Jurists Lecture (LOC, TRL, FRIA)

1. If you have been following the news the past few weeks, your Chairman only passed 219 students out of 5,000 examinees.
2. Letters of Credit
a. Typical question in the Bar is Pedro wants to import shoes from abroad. He approaches you, a well-known international trade lawyer, on your advice on what is
the best way to import. What will you advice? The answer will depend on whether Pedro has money with the bank or does he have money at all. If there is
money, go to a Letter of Credit. By definition, you have to have a relationship with the Bank to have an LOC. Will your answer be the same if Pedro has no
money? Yes. Your answer will be different because you will now utilize Trust Receipt. You sign a trust receipt with the bank and in exchange, the Bank will open
its facilities to give you a chance to have a LOC. The payment of which will not be taken from your account but from the proceeds of the sale of the items
covered by the trust receipt. Those are the definitions of the two in a nutshell.
b. What is an LOC? The nature of LOC is found in BPI vs. CIR.
BPI vs. CIR Under Code of Commerce, LOC are those issued by the merchant to another for the purpose of attending to a commercial transaction (Art. 567)

i. I call it the Middle Ground Document.

1. Why? It is the document that gathers two persons and make them agree. A seller who does not want to deliver the goods unless he is paid
and a buyer who does not want to pay unless the goods are delivered. If you have those two persons and you have no means to reconcile,
you’ll never have a transaction.
ii. (MEMORIZE BECAUSE BAR CHAIR ASKS THESE) LOC is a financial device or mode of payment developed as a convenient and relative safe mode of
dealing with sale of goods to satisfy the seemingly irreconcilable interests of a seller who does not want to part with his goods without being paid
and a buyer who does not want to pay without having control over the goods.
1. The situation of advance payment will happen only if the goods are so desirable that everyone is willing to pay you. If you meet for the first
time, the above situation is the usual situation.
iii. Is the Code of Commerce still a good law? Yes.
1. Transportation Law may be asked in relation to the maritime incident with a Chinese vessel and a Filipino fishing boat (news)
iv. (Dean Villanueva on LOC) It is an instrument issued by a bank on behalf of one of its customers, authorizing an individual or firm to draw on the
bank or one of its correspondents for its account under certain conditions of the credit.

Prudential Bank vs. An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon
CA, 216 SCRA 257 compliance with the conditions specified in the credit. Through it, the bank substitutes its own promise to pay with the promise to pay off one of its
customers who, in return, promises to pay the bank the funds mentioned in the letters of credit or commitment fees mutually agreement upon.

c. In effect, these are absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument.
i. Essentially, the seller does not trust you but he trusts your bank; or the bank of the seller trusts the bank of the buyer. That being said, are letters of
credit primary or secondary contracts?
Metropolitan vs. Daway They are primary obligations and not accessory contracts. While they are security arrangements, they are not converted into contracts of
guaranty.

ii. It is a commercial transaction because it is one of the contracts provided for by the Code of Commerce not repealed by the Civil Code.

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 d. What the LC is not?
i. While a standby LOC is a security arrangement as they secure the obligation of the borrower to the lender, they are not converted into a contract of
guaranty.
1. If the bank says that the LOC is a contract of guaranty, that will be ultra vires on the part of the Bank.
Insular Bank of Asia vs. Standby Letters of Credit are primary obligations and not accessory contracts.
IAC, 1988
Transfield Philippines vs. Relationship between seller and the issuing bank is not strictly contract because there is no privity. However strict compliance with its terms is an
Luzon Hydro, 2004 enforceable right. Nevertheless, LC is not a contract pour autrui because Issuing Bank must honor the drafts the seller issued against the LC
regardless of problems that may arise in the contract of sale.

While the Issuing Bank is bound to honor the credit, it is the seller and not the buyer who has the right to ask it to honor the credit by allowing him
to draw on it. Since the issuing bank’s client (buyer) cannot draw on the LC, there is no assignment between the buyer and the seller.

If properly used, LC is not a contract of suretyship or gurantee because the Issuing Bank’s liability is primary following a default. Guarantees
destroy the independence of the bank’s responsibility from the contract. Guarantor’s obligation is merely collatereal and arises only upon default
of the person liable, while in LOC, there is a primary obligation.

LC is not a negotiable instrument, because it is not payable to the order or bearer and is generally conditional. Yet, the draft presented under it is
often negotiable.

e. Governing Laws:
i. Code of Commerce (only 5 sections here)
ii. Uniform Customs and Practice for Documentary Credits (UCP)
1. Why do we adhere to something that is not even a law? Go to the Code of Commerce. Observance of the UCP is justified in Art. 2 which
provides that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by the usage
and customs generally observed. UCP is a repository of usage and customs.
2. What is the significance of UCP TO LOC?
a. It allows LOC to be payable to order. If you look at the Code of Commerce, you can only issue the LOC in favor of a definite person
and not to order. But after the adoption to UCP, an LOC can now be issued to order.
f. Conditions of LOC:
i. It is now allowed to be payable to order (UCP)
ii. Its amount is fixed and specified (Art. 568)
1. What is the effect of non-compliance of these conditions on LOC?
a. If any of these essential conditions is not present, the instrument is merely considered a Letter of Recommendation. This means that
the receiving bank on behalf of the seller may say that they cannot accept it.

g. Duration of LOC: LC becomes void if it is not used with the applicable period
i. Upon the period fixed by parties
ii. If none is fixed, it will depend on when you will use it (there is a misconception that LOC is used only for international trade; these are also available in
domestic transactions)—6 months from its date if used in the Philippines or 12 months if used abroad (Art. 572)

h. What is the point of reckoning with respect to the perfection of the LC?
Belman Inc. vs. Central Bank, An LC issued embodies a valid and binding contract but the LC is deemed consummated only from the moment the correspondent bank
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1958 pays the persons in whose favor the LC has been opened.

Johannes Schuback & Sons vs. CA, Opening an LC in favor of the seller is only a mode of payment. It is not among the requisites for perfection of a contract of sale.
1993 Therefore, the non-opening of an LC will not prevent the perfection of sale between parties, when it is not specifically provided as a
suspensive condition.

i. This is the period of perfection of the promise in LC. However, you count it from the date of issuance.

i. Parties Involved:
i. Applicant (buyer or importer); One who purchases the goods, procures the LC, and obliges himself to reimburse the issuing bank upon receipt of the
documents of title. He will have a relation with the Issuing or Opening Bank.
ii. Issuing/Opening Bank; One which issues the LC, and undertakes to pay the seller upon receipt of draft and proper documents of title from the seller
and to surrender them to the buyer upon reimbursement.
iii. (On the other side) Seller/Exporter/Beneficiary; One who sells the goods to the buyer and who delivers the draft and documents to the issuing bank to
recover payment.
iv. Advertising or Notifying Bank; Correspondent bank (agent) of the opening bank through which it advises the beneficiary of the LC.
1. EX: A wants to import play stations from Sony in US. Sony wants to deal but through letters of credit. A talks to his bank, BPI. BPI asks what is
Sony’s bank (Sony’s bank will be the advertising or notifying bank). Sony’s bank will notify Sony that there is a letter of credit issued on its
behalf by BPI because it has a buyer.
v. Down the line: These apply when you are dealing with persons who are not holding their office in the capital city of that country or are not holding
their office in the province and there are banks that will have to be involved. More parties get involved depending on where the office is.
1. Confirming Bank; bank which confirms the LC issued, upon the request of the beneficiary.
a. Usually, in the hierarchy of banks pertaining to letter of credit:
i. Commercial and Universal banks are allowed to issue it. If it is not those banks, LOC cannot be granted. Rural Banks can
issue but only for local use.
ii. What if the bank of Sony does not know BPI? Sony’s bank will now ask a bank on whether BPI is trustworthy etc. (this is now
the Confirming Bank).
2. Paying Bank; bank on which the drafts are to be drawn. It may be the opening bank or another bank not in the city of the beneficiary.
a. If the location is not in the city where there is the account of the beneficiary, it goes through the Paying Bank.
3. Negotiating Bank; bank in the city of the beneficiary which buys or discounts the drafts contemplated by the LC, if such draft is to be drawn
on the opening bank or on another designated bank not in the city of the beneficiary.
a. It is the bank in the city of the seller who will now discount or buy the drafts because BPI has no relationship with any bank in that
ultimate destination.
b. Before negotiation, it has no liability to the seller.
c. After negotiation, it has a contractual relationship with the seller just like between a drawer and purchaser of drafts. It only deals
with documents and not on goods described in those drafts.
d. It has right of recourse against the Issuing bank. Until reimbursement is obtained, it continues to assume contingent liability. ß
i. The number of parties may be increased. Modern letters of credit are usually not made between natural persons. They
involve bank to bank transactions.
1. What now if its bank to bank? The LC deals only with documents.
2. Why do you have to know the distinctions?

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 a. A mere advertising or notifying bank is not liable for a breach of letter of credit (why? They just advise
you)
b. Confirming bank is liable in case of breach (it was on its own that the bank, or in the example, BPI, could
be trusted).

Bank of America vs. CA, 1993 An advertising bank is bound only to check the apparent authenticity of the LOC.

j. Stages in the life of an LC:

i. The first executed will be the primary contract of sale between the buyer and seller.
ii. The buyer will apply for an LC with the bank.
iii. The bank will do due diligence over the application. The bank will ask for account details, who are the involved parties etc.
iv. The bank will issue an LC in favor of the buyer.
v. It will send a notification to the notifying or advertising bank of the seller.
vi. The notifying bank will inform the seller that there is a letter of credit issued for him.
vii. If the notifying bank does not know the issuing bank, it will ask another bank or a confirming bank to confirm the status or credibility of the issuing
bank. Such bank will vouch for the integrity of the issuing bank.
viii. If all are okay, the seller will ship the goods.
ix. While the goods are in transit, the draft will be executed and tendered to the buyer. The seller will comply with all documentary requirements
requested by the bank of the buyer (this is the foundation of Strict Compliance Rule; if the buyer’s bank requests that the seller should give 12
documents, seller must prepare 12 documents; if 2 of the 12 documents are fake, he will not be paid under the Fraud Exception Rule applies)
x. The buyer’s bank will now ask, were the goods delivered? The reference will be the Bill of Lading.
xi. The draft (payment) is redeemed and the issuing bank obtains the documents prepared by the seller.
xii. The buyer will now redeem the bank of the amount the issuing bank paid to the seller and he will obtain the seller’s documents. The issuing bank will
charge it to the buyer’s account.
1. The key to understanding all of these is the matter of IncoTerms.

k. Inco-Terms (International-Commercial Terms; examples are FOB, EXW)

i. They are short-hand abbreviations for Trade Terms commonly used in international trade, published by International Chamber of Commerce, Paris.
ii. The main purpose of the trade term is to determine at what point the seller has fulfilled his obligations so that the goods could be said to have been
delivered to the buyer in a legal sense.
iii. Function of trade terms:
1. Who shall arrange and pay for freight
2. Who shall arrange and pay for import or export licenses
3. Who shall arrange the insurance of risk of loss and damages
iv. These are not synonymous to payment terms. These are also called shipment terms or delivery terms.
1. Payment terms are different:
a. Advance payment (it happens when both parties know each other)
b. Open account
c. Collections
d. Letters of credit
e. Standby letters of credit

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v. To illustrate:
1. Advance payment:

2. Open account

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3. Collections

4. Letters of credit

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 5. Standby letters of credit (its functions is of a guaranty)
a. It can be used or not as opposed of a letter of credit.
b. The SBLC becomes material if there is default like when buyer does not pay directly to seller. In that moment, seller will tell the
default to the bank and the seller’s bank will advice the buyer’s bank. The issuing bank will pay the seller’s bank and charge it from
the buyer’s account.

vi. Commonly used in Transportation Law:

1. FOB (Free on Board): until the goods are carried from the factory to the pier and until to carrier
2. FAS: the truck will be brought to the side of the carrier; the moment from the truck to the carrier is now a liability of the carrier.
3. CIF (Cost Insurance Freight): liability of the buyer because he already paid for costs, insurance and freight. He can now claim from insurance
and insurance go after under subrogation.
4. These are important to know when liability for loss is transferred.

l. There are several relationships involved in an LOC transaction (this was asked in the Bar; enumerate the relations)
i. Contracts involved in an LOC transaction: there are at least 3 distinct and independent contracts involved in an LC transaction
1. Contract of sale between the buyer and the seller
2. Contract of the buyer with the issuing bank
3. Letter of Credit roper in which the bank promises to pay the seller pursuant to the terms and conditions stated therein (with a pour autrui
stipulation in favor of the seller)
a. You might want to add that there is a separate and distinct contract between the seller and its bank and the two banks involved.

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 b. Knowing these relationships, you can revert to the Independence Principle of LOC. Each of the relationships here are independent of
each other.

ii. Applicable Rules Governing Each Independent Transaction

1. Issuing bank and applicant buyer/importer shall be governed by the terms of the application and agreement for the bank’s issuance of the
letter of credit.
2. Issuing bank and beneficiary/seller/exporter shall be governed by the terms of the letter of credit issued by the bank.
3. Applicant and beneficiary shall be governed by the sales contract.

m. Independence Principle of LOC:

i. The 3 basic contracts are distinct and independent, and the undertakings of the respective parties in each are neither subject to claims and defenses
nor affected by the breach in others.
1. A direct consequence of the Independence Principle is the rule that banks deal only with documents and not with goods, services or
obligations to which they relate. (Use this in Bar Exams)
2. By this principle, the bank determines compliance with LOC only by examining the shipping documents present. It does not have to
determine whether the main contract is actually accomplished or not.

Transfield Issuing banks do not have responsibility or liability for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document, or the
Philippines vs. general and particular conditions stipulated in it. They do not have responsibility for the description, quantity, weight, quality, condition, packing, delivery,
Luzon Hyrdro, value or existence of goods represented by the documents. They are not responsibility for good faith or acts, omissions solvency, performance or standing
1994 of the consignor, carriers, or insurance or any other person.

This assures the seller of prompt payment, independent from any breach of contract and precludes the Issuing bank from determining whether the
contract is actually accomplished or not.

ii. Reason behind the adherence to the Independent Principle:

1. If the letter of credit is drawable only after the settlement of any dispute on the main contract entered into by the buyer and seller, there
would be no practical use for the letter of credit in commercial transactions.
iii. Based on this, you will have an idea that LOC are bank to bank transactions. As such, they deal only with documents. This is an offshoot of the
Independence of LOC Principle. There is only one primordial consideration before banks will act, where the goods delivered? As to whether or not the
goods delivered were the proper goods, it is not for the bank to agree upon. That is a matter between the buyer and the seller.
1. EX: Contract of sale indicated black shoes. What was delivered was half black and half white. There is a breach of contract. Will this breach
affect the settlement of LOC? No. If that is the case, it is unfair to the buyer but there are remedies available.
iv. If you are the lawyer, what will be your remedy?
1. Can it be the basis of a stop payment? No. It will still be paid.
2. Go after the selling entity for breach of contract because this contract is different from the other contracts involved.

v. Exceptions to the Independence Principle:

1. Strict Compliance Rule
Feati Bank vs. Documents tendered must strictly conform to the terms of the LC. Seller must include all documents required.
CA, 1991 If the Correspondent Bank departs from the LC, like when it accepts a faulty tender, it acts on its own risks and may not recover from the Issuing Bank or
the buyer the money it pays to the seller.
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 a. What are the documents involved in a letter of credit transactions relative to payment and settlement of the draft?
i. DRAFT: A bill of exchange which is an order written by the seller/exporter instructing the buyer to pay a specified amount of
money at a specified time.
1. Is a letter of credit negotiable? No. However, the draft is issued to settle the letter of credit is negotiable. Letters of
credit are not negotiable because it is conditional. Its settlement depends on delivery. No delivery, no settlement.
ii. Bill of Lading: If there is one cargo, BL. If there are many BL for different cargoes, Manifest.
iii. Commercial invoice, consular invoice, certificate of analysis, packing list, export declaration
1. If two are missing, the bank will not pay you.
2. If all are complete but one is not truthful, the Fraud Exception Rule Applies.

2. Fraud Exception Rule

a. The untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud which is
enough to support an injunction against payment.
i. What is the remedy?
1. Injunction—so that there will be no payment. It has to emanate from the buyer. Without injunction from the
buyer, the bank will honor the LOC.
a. However, injunction should only be granted if:
i. There is clear proof of fraud.
ii. Fraud involves the abuse of the Independence Principle and not just fraud on the Contract of Sale
(main agreement). The fraud must be on the document (after goods are delivered) and not the
mother contract. Relate this to fraud in esse contractus (breach of contract).
iii. It involves irreparable injury that might follow.
Transfield Fraud is an Exception to the Independence Principle. The remedy for fraudulent abuse is an injunction, which shall be granted only when:
Philippines vs.  There is a clear proof of fraud.
Luzon Hyrdro,  Fraud constitutes fraudulent abuse of the independence of the letter of credit and not only fraud under the main agreement.
1994  Irreparable injury might follow if the injunction is not granted or the recovery of damages would be seriously undermained.

n. Confirmed Letter of Credit vs. Irrevocable Letter of Credit.

Confirmed Letter of Credit
A letter of credit is issued by the buyer’s bank and confirmed by the seller’s bank.
Both banks are obligated to honor the drafts drawn in compliance with the credit.
Correspondent Bank gives the seller its absolute assurance that it will take the issuing
bank’s obligation as its own, according to the terms and conditions of the credit.
Irrevocable Letter of Credit
The issuing bank constitutes its engagement to the beneficiary and bona fide holders
of the draft and documents presented under it, that provisions for payment,
acceptance and negotiation will be fulfilled as long as the terms and conditions of the
credit are complied with.
Issuing Bank may not revoke his understanding under the LC without the consent of
the seller and the buyer.

Philippine Virginia A court cannot order the release of proceeds to another person of an irrevocable letter of credit which was issued for the tobacco purchased from
Tobacco vs. De Los the beneficiary-seller. This order will violate the irrevocable nature of this kind of LOC.
Angeles, 164 SCRA 543  By being irrevocable, its terms cannot be changed without the consent of parties, especially of the seller (beneficiary).
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  If it is issued for a particular person, that particular person must give its consent because the LOC can be changed and made payable to
another entity.

o. Other kinds of LOC:

Revolving LC Standby LC
A credit that provides for the renewed credit to become available as soon as the A security arrangement for the performance of certain obligations. It can be drawn
opening bank advises the paying bank that the buyer has already reimbursed the against only if another business transaction is permitted.
opening bank to which the drafts which were already drawn by the seller
 It is one which you can use several times. Usually, LOCs are perfected once
the bank charges payment from the buyer. To save you from applying again,
they can issue a revolving LC.

3. Trust Receipts
a. LOC vs. Trust Receipts
i. While the trust receipt may have been executed as a security on the letter of credit, the two documents involve different undertakings and
obligations.
ii. If you have no money, you resort to trust receipts. If you sign a trust receipt, you can now also be issued a letter of credit.
Letter of Credit Trust Receipt (PD 115)
It is an engagement by a bank or other person that the issuer will honor drafts or It is a commercial document whereby the bank releases the goods in the possession
other demands for payment once the conditions specified in the letter of credit are of the entrustee but it retains ownership over it. Meanwhile, the entrustee shall sell
complied with. (more on delivery of goods) the goods and apply the proceeds he gets to pay his liability with the bank (like
consignment)
 From here, it is the bank that will facilitate the arrival of goods and its
release to the entrustee.
o There are decisions saying that the real owner is the bank while
there are others saying it is the entrustee.

They are not negotiable instruments, but the drafts are. Thus, as a result, the drafts
have presumption of presence of consideration.

4. Trust Receipts Law (PD 115)

a. Trust receipt:
i. Written agreement
ii. Whereby the entrustee releases the goods, documents or instruments to the possession of the former upon the entrustee’s promise:
1. To sell
2. To remit
3. To return, if not sold
a. How can the obligation to return be enforced? Through criminal liability.

DBP vs. In a trust receipt transaction, the goods are released by the entruster (who owns or holds an absolute title or security interests over the said goods) to the
Prudential Bank, entrustee on the latter’s execution and delivery to the entruster of a trust receipt.
2005  From this ruling, entruster owns.
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  The entrustee is the one that executes a trust receipt.

b. The trust evidences the absolute title or security interest of the entruster over the goods. Thereby, a two-fold obligation arises on the part of the entrustee:
i. To sell
ii. To remit and/or return the proceeds or the unsold goods.

c. Other grounds for the release of goods:

i. In the case of goods, they may also be released for other purposes substantially equivalent to:
1. Sale or procurement of their sale
a. Are the goods subject of a trust receipt finished products? Not really. Trust receipts may even cover raw materials (to be
processed by the industrial facility of the importer or entrustee). For as long as the finished products will be sold, the obligation to
return or remit subsists.
2. Their manufacture or processing with the purpose of ultimate sale, in which case the entruster retains his title over the goods whether in
their original or processed form until the entrustee has complied fully with his obligation under the trust receipt.
3. The loading, unloading, shipment or transshipment or otherwise dealing with them in a manner preliminary or necessary to their sale.
a. Thus, in a trust receipt transaction, the release of the goods to the trustee, on his execution of a trust receipt, is essentially for the
purpose of their sale or is necessarily connected with their ultimate or subsequent sale.
i. Connect this with Estafa: What is the effect if there is failure to remit or return? There is potential criminal liability for Estafa
under the RPC. That liability is predicated on whether or not there is an obligation to sell.
ii. If there is no sale, there is no trust receipt. You may call the contract as one but it is not trust receipt per se because you
have to remember that penal provisions are strictly construed. If it is never meant for sale or there was no sale at all, there
is nothing to remit.

d. Purposes of Trust Receipts Law

i. To encourage the use and promote the transactions based on trust receipts.
ii. To encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade
iii. To regulate the trust receipt transactions in order to assure the protection of the rights and enforcement of obligations of parties involved.
iv. To declare the misuse or misappropriation of goods or the proceeds realized from the sale of goods released under trust receipts as an offense
punishable under Article 315, RPC (Section 2).

e. Do you go to jail for non-payment of debt? That is not allowed. It is a guarantee under the Constitution
i. The Trust Receipt Law does not violate the guarantee of non-imprisonment for non-payment of debt. You don’t go to jail for non-payment of the trust
receipt obligation but for the dishonesty and abuse of confidence in the handling of money and goods. It is not an offense against property but an
offense against public order (People vs. Nitafan, 207 SCRA 726).
ii. That is why the anchor of the criminal liability here is if whether the goods are intended to be sold. Because if there is no intention to be sold, there
is no reason for it to be handled. If the goods are not intended to be sold but installed in the factory, there are no goods to be handled. Thus, there
is no dishonesty or confidence to be abused.

f. Security features of a trust receipt:

Rosario Textile Mills vs. Home In Samo vs. People, a trust receipt is described as a security transaction intended to aid in financing importers and retail dealers who do not
Bankers Savings Bank and have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except
Trust Company, 2005 through utilization, as collateral of the merchandise imported or purchased.
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 Why is it in some cases, the bank owns the goods and in others it is not?
If the bank is made to appear as the owner under the trust receipt, it is only an artificial expedient, more of legal fiction than fact, for it were
really so, it could just dispose the goods in any manner it wants, which it cannot do, just to give the consistence with purpose of the trust
receipt of giving a strong security for the loan obtained by the importer.
 If the bank sells the goods on its own, it will be an ultra vires act since it is not in the purpose clause of the bank. The only way for a
bank to dispose the goods is through foreclosure. To consider the bank as the absolute owner would be to disregard the loan
feature.
 If the good sold is defective, the final buyer or customer will go to the buyer-entrustee and not to the bank. The warranties of a
seller are chargeable to the entrustee and not the bank. If it is really the bank that’s the owner, the final buyer should charge the
violation of warranties against the bank.
 However, for the purposes of the Bar, answer that the Bank is the owner. Why? If it is not sold, the goods are returned to the bank.

g. Security Interest Principle (this may be asked in the Bar):

i. Security Interest is a property interest in goods, documents or instruments to secure the performance of some obligation of the entrustee or some
third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for
security only.

h. Duties and obligations:

i. Entrustee:
1. To hold the goods in trust
2. To sell the goods
3. To turn over the proceeds thereof to the extent of what is owning to the entruster
a. The entrustee is expected to return the value of the goods upon arrival and not when sold to the public because it is the value of the
goods upon arrival which is the value of the loan. It is the landed value.
4. To return the goods if unsold (this is the typical question in the Bar).
a. Mere return of goods covered by the trust receipt will not extinguish the civil liability.
b. The return of goods will only erase potential criminal liability of Estafa but it will not erase the civil liability of the loan.
c. Can it not be a subject of a public sale and within the Bank can be the buyer? If the bill is low or bank was not able to buy, the excess
of the amount will still be charged against the entrustee, what will be your advice if you are the bank’s lawyer?
5. To insure the goods for their total value against loss from fire, theft, pilferage or other casualties.
6. To dispose the goods or proceeds according to the terms of the trust agreement
7. To keep the goods or proceeds thereof separate and capable of identification as property of the entruster.
a. Why can’t you commingle? You have to return it later on.
b. If your inventory of goods is covered by separate and distinct trust receipts from separate and distinct entrusters, do not commingle.
You will be held accountable for one missing part and no matter how miniscule, it charges criminal liability.

i. Parties involved:
i. Entrustee
ii. Entrustor
1. In issuing trust receipts, the bank will be preferred over other creditors of the entrustee if not paid what is due it. The security interest of the
entruster shall be valid and binding against all creditors of the entrustee for the duration of the trust receipt agreement.
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 a. If a creditor seeks to get a levy over the goods under the trust receipt, you can invoke the security interest.
b. If the creditor wants to acquire all the interest-- Security interest of the entruster’s advances will have to be settled first before the
entrusteee can consolidate his ownership over the goods. Once it is consolidated, it is the only time a creditor of the entrustee can
charge his interest.
2. He is not liable as principal or vendor under any sale or contract to sale made by the entrustee.
a. There is no agency relationship established in Trust Receipts Law.
3. Rights of the Entrustor (PROCN):
a. Entitled to the proceeds from the sale of goods, documents or instruments
b. Entitled to the retun of goods in case of non-sale
c. Entitled to enforce all other rights conferred on him under the trust receipts
d. May cancel the trust and take possession of goods in case of breach of trust agreement (don’t forget this)
i. It may be asked in the Bar that if there is direct contravention of what was stated in the trust receipt in such a way that the
entrustee was selling in a manner excepted upon and you sought the advice of a lawyer. You are now the corporate lawyer,
what will be your advice?
e. Give at least 5 days notice to the entrustee of the intention to sell the goods, etc.; he may purchase at a public sale

j. On loss of goods
i. The question to be settled here is when the goods are lost.
1. If the goods are lost before the release, it is the bank.
2. If the goods are in the possession of the entrustee, the risk of loss shall be borne by the entrustee.
ii. Can fortuitous event extinguish liability? No. Loss of goods pending disposition, whether due to the fault or negligence of the entrustee shall not
extinguish his obligation to the entruster for the value thereof.
1. Therefore, there are two things that will not extinguish liability:
a. Return of goods (civil liability still exists)
b. Loss of goods whether to the fault of the entrustee or not
iii. Why is risk of loss assumed by the entrustee? It is assumed that the title and possession is turned over to the entrustee.

k. The law does not cover sales on credit with the title or other interest being retained by the seller as security thereof.
l. A purchaser for value and in good faith acquires said goods etc. is free from the entruster’s security interest.
m. Civil Law Concepts and Trust Receipts Law Concepts:
Civil Law Concepts Trust Receipts Law Concepts
Where there is a contract of sale, the buyer is to acquire only whatever title the seller Although the trustee is not the owner of the goods under a trust receipt (ownership
had at the time the sale was perfected (Art. 1505) is retained by the enturster), anyone who acquires the goods from the entrustee
acquires good title over the goods.

Owner will bear the risk of loss. Although the entrustee is not the owner of the goods covered by the trust receipt, he
bears the risk of loss.

n. Effects of breach of obligation:

i. Acts involving the violation of trust receipts agreement, such as failure to turn over the goods or proceeds realized from the sale thereof, shall render
the offender liable for estafa under Article 315, Par. 1-B RPC.
1. When is the officer liable:

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 a. By direct provision of law
i. Bouncing Checks Law (civil liability for the amount is on the corporation but the criminal liability is charged on the one who
signed)
ii. Trust Receipts Law (if the violation or offense is committed by a corporation, penalty shall be imposed upon the directors,
officers, employees or other officials or persons responsible for the offense, without prejudice to the civil liabilities arising
from the criminal offense)
b. When the officer does a corporate act and the corporation did not ratify it
c. When the officer expressly provided that he shall be personally liable (as surety)
2. Is demand material?
a. No. In the event of default by the entrustee, the entruster does not need to demand the return of the unsold goods to be able to
enforce his rights under the trust receipt.
i. There are some decisions saying that demand is material when it comes to criminal liability but it will not affect the civil
liability.
3. Is fraud and deceit material?
a. Fraud and deceit need not be proven for the offense is punished as malum prohibitum regardless of intent or malice.
4. Is surrender of goods material?
a. No. Surrender of goods to the bank, if unsold, merely extinguishes the entrustee’s criminal liability but is not relieved for its
obligation to pay for the money borrowed.
b. Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes violation of PD 115. However, what is being
punished by the law is the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another
regardless of whether the latter is the owner.
c. Even if the nature of the offense is mala prohibita, intent to misuse or misappropriate the goods or their proceeds has to be
established by the records (PNB vs. Ong, GR 133176)
o. Trust Receipt vs. Pledge
Trust Receipt Pledge
The property is in the possession of the person financed. The person doing the financing has possession of the property.

p. Trust Receipt vs. Conditional Sale

Trust Receipt Conditional Sale
There is no sale of the property from the entruster to the entrustee There is a sale of the property from the seller to the buyer.

q. Trust Receipt vs. Chattel Mortgage

Trust Receipt Chattel Mortgage
It does not involve the creation of a lien It involves the creation of a lien upon the property

r. Trust Receipt vs. Consignment

Trust Receipt Consignment
The seller does not retail title to the property but transfers such title to the entruster. The consignor retails title to the property to secure the indebtedness due form the
consignee.

s. Points to ponder:

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 i. ABC Inc. opened an irrevocable commercial LOC with BPI for $500,000 in connection with the importation of ABC of 5,000 units of spindles. The goods
were released to ABC after it executed trust receipts in favor of BPI and the items were installed by ABC in its factory.
1. It is not a trust receipt under law that is issued. Here, the agreement was trust receipt but the items were never sold but installed in the
factory. If the spindles are sold, then there is an obligation to remit. The spindles were not released to ABC Inc. to be sold nor was the
transfer of possession intended to be a preliminary step for the goods to be ultimately or subsequently sold. Thus, the trust receipt
transaction between BPI and ABC Inc. is not strictly covered by the Trust Receipts Law in this case. However, it is a perfectly valid agreement
in the absence of any contravention with the law, morals, good customs, public order or public policy. If there is breach, the borrower will not
be liable criminally but only civilly.
ii. Pedro, the president of ABC Inc., applied with BPI for the issuance of LOC to finance its importation of assorted goods. The letters were issued and the
goods were purchased and delivered in trust to ABC Inc. Pedro signed the trust receipts as security. When the trust receipts matured, Pedro failed to
return the goods to BPI or to return their value to BPI. As a result, BPI filed a criminal complaint for Estafa against Pedro. Pedro’s defense was that he
signed the receipts as President of ABC Inc. as such he is not personally liable. Is Pedro correct?
1. No, he cannot. It is clear under Section 13 of Trust Receipts Law that if the offense is committed by a juridical person, the penalty provided
shall be imposed upon the directors responsible for the offense without prejudice to the civil liabilities arising from the criminal offense.
a. The rationale here is that failure of return of goods must be treated as a public nuisance to be abated by the imposition of penal
sanctions.
b. Such failure is crime without intent of proving intent to defraud. The law punishes dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of the entruster regardless of whether the latter is the owner or not.
c. A mere failure to deliver the proceeds of the sale of goods, if not sold, constitutes a criminal offense that causes prejudice, not only
to another but more importantly, to the public interest (Ching vs. Secretary of Justice, 2006)
i. But we have to be clear—pardon the criminal aspect does not erase the civil liability and condonation of the civil aspect
does not remove the criminal liability.
SSS vs. DOJ, 2007 Can a party facing conviction under Trust Receipts Law invoke novation to reverse conviction in a case where the underlying contract initially
defined the relation of parties such as the contract in sale of goods in cases of violation of the Trust Receipts Law?

Yes. While Novation is not one of the means whereby criminal liability may be extinguished, the role of novation may either prevent the rise of criminal
liability or cast doubt on the true nature of the original basic transaction. Remember that this is strictly construed against the State and liberally in favor
of the accused. However, the party invoking the novation must prove that a new contract did indeed take place. Remember that novation is never
presumed.

Ong vs. CA, 124 Take note: Compromise of estafa case arising from a trust receipt transaction after the case has been filed in court does not amount to novation and
SCRA 578 does not erase the criminal liability of the accused.

As for civil liability arising from the criminal offense, person signing the trust receipt for the corporation is not solidarily liable with the entrustee
corporation for the civil liability arising from the criminal offense. He may, however, be personally liable if he bound himself to pay the debt of the
corporation under a separate contract of surety or guaranty. Relate this to liability of corporation’s officers (this is different).

t. What must be proved to absolve the client (for defense)? If goods are actually received by the client.
i. Where proof of delivery of goods covered by the trust receipt to the accused is insufficient, conviction for estafa cannot lie.
1. Introduction of commercial invoices attached to the application for letters of credit and of the trust receipts, where such invoices are actually
not more than the list of items sought to be purchased and their price, does not amount to a delivery receipt (Ramos vs. CA)

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 2. There must be categorical, actual receipt of goods to shift the burden. Otherwise, there is no obligation to sell.
ii. Since trust receipt is a mere security arrangement, the repossession of the machinery and equipment by the entruster cannot be considered payment
of loan or advances given by the entrustee under the letter of credit or trust receipt. Payment would only legally result after the entrust has foreclosed
the said securities, sold it and applied the proceeds to the entrustee’s obligation under the trust receipts. Unless the loan is paid, the entruster is not
precluded from foreclosing the real estate mortgage executed by the surety to secure it (PNB vs. Pineda, 197 SCRA 1)

u. Take note for Entruster (prosecution)

i. A trust receipt agreement is merely a collateral agreement wherein its purpose is to serve as a security for a loan. If there is default or failure of the
entrustee to comply with the terms of the trust receipt agreement, entruster may cancel the trust and take possession of the goods. While in
possession, he may cause the sale of the goods after at least 5-day notice to the entrustee in a private or public sale.
1. At the public sale, the entruster may become a purchaser. If the proceeds of the sale were insufficient to satisfy entirely the entrustee’s
indebtedness, the entruster may file an action to collect the deficiency (LANDL and Company vs. Metrobank).

5. Financial Rehabilitation and Insolvency Act

a. FRIA repealed Act 1956 as amended or Insolvency Law.
i. At present, it provides the current legislative framework for insolvency and rehabilitation of financially-distressed entities.
1. Before, the push was always Insolvency in Insolvency Law. FRIA pushed for rehabilitation.
2. The old law leaned toward financially troubled companies at the expense of creditors. FRIA sought to correct this. FRIA presumes that
everybody is involved— “allow the debtors to pay the creditors; but in order to allow them, creditors should suspend first demand for
payment”.
3. Before, rehabilitation was not considered a viable option.
ii. Seen as an act of “judicial activism”, SC promulgated the Interim Rules of Procedure on Corporate Recovery of 2000, which contained not only
procedural rules but key provisions that bordered on substantive laws. In January 2009, SC Rules on Procedure on Corporate Rehabilitation (SC AM 00-
8-10-SC) took effect.
iii. In 2010, FRIA (RA 10142) was enacted.
1. The act providing for the rehabilitation or liquidation of financially distressed enterprises and individuals. It lapsed into law on July 18, 2010
without the signature of the President.

b. Why the fuss over a new insolvency law? Why should there be a new insolvency law?
i. The strength of financial markets depends not only on the performance and soundness of financial institutions and that of regulatory agencies, but
also in having an effective rehabilitation and insolvency system which recognizes creditor rights and provides an orderly procedure in pursuing
rehabilitation and liquidation of distressed enterprises.
ii. The rights of debtors and their employees may not be adequately protected and different creditors may not be treated equitably. Thus, there must be
a predictable and transparent manner by which both secured and unsecured creditors can enforce their claims. Uncertainty always exacts a price—by
way of higher credit cost. It is crucial to define and set the rules for resolution of corporate failures either through rehabilitation or liquidation.
Investor confidence is anchored on quick resolution—the sooner you resolve it, the sooner you prevent deterioration of assets and the assets can now
go back to the main stream.
iii. What is the significance of FIRA law? We want to project the Philippines as an investment haven. It adopted best practices in dealing with insolvency
issues, outlined from several publications of reputable international organizations such as UN Commission on International Trade Law Legislative
Guide on Insolvency Law.

c. Purposes behind enactment of FRIA:

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 i. To encourage juridical and natural debtors and their creditors to collectively and realistically resolve and adjust competing claims and property rights.
ii. To ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. At every stage of the rehabilitation, the creditors
have a say. That is why there is a creation of Creditor’s Committee which is the liaison between creditors and debtors.
iii. To ensure certainty and predictability in commercial transactions
iv. To preserve and maximize the value of assets of debtors
v. To recognize creditor’s rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated.

d. Guarantee to creditors:
i. In case the efforts to rehabilitate fails, the government will step in to see to it that the debtors remaining assets are properly liquidated and equitably
distributed to creditors. If the rehabilitation is not viable, the court can covert it to liquidation. In liquidation, everything is sold and divided.

e. Salient points of FRIA Law:

i. The proceedings under FRIA will be conducted in a summary and non-adversarial manner with a view towards efficient rehabilitation or liquidation of
debtors. Why? Time is of the essence.
ii. How will this be achieved? It affords tax exemptions on indebtedness reduced or forgiven pursuant to rehabilitation or liquidation proceedings.
iii. Rehabilitation proceedings may be initiated by the debtor and/or creditors.
iv. There are 3 concepts of rehabilitation under the Law:
1. Court-supervised
a. The good thing about court-supervised is if the court determines that the debtor can no longer be rehabilitated, the rehabilitation
proceedings may be converted into liquidation proceedings even while pending once the debtor or creditors file a motion.
2. Pre-negotiated
3. Out-of-court or informal proceedings
v. FRIA also acknowledges cross-border insolvency proceedings.
1. Cross-border insolvency proceeding—not all companies operate in the Philippines. Companies may have assets here but operate in another
country.
a. What can be done? What you advise? You can invoke FRIA because upon petition, the court may issue necessary relief arising from
insolvency or rehabilitation proceedings in a foreign jurisdiction involving a foreign entity with assets in the Philippines.
vi. FRIA contains express provision allowing Creditor’s Committee.
1. This will serve as the primary liaison between the rehabilitation receiver and creditors in order assist the rehabilitation receiver in
communicating with the creditors of the debtor.
a. This is an innovation not found in PD 902-A or any rules promulgated by SC to implement the Insolvency Law.
b. This is actually the problem, the resolution of which was channeled in a decision:
Bank of New York FACTS: Bank of New York filed a motion for rehabilitation against Bayantel. In the process, the creditor’s committee was granted extensive veto powers
vs. CA, 2012 to the point that it was trying to overturn or subsume the decisions of the board. Generally, we don’t interfere with the judgment of the BOD under the
Business Judgment Rule.

Up to what extent is the power of the Creditor’s Committee? Can it have the power to interfere with the decision of the BOD of the Company under
rehabilitation? Remember that the factual antecedents were before the enactment of the FRIA Law.
SC noted that the expansive powers granted to the creditor’s committee were beyond those of the rehabilitation receiver’s.
While corporate powers of all corporations may be exercised, PD 902-A provides an exemption by empowering the rehabilitation court to create and
appoint a management committee to undertake the management of the corporation. This exception applies when there is imminent danger of
dissipation, loss, wastage or destruction of assets or other properties or paralyzation of business operations of such corporations which may be
17
 prejudicial to the interest of minority stockholders, party-litigants or the general public. In such a case, the management committee may overrule or
revoke the actions of the previous management and BOD of such entity.

However, since BNY neither petitioned for appointment of a management committee nor presented evidence showing that any of the conditions to
warrant its creation exist, the expansive powers granted to the monitoring committee are not sanctioned under the law. Monitoring committee and
management committee are different. Only the management committee has the power to overrule and revoke previous actions of previous
management and BOD.
Under FRIA, creditor’s committee is not authorized to modify or supplant the decisions of the BOD of a debtor because the law maintained that ther eis
a legal difference between a creditor’s committee (FRIA) and a management committee (Corporation Code).

vii. There is a stay or suspension order.

1. Among the legal innovations introduced by FRIA is the automatic issuance of the Stay or Suspension Order upon commencement of the
proceedings.
a. Before FRIA, the only statutory or legal support for issuance of a Suspension Order was PD 902-A as amended by PD 1758. The
relevant provision is Section 6-C which states, “in order to effectively exercise such jurisdiction, the Commission shall possess the
following powers—to appoint one or more receives of property which is the subject of action pending before the Commission in
accordance with provisions of Rules of Court in such other cases whenever necessary in order to preserve the rights of the party-
litigants and/or protect the interest of the investing public and creditors”.
2. What is the wisdom behind the suspension order?
a. The suspension order is issued in favor of corporations, associations or partnerships which are under receivership or management of
management committee in order to suspend all actions for claims against the former.
b. The moment you commence an insolvency proceeding, there is a barrier. Nothing can proceed.
3. How is the Stay Order different from the Suspension Order under FRIA?
a. Section 16 FRIA defines the effects of the Suspension Order, “Stay or Suspension Order is automatically included in the issuance of
the Commencement Order”.
b. Some people say that the Suspension Order is the very heart of FRIA.
c. In Insolvency Law, you have to apply for a Stay Order. In FRIA, the Suspension Order is automatically included in the issuance of the
Commencement order.
4. The issuance of the Suspension Order has 4 very important effects on the insolvent debtor:
a. For the protection of the debtor:
i. It suspends all actions and proceedings, in court or otherwise, for the enforcement of claims against the debtor.
ii. It suspends all actions to enforce any judgment, attachment or other provisional remedies against the debtor.
1. These first two is to protect the debtor who is now given temporary relief from having to pay for his debts. It will
also prevent the multiplicity of suits and protect the debtor from defending himself against multiple lawsuits.
2. Remember that we are also protecting the creditor. The next two are for preservation of value of debtor’s
properties.
b. For the protection of the creditor:
i. It prohibits the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the
ordinary course of business.
ii. It prohibits the debtor from making any payment of its liabilities outstanding as of the commencement date except as may
be provided herein.

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 1. If what is paid is for the ordinary course of business, the payment should be allowed. If the payment it outstanding
in favor of one creditor to the detriment of another, it should not be allowed. It is covered by the Stay Order.
2. This shall also prevent sham transactions entered into by the debtor wherein their property is transferred to a
third person in order to defraud creditors.
a. What is a sham transaction? Any transaction that is done to defraud creditors. Before, it is any disposal
made 30 days before the filing of insolvency shall be presumed in fraud of creditors.
5. How do you enforce a Suspension Order?
a. Remember that all proceedings under FRIA are summary in nature (Section 3). Thus, these are immediately executory as also
indicated in existing rules on Insolvency and Rehabilitation proceedings.
b. The execution of a Suspension Order is mandatory and may be availed of by the interested party as a matter of right whether or not
an order of appeal was perfected. Thus, the enforcement of a Suspension Order may be availed of by a writ of execution.
i. Under this circumstance where execution is as matter of right, Section 1 Rule 39 Rules of Court shall govern: “Execution
shall issue as a matter of right, on motion, upon a judgment or order that disposes of the action or proceeding upon the
expiration of the period to appeal therefrom if no appeal has been duly perfected”.
c. An interested debtor or creditor may enforce the suspension order by securing a Writ of Execution from the rehabilitation or
insolvency court which issued the same suspension order.
d. Section 11 Rule 39 talks about execution of judgment. If you are the insolvent debtor and you have a persistent creditor, what will be
your advice?
i. An insolvent debtor, who is sued or is being sued by a creditor even after the Suspension Order is issued, may present the
Writ of Enforcement to the court where he is being sued and ask the court to suspend the proceedings until the Suspension
Order is lifted or terminated.
6. Remedies for non-compliance with Suspension Order:
a. Remedies for aggrieved debtor:
i. If despite the issuance of the Suspension Order, another court or tribunal proceeds to hear a suit for enforcement of claims
against the debtor, the debtor is not left without any remedies. What are his remedies?
1. Remedies under the Rules of Court:
a. Section 2 Rule 65: Remedy of Prohibition
i. The Write of Prohibition, once issued, shall command the respondent court or tribunal to desist
from hearing or proceeding when he is acting without or in excess of his jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction.
ii. This can be a Bar Question: What are the remedies available under law that can be used to
protect the debtor?
2. Remedies under the Civil Code:
a. Article 27 NCC, “the debtor who suffers material or moral loss due to the neglect or the unjustified refusal
of a public officer to uphold his legal duty to obey the Suspension Order and Section 19 FRIA may sue the
latter for damages”.
i. Art 27, by itself, can be in additional to filing of administrative charges against the erring public
official.
b. Article 2176 NCC, action for tort or quasi-delict— “Whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is
no pre-existing contractual relation between parties, is called a quasi delict and is governed by the
provisions of this Chapter”.

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 i. Here, you are not going after the creditor but after the public officer. If a Public Officer refuses to
uphold or obey the Suspension Order issued by the Rehabilitation Court and the waiver of taxes
and fees granted by Section 19 FRI, the aggrieved debtor may find remedies in the Civil Code.
3. Administrative remedies under the Civil Service Decree (PD 807)
a. Private citizens may file with the Civil Service Commission a verified written complaint for disciplinary
action against the erring employee.
b. The aggrieved debtor may rely on the ground of “refusal to perform official duty”, “neglect of duty”, or
“inefficiency and incompetence in the performance of official duties”.
4. Criminal remedies under the Anti-Graft and Corrupt Practices Act
a. Section 3(e) and (f)-- Section 3. Corrupt practices of public officers. In addition to acts or omissions of
public officers already penalized be existing law, the following shall constitute corrupt practices of any
public officer and are declared to be unlawful:
i. Causes any undue injury to any party or giving a private party any unwarranted benefits,
advantage or preference in the discharge of his official administrative or judicial functions
through manifest partiality, evidence BF or gross inexcusable negligence. This provision shall
apply to officers and employees of offices or government corporations charged with the grant of
licenses or permits or other concessions.
b. Remedies for aggrieved creditor:
i. Despite the issuance of a Suspension Order, it is still entirely possible that the debtor or any of the officers of a debtor-
corporation may attempt to circumvent the order or refuse to abide by the other of court (sham transactions). What is the
remedy of the creditor?
1. In such cases, Section 145 provides penal sanction against the debtor who shall attempt to circumvent the
Suspension Order.
a. SEC 145: An owner, partner, director, officer or other employee of the debtor who commits any one of
the following acts shall, upon conviction thereof, be punished by a fine of not more than 1,000,000 and
imprisonment for not less than 3 months nor more than 5 years for each offense:
i. If the debtor hides, conceals, destroys or causes any property of belonging to the debtor to be
destroyed, despite having notice that proceedings have commenced or if there is reason to
believe that proceedings are about to be commenced, or in contemplation of such proceedings.
ii. If he hides, destroys, after mutilates or falsify, or case to be hidden, destroyed, altered, mutilated
or falsified, any book, deed, document or related writing
iii. If the debtor makes any payment, sale, assignment, transfer or conveyance of any property
belong to him with intent to defraud his creditors
iv. If he knowingly violates a prohibition or knowingly fail to undertake an obligation established by
this Act.
b. This remedy is in the nature of a penalty which is imposed after the fact. It is available to creditors who
are seeking redress from a fraudulent debtor who violates his obligations under the Suspension Order.
c. The debtor and creditor are therefore equipped with a multitude of options to enforce the rights granted to them by the FRIA upon
issuance of the commencement order.
i. They may resort to enforcement of Suspension Order, Order through RC, they may sue the erring officer through a civil
complaint for damages, suit for tort and quasi-delict, an administrative complaint and even a criminal complaint.

viii. Taxes and fees due to the National Government and LGU’s are waived.
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 1. Remember that the commencement order and stay order does not carry with it the waiver. It has to be a separate issuance.
2. Section 19— “Simultaneous with the issuance of the Commencement Order—and thus with the Stay or Suspension Order—but entirely
distinct and separate therefrom is the Waiver by both National and Local Government of taxes and fees”
a. Under Section 19, the imposition of all taxes and fees including penalties, interests and charges thereof due to the national
government or to LGUs during time of rehabilitation shall be considered waived, in furtherance of the objectives of rehabilitation.
b. Procedurally, it is not part of the Stay or Suspension Order even if this relief is granted at the same time the Commencement Order
and Suspension Order is issued. You have to invoke it since it is a special privilege wherein there is a waiver during the rehabilitation
proceeding for as long as there is a substantial likelihood that you can be rehabilitated.
c. While the Suspension Order is effective for the duration of the rehabilitation proceedings for as long as there is a substantial
likelihood that the debtor can be successfully rehabilitated, the Waiver of Taxes and Fees under Section 19 is only effective until the
Rehabilitation Plan has been either approved or dismissed unless lifted by court.
i. Be as it may, Section 19 create a real and enforceable right in favor of the debtor under rehabilitation.

ix. Rehabilitation Proceedings

1. Nature?
a. Section 3, FRIA, “Proceedings shall be in rem. The proceedings shall be conducted in a summary and non-adversarial manner
consistent with declared policies of this Act and in accordance with rules of procedure that SC may promulgate.
2. How is jurisdiction over parties acquired?
a. Jurisdiction is considered acquired upon the publication of notice of the commencement proceedings in any newspaper of general
circulation in the Philippines in the manner prescribed by the rules of procedure to be promulgated by SC (Section 3)
i. What is a newspaper of general circulation?
Perez vs. Perez, To be a newspaper of general circulation, it is enough that:
2005 1. It is published for dissemination of local news and general information.
2. It has a bona fide subscription list of paying subscribers
3. It must be published at regular intervals.
4. It must not be devoted to the interests or published for the entertainment of a particular class, profession, trade, calling, race or religious
denomination.

Which of the following is a newspaper of general circulation—IBP Law Journal, Sabong, FHM, Remate?
IBP is not punished for local news and general information. Sabong may only include winners.
All are published at regular intervals.
IBP fails the 4th criteria—it is presumable for lawyers. Sabong is presumably for gambles. FHM is presumably for perverts.

What if the newspaper only has 2 subscribers, is it considered of general circulation?

It need not have a large circulation so long as it is of general circulation.

3. Who is a creditor?
a. A creditor shall refer to any natural or judicial person which has a claim against the debtor what arose on or before the
commencement date (Section 4).
4. Who is the debtor?
a. Debtor shall refer to a sole proprietorship (registered with DTI), a partnership (registered with SEC), a corporation (organized and
existing under Philippine laws) and individual debtor who has become insolvent as defined herein (Sect 4)
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 i. The term “debtor” excludes the following (because these have different structures and modes of rehabilitation and
liquidation):
1. Banks—it shall refer to any duly licensed bank or quasi-bank that is potentially or actually subject to
conservatorship, receivership or liquidation proceedings under the New Central Bank Act (RA 7653) or successor
legislation.
a. You will go after PDIC for the first 500,000 automatically as insurer. The excess to the 500,000 limit can be
given by PDIC as liquidator after following the concurrence and preference of creditors. Theoretically, you
can recover the entire amount even if it exceeds 500,000 from the same entity wearing different hats. The
first hat shall be as insurer and the second as liquidator. The purpose of liquidation is the sell everything
to raise revenue. Thus, as long as there is something that can be liquidated, you can get an amount.
2. Insurance Company—those companies that are potentially or actually subject to insolvency proceedings under the
Insurance Code (PD 1460) or successor legislation.
3. Pre-Need Company—any company authorized or licensed to sell or other to sell pre-need plans.
ii. Government financial institutions other than banks and GOCCs shall be covered by this Act, unless their specific charter
provides otherwise (Section 5)

x. Court-supervised rehabilitation proceedings: the difference between a voluntary and involuntary proceeding is that a voluntary proceeding does not
have a threshold. The debtor has the best position to know if it needs help.
1. Voluntary proceeding
a. How may an insolvent debtor initiate a voluntary proceeding?
i. It depends on the structure:
1. If you are a sole proprietorship, once it is approved by the owner.
2. If you are a partnership, by majority of the partners.
3. If you are a corporation, by majority vote of BOD or trustees and authorized by the vote of stockholders
representing at least 2/3 OCS.
a. A non-stock corporation may still be subject to voluntary court-supervised proceedings by vote of at least
2/3 of members in a stockholder’s or member’s meeting duly called for the purpose.
ii. The insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for rehabilitation with the court
and on the grounds specifically provided in it (Section 12, FRIA)
2. Involuntary proceeding
a. How may a creditor initiate an involuntary proceeding?
i. Any creditor or group of creditors must have a claim or an aggregate of whose clams of at least 1,000,000 or at least 25% of
the subscribed capital stock, or partners’ contributions whichever is higher in order to initiate involuntary proceedings
against the debtor through filing a petition for rehabilitation with court (Section 13, FRIA).
b. You have to state that the following circumstances are present in order to initiate an involuntary proceeding:
i. There is genuine issue of fact on law on the claims of the petitioners, and that the due and demandable payments have not
been made for at least 60 days or that the debtor has failed generally to meet its liabilities as they fall due
ii. A creditor, other than the petitioners, has initiated foreclosure proceedings against the debtor that will prevent the debtor
from paying its debts as they become due or will render it insolvent (Section 13, FRIA). Here, it presupposes a situation
wherein if the foreclosure is paid, the remaining debts will no longer be paid. There must be equitable distribution.
3. When shall rehabilitation proceeding commence?
a. Proceedings shall commence upon the issuance of the Commencement Order (Section 16).
4. When shall the court issue the Commencement Order?
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 a. If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall issue a Commencement Order within 5
working days from the filing of petition (Section 15).
i. Remember that Commencement Order also brings with it the Suspension Order.
5. How long shall the Commencement Order be effective?
a. Unless lifted by the court, the Commencement Order shall be effective for the duration of the rehabilitation proceedings for as long
as there is a substantial likelihood that the debtor will be successfully rehabilitated (Section 21).
i. Remember that the mode here is rehabilitation. Liquidation is a mode of last resort. Only if all else fails do we liquidate. We
don’t even talk about liquidation in the initial meeting.
6. What are the effects on the issuance of a Commencement Order?
a. The commencement order shall include the Suspension Order which shall:
i. For the protection of the debtor:
1. It suspends all actions and proceedings, in court or otherwise, for the enforcement of claims against the debtor.
2. It suspends all actions to enforce any judgment, attachment or other provisional remedies against the debtor.
a. These first two is to protect the debtor who is now given temporary relief from having to pay for his
debts. It will also prevent the multiplicity of suits and protect the debtor from defending himself against
multiple lawsuits.
b. Remember that we are also protecting the creditor. The next two are for preservation of value of debtor’s
properties.
ii. For the protection of the creditor:
1. It prohibits the debtor from selling, encumbering, transferring or disposing in any manner any of its properties
except in the ordinary course of business. It must always be qualified on the ordinary course of business.
a. What is an example of ordinary business? If you are a realty company selling condominium units and
there is a Suspension Order, you may still sell condominium units because that is in line with its business
purposes.
b. How will you be rehabilitated if you don’t sell or function at all.
c. If you sell and that sale is part of its revenue generation, that should even be encouraged in order to be
rehabilitated.
2. It prohibits the debtor from making any payment of its liabilities outstanding as of the commencement date except
as may be provided herein.
b. In addition to the effects of the Suspension Order, the Commencement Order shall also:
i. Vest the rehabilitation with all the powers and functions provided for this Act, such as the right to review and obtain
records to which the debtor’s management and directors have access including bank accounts or whatever nature of the
debtor subject to the approval of court of the performance bond fide by the rehabilitation receiver.
1. The court shall be given the power to review and obtain records.
2. How will we know that you can be rehabilitated if you do not show your bank accounts?
ii. Prohibit or serve as legal basis rendering null and void the results of any extrajudicial activity or process to seize property,
sell encumbered property or otherwise attempt to collect or enforce a claim against the debtor after commencement date
unless otherwise allowed in this Act.
iii. Serve as legal basis for rending null and void any setoff after the commencement date of any debt owed to the debtor by
any of the debtor’s creditors.
1. You cannot pay unless it is under the ordinary course of business.
iv. Serve as legal basis for rendering null and void the perfection of any lien against the debtor’s property after the
commencement date.
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 1. What is important here is when the lien is perfected—before or after the commencement date.
v. All legal proceedings are stopped, except any proceeding where the debtor is the one who initiated because he was seeking
the recovery of amounts owing to it or any property which he should possess and upon approval by court.
1. Why? This is part of rehabilitation.
2. Court may allow the continuation of cases on other courts where the debtor had initiated the suit (Section 17)
a. What if the adverse party going after the debtor is a government entity? Will the government stop itself?
Will the Stay or Suspension Order apply to government financial institutions?
i. Yes. The provisions of this Act concerning the effects of the Commencement Order and the
Suspension Order on the suspension of rights to foreclose or otherwise pursue legal remedies
shall apply to government financial institutions notwithstanding provisions in their charters or
other laws provide the contrary (Section 20); Potential question in the Bar.
7. What are the exceptions to the Suspension Order?
a. Cases already pending appeal in the SC as of commencement date. Provided that any final and executory judgment arising from such
appeal shall be referred to the court for appropriate action.
b. Subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon
determination by the court is capable of resolving the claim more quickly, failure and efficiently than the court. Provided that any
final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim.
i. EX: You have products that are subject of patent infringement that are already pending in IPO and that if you win, you will
get a big award, this is specialized. Another example is you are a shipping company and you have a case at MARINA and
wherein the case shall be decided faster in another court.
c. To the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation
mortgagors as well as issuers of LOC, unless the property subject of the third party or accommodation mortagge is necessary to the
rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver.
i. The case pertaining to the person who are solidarily liable with you (and not you per se) will continue. The ones solidarily
liable with you cannot hide behind your skirt and say that they are also exempted. There is no spill over. The benefits of the
Suspension Order is personal to the claimant.
ii. The persons solidarily liable can argue that the property subject to the mortgage is necessary for the rehabilitation of the
debtor
d. To any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities
entrusted to the latter in the ordinary course of the latter’s business as well as any action of such securities market participate or the
appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities.
i. If you are a bonding entity but you guaranteed a security entrusted to you, then it is not in the ordinary course of your
business.
e. To the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin
agreement for the settlement of securities transactions in accordance with the provisions of SRC and its implementing rules and
regulations.
f. The clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized,
registered and/or recognized by the appropriate regulatory agency like the BSP and SEC as well as any form of actions of such
agencies or entities to reimburse themselves for any transactions settled for the debtor.
g. Any criminal action against individual debtor or owner, partner, director or officer of a debtor shall not be affected by any
proceeding commend under this Act (Section 17)
8. What actions can the court undertake at the initial hearing?

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 a. What will the court ask of you? There are two lists at the minimum—inventory of creditors (who, how much and what) and
inventory of your property.
i. Determine the creditors who have made timely and proper filing of their notice of claims.
1. If you did not file a timely claim, will you be omitted? Yes and No. Yes, in the proceedings but no, in the
distribution. This means you have no say on how much will be distributed to you.
ii. Hear and determine any objection to the qualifications of the appointment of the rehabilitation receiver and, if necessary,
appoint a new one in accordance with this Act.
1. Rehabilitation receivers are generally lawyers.
2. What does a Rehabilitation Plan contain? It is a series of promises and courses of action aimed at making the entity
more efficient.
a. Selling off other businesses to focus on competencies
b. Retiring some high earning jobs properly and to outsource it
c. (the most common is to take off the excess fat) In the corporate structure, these are the bonuses,
extravagant parties and team building. Holding off in abeyance the p
iii. Direct the creditors to comment on the petition and Rehabilitation Plan and to submit the same to the court and to the
rehabilitation receiver within a period not more than 20 days.
1. Is the Rehabilitation Plan viable?
2. If the rehabilitation plan is given to the rehabilitation receiver, it is the duty of the receiver to convince the court.
iv. Direct the rehabilitation receiver to evaluate the financial condition of the debtor and to prepare and submit to the court
within 40 days from initial hearing the report (Section 22)
9. What is the effect of failure to file a notice of claim?
a. A creditor whose claim is not listed in the schedule of debts and liabilities and who fails to file a notice of claim in accordance with
the Commencement Order but subsequently files a belated claim shall not be entitled to participate in the rehabilitation proceedings
but shall still be entitled to receive distributions arising from it (Section 23).
10. When may the court give due course to the petition? What should you prove conclusively?
a. Within 10 days from receipt of report of the rehabilitation receiver, the court may give due course to the petition once it finds that:
i. The debtor is insolvent.
ii. There is a substantial likelihood for the debtor to be successfully rehabilitated (Section 25).
11. What will be the action of the court if the petition is given due course?
a. If the petition is given due course, the court shall direct the rehabilitation receiver to review, revise and/or recommend action on the
Rehabilitation Plan and submit the same or a new one to the court within a period of not more than 90 days.
b. The court may refer any dispute relating to the Rehabilitation Plan or the rehabilitation proceedings pending before it to arbitration
or other modes of dispute resolution as provided for under RA 9285 (ADR Act 2004), should it determine that such mode will resolve
the dispute more quickly, fairly and efficiently than the court (Section 26)
i. In the process, the court may even go to the extent of rehabilitation of that will be better.
12. If the court is not convinced, it may dismiss the petition. When may the court dismiss the petition?
a. Within 10 days from receipt of report of rehabilitation receiver, the court may dismiss the petition upon a finding that:
i. The debtor is not insolvent.
ii. The petition is only a sham filing intended only to delay the enforcement of rights of creditors.
iii. The petition or rehabilitation plan and its attachments contain any materially false or misleading statements
1. If the Rehabilitaiton Plan is not viable, all they have to do is to amend. But if there are any materially false
statements, the remedy is to dismiss.
iv. The debtor has committed acts of misrepresentation or in fraud of tis creditors (Section 25[b])
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13. What are the consequences if the petition is dismissed?
a. If the petition is dismissed, the court may order the petitioner to pay damages to any creditor or to the debtor who may have been
injured to the extent of any such injury (Section 27).
14. If rehabilitation is out of the question, what is the next remedy? When may the court convert the proceedings into one for liquidation?
a. Within 10 days from receipt of report of rehabilitation receiver, the court may convert the proceedings into one for the liquidation
of the debtor upon a finding that:
i. The debtor is insolvent.
ii. There is no substantial likelihood for the debtor to be successfully rehabilitated as determined in accordance with the rules
to be promulgated by SC (Section 25[c]).
1. All you have to prove is it is a lost cause and the company can no longer be rehabilitated.
15. Can the court terminate the proceedings? Yes. Under what circumstances?
a. The rehabilitation proceedings shall be terminated by order of the court either declaring a successful implementation of the
Rehabilitation Plan or a failure of rehabilitation. This shall be upon motion by any stakeholder of the rehabilitation receiver (Section
74).
i. It is either you failed or you succeeded.
16. When is there a failure of rehabilitation?
a. There is failure of rehabilitation in the following cases:
i. The court dismisses the petition.
ii. The Rehabilitation Plan was never submitted or by the debtor (debtor fails to submit).
iii. Under the Rehabilitation Plan submitted by the debtor, there is no substantial likelihood that the debtor can be
rehabilitated within a reasonable period (the rehabilitation plan is not viable)
iv. The Rehabilitation Plan or its amendment is approved by court but the debtor fails to perform is obligations or there is
failure to realize the objectives, targets or goals including the timeless and conditions for the settlement of the obligations
due to the creditors and other claimants during its implementation.
v. The commission of fraud in securing the approval of the Rehabilitation Plan or its amendment.
vi. Other analogous circumstances as may be defined by the rules of procedure (Section 74).
17. Who may serve as a rehabilitation receiver?
a. Any qualified natural or juridical person may serve as a rehabilitation receiver, provided that if it is a juridical entity, it must still
designate a natural person who possesses all the qualifications and none of the disqualifications as its representative, it being
understood that the juridical entity and its representatives are solidarily liable for all obligations and responsibilities of the
rehabilitation receiver (Section 28).
18. What are the qualifications of a rehabilitation receiver?
a. A citizen of the Philippines or a resident of the Philippines in the 6 months immediately preceding his nomination.
b. Of good moral character and with acknowledged integrity, impartiality and independence.
c. Has requisite knowledge of insolvency and other relevant commercial laws, rules and procedures, as well as the relevant training
and/or experience that may be necessary to enable him to properly discharge the duties and obligations of a rehabilitation receiver.
d. Has no conflict of interest: provided that such conflict of interest may be waived, expressly or impliedly, by a party who may be
prejudiced by it.
i. It may be asked in the Bar is you might be the DOSRI of the distressed company. You cannot be a rehabilitation receiver
because there will be a conflict of interest.
19. What are the powers of the Rehabilitation Receiver?

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 a. He is deemed as an officer of the court with the principal duty of preserving and maximizing the value of assets of the debtor during
the rehabilitation proceedings, determining the viability of the rehabilitation of the debtor, preparing and recommending a
Rehabilitation Plan to the court, and implementing the approved Rehabilitation Plan.
i. You are so powerful that you can cross out anything on the rehab plan that will not serve its purpose.
b. To this end, and without limiting the generality of the foregoing, he has the following powers, duties and responsibilities:
i. Verify the accuracy and factual allegations in the petition and its annexes.
ii. Verify and correct, if necessary, the inventory of all the assets of the debtor and their valuation.
iii. Verify and correct, if necessary, the schedule of debts and liabilities of the debtor
iv. Evaluate the validity, genuineness and true amount of all claims against the debtor.
v. Take possession, control and custody and to preserve the value of all properties of the debtor.
vi. Sue and recover, with approval of court, all amounts owed to, and all properties pertaining to the debtor
vii. Have access to all information necessary, proper or relevant to the operations and business of the debtor and for its
rehabilitation.
viii. Sue and recover, with approval of court, all property or money the debtor paid, transferred or disbursed in fraud of the
debtor or its creditors, or which constitute undue preference of creditors. You are a one-man oversight committee.
ix. Monitor the operations and the business of the debtor to ensure that no payments or transfers of property are made other
than in the ordinary course of business.
x. With court’s approval, engage the services of or to employ persons or entities to assist him in the discharge of his functions.
You may even bring your own team.
xi. Determine the manner by which the debtor may be best rehabilitated, to review, revise and recommend action on the
Rehabilitation Plan and submit the same or a new one to the court for approval.
xii. Implement the Rehabilitation Plan as approved by court, if provided under the Rehabilitation Plan.
xiii. Assume and exercise the powers of management of debtor, if directed by the court.
xiv. (Catch all power) Exercise such other powers as may, from time to time, be conferred upon him by the court.
xv. Submit a status report on the rehabilitation proceedings every quarter or as may be required by the court motu proprio or
upon motion of any creditor or as may be provided, in the Rehabilitation Plan.
6. Discussion more scenarios in the Pre-Week.

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