deposit for safekeeping. cases of:
a. Loans;
What are the types of deposit accounts? b. Forbearance of money, goods and credits;
1. Individual; or, c. Judgment involving such loan or forbearance,
2. Joint: in the absence of express agreement as to
a. ―And‖ account – the signature of both such rate of interest.
co‐depositors are required for withdrawals;
b. ―And/or‖ account – either one of the What are the limitations imposed upon banks
co‐depositors may deposit and withdraw with respect to its loan function?
from the account without the knowledge 1. GR: Single borrower’s limit – The total
consent and signature of the other. amount of loans, credit accommodations and
guarantees that the bank could grant should at
Is an anonymous account prohibited? no time exceed 25% of the bank‘s net worth.
GR: Anonymous accounts or those under fictitious (Sec 35.1, GBL)
names are prohibited. (R.A. 9160 as amended by XPN:
R.A. 9194; BSP Circular No. 251, July 21, 2000) a. As the Monetary Board may otherwise
XPN: In case where numbered accounts is allowed prescribe for reasons of national
such as in foreign currency deposits. However, interest;
banks/non‐bank financial institutions should ensure b. Deposits of rural banks with
that the client is identified in an official or other government‐owned or controlled
identifying documents. (Sec. 8, R.A. 6426 as financial institutions like LBP, DBP, and
amended, FCDA) PNB.
What is the nature of a bank deposit?

All kinds of bank deposits are loan. The bank 2. The total amount of loans, credit
can make use as its own the money deposited. accommodations and guarantees prescribed in
Said amount is not being held in trust for the (a) may be increased by an additional 10% of
depositor nor is it being kept for safekeeping. (Tang the net worth of such bank provided that

additional liabilities are adequately secured by On the matter of estafa, it was ruled that the bank
trust receipt, shipping documents, warehouse money which came to the possession of petitioner
receipts and other similar documents which was money held in trust or administration by him for
must be fully covered by an insurance. (Sec. the bank, in his fiduciary capacity as the President
35.2, GBL); of said bank. It is not accurate to say that petitioner
became the owner of the PhP 8 million because it
3. Loans and other credit accommodations secured was the proceeds of a loan. That would have been
by REM shall not exceed 75% of the appraised correct if the bank knowingly extended the loan to
value of the real estate security plus 60% of the petitioner himself. If the loan was supposed to be
appraised value of the insured improvements for another person through falsification, by making
(Sec. 37, GBL) CM/intangible property such as it appear that said when one person applied for the
patents, trademarks, etc. shall not exceed 75% loan when in fact he did not, there is fraud. Through
of the appraised value of the security (Sec. 38, such fraudulent device, petitioner obtained the loan
GBL); proceeds and converted the same. Under these
circumstances, it cannot be said that petitioner
4. Loans being contractual, the period of payment became the legal owner of the money. Thus,
may be subject to stipulation by the parties. In petitioner remained the bank‘s fiduciary with
the case of amortization, the amortization respect to that money, which makes it capable of
schedule has no fixed period as it depends on misappropriation or conversion in his hands.
the project to be financed such that if it was
capable of raising revenues, it should be at On the matter of DOSRI violation, petitioner is liable
least once a year with a grace period of 3 years due to the reason that he indirectly borrowed the
if the project to be financed is not that profitable money from RBSM. (DOSRI law prohibits the direct
which could be deferred up to 5 years if the and indirect borrowing of a bank‘s DOSRI without
project was not capable of raising revenues. compliance with the requirements) Petitioner
(Sec. 44, GBL); indirectly borrowed from RBSM in his capacity as
its president, knowing fully well that the same has
5. Loans granted to DOSRI: been done by him without the written consent and
a. Director; approval of the majority of the board of directors,
b. Officer; and which consent and approval the said accused
c. Stockholder, which should at least 1% (not deliberately failed to obtain and enter the same in
covered if below 1%); the records of RBSM and transmit a copy thereof to
d. Related Interests, such as DOS‘s spouses, BSP‘s supervising and examining department, by
their relatives within the first degree whether using Enrico Carlos‘ name, the latter having no
by consanguinity or affinity, partnership knowledge of the said loan, and once in possession
whereby DOS is a partner or a corporation of the said amount, petitioner converted the same
where DOS owns at least 20%. to his own personal use and benefit (Hilario P.
Soriano v. People of the Philippines, et. al., G.R.
Restrictions on Bank Exposure to DOSRI No. 162336, February 1, 2010, Del Castillo, J.).
May an Information filed for estafa bar the filing
of another complaint for violating the DOSRI What are excluded from such loan limitations?
Law? Non‐risk loans, such as:
No, the filing of a case for violation of the DOSRI 1. Loans secured by obligations of the Bangko
Law does not bar a subsequent case for estafa Sentral ng Pilipinas or the Philippine
under the RPC. Government;
2. Loans fully guaranteed by the Government;

3. Loans covered by assignment of deposits Patentable Any technical solution of a
maintained in the lending bank and held in Inventions problem in any field of human
the Philippines; activity which is new involves
4. Loans, credit accommodations and an inventive step and is
acceptances under letters of credit to the industrially applicable. (Kho v.
extent covered by margin deposits; CA, G.R. No. 115758, Mar. 11,
5. Other loans or credit accommodations 2002).
which the Monetary Board may specify as
non‐risk items. TECHNOLOGY TRANSFER ARRANGEMENTS
What is a technology transfer arrangement?
INTELLECTUAL PROPERTY LAWS Contracts or arrangements involving the transfer of
systematic knowledge for the manufacture of a
INTELLECTUAL PROPERTY RIGHTS product, the application of the process, or rendering
What are covered by intellectual property a service including management contracts, and
rights? transfer, assignment or licensing of all forms of
intellectual property rights, including licensing of
1. Copyright and Related Rights; computer software except computer software
2. Mark (trade, service and collective); developed for mass market. (Sec. 4.2, IPC)
3. Geographic indications;
4. Industrial designs; What is undisclosed information?
5. Patents; It is any information which:
6. Layout designs (Topographies) of 1. Is a secret in the sense that it is not, as a body
Integrated Circuits; or in precise configuration and assembly of
7. Protection of Undisclosed Information. (Sec. components, generally known among, or readily
4.1, Intellectual Property Code [IPC]) accessible to persons within the circles that
normally deal with the kind of information in
DIFFERENCES BETWEEN COPYRIGHTS question;
TRADEMARKS AND PATENT 2. Has commercial value because it is a secret; or,
Intellectual Definition 3. Has been subjected to reasonable steps under
Properties the circumstances, by the person lawfully in
Trademark Any visible sign capable of control of the information, to keep it a secret.
distinguishing the goods (Article 39, TRIPS Agreement)
(trademark) or services (service
mark) of an enterprise and shall What is the nature of undisclosed
include a stamped or marked information/trade secret?
container of goods. Those trade secrets are of a privileged nature. The
Trade name The name or designation protection of industrial property encourages
identifying or distinguishing an investments in new ideas and inventions and
enterprise. stimulates creative efforts for the satisfaction of
Copyright Literary and artistic works human needs. It speeds up transfer of technology
which are original intellectual and industrialization, and thereby brings about
creations in the literary and social and economic progress. Verily, the
artistic domain protected from protection of industrial secrets is inextricably linked
the moment of their creation. to the advancement of our economy and fosters
healthy competition in trade. (Air Philippines

Corporation v. Pennswell, Inc., G.R. No. 172835, applications are not one and the same. (Sec. 24,
Dec. 13, 2007) IPC)
PATENTS What is meant by “made available to the public”

What is a patent? and what are its effects?
A statutory grant which confers to an inventor or his To be ―made available to the public‖ means at least
legal successor, in return for the disclosure of the one member of the public has been able to access
invention to the public, the right for a limited period of knowledge of the invention without any restriction
time to exclude others from making, using, selling or on passing that knowledge on to others.
importing the invention within the territory of the XPN: Non‐prejudicial disclosure – the
country that grants the patent. disclosure of information contained in the
application during the 12‐month period before
What are the patentable inventions? Any the filing date or the priority date of the
technical solution of a problem in any field of application if such disclosure was made by:
human activity which is new involves an inventive 1. The inventor;
step and is industrially applicable. It may be, or may 2. A patent office and the information was
relate to, a product, or process, or an improvement contained:
of any of the foregoing. (Sec. 21) a. In another application filed by the
inventor and should have not have
What are the conditions for patentability? been disclosed by the office, or,
1. Novelty – An invention shall not be considered b. In an application filed without the
new if it forms part of a prior art. (Sec. 23, knowledge or consent of the inventor
IPC); by a third party which obtained the
2. Involves an inventive step – if, having regard to information directly or indirectly from
prior art, it is not obvious to a person skilled in the inventor;
the art at the time of the filing date or priority 3. A third party which obtained the
date of the application claiming the invention. information directly or indirectly from the
3. Industrially Applicable – An invention that can inventor. (Sec. 25, IPC).
be produced and used in any industry shall be
industrially applicable (Sec. 27, IPC). Who has the burden of proving want of novelty
of an invention?
What is prior art? The burden of proving want of novelty is on him
1. Everything which has been made available to the who avers it and the burden is a heavy one which is
public anywhere in the world, before the filing met only by clear and satisfactory proof which
date or the priority date of the application overcomes every reasonable doubt. (Manzano v.
claiming the invention; CA, G.R. No. 113388. Sept. 5, 1997)
2. The whole contents of a published application,
filed or effective in the Philippines, with a filing or What is inventive step?
priority date that is earlier than the filing or GR: An invention involves an inventive step if,
priority date of the application. having regard to prior art, it is not obvious to a
Provided, that the application which has validly person skilled in the art at the time of the filing
claimed the filing date of an earlier application date or priority date of the application claiming
under Section 31 of the IPC, there shall be a the invention. (Sec. 26, IPC)
prior art with effect as of the filing date of such XPN: In the case of drugs and medicines, there is
earlier application: Provided further, that the no inventive step if the invention results from
applicant or the inventor identified in both the mere discovery of a new form or new

property of a known substance which does not enhancement of the efficacy of that
result in the enhancement of the known efficacy substance;
of that substance. (Sec. 26.2, as amended by 3. Schemes, rules and methods of performing
R.A. 9502) mental acts, playing games or doing
business, and programs for computers;
What is the test of non‐obviousness? 4. Methods for treatment of the human or animal
If any person possessing ordinary skill in the art body;
was able to draw the inferences and he constructs 5. Plant varieties or animal breeds or essentially
that the supposed inventor drew from prior art, then biological process for the production of plants
the latter did not really invent. or animals. This provision shall not apply to
micro‐ organisms and non‐biological and
Who is considered a person of ordinary skill? microbiological processes;
A person who is presumed to: 6. Aesthetic creations;
1. Be an ordinary practitioner aware of what was 7. Anything which is contrary to public order or
common general knowledge in the art at the morality. (Sec. 22, IPC as amended by R.A.
relevant date; 9502)
2. Have knowledge of all references that are
sufficiently related to one another and to the Are computer programs patentable?
pertinent art and to have knowledge of all arts GR: Computer programs are not patentable but are
reasonably pertinent to the particular problems copyrightable.
with which the inventor was involved; XPN: They can be patentable if they are part of a
3. Have had at his disposal the normal means and process (e.g. business process with a step
capacity for routine work and experimentation. involving the use of a computer program).
(Rules and Regulations on Inventions, Rule
207)‘ OWNERSHIP OF A PATENT
Who is entitled to a patent?
Utility Model 1. Inventor, his heirs, or assigns;
When does an invention qualify as a utility 2. Joint invention – Jointly by the inventors. (Sec.
model? 28, IPC);
An invention may qualify as a utility model if it is 3. 2 or more persons invented separately and
new and industrially applicable. A model of independently of each other – To the person
implement or tools of any industrial product even if who filed an application;
not possessed of the quality of invention but which 4. 2 or more applications are filed – the applicant
is of practical utility. (Sec. 109.1, IPC) who has the earliest filing date or, the earliest
priority date. (First to File Rule; Sec. 29, IPC)
What is the term of a utility model? 5. Inventions created pursuant to a commission–
Seven (7) years from date of filing of the application Person who commissions the work, unless
(Sec. 109.3, IPC). otherwise provided in the contract. (Sec. 30.1,
IPC);
NON‐PATENTABLE INVENTIONS 6. Employee made the invention in the course of
What are not patentable inventions? his employment contract:
1. Discoveries, scientific theories and a. The employee, if the inventive activity is not
mathematical methods; a part of his regular duties even if the
2. In the case of Drugs and medicines, mere employee uses the time, facilities and
discovery of a new form or new property of a materials of the employer;
known substance which does not result in the

b. The employer, if the invention is the result 3. Industrial Design – 5 years from the filing date of
of the performance of his regularly‐assigned the application, renewable for not more than
duties, unless there is an agreement, two (2) consecutive periods of five (5) years
express or implied, to the contrary. (Sec. each. (Sec. 118.2, IPC)
30.2, IPC)
PATENT INFRINGEMENT
What is the “First To File” Rule? What are the tests in patent infringement?
1. If two (2) or more persons have made the 1. Literal Infringement Test – Resort must be had,
invention separately and independently of in the first instance, to words of the claim. If the
each other, the right to the patent shall belong accused matter clearly falls within the claim,
to the person who filed an application for such infringement is committed. Minor modifications
invention, or are sufficient to put the item beyond literal
2. Where two or more applications are filed for the infringement. (Godines v. CA, G.R. No. L‐
same invention, to the applicant which has the 97343, Sept. 13, 1993)
earliest filing date. (Sec. 29, IPC) 2. Doctrine of Equivalents – There is infringement
where a device appropriates a prior invention by
What is priority date? incorporating its innovative concept and,
An application for patent filed by any person who although with some modification and change,
has previously applied for the same invention in performs substantially the same function in
another country which by treaty, convention, or law substantially the same way to achieve
affords similar privileges to Filipino citizens, shall be substantially the same result. (Ibid.)
considered as filed as of the date of filing the
foreign application. (Sec. 31, IPC) Does the use of a patented process by a third
person constitute an infringement when the
What are the conditions in availing of priority alleged infringer has substituted, in lieu of
date? some unessential part of the patented process,
1. The local application expressly claims a well‐ known mechanical equivalent.?
priority; Yes, under the doctrine of mechanical equivalents,
2. It is filed within 12 months from the date the the patentee is protected from colorable invasions
earliest foreign application was filed; and, of his patent under the guise of substitution of some
3. Certified copy of the foreign application part of his invention by some well-known
together with an English translation is filed mechanical equivalent. It is an infringement of the
within 6 months from the date of filing in the patent, if the substitute performs the same function
Philippines. (Sec. 31, IPC). and was well known at the date of the patent as a
proper substitute for the omitted ingredient. (Gsell
When shall the patent take effect? v. Yap‐Jue, G.R. No. L‐4720, Jan. 19, 1909)
A patent shall take effect on the date of the
publication of the grant of the patent in the IPO What is meant by “equivalent device”?
Gazette. (Sec. 50.3, IPC) It is such as a mechanic of ordinary skill in
construction of similar machinery, having the forms,
What is the duration of a patent, utility model specifications and machine before him, could
and industrial design? substitute in the place of the mechanism described
1. Patent – 20 years from date of filing of without the exercise of the inventive faculty.
application without renewal. (Sec. 54, IPC);
2. Utility Model – 7 years from the filing date of the
application without renewal. (Sec. 109.3, IPC)

What are the remedies of the owner of the which a patent has been granted or
patent against infringers? assigned, whether or not it is licensed to do
1. Civil action for infringement – The owner business in the Philippines. (Sec. 77, IPC)
may bring a civil action with the appropriate
Regional Trial Court to recover from TRADEMARKS
infringer the damages sustained by the What is a trademark and how does it differ from
former, plus attorney‘s fees and other a trade name?
litigation expenses, and to secure an A make is any visible sign capable of distinguishing
injunction for the protection of his rights. the goods (trademark) or services (service mark) of
2. Criminal action for infringement – If the an enterprise, while a trade name is a name or
infringement is repeated, the infringer shall designation identifying or distinguishing an
be criminally liable and upon conviction, enterprise.
shall suffer imprisonment of not less than
six (6) months but not more than three (3) TRADEMARK TRADE NAME
years and/or a fine not less than Goods or services A natural or artificial
P100,000.00 but not more than offered by a proprietor person who does
P300,000.00; or enterprise are business and produces or
3. Administrative remedy – Where the designated by performs the goods or
amount of damages claimed is not less than trademark (goods) or services designated by
P200, 000.00, the patentee may choose to service marks trademark or service
file an administrative action against the (services) mark.
infringer with the Bureau of Legal Affairs Refers to the goods. Refers to business and its
(BLA). The BLA can issue injunctions, direct goodwill.
infringer to pay patentee damages, but
Acquired only by Need not be registered.
unlike regular courts, the BLA may not issue
registration.
search and seizure warrants or warrants of
arrest.
What is a collective mark?
A "collective mark" or collective trade‐name" is a
What are the limitations to the civil/criminal
mark or trade‐name used by the members of a
action?
cooperative, an association or other collective
1. No damages can be recovered for acts of
group or organization. (Sec. 40, R.A. 166)
infringement committed more than four (4)
years before the filing of the action for
What is the Doctrine of Secondary Meaning?
infringement. (Sec. 79, IPC);
This doctrine is to the effect that a word or phrase
2. The criminal action prescribes in three (3)
originally incapable of exclusive appropriation with
years from the commission of the crime.
reference to an article on the market, because it is
(Sec. 84, IPC)
geographical or otherwise descriptive, may
nevertheless be used exclusively by one producer
Who can file an action for infringement?
with reference to his article so long as in that trade
1. The patentee or his successors‐in‐ interest
and to that branch of the purchasing public, the
may file an action for infringement. (Creser
word or phrase has come to mean that the article
Precision Systems, Inc. v. CA, G.R. No.
was his product. (G. and C. Merriam Co. v.
118708, Feb. 2, 1998),
Saalfield, 198 F. 369, 373, cited in Ang v. Teodoro,
2. Any foreign national or juridical entity who
G.R. No. L‐48226, Dec. 14, 1942)
meets the requirements of Sec. 3 and not
engaged in business in the Philippines, to

Is there an infringement of trademark when two here, used for identical or similar goods or
similar goods use the same words, “PALE services;
PILSEN”? 6. Is identical with an internationally well‐
No, because ―pale pilsen‖ are generic words known mark which is registered in the
descriptive of the color (pale) and of a type of beer Philippines with respect to non‐similar
(pilsen), which is a light bohemian beer with strong goods or services. Provided, that the
hops flavor that originated in the City of Pilsen in interests of the owner of the registered mark
Czechoslovakia. Pilsen is a primarily geographically are likely to be damaged by such use;
descriptive word, hence, non–registrable and not 7. Is likely to mislead the public as to the
appropriable by any beer manufacturer (Asia nature, quality, characteristics or
Brewery, Inc. v. CA, G.R. No. 103543, July 5, geographical origin of the goods or services;
1993). 8. Consists exclusively of signs that are
generic for the goods or services that they
ACQUISITION AND OWNERSHIP OF TRADE seek to identify;
NAME 9. Consists exclusively of signs that have
How are trade names acquired? become customary or usual to designate
Trade names or business names are acquired the goods or services in everyday language
through adoption and use. Registration is not and established trade practice;
required. (Sec. 165, IPC) 10. Consists exclusively that may serve in trade
to designate the kind, quality, quantity,
NON‐REGISTRABLE MARKS intended purpose, value, geographical
What marks may not be registered? origin, time or production of the goods or
1. Consists of immoral, deceptive or rendering of the services, or other
scandalous matter or falsely suggest a characteristics of the goods or services;
connection with persons, institutions, 11. Consists of shapes that may be
beliefs, or national symbols; necessitated by technical factors or by the
2. Consists of the flag or coat of arms or other nature of the goods themselves or factors
insignia of the Philippines or any of its that affect their intrinsic value;
political subdivisions, or of any foreign 12. Consists of color alone, unless defined by a
nation; given form; or,
3. Consists of a name, portrait or signature 13. Is contrary to public order or morality. (Sec.
identifying a particular living individual 123)
except by his written consent, or the name,
signature, or portrait of a deceased PRIOR USE OF MARK AS A REQUIREMENT
President of the Philippines, during the life Is the prior use of the mark still a requirement
of his widow except by written consent of for registration?
the widow; No. Actual prior use in commerce in the Philippines
4. Identical with a registered mark belonging to has been abolished as a condition for the
a different proprietor or a mark with an registration of a trademark. (RA 8293)
earlier filing or priority date, in respect of:
a. The same goods or services; or, TEST TO DETERMINE CONFUSING SIMILARITY
b. Closely related goods or services; or, BETWEEN MARKS
c. If it nearly resembles such a mark as to What are the tests in determining whether there
be likely to deceive or cause confusion; is a trademark infringement?
5. Is identical with an internationally well‐
known mark, whether or not it is registered

1. Dominancy Test – Focuses on the similarity of Registration of the mark shall not confer on the
the prevalent features of the competing marks. If registered owner the right to preclude third parties
the competing trademark contains the main or from using bona fide their names, addresses,
essential or dominant features of another, and pseudonyms, a geographical name, or exact
confusion is likely to result, infringement takes indications concerning the kind, quality, quantity,
place. (Asia Brewery v. CA, G.R. No. 103543, 5 destination, value, place of origin, or time of
July 1993) production or of supply, of their goods or services.
2. Totality or Holistic Test – Confusing similarity INFRINGEMENT AND REMEDIES

is to be determined on the basis of visual, aural, What are the elements to be established in
connotative comparisons and overall impressions trademark infringement?
engendered by the marks in controversy as they 1. The validity of the mark
are encountered in the marketplace. 2. The plaintiff‘s ownership of the mark
Note: The dominancy test only relies on 3. The use of the mark or its colorable imitation by
visual comparisons between two the alleged infringer results in ―likelihood of
trademarks whereas the totality or holistic confusion.‖ (McDonald’s Corporation v. L.C. Big
test relies not only on the visual but also on Mak Burger, Inc., G.R. No. 143993, Aug 18,
the aural and connotative comparisons and 2004)
overall impressions between the two
trademarks. (Societe Des Produits Nestle, What is meant by non‐competing goods?
S.A. v. CA, G.R. No. 112012, Apr. 4, 2001) Those which, though they are not in actual
competition, are so related to each other that it
RIGHTS CONFERRED BY REGISTRATION might reasonably be assumed that they originate
What is the duration of a certificate of from one manufacturer. Non‐competing goods may
trademark registration? also be those which, being entirely unrelated, could
10 years, renewable for a period of another 10 not reasonably be assumed to have a common
years. Each request for renewal must be made source. In the case of related goods, confusion of
within 6 months before or after the expiration of the business could arise out of the use of similar
registration. marks; in the latter case of non‐related goods, it
could not. The vast majority of courts today follow
What are the rights of a registered mark owner? the modern theory or concept of "related goods"
1. Protection against reproduction, or imitation or which the court has likewise adopted and uniformly
unauthorized use of the mark (infringement of recognized and applied. (Esso Standard Eastern,
mark); Inc. v. CA, G.R. No. L‐29971, Aug. 31, 1982)
2. To stop entry of imported merchandise into the
country containing a mark identical or similar to Is there infringement even if the goods are
the registered mark; non‐competing? Are there exceptions?
3. To transfer or license out the mark. No, unless it prevents the natural expansion of his
business and, second, by having his business
USE BY THIRD PARTIES OF NAMES, ETC. reputation confused with and put at the mercy of
SIMILAR TO REGISTERED MARK the second user. (Ang v. Teodoro, G.R. No.
L‐48226, Dec. 14, 1942)
What is the effect of use of Indications by third
parties for purposes other than those for which UNFAIR COMPETITION
the mark is used? What distinguishes infringement of trademark
from unfair competition?

of another. (Ching Kian Chuan v. CA, G.R. No.
INFRINGEMENT UNFAIR 130360, Aug. 15, 2001)
OF TRADEMARK COMPETITION 2. Expression – Must be embodied in a medium
Unauthorized use The passing off of sufficiently permanent or stable to permit it to be
of a trademark. one‘s goods as those perceived, reproduced or communicated for a
of another. period more than a transitory duration.
Fraudulent intent Fraudulent intent is
is unnecessary. essential. What are the elements of originality?
Prior registration Registration is not 1. It is independently created by the author, and
of the trademark is necessary. (Del 2. It possesses some minimal degree of creativity
a prerequisite to Monte Corp. v. CA,
the action G.R. No. 78325, Jan. When does copyright vest?
23, 1990) Works are protected from the time of their creation,
irrespective of their mode or form of expression, as
What is the right protected under unfair well as of their content, quality and purpose.
competition?
A person who has identified in the mind of the What are copyrightable works?
public the goods he manufactures or deals in, his 1. Literary and Artistic Works
business or services from those of others, whether 2. Derivative Works
or not a registered mark is employed, has a a. Dramatizations, translations, adaptations,
property right in the goodwill of the said goods, abridgements, arrangements, and other
business or services so identified, which will be alterations of literary or artistic works;
protected in the same manner as other property b. Collections of literary, scholarly, or artistic
rights. (Sec. 168.1, IPC) works and compilations of data and other
materials which are original by reason of the
TRADE NAMES OR BUSINESS NAMES selection or coordination or arrangement of
What is a trade name or business name? their contents. (Sec. 173)
Any individual name or surname, firm name, device
nor word used by manufacturers, industrialists, Note: Derivative Works shall be protected as
merchants, and others to identify their businesses, new works, provided that such new work
vocations or occupants (Converse Rubber Corp. shall not affect the force of any subsisting
vs. Universal Rubber Products, GR No. L‐27425, copyright upon the original works employed
L‐30505, April 28, 1980). or any part thereof, or be construed to imply
any right to such use of the original works, or
COPYRIGHT to secure or extend copyright in such original
What is copyright? works. (Sec. 173.2, IPC)
A right over literary and artistic works which are
original intellectual creations in the literary and Paeng & Denn was granted a copyright on the
artistic domain protected from the moment of technical drawings of light boxes as
creation. (Sec. 171.1, IPC) "advertising display units". SMI, however,
manufactured similar or identical to the light
What are the elements of copyrightability? box illustrated in the technical drawings
1. Originality – Must have been created by the copyrighted by Paeng & Denn for leasing out to
author‘s own skill, labor, and judgment without different advertisers. Was this an infringement
directly copying or evasively imitating the work of Paeng & Denn’s copyright over the technical
drawings?

No, Paeng & Denn‘s copyright protection extended the author of the work so adapted – audiovisual
only to the technical drawings and not to the light work.
box itself. The light box was not a literary or artistic XPN: The producers shall exercise the
piece which could be copyrighted under the copyright to an extent required for the exhibition
copyright law. If SMI reprinted Paeng & Denn‘s of the work in any manner. (Sec. 178.5, IPC)
technical drawings for sale to the public without 6. Writer – in respect of letters subject to the
license from Paeng & Denn, then no doubt they provisions of Article 723, Civil Code. (Sec.
would have been guilty of copyright infringement. 178.6, IPC)
Only the expression of an idea is protected by 7. GR: Publishers – deemed representatives of the
copyright, not the idea itself. If what Paeng & Denn author in case of anonymous and
sought was exclusivity over the light boxes, it pseudonymous works.
should have instead procured a patent over the XPN: When the contrary appears or where the
light boxes itself. (Pearl and Dean Inc. v. Shoe Mart pseudonym or adopted name leaves no doubt
Inc., GR No. 148222, Aug. 15, 2003) as to the author‘s identity; or author discloses
his identity.
RULES ON OWNERSHIP OF COPYRIGHT 8. In case of collective works – contributor is
Who owns copyright? deemed to have waived his right unless he
1. Author – Original literary and artistic works. expressly reserves it. (Sec. 196, IPC)
(Sec. 178.1, IPC);
2. Co‐authors – Works of joint authorship; in the BR and CT are noted artists whose paintings
absence of agreement, their rights shall be are highly prized by collectors. Dr. DL
governed by the rules on co‐ownership. commissioned them to paint a mural at the
Note: If work of joint authorship consists of main lobby of his new hospital for children.
parts that can be used separately, then the Both agreed to collaborate on the project for a
author of each part shall be the original owner total fee of two million pesos to be equally
of the copyright in the part that he has created. divided between them. It was also agreed that
(Sec. 178.2, IPC) Dr. DL had to provide all the materials for the
3. In the course of employment, copyright belongs painting and pay for the wages of technicians
to: and laborers needed for the work on the
a. The employee, if not a part of his regular project. Assume that the project is completed
duties even if the employee uses the time, and both BR and CT are fully paid the amount
facilities and materials of the employer; of P2M as artists' fee by DL. Under the law on
b. The employer, if the work is the result of the intellectual property, who will own the mural?
performance of his regularly‐assigned Who will own the copyright in the mural? Why?
duties, unless there is an agreement, Explain.
express or implied, to the contrary (Sec. Under Sec. 178.4 of the Intellectual Property Code,
178.3, IPC). in case of commissioned work, the creator (in the
4. The person who commissioned the work shall absence of a written stipulation to the contrary)
own the work but the copyright thereto shall owns the copyright, but the work itself belongs to
remain with the creator – In cases of work the person who commissioned the creation.
pursuant to commission, unless there is a Accordingly, the mural belongs to DL. However, BR
written stipulation to the contrary. (Sec. 178.4, and CT own the copyright, since there is no
IPC) stipulation to the contrary. (1995 Bar Question)
5. GR: Producer, the author of the scenario, the
composer of the music, the film director, and

What are the other limitations on copyright? Copyright Plagiarism is
The fair use of a copyrighted work for criticism, infringement is a specific as it refers
comment, news reporting, teaching including very broad term only to using
multiple copies for classroom use, scholarship, that describes a someone else‘s
research, and similar purposes is not an variety of acts. It work without
infringement of copyright. (Sec. 185, IPC) may be proper
duplication of a acknowledgement.
Note: Decompilation, which is the reproduction of work, rewriting a
the code and translation of the forms of the piece, performing
computer program to achieve the inter‐operability of a written work or
an independently created computer program with doing anything
other programs, may also constitute fair use (e.g. that is normally
the software program for Windows 7 will be considered to be
disassembled by a skilled programmer in order to the exclusive right
understand much of the structure and operation of of the copyright
the program). holder.
There is no Public documents
What is the difference between copyright copyright can be plagiarized
infringement and plagiarism? infringement on so long as it is not
COPYRIGHT PLAGIARISM public documents. acknowledged.
INFRINGEMENT
The unauthorized The use of
use of copyrighted another‘s Virtucio was a composer of llocano songs who
material in a information, has been quite popular in the llocos Region.
manner that language, or Pascuala is a professor of music in a local
violates one of the writing, when done university with special focus on indigenous
copyright owner‘s without proper music. When she heard the musical works of
exclusive rights, acknowledgment of Virtucio, she purchased a CD of his works. She
such as the right the original source. copied the CD and sent the second copy to her
to reproduce or Music instructions for the class to listen to the
perform the CD and analyze the works of Virtucio. Did
copyrighted work, Pascuala thereby infringe Virtucio's copyright?
or to make Explain your answer.
derivative works No, there was no copyright infringement as the
that build upon it. duplication of the CD may be allowed under the
Doctrine of Fair Use, which is a limitation on
copyright. Under this doctrine, the fair use of a
copyrighted work for teaching including multiple
copies for classroom use, scholarship, research,
and similar purposes is not an infringement of
copyright. Pascuala‘s instruction to her class to
analyze the works of Virtucio is within the ambit of
the said doctrine (Section 185.1, IPC, 2017 Bar
Question).

SPECIAL LAWS accommodation, correspondence or
administrative address for a company, a
Anti-Money Laundering Act (R.A. 9160) partnership or any other legal person or
What is money laundering? arrangement, acting as (or arranging for another
Money laundering is an act or series or combination person to act as) a nominee shareholder for
of acts whereby proceeds of an unlawful activity, another person;
whether in cash, property or other assets, are  Persons who are engaged in the managing of
converted, concealed or disguised to make them client money, securities or other assets,
appear to have originated from legitimate sources. management of bank, savings or securities
One way of laundering money is through the accounts, organization of contributions for the
financial system. creation, operation or management of
companies, and creation, operation or
Republic Act No. 9160, otherwise known as the management of juridical persons or
Anti-Money Laundering Act of 2001 (AMLA), as arrangements, and buying and selling business
amended, defined money laundering as a scheme entities, except lawyers and accountants acting
whereby proceeds of an unlawful activity are as independent legal professionals in relation to
transacted or attempted to be transacted, thereby information concerning their clients or where
making them appear to have originated from disclosure of information would compromise
legitimate sources. client confidences or the attorney-client
relationship (as amended by R.A. 10365, Feb.
Who are the covered institutions? 15, 2013);
 Banks, offshore banking units, quasi-banks,  Casinos, including internet and ship-based
trust entities, non-stock savings and loan casinos, with respect to their casino cash
associations, pawnshops, and all other transactions related to the gaming operations
institutions, including their subsidiaries and (as amended by R.A. 10927, July 14, 2017).
affiliates supervised and/or regulated by the
Bangko Sentral ng Pilipinas (BSP); How shall the freezing of monetary instrument
 Insurance companies, holding companies, and or property be done?
all other institutions supervised or regulated by Upon a verified ex parte petition by the AMLC and
the Insurance Commission (IC); after determination that probable cause exists that
 Securities dealers, brokers, pre-need any monetary instrument or property is in any way
companies, foreign exchange corporations, related to an unlawful activity as defined in Section
investment houses, trading advisers as well as 3(i) hereof, the Court of Appeals may issue a freeze
other entities supervised or regulated by the order which shall be effective immediately, and
Securities and Exchange Commission; which shall not exceed six (6) months depending
 Jewelry dealers in precious metals and/or upon the circumstances of the case (Section 10,
stones, who, as a business, trade in precious AMLA).
metals and/or stones;
 Company service providers which, as a business, Provided, That if there is no case filed against a
provide unto third parties services such as acting person whose account has been frozen within the
as a formation agent of juridical persons, acting period determined by the court, the freeze order
as (or arranging for another person to act as) a shall be deemed ipso facto lifted:
director or corporate secretary of a company, a
partner of a partnership, or a similar position in Provided, further, That this new rule shall not apply
relation to other juridical persons, providing a to pending cases in the courts. In any case, the
registered office, business address or court should act on the petition to freeze within

twenty-four (24) hours from filing of the petition. If i. Medicine
the application is filed a day before a nonworking ii. Medical Technology
day, the computation of the twenty-four (24)-hour iii. Dentistry
period shall exclude the nonworking days. iv. Midwifery
v. Nursing
―A person whose account has been frozen may file vi. Nutrition and Dietetics
a motion to lift the freeze order and the court must vii. Optometry
resolve this motion before the expiration of the viii. Pharmacy
freeze order. ix. Physical and Occupational Therapy
x. Radiologic and X-ray Technology
―No court shall issue a temporary restraining order xi. Veterinary Medicine
or a writ of injunction against any freeze order, c. Accountancy
except the Supreme Court.‖ d. Architecture
e. Criminology
Who shall have the authority to inquire into f. Chemistry
bank deposits? g. Customs Brokerage
The authority to inquire into or examine the main h. Environmental Planning
account and the related accounts shall comply with i. Forestry
the requirements of Article III, Sections 2 and 3 of j. Geology
the 1987 Constitution, which are hereby k. Interior Design
incorporated by reference. Likewise, the l. Landscape Architecture
constitutional injunction against ex post facto laws m. Law
and bills of attainder shall be respected in the n. Librarianship
implementation of this Act (Sec. 21) o. Marine Deck Officers
p. Marine Engine Officers
Foreign Investments Act (RA 7042) q. Master Plumbing
Philippine Foreign Investment Negative List r. Sugar Technology
Foreign ownership is limited by constitutional s. Social Work
mandate and specific laws. Hence, there shall be t. Teaching
no foreign equity in: u. Agriculture
1. Mass Media except recording v. Fisheries
2. Practice of professions w. Guidance counselling
a. Engineering x. Real estate service
i. Aeronautical y. Respiratory therapy
ii. Agricultural z. Psychology
iii. Chemical
iv. Civil FINANCIAL REHABILITATION AND INSOLVENCY ACT
v. Electrical Maylupaka Realty commenced an action for
vi. Electronics and Communication unlawful detainer against Allan Graber to
vii. Geodetic recover previously leased premises. Allan
viii. Mechanical Graber argues that the Maylupaka is
ix. Metallurgical incapacitated to file the suit considering it had
x. Mining been placed under receivership by the SEC and
xi. Naval Architecture and Marine a rehabilitation receiver had been duly
xii. Sanitary appointed. Allan furthered that the rehabilitation
b. Medicine and Allied Professions receiver has the power to take possession,

control and custody of the debtor’s assets. Under the 2009 Rules on Corporate Rehabilitation,
Thus, the receiver is the real party-in-interest. corporate rehabilitation is defined as the restoration
Upon such merits, the action was dismissed. of the debtor to a position of successful operation
The Regional Trial Court, on appeal, reversed and solvency, if it is shown that its continuance of
the earlier judgment and held that Maylupaka operation is economically feasible and its creditors
retained all its corporate powers, including the can recover by way of the present value of
power to sue, despite the appointment of a payments projected in the plan more if the
rehabilitation receiver. Citing the Interim Rules, corporation continues as a going concern than if it
it noted that the rehabilitation receiver was not is immediately liquidated.
granted therein the power to file complaints on
behalf of the corporation. Does a receiver have The intention of the law is to effect a feasible and
the exclusive right to sue in behalf of a viable rehabilitation by preserving a floundering
corporation undergoing rehabilitation? business as a going concern, because the assets
of a business are often more valuable when so
Suggested Answer: maintained than they would be when liquidated.
No, being placed under corporate rehabilitation and This concept of preserving the corporations
having a receiver appointed to carry out the business as a going concern while it is undergoing
rehabilitation plan does not ipso facto deprive a rehabilitation is called debtor-in-possession or
corporation and its corporate officers of the power debtor-in-place.
to recover its unlawfully detained property.
Hence, the debtor corporation, through its Board of
Corporations are granted the power to sue in its Directors and corporate officers, remains in control
own name unless specifically revoked by another of its business and properties, subject only to the
law. Corporate rehabilitation imposes several monitoring of the appointed rehabilitating receiver.
restrictions on the debtor corporation, most of
which concern the disposition or encumbrance of The receiver has to be notified of the developments
corporate assets. None, however, touch on its right of the case so that corporate assets would be
to sue for the recovery of assets and collection of managed in accordance with the approved
receivables. rehabilitation plan (Leonardo S. Umale v. ASB
Realty Corporation, G.R. No. 181126, June 15,
2011, Del Castillo).
Sources:
1. PCU Law Case Digests of Supreme Court 6. http://www.vayama.com/pdf/warsawConven
Decisions penned by Associate Justice tion.pdf
Mariano Del Castillo (2009-2017) 7. Central Books eSCRA
2. PCU Law 2017 Pre-Week Notes (www.central.com.ph/escra/)
3. UST Golden Notes 2017 8. Cesar L. Villanueva and Gabriel S.
4. San Beda College of Law 2016 Centralized Villanueva, Commercial Law Review (Rex
Bar Operations Memory Aid in Commercial Book Store, 2015) 389-498 and 590-835
Law. 9. UP Law Bar Operations Commission 2013.
5. Public Act 521, Carriage of Goods by Sea Mercantile Law, 2013. Siklab 2013.
Act 10. Sundiang, SR. and Aquino, Reviewer on
Commercial Law 2017 Edition


PCU 2018 Mercantile Law Reviewer

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Subject Head: Jan Niño R.

ACADS Head: Malyn Gonzales

PHILIPPINE CHRISTIAN UNIVERSITY COLLEGE OF LAW [Page 2 | 76]

TRUST RECEIPTS LAW What are the remedies available of the

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Forgery in Bills of Exchange / Checks Importance of Consideration – The general rule

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Notice of dishonor may be given either to the What is a material alteration?

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XPN: Any person who is forbidden from receiving

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Proof of Observance of Required Diligence Bill of Lading

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Liability per PASSENGER BAGGAGE / CARGO

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CORPORATION CODE 2. Non-Stock Corporation; One expressly

A corporation is a creature of the law granted with 3. Corporation De Jure – A corporation

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What are the general powers of a corporation In case of extension of

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May a company end performing its duties to Persons acquiring securities

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