5 - Mercantile Law - Green Notes PDF

DE LA SALLE UNIVERSITY COLLEGE OF LAW
Lasallian Commission on Bar Operations
MERCANTILE LAW
Green Notes 2019
Green Notes 2019 Letters of Credit and Trust Receipt
Table of Contents
Letters of Credit and Trust Receipt ........................................................................................................................................................................... 1
Basic Concepts ............................................................................................................................................................................................................. 1

Essential Conditions .............................................................................................................................................................................................. 1
Duration ................................................................................................................................................................................................................... 2
Doctrine of Independence .................................................................................................................................................................................. 2
Fraud Exception Principle .................................................................................................................................................................................. 2
Doctrine of Strict Compliance .......................................................................................................................................................................... 2
Parties and Contracts Involved ............................................................................................................................................................................. 3

Contracts Involved ................................................................................................................................................................................................ 3
Parties in a Letter of Credit ................................................................................................................................................................................ 3
Rights and Obligations of Parties ..................................................................................................................................................................... 3
Trust Receipts Law .................................................................................................................................................................................................... 4

Definition ................................................................................................................................................................................................................. 4
Loan/Security Feature ........................................................................................................................................................................................ 4
Warehouseman’s Lien .......................................................................................................................................................................................... 4
Ownership of the Goods, Documents, and Instruments Under a Trust Receipt ............................................................................... 5
Validity of the Security Interest of the Entruster as Against the Creditors of the Entrustee or Innocent Purchaser for
Value .......................................................................................................................................................................................................................... 5
Rights and Obligations ............................................................................................................................................................................................. 5

Rights and Obligations of the Entruster ......................................................................................................................................................... 5
Rights and Obligations of the Entrustee ........................................................................................................................................................ 6
Penal Sanction ........................................................................................................................................................................................................ 6
Remedies Available .................................................................................................................................................................................................... 5

Cancel the Trust and Take Possession of GDI .............................................................................................................................................. 6
Demand Payment for Defiency ......................................................................................................................................................................... 6
Charge for Estafa ................................................................................................................................................................................................... 6
Other Remedies ...................................................................................................................................................................................................... 7
Negotiable Instruments Law........................................................................................................................................................................................ 8
Negotiability ................................................................................................................................................................................................................. 8
Definition ................................................................................................................................................................................................................. 8
Features .................................................................................................................................................................................................................... 8
Requisites of Negotiability ...................................................................................................................................................................................... 8
Forgery ......................................................................................................................................................................................................................... 10
Summary of Rights and Liabilities in relation to Forgery ......................................................................................................................... 12
Material Alteration ................................................................................................................................................................................................... 14

Concept ................................................................................................................................................................................................................... 14
Effect of Material Alteration.............................................................................................................................................................................. 14
Negotiation .................................................................................................................................................................................................................. 15
Kinds of Transfer .................................................................................................................................................................................................. 15

Negotiation v. Assignment ................................................................................................................................................................................. 15

Modes of Negotiation .......................................................................................................................................................................................... 15
Kinds of Indorsements ........................................................................................................................................................................................ 16
Rights of the Holder ................................................................................................................................................................................................ 20

Holder-in-Due Course ........................................................................................................................................................................................ 19
Shelter Rule ............................................................................................................................................................................................................ 19
HID v. Not HID ...................................................................................................................................................................................................... 21
Defenses against the Holder ............................................................................................................................................................................. 21
Personal Defenses v. Real Defenses ............................................................................................................................................................... 22
Liabilities of Parties ............................................................................................................................................................................................ 22
Drawer ................................................................................................................................................................................................................... 22
Acceptor ................................................................................................................................................................................................................. 22
Indorser .................................................................................................................................................................................................................. 23
Sec. 65(d) v Sec. 66(b) ......................................................................................................................................................................................... 24
Checks .......................................................................................................................................................................................................................... 24
Definition ............................................................................................................................................................................................................... 24
Summary of Warranties, Undertakings, Defenses Barred, and Beneficiaries ................................................................................... 26
Insurance Law ................................................................................................................................................................................................................. 28
Concept of Insurance .............................................................................................................................................................................................. 28

Contract of Insurance ........................................................................................................................................................................................ 28
Requisites ............................................................................................................................................................................................................... 28
What may be Insured ......................................................................................................................................................................................... 28
Kinds of Insurable Risks..................................................................................................................................................................................... 29
Requirements to be Insurable ......................................................................................................................................................................... 29
What Constitutes Doing an Insurance Business? ...................................................................................................................................... 29
Insurable Interest ................................................................................................................................................................................................ 30
Interest in Life v. Property................................................................................................................................................................................ 30
Standard or Union Mortgage Clause v. Open or Loss Payable Mortgage Clause ............................................................................ 31
Double Insurance and Over Insurance .......................................................................................................................................................... 31
Over Insurance v. Double Insurance ............................................................................................................................................................. 32
Reinsurance........................................................................................................................................................................................................... 32
Double Insurance v. Reinsurance ................................................................................................................................................................... 33
No Fault, Suicide, and Incontestability Clauses ......................................................................................................................................... 33
Perfection of Contract of Insurance .................................................................................................................................................................. 34

Perfection .............................................................................................................................................................................................................. 34
Offer ........................................................................................................................................................................................................................ 34
Acceptance ............................................................................................................................................................................................................ 34
Premium Payments ............................................................................................................................................................................................. 35
Premium v. Assessment ..................................................................................................................................................................................... 35
;Cash and Carry” Rule ......................................................................................................................................................................................... 35
Non-Default Options in Life Insurance ........................................................................................................................................................ 36
Refund of Premiums ........................................................................................................................................................................................... 36

Rights and Obligations Of Parties ...................................................................................................................................................................... 37

Parties to Contract of Insurance .................................................................................................................................................................... 37
Summary of Rules Regarding Beneficiaries ................................................................................................................................................. 37
Effects of Irrevocable Designation of Beneficiary ..................................................................................................................................... 37
Rescission of Insurance Contracts..................................................................................................................................................................... 38

Grounds for Rescission ...................................................................................................................................................................................... 38
Concealment ......................................................................................................................................................................................................... 38
Misrepresentations/Omissions ...................................................................................................................................................................... 38
Breach of Warranties ......................................................................................................................................................................................... 39
Warranty v. Representation ............................................................................................................................................................................. 39
Breach of Condition Subsequent .................................................................................................................................................................... 39
Waiver of the Right to Rescind ........................................................................................................................................................................ 40
Limitations on the Right of the Insurer to Rescind ................................................................................................................................... 40
Cancellation of Non-Life Insurance Policy .................................................................................................................................................. 40
Loss................................................................................................................................................................................................................................ 40
Scope ....................................................................................................................................................................................................................... 40
Cause ....................................................................................................................................................................................................................... 40
Liability of Insurer against Loss ...................................................................................................................................................................... 40
Instance Where Insurer is Not Liable for Loss ............................................................................................................................................ 41
Notice of Loss ........................................................................................................................................................................................................ 41
Actual Loss on a Ship ........................................................................................................................................................................................... 41
Transportation Law....................................................................................................................................................................................................... 42
Common Carriers ..................................................................................................................................................................................................... 42

Definition ............................................................................................................................................................................................................... 42
Common Carriers v. Private Carrier .............................................................................................................................................................. 43
Diligence Required of Common Carriers ..................................................................................................................................................... 43
Obligations of the Carriers ................................................................................................................................................................................... 43
Vigilance over Goods ............................................................................................................................................................................................... 43

Exempting Causes ............................................................................................................................................................................................... 43
Duration of Liability ............................................................................................................................................................................................ 45
Carriage of Goods By Sea Act .......................................................................................................................................................................... 45
Bill of Lading .............................................................................................................................................................................................................. 46

Definition ............................................................................................................................................................................................................... 46
Three-Fold Character ........................................................................................................................................................................................ 46
Delivery of Goods ................................................................................................................................................................................................ 46
Period of Filing Notice of Claims by Shipper ...............................................................................................................................................47
Period of Filing Actions .......................................................................................................................................................................................47
Safety of Passengers ................................................................................................................................................................................................ 47

Void Stipulations...................................................................................................................................................................................................47
Duration of Liability .............................................................................................................................................................................................47
Liability for Acts of Others ................................................................................................................................................................................47

Defenses Available to Common Carriers ......................................................................................................................................................... 47

Liabilities of Common Carriers ....................................................................................................................................................................... 48
Proof of Negligence ............................................................................................................................................................................................ 48
Due Diligence in the Selection and Supervision of Employees ............................................................................................................. 48
Fortuitous Event .................................................................................................................................................................................................. 49
Contributory Negligence .................................................................................................................................................................................. 49
Doctrine of Last Clear Chance ........................................................................................................................................................................ 50
Extent of Liability ..................................................................................................................................................................................................... 50

Recoverable Damages ........................................................................................................................................................................................ 50
Stipulations Limiting Liability ........................................................................................................................................................................... 51
Liability for Baggage of Passengers ............................................................................................................................................................... 51
In Possession of Carrier v. In Possession of Passengers ........................................................................................................................ 52
Liability of Ship Owners and Shipping Agents............................................................................................................................................ 52
Warsaw Convention ................................................................................................................................................................................................ 53

Definition ............................................................................................................................................................................................................... 53
COGSA v. WARSAW ............................................................................................................................................................................................ 53
Applicability........................................................................................................................................................................................................... 53
Liability of the Carrier ........................................................................................................................................................................................ 53
Limitation of Liability ......................................................................................................................................................................................... 53
Willful Misconduct .............................................................................................................................................................................................. 54
Prescriptive Period ............................................................................................................................................................................................. 54
Jurisdiction ............................................................................................................................................................................................................ 54
Corporation Law ............................................................................................................................................................................................................. 55
General Principles ................................................................................................................................................................................................... 55

Nationality of Corporations ............................................................................................................................................................................. 55
Doctrine of Separate Personality ................................................................................................................................................................... 56
Doctrine of Piercing the Corporate Veil........................................................................................................................................................57
Stock v. Non-Stock Corporations ....................................................................................................................................................................... 59

Stock Corporation ............................................................................................................................................................................................... 59
Non-Stock Corporations ................................................................................................................................................................................... 59
De Facto Corporations and Corporations by Estoppel ................................................................................................................................ 60
Board of Directors and Trustees ..........................................................................................................................................................................61

Basic Principles ..................................................................................................................................................................................................... 61
Duties Liabilities and Responsibility for Unlawful Acts ........................................................................................................................... 62
Doctrine of Corporate Opportunity .............................................................................................................................................................. 63
When Personal Liability Attaches ................................................................................................................................................................... 63
Responsibility for Crimes .................................................................................................................................................................................. 63
Inside Information .............................................................................................................................................................................................. 63
Powers of Corporations ......................................................................................................................................................................................... 64

Express and Implied Powers ............................................................................................................................................................................ 64
Doctrine of Necessary Implication ................................................................................................................................................................ 64

Theory of General Capacity ............................................................................................................................................................................. 64

Theory of Limited Capacity .............................................................................................................................................................................. 64
General Powers .................................................................................................................................................................................................... 64
Specific Powers .................................................................................................................................................................................................... 65
Stockholders and Members Rights of a Stockholder And Member .........................................................................................................72

Doctrine of Equality of Shares..........................................................................................................................................................................72
Proprietary Rights ................................................................................................................................................................................................72
Intra-Corporate Disputes ..................................................................................................................................................................................75
Foreign Corporation ................................................................................................................................................................................................ 75

What Constitutes as Doing Business ..............................................................................................................................................................75
Twin Characterization Test...............................................................................................................................................................................75
Contract Test: ....................................................................................................................................................................................................... 76
Personality to Sue or be Sued .......................................................................................................................................................................... 76
Doctrine of Isolated Transactions: ................................................................................................................................................................. 76
Mergers and Consolidations ................................................................................................................................................................................. 77

Concepts ................................................................................................................................................................................................................. 77
Merger v. Consolidation ..................................................................................................................................................................................... 77
Effect and Limitation .......................................................................................................................................................................................... 78
Securities Regulation Code ........................................................................................................................................................................................ 80
State Policy and Purpose ....................................................................................................................................................................................... 80

Declared State Policy ......................................................................................................................................................................................... 80
Purpose ................................................................................................................................................................................................................... 80
Securities and Exchange Commission .............................................................................................................................................................. 80

Sec as a Collegial Body ....................................................................................................................................................................................... 80
Powers and Functions ......................................................................................................................................................................................... 81
Definition of Securities .......................................................................................................................................................................................... 82

Definition ............................................................................................................................................................................................................... 82
Howey Test............................................................................................................................................................................................................ 82
Parties/Entities Involved .................................................................................................................................................................................. 82
Procedure for Registration of Securities ......................................................................................................................................................... 82

Mandatory Registration ..................................................................................................................................................................................... 82
Procedure .............................................................................................................................................................................................................. 82
Registration Statement ...................................................................................................................................................................................... 82
Grounds for Rejection and Revocation of Registration of Securities .................................................................................................. 83
Withdrawal ............................................................................................................................................................................................................ 83
Exemptions to Registration .................................................................................................................................................................................. 83

Exempt Securities ............................................................................................................................................................................................... 83
Exempt Transactions ......................................................................................................................................................................................... 83
Formal Application for Exemption ................................................................................................................................................................. 84
Non-Exempt.......................................................................................................................................................................................................... 84
Prohibitions On Fraud, Manipulation and Insider Trading ...................................................................................................................... 85

Manipulation of Security Prices ...................................................................................................................................................................... 85

Fraudulent Transaction ..................................................................................................................................................................................... 86
Insider Trading ..................................................................................................................................................................................................... 86
Protection Of Investors.......................................................................................................................................................................................... 87
Tender Offer Rule ................................................................................................................................................................................................ 87
Proxy Solicitation ................................................................................................................................................................................................ 88
Full Disclosure Rule ............................................................................................................................................................................................ 88
Banking Law..................................................................................................................................................................................................................... 89
The New Central Bank Act .................................................................................................................................................................................... 89

State Policies ......................................................................................................................................................................................................... 89
Responsibility and Primary Objective of the BSP ...................................................................................................................................... 89
Monetary Board - Powers and Functions .................................................................................................................................................... 89
Legal Tender Power ............................................................................................................................................................................................90
Foreign Exchange Operations .........................................................................................................................................................................90
Banks In Distress ......................................................................................................................................................................................................91

Definition of Terms .............................................................................................................................................................................................. 91
Conservatorship.................................................................................................................................................................................................... 91
Closure.................................................................................................................................................................................................................... 92
Receivership .......................................................................................................................................................................................................... 92
Liquidation............................................................................................................................................................................................................. 94
Law On Secrecy of Bank Deposits ...................................................................................................................................................................... 99
Foreign Currency Deposit Act ........................................................................................................................................................................... 100

RA No. 1405 v. RA No. 6426 ............................................................................................................................................................................. 100
General Banking Law ............................................................................................................................................................................................ 100

Classification of Banks ..................................................................................................................................................................................... 100
“Know Your Customer” Rule .......................................................................................................................................................................... 102
Diligence Required of Banks .......................................................................................................................................................................... 102
Stipulation on Interests ................................................................................................................................................................................... 103
Grant of Loans and Security Requirements a Single Borrower’s Limits ........................................................................................... 103
Philippine Deposit Insurance Corporation Act ........................................................................................................................................... 105
Intellectual Property Code ....................................................................................................................................................................................... 107

Copyright v. Trademarks v. Patents ..............................................................................................................................................................107
Patents ....................................................................................................................................................................................................................... 107

Patentable vs. Non-Patentable Inventions .................................................................................................................................................107
Ownership of a Patent ..................................................................................................................................................................................... 108
Grounds for Cancellation of a Patent .......................................................................................................................................................... 109
Remedy of the True and Actual Inventor ................................................................................................................................................... 109
Rights conferred by a Patent ........................................................................................................................................................................ 109
Limitation on Patent Rights............................................................................................................................................................................. 110
Patent Infringement .......................................................................................................................................................................................... 110
Trademarks ................................................................................................................................................................................................................111

Mark vs. Collective Marks vs. Tradenames .................................................................................................................................................. 111

Acquisition of Ownership ................................................................................................................................................................................. 111
Concept of Actual Use ..................................................................................................................................................................................... 112
Effect of Registration ........................................................................................................................................................................................ 112
Non-Registrable marks ..................................................................................................................................................................................... 112
Well-known marks ............................................................................................................................................................................................. 113
Priority Rights...................................................................................................................................................................................................... 113
Rights Conferred by Registration .................................................................................................................................................................. 114
Cancellation of Registration ........................................................................................................................................................................... 114
Trademark Infringement ................................................................................................................................................................................. 114
Unfair Competition ............................................................................................................................................................................................ 115
Unfair Competition v. Trademark Infringement ....................................................................................................................................... 115
Copyright.................................................................................................................................................................................................................... 115
Copyrightable Works......................................................................................................................................................................................... 115
Non-copyrightable works ................................................................................................................................................................................ 116
Rights Conferred by a Copyright ................................................................................................................................................................... 116
Ownership of a Copyright.................................................................................................................................................................................117
Limitations on Copyright ................................................................................................................................................................................. 118
Doctrine of Fair Use........................................................................................................................................................................................... 119
Copyright Infringement.................................................................................................................................................................................... 119
Anti-Money Laundering Act .................................................................................................................................................................................... 120
Covered Institutions ............................................................................................................................................................................................. 120
Obligations of Covered Institutions ................................................................................................................................................................. 121

Customer Identification ................................................................................................................................................................................... 121
Record Keeping ................................................................................................................................................................................................... 121
Reporting of Covered and Suspicious Transactions ................................................................................................................................ 121
Covered Transactions ............................................................................................................................................................................................ 121
Suspicious Transaction ......................................................................................................................................................................................... 121
Safe Harbor Provision............................................................................................................................................................................................122
Money Laundering: when Committed .............................................................................................................................................................122

Unlawful Activities or Predicate Crimes .....................................................................................................................................................122
Authority to Inquire into Bank Deposits ...................................................................................................................................................... 123
Electronic Commerce Act ......................................................................................................................................................................................... 124
Legal Recognition ................................................................................................................................................................................................... 124

Electronic Data Message ..................................................................................................................................................................................124
Electronic Document ........................................................................................................................................................................................124
Electronic Signatures ........................................................................................................................................................................................124
Presumption Relating to Electronic Signatures ..........................................................................................................................................125
Admissibility and Evidentiary Weight .............................................................................................................................................................125
Obligation of Confidentiality.............................................................................................................................................................................. 126

Data Privacy Act ............................................................................................................................................................................................................ 127

Personal v. Sensitive Personal Information................................................................................................................................................... 127

Personal Information......................................................................................................................................................................................... 127
Sensitive Personal Information ...................................................................................................................................................................... 127
Personal Information v. Sensitive Personal Information ....................................................................................................................... 127
Scope ............................................................................................................................................................................................................................ 127
Processing of Personal Information ................................................................................................................................................................ 128

General Data Privacy Principles.....................................................................................................................................................................128
Criteria for Lawful Processing of Personal Information .........................................................................................................................129
Sensitive Personal Information and Privileged Information .................................................................................................................129
Subcontract of Personal Information...........................................................................................................................................................129
Extension of Privileged Communication .....................................................................................................................................................129
Rights of Data Subject .......................................................................................................................................................................................... 129

Transmissibility of Rights of Data Subject ................................................................................................................................................. 130
Right to Data Portability .................................................................................................................................................................................. 130
Limitations ........................................................................................................................................................................................................... 130
Financial Rehabilitation And Insolvency Act ...................................................................................................................................................... 131
Basic Concepts ......................................................................................................................................................................................................... 131

Insolvency ............................................................................................................................................................................................................. 131
Rehabilitation ....................................................................................................................................................................................................... 131
Liquidation............................................................................................................................................................................................................ 131
Suspension of Payments .................................................................................................................................................................................. 131
Modes of Rehabilitation ....................................................................................................................................................................................... 132

Court Supervised Rehabilitation ....................................................................................................................................................................132
Effects of Commencement Order .................................................................................................................................................................133
Pre-Negotiated Rehabilitation .......................................................................................................................................................................134
Out of Court or Informal Restructuring Agreements or Rehabilitation Plans .................................................................................135
Rehabilitation Receiver ........................................................................................................................................................................................ 136

Management Committee ................................................................................................................................................................................. 137
Rehabilitation Plan ............................................................................................................................................................................................. 137
Calm Down Effect...............................................................................................................................................................................................138
Liquidation................................................................................................................................................................................................................ 138
Kinds of Debtors .................................................................................................................................................................................................138
Procedure ............................................................................................................................................................................................................ 140
Effects of the Liquidation Order ................................................................................................................................................................... 140
Determination of Claims ..................................................................................................................................................................................142
Suspension of Payments ...................................................................................................................................................................................... 143

Stay or Suspension Order ................................................................................................................................................................................143
Remedies ................................................................................................................................................................................................................... 144

Motion for Reconsideration ............................................................................................................................................................................144
Petition for Certiorari .......................................................................................................................................................................................144


LETTERS OF CREDIT
BASIC CONCEPTS
A letter of credit is an instrument issued by a bank that
guarantees its client’s ability to pay for imported goods or
services, authorizing an individual or a firm to draw drafts
on the bank or on its correspondents for bank’s account
under conditions specified in the credit. Its purpose is to
LETTERS OF insure a seller payment of a definite amount upon

presentation of documents. [Prudential Bank v. IAC, G.R.
No. 74886, December 8, 1992]
CREDIT AND A letter of credit is a financial device developed by
TRUST RECIEPTS
merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with
his goods before he is paid, and a buyer, who wants to have
control of the goods before paying.
To break the impasse, the buyer may be required to

contract with a bank to issue a letter of credit in favor of
the seller so that, by virtue thereof, the issuing bank
authorizes the seller to draw a draft and engage to pay
them upon their presentment simultaneously with the
tender of documents required by the letter of credit, which
basically are the shipping documents of the goods
purchased. [Bank of America v. Court of Appeals, G.R. No.
105395, December 10, 1993]
Letter of Credit Guaranty

Bank undertakes a Accessory obligation -
primary obligation - Guarantor undertakes a
Issuing bank engages to collateral obligation
pay seller once the draft which arises only upon
and other required debtor’s default.
shipping documents are
presented to it.
[Metropolitan Waterworks v. Daway, G.R. No. 160732, June
21, 2004]
A. ESSENTIAL CONDITIONS
1. Issued in favor of a determined person and not to

order;
2. Amount must be:
a. Fixed and specified; or
b. Indeterminate but within a maximum sum, the

limit of which already stated.
Non-compliance with the essential conditions renders the

instrument only as a letter of recommendation. [Art. 568,
Code of Commerce]
2. DURATION

1
1. Period fixed by parties; obligation from the underlying agreement like a

typical standby (letter of credit); or
2. If none:
b. Independence only as to the justification aspect like
a. 6 months from its date if used in the Philippines; in a commercial letter of credit or repayment standby,
which is identical with the same obligations with the
b. 12 months from its date if used abroad. [Art. 572, underlying agreement. [Transfield Philippines, Inc. v.
Code of Commerce] Luzon Hydro Corp., G.R. No. 146717, November 22,
2004]
3. DOCTRINE OF INDEPENDENCE Commercial L/C Standby L/C

Credits become payable Credits become payable
A letter of credit is an entirely distinct and separate
upon presentation by the upon certification of a
agreement which should not be affected by the main
seller of documents; party’s non-performance;
contract. Banks assume no liability or responsibility for the
Seller must demonstrate Beneficiary must certify
form, sufficiency, accuracy, genuineness, falsification or
by documents that he has that obligor has not
legal effect of any documents, or for the general and/or
performed the contract performed the contract;
particular conditions stipulated in the documents or
(of sale);
superimposed thereon, nor do they assume any liability or
responsibility for the description, quantity, weight, quality, Documents show Documents show
condition, packing, delivery, value or existence of the affirmative steps to applicant has not
goods represented by any documents, or for the good faith comply with contract; performed;
or acts and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the insurers of 4. FRAUD EXCEPTION PRINCIPLE
the goods, or any other person whomsoever.
Fraud and forgery is an exception to the independence
The letter of credit is an entity unto itself, thus: principle. The “fraud exception” exists when the
beneficiary, for the purpose of drawing on the credit,
1. The relationship between the beneficiary and the fraudulently presents to the conforming bank, documents
issuer of a letter of credit is not strictly that contain, expressly or by implication, material
contractual, because both privity and a meeting representations of fact that to his knowledge be untrue.
of the minds are lacking, yet strict compliance
with its terms is an enforceable right; The remedy for fraudulent abuse is an injunction.
However, injunction should not be granted unless:
2. The letter of credit is not a third-party
beneficiary contract (pour atrui), because the a. There is clear proof of fraud;
issuer must honor drafts drawn against a letter
regardless of problems subsequently arising in b. Fraud constitutes fraudulent abuse of
the underlying contract; the independent purpose of the letter
of credit and not only fraud under the
3. Since the bank's customer (Buyer-Applicant) main agreement; and
cannot draw on the letter, it does not function as
an assignment by the customer to the c. Irreparable injury might follow if
beneficiary; injunction is not granted or the
recovery of damages would be
4. If properly used, the letter of credit is not a seriously damaged. [Transfield
contract of suretyship or guarantee, because it Philippines, Inc. v. Luzon Hydro Corp.,
entails a primary liability following a default; and G.R. No. 146717, November 22, 2004]
5. Finally, the letter of credit is not in itself a Prescriptive period: 10 years as the cause of action arises
negotiable instrument, because it is not payable from a contract. [National Commercial Bank of Saudi
to order or bearer and is generally conditional, Arabia v. Court of Appeals, G.R. no. 124267, January 31, 2003]
yet the draft presented under it is often
negotiable. § DOCTRINE OF STRICT COMPLIANCE
The doctrine works to the benefit of both the issuing bank Commercial involving letters of credit that the documents
and the beneficiary. Its purpose is to assure the seller of tendered must strictly conform to the terms of the letter
prompt payment independent of any breach of the main of credit. The tender of documents by the beneficiary
contract and to preclude the issuing bank from (seller) must include all documents required by the letter.
determining whether the main contract is actually A correspondent bank which departs from what has been
accomplished or not. stipulated under the letter of credit, as when it accepts a
faulty tender, acts on its own risks and it may not
The independent nature may be: thereafter be able to recover from the buyer or the issuing
bank, as the case may be, the money thus paid to the
a. Independent in toto where credit is independent beneficiary. [Feati Bank v. Court of Appeals, G.R. No. 94209,
from the justification aspect and is a separate April 30, 1991]

2
C. RIGHTS AND OBLIGATIONS OF

PARTIES AND CONTRACTS INVOLVED PARTIES
CONTRACTS INVOLVED a. Buyer –
In a letter of credit, there are 3 distinct and independent 1. Reimburse issuing bank;
contracts:
2. Obtain shipping documents to claim the goods
A. Contract of sale between the buyer and the upon reimbursement; [The Hongkong &
seller; Shanghai Banking Corporation v. National Steel
Corporation, G.R. No. 183486, February 24, 2016]
B. Contract of the buyer with the issuing bank; and
3. Contingent liability until reimbursement by
C. Letter of credit proper in which the bank issuing bank to negotiating bank, if any; [Bank
promises to pay the seller pursuant to the terms of America v. Court of Appeals, G.R. No. 105395,
and conditions stated therein. December 10, 1993]
The three contracts which make up the letter of credit b. Issuing Bank -
arrangement are to be maintained in a state of perpetual
separation. A transaction involving the purchase of goods a. Solidary, direct, primary, absolute and
may also require, apart from a letter of credit, a contract definite undertaking to pay the beneficiary
of transportation specially when the seller and the buyer only upon presentation of the required
are not in the same locale or country, and the goods documents. [Metropolitan Waterworks v.
purchased have to be transported to the latter. [Keng Hua Daway, G.R. No. 160732, June 21, 2004]
Paper Products v. Court of Appeals, G.R. No. 116863, February
12, 1998] b. Holds unto the shipping documents until
reimbursement. [The Hongkong & Shanghai
PARTIES IN A LETTER OF CREDIT Banking Corporation v. National Steel
Corporation, G.R. No. 183486, February 24,
Primary parties: 2016]
a. Buyer/Applicant – purchases goods, procures c. Seller – Draw drafts and recover from the bank the
the letter of credit and obliges himself to value of his shipment if made within the terms of the
reimburse the issuing bank upon receipts of the instrument and documents are complete;
documents of title;
d. Confirming Bank – Direct and primary obligation to
b. Opening/Issuing Bank (of the Letter of Credit) - the seller or beneficiary as if credit were issued by
undertakes to pay the seller upon receipt of the the opening and confirming banks jointly. [Bank of
draft and proper document of titles and to America v. Court of Appeals, G.R. No. 105395,
surrender the documents to the buyer upon December 10, 1993]
reimbursement; and
e. Advising/Notifying Bank - No liability except to
c. Seller/Beneficiary - ships the goods to the notify and/or transmit to the beneficiary the
buyer and delivers the documents of title and existence of the letter of credit.
draft to the issuing bank to recover payment.
f. Negotiating Bank –
Other parties:
a. Before negotiation – no liability with respect to
1. Advising/Notifying Bank – conveys to the seller the the seller.
existence of the credit;
b. After negotiation – Contractual relationship
2. Confirming bank – lends credence to the letter of with seller. [Feati Bank v. Court of Appeals, G.R.
credit issued by a lesser known issuing bank; No. 94209, April 30, 1991]
3. Paying Bank – the opening bank or another bank on c. Present the instrument to the issuing bank for
which drafts are drawn and undertakes to encash the payment.
drafts drawn by the seller;
g. Paying Bank – pay the seller/beneficiary and seeks
4. Negotiation Bank – buys or discounts the draft where reimbursement from the issuing bank:
buyer opted to approach the negotiating bank instead
of claiming payment from the issuing bank. [Bank of a. Debit the account which the opening bank has
America v. Court of Appeals, G.R. No. 105395, December with it; or
10, 1993]

3
b. Draw a bill of exchange on the opening bank. a. Loan – Bank (entruster) extends a loan,
[Bank of America v. Court of Appeals, G.R. No. represented by a letter of credit, for the
105395, December 10, 1993] importation of goods subject of the trust
receipt;
TRUST RECEIPTS LAW
b. Security – A trust receipt is a security
agreement pursuant to which a bank acquires a
a. DEFINITION security interest in the goods. It secures an
indebtedness and there can be no such thing as
A trust receipt is a commercial document whereby the security interest that secures no obligation.
bank releases the goods in the possession of the entrustee [Vintola v. Insular Bank of Asia and America, G.R.
but retains ownership thereof, while the entrustee shall No. 73271, May 29, 1987]
sell the goods and apply the proceeds for the full payment
of his liability with the bank. It is a security arrangement to Note: Security interest refers to a property interest in GDI
which a bank acquires ownership of the imported personal to secure performance of some obligation of the entrustee
property. [Garcia v. Court of Appeals, G.R. No. 119845, July or of some third persons to the entruster and includes
5, 1996] title, whether or not expressed to be absolute, whenever
such title is in substance taken or retained for security
A trust receipt transaction is any transaction between an only.
entruster and entrustee whereby:
c. WAREHOUSEMAN’S LIEN
a. The entruster, who holds absolute title or
security interest over certain specified goods,
documents or instruments (GDI), releases the GENERAL RULE: A warehouseman, by issuing the receipt,
same to the possession of the entrustee; is estopped from setting up any title or right to possession
of the goods.
b. The entrustee executes and delivers to the
entruster a document called a trust receipt, EXCEPTION: Except when it pertains to his lien.
binding himself to hold the merchandise in trust [Villanueva, 581]
with respect to two obligations:
A warehouseman’s lien is a lien over the goods deposited
1. Deliver to the entruster the price of the sale with him as his security for the payment of lawful charges,
(entregarla); and advances and other expenses in relation to such goods.
[Sec. 27, Act No. 2137]
2. Return the GDI if unsold (devolvera) [Sec. 4, P.D.
No. 115] CLAIMS INCLUDED
When both parties enter into an agreement knowing that a. Lawful charges for storage and preservation of the
the return of the goods subject of the trust receipt is not goods;
possible even without any fault on the part of the
entrustee, the transaction is a mere loan where the b. Lawful claims for money advanced, interest,
borrower is obligated to return the amount spent for the insurance, transportation, labor, weighing,
purchase of the goods through the proceeds of the sale. coopering and other charges and expenses in
[Land Bank of the Philippines v. Perez, G.R. No. 166884, June relation to such goods;
13, 2012]
c. Reasonable charges and expenses for notice, and
No violation of the right against imprisonment for non- advertisements of sale; and
payment of a debt - The law does not singularly seek to
enforce payment of the loan. It punishes the dishonesty d. Sale of the goods where default had been made in
and abuse of confidence in the handling of money or goods satisfying the warehouseman's lien. [Sec. 27, Act No.
to the prejudice of another, regardless of whether the 2137]
latter is the owner or not.[People v. Nitafan, G.R. Nos.
81559-60, April 6, 1992] GOODS SUBJECT TO LIEN
b. LOAN/SECURITY FEATURE The warehouseman may enforce his lien against the
following:
A trust receipt is considered as a security transaction
intended to aid in financing importers and retail dealers a. Goods of the depositor who is liable as debtor
who do not have sufficient funds or resources to finance whenever such goods are deposited; and
the importation or purchase of merchandise, and who may
not be able to acquire credit except through utilization, as b. Goods of other persons stored by the depositor
collateral of the merchandise imported or purchased. who is liable as debtor with authority to make a
[Samo v. People, G.R. No. L-17603-04, May 31, 1962] valid pledge. [Sec. 28, Act No. 2137]
There are two features in the transaction:

4
2. VALIDITY OF THE SECURITY

LOSS AND WAIVER OF LIEN INTEREST OF THE ENTRUSTER AS
A warehouseman loses his lien upon goods by: AGAINST THE CREDITORS OF THE
ENTRUSTEE OR INNOCENT
a. Surrendering possession thereof; or PURCHASER FOR VALUE
b. Refusing to deliver the goods when a demand is
GENERAL RULE: The entruster's security interest in
made with which he is bound to comply. [Sec. 29,
goods, documents, or instruments pursuant to the written
Act No. 2137] terms of a trust receipt shall be valid as against all creditors
of the entrustee for the duration of the trust receipt
ENFORCEMENT OF WAREHOUSEMAN’S agreement. [Sec. 12, P.D. No. 115]
LIEN
EXCEPTION: When the goods are in the hands of an
The remedies available to a warehouseman for enforcing innocent purchaser for value and in good faith. [Prudential
his lien against the person demanding the goods are as Bank v. NLRC, G.R. No. 112592, December 19, 1995]
follows:
Any purchaser who buys the GDI for value and in good
(1) Refusing to deliver the goods until the lien faith from the entrustee, acquires said goods, documents
is satisfied; [Sec. 31, Act No. 2137] or instruments free from the entruster's security interest.
[Sec. 11, P.D. No. 115]
(2) Causing the extrajudicial sale of the
property and applying the proceeds to the This is an exception to Nemo Dat Quod Non Habet where
value of the lien; [Secs. 33-34, Act No. 2137] the buyer is to acquire only whatever title the seller had at
the time the sale was perfected and the object is delivered.
(3) Undertaking other means allowed by law to [Villanueva, 559]
a creditor against his debtor for the
collection from the depositor of all charges
which the depositor has bound himself to RIGHTS AND OBLIGATIONS
pay; [Sec. 32, Act No. 2137]
1. RIGHTS AND OBLIGATIONS OF THE
Undertaking other remedies allowed by law for the
enforcement of lien against personal property. [Sec. 35, ENTRUSTER
Act No. 2137]
Rights of Entruster
1. OWNERSHIP OF THE GOODS,
a. Proceeds from the sale of GDI to the extent of
DOCUMENTS, AND INSTRUMENTS
the amount owing to the entruster or as
UNDER A TRUST RECEIPT appears in the trust receipt;
The importer (entruster) becomes absolute owner of the b. Return of GDI in case of non-sale;
imported merchandise as soon as he has paid its price. The
ownership of the merchandise continues to be vested in c. Cancel the trust and take possession of GDI or
the owner thereof or in the person who has advanced the proceeds thereof at any time upon default
payment (entrustee), until he has been paid in full, or if the or failure of the entrustee to comply with any
merchandise has already been sold, the proceeds of the of the terms and conditions of the trust receipt
sale should be turned over to him by the importer or by his or any other agreement between the entruster
representative or successor in interest. [Prudential Bank v. and the entrustee;
NLRC, G.R. No. 112592, December 19, 1995]
d. Become the purchaser as a public sale held not
The bank does not become the real owner of the goods. It less than 5 days after service of notice;
is merely the holder of a security title for the advances it
had made to the importer. The goods the importer had e. Enforcement of all other rights conferred on
purchased through the bank financing, remain the him in the trust receipt provided such are not
importer's property and he holds it at his own risk. The contrary to law. [Sec. 7, P.D. No. 115]
trust receipt arrangement does not convert the bank into
an investor; it remains a lender and creditor. This is so Obligations of Entruster
because the bank had previously extended a loan which
the letter of credit represents to the importer, and by that 1. Give possession of goods to the entrustee;
loan, the importer should be the real owner of the goods.
[Abad v. Court of Appeals, G.R. No. L-42735, January 22, 2. Give notice of intention to sell in a private or
1990] public sale, on or after default, to the entrustee
if entruster is already in possession of the GDI;
Application of proceeds of any sale:

5
1. Expenses of sale; f. Observe all other terms and conditions of the trust
receipt not contrary to law; [Sec. 9, P.D. No. 115]
2. Expenses of re-taking, keeping, and storing GDI;
and 3. PENAL SANCTION
3. Entrustee’s indebtedness to entruster.
Failure of entrustee to turn over the proceeds of the sale
of the goods, covered by trust receipt to entruster or to
Notice must be:
return said goods if they were not disposed of in
accordance with the terms of the trust receipt, shall be
1. In writing;
punishable as estafa under Article 315 paragraph 1(b) of the
Revised Penal Code. [Sec. 13, P.D. No. 115]
2. Personal service or sent by ordinary mail to
entrustee’s last known business address.
If the entrustee is a corporation, the law makes the officers
or employees suffer imprisonment. However, the person
2. RIGHTS AND OBLIGATIONS OF THE signing the trust receipt for the corporation is not
ENTRUSTEE solidarily liable with the corporation for the civil liability
arising from the criminal offense. [Ong v. Court of Appeals,
Rights of Entrustee G.R. No. 119858, April 29, 2003]
a. Possess the goods pursuant to the trust receipt REMEDIES AVAILABLE

agreement; and
b. Receive surplus but not liable for any deficiency CANCEL THE TRUST AND TAKE
from the sale. [Sec. 7, P.D. No. 115] POSSESSION OF GDI
Obligations Of Entrustee In the event of default or failure of the entrustee to comply

with the trust receipt, the entruster may cancel the trust
and take possession of the GDI or of the proceeds realized
a. Payment/delivery of proceeds of sale or disposition
therefrom at any time as a statutory remedy. The entruster
of goods, documents, or instruments;
may give notice of the intention to sell on or after default
and may also become a purchaser. [Sec. 7, P.D. No. 115]
Entregarla - A trust receipt transaction imposes
upon the entrustee the obligation to deliver to the
entruster the price of the sale. [Gonzales v. HSBC, DEMAND PAYMENT FOR DEFIENCY
G.R. No. 164904, October 19, 2007]
The entrustee is be liable to the entruster for any
b. Return of goods, documents, or instruments in case deficiency after the proceeds of the sale have been applied
of non-sale; to the payment of the expenses of the sale, the payment of
the expenses of re-taking, keeping and storing the goods,
Devolvera – In case of non-sale, the entrustee must documents or instruments, and the satisfaction of the
return the merchandise to the entruster. [Gonzales entrustee’s indebtedness to the entruster. [Sec. 7, P.D. No.
v. HSBC, G.R. No. 164904, October 19, 2007] 115]
c. Liability for loss of goods, documents, or CHARGE FOR ESTAFA

instruments;
The failure to turn over the goods or the proceeds realized
The risk of loss is borne by the entrustee. Loss of GDI from the sale thereof is a criminal offense punishable
subject of a trust receipt, pending their disposition, under Article 315 (1) (b) of the Revised Penal Code.
irrespective of whether or not it was due to the fault Elements:
or negligence of the entrustee, shall not extinguish
his obligation to the entruster for the value thereof. 1. Receipt of subject goods in trust or under the
[Sec. 10, P.D. No. 115] obligation to sell the same and to remit the proceeds
to the entruster, or to return the goods if not sold;
This is an exception to Res Perit Domino where it is
the owner who must bear the risk of loss. The 2. Misappropriation or conversion of goods and/or
entrustee will bear the less should the goods be lost proceeds of sale;
while in his possession although he is not the owner
thereof. [Villanueva, 559] 3. Performance of such acts with abuse of confidence to
the damage and prejudice of the entruster; and
d. Insure goods for their total value against loss from
fire, theft, pilferage or other casualties; 4. Demand was made by the entruster for the
remittance of the proceeds of return of the unsold
e. Keep goods or proceeds thereof separate and goods.
capable of identification as entruster’s property;
Intent to defraud is presumed when:

6
§ Entrustee fails to turn over the proceeds of the

sale;
§ Entrustee fails to return the goods if they are not

disposed of in accordance with the trust
receipts. [Land Bank of the Philippines v. Perez,
G.R. No. 166884, June 13, 2012]
Acquittal does not extinguish underlying loan - The

acquittal of the entrustee in the criminal charge of estafa
does not extinguish the civil liability arising from the trust
receipt arrangement. [Vintola v. Insular Bank, G.R. No.
73271, May 29, 1987]
Damage to the entruster need not be proven – The offense

is punished as malum prohibitum. A mere failure to deliver
the proceeds or return the goods constitutes a criminal
offense that cause prejudice to another and to public
interest. [Metropolitan Bank v. Tonda, G.R. No. 134436,
August 16, 2000]
OTHER REMEDIES
The law uses the word "may" in granting to the entruster

the right to cancel the trust and take possession of the
goods. Consequently, the entrustor has the discretion to
avail of such right or seek any alternative action, such as a
third party claim or a separate civil action (collection)
which it deems best to protect its right, at any time upon
default or failure of the entrustee to comply with any of
the terms and conditions of the trust agreement. [South
City Homes, Inc. v. BA Finance Corp., G.R. No. 135462,
December 7, 2001]
Under Article 33 of the Civil Code, a civil action for

damages, entirely separate and distinct from the criminal
action, may be brought by the injured party in cases of
defamation, fraud and physical injuries. Estafa falls
under fraud. [Prudential Bank v. IAC, G.R. No. 74886,
December 8, 1992]

7
Green Notes 2019 Negotiable Instruments Law
NEGOTIABILITY
DEFINITION
A Negotiable Instrument is a written contract for the
payment of money which is intended as a substitute for
money and passes from one person to another as money,
in such a manner as to give a holder in due course the right
to hold the instrument free from defenses available to
prior parties. [Salvador Austria & Timoteo Aquino,
Fundamentals of Negotiable Instruments Law (2009]
NEGOTIABLE FEATURES
INSTRUMENTS 1. Negotiability – NI can be transferred from one person

to another.
LAW 2. Accumulation of Secondary Contracts – Indorsers

become secondarily liable to the immediate
transferees and to any holder.
Note:
§ The negotiability of an instrument is determined

from the writing, that is, from the face of the
instrument itself. [Caltex v. Court of Appeals, G.R.
No. 97753, August 10, 1992]
§ An instrument is negotiated when it is

transferred from one person to another in such
a manner as to constitute the transferee the
holder thereof, and a holder may be the payee or
indorsee of a bill or note, who is in possession of
it, or the bearer thereof. [Id]
§ The fact that an instrument does not meet the

foregoing requisites will not affect its validity,
however it will be governed by the Civil Code,
instead of NIL. [Ang Tiong v. Ting, G.R. No. L-
26767, February 22, 1968]
REQUISITES OF NEGOTIABILITY
1. Written and signed by the maker/drawer;
2. Contain an unconditional promise or order to pay a
sum certain in money;
3. Payable on demand, or at a fixed or determinable
future time;
4. Payable to order or bearer;
5. Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
Written & Signed by the Maker/Drawer

8
§ A note or bill, if it is to be negotiable, must be

§ The writings may be made in any manner. payable in money, not in other forms.
§ The signature is binding whether it is in one’s § An instrument which contains an order or

handwriting, or printed, engraved, lithographed promise to do an act in addition to the payment
or photographed, so long as it is intended or of money is not negotiable.
adopted as the signature of the signer or made
with his authority. § But if the order or promise gives the holder the
option to require something to be done in lieu of
Unconditional Promise or Order to Pay a Sum Certain in money, the instrument is negotiable.
Money
Payable on Demand, or at a Fixed or Determinable Future
Promise to Pay Order to Pay Time
A promise to pay is a An order to pay instructs
written commitment of another person to make § The requirement as to certainty of time of
the maker to pay a sum of the payment. payment is for the purpose of informing the
money to the payee or holder of the instrument of the date when he
payee’s order. An order to pay may be may enforce the payment thereof.
expressed or implied
A promise to pay must be through words equivalent 3.1. Payable at a fixed period after date or sight
on the instrument itself, to an order or which show
although it is not the drawer’s will that the § “Fixed period after date” – Pertains to a period of
necessary to use the word money should be paid. time (i.e. 30 days, 2 months) after a specified date
“promise.” It is enough (i.e. June 20, 2016) within which payment must be
that the meaning of A mere authorization to made.
promise is expressed or pay or request to pay is not § “After sight” – Pertains to the time after the
implied in the instrument negotiable because it drawee has seen the instrument upon
itself. leaves the payee with presentation for acceptance
discretion.
In addition to the On or before a fixed or determinable future time
acknowledgement of
indebtedness, there must § The phrase “on or before” gives the person liable
be other words the option to pay on any other day before the due
expressing or implying date, which is either fixed or determinable.
the intention to pay.
On or at a fixed period after the occurrence of a
specified event, certain to happen
Condition
§ The event described herein is that which will
§ Future and contingent event, or a past event certainly happen, but cannot be specifically
unknown to the parties, the happening or non- determined in advance (i.e. death).
happening of which will either give rise to an
obligation or extinguish existing obligations. § A determinable future time can mean nothing
[Art. 1181, New Civil Code] else than a time that can be certainly determined
after the execution of the note.
§ The mere fact that the underlying transaction
stated in the instrument will not make the § A contingency is, in law, an uncertain future
promise or order conditional. But where the event, and, as a contingency may never happen,
promise or order is made subject to the terms an instrument payable only upon the happening
and conditions of the transaction stated, then, thereof may never come due, and is therefore
the instrument is rendered non-negotiable. not negotiable. [State Bank of Halstad v. Bilstad]
§ An order or promise to pay out of a particular When payable on demand

fund is not unconditional [Sec. 4, NIL] because
the possibility of payment is contingent on the § Where a blank for time for payment is unfilled,
availability of funds in the particular fund the instrument has been held to be payable on
specified. demand.
2.1. Sum Certain in Money § After the date of maturity, the instrument can no
longer be negotiated as to make the parties who
§ The amount of money to be paid must be acquire the instrument after the date of maturity
determinable by inspection and must be stated holders in due course because they become
specifically and definitely on the face of the holders thereof with notice that it is already
instrument. overdue, as this can be determined from the face
of the instrument itself. The last paragraph of
Section 7 means that the instrument is payable

9
on demand only as between the immediate

parties – the indorser and the payee [Sec. 7, NIL]. When payable to bearer
Payable to order or to bearer a. When an instrument is payable to bearer, it is

payable to whoever has physical possession.
§ An instrument is not negotiable unless made The bearer can indorse, present for payment,
payable to a person or his “order” (ex. “Mr. X or and collect the proceeds of the instrument.
his order”; “Order of Mr. X”) or to “bearer” (ex.
“Mr. X or bearer”; “Bearer”). Where the b. Bearer instruments need not to be indorsed
instrument is payable only to a specified person because it is negotiated by mere delivery.
(ex. “Pay to Mr. X”), it is not payable to order.
c. When the last indorsement is an indorsement in
§ “Order” or “bearer” are critical words that define blank, the instrument becomes bearer
negotiability. These words connote that the instrument.
instrument is transferrable from one person to
another. Additional provisions not affecting negotiability (Sec. 5.)
§ Order means the instrument is payable to payee An instrument which contains an order or promise to do
or whom payee identifies. Bearer means the any act in addition to the payment of money is not
instrument payable to whoever has possession of negotiable. But the negotiable character of an instrument
the instrument. otherwise negotiable is not affected by a provision which:
Fictitious Payee Rule § Authorizes the sale of collateral securities in case

the instrument be not paid at maturity – A promise
§ A check that is payable to a specified payee is an
of the maker to furnish additional collateral will
order instrument. However, under Sec. 9(c) of
render the note non-negotiable, as that would be an
the NIL, a check payable to a specified payee may
additional act to the promise to pay money.
nevertheless be considered as a bearer
instrument if it is payable to the order of a § Authorizes a confession of judgment if the
fictitious or non-existing person, and such fact instrument be not paid at maturity – Confession of
is known to the person making it so payable. judgments are void under Philippine Law.
§ A check made expressly payable to a non- § Waives the benefit of any law intended for the
fictitious and existing person is not necessarily
advantage or protection of the obligor – Benefits
an order instrument. If the payee is not the
intended for the advantage or protection of the
intended recipient of the proceeds of the check,
obligor are the rights to (1) presentment for payment,
the payee is considered a "fictitious" payee and
(2) notice of dishonor, and (3) protest. All of these may
the check is a bearer instrument. [PNB v.
be waived.
Rodriguez]
§ General rule: drawee bank is absolved from
§ Gives the holder an election to require something to
liability and the drawer bears the loss. The check
be done in lieu of payment of money – Even if there
is then considered as a bearer instrument
is an additional act given as an option, the instrument
still remains to be negotiable provided that the right
§ Exception: COMMERCIAL BAD FAITH: bad faith to choose between payment of money or the
on the part of the drawee bank or any of its performance of the additional act is in the hands of
transferee cannot use the fictitious payee rule as the holder.
a defense [Id.]
However, the presence of any of these provisions in an
When payable to order. instrument shall not validate other provisions which are
illegal.
a. Without the words “or order” or “to the order of”, the
instrument is payable only to the person designated
therein and is therefore non-negotiable.
FORGERY
b. The instrument, to be negotiable, must contain words
of negotiability – must be payable “to the order” or “to § Sec. 23 of the NIL applies only to forged
the bearer” [Consolidated Plywood Industries vs. IFC signatures or signatures made without the
Leasing and Acceptance Corp, G.R No. 72593] authority of the person whose signature
c. There must always be a specified person named in the purports to be.
instrument [Id.] § Consequently, if the forgery consists of
alteration in the amount, Sec. 23 does not apply.
d. Under the last paragraph of this section, the law Such alterations are covered by Sec. 124.
requires that the payee must be named or otherwise
indicated with reasonable certainty. If there is no
payee, where the instrument is payable to order, no
one could indorse the instrument.

10
to A. The check is not a forgery. The fraud here is in

inducing B to issue the check. Here, there is an intention
Cases covered by Sec. 23: of B to issue an instrument.
§ Where the signature on the instrument is
forged; INDORSEMENT IS
SIGNATURE IS FORGED
FORGED
§ Where the signature is made without the 2. Drawer can recover 8. .drawee bank cannot
authority of the person whose signature it from drawee bank debit the drawer’s
purports it to be – Mr. F signed the NI for and in 3. Drawee bank is under account BUT may
behalf of drawer DR, without the knowledge and strict liability to pay the generally pass the
consent of DR
check to the order of liability to collecting
the payee bank, and ultimately
GENERAL RULE: The forged signature is wholly
4. Payment under a 9. Collecting bank is an
inoperative but the instrument itself is operative [Austria].
forged indorsement is indorser who warrants
§ Payment made through or under such forged
not under the drawer’s the genuineness of an
signature is ineffectual or does not charge the
order indorsement
instrument [Samsung Construction v. Far East
5. General rule: bank may a. Ascertains that
Bank and Trust Co., GR No. 129015, Aug. 2004]
not debit the drawer’s holder has good title
§ If payment is made, the drawee bank cannot
account to the instrument,
charge it against the account of the drawer [Id.]
a. Drawee bank bears that all prior parties
§ A person whose signature is forged is never a
loss had capacity to
party and never consented to the contract which
6. Exception: if the contract, and that the
gave rise to the instrument [Associated bank v.
drawee bank proves instrument is valid
CA, GR No. 107382, Jan 1996]
negligence on the part and subsisting at the
§ Forgery is a real defense, since the person who
of the drawer time of indorsement
signature was forged never consented to the NI.
a. Drawer is precluded b. Bound by his
from setting up warranties
Fraud in Factum - Fraud in factum amounts to forgery and
defense of forgery c. Forged indorsement
is a real defense.
7. Chain of liability ends = breach of warranty
EXCEPTION: Negligence on the part of the person who with drawee bank 10. Collecting bank
signed. may recover damages
§ Sec. 23 bars the setting up of forgery as a defense from forger
should there be negligence on the part of the
drawer [Samsung Construction v. FEBTC]
Forgery is not presumed. It must be established by clear,
positive and convincing evidence. The checks must be
OTHER PARTIES WHO ARE PRECLUDED FROM
presented (Best Evidence Rule). However, if without bad
SETTING UP THE DEFENSE OF FORGERY:
faith on the part of the offeror, the original checks have
§ Parties who warrant or admit the genuineness of
been destroyed or cannot be produced in court, secondary
the signature
evidence may be produced. [BPI v. Casa Montessori
§ Those who, by their acts, silence, or forgery, are
Internationale, GR No. 149454, May 28, 2004]
precluded from using the defense [Associated
bank v. CA] Commercial Bad Faith Rule
§ Those who are in unreasonable delay in A. If at the same time the drawee bank was also
disclosing the forgery upon discovery negligent to the point of substantially contributing to
In bearer instruments: the signature of payee or holder is the loss, then such loss from the forgery can be
UNNECESSARY to pass title to the instrument apportioned between the negligent drawer and the
§ WHY: mere delivery is sufficient negligent bank. [Associated Bank v. Court of Appeals,
§ In this case, only the person whose signature is G.R. No. 107382/G.R. No. 107612, January 31, 1996].
forged can raise the defense of forgery EVEN
AGAINST A HOLDER IN DUE COURSE
In order instruments: signature of the rightful holder is

essential to transfer title thereto
1. When the indorsement is forged, ALL PARTIES
PRIOR TO THE FORGERY may raise the real
defense against all parties subsequent thereto
Fraud in Inducement – Fraud in inducement does not

amount to forgery and is only a personal defense.
Example: A sells to B what he represents to be as a

diamond ring, which in fact is only glass. B issues a check

11
FORGERY OF PROMISSORY NOTES FORGERY OF BILLS OF EXCHANGE
Forgery of Maker’s Signature Forgery of Payee’s Signature Forgery of Drawer’s Signature

Rule The maker is not liable to any holder.
Reason The maker, whose signature is forged, is Drawer vs. Drawee Bill Accepted
not a party to the transaction. Rule Drawee Bank suffers the loss and must Rule Reason
Exception He may be made liable if the doctrine of reimburse the account of Drawer. Drawee/Acceptor By accepting the
estoppel finds application. Reason Drawer instructed Drawee Bank to pay Payee must pay the check. check, an acceptor
Caveat If the note is negotiated nevertheless by and no one else. If Payee is not paid, Drawee undertakes to pay
subsequent endorsement and delivery, Bank did not obey the instruction. the instrument in
the endorsers may be held liable on their accordance with
statutory warranties. Drawee vs. Collecting Bank the tenor of his
Rule Drawee Bank may recover from Collecting acceptance.
Forgery of Indorser’s Signature Bank because Collecting Bank had no authority Drawer is not liable A forged signature
Note Payable to Order to pay the proceeds of the check to Forger. for the value of the is totally
Rule Endorser whose signature is forged and Reason Collecting Bank has the legal duty to ascertain check. inoperative.
all prior parties, including the maker are that the payee’s endorsement is genuine.
not liable to any holder. Bill Not Accepted
Reason The signature of the endorser and the Drawer vs. Collecting Bank Rule Reason
delivery of the note are necessary to Rule Drawer has no cause of action against Drawee Bank cannot Drawee Bank
transfer title to the note. Since an Collecting Bank. recover the proceeds of should have
endorser’s signature is forged, the Reasons There is no privity of contract between the check from Holder detected the
transfer of title to a subsequent endorsee drawer and collecting bank. The duly to if he is a holder in due forgery of
is inoperative. observe due care is owed by the collecting course. Drawer’s
bank to the payee. signature
Note Payable to Bearer because Drawer
Rule Endorser whose endorsement is forged Payee vs. Drawer is its client.
and all prior parties including the maker Rule Payee may recover from Drawer. Endorser is liable to An endorser is
ARE LIABLE TO A HOLDER IN DUE Reason The claim of Payee against Drawer remains Holder, if Drawee Bank liable under his
COURSE, provided the note is unpaid. dishonored the check warranties in
mechanically complete before the Section 66.
forgery. Payee vs. Recipient of Payment Drawer generally A forged
Reason The endorsement is not necessary to Rule Payee may recover from Forger. enjoys protection signature is
transfer title. The only defense available against forgery. wholly
Reason Forger is not entitled to the proceeds of the
to resist the claim is want of delivery of However, he must not inoperative.
check. At best, Forger holds the proceeds of
a mechanically complete instrument be guilty of negligence;
the check in trust for Payee.
under Section 16. i.e., the forgery must
Exception Section 16 is a defense available only not have been caused
Payee vs. Collecting Bank
against a holder who is not a holder in by his own negligence.
Rule Payee may recover from the Collecting Bank.
due course, because a valid and Also, he must discover
intentional delivery of the note is Reason Collecting Bank’s collection of the proceeds of the forgery within a
the check is unlawful, and Collecting Bank reasonable period of
presumed by law as regards a holder in
therefore holds the funds in trust for the time.
due course.
payee. A forged endorsement is totally
Qualification If the note is incomplete, Section 14
inoperative. Collecting Bank’s collection of the
would apply, in which case the
proceeds of the check amounts to a conversion
possessor of the note must complete
– i.e., the unauthorized assumption and
Lasallian Commission on Bar Operations 12

FORGERY OF PROMISSORY NOTES FORGERY OF BILLS OF EXCHANGE
the instrument strictly in accordance exercise of rights of ownership over goods and
with the authority given and within a chattels belonging to another.
reasonable time. But if upon completion
the note is negotiated to a holder in due Payee vs. Drawee
course, the note is valid and effectual for Rule Payee has no cause of action against
all purposes in his hands and he may Drawee Bank unless the check has been
enforce the note as if it was strictly filled certified or accepted by the latter.
up in accordance with the authority Reason There is no privity of contract between the
given, and within a reasonable period of payee and the drawee.
time.
Collecting Bank vs. Forger
If the note is incomplete and C (Collecting Bank) has a cause of action
Rule
undelivered, then Section 15 will apply against Y (forger) for the recovery of the
and it will not be valid in the hands of proceeds of the check.
any holder unless completed and
Reason C was prejudiced by the withdrawal of funds by
negotiated with authority.
Y, which amount must be reimbursed by C to
either the Payee or the Drawee.

MATERIAL ALTERATION drawer [Metrobank v. Cabilzo, GR No. 154469, Dec,

6 2006]
i. When the drawee bank pays a
CONCEPT materially altered check, it violated the
terms of the check as well as its duty to
Alteration of instrument charge to its clients’ accounts only for
bon fide disbursements he had made
§ Material alteration is any change in the [Id.]
details of the instrument that results in
a change in the effect of such c. The instrument is avoided in the hands of one
instrument. who is not a holder in due course as against any
§ Alters the effects of an instrument or prior party who has not assented to the
an unauthorized change in an alteration.
instrument that purports to modify in d. Exceptions: The instrument is not avoided as
any respect the obligation of a party against:
§ An unauthorized addition of words or
number, or other change to an i. A party who has made the alteration;
incomplete instrument relating to the ii. A party who authorizes or assented to
obligation of a party [PNB v. Court of the alteration; and
Appeals, G.R. No. 107508, April 25, 1996] iii. Subsequent indorsers.
§ Changes the items which are required i. by the indorsement he warrants, among
to be stated under Sec. 1 of the NIL. other things, that the instrument is in all
[International Corporate Bank v. CA, GR what it purports to be and that it was
No. 129910, Sept. 5, 3006] valid and subsisting at the time of his
§ Alteration of the serial number is not indorsement
material, if its purpose is merely to
identify the issuing government office e. Reason for the rule on material alterations:
or agency [PNB v. CA] Public policy [De Leon at p. 353]
§ Section 125 specifies and defines what 24-Hour Clearing Rule

constitutes a material alteration. Any
other alteration not mentioned under a. Under Section 1 of the BSP Circular, the clearing
Sec. 125 would be non-material and is conducted at 4:00 pm every business day.
would not affect the liability of any Therefore, defective items must be returned by
prior party on the instrument. the drawee bank not later than 4:00 pm the next
business day after the questioned check was
§ Examples of Material Alterations: presented for clearance.
o Substituting the words “or bearer” for “order”;
o Writing “protest waived” above blank b. As to altered/forged checks, the drawee bank
indorsements; can still return them even after 4:00 pm of the
o A change in the date from which interest is to next day provided it does so within 24 hours from
run; its discovery of the alteration or forged
o A change in the sum payable; indorsement, but in no case may return be made
o Adding the words “with interest”; beyond the usual prescriptive period under law,
o An alteration in the maturity of a note; which would be 10.
o A change in or addition to the name of the a. Thus, if the drawer discovers the
payee; alteration or forged indorsement say,
o Inserting the name of a different payee. [PNB one year after the check’s clearing, he
v. Court of Appeals, G.R. No. 107508, April 25, should notify and return the defective
1996] check to the collecting bank not later
than 4pm of the next business day after
EFFECT OF MATERIAL ALTERATION it receives notice of the defect.
Otherwise, the collecting bank will not
a. Any material alteration in the terms of the NI by be liable to return the amount to the
holder of the same, without the consent of the drawee bank.
obligor, will relieve such obligor from all liability
thereon. [American Bank v. Macondray, G.R. No. c. Regardless of forgery/alteration or lack thereof,
1808, August 23, 1905] under banking laws, when a check is deposited
and the drawee bank does not act within 24
b. Payment made under a materially altered hours, the drawee bank is considered to have
instrument is not payment done in accordance conclusively honored the check. This is
with the instruction of the drawer, thus, the irreversible.
drawee bank has no right to claim
reimbursement for wrongful payment from the d. In this case, the check was not returned to the
collecting bank in accordance with the 24-hour

14
clearing house period, but was cleared by the § No negotiation if the transfer does not make the
drawee bank. Failure of the drawee bank, transferee the holder of the instrument
therefore, to call the attention of the collecting
bank to the alteration of the check in question Assignment: involves transfer of rights under a contract
until after the lapse of nine days, negates § Generally refers to non-negotiable instruments,
whatever right it might have against the but may involve negotiable instruments when
collecting bank. Its remedy is not against the delivery is made WITHOUT INDORSEMENT
collecting bank, but against the party responsible
§ Assignee acquires the right to have the
for the alteration.
indorsement of an assignor; subsequently,
deemed as a negotiation only as of the time the
e. As to the liability of the collecting bank on its
clearing house endorsement, such an indorsement was made (Sec. 49)
indorsement must be read together with the 24-
hour regulations on clearing House Operations NEGOTIATION ASSIGNMENT
of the Central Bank. Once that 24-hour period is § Strictly the transfer of a § The transferee is an
over, the liability on such an indorsement has NI to a holder assignee
ceased. § Applies only to a § Applies only to non-
negotiable instrument negotiable instruments
f. Banks are bound by 24-hour clearing house rule, § Holder in due course is § Refers generally to an
and must notify collecting banks within 24 hours subject only to real ordinary contract
of alteration of checks. defenses § Subject to both real and
§ Holder in due course personal defenses
g. The 24-hour clearing house rule is a valid rule
may acquire a better § Assignee merely steps
applicable to commercial banks. When an
title or greater rights into the shoes of an
indorsement is forged, the collecting bank or last
under the instrument assignor
indorser, as a general rule, bears the loss. But the
unqualified indorsement of the collecting bank than those acquired by § Assignor generally does
on the check should be read together with the the transferor or a prior not warrant the
24-hour regulation on clearing house operation. party solvency of a prior party
Thus, when the drawee bank fails to return a § General indorser o XPN: expressly
forged or altered check to the collecting bank warrants the solvency stipulated or is
within 24-hour clearing period, the collecting of a prior parties known to him
bank is absolved from liability. § Indorser is not liable § Assignor liable even
unless there be without notice of
h. When drawee bank fails to return a forged or presentment and notice dishonor
altered check to the collecting bank within the of dishonor § Governed by Arts. 1624
24-hour clearing period, collecting bank is § Governed by the NIL to 1635 of the NCC [De
absolved for liability. [De Leon at p. 163] Leon at p. 163]
•
i. It is true that when an indorsement is forged, the
collecting bank or last indorser, as a general rule,
bears the loss. But the unqualified indorsement § Distinction is not material when there is no
of the collecting bank on the check should be defense to the obligation and only the maker of
read together with the 24-hour regulation on the instrument is sought to be held liable [De
clearing house operation. Thus, when the Leon at p. 163-164].
drawee bank fails to return a forged or altered
check to the collecting bank within the 24-hour
clearing period, the collecting bank is absolved
MODES OF NEGOTIATION
from liability. [Republic Bank v. Court of Appeals,
a. By Delivery - Bearer instruments are
G.R. No. 42725, April 22, 1991]
negotiated by mere delivery.
NEGOTIATION b. By Indorsement Coupled With Delivery -

Order instruments are negotiated by
KINDS OF TRANSFER indorsement coupled with delivery
a. Instrument must be exhibited when presented
§ Negotiation; for payment to the person from whom payment
is demanded. (Sec. 74, NIL)
§ Assignment;
Meaning of Delivery
§ Operation of Law (i.e. succession). a. Delivery: transfer of possession, actual or
constructive, from one person to another. [Sec.
Negotation: transfer of a negotiable instrument from one 191, NIL]
person to another, made in such a manner as to constitute b. Delivery means the transfer of possession of the
instrument by the maker or drawer with the
the transferee a holder in due course.

15
intent to transfer title to the payee and recognize § It constitutes a transfer or sale of the instrument
him as holder thereof. to the indorsee or transferee;
§ It signifies the agreement of the indorser to
Delivery When Effectual; When Presumed answer for the amount represented by the
instrument in case of default of the maker or the
a. As to a holder in due course party primarily liable.
§ A valid delivery is presumed done by all parties One who negotiates by mere delivery, although he
prior to him so as to make them liable. assumes the liabilities of a seller or transferor of the note
§ When the instrument is no longer in the or bill, does not warrant that he will pay in case the primary
possession of the party whose signature appears party fails to pay.
thereon, the presumption is that there is a valid
and intentional delivery. Where the indorsement is written on a paper attached to
the instrument, such paper is called an “allonge.”
b. As to holder not in due course
Indorsement of a Part of the Amount Payable
§ In order to have a valid delivery, must be made
either by or under the authority of the party c. An indorsement of a part of the amount
making, accepting, indorsing, o drawing, (MAID) payable is not negotiation, but mere
as the case may be. assignment.
§ Delivery must be shown to have been d. There can still be indorsement if the part
conditional, or for a special purpose only, and not indorsed was already paid.
not for the purpose of transferring the
instrument. Indorsement to Two or More Indorsees
KINDS OF INDORSEMENTS a. Indorsement to two or more indorsees severally

is not negotiation, but mere assignment.
§ Special indorsement [Sec. 34, NIL];
b. Indorsement to two or more indorsees can still
§ Blank indorsement [Sec. 34 – 35, NIL];
be negotiation, so long as it is not made
§ Restrictive indorsement [Sec. 36, NIL];
“severally”.
§ Qualified indorsement [Sec. 38, NIL];
§ Conditional indorsement [Sec. 39, NIL];
§ Joint indorsement [Sec. 41, NIL]; Basis of Classification of Indorsements
§ Successive indorsement [Sec. 50, NIL]; and
Indorsements containing such additional words are
§ Irregular indorsement. [Sec. 64, NIL]
classified into special, restrictive, qualified, and
conditional. Where only the signature of the indorser
Indorsement
appears, it is called a blank indorsement.
a. When the payee of an instrument transfers
§ Special and blank – Future method of
it to another by signing at the back thereof
negotiation, whether by indorsement and
he is said to have negotiated or indorsed the
delivery or by delivery alone.
same and thereby becomes an indorser.
b. The person to whom he negotiates it is the
§ Restrictive and non-restrictive – Kind of title
indorsee, who, by such negotiation becomes
transferred.
the holder of the instrument.
An indorser, by indorsing the bill or note, impliedly enters § Qualified and unqualified – Scope of the liability
into 2 contracts: assumed by the indorser.
a. He is selling or transferring the instrument § Conditional and unconditional – Presence or

to his indorsee absence of express limitations put by the
§ assuming liabilities similar to that of a seller or indorser upon the primary obligor’s privileges of
transferor of personal property; and paying the holder.
b. He warrants that he will pay the instrument
Special Indorsement
when the two conditions for his liability
mentioned above have been fulfilled.
• Specifies the person to whom, or to whose order,
§ The holder can therefore hold any indorser
the instrument is to be payable, and the
liable should the maker or acceptor fail to pay, indorsement of such indorsee is necessary to the
provided these two conditions are complied. further negotiation of the instrument. An
indorsement of a specified person is not similar
An indorsement consists of the signature of the indorser with an instrument payable to a specified person.
usually on the back of the instrument. An indorsement has An indorsement need not to comply with the
double significance: requirements under Sec. 1 of NIL. [Sec. 34, NIL]

16
Example: “Pay to A, Signed P”
Blank Indorsement Restrictive Indorsement
• An indorsement that specifies no indorsee, and § An indorsement is restrictive which either:

an instrument so indorsed is payable to bearer,
and may be negotiated by delivery. [Sec. 3, NIL] a. Prohibits the further negotiation of the
instrument; or
Example: “Signed P” b. Constitutes the indorsee the agent of the
indorser; or
• To convert a blank indorsement into a special c. Vests the title in the indorsee in trust for or to
indorsement, the holder may write over the the use of some other persons.
signature of the indorser in blank any contract
consistent with the character of the § But the mere absence of words implying power
indorsement. [Sec. 35, NIL] to negotiate does not make an indorsement
restrictive. [Sec. 36, NIL]
• Where the instrument is originally payable to
order and it is negotiated by § While the omission of words of negotiability in
a. special indorsement: it can be further the indorsement does not affect the negotiability
negotiated by the indorsee by indorsement of the instrument, such omission in the body will
completed by delivery. render the instrument non-negotiable.
b. the payee by blank indorsement: it can be
further negotiated by the holder by mere § A restrictive indorsement either restricts the
delivery. right of the indorsee to further negotiate the
i. The effect of a blank indorsement is to instrument [Sec. 36a, NIL] or reserves beneficial
make the instrument payable to interest therein in the indorser or in a third
bearer. person [Sec. 36 (b-c), NIL].
o In the latter case, although the instrument
• Where the instrument is originally payable to may be further negotiated, all subsequent
bearer it can be further negotiated by mere indorsees are subject to the rights of the
delivery, even if the original bearer negotiated it restrictive indorser or the third person (i.e.
by special indorsement. the subsequent indorsee will also be an
a. liable only to his immediate transferee. agent or trustee), as the case may be.
b. A special indorser however is liable to
subsequent holders § The notation “for deposit” is a restrictive
i. XPN: the instrument is originally A indrosement and indicates that the indorsee
bearer instrument, in which case he is bank is an agent for collection and not the payee.
liable only to those who take title
through his indorsement. § Indorsement for a check by the payee “for
deposit” does not thereby render it negotiable
• The holder may convert a blank indorsement o prohibits further negotiation for any
into a special indorsement by writing over the purpose except for collection for deposit in
signature of the indorser in blank any contract the payee’s account in the bank selected by
consistent with the character of the the payee. By adding the notation, title to
indorsement. [Sec. 35, NIL] the check remained in the name of the firm.
[Granado v. Riverdale]
• An instrument payable to order on its face may
§ An indorsement to A for the benefit of B was held
be converted into a bearer instrument by means
of a blank indorsement, and may later be restrictive making the indorsee or his successors
reconverted into an order instrument by a subject to good defenses against the restrictive
subsequent special indorsement, indorser. [Sulbrason-Dickenson Co. v. Hopkins]
a. the last indorsement always controlling
the means of further negotiation. Effect of Restrictive Indorsement; Right of Indorsee
b.
• On the other hand, an instrument payable to § To receive payment of the instrument;
§ To bring any action thereon that the indorser
bearer on its face always remains a bearer
could bring;
instrument.
§ To transfer his rights as such indorsee, where
a. An indorsement of a bearer instrument
the form of the indorsement authorizes him to
does not convert it to an instrument
do so.
payable to order. Therefore, a bearer
instrument can always be negotiated by
Note: But all subsequent indorsees acquire only the title of
mere delivery.
the first indorsee under the restrictive indorsement.

17
§ As such, non-fulfillment of the condition carries

with it a caveat to the indorsee or transferee that
Qualified Indorsement the indorser does not intend to be bound on the
instrument.
• A qualified indorsement constitutes the indorser
as a mere assignor of the title to the instrument. § NIL allows payment by the maker/drawer even
‘Without recourse’ means without resort to a before the happening of the event that serves as
person who is secondarily liable after the default a suspensive condition. If the condition is not
of the person who is primarily liable. fulfilled, the holder is obligated to return the
amount received.
• The indorser transfers his title over the
instrument but he is not secondarily liable for Indorsement of instrument payable to bearer.
payment, since he does not warrant the solvency
of the maker/drawer. However, he is still liable • Applies only to instruments which are
as an indorser under Sec. 65. originally payable to bearer. It does not
apply to instruments originally payable to
Recourse order, even when they become payable to
Means resort to a person who is secondarily liable after the bearer.
default of the person who is primarily liable.
• An instrument, which is originally payable
• By indorsing the note “with recourse” does not to bearer is always payable to bearer.
make itself a qualified indorser but a general Hence, even when specially indorsed, it can
indorser who is secondarily liable. be negotiated by mere delivery.
• it agreed that if the party primarily liable fails to
pay the note, the indorsee can go after the • A special indorser of an originally payable to
indorser. bearer instrument is not liable to a holder
who became a holder through delivery
• The effect of such indorsement is that the note because delivery was sufficient to transfer
was indorsed without qualification. title.
• A person who indorses without qualification
engages that on due presentment, the note shall • However, a special indorser is liable to
be accepted or paid, or both as the case may be, special indorsee/s because they acquire
and that if it be dishonored, he will pay the their title over the instrument through the
amount thereof to the holder. special indorsement as they can trace their
• An intention of indorsing the note without title through a series of unbroken
qualification does not limit liability but confirms indorsements.
his obligation as a general indorser.
• Indorser without qualification is not only Indorsement where payable to two or more persons
secondarily liable but also becomes the principal
debtor. His liability becomes the same as that of Such rule applies only to instruments payable to two or
the original obligor. more payees jointly.
• To qualify the indorser’s liability, it should have
indorsed them “without recorse,” or in such a GENERAL RULE:
manner as to disclaim any personal liability. All payees or indorsees must indorse. [Sec 41, NIL]
Words or Phrases for Qualified Indorsement EXCEPTIONS:
§ Without recourse; § Where the payee or indorsee indorsing has

§ Sans recourse; authority to indorse for the others [Sec 41, NIL];
§ Indorsee’s own risk; and
§ No recourse; § Where the payees or indorsees are partners.
§ With no recourse.
Indorsement where name is misspelled, and so forth.
Conditional Indorsement
§ The mistake in the spelling or designation of the
§ An indorsement subject to the happening of a indorsee or payee does not affect the
contingent event, that is, an event that may or negotiability of the instrument or the validity or
may not happen, or a past event unknown to the effectivity of the indorsement. [Austria]
parties. §
Indorsement in representative capacity
§ imposes to the indorsee or transferee a contract
and that the person who makes the condition is
A representative must indorse in the same manner as an
bound by it upon its fulfillment.
agent of the maker, drawer or acceptor should in order to
escape personal liability under Section 20.

18
§ He must add words describing himself as an Where the holder of an instrument payable to his order
agent; transfers it for value without indorsing it, the transfer vests
§ He must disclose his principal; and in the transferee such title as the transferor had therein
§ He must be duly authorized. § transferee acquire, in addition, the right to have
the indorsement of the transferor.
Time of Indorsement § But for the purpose of determining whether the
transferee is a holder in due course, the
1. Except where an indorsement bears date after the negotiation takes effect as of the time when the
maturity of the instrument, every negotiation is indorsement is actually made. [Sec. 49, NIL]
deemed prima facie to have been effected before the
instrument was overdue.
Note: This applies only to instruments payable to order.
2. This provision becomes important in connection with
Rights of the Transferee for Value When No Indorsement
Section 52(b). In order that one may be a holder in due
course, the instrument must be negotiated to him was Made:
before it becomes overdue or before maturity date. o The transferee acquires only the rights of the
transferor.
3. The indorsement without date establishes a prima o if a defense is available against the
facie presumption that the instrument was transferor, that defense is also
negotiated before maturity, and one who denies that available against the transferee.
the holder of such instrument is a holder in due o The transferee has also the right to require the
course has the burden of proof. transferor to indorse the instrument.
Place of Indorsement Note: The transferee of an unindorsed instrument may

become a holder by obtaining the indorsement of his
• Except where the contrary appears, every transferor. It is only at this time that the instrument can be
indorsement is presumed prima facie to have considered as having been negotiated.
been made at the place where the instrument is
dated Successive Indorsement
• An instrument negotiable in its origin continues § If a prior party acquires the NI again through
to be negotiable until it has been restrictively negotiation, he is remitted to his former rights as
indorsed or discharged by payment or a prior party. He cannot therefore enforce
otherwise. payment against an intervening party. His
liability to subsequent indorsers megatives the
Two Ways a Negotiable Instrument Can Be Rendered liability of the same indorsers to him as holder.
Non-Negotiable [Austria]
§ Restrictive indorsement under Sec. 36(a); or Illustration: Payee negotiated NI to A by indorsement and
§ NI is discharged by payment or otherwise. delivery, then A to B in the same manner, B to C, C to D,
and D too A. A is remitted to his former rights as the
Note: After maturity, an instrument originally negotiable indorsee of the payee. A cannot seek payment against
continues to be negotiable in the sense that the contracts intervening parties B, C, D. [Austria]
of the parties to it continue and are governed by the NIL.
However, the transferee after maturity is not a holder in Fictitious-Payee Rule
due course, and, therefore, is not free from defenses
obtaining between prior parties. Effect:
• The drawee bank is absolved from liability and
Striking out Indorsement the drawer bears the loss.
• The check is treated as a bearer instrument that
§ The holder may at any time strike out any can be negotiated by delivery.
indorsement, which is not necessary to his title. • The underlying theory is that one cannot expect
The indorser whose indorsement is struck out, a fictitious payee to negotiate the check by placing
and all indorsers subsequent to him, are thereby his indorsement thereon.
relieved from liability on the instrument. [Sec. 48, • Since the maker knew this limitation, he must
NIL] have intended for the instrument to be
negotiated by mere delivery.
Effects of Striking Out • In case of controversy, the drawer of the check
will bear the loss. [PNB v. Rodriguez, G.R. No.
§ Indorser whose indorsement is struck out is 170325, September 26, 2008]
relieved from liability on the instrument; and
Commercial Bad Faith
§ All subsequent indorsers are also relieved from
their liability on the instrument. § A showing of commercial bad faith on the part of
the drawee bank, or any transferee of the check

19
for that matter, will work to strip it of this becomes subject to the same defenses to which
defense. The exception will cause it to bear the it would have been subject as if the paper had
loss. Commercial bad faith is present if the never passed through the hands of a holder in
transferee of the check acts dishonestly, and is a due course. The same is true where the
party to the fraudulent scheme. [PNB v. instrument is retransferred to the agent of a
Rodriguez, G.R. No. 170325, September 26, 2008] person not a holder in due course. [Fossum v.
Hermanos, G.R. No. L-19461, March 28, 1923]
RIGHTS OF THE HOLDER Complete and Regular Upon its Face
§ To sue in his own name; a. An instrument is complete when the instrument

contains all requisites of negotiability under Sec.
§ To receive payment; and 1.
§ To transfer his right through negotiation or b. A NI is not regular on its face if it contains a
assignment material alteration.
c. If the alteration is not apparent on its face, the
Holder: The payee or indorsee of a bill or note who is in NI is considered regular.
possession of it or the bearer thereof. [Sec. 191, NIL]
Receipt Before Negotiable Instrument is Overdue
HOLDER IN DUE COURSE a. An instrument is overdue after the date of

maturity.
A person who derives his title through a holder in due b. The fact that the instrument is overdue is a
course and who is not himself a party to any fraud or strong indication that it was dishonored and the
illegality affecting the instrument law puts the potential holder on inquiry as to
whether it was dishonored and the reason
GENERAL RULE: Prima facie presumption it that every therefor.
holder is a HIDC. c. Montinola cannot be considered a holder in due
course because Section 52 defines a holder in
EXCEPTIONS: Unless proven otherwise; or negotiation for due course as a holder who has taken the
an unreasonable length of time. instrument under certain conditions, one of
which is that he became a holder before it was
Note: As a general rule, every holder is presumed prima overdue. When he received the check, it was long
facie to be a holder in due course and he who claims overdue. [Montinola v. PNB, G.R. No. L-2861,
otherwise has the onus probandi to prove that one or more February 26, 1951]
of the conditions required to constitute a holder in due
course are lacking. In this case, BPI contends that the Without Notice of Infirmity and Defect
element of “value” is not present, therefore, Roxas could
not be a holder in due course. [BPI v. Gregorio Roxas, G.R. § Knowledge of the principal or his agent of any
No. 157833, October 15, 2007] infirmity in the instrument or defect in the title
of a prior party will destroy due course holding
SHELTER RULE § Infirmity - Any irregularity in the instrument
(i.e. alteration, wrong date).
§ Defect - Title of prior party is obtained through
Requisites of a Holder in Holder in Due Course
fraud, duress, or force and fear, or other unlawful
§ He derived his title from a holder in due course; means, or for an illegal consideration, or when he
negotiated it in breach of faith, or other such
and
circumstances as amount to fraud. [Sec. 57, NIL]
§ He was not himself a party a party to any fraud
or illegality affecting the instrument. Circumstances Which Make Title Defective
Shelter Rule An instrument is defective when he obtained the

instrument, or any signature thereto, by: (FADOBIC)
§ Shelter sets in when the holder though a holder
not in due course derives his title from a holder § Fraud;
in due course, and the holder in due course is not § Force And fear;
a party to any fraud or illegality affecting the § Duress;
instrument, the holder not in due course has all § Other unlawful means;
the rights of a holder in due course enforceable § When he negotiates it in Breach of faith;
against all parties prior to the said holder in due § For an Illegal consideration; and
course. § Under such Circumstances as amount to a fraud.
§ If a person not a holder in due course reacquires To constitute notice of defect or infirmity, the transferee
from a holder in due course, the instrument must have actual knowledge, either -

20
after its issue, the holder is not deemed a holder

a. of the defect or infirmity; or in due course. [Sec. 53, NIL]
b. of such facts that his action in taking the b. In determining the reasonability of time, regard
instruments amounts to bad faith. is to be had in the nature of the instrument, the
usage of the trade or business with respect to
such instruments, and the facts of the particular
Note: case. [Austria]
• Where there is knowledge of suspicious

circumstances, coupled with means of verifying HIDC NOT HIDC
them, taking the instrument may amount to bad All Sec. 52 requisites are Not all Sec. 52 requisites
faith. present are present
• It is sufficient that the buyer of a note had notice His rights can be defeated His rights can be
or knowledge that the note was in some way only by real defenses, and defeated by both real
tainted with fraud. It is not necessary that he not personal defenses defenses and personal
should know the particulars or even the nature defenses
of the fraud, since all that is required is He has the right to enforce payment, sue in his own
knowledge of such facts that his action in taking name, and negotiate the instrument
the note amounted bad faith. [Ozark Motor Co. v.
Horton]
a. A holder in due course can acquire a better title
Effects of Crossing a Check than his predecessors because he takes the
instrument free from any defect of title of prior
a. The check may not be encashed, but only parties. He is furthermore free from defenses
deposited in the bank; available to prior parties among themselves.
b. The check may be negotiated only once to one b. The fact that a holder is not in due course will in
who has an account with a bank; no way affect the negotiability of the instrument.
c. The act of crossing the check serves as a warning It only affects such holder’s rights, and does not
to the holder that the check has been issued for necessarily prevent subsequent holders from
a definite purpose so that he must inquire if he acquiring the status of due course holders.
has received the check pursuant to that purpose,
otherwise he is not a holder in due course. Additional Rights of a Holder in Due Course
Note: For failure to inquire from the holder as to the a. He holds the instrument free from defects and
purpose of the check, plaintiff is not a HIDC, and is thus defenses;
subject to personal defenses. [State Investment House v. b. He may enforce payment against all prior parties.
IAC, G.R. No. 72764, July 13, 1989]
Good Faith DEFENSES AGAINST THE HOLDER
a. A holder is in good faith if he has no knowledge Kinds of Defenses

of any infirmity in the instrument or defect in his
title or the title of prior parties. [Austria] § Personal Defense; and
b. Good faith on the part of the holder is presumed. § Real Defense.
c. Presumption of good faith is destroyed if the NI
is a crossed check.. Note: The defenses referred to in Section 57, from which
the holder in due course is free, are equitable (personal)
For Value defenses only, not legal (real) defenses, which latter class
of defenses can be set up against all holders.
a. Where the holder gave no valuable consideration
for the transfer of the instrument to him, he Personal
cannot be a holder in due course.
b. Whether or not the words “for value received” a. Available only against a particular person or a
appear in an instrument is immaterial. In their subsequent holder who stands in privity with
absence, the presumption fills in the gap. On the him.
other hand, their presence will not preclude
evidence to show lack of consideration. The GENERAL RULE: Personal defenses can be interposed
presumption of consideration paid is prima facie against a person not a holder in due course.
and may be rebutted by proof to the contrary. 1. A Holder in Holder in Due Course has all the rights of
a such former holder (in due course) in respect to all
When Person Not Deemed Holder In Due Course parties prior to the latter.
a. Where an instrument payable on demand is EXCEPTION: Equitable defenses cannot be interposed

negotiated on an unreasonable length of time against him by parties prior to the holder in due course
from whom he derived his title.

21
if the person primarily liable fails or refuses to pay.

Real [Austria]
§ Available against any holder, since the right
sought to be enforced has never existed or has Parties:
ceased to exist.
a. Indorsers (PN, BoE); and
b. Drawer (BoE)
Personal Defenses Real Defenses MAKER

Available against ordinary Available against all
holders. holders, including HIDC. Primary Liability of the Maker
§ To pay absolutely the note according to its tenor
Not available against:
(1) HIDC; and Warranties of the Maker
(2) Holders in HIDC in Sec.
58 • Maker admits the existence of the payee.
• Absence or failure of [F2EU-ADM2-WIWI] • Maker admits the capacity of the payee to
consideration [Sec. 28] § Forgery [Sec. 23] endorse.
• Absence of delivery of § Fraud in factum
complete instrument § Execution between The maker consequently is precluded from setting up the
[Sec. 16] public enemies following defenses:
• Insertion of wrong date § Ultra vires acts of a
when date is necessary corporation • That the payee is a fictitious person because, by
• Filling up blanks in § Absence of delivery of
making the note, he admits that the payee exists;
excess of authority [Sec. incomplete instrument and
14] [Sec. 15]
• That the payee was insane, a minor, or a
• Fraud in inducement § Duress amounting to
corporation acting ultra vires because, by
• Acquisition of forgery
making the note, he admits the then capacity of
instrument by ordinary § Minority (available only
the payee to indorse.
duress, force, or fear to the minor)
• Negotiation in breach of § Material alteration
(Secs. 124, 125) DRAWER
faith or under
circumstances § Want ot authority of
agent Secondary Liability of the Drawer
amounting to fraud
[Sec. 55] § Illegality of contract
§ Want of marital consent § Assures that the drawee will pay and if the
• Conditional delivery or
§ Insanity drawee will not pay, the drawer promises to pay
delivery for a special
the holder.
purpose of a complete
instrument [Sec. 16]
Conditions for Payment by Drawer
• Acquisition through
unlawful means [Sec. 55] § BoE is dishonored; and
• Illegality of
consideration § Necessary proceedings of dishonor are duly
• Ante-dating or post- taken
dating a check for illegal
or fraudulent purpose
Negativing Liability
[Sec. 12]
§ The Drawer may negative his liability by
LIABILITIES OF PARTIES inserting a provision, “sans recourse against the
drawer”. When such provision is inserted, the
PRIMARY LIABILITY drawer is no longer secondarily liable. [Austria]
1. There is primary liability if the party is the person who
has an absolute obligation to pay the NI. The party’s Warranties of the Drawer
liability arises the moment he becomes a party to the
NI. [Austria] 1. Drawer admits the existence of the payee.
2. Drawer admits the capacity of the payee to endorse.
Parties:
ACCEPTOR
a. Maker (PN); and
b. Acceptor (BoE) Status of Drawee Prior to Acceptance
SECONDARY LIABILITY § He is not liable on the instrument until he

2. There is secondary liability if the party is not subject accepts it, and even a holder in due course
to immediate recourse. The party’s liability arises only

22
cannot sue him on the instrument before his § The drawee, by accepting unconditionally the
acceptance. bill, becomes liable to the holder, and cannot
o The mere issuance of the bill does not allege want of consideration between him and
make the drawee liable thereon the drawer. The holder is a stranger as regards
because it does not operate as an the transaction between the drawer and the
assignment of the funds of the drawee drawee, and if he has given value to the drawer
§ A bill of exchange presupposes a debtor-creditor and has no knowledge of any equity between the
relationship between the drawer and the drawer and drawee, he is in the same situation as
drawee. Thus, although a drawee is not liable to an indorsee in good faith.
the holder until and unless he accepts, the
drawee who refuses to accept may, under some § An acceptor, upon acceptance, detaches himself
circumstances, be made liable to the drawer for from the underlying transaction. He assumes
breach of contract or for damages based on tort. liability under the instrument and independent
§ If the drawee, for a certain consideration, had from the underlying trasaction of the
previously promised the drawer that he would instrument. Thus, defects in the underlying
honor the latter’s bill, unjustified refusal to transaction do not affect the acceptor. [PNB v.
accept will be a breach of the promise. Picornell, G.R. Nos. L-18751 & L-18915, September
26, 1922]
Primary Liability of the Acceptor
§ The drawee bank’s duty is to verify the
§ By the drawee’s acceptance of the BoE, he genuineness of the drawer’s signature, and not
becomes primarily liable to pay the holder. that of the indorsement because the drawer is its
client. [Associated Bank v. Court of Appeals, G.R.
Warranties of the Acceptor No. 107382/G.R. No. 107612, January 31, 1996]
a. Acceptor admits the existence of the INDORSER

drawer (“DR”).
b. Acceptor admits the genuineness of the § In the absence of any indication in what capacity
signature of the DR. a person whose signature is written on the
c. Acceptor admits the capacity of the DR to instrument intends to be bound, he shall be
draw the instrument. deemed an indorser.
d. Acceptor admits the existence of the payee. § And one who signs otherwise than as maker,
e. Acceptor admits the capacity of the payee drawer, or acceptor, will not be deemed an
to indorse. indorser if he indicates by appropriate words his
intention to be bound in some other capacity.
Note: But he does not admit the genuineness of the
indorser’s signature. § An indorser upon a promissory note or bill of
exchange who indorses for the purpose of
Effect of Acceptor’s Admissions indentifying the person only and not for the
purpose of incurring any liability as to the
§ The acceptor is consequently precluded from payment of such promissory note or bill of
setting up the defense that the drawer is non- exchange incurs no liability. This indorsement or
existent or fictitious because of his admission of guaranty, however, must clearly indicate that it
the drawer’s existence; is for the purpose of identification only.
[American Bank v. Macondray & Co., G.R. No.
§ Neither can he claim that the drawer’s signature 1808, August 23, 1905]
is a forgery because he admits the genuineness
of the drawer’s signature. Liability of General Indorser
§ Neither can the drawee escape liability by Every indorser who indorses without qualification,
alleging want of consideration between him and warrants to all subsequent holders in due course:
the drawer as, by accepting the bill, he admits
the capacity and authority of the drawer to draw § The matters and things mentioned in
the bill. For the same reason, the better rule subdivisions (a), (b), and (c) of the next preceding
seems to be that the acceptor is liable on the bill section; and
even if the drawer has overdrawn his account.
§ That the instrument is, at the time of his
§ An acceptor will pay the instrument according to indorsement, valid and subsisting;
the tenor of his acceptance, not according to the
tenor of the instrument. Acceptor may choose to And, in addition, he engages that, on due presentment, it
accept the instrument on terms that are shall be accepted or paid, or both, as the case may be,
different from what was written on the according to its tenor, and that if it be dishonored and the
instrument. When you agree to pay, you are necessary proceedings on dishonor be duly taken, he will
bound to the instrument. pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it. [Sec. 66, NIL]

23
A depositor places money in his bank under an agreement

Secondary Liability of the General Indorser that it may be withdrawn anytime by his order.
3. The order is evidenced by the check which he draws
• Liable if for any reason, the NI is dishonored (i.e. and by which he expresses his desire to appropriate
the maker or acceptor cannot pay). as much of his money in the bank to the payee named
therein
GENERAL RULE: The provisions of the NIL applicable to a

bill of exchange payable on demand shall also apply to a
Warranties of the General Indorser check.
• That the instrument is genuine and in all EXCEPTION: Except as otherwise provided. [Sec. 185, NIL]
respects what it purports to be;
• That he has a good title to it; § There is an element of certainty or assurance
• That all prior parties had capacity to contract; that the instrument will be paid upon
and presentation.
• That the instrument is, at the time of his
indorsement, valid and subsisting. § Checks are not presented for acceptance, as it is
always payable on demand and drawn on a bank.
Section 65 (d) Section 66 (b) However, checks must be presented for
There is no mention of the There is a payment.
validity of the instrument but categorical
only a warranty that he has no statement that the § The relationship between the bank and depositor
knowledge of any fact that would instrument is valid is that of a debtor and creditor.
impair the instrument’s validity and subsisting. o By virtue of the contract of deposit
or render it valueless. between the banker and its depositor,
the banker agrees to pay checks drawn
by the depositor provided that said
Requisites of an Irregular Indorser depositor has money in the hands of
the bank.
(a) He must not otherwise be a party to the instrument,
that is, he must not be a maker, drawer, acceptor or § Hence, where the bank possesses funds of a
regular indorsee thereon; depositor, it is bound to honor his checks to the
(b) He must sign the instrument in blank; and extent of the amount of his deposits.
(c) He must sign before delivery. o The failure of a bank to pay the check
of a merchant or a trader, when the
Note: An irregular indorser signs the instrument even deposit is sufficient, entitles the
before issuance. Like a deemed indorser, an irregular drawer to substantial damages without
indorser is also an accommodation indorser. He any proof of actual damages. [Sps.
accommodates the maker/drawer. An accommodation Moran v. Court of Appeals, G.R. No.
party can never claim lack of consideration. Since an 105836, March 7, 1994]
accommodation party does not have any liability to the
payee or the subsequent parties, Section 64 makes the KINDS
accommodation party liable because subsequent parties
relied in good faith on the signature of the accommodation § Cashier’s Check and Manager’s Check
party. Thus, subsequent parties may look to the
accommodation party for payment. 1. Bill drawn by a bank upon itself, and is accepted by its
issuance.
2. A manager’s check is one drawn by a bank’s manager
CHECKS
upon the bank itself.
3. It stands on the same footing as a certified check,
DEFINITION which is deemed to have been accepted by the bank
that certified it.
A check is a bill of exchange drawn on a bank payable on a. As the bank’s own check, a manager’s check
demand. [Sec. 185, NIL] becomes the primary obligation of the bank
and is accepted in advance by the act of its
§ A check is an instrument which is in the form and issuance. [Security Bank v. RCBC, G.R. No.
nature of a bill of exchange, but unlike an 170984, January 30, 2009]
ordinary bill it is always payable on demand and
always drawn on a bank. § Memorandum Check
§ If it is not drawn on a bank or is not payable on 4. Ordinary check, with the word “memorandum” or
demand, it is not a check. “memo” written across its face, signifying the maker
or drawer engages to pay the bona fide holder

24
absolutely, without any condition concerning the privity of contract between the drawee bank and the
presentment. payee, or holder of the check.
§ Certified Check
5. Bill drawn by a depositor upon funds to his credit in a

bank which a proper officer of the bank certifies will
be paid when duly presented for payment.
§ Crossed Check
6. Check with two parallel lines written diagonally on

the left top portion of the check, to put the holder on
notice that the check has been issued for a particular
purpose. [Austria]
7. Effects of Crossing a Check:
§ The check may not be encashed but only

deposited in the bank;
§ The check may be negotiated only once – to one
who has an account with the bank; and
§ The act of crossing serves as a warning to the
holder that the check has been issued for a
definite purpose so that he must inquire if he has
received the check pursuant to that purpose.
PRESENTMENT FOR PAYMENT
Time
§ A check must be presented within a reasonable

time after its issue.
Effect of Delay
§ A stale check is not presented for payment

within a reasonable time after its issue.
§ the drawer is discharged but only to the extent
of the loss caused by the delay.
§ Delay in the presentment of a check for payment
will discharge the indorsers thereon, whether or
not he is injured by the delay as the law presume
that he is prejudiced.
Certification of check
A certification is an agreement whereby the bank against

whom a check is drawn, undertakes to pay it at any future
time when presented for payment. Certification is thus
equivalent to acceptance, and dispenses the need for
presentment for acceptance.
When check operates as an assignment.
1. A check of itself is not an assignment of the funds of

the drawer in the bank. A check drawn upon the bank
in the usual form, not accepted or certified by its
cashier to be good, does not constitute a transfer of
any money to the credit of the holder.
2. Before acceptance or certification, the bank is not

liable and the holder has no right to sue the drawee
bank on the check. Without acceptance or
certification, as provided by the statute, there is no

25
SUMMARY OF WARRANTIES, UNDERTAKINGS, DEFENSES BARRED, AND BENEFICIARIES
General (Irregular)
Maker Drawer Acceptor Qualified Indorser
Indorser
Section 60 61 62 65 66 (64)
drawer is a instrument instrument
drawer’s
fictitious or non- is genuine is genuine
existence
payee is a fictitious payee is a fictitious existent person and in all forgery and and in all forgery and
payee's payee's
person or non- person or non- respects material respects material
existence existence drawer’s
existent person existent person forgery of drawer’s what it alteration what it alteration
genuine
signature purports to purports to
signature
be be
drawer is a minor
he has no he has no
or an insane
title to the title to the
person or
instrument instrument
otherwise he has good he has good
drawer’s because he because he
incapacitated title to the title to the
capacity stole it or he stole it or he
in the case of a instrument instrument
procured it procured it
corporate payee,
payee is a minor or payee is a minor or an through through
the transaction is
an insane person or insane person or fraud fraud
ultra vires
otherwise otherwise
drawer lacks of
incapacitated incapacitated a prior party a prior party
drawer’s authority to draw
is a minor or is a minor or
authority instrument (e.g.
an insane an insane
to draw want of
person or person or
the consideration or
Warranties all prior otherwise otherwise
instrumen amount drawn is in all prior
- Defenses parties incapacitate incapacitate
t excess of drawer’s parties have
Barred have d d
funds) capacity to
capacity to
payee's payee's in the case of contract in the case of
contract
capacity capacity a corporate a corporate
payee is a fictitious
to indorse to indorse payee’s prior party, prior party,
person or non-
existence the the
existent person
transaction transaction
is ultra vires is ultra vires
payee is a minor or if the
an insane person insolvency
no
in case of a in the case of a or otherwise of the maker
knowledge
corporate payee, corporate payee, the incapacitated at the time the
of fact that
the transaction is transaction is ultra of instrument illegality of
would
ultra vires vires payee’s negotiation is, at the the note
impair the
capacity is known to time of his because of
validity of
to in the case of a the endorseme illegal
the
endorse corporate payee, endorser, he nt is valid consideratio
instrument
the transaction is would be and n
or would
ultra vires liable for a subsisting
render it
breach of
valueless
this
warranty

General (Irregular)
Maker Drawer Acceptor Qualified Indorser
Indorser
qualified
by delivery
indorsement
Warranties
extend to all
subsequent
parties
deriving title
through the
qualified
endorsemen Warranties extend to all
t, whether or holders in due course as well
not such as to the transferee of a
Beneficiaries Warranties
subsequent holder in due course. The
of extend to
party is a secondary obligation to pay
Warranties immediate
holder in is not limited to a dishonor
transferee
due course. resulting from a breach of
only.
No the warranties.
undertaking
to pay the
instrument
except if
dishonor
results in a
breach of
any of the 4
warranties.
If bill is dishonored and proceedings

Unconditional and principal for dishonor taken, he will pay the Pay the bill according to the tenor If instrument is dishonored, and proceedings for dishonor
Undertaking
obligation to pay according to bill to holder or endorser who may of his acceptance; obligation is are taken, he will pay holder or any endorser who pays it;
s
tenor of instrument. be compelled to pay it; obligation to principal. obligation is secondary.
pay is secondary and conditional.

Green Notes 2019 Insurance Law
CONCEPT OF INSURANCE
§ Agreement by which one party (insurer) for a
consideration (premium) paid by the other party
(insured), promises to pay money or its equivalent, or
to do some act valuable to the latter, upon the
happening of a loss, damage, liability, or disability
arising from an unknown or contingent event.
§ The term assurance is also used, although seldom

employed. But modern writers use assurance to
describe the life insurance business. Thus, assurance
is used to refer to an event like death, which must
happen; while insurance, to a contingent event, which
may or may not happen.
§ The definition of law is subject to criticism for it does

not include life insurance (contract upon a condition
rather than to indemnify, since a loss of life is beyond
pecuniary estimation.
CONTRACT OF INSURANCE
• An agreement whereby one undertakes for a

consideration to indemnify another against loss,
damage or liability arising from an unknown or
contingent event.
INSURANCE • A contract of insurance involves public interest. Thus,
LAW
the business is regulated by the State through the
requirement of license or certificate of authority.
(White Gold Marine Services v. Pioneer Insurance)
REQUISITES
a. Subject matter which the insured has an

insurable interest;
b. Consideration known as premium;
c. Event or peril insured against which may be any

future contingent or unknown event, past or
future and a duration for the risk thereof;
d. Promise to pay or indemnify in a fixed or

ascertainable amount; and
e. Meeting of the minds of the parties
WHAT MAY BE INSURED

§ Future contingent event resulting in loss or
damage (e.g., possible destruction of cargo);
§ Past unknown event resulting in loss or damage

(e.g., fact of past sinking of a vessel unknown to
the parties);
§ Contingent liability (e.g., reinsurance).
RISK

28
REQUIREMENTS TO BE INSURABLE
The chance of loss. If loss is certain to happen No risk is
involved.
a. Importance
PERIL
§ The loss should be important enough. An
attempt to cover every small loss would
A contingent or unknown event which may cause a loss.
increase the cost of protection.
Its existence creates the risk. It can be covered or
excluded by a policy. Ex. fires, floods, accident, etc.
b. Calculability
HAZARD § Risk must be calculable, if not, it is
impossible to determine the premiums.
The condition or factor, tangible or intangible, which may
create or increase the chance of loss from a given peril.
c. Definiteness of Loss
PHYSICAL HAZARDS § As to cause, time, place, amount.
Everything relating to location, structure, occupancy, d. No Catastrophic Loss

exposure, etc. (e.g., pile of papers, stored gasoline in the
premises, unsafe brakes in the car). § When a large number of people are subject
to the same kind of losses, it is an obvious
MORAL HAZARDS deviation of the principle that losses of a
few are borne by the contributions of many.
§ Factors that involve mental attitudes in which Thus, war and political risks are often
appraisal of this hazard requires the study of the excluded. They may sometimes be
character of the person under consideration in the shouldered by the State.
light of his reputation (e.g., hazards created by
dishonesty, insanity, carelessness) e. Accidental Nature
§ In practice, the terms are used interchangeably or § Insurance is intended to cover fortuitous
may be given more than one meaning. events. Intentional losses are uninsurable
because they are against public policy.
KINDS OF INSURABLE RISKS Other losses are commonly expected: wear
and tear
Personal Risks
Involves a person, it is often divided into life and health § The above requirements are not absolute.
risks and mainly concerned with the time of death or Insurability is relative. What is insurable
disability. varies among insurers and may change over
time.
Property Risks
Involves loss or damage to property. WHAT CONSTITUTES DOING AN
INSURANCE BUSINESS?
Direct Losses
By fire, lightning, etc. offer a constant threat of loss on the 1. Making or proposing to make, as insurer, any
property itself. insurance contract;
Indirect Losses 2. Making or proposing to make, as surety, any

Involves loss of profits, rents, or favorable leases. contract of suretyship as a vocation, not as a mere
incident to any other legitimate business of a
Liability Risks surety;
o Involves liability for the injury to the person or 3. Doing any insurance business, including a
property of others occasioned by the law on reinsurance business;
liability (torts).
4. Doing or proposing to do any business in
o Also called third party risks because insurance is substance equivalent to any of the foregoing.
used to pay a “third party”, as agreed by the
insurer and the insured. Note: The fact that no profits is derived from the making
of insurance contracts, agreements or transactions or that
o Includes bodily injury and property damage risks no separate or direct consideration is received thereof,
shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an
insurance business.

29
obtains a policy on the life of another and names

himself as the beneficiary, he must have
INSURABLE INTEREST insurable interest therein.
A person is deemed to have an insurable interest in the
IN PROPERTY
subject matter where he has a relation or connection with
or concern in it that he will derive pecuniary or financial
benefit or advantage from its preservation and will suffer Every interest in property whether real or personal, or any
pecuniary loss or damage from its destruction, relation thereto, or liability in respect thereof, of such
termination, or injury by the happening of the event nature that the contemplated peril might directly damnify
insured against. the insured. It consists of:
a. an existing interest;
Note:
b. any inchoate interest founded on an existing
§ The existence of insurable interest gives the
interest; or
person the legal right to insure the subject of the
policy of insurance.
c. an expectancy coupled with an existing interest
in that out of which the expectancy arises.
§ In its absence, the person insuring would in
effect be merely gambling since it allows the
When it should exist
insured to have an interest in destruction of the
When the insurance takes effect and when the loss occurs,
subject matter rather than in its preservation.
but need not exist in the meantime.
§ However, it is held not to apply to industrial life
insurance. Amount
The measure of insurable interest in property is the extent
to which the insured might be damnified by loss or injury
IN LIFE/HEALTH
thereof.
Every person has an insurable interest in the life and health
Interest in Life and Property, Distinguished
of:
§ himself, his spouse and his children; Life Property

§ any person on whom he depends wholly or in Existence
part for education or support; Only at the time the policy At the time the policy
§ any person under a legal obligation to him to pay takes effect and need not takes effect and when
money or respecting property or services, of exist at the time of loss the loss occurs
which death or illness might delay or prevent Value
performance; and Unlimited except in life Limited to actual value of
§ any person upon whose life any estate or interest insurance effected by interest in property
vested in him depends. creditor on life of debtor. insured.
Expectation of benefit derived
When it should exist
from the continued existence
Need not have any legal
When the insurance takes effect; not thereafter or
basis whatever. A Must have a legal basis.
when the loss occurs.
reasonable probability is
sufficient without more.
Amount
Interest of Beneficiary
Need not have an insurable
GENERAL RULE: There is no limit in the amount the
interest over the life of the
insured can insure his life.
insured if the insured
himself secured the policy. Must have insurable
EXCEPTION: In a creditor-debtor relationship where the However, if the life interest over the thing
creditor insures the life of his debtor, the limit of insurable insurance was obtained by insured.
interest is equal to the amount of the debt.) the beneficiary, the latter
must have insurable
Notes: interest over the life of the
a. If at the time of the death of the debtor the whole insured.
debt has already been paid, the creditor can no
longer recover on the policy because the
Other Cases
principle of indemnity applies.
Carrier or Depositary
b. Each person has unlimited interest in his own
A carrier or depository of any kind has an insurable
life, whether the insurance is for the benefit of
interest in a thing held by him as such, to the extent of his
himself or another.
liability but not to exceed the value thereof.
c. The beneficiary designated need not have any
interest in the life of the insured when person Mortgaged Property
takes out policy on his own life. But if a person

30
o The mortgagor and mortgagee have each an would otherwise avoid the insurance affects the
insurable interest in the property mortgaged and mortgagee even if the property is in the hands of
this interest is separate and distinct from the the mortgagee.
other. c. Any act, which under the contract of insurance
is to be performed by the mortgagor, may be
o Thus, insurance taken by one in his own name performed by the mortgagee with the same
only and in his favor alone, does not inure to the effect.
benefit of the other.
d. In case of loss, the mortgagee is entitled to the
o In case both of them take out separate insurance proceeds to the extent of his credit.
policies on the same property, or one policy
covering their respective interest, the same is e. Upon recovery by the mortgagee to the extent of
not open to the objection that there is double his credit, the debt is extinguished.
insurance.
Standard Or Union Open Or Loss Payable
o Mortgagor- Has an insurable interest therein to
Mortgage Clause Mortgage Clause
the extent of its value, even if the mortgage debt
equals such value since he is the owner. Subsequent acts of the Acts of the mortgagor affect
mortgagor cannot the mortgagee because the
o Reason: Loss or destruction of the property affect the rights of the former does not cease to be a
insured will not extinguish the mortgage debt. assignee party to the contract.
o Mortgagee- Interest is only up to the extent of Note: In case a mortgagee insures his own interest and a
the debt and the interest continues until the loss occurs, he is entitled to the proceeds of the insurance
mortgage debt is extinguished. but he is not allowed to retain his claim against the
mortgagor as the claim is discharged but it passes by
Note: The lessor cannot be validly a beneficiary subrogation to the insurer to the extent of the money paid
of a fire insurance policy taken by a lessee over by such insurer.
his merchandise, and the provision in the lease
contract providing for such automatic DOUBLE INSURANCE AND OVER
assignment is void for being contrary to law and
public policy. (Sps. Cha v. Court of Appeals)
INSURANCE
Double Insurance
Insurance by Mortgagor of His Own Interest
Exists where same person is insured by several insurers
separately in respect to same subject and interest. [Sec. 95,
a. Own benefit
Insurance Code]
§ In case of loss, the insurance proceeds do not
Requisites of Double Insurance
inure to the benefit of the mortgagee who has no
greater right than unsecured creditors
§ Person insured is the same;
§ Two or more insurers insuring separately;
b. Benefit of mortgagee
§ Subject matter is the same;
§ Interest insured is also the same;
§ Loss payable to mortgagee made through the § Risk or peril insured against is likewise the same.
following ways:
§ Assignee of the policy (with insurer’s consent);

Note: Requisites According to Atty. Ceniza [SIRS2]
a. Several Insurers;
§ Mere pledge (without insurer’s consent);
b. Interest;
§ Rider; c. Risk
d. Same Subject; and
§ Standard mortgage clause; e. Same Insured.
§ Equitable lien- the policy procured by a Effects of Double Insurance

mortgagor under a contract duty to insure for
the mortgagee’s benefit. Where double insurance is allowed, but over insurance
results:
Effects of Loss Payable Clause
a. The insured, unless the policy otherwise
a. The contract is deemed to be upon the interest provides, may claim payment from the insurers
of the mortgagor; hence, he does not cease to be in such order as he may select, up to the amount
a party to the contract. for which the insurers are severally liable under
their respective contracts;
b. Any act of the mortgagor prior to the loss, which
b. Where the policy under which the insured claims

31
is a valued policy, the insured must give credit as

against the valuation for any sum received by
him under any other policy without regard to the Double Insurance and Over Insurance, Distinguished
actual value of the subject matter insured;
c. Where the policy under which the insured claims Over Insurance Double Insurance
is an unvalued policy he must give credit, as
against the full insurable value, for any sum There may be no over-
received by him under any policy; Amount of the insurance insurance when the sum
is beyond the value of the total of the amounts of the
d. Where the insured receives any sum in excess of insured’s insurable policies issued does NOT
the valuation in the case of valued policies, or of interest. exceed the insurable
the insurable value in the case of unvalued interest of the insured.
policies, he must hold such sum in trust for the There may be only one ALWAYS several insurers.
insurers, according to their right of contribution insurer involved.
among themselves;
REINSURANCE
e. Each insurer is bound, as between himself and
the other insurers, to contribute ratably to the Concept of Reinsurance
loss in proportion to the amount for which he is
liable under his contract. • Referred to as an “insurance of an insurance”.
Additional or “Other Insurance” Clause • It is one by which an insurer procures a third

person to insure him against loss or liability by
• Double insurance is not prohibited under the reason of such original insurance. [Sec. 97,
law, unless the policy contained a stipulation to Insurance Code]
the contrary. Such clause is intended to prevent
over insurance and thus avert the perpetuation • A reassurance is presumed to be a contract of
of fraud.
indemnity against liability, and not merely
against damage. [Sec. 99, Insurance Code]
• Usually, insurance policies contain “other
insurance clause” which is condition in the policy
• The original insured has no interest in a contract
requiring the insured to inform the insurer of any
of reinsurance. [Sec. 100, Insurance Code]
other insurance coverage of the property
insured.
• In every reinsurance, the original contract of
insurance and the contract of reinsurance are
a. It is lawful and specifically allowed under
covered by separate policies.
Sec. 75 which provides that “(a) policy may
declare that a violation of a specified
provision thereof shall avoid it, otherwise Nature of Contract of Reinsurance
the breach of an immaterial provision does
not avoid it.” • Contract of Indemnity against liability -
reinsurer agrees to indemnify the insurer against
b. To constitute a violation of the clause, there liabilities incurred. Not a condition precedent
should have been double insurance. that the insurer first paid a loss before
demanding payment from the reinsurer;
Over Insurance
Results when the insured insures the same property for an • Contract separate from original insurance
amount greater than the value of the property with the policy;
same insurance company.
• Contract based on original policy - The
Effect in Case of Loss reinsured risk must be the same as that covered
by the original insurance policy;
§ The insurer is bound only to pay to the extent of
the real value of the property lost; • Insurable interest requirement applicable- The
primary insurer is not entitled to contract for
§ The insured is entitled to recover the amount of reinsurance exceeding the limits of the policy
premium corresponding to the excess in value of ceded to the reinsurer. The reinsurer also
the property. cannot provide coverage beyond the risks
covered by the primary insurer; and
Note: Over-insurance is not per se void but recovery is
allowed only to the extent of the loss or damage incurred • Rule on subrogation is applicable.
by the insured.

32
§ There is no privity of contract between the

original reinsured and the reinsurer.
Original Insurance Contract And Reinsurance Contract
Distinguished Liability of Reinsurer to Reinsured
a. The original insurance contract is separate and • The reinsurer is entitled to avail itself of every
distinct from the insurance contract. defense which the reinsured might urge in an
action by the person originally insured; and
b. An original insurance contract covers indemnity
against damages, while reinsurance covers • Reinsurer is not liable to the reinsured for a loss
indemnity against liability. if the latter is not liable to the original insured, or
for an amount more than the sum actually paid
Double Insurance and Reinsurance, Distinguished to the insured.
Liability of Reinsurer to Original Insured

Double Insurance Reinsurance
Involves the same Involves different interest • Contract of reinsurance solely between the
interest insurer and the reinsurer- the original insured
Insurer remains in such Insurer becomes the insured absolutely has no interest in the contract. Thus,
capacity in relation to reinsurer remedy of the original insured is only against the
insurer.
Insured is the party in Original insured has no
interest in the 2 interest in the reinsurance
contracts contract. • Contract of reinsurance with stipulation in favor
of original insured- the reinsurer may bind
Subject of insurance is Subject of insurance is the
himself to pay to the policy holder for any loss
property original insurer’s risk
for which the insurer may become liable. Thus,
Insured has to give his Insured’s consent not
remedy of the original insured is both against the
consent necessary
reinsurer and the insurer.
Reinsurance Treaty
• Contract of reinsurance amounting to novation
of original contract- circumstances attending
§ Merely an agreement between two insurance
the making of the contract of reinsurance
companies whereby one agrees to cede and the
amount to a novation of the original contract,
other to accept reinsurance business pursuant
thus discharging the original insurer from all
to provisions specified in the treaty.
obligations thereunder.
Automatic Reinsurance Note: Technically not one of reinsurance since the

reinsurer is substituted for the original insurer.
§ The reinsured is bound to cede and the reinsurer
is obligated to accept a fixed share of the risk
which has to be reinsured under the contract. NO FAULT, SUICIDE, AND
INCONTESTABILITY CLAUSES
Facultative Reinsurance
1. No Fault
§ There is no obligation to cede or accept A person insured is entitled to a return of the
participation in the risk each party having a free premium when:
choice. But once the share is accepted, the
obligation is absolute and the liability thereunder a. The contract is voidable,
can be discharged only by payment. [Equitable b. Subsequently annulled under the provisions of
Insurance & Casualty Co. v. Rural Insurance & the Civil Code; or
Surety Co., G.R. No. L-17436, January 31, 1962] c. On account of the fraud or misrepresentation of
the insurer, or of his agent, or
Retrocession d. on account of facts, or the existence of which the
insured was ignorant of without his fault; or
§ A transaction whereby the reinsurer in turn, e. When by any default of the insured other than
passes to another insurer a portion of the risk actual fraud, the insurer never incurred any
reinsured. It is really the reinsurance of liability under the policy.
reinsurance.
ON COMPULSORY MOTOR VEHICLE INSURANCE

Rights of Original Insured in Contract of Reinsurance
Any claim for death or injury to any passenger or third-
party pursuant to the provisions shall be paid without the
§ The insured has no concern with the contract of
necessity of proving fault or negligence of any kind.
reinsurance, and the reinsurer is not liable to the
insured either as surety or otherwise. Unless the
contract so provides.

33
2. Suicide OFFER
General Rule: The insurer in a life insurance contract shall Party Making the Offer
be liable in case of suicide only when it is committed after It is the insurer who makes an offer to the insurer, who
the policy has been in force for a period of two (2) years accepts the offer, rejects it, or makes a counter-offer.
from the date of its issue or of its last reinstatement.
How Offer is Made
Exception: The policy provides a shorter period;
Exception to the Exception: That suicide committed in the It depends upon whether the insured pays the premium at
state of insanity shall be compensable regardless of the the time he applies for insurance.
date of commission.
a. If he does not pay the premium, his application
is considered an invitation to the insurer to make
3. Incontestability Clause an offer, which he must then accept before the
contract goes into effect.
Clause in life insurance policy that stipulates that the
policy shall be incontestable after a stated period. b. If he pays the premium with his application, his
application will be considered an offer.
GENERAL RULE: The policy shall be incontestable after it
shall have been in force during the lifetime of the insured
for a period of 2 years from issuance as shown in the policy
ACCEPTANCE
or date of approval of last reinstatement.
When is there an acceptance?
Where the application for insurance constitutes an offer
EXCEPTIONS:
by the insured, a policy is issued strictly in accordance
with the offer is an acceptance of the offer that perfects in
1. Non-Payment of Premium; and
the contract.
2. Violation of the conditions of the policy relating
Issuance of Policy Without Acceptance
to military or naval service in times of war.
If the issued policy does not conform to the insured’s
application, it is an offer to the insured which he may
a. Requisites of Incontestability Clause:
accept or reject.
a. Life insurance policy;
Effect of Delay
Unreasonable delay in returning the premium raises the
b. Payable on the death of the insured; and
presumption of acceptance of the insurance application.
[Gloria v. Philippine American Life Ins. Co.)
c. It has been in force during the lifetime of
the insured for a period of at least two years
Binding Effect of a Policy
from the date of its issue or of its last
reinstatement.:
Insurance Policy becomes binding under the following
circumstances:
The period of 2 years may be shortened but it cannot be
extended by stipulation.
1. When all the conditions precedent stated in the offer
have been satisfied; and
Incontestability only deprives the insurer of those
defenses which arise in connection with the formation and
2. When delivered.
operation of the policy prior to loss.
Requisites for a Valid Delivery
PERFECTION OF CONTRACT OF a. Intention of the insurer to give legal effect as a

INSURANCE completed instrument;
b. Word or act by insurer putting the instrument

PERFECTION beyond his legal, though not necessarily physical
control; and
When the consent is manifested by the meeting of the
offer and the acceptance upon the thing and the cause
c. Insured must comply in this intention.
which are to constitute the contract. Mere offer or
proposal is not contemplated. (De Lim v. Sun Life
Note: Possession of the policy by the insured raises the
Assurance Co.)
presumption of delivery, while the possession by the
insurer is prima facie evidence of no delivery.

34
relation between the parties having ceased. If the peril

PREMIUM PAYMENT insured against had occurred, the insurer would have had
a valid defense against the recovery under the policy.
Definition of Premium
It is an agreed price for assuming and carrying the risk – “Cash and Carry” Rule
that is, the consideration paid an insurer for undertaking
to indemnify the insured against a specific peril. BAR 2003
No policy or contract of insurance issued by an
Premium v. Assessment insurance company is valid and binding unless and until
the premium thereof has been paid. Any agreement to
PREMIUM ASSESSMENT the contrary is void. (2003 Bar Question)
It is levied and paid to It is collected to meet
meet anticipated losses. actual losses.
It is not a debt. It is properly levied. EXCEPTION: A policy is valid and binding even when there
is non-payment of premium: (LAICEP)
Non-Payment of Balance of Premiums
Non-payment of balance of premiums does not cancel the § In case of life or industrial life policy whenever
policy. A contrary rule would place exclusively in the hands the grace period provision applies;
of the insured the right to decide whether the contract
should stand or not. (Philippine Phoenix Surety & § When there is acknowledgment in a policy of a
Insurance, Co., Inc., v. Woodworks, Inc.) receipt of premium even if there is stipulation
therein that it shall not be binding until the
Effects of Non-Payment of Premiums premium is actually paid;
Non-payment of the first premium unless waived,
prevents the contract from becoming binding § When there is an agreement allowing the insured
notwithstanding the acceptance of the application or the to pay the premium in installments (Makati
issuance of the policy. Tuscany Condominium Corp. v. Court of Appeals)
Non-payment of the subsequent premiums does not affect § When there is an agreement to grant the insured
the validity of the contracts unless, by express stipulation, credit extension for the payment of the premium
it is provided that the policy shall in that event be and the loss occurs before the expiration of the
suspended or shall be lapse. credit term; (UCPB General Insurance v.
Masagana Telemart)
Non-Payment of Premiums Due to Fortuitous Event
§ When estoppel bars the insurer to invoke non-
GENERAL RULE: Non-payment of premiums does not recovery on the policy;
merely suspend but put an end to an insurance contract
since the time of the payment is peculiarly of the essence § When the public interest so requires, as
of the contract. determined by the Insurance Commissioner.
EXCEPTIONS:
Effect of Acknowledgment of Receipt of Premium in
§ The insurer has become insolvent and has Policy
suspended business, or has refused without
justification a valid tender of premiums When the policy contains a written acknowledgement, it is
(Gonzales v. Asia Life Ins. Co.) presumed that the insurer has waived the condition of
prepayment. It hereby creates a legal fiction of payment.
§ Failure to pay was due to the wrongful conduct The presumption is however, extended only to the
of the insurer; question of the binding effect of the policy.
§ The insurer has waived his right to demand As far as the payment of the premium itself is concerned,
payment. the acknowledgement is only a prima facie evidence of the
fact of such payment.
Effect of Acceptance of Premium
Acceptance of premium within the stipulated period for BAR 2006
payment thereof, including the agreed grace period, Q: Is the insurance company liable when a car, bought
merely assures continued effectivity of the insurance on installment basis, met an accident but the car is not
policy in accordance with its terms. (Stoke v. Malayan yet fully paid?
Insurance Co.)
A: Yes, when insured and insurer have agreed to the
What if there was no premium paid, may the insurer payment of premium by installments and partial
payment has been made at the time of the loss, then the
recover the unpaid premium from the insured?
No. The continuance of the insurer’s obligation is insurer becomes liable. (2006 Bar Question)
conditioned upon the payment of the premium, so that no
recovery can be had upon a lapsed policy, the contractual

35
NON-DEFAULT OPTIONS IN LIFE REFUND OF PREMIUMS

INSURANCE
The insured is entitled to recover premiums already paid,
Devices used to prevent the forfeiture of a life insurance when:
after the payment of the first premium:
Whole:
a. Grace Period – after the payment of the first
premium, the insured is entitled to a grace a. No part of the thing insured has been exposed to
period of 30 days within which to pay the any of the perils insured against;
succeeding premiums.
b. The contract is voidable because of the fraud or
b. Cash Surrender Value – the amount the insurer misrepresentation of the insurer of his agent;
agrees to pay to the holder of the policy if he
surrenders it and releases his claim upon it. c. The insurance is voidable because of the
existence of the facts of which the insured was
c. Extended Insurance – it is where the insured is ignorant without his fault;
given a right, upon default, after payment of at
least three full annual premiums to have the d. The insurer never incurred any liability under
policy continued in force from the date of the policy because of the default of the insured
default. other than the actual fraud;
e. The rescission is granted due to insurer’s breach

d. Paid Up Insurance – the insured is given a right,
of contract.
upon default, after the payment of a least three
annual premiums to have the policy continued in
force from the date of default. Pro rata:
§ The insurance is for a definite period and the

e. Automatic Loan Clause – a stipulation in the
insured surrenders his policy before the
policy providing that upon default in payment of
termination thereof; except:
premium, the same shall be paid from the loan
value of the policy until that value is consumed.
a. Policy not made for a definite period of
time;
f. Reinstatement – provision that the holder of the
policy shall be entitled to reinstatement of the
b. Short period rate is agreed upon;
contract at any time within 3 years from the date
of default in the payment of premium unless the
c. Life insurance policy.
cash surrender value has been paid or the
extension period expired.
§ When there is over-insurance. The premiums to
be returned shall be proportioned to the amount
by which the aggregate sum insured in all the
REINSTATEMENT OF A LAPSED POLICY policies exceeds the insurable value of the thing
at risk.
Purpose of Reinstatement Provision
It is to clarify the requirements for restoring a policy to When Insured is not Liable to Return the Premiums Paid
premium-paying status after it has been permitted to
lapse. 1. The risk has already attached and the risk is
entire and indivisible;
Period for Reinstatement of the Contract
The law requires that the policy owner be permitted to 2. In life policies;
reinstate the policy, subject to the violation specified, any
time within 3 years from the date of default of premium 3. If contract is void ab initio because of fraud by
payment. A longer period, being more favorable to the the insured;
insured, may be used.
4. If contract is illegal and the parties are in pari
Reinstatement of a Lapsed Policy is not an Absolute Right delicto.
Reinstatement is not an absolute right of the insured, but
discretionary on the part of the insurer, which has the
right to deny reinstatement if it were no satisfied as to the
insurability of the insured, and if the latter dis not pay all
overdue premiums and other indebtedness to the insurer.
[McGuire v. Manufacturer’s Life Insurance Co.)

36
RIGHTS AND OBLIGATIONS OF Reason: A life insurance policy is no different form a civil
PARTIES donation insofar as the beneficiary is concerned. Both are
founded on the same consideration of liberality. [Insular
Life v. Ebrado]
PARTIES TO CONTRACT OF INSURANCE
Note:
Insurer
1. A person who insures the life of another person
a. Person who undertakes to indemnify another. and name himself as the beneficiary must have
an insurable interest in such life.
b. The business of insurance may be carried on by
individuals just as much as by corporations and 2. The insured shall have the right to change the
associations. beneficiary he designated in the policy (unless he
has expressly waived this right in the policy).
c. For a person to be called an insurance agent, it is
necessary that he should perform the function for 3. The interest of a beneficiary in a life insurance
compensation. (Aisporna v. Court of Appeals) policy shall be forfeited when the beneficiary is
the principal accomplice or accessory in willfully
Insured bringing about the death of the insured in which
event, the nearest relative of the insured shall
1. The person whose loss is the occasion for the receive the proceeds of said insurance if not
payment of the insurance proceeds by the otherwise disqualified.
insurer.
Property Insurance
2. Requisites:
§ Unlike in life insurance, the beneficiary of
• Capacity to contract; property insurance must have an insurable
interest in such property, which must exist
• Possess an insurable interest in the subject not only at the time the policy takes effect
of the insurance; but also when the loss occurs.
• Must not be a public enemy: EFFECTS OF IRREVOCABLE

DESIGNATION OF BENEFICIARY
Note: Public Enemy nation with which the
Philippines are at war (includes every citizen
Insured cannot:
or subject of such nation).
§ Assign the policy;
3. The terms insured and assured are generally
used interchangeably; but technically, insured
§ Take the cash surrender value of the policy;
refers to the owner or property insured or the
person whose life is the subject of the contract
§ Allow his creditors to attach or execute on
of insurance; while assured refers to the person the policy;
for whose benefit the insurance is granted.
§ Add new beneficiary; or
Beneficiary
A person designated to receive proceeds of policy when § Change the irrevocable designation to
risk attaches. revocable, even though the change is just
and reasonable.
SUMMARY OF RULES REGARDING
Note: The insured does not even retain the power to
BENEFICARIES
destroy the contract by refusing to pay the premiums for
the beneficiary can protect his interest by paying such
Life Insurance premiums for he has an interest in the fulfillment of the
obligation.
GENERAL RULE: A person who insures his own life can
designate any person as his beneficiary, whether or not the
beneficiary has an insurable interest in the life of the
insured subject to the limitations under the NCC
provisions on void donations.
EXCEPTION: Any person who is forbidden from receiving

any donation under Article 739, Civil Code cannot be
named beneficiary of a life insurance policy by the person
who cannot make any donation to him.

37
RESCISSION OF INSURANCE inquiries as to such facts where they are distinctly implied
in other facts of which information is communicated.
CONTRACTS
Where matters of opinion or judgment are called for,
GROUNDS FOR RESCISSION answers made in good faith and without intent to deceiver
will not avoid the policy even though they are untrue.
a. Concealment; Reason: The insurer cannot rely on those statements. He
b. Misrepresentation; must make further inquiry. (Philamcare Health Systems v.
c. Breach of material warranty; and Court of Appeals)
d. Breach of a condition subsequent.
MISREPRESENTATIONS/OMISSIONS
CONCEALMENT
Factual statements made by the insured at the time of, or
A neglect to communicate that which a party knows and prior to, the issuance of the policy to give information to
ought to communicate. the insurer and induce him to enter into the insurance
contract. They are considered an active form of
Requisites: concealment.
• A party knows a fact which he neglects to Requisites of Misrepresentation:

communicate or disclose to the other;
a. The insured stated a fact which is untrue;
• Such party concealing is duty bound to disclose
such fact to the other; b. Such fact was stated with knowledge that it is
untrue and with intent to deceive or which he
• Such party concealing makes no warranty as to states positively as true without knowing it to be
the fact concealed; true and which has a tendency to mislead; and
• The other party has not the means of c. Such fact in either case is material to the risk.
ascertaining the fact concealed; and
Characteristics:
• Fact must be material
a. It is not a part of the contract but merely a
Effects of Concealment collateral inducement to it;
• Entitles insurer to rescind, even if the death or b. It may be oral or written;

loss is due to a cause not related to the concealed
matter. c. It is made at the same time of issuing the policy
or before but not after;
• Good Faith is not a defense in concealment. Sec.
27 clearly provides that, “the concealment d. It may be altered or withdrawn before the
whether intentional or unintentional entitles the insurance is effected but not afterwards;
injured party to rescind the contract of
insurance.” e. It always refers to the date the contract goes into
effect.
Test of Materiality
Kinds:
GENERAL RULE: It is determined not by the event, but
solely by the probable and reasonable influence of the facts 1. Affirmative – Affirmation of a fact when the contract
upon the party to whom the communication is due, in begins.
forming his estimate of the advantages of the proposed
contract, or in making his inquiries. 2. Promissory – Promise to be performed after policy
was issued.
EXCEPTIONS:
Incontestability Clause; and Matters under Sec.110 (marine Effect of Misrepresentation
insurance)
§ The injured party is entitled to rescind from the
The waiver of medical examination in a non-medical time when the representation becomes false.
insurance contract renders even more material the
information required of the applicant concerning the Test of Materiality
previous conditions of health and diseases suffered.
(Sunlife v. Sps. Bacani,) § Same as that in concealment.
The right to information of material facts may be waived, Note: Where the insured merely signed the application
either by the terms of the insurance or by neglect to make form and made the agent of the insurer fill the same for
him, it was held that by doing so, the insured made the

38
agent of the insurer his own agent and he was responsible Warranty and Representation, Distinguished
for his acts for that purpose. [Insular Life v. Feliciano, G.R.
No. L-47593, September 13, 1941] Warranty Representation
Part of the contract Mere collateral
BREACH OF WARRANTIES inducement
Written on the policy, May be written in the
Statement or promise by the insured set forth in the policy actually or by reference policy or may be oral.
or by reference incorporated therein, the untruth or non-
fulfillment of which in any respect, and without reference Presumed material Must be proved to be
to whether insurer was in fact prejudiced by such untruth material
or non-fulfillment, renders the policy voidable by the
Must be strictly Requires only substantial
insurer.
complied with truth and compliance
Purpose
To eliminate potentially increasing hazards which may BREACH OF CONDITION SUBSEQUENT
either be due to the acts of the insured or to the change to
the condition of the property. Definition of Condition
Kinds of Breach of Warranty: § Events signifying in its broadest sense either an

occurrence or a non-occurrence that alters the
§ Express Breach – An agreement expressed in a previously existing legal relations of the parties
policy whereby the insured stipulates that to the contract. They may be conditions
certain facts relating to the risk are or shall be precedent or conditions subsequent.
true, or certain acts relating to the same subject
have been or shall be done. Effects of Breach of Condition:
§ Implied Breach – It is deemed included in the § Condition Precedent –

contract although not expressly mentioned.
Example: In marine insurance, seaworthiness of § GENERAL RULE: It prevents the accrual of
the vessel. cause of action.
Effects of Breach of Warranty: Note: The insurer may also protect himself
against fraudulent claims of loss. He attempts to
§ Material – do this by inserting in the policy various
conditions. This takes the form of a condition
GENERAL RULE: The violation of material warranty precedent.
or of a material provision of a policy will entitle the
other party to rescind the contract. For instance, there are conditions requiring
immediate notice of loss or injury and detailed
EXCEPTIONS: proofs of loss within a limited period.
a. Loss occurs before the time of § EXCEPTIONS: Provisions that may specify
performance of the warranty; excepted perils. It makes more definite the
coverage indicated by the general
b. The performance becomes unlawful at description of the risk by excluding certain
the place of the contract; and specified risk that otherwise would be
included under the general language
c. Performance becomes impossible. describing the risks assumed
§ Immaterial – § Condition Subsequent – It avoids the policy

or entitles the insurer to rescind.
GENERAL RULE: It will not avoid the policy.
EXCEPTION: When the policy expressly provides or

declares that a violation thereof will avoid it.

39
SCOPE
WAIVER OF THE RIGHT TO RESCIND
A loss may be either total or partial. Every loss which is not
Acceptance of premium payments despite the knowledge total is partial.
of the ground for rescission.
LIMITATIONS ON THE RIGHT OF THE CAUSE

INSURER TO RESCIND
An actual total loss is caused by:
a. Non-Life - The right must be exercised
prior to the commencement of an § A total destruction of the thing insured;
action on the contract; § The irretrievable loss of the thing by
sinking, or by being broken up;
b. Life – The right must be availed of § Any damage to the thing which renders it
during the first two years from the date valueless to the owner for the purpose for
of issue of policy or its last which he held it; or
reinstatement; prior to § Any other event which effectively deprives
“incontestability.” the owner of the possession, at the port of
destination, of the thing insured.
CANCELLATION OF NON-LIFE
INSURANCE POLICY LIABILITY OF INSURER AGAINST LOSS
Right of the insurer to abandon the contract on the
occurrence of certain grounds after the effectivity date of General Rule: Unless otherwise provided by the policy, an
a non-life policy. insurer is liable for a loss of which a peril insured against
was the proximate cause, although a peril not
Grounds for Cancellation: contemplated by the contract may have been a remote
cause of the loss
§ Non-payment of premium;
§ Conviction of a crime out of acts increasing the An insurer is liable where the thing insured is rescued
hazard insured against; from:
§ Discovery of fraud or material
misrepresentation;
§ Discovery of willful or reckless acts of omissions § A peril insured against that
increasing the hazard insured against; would otherwise have caused
§ Physical changes in property making the a loss;
property uninsurable; and § If, in the course of such
§ Determination by the Insurance Commissioner rescue, the thing is exposed
to a peril not insured against;
that the continuation of the policy would violate
the Insurance Code. § Which permanently deprives
the insured of its possession,
in whole or in part; or
Requirements for Cancellation
§ Where a loss is caused by
efforts to rescue the thing
§ Prior notice of cancellation to the insured;
insured from a peril insured
§ Notice must be in writing, mailed or delivered to
against.
the named insured at the address shown in the
policy;
§ Notice must state which of the grounds set forth Exception: An insurer is not liable for a loss of which the
in Sec. 64 is relied upon and upon request of the peril insured against was only a remote cause.
insured, the insurer must furnish facts on which
the cancellation is based;
Where a peril is especially excepted in a contract of
§ Grounds should have existed after the effectivity
insurance, a loss, which would not have occurred but for
date of the policy.
such peril, is thereby excepted although the immediate
cause of the loss was a peril which was not excepted.
INSTANCE WHERE INSURER IS NOT

LIABLE FOR LOSS
LOSS General Rule: By the willful act or through the connivance

of the insured.

40
Exception: But he is not exonerated by the negligence of

the insured, or of the insurance agents or others.
NOTICE OF LOSS
In case of loss upon an insurance against fire, an insurer is

exonerated, if
a. Written notice thereof be not given to him by an

insured;
b. Some person entitled to the benefit of the
insurance, without unnecessary delay.
Note: For other non-life insurance, the Commissioner may

specify the period for the submission of the notice of loss.
ACTUAL LOSS ON A SHIP
An actual loss may be presumed from the continued

absence of a ship without being heard of. The length of
time which is sufficient to raise this presumption depends
on the circumstances of the case.
When a ship is prevented, at an intermediate port, from

completing the voyage, by the perils insured against, the
liability of a marine insurer on the cargo continues after
they are thus reshipped.
A marine insurer is bound for damages, expenses of

discharging, storage, reshipment, extra freightage, and all
other expenses incurred in saving cargo reshipped
pursuant to the last section, up to the amount insured.
Upon an actual total loss, a person insured is entitled to

payment without notice of abandonment.
Where it has been agreed that an insurance upon a

particular thing, or class of things, shall be free from
particular average, a marine insurer is not liable for any
particular average loss not depriving the insured of the
possession, at the port of destination, of the whole of such
thing, or class of things, even though it becomes entirely
worthless; but such insurer is liable for his proportion of
all general average loss assessed upon the thing insured.
An insurance confined in terms to an actual loss does not

cover a constructive total loss, but covers any loss, which
necessarily results in depriving the insured of the
possession, at the port of destination, of the entire thing
insured.

41
Green Notes 2019 Transportation Law
COMMON CARRIERS
DEFINITION
Persons, corporations, firms or associations engaged in
the business of carrying or transporting passengers or
goods or both, by land, water, or air, for compensation,
offering their services to the public.
Characteristics:
1. No distinction between one whose principal
business is the transportation of persons/goods
and one who does such as an ancillary business
(sideline);
2. No distinction between regular or scheduled

basis and one offering such service on an
occasional, episodic or unscheduled business;
3. No distinction as to the means of transporting,

as long as it is by land, water or air;
4. No specification to use motor vehicles only. As

such, pipeline operators are Common Carriers –
not necessarily motor vehicles;
TRANSPORTATION
5. Still a Common Carrier even if he has no fixed
and publicly know route, maintains no terminals,
and issues no tickets;
LAW 6. Still a Common Carrier even if services offered to

a limited clientele (between the general public
and a narrow segment of the general population);
and
7. Still considered a Common Carrier even if he did

not secure a Certificate of Public Convenience.
Test to Determine if Common Carrier:
§ It must be engaged in the business of

carrying goods for others as a public
employment and must hold itself out as
ready to engage in the transportation of
goods generally as a business and not as a
casual occupation;
§ It must undertake to carry goods of the kind

to which its business in confined;
§ It must undertake to carry by the method by

which his business is conducted and over its
established roads; and
§ The transportation must be for hire. [FPIC

v. Court of Appeals, G.R. No. 125948,
December 29, 1998]

42
§ Acceptance would result in

Common Carrier vs. Private Carrier: overloading;
§ Contrabands or illegal goods;

COMMON CARRIER PRIVATE CARRIER
§ Goods injurious to health;
Engaged in the business of The undertaking is an
carrying or transporting isolated transaction, and § Goods will be exposed to
passengers or goods or not a part of the business untoward danger;
both, by land, water, or air, or occupation. The carrier
for compensation, offering does not hold itself out to § Goods will be exposed to disease;
their services to the carry the goods for the
public. general public or to a § Strike; and
limited clientele
§ Failure to tender goods on time.
Extraordinary diligence in Ordinary diligence in the
the vigilance over the carriage of goods will
goods they carry suffice Duty to Deliver Goods and Passengers.
§ Time to deliver: period stipulated in contract or

In case of loss, No such presumption reasonable time if no contract.
destruction, or applies to private carriers,
deterioration of goods, for whosoever alleges § Reasonable time: depends on circumstances and
they are presumed to have damage to or nature of goods.
been at fault or to have deterioration n of the
acted negligently; burden goods carried has the Duty to Exercise Extraordinary Diligence.
of proving otherwise rests onus of proving that the
on them cause was the negligence § Goods should be delivered in the same
of the carrier condition that they were received.
Cannot stipulate that it is May validly enter into § Passengers should be transported without
exempt from liability for such stipulation encountering any harm or loss.
the negligence of its
agents or employees
VIGILANCE OVER GOODS
*Towage, Arrastre, and Stevedoring services are not
Common Carriers unless their nature expressly EXEMPTING CAUSES
provides otherwise.
Presumption on Loss, Destruction, or Deterioration of
DILIGENCE REQUIRED OF COMMON Goods:
CARRIERS
GENERAL RULE: The common carrier is presumed to have
been at fault or to have acted negligently when the goods
Extraordinary Diligence – rendition of service with the
transported are lost, destroyed or deteriorated.
greatest skill and utmost foresight but not an absolute
insurer of all risks of travel. A common carrier is obliged to
transport its passengers to their destinations with the Note: The presumption of fault or negligence against the
utmost diligence of very cautious persons. carrier is only a disputable presumption. The law, in
creating such a presumption merely relieves the owner of
the goods, for the time being, from introducing evidence
OBLIGATIONS OF THE CARRIERS to fasten the negligence on the former, because the
presumption stands in the place of evidence.
Duty to Accept Cargo or Passengers Without EXCEPTIONS: When the same is due to any of the
Discrimination. following causes only:
EXCEPTIONS (When can common carriers refuse 1. Fortuitous Event (Flood, storm, earthquake,
accepting): lightning or other natural disaster or calamity).
Provided, the following conditions are present:
§ Cargoes consist of dangerous a. Natural disaster was the proximate and
objects or substances; only cause;
§ Goods are unfit for b. Carrier exercised diligence to prevent

transportation; or minimize loss before, during and
after the occurrence of the natural
disaster; and

43
c. The common carrier has not Liability in Relation to Acts of Criminals or Strangers:
negligently incurred delay in
transporting the goods. [Art. 1740, New GENERAL RULE: A common carrier is liable even for acts
Civil Code] of criminals or strangers.
Note: EXCEPTION: Where such thieves or robbers acted "with

§ Mechanical defects are not fortuitous grave or irresistible threat, violence or force." The
events. [Sweet Lines, Inc. v. Court of Appeals, common carrier is not liable for the value of the
G.R. No. L-46340, April 29, 1983] undelivered merchandise which was lost because of an
event that is beyond his control. [De Guzman v. CA, G.R.
§ Fire will only be considered a fortuitous No. L-47822, December 22, 1988]
event if caused by natural disasters or
calamities. [Eastern Shipping Lines v. IAC, Rules Regarding Time of Delivery of Goods:
G.R. No. L-69044, May 29, 1987]
a. If there is an agreement as to time of delivery –
2. Act of the public enemy in war, whether delivery must be within the time stipulated in the
international or civil, provided: contract or bill of lading
a. Act was the proximate and only cause;
b. If there is no agreement – delivery must be
b. Carrier exercised diligence to prevent within a reasonable time. [Saludo, Jr. v. CA, G.R.
or minimize loss before, during and No. 95536, March. 23, 1992]
after the act; and
Liability in Case of Delay in Delivery of Goods:
c. No delay. [Art. 1740, New Civil Code]
§ The carrier shall be liable for damages
Note: Presupposes a state of war and refers to immediately and proximately resulting from
the government of a foreign nation at war with such neglect of duty. [Saludo, Jr. v. CA, GR
the country to which the carrier belongs, though No. 95536, March 23, 1992]
not necessarily with that to which the owner of
the gods owes allegiance. Civil Code Provisions Regarding Delay in the
Transportation of Goods:
3. Act or omission of the shipper or owner of the
goods, provided:
a. Those who in the performance of their
a. If proximate and only cause- obligations are guilty of fraud, negligence, or
exempting; delay, and those who in any manner contravene
the tenor thereof, are liable for damages; [Art.
b. If contributory negligence- mitigating. 1170, New Civil Code]
4. The character of the goods or defects in the b. If the common carrier negligently incurs in delay
packing or in the containers. Provided, carrier in transporting the goods, a natural disaster shall
exercised due diligence to forestall or prevent not free such carrier from responsibility; [Art.
loss. [Art 1742, New Civil Code] 1740, New Civil Code]
Note: If the fact of improper packing is known to the c. If the common carrier, without just cause, delays
carrier or its servants, or apparent upon ordinary the transportation of the goods or changes the
observation, but it accepts the goods notwithstanding stipulated or usual route, the contract limiting
such condition, it is not relieved from responsibility for the common carrier’s liability cannot be availed
loss or injury resulting therefrom. [Southern Lines Inc., v. of in case of the loss, destruction, or
CA, G.R. No. L-16629, January. 31, 1962] deterioration of the goods; [Art. 1747, New Civil
Code]
5. Order or act of competent authority. Provided,
the authority is with power to issue order [Art. d. An agreement limiting the common carrier’s
1743, New Civil Code]. If the officer acts without liability for delay on account of strikes or riots is
legal process, the common carrier will be held valid. [Art. 1748, New Civil Code]
liable [Ganzon vs. CA, GR No. L-48757, May 30,
1988].
Note: The public officer should be acting within its powers

and authority in issuing such.
Note: In all cases other than those enumerated above,

there is presumption of negligence even if there is an
agreement limiting the liability of the common carrier in
the vigilance over the goods

44
DURATION OF LIABILITY CARRIAGE OF GOODS BY SEA ACT

(COGSA – PUBLIC ACT NO. 521)
1. Delivery of Goods to Common Carrier
§ Application
§ From the time the goods are
unconditionally placed in the possession of o International/overseas/foreign (from
and received by the carrier for foreign port to Philippine port);
transportation until the same are delivered
actually or constructively by the carrier to o Water/Maritime transportation; and
the consignee or to the person who has the
right to receive them. § Carriage of goods.
2. Actual or Constructive Delivery Rules on the application:
§ Liability continues to be operative even If the common carrier is coming to the Philippines:
during the time the goods are stored in a
warehouse of the carrier at the place of § First: Civil Code;
destination until the consignee has been
advised of the arrival of the goods and has § Second: COGSA (in foreign trade);
had reasonable opportunity thereafter to
remove them or otherwise dispose of them. § Third: Code of Commerce;
§ Delivery of goods to the custom authorities If the private carrier is coming to the Philippines:
is not delivery to the consignee.
§ First: COGSA;
§ Constructive Delivery – delivery of a
representation of property (as a written § Second: Code of Commerce;
instrument) or means of possession (as a
key) that is construed by a court as § Third: Civil Code (excluding rules on common
sufficient to show the transferor's intent or carriers);
to put the property under the transferee's
control If the private or common carrier is from the Philippines to
a foreign country, the law of the foreign country applies
3. Temporary Unloading or Storage [Art. 1753, Civil Code] UNLESS the parties make COGSA
applicable.
Ø GENERAL RULE: Liability remains
in full force and effect even when Note: Under Art. 1766, in all matters not regulated by the
they are temporarily unloaded or Civil Code, the rights and obligations of common carriers
stored in transit. shall be governed by the Code of Commerce and special
laws. Thus, although a special law, COGSA only applies
Ø EXCEPTION: Unless the shipper when the Civil Code has no provision dealing with the
or owner has made use of the matter. [UP Reviewer]
right of stoppage in transitu.
Notice of Loss or Damage
Note: Notice of claim and the general nature of the loss or
damage must be given in writing to the carrier or his
§ The Right of Stoppage In Transitu – It is the agent at the port of discharge before or at the time of the
right exercised by the seller by stopping the removal of the goods [Section 3(6), COGSA].
delivery of the goods to a certain buyer or
consignee (because of insolvency) when § Patent Damage: shipper should file a claim with
such goods are already in transit. the carrier immediately upon delivery
§ Ordinary diligence is required in exercising § Latent Damage: shipper should file claim with
the right of stoppage in transitu, because of the carrier within three days from delivery
the following:
Note: Filing of notice of claim is not a condition precedent.
§ It is holding the goods in the capacity of an
ordinary bailee or warehouseman and not Period of Prescription
as a carrier; Action for loss or damage to the cargo should be
brought within one year after:
§ There is a change of contract from a
contract of carriage to a contract of deposit. o Date of delivery of goods when there
is delivery; or

45
3. Document of title, which makes it a symbol of the

o Date when the goods should have goods.
been delivered when the goods were
NOT delivered at all. DELIVERY OF GOODS
Note: The cases of misdelivery or conversion are not Period of Delivery –
covered. Instead, what will apply are the rules under the
Civil Code. Prescriptive period is 10 years for contracts or
GENERAL RULE: Period to deliver is that which is stated
4 years for tortious obligations [Ang v. American Steamship in the contract of Bill of Lading.
Agencies, G.R. No. L-25047, March 18, 1967]
EXCEPTION: When no period is provided, delivery shall be
The one-year prescriptive period is suspended by:
made:
a. The express agreement of the parties [Universal
a. Within reasonable time, or
Shipping Lines, Inc. v. IAC, G.R. No. 74125, July 31,
1990]; b. In the first shipment of the same goods
or similar goods which he may make
b. The filing of an action in court until it is the point of delivery.
dismissed. [F. H. Stevens & Co. v. Nordeutscher
Lloyd, G.R. No. L-17730, September 29, 1962]
Effects of Delay –
Limitation of Liability
1. Merely suspends and generally does not
terminate the contract of carriage;
§ $500 per package or customary freight unit
unless the nature and value of such good is
2. Carrier remains duty bound to exercise
declared by the shipper.
extraordinary diligence;
§ Bigger amount declared by shipper when such
3. Natural disaster shall not free the carrier
amount is the real value of goods.
from responsibility [Art. 1740, New Civil
Code];
BILL OF LADING
4. If delay is without just cause, the contract
limiting the common carrier’s liability
DEFINITION cannot be availed of in case of loss or
deterioration of the goods. [Art. 1747, New
Civil Code]
Written acknowledgment of receipt of goods and
agreement to transport them to a specific place to a
person named or to his order. Delivery Without Surrender of Bill of Lading –
Not indispensable for the creation of a contract of carriage GENERAL RULE: Bill of Lading shall be returned to the
[Compañia Maritima v. Insurance Company of North carrier upon delivery of the goods, and such obligations
America, G.R. No. L-18965, October 30, 1964]; in the absence and actions shall be considered cancelled [Art. 353, 2nd
of a Bill of Lading, disputes shall be determined by the legal par., Code of Commerce].
proofs presented by the parties in accordance with the
general provisions of the Code of Commerce in relation to EXCEPTION: When the bill of lading cannot be returned
commercial contracts. because it was lost or whatever reason – the carrier shall
be issued a receipt to that effect which shall produce same
In the absence of fraud, concealment, or improper effect as if the bill of lading has been returned.
conduct, it is presumed that the stipulations of the bill are
known to the shipper, and he is generally bound by his Right of Consignee to Refuse the Delivery –
acceptance whether he reads the bill or not. [Magellan
Manufacturing Marketing Corp. v. Court of Appeals, G.R. No. 1. Partial non-delivery, where the goods are
95529, August 22, 1991] useless without the others [Art. 363, Code of
Commerce];
THREE-FOLD CHARACTER
2. Goods are rendered useless for sale or
consumption for the purposes for which
1. Receipt as to the quantity and description of the
goods shipped; they are properly destined [Art. 365, Code of
Commerce];
2. Contract to transport and deliver the goods to
the consignee or other person therein 3. In case of delay through the fault of the
designated, on the terms specified in such carrier [Art. 371, Code of Commerce];
instrument; and
4. In case part of the goods is in good
condition and separation is possible, the

46
consignee may refuse to receive only the § EXCEPTION: Gratuitous carriage where in
damaged goods. [Art. 365, Code of the carrier and passenger may stipulate
Commerce] limiting the common carrier’s liability for
negligence. However, they cannot stipulate
PERIOD OF FILING NOTICE OF CLAIMS to completely eliminate the liability of the
carrier.
BY SHIPPER
Note: The reduction of fare does not justify any limitation
§ Patent Damage: notice must be filed
of the common carrier’s liability.
immediately upon delivery of cargo to the
consignee or place of destination.
DURATION OF LIABILITY
§ Latent Damage: notice must be filed within
24 hours from delivery of cargo to the The duty of a common carrier to provide safety to its
consignee or place of destination. passengers so obligates it not only during the course of the
trip, but for so long as the passengers are within its
Note: premises and where they ought to be in pursuance to the
contract of carriage.
a. Shorter or modified period may be
stipulated by parties. [PHILAMGEN v. Sweet Waiting for Carrier or Boarding of Carrier
Lines, Inc., G.R. No. 87434, August 5, 1992] All persons who remain on the premises within a
reasonable time after leaving the conveyance are to be
b. Notice of claim is a condition precedent deemed passengers, who are under common carrier’s duty
before filing of court action because the rule to protect.
protects the carrier by affording it an
opportunity to make an investigation of a Arrival at Destination
claim while the matter is still fresh and easily The duty which the carrier of passengers owes to its
investigated so as to safeguard itself from patrons extends to persons boarding the cars as well as to
false and fraudulent claims. [UCPB General those alighting therefrom including a reasonable time to
Ins. Co., Inc. v. Aboitiz Shipping, G.R. No. see after his baggage and prepare for his departure.
168433, February 10, 2009]
PERIOD OF FILING ACTIONS LIABILITY FOR ACTS OF OTHERS
The general rules under the Civil Code on extinctive 1. Employees

prescription apply. Thus, action for damages must be filed Required Diligence: Extraordinary.
in court: Nature of Liability: Tort or Quasi-Delict.
Requisite: Employee must be on duty at the time
a. If a bill of lading was issued: of the injury so that the Common Carrier may be
within 10 years; and held liable.
Defense: Diligence in the selection and
b. If a bill of lading was not issued: supervision of employees.
within 6 years.
2. Other Passengers and Strangers
Note: Period based on New Civil Code because Code of Required Diligence: Ordinary.
Commerce is silent. Nature of Liability: Limited by Article 1763.
As to acts of strangers and other passengers, the common

SAFETY OF PASSENGERS carrier can still be held liable if its employee could have
prevented the injury (not death) to the passenger through
the exercise of the diligence of a good father of a family.
VOID STIPULATIONS [Art. 1763, New Civil Code]
§ Dispensing with or lessening the

extraordinary responsibility of a common DEFENSES AVAILABLE TO COMMON
carrier for the safety of passengers imposed CARRIERS
by law by stipulation, by posting of notices,
by statements on tickets or otherwise.
LIABILITIES OF COMMON CARRIERS
§ Thus, the carrier and the passenger cannot
enter into an agreement which absolutely GENERAL RULE: Common Carriers are presumed
exempts the carrier from liability from the negligent the moment he fails to deliver the goods to its
passenger’s death or injuries and lessening destination, or the passenger did not reach the
the required degree of diligence required by destination.
law.

47
common carrier is responsible for injuries suffered by a

passenger on account of the willful acts or negligence of
Defenses Against Liability: other passengers or of strangers, if the common carrier’s
employees through the exercise of the diligence of a good
a. Total release from liability: father of a family could have prevented or stopped the act
Carrier exercised extraordinary diligence and so or omission. This rule applies to cases involving fortuitous
there is no causal connection between the events because the carrier will still be responsible if it did
damage and the carrier’s act or omission. not exercise due diligence in preventing the injury or death
of the employee
b. Mitigating liability:
Employees
1. Contributory Negligence; The carrier is liable for the acts of its employees. It cannot
escape liability by claiming that he exercised due diligence
2. Avoidable Consequences Rule; and in the selection and supervision of the employee.
3. Valid stipulation reducing liability. Rationale
The special undertaking of the carrier requires that it

PROOF OF NEGLIGENCE furnish its passenger that full measure of protection
afforded by the exercise of the high degree of care
In case of loss of effects or cargo or passengers, the prescribed by the law, inter alia from violence and insults
common carrier is presumed to be at fault or have acted at the hands of strangers and other passengers, but above
negligently unless he had observed extraordinary diligence all, from the acts of the carrier’s own servants charged with
in the vigilance thereof. the passenger’s safety.
Proof that extraordinary diligence was observed will Liability of the carrier for the servant’s violation of duty to
release the common carrier from total liability because passengers is the result of the former’s confiding in the
there is no causal connection between the damage and the servant’s hands the performance of his contract to safely
carrier’s act or omission transport the passenger, delegating therewith the duty of
protecting the passenger with the utmost care prescribed
The presumption of negligence was rebutted by the by law.
common carrier when it was established that the accident
was solely caused by the negligence of the other vehicle
As between the carrier and the passenger, the former must
that was involved in the collision (Mariano, Jr. v. Calleja, GR
bear the risk of wrongful acts or negligence of the carrier’s
No. 166640, July 31, 2009)
employees against passengers, since it, and not the
passengers, has the power to select and remove them.
Requirement of Absence of Negligence – Requisites:
a. The cause of the breach of obligation must be Other Passengers and Third Persons
independent of the will of the debtor;
With respect to acts of strangers and other passengers
b. The event must be unforeseen or unavoidable; resulting in injury to a passenger, the availability of such
defense is also subject to the exercise of a carrier of due
c. The event must be such as to render it diligence to prevent or stop the act or omission.
impossible for the debtor to fulfil his obligation
in a normal manner; Negligence of the carrier need not be the sole cause of the
damage or injury to the passenger or the goods.
d. The debtor must be free from any participation
in or aggravation of the injury to the creditor. The carrier would still be liable even if the contractual
breach concurs with the negligent act or omission of
Absence of Delay: another person.
The absence of delay is important in case of natural
disaster because if a common carrier incurs in delay in
transporting the goods, such disaster shall not free such
carriers from responsibility. [Art. 1740 New Civil Code]
DUE DILIGENCE IN THE SELECTION AND

SUPERVISION OF EMPLOYEES
The primary defense of the carrier in transporting

passengers is exercise of extraordinary diligence. Thus,
even if there is a fortuitous event, the carrier must also
present proof of exercise of extraordinary diligence. A

48
• Defective brakes cannot be considered

fortuitous in character (Vergara v. CA, G.R.
FORTUITOUS EVENT No. 77679, September 30, 1987).
Events which cannot be foreseen and which having been

Fire is not considered a natural disaster
foreseen, are inevitable.
Fire arises almost invariably from some act of man or by
human means. It does not fall within the category of an act
To be a valid defense, a fortuitous event must be of God UNLESS caused by lightning or by other natural
established to be the proximate cause of the loss. disaster or calamity. It may even be caused by the actual
fault or privity of the carrier (Eastern Shipping Lines v. IAC,
G.R. No. L- 69044, May 29, 1987).
Requisites of Fortuitous Event:
1. The cause of the unforeseen and unexpected But if the outbreak of fire is due to a crack in the auxiliary
occurrence, or the failure of the debtor to comply with his engine fuel oil service truck, which resulted in the loss of
obligations, must be independent of human will; cargoes, that is not due to a force majeure but to
negligence (Edgar Cokaliong Shipping Lines, Inc. v. UCPB
General Insurance Company, Inc., G.R. No. 146018, June 25,
2. It must be impossible to foresee the event which
2008).
constitutes the caso fortuito, or if it can be foreseen, it
must be impossible to avoid;
Hijacking of the carrier
3. The occurrence must be such as to render it impossible Hijacking not being included in the provisions of Article
for the debtor to fulfill his obligation in a normal manner; 1734, must be dealt with under the provisions of Article
and 1735 and thus, the common carrier is presumed to have
been at fault or negligent.
4. The obligor must be free from any participation in the
aggravation of the injury resulting to the creditor. There To exculpate the carrier from liability arising from
must be an entire exclusion of human agency from the hijacking, he must prove that the robbers or the hijackers
cause of injury or loss. acted with grave or irresistible threat, violence, or force
(De Guzman v. CA, supra).
Moreover, a common carrier may not be absolved from
liability in case of force majeure or fortuitous event alone. Typhoon as a fortuitous event
The common carrier must still prove that it was not If all the elements of a natural disaster or calamity concur
negligent in causing the death or injury resulting from an and there was no contributory negligence or delay, the
accident (Yobido v. CA). occurrence of a typhoon is a fortuitous event. This holds
true especially if the vessel was seaworthy at the time it
undertook that fateful voyage and that it was confirmed
Loss of a ship and of its cargo, in a wreck due to accident
with the Coast Guard that the weather condition would
or force majeure must, as a general rule, fall upon their
permit safe travel of the vessel to its destination (Philippine
respective owners, except in cases where the wrecking or
American General Insurance Co., Inc. v. MGG Marine
stranding of the vessel occurred through the malice,
Services, Inc., G.R. No. 135645, March 8, 2002).
carelessness, or lack of skill on the part of the captain or
because the vessel put to sea is insufficiently repaired and
prepared. The loss of cargoes due to the sinking of a seaworthy
tugboat which was suddenly tossed by waves of
extraordinary height is due to a force majeure (Philippine
In order that the exemption due to force majeure would
American General Insurance Company v. PKS Shipping
apply, the carrier must prove that the loss or destruction
Company, G.R. 149038, April 9, 2003).
of the merchandise was due to accident and force majeure
and not to fraud, fault, or negligence on the part of the
captain or owner of the ship (Tan Chiong Sian v. Inchausti) CONTRIBUTORY NEGLIGENCE
A mechanical defect is not fortuitous event GENERAL RULE: If the shipper or owner merely
• Mechanical defects in the carrier are NOT contributed to the loss, destruction or deterioration of the
considered a caso fortuito that exempts the goods, the proximate cause thereof being the negligence
carrier from responsibility (Sweet Lines, of the common carrier, the latter shall be liable for
Inc. v. CA, G.R. No. L-46340, April 29, 1983). damages, which however, shall be equitably reduced. [Art.
1741, New Civil Code]
• Tire blowout of a jeep is not a fortuitous EXCEPTION: In a collision case and allision cases, the
event where there exists a specific act of parties are liable for their own damages.
negligence by the carrier consisting of the
fact that the jeepney was overloaded and Note: Allision – The running of a ship upon another ship
speeding at the time of the incident (Juntilla that is stationary.
v. Fontanar, GR No. L-45637, May 31, 1985).

49
Partial Relief from Liability: Exception is when the act or omission was done
outside the line of duty of the employee or may fall
a. The Shipper or Owner contributed negligence; under caso fortuito (see De Gillaco, et. al. v. Manila
b. Inherent defect or character of the goods or in Railroad)
the packing or container.
In quasi-delict cases, an employer is subsidiary liable
Carrier cannot be relieved from any liability when it with the employee. The employer is also directly liable
accepts the goods knowing of their improper packing or for negligence in selecting and supervising his
the defect was apparent upon ordinary observation. employee.
DOCTRINE OF LAST CLEAR CHANCE c. Liability from Carrier’s Defective Equipment

and Facilities
When both parties involved in the accident were both
negligent, the negligence of the party will not be Passengers are entitled to recover damages from the
considered the proximate cause if the other party has the carrier resulting from a defect in an appliance
last clear chance of avoiding the injury. Thus, if the plaintiff purchased from a manufacturer, when it appears that
has the last clear chance of avoiding the injury, the the defect would have been discoverable by the
defendant may no longer be held liable. In such case, the carrier if it had exercised the degree of care which
negligence of the plaintiff – which is not just contributory under the circumstances was incumbent upon it.
negligence – will be considered an efficient intervening
cause. d. Liability as to Third Persons
The doctrine cannot be applied against a passenger. The Quasi-delict. The common carrier is liable and may
principle of “last clear chance” applies in a suit between the maintain an action to recover damages against its
owners and drivers of colliding vehicles. It does not arise employee. The law requires common carriers to
where a passenger demands responsibility from the carrier exercise extraordinary diligence in carrying and
to enforce its contractual obligations (Phil. Rabbit Bus transporting passengers. In requiring the highest
Lines, Inc. v. IAC, the Supreme Court) form of diligence, the law compels them to curb the
recklessness of drivers. [Kapalaran Bus Line v.
Coronado, G.R. No. 85331, August 25, 1989]
EXTENT OF LIABILITY
Common carriers are also liable for any omission,
lapse or neglect that results to the damage, prejudice,
a. Liability of the Common Carrier
injuries or even death caused to members of its crew
members or complement operating the carrier. [PAL
In a contract of carriage, it is presumed that the v. Court of Appeals, G.R. No. L-46558, July 31, 1981]
common carrier is at fault or was negligent when
a passenger dies or is injured. This presumption
e. Liability of Common Carriers for Injuries
may only be overcome by evidence that the
Caused by Other Passengers
common carrier exercised extraordinary
diligence. [Baliwag Transit v. Court of Appeals,
Common carriers are liable for the injuries suffered
G.R. No. 116110, May 15, 1996]
by its passengers due to the willful acts or negligence
of other passengers or of strangers, if the common
Act or omission of passenger – Passengers are
carrier’s employees, through the exercise of the
required to exercise diligence of a good father of
diligence of a good father of a family, could have
a family to avoid injury to themselves. [Art. 1761,
prevented or stopped the act or omission. [Manila
New Civil Code]
Railroad Company v. Ballesteros et. al., G.R. No. L-19161,
April 29, 1966]
1. If the passenger’s act or omission is the
proximate cause of the injury or death,
then the common carrier is exempt RECOVERABLE DAMAGES
from liability. If the act or omission of
the passenger is only contributory, In a contract of carriage, the carrier in good faith is liable
damages to be paid by the common only to pay for the damages that are the natural and
carrier will be mitigated. [Art. 1762, New probable consequences of the breach of the obligation,
Civil Code] and which the parties have foreseen or could have
reasonably foreseen at the time the obligation was
b. Liability for Acts of Employees constituted. However, if the carrier is in bad faith or was
guilty of gross negligence, the said carrier is liable for all
Common carriers are bound to carry its passengers damages, whether the same can be foreseen or not (Art.
safely to their destination. Common carriers are also 2201 New Civil Code).
liable for the actions or omission of its employees that
may result to the damage, injury, or death of the It should be noted, however, that the carrier who may be
passenger. compelled to pay damages for the loss or damage to the
goods or passengers has the right of recourse against the

50
employee who committed the negligent, intentional or o That the carrier is not responsible
fraudulent act. for the loss, destruction or
deterioration of the goods on
Kinds of Damages: account of the defective condition
a. Actual or Compensatory; of the car, vehicle, ship or other
b. Moral; equipment used in the contract of
c. Nominal; carriage.
d. Temperate or Moderate;
e. Liquidated; and o Any similar stipulation that is
f. Exemplary or Corrective. unreasonable, unjust, and
contrary to public policy. [Art.
Under Art. 2216 of the New Civil Code, no proof of 1745, New Civil Code]
pecuniary loss is necessary in order that moral, nominal,
temperate, liquidated or exemplary damages may be § Valid Stipulations
adjudicated. The assessment of such damages, except o Reduction of degree of diligence to
liquidated ones, is left to the discretion of the court, ordinary diligence, provided it be in
according to the circumstances of each case. However, writing, signed by the shipper or owner,
proof of pecuniary loss is necessary if actual or supported by a valuable consideration
compensatory damages are being claimed. other than the service rendered by the
carriers; and reasonable, just and not
STIPULATIONS LIMITING LIABILITY contrary to public policy. [Art. 1744, New
Civil Code]
GENERAL RULE: Stipulations limiting the liability of a
common carrier are not valid. o Limitation of Liability to Fixed Amount;
EXCEPTION: Unless § A contract fixing the sum to be

recovered by the owner or shipper
1. in writing, signed by the shipper or owner; for the loss, destruction or
deterioration of the goods, if it is
2. supported by a valuable consideration other than reasonable and just under the
the service rendered by the common carrier; circumstances and has been fairly
and freely agreed upon; [Art. 1750,
3. Reasonable, just and not contrary to public New Civil Code]
policy. [Art. 1744, New Civil Code]
o Limitation of Liability in Absence of
Declaration of Greater Value;
§ Void Stipulations
§ Stipulation limiting liability to the
value of the goods appearing in the
o That the goods are transported at
bill of lading, unless the shipper or
the risk of the owner or shipper;
owner declares a greater value.
[Art. 1749, New Civil Code]
o That carrier will not be liable for
any loss, destruction or
o Limitation of Liability for Delay;
deterioration of the goods;
§ An agreement limiting the common
o That the carrier need not observe
carrier’s liability for delay on
any diligence in the custody of the
account of strikes or riots. [Art.
goods;
1748, New Civil Code]
o That the carrier shall exercise a
degree of diligence less than that LIABILITY FOR BAGGAGE OF
of a good father of a family over PASSENGERS
the movable transported;
Rules Regarding Checked-In Baggage of Passengers:
o That the carrier shall not be
responsible for the acts or The provisions of Articles 1733 to 1753 of the Civil Code
omissions of his or its employees; shall apply.
o That the carrier’s liability for acts Rules Regarding Baggage in Possession of Passengers:
committed by thieves or robbers
who do not act with grave or
• The common carrier shall be responsible for
irresistible threat, violence or
shipper’s baggage as depositaries, provided that
force is dispensed with or
notice was given to them, or to their employees,
diminished;
of the effects brought by the guests and that, on
the part of the shipper, they take the precautions

51
which said common carriers or their substitutes 2. For all the thefts committed by the crew,
advised relative to the care and vigilance of their reserving his right of action against the guilty
effects. [Art. 1998, New Civil Code] parties;
• The responsibility shall include the loss of, or 3. For the losses, fines, and confiscations imposed
injury to the personal property of the shipper on account of violation of the laws and
caused by the employees of the common carrier regulations of customs, police, health, and
as well as strangers; but not that which may navigation;
proceed from any force majeure. [Art. 2000, New
Civil Code] 4. For the losses and damages caused by mutinies
on board the vessel, or by reason of faults
• The act of a thief or robber, who has entered the committed by the crew in the service and
carrier is not deemed force majeure, unless it is defense of the same, if he does not prove that he
done with the use of arms or through an made full use of his authority to prevent or avoid
irresistible force. [Art. 2001, New Civil Code] them;
• The common carrier is not liable for 5. For those arising by reason of an undue use of
compensation if the loss is due to the acts of the powers and non-fulfillment of the obligations
shipper, his family, or servants, or if the loss which are his;
arises from the character of the things brought
into the carrier. [Art. 2002, New Civil Code] 6. For those arising by reason of his going out of his
course or taking a course which he should not
• The common carrier cannot free himself from have taken without sufficient cause, in the
responsibility by posting notices to the effect opinion of the officers of the vessel at a meeting
that he is not liable for the articles brought by the with the shippers or supercargoes who may be
passenger. Any stipulation between the common on board;
carrier and the shipper whereby the
responsibility of the former as set forth in 7. For those arising by reason of his voluntarily
Articles 1998 to 2001 is suppressed or diminished entering a port other than that of his destination;
shall be void. [Art. 2003, New Civil Code]
8. For those arising by reason of non- observance
of the provisions contained in the regulations on
Distinction:
situation of lights. [Art. 618, Code of Commerce]
In Possession of In Possession Limited Liability Rule (Hypothecary Doctrine)

Carrier (check- of Passengers
in) 1. The liability of shipowner and ship agent is
limited to the amount of interest in said vessel
Nature Mere goods Necessary such that where vessel is entirely lost, the
Deposit obligation is extinguished.
Diligence Extraordinary Ordinary 2. The interest extends to:

required of a
common carrier • Vessel itself;
Applicable NCC 1733-1753 NCC 1998, • Equipment;

Rules 2000-2003
• Freightage; and
• Insurance proceeds.
LIABILITY OF SHIP OWNERS AND Exceptions Limited Liability Rule

SHIPPING AGENTS
§ Claims under Workmen’s Compensation
Liability for Acts of Captain [Abueg v. San Diego, G.R. No. L-773,
December 17, 1946];
The captain shall be liable to the agent, and the latter to
§ Injury or damage due to shipowner or to the
third persons:
concurring negligence of the shipowner
and the captain;
1. For all the damages suffered by the vessel and his
cargo by reason of want of skill or negligence on
§ The vessel is insured [Vasquez v. Court of
his part;
Appeals, G.R. No. L-42926, September 13,
1985];

52
§ Expenses for repair on vessel completed Party if there is an agreed stopping place within the
before loss; territory of another State, even if that State is not a High
Contracting Party.
§ In case there is no total loss and the vessel
is not abandoned;
§ Collision between two negligent vessels.
WARSAW CONVENTION LIABILITY OF THE CARRIER

The carrier is liable for damage sustained:
DEFINITION
a. In the event of the death or wounding of a
The Warsaw Convention is an international convention passenger or any other bodily injury suffered by
which regulates liability for air carriers that cross a passenger if the accident took place:
international boundaries.
• On board the aircraft; or
Differences between Warsaw Convention and Carriage
of Goods by Sea Act: • In the course of any of the operations of
embarking or disembarking. [Art. 17,
Warsaw Convention]
COGSA WARSAW
b. In the event of the destruction or loss of, or
damage to, any registered baggage or cargo, if
Applies to goods only Applies to goods and the occurrence took place:
passengers
• During the carriage by air [Art. 18, Warsaw
Applies to carriage of goods Applies to carriage by air Convention];
by sea or water
• By reason of delay [Art. 19, Warsaw
Applies to domestic Applies to international Convention]
carriage (when the carriage only
destination is the Note: Carrier is not liable if he proves that the destruction,
Philippines) loss of, or damage to, the cargo resulted solely from one or
more of the following:
Domestic Law International Law
a. Inherent defect, quality or vice of that cargo;
Prescriptive period of 1 year Prescriptive period of 2 b. Defective packing of that cargo performed by a
to file suit years to file suit person other than the carrier or his servants or
agents;
c. An act of war or an armed conflict;

APPLICABILITY
d. An act of public authority carried out in
Warsaw Convention applies to: connection with the entry, exit or transit of the
cargo. [Art. 18 (3), Warsaw Convention]
1. All international carriage of persons, baggage,
or cargo performed by aircraft for reward; and c. Occasioned by delay in the transportation by air
of passengers, baggage, or cargo. [Art. 19,
2. Gratuitous carriage by aircraft performed by an Warsaw Convention]
air transport undertaking.
The carrier shall not be liable if he proves:
When Inapplicable:
• that he and his servants and agents have
a. When public policy is contradicted; and taken all necessary measures to avoid the
damage; or
b. If requirements under convention has not been
complied with. • that it was impossible for them to take such
measures. [Art. 20, Warsaw Convention]
International Carriage - any carriage in which, according
to the agreement between the parties, the place of LIMITATION OF LIABILITY
departure and the place of destination, whether or not
there be a break in the carriage or a transhipment, are GENERAL RULE: Any provision tending to relieve the
situated either within the territories of 2 High Contracting carrier of liability or to fix a lower limit than that laid down
Parties or within the territory of a single High Contracting

53
in the Warsaw Convention shall be null and void. [Art. 23 4. Accepting goods without airway bill or baggage
(1), Warsaw Convention] without baggage check.
Note: The nullity of any such provision does not involve the WHEN COMPLAINT MUST BE MADE
nullity of the whole contract.
§ In the case of damage: the person entitled to delivery
EXCEPTION: The rule does not apply to provisions must complain to the carrier after the discovery of the
governing loss or damage resulting from inherent defect, damage within:
quality or vice of the cargo carried. [Art. 23 (2), Warsaw o Baggage: 7 days from the date of
Convention] receipt;
o Cargo: 14 days from the date of
receipt.
Liability to Passengers
§ In the case of delay: complaint must be made at the latest
GENERAL RULE: The liability of the carrier for each within 21 days from the date on which the baggage or cargo
passenger is limited to the sum of 250,000 francs (16, 600 have been placed at his disposal. [Art. 26 (2), Warsaw
Special Drawing Rights) Convention]
EXCEPTION: By special contract, the carrier and the GENERAL RULE: If there is failure to raise complaint
passenger may agree to a higher limit of liability. within the times stated, no action shall lie against the
carrier.
Liability for Checked Baggage
EXCEPTION: In case of fraud.
GENERAL RULE: In the carriage of registered baggage, the
liability of the carrier is limited to a sum of 250 francs (17 PRESCRIPTIVE PERIOD
Special Drawing Rights) per kilogram.
The right to damages shall be extinguished if action is not
EXCEPTION: When the passenger or consigner has made, brought within 2 years:
at the time when the package was handed over to the
carrier, a special declaration of interest in delivery at a. from date of arrival at the destination; or
destination and has paid a supplementary sum. In that case
the carrier will be liable to pay a sum not exceeding the b. from date on which the aircraft ought to have
declared sum. arrived; or
EXCEPTION TO EXCEPTION: When he proves that the c. from the date on which the carriage stopped. [Art.
sum is greater than the passenger’s or consignor’s actual 29, Warsaw Convention]
interest in delivery at destination.
JURISDICTION
Liability for Handcarried Baggage
An action for damages must be brought, at the option of
Absolute rule: As regards objects which the passenger the plaintiff, in the territory of one of the High Contracting
takes charge himself, the liability of the carrier is limited to Parties, either before the court where:
5,000 francs (332 Special Drawing Rights) per passenger.
a. the carrier is ordinarily resident;
WILLFUL MISCONDUCT
b. the carrier has his principal place of
For willful misconduct to exist, there must be a showing business;
that the acts complained of were impelled by an intention
to violate the law, or were in persistent disregard of one’s c. the carrier has an establishment by which
rights. It must be evidenced by a flagrantly or shamefully the contract has been made; or
wrong or improper conduct. [Luna v. Court of Appeals,
G.R. Nos. 100374-75, November 27, 1992] d. at the place of destination. [Art. 28, Warsaw
Convention]
A common carrier may not avail of the limitation of liability
in the following cases:
1. Willful misconduct;
2. Default amounting to wilful misconduct [Art. 25,

Warsaw Convention];
3. Accepting passengers without ticket [Art. 3 (2),

Warsaw Convention]; and

54
Green Notes 2019 Corporation Law
A. GENERAL PRINCIPLES
NATIONALITY OF CORPORATIONS
Place of
Incorporation Control Test Grandfather Rule
Test
CORPORATION
The nationality It is the principal Where various
of the test of nationality nationality tests shall
corporation is of the corporation first be applied on the
LAW
determined by where the shareholders of the
the laws of the citizenship of the holding companies to
country under controlling determine the
which it has stockholders is nationality of the
been used as the gauge equity in the
incorporated to determine the corporation and
nationality thereby arrive at the
of the corporation. nationality of the
target corporation.
However, the
application of this rule
in determining the
nationality of a
corporation cannot go
beyond a reasonable
level. (Palting v. San
Jose)
PLACE OF INCORPORATION TEST

A corporation is considered a national of the country
under whose laws it has been organized and registered.
[Villanueva, 55]
This is the primary test in determining nationality because

the Philippines adheres to the doctrine that a corporation
is a creature of the State. [SEC-OGC Opinion No. 11-42,
2011]
Nationality under RA 7042, the Foreign Investments Act

of 1991:
Engaging in nationalized activities and exploiting natural

resources depend on the nationality per se of the
corporation as incorporated and on the citizenship of the
stockholders.
Sec. 2, Article XII of the 1987 Constitution limits the

exploration, development and utilization of natural
resources to Filipino citizens or corporations at least 60%
of whose capital is owned by such citizens. The 60%
requirement ensures that corporations allowed to exploit
natural resources are controlled by Filipinos.
Capital, under the constitutional proscription, refers to

shares of stock which are entitled to vote in the election of
directors or that of controlling interest. In the absence of

55
provisions in the Articles, preferred shares are presumed purposes of nationalized activities. [Narra Nickel
to have the same voting rights as common shares. [Gamboa Mining and Development Corp. v. Redmont
v. Tevez, G.R. No. 176579, June 28, 2011] Consolidated Mines Corp., G.R. No. 195580,
January 28, 2015]
A Corporation is Considered a Philippine National When:
It is organized under the laws of the Philippines and at GRANDFATHER RULE
least 60% of the capital stock outstanding and entitled to The combined totals in the investing corporation and the
vote is owned and held by Philippine citizens; investee corporation must be traced or grandfathered to
determine the total percentage of Filipino ownership.
It is organized abroad and registered as doing business in [SEC-OGC Opinion No. 07-22, December 7, 2007]
the Philippines under the Corporation Code. 100% of its
capital stock outstanding and entitled to vote is wholly
If the percentage of Filipino ownership in the corporation
owned by the following:
is less than 60%, only the number of shares corresponding
to such percentage shall be counted as Philippine
a. Filipinos; nationality. [1967 SEC Rules]
b. Trustee of funds for retirement or separation
benefits; The Control Test must first be complied with before the
c. Trustee must be a Philippine national; Grandfather Rule is applied. If the Filipino equity of the
d. At least 60% of the fund must be for the benefit second layer corporation (or the corporation that owns
of Philippine nationals; [Sec. 3, R.A. No. 7042] shares in another) falls below 60%, it is immediately
considered foreign-owned and there is no need to apply
the Grandfather Rule. Otherwise, when there is doubt (i.e.
Double 60% Rule
foreign investors practically manage the said company and
Where a corporation and its non-Filipino stockholders
provide all the financial and technological support), the
own stocks in a SEC-registered enterprise, the following
Grandfather Rule may then be applied. [Narra Nickel
must concur for the latter enterprise to be considered a
Mining and Development Corp. v. Redmont Consolidated
Philippine national:
Mines Corp., G.R. No. 195580, January 28, 2015]
a. At least 60% of capital stock outstanding and

Note: The Control Test and Grandfather Rule apply when
entitled to vote of both corporations must be
the subject Philippine corporation is owned by another
owned and held by Filipino citizens;
Philippine corporation that has foreign stockholders.
b. At least 60% of the Board of Directors of BOTH
corporations must be Filipino citizens. [Sec. 3,
R.A. No. 7042] Nationality of Non-Stock Corporations [SEC
Memorandum Circular no. 10 (2016)]
Required Percentage of Filipino Ownership is Applicable
to Both: A SEC-registered non-stock corporation is considered a
Philippine national if:
a. The total number of outstanding shares of stock • All of its members are Philippine citizens; or
entitled to vote in the election of directors; and • 60% of its members entitled to vote are Philippine
b. The total number of outstanding shares of stock, citizens; or
whether or not entitled to vote in the said • At least 60% of its member’s total numbers of votes as
election. [SEC Memorandum Circular No. 8, May broadened in the By-laws are held by Philippine
22, 2013] citizens; or
• All members of a foreign non-stock corporation
Other Requirements licensed to do business by the SEC are Philippine
Beneficial Ownership – Filipinos are the principal citizens.
beneficiaries in the exploitation of natural resources;
DOCTRINE OF SEPARATE JURIDICAL
Situs of Control. [DOJ Opinion No. 130, October 7, 1985] PERSONALITY
CONTROL TEST A corporation is a juridical entity with legal personality

The nationality of a corporation is determined by the separate and distinct from those acting for and in its behalf
nationality of its stockholders. Shares belonging to and, in general, from the people comprising it; and that
corporations where at least 60% of the capital is Filipino- obligations incurred by the corporation, acting through its
owned shall be considered of Philippine nationality. There directors, officers and employees are its sole liabilities.
is no need to further trace the nationality of the 60% [Santos v. NLRC, G.R. No. 101699, March 13, 1996]
stockholdings since it is already deemed Filipino. [DOJ
Opinion No. 20, May 5, 2005]
Liability for Torts and Damages
A corporation is civilly liable for torts in the same manner
The control test is the prevailing mode of as natural persons, because the rules governing the
determining the nationality of a corporation for

56
liability of a principal for a tort committed by an agent are DOCTRINE OF PIERCING THE
the same whether the principal be a natural person or a
corporation, and whether the agent be a natural or
CORPORATE VEIL
artificial person. [PNB v. CA, G.R. No. L-27155, May 18, 1978]
It is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation
Rules on Liability for Torts: is used for wrongful purposes. The corporate existence
may be disregarded where the entity is formed or used for
non-legitimate purposes, such as to evade a just and due
• Liable for all contracts and default that arise from obligation, or to justify a wrong, to shield or perpetrate
those entered into by its agent within the scope of his fraud or to carry out similar or inequitable considerations,
authority, or even those outside the scope of his other unjustifiable aims or intentions, in which case, the
authority if ratified by the corporation; fiction will be disregarded and the individuals composing
it and the two corporations will be treated as identical.
• Acting officer is solidarily liable with the corporation [Livesey v. Binswanger Phils Inc., G.R. No. 177493, March 19,
with the damages resulting from his negligence as a 2014]. In effect, Individuals who compose the corporation
joint-tortfeasor. are held directly liable.
GENERAL RULE: Corporations cannot be proceeded GENERAL RULE: Obligations incurred by the corporation,
against as defendants or accused in criminal proceedings acting through its directors, officers, and employees, are
because there are no existing laws by which to support its sole liabilities.
such a process. Ultimately, a crime committed in the name
of a corporation is actually committed by the individuals
who act for and in behalf of such corporation. [Villanueva, Exceptions:
44] • When directors and trustees or, in appropriate
cases, the officers of a corporation vote/assent to
EXCEPTION: Under the Anti-Money Laundering Act patently unlawful acts of the corporation, act in
(AMLA) a corporation may be considered as an offender bad faith or gross negligence in directing
and may be meted out with the penalty of suspension or corporate affairs or are guilty of conflict of
revocation of license. interest to the prejudice of the corporation, its
stockholders or members, and other persons;
• When a director or officer has consented to the
Note: If the crime is committed by a corporation, the issuance of watered stocks or who, having
directors, officers, employees or other officers thereof knowledge thereof, did not forthwith file with the
responsible for the offense shall be charged and penalized corporate secretary his written objection thereto;
for the crime, precisely because of the nature of the crime • When a director, trustee or officer has
and the penalty therefor. A corporation cannot be arrested contractually agreed or stipulated to hold himself
and imprisoned; hence, cannot be penalized for a crime personally and solidarily liable with the
punishable by imprisonment. However, a corporation may corporation; or
be charged and prosecuted for a crime if the imposable • When a director, trustee or officer is made, by
penalty is fine. Even if the statute prescribes both fine and specific provision of law, personally liable for his
imprisonment as penalty, a corporation may be corporate action. [Shrimp Specialists, Inc., vs. Fuji-
prosecuted and, if found guilty, may be fined. [Ching v. Triumph Agri-Ind’l Corp., G.R. No. 168756,
Secretary of Justice, G.R. No. 164317, February 6, 2006] December 7, 2009]
Recovery of Moral Damages Grounds for Application for this doctrine

Moral damages cannot be awarded in favor of a
corporation because, being an artificial person and having
existence only in legal contemplation, it has no feelings, no 1. Fraud
emotions, no senses. It cannot, therefore, experience When the corporation is used to commit fraud or wrong,
physical suffering and mental anguish, which can be to perpetuate the violation of a statutory or other positive
experienced only by one having a nervous system. legal duty, or dishonest and unjust act in contravention of
another’s legal rights. [Philippine National Bank v. Hydro
Note: The findings in People v. Manero and Mambulao Resources Contractors Corporation, G.R. no. 167530, March
Lumber Co. v. Philippine National Bank, G.R. No. L-22973, 13, 2013]
January 30, 1968 that a corporation may recover moral
damages if it has a good reputation that is debased, Elements:
resulting in social humiliation is an obiter dictum. [ABS- There must have been fraud or an evil motive in the
CBN Broadcasting Corp. vs. CA, 301SCRA 589, G.R. No. affected transaction, and the mere proof of control of the
128690. January 21, 1999] corporation by itself would not authorize piercing;

57
• The corporate entity has been used in d. When piercing of the corporate fiction is
the perpetration of the fraud or in the necessary to achieve justice or EQUITY.
justification of a wrong, or to escape
personal liability; and
Note: Mere similarity and interrelation between two
corporations, as well as the overlap of officers, do not
• The main action should seek for the warrant the piercing of the veil. The wrongdoing must
enforcement of pecuniary claims be proven clearly and convincingly. [China Banking
pertaining to the corporation against Corporation vs. Dyne-Sem Electronics Corp. G.R. No.
corporate officers or stockholders, or 149237, June 11, 2006]
vice versa. [Villanueva, 111]
Test in Determining Applicability [Three- Pronged
The Court pierced the veil of corporate fiction of two Control Test]
corporations when there was a confluence of the • CONTROL, not mere majority or complete
following factors: stock control, but complete domination, not
only of finances but of policy and business
practice in respect to the transaction
a. A first corporation is dissolved
attacked so that the corporate entity as to
this transaction had at the time no separate
b. The assets of the first corporation is transferred mind, will or existence of its own;
to a second corporation to avoid a financial
liability of the first corporation; and • Such control must have been used by the
c. Both corporations are owned and controlled by defendant to commit FRAUD or wrong, to
the same persons such that the second perpetuate the violation of a statutory or
corporation should be considered as a other positive legal duty, or dishonest and
continuation and successor of the first unjust act in contravention of plaintiff’s
corporation. legal right; and
d. Note: There must be at least a substantial
identity of stockholders for both corporations in • HARM. The control and breach of duty must
order to consider this factor to be constitutive of have proximately caused the injury or
corporate identity. [Kukan Int’l Corp. vs. Hon. unjust loss complained of. [Pacific Rehouse
Amor Reyes, et. al. G.R. No. 182729, Sept. 29, 2010] Corporation v. CA, G.R. No. 199687, March 24,
2014]
Note: All elements must concur.
2. Equity
The veil of separate corporate personality may
be lifted when it is used as a shield to confuse legitimate Probative Factors
issues, or where lifting the veil is necessary to achieve
equity or for the protection of creditors and third persons.
The following are the probative factors that are to be
[Martinez v. CA, G.R. no. 131673, September 10, 2004]
considered when the corporate mask may be lifted and the
corporate veil pierced:
3. Alter Ego
Where a corporation is a merely a farce since it a. STOCK ownership by one or common ownership
is a mere alter ego or business conduit of a person, or of both corporations;
where the corporation is so organized and controlled and b. IDENTITY of directors and officers;
its affairs are so conducted as to make it merely an c. Manner of keeping CORPORATE BOOKS and
instrumentality, agency, conduit or adjunct of another records; and
corporation. [Philippine National Bank v. Hydro Resources d. Methods of CONDUCTING business. [Heirs of
Contractors Corporation, G.R. no. 167530, March 13, 2013] Tan Uy v. International Exchange Bank, 2013]
Classifications of Piercing the Corporate Veil Circumstances to Justify the Application of the Doctrine
a. When the corporate entity is used to commit a. The parent corporation owns all or most of the
FRAUD or to justify a wrong, or to defend a capital stock of the subsidiary;
crime;
b. The parent and subsidiary corporations have
b. When the corporate entity is used merely as a common directors or officers;
mere ALTER EGO, business conduit or
instrumentality of a person or another entity; c. The parent company finances the subsidiary;
c. When the corporate entity is used to defeat d. The parent company subscribed to all the capital
PUBLIC CONVENIENCE, or justify wrong; stock of the subsidiary or otherwise causes its
incorporation;

58
B. STOCK VS NON STOCK

e. The subsidiary has grossly inadequate capital; CORPORATIONS
Stock Corporations Non-stock Corporations
f. The subsidiary has substantially no business
except with the parent corporation or no assets Corporations which have One where no part of its
except those conveyed to or by the parent capital stock divided into income is distributable as
corporation; shares and are authorized to dividends to its members,
distribute to the holders of trustees or officers, subject
such shares dividends or to the provisions on
g. The papers of the parent corporation or in the allotments of the surplus dissolution: Provided, That
statements of its officers, the subsidiary is profits on the basis of the any profit which a non-
described as a department or division of the shares held are stock stock corporation may
parent corporation, or its business of financial corporations. [Sec. 3, obtain as an incident to its
responsibility is referred to as the parent Corporation Code] operations shall, whenever
corporation’s own; necessary or proper be used
for the furtherance of the
h. The parent corporation uses the property of the purpose or purposes for
subsidiary as its own; which the corporation was
organized [Sec. 87]
i. The directors or executives of the subsidiary do STOCK CORPORATIONS

not act independently in the interest of the Corporations, which have a capital stock divided into
subsidiary, but take their orders from the parent shares and are authorized to distribute to the holders’
corporation;
dividends. [86, Villanueva 2018]
j. The formal legal requirements of the subsidiary 2 Requisites for a Stock Corporation to exist:
are not observed. [Philippine National Bank v.
Ritratto Group Inc., G.R. No. 142616, July 31, 2001] A. A Capital stock divided into shares
B. Authority to distribute dividends.
Due Process is Essential
NON-STOCK CORPORATIONS
Purposes
The court must acquire jurisdiction over the corporations Non-stock Corporations may be formed or organized for
involved before their separate personalities are the following purposes:
disregarded; and
a. Cultural;
Piercing can only be raised in a full-blown trial over a cause b. Charitable;
of action commenced involving parties brought under the c. Civic service;
authority of the court by way of service of summons or d. Religious;
what passes as service. [Kukan International Corp. v. Reyes e. Educational;
et al., G.R. No. 182729, September 29, 2010] f. Professional;
g. Fraternal;
h. Literary;
i. Similar purposes like trade, industry and
chambers. (Sec. 88)
Treatment of profits
That any profit which a nonstick corporation may obtain

as an incident to its operation shall, whenever necessary
or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized, subject
to the provisions of the Corporation Code. (Sec. 87)
The non-incurring of profit is not determinative for an

entity to be classified as “non-profit” corporation. Non-
stock and non-profit corporations may earn profits as an
incident to their primary operations, and so long as the
profits are devoted for their eleemosynary purpose.
[Villanueva, 883]

59
Distribution of Assets upon Dissolution upon approval of at least two-thirds (2/3) of

the members having voting rights present
or represented by proxy at such
Rules on distribution and application of assets:
meeting. (Sec.95)
a. All liabilities and obligations of the corporation

Note: Therefore, in a regular non-stock corporation it is
shall be paid, satisfied and discharged, or
possible for its net assets, as well as the accumulated
adequate provision shall be made therefore;
“earnings” from its years of operations, to inure to the
benefit of private individuals, like its own members, or
b. Assets held by the corporation upon a condition entities for profit, but only as a consequence of dissolution.
requiring return, transfer or conveyance, and [Villanueva, 885]
which condition occurs by reason of the
dissolution, shall be returned, transferred or
Conversion of Non-Stock Corporation to Stock
conveyed in accordance with such
Corporation
requirements;
The SEC has ruled that while an existing stock corporation
may be converted into a non-stock corporation by mere
c. Assets received and held by the corporation amendment of its articles of incorporation, an existing
subject to limitations permitting their use only corporation cannot be converted into a stock corporation
for charitable, religious, benevolent, educational by the simple process of amending its articles of
or similar purposes, but not held upon a incorporation. [Villanueva, 901]
condition requiring return, transfer or
conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more C. DE FACTO CORPORATIONS AND
corporations, societies or organizations engaged CORPORATIONS BY ESTOPPEL
in activities in the Philippines substantially De Jure Corporations by
similar to those of the dissolving corporation De Facto Corporation
Corporation Estoppel
according to a plan of distribution adopted One that is defectively One that has One which is in
pursuant to this chapter; created but there is an been created in reality not a
exercise of corporate strict compliance corporation but
d. Assets other than those mentioned in the rights and franchise with all the legal is considered as
preceding paragraphs, if any, shall be distributed resulting from an requirements one with
in accordance with the provisions of the articles attempt in good faith and whose right respect to those
of incorporation or the by-laws, to the extent to incorporate on the to exist as a who are
that the articles of incorporation or the by-laws, part of its members. It corporation precluded by
determine the distributive rights of members, or has all the powers of a cannot be their admission
any class or classes of members, or provide for de jure corporation successfully or conduct from
distribution; and but its due existence attacked in a denying its
can be attacked direct existence.
directly in a quo proceeding for
e. In any other case, assets may be distributed to warranto proceeding. that purpose by
such persons, societies, organizations or the State.
corporations, whether or not organized for
profit, as may be specified in a plan of
distribution. (Sec.94) Corporation De Facto
A corporation has a de facto existence where there is a
bona fide attempt to incorporate, colorable compliance
Plan of distribution of assets with the statute and user of corporate powers.
• The board of trustees shall, by majority Its juridical personality, due incorporation and right to
vote, adopt a resolution recommending a exercise corporate powers cannot be questioned
plan of distribution and directing the collaterally in any private suit. The inquiry may be made by
submission thereof to a vote at a regular or the Solicitor General in a quo warranto proceeding. [Sec.
special meeting of members having voting 20, Corporation Code]
rights.
Requisites for Application of the De Facto Doctrine:

• Written notice setting forth the proposed a. The existence of a valid law under which the
plan of distribution or a summary thereof corporation may be incorporated;
and the date, time and place of such b. Attempt in good faith to incorporate, or
meeting shall be given to each member existence of a “colorable compliance” with provisions
entitled to vote, within the time and in the on incorporation; and
manner provided in this Code for the giving c. Assumption by the enterprise of corporate
of notice of meetings to members. powers. [Villanueva, 152]
• Such plan of distribution shall be adopted

60
Examples of Defects Which Do Not Preclude the Exceptions:

Creation of a De Facto Corporation ▪ The said person is not trying to escape liability
from the contract but rather is the one claiming
from the contract. [International Express Travel
▪ Defects in the incorporation papers – e.g.
& Tour Services Inc. v. CA, G.R. No. 119002,
incorrect or incomplete entries in the articles;
October 19, 2000]
▪ Corporate name that resembles that of a pre-
existing corporation;
▪ The conflict does not involve third parties and it
▪ Ineligibility of incorporators – the incorporators is only among those assuming the form of a
or a certain number of them are not residents; corporation. [Lozano v. De Los Santos, G.R. No.
▪ Defects in the execution of incorporation 125221, June 19, 1997]
papers, the acknowledgement in the articles of
incorporation, or certificate of incorporation is
insufficient or defective in form, or it was D. BOARD OF DIRECTORS AND
acknowledged before the wrong office. TRUSTEES
[Villanueva, 155]
1. BASIC PRINCIPLES
Corporation by Estoppel
All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general a. DOCTRINE OF CENTRALIZED
partners for all debts, liabilities and damages incurred or MANAGEMENT
arising thereof. [Sec. 21, Corporation Code]
All businesses of the corporation shall be
Thus, even if the ostensible corporate entity is proven to conducted and all its properties shall be
be legally nonexistent, a party may be estopped from controlled and held by the Board of Directors or
denying its corporate existence. "The reason behind this Trustees. A corporation can act only through its
doctrine is obvious — an unincorporated association has no directors and officers. Acts of management
personality and would be incompetent to act and pertain to the board and those of ownership to
appropriate for itself the power and attributes of a the stockholders or members. [Tan v. Sycip, G.R.
corporation as provided by law; it cannot create agents or No. 153468, August 17, 2006]
confer authority on another to act in its behalf; thus, those
who act or purport to act as its representatives or agents GENERAL RULE: The board has the sole power
do so without authority and at their own risk. And as it is and responsibility to decide whether a
an elementary principle of law that a person who acts as corporation should sue, purchase and sell
an agent without authority or without a principal is himself property, enter into any contract, or perform any
regarded as the principal, possessed of all the right and act. [Campos, 341]
subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no EXCEPTION: In instances where the Code
valid existence assumes such privileges and obligations expressly grants a specific power to the
and becomes personally liable for contracts entered into stockholders or members. [Ibid.]
or for other acts performed as such agent." [Lim Tong Lim
v. Phil. Fishing Gear Industries, G.R. No. 136448. November Note: Since the law has vested the responsibility
3, 1999., citing Salvatierra v. Garlitos, 103 Phil. 757] of managing the corporate affairs on the board,
the stockholders must abide by its decision.
When Estopped [Campos, 341]
Remedy: In case the stockholders do not agree

1. When such ostensible corporation is sued with the policies of the board, their remedy is to
on any transaction entered by it as a wait for the next election of directors and choose
corporation or on any tort committed by it new ones to take their place. [Campos, 341]
as such; [Corporation Code, Sec. 21]
Note: The board of directors of a corporation
2. When the corporation continues its may validly delegate some of its functions to
business after the expiration of the individual officers or agents appointed by
corporate term for the purpose of being it. Thus, contracts or acts of a corporation must
sued on its contracts; [De Leon, 203] be made either by the board of directors or by a
corporate agent duly authorized by the board.
3. A third party who, knowing an association Absent such valid delegation/authorization, the
to be unincorporated, nonetheless treated rule is that the declarations of an individual
it as a corporation and received benefits director relating to the affairs of the corporation,
from it, may be likewise be barred. [Lim v. but not in the course of, or connected with, the
Philippine Fishing Gear Industries, G.R. No. performance of authorized duties of such
136448, November 3, 1999] director, are held not binding on the

61
corporation. [AF Reality and Development Inc. v. directors and/or officers acted in bad faith and
Ranullo, G.R. No. 111448, January 16, 2002] with malice in doing the assailed acts.
The concentration in the board of the powers of Bad faith does not simply connote bad judgment
control of corporate business and of or negligence. It imports a dishonest purpose or
appointment of corporate officers and managers some moral obliquity and conscious doing of a
is necessary for efficiency in any large wrong, a breach of a known duty through some
organization. Stockholders are too numerous, motive or interest or ill-will partaking of the
scattered and unfamiliar with the business of a nature of fraud. [Filipinas Port Services Inc. v. Go,
corporation to conduct its business directly. And G.R. No. 161886, March 16, 2007]
so the plan of corporate organization is for the
stockholders to choose the directors who shall 2. DUTIES LIABILITIES AND
control and supervise the conduct of corporate
business. [Filipinas Port Services Inc. v. Go, G.R.
RESPONSIBILITY FOR UNLAWFUL ACTS
No. 161886, March 16, 2007]
Fiduciary Duty
The directors elected by the stockholders act as a body in
b. BUSINESS JUDGMENT RULE the formulation of all corporate policies and exercise all
powers of management. They are fiduciaries of the
A resolution or transaction pursued within the corporation, and as such, they are expected to serve the
corporate powers and business operations of the corporation with reasonable diligence and skill and with
corporation, and passed in good faith by the utmost loyalty to its interests. [Campos, 641]
board of directors, is valid and binding, and
generally the courts have no authority to review The members of the Board of Directors have a three-fold
the same or substitute their own judgment, even duty: duty of obedience, duty of diligence, and the duty of
when the exercise of such power may cause loyalty. Accordingly, the members of the board of directors
losses to the corporation or decrease the profits (1) shall direct the affairs of the corporation only in
of a department. [Villanueva] accordance with the purpose for which it was organized;
(2) shall not willfully and knowingly vote for or assent to
Directors cannot be held liable for mistakes or patently unlawful acts of the corporation or act in bad faith
errors in the exercise of their business judgment, or with gross negligence in directing the affairs of the
provided they have acted in good faith and with corporation; and (3) shall not acquire any personal or
due care and prudence. [Campos, 642] pecuniary interest in conflict with their duty as such
directors or trustees. [Strategic Alliance Dev. Corp. v.
Coverage: Radstock Securities Ltd., G.R. No. 178158, December 4, 2009]
Resolutions and transactions entered into by the Duty of Obedience

Board of Directors within the powers of the The directors or trustees and officers to be elected shall
corporation cannot be reversed by the courts perform the duties enjoined on them by law and the by-
not even on the behest of the stockholders of the laws of the corporation. [Sec. 25, Corporation Code]
corporation; and
The duty of obedience imposes on the directors the
Directors and officers acting within such obligation to act only within the corporate powers, under
business judgment cannot be held personally the penalty of liability for damages unless they acted in
liable for the consequences of such acts. good faith and with due diligence. [Campos, 641]
[Villanueva]
EXCEPTIONS: Duty of Diligence
Directors or trustees who willfully and knowingly vote for
a. When the director willfully and knowingly vote or assent to patently unlawful acts of the corporation or
for patently unlawful acts of the corporation; who are guilty of gross negligence or bad faith in directing
the affairs of the corporation or acquire any personal or
b. When he is guilty of gross negligence or bad pecuniary interest in conflict with their duty as such
faith in directing the affairs of the corporation; directors or trustees shall be liable jointly and severally for
and all damages resulting therefrom suffered by the
corporation, its stockholders or members and other
c. When he acquires any personal or pecuniary persons. [Sec. 31, Corporation Code]
interest in conflict with his duty as such
directors. [Secs. 31 and 34, Corporation Code] Directors and officers are required to exercise due care in
the performance of their functions. The standard of care is
Note: If the cause of the losses is merely error in that of a reasonable prudent person. (Aquino, 289)
business judgment, not amounting to bad faith or
negligence, directors and/or officers are not Duty of Loyalty
liable. For them to be held accountable, the Directors or trustees who acquire any pecuniary or
mismanagement and the resulting losses on personal interest in conflict with their duty as such shall
account thereof are not the only matters to be be liable jointly and severally for all damages resulting
proven; it is likewise necessary to show that the therefrom.

62
When a director or trustee attempts to acquire or acquires • they agree to hold themselves personally
any interest adverse to the corporation in respect of any and solidarily liable with the corporation; or
matter which has been reposed in him in confidence as to
which equity imposes a liability upon him to deal in his own • they are made by specific provision of law
behalf, he shall be liable as trustee for the corporation and personally answerable for their corporate
must account for all the profits which otherwise would action. [Harpoon Marine Services, Inc., et al.
have accrued to the corporation. [Sec. 31, Corporation v. Fernan H. Francisco, G.R. No. 167751,
Code] March 2, 2011]
Doctrine of Corporate Opportunity Responsibility for Crimes

Corporate officers are not permitted to use their position Corporations cannot be held criminally liable within
of trust and confidence to further their private interests. Philippine jurisdiction since there is no law relating to the
The doctrine of “corporate opportunity” is precisely a practice and procedure in criminal actions whereby a
recognition by the courts that the fiduciary standards corporation may be brought to court to be proceeded
could not be upheld where the fiduciary was acting for two against criminally. [West Coast Life Insurance Co. v. Hurd,
entities with competing interest. The doctrine rest G.R. No. L-8527, March 30, 1914]
fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage If the crime is committed by a corporation, the directors,
of an opportunity for his personal profit when the interest officers, employees or other officers thereof responsible
of the corporation justly calls for protection. [Gokongwei v. for the offense shall be charged and penalized for the
SEC, G.R. No. L-45911, April 11, 1979] crime, precisely because of the nature of the crime and the
penalty therefor. A corporation cannot be arrested and
GENERAL RULE: Directors and officers are not solidarily imprisoned; hence, cannot be penalized for a crime
liable with the corporation. punishable by imprisonment. However, a corporation may
be charged and prosecuted for a crime if the imposable
EXCEPTIONS: penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be
a. Criminal liability for a crime committed through prosecuted and, if found guilty, may be fined. [Ching v.
the officer’s act, default or omission; Secretary of Justice, G.R. No. 164317, February 6, 2006]
b. Solidary liability under specific provision of law;
c. Stipulation in a contract holding the officer Inside Information
personally liable with the corporation; As insiders, directors and officers have access to
d. Consent to the issuance of watered stocks or confidential information relating to the business of the
having knowledge thereof, fails to file objections; corporation. Their fiduciary position prohibits them from
e. Guilty of gross negligence or bad faith in using any such information to benefit themselves or any
directing the affairs of the corporation; competitor corporation in which they may have a more
f. Acquiring any personal or pecuniary interest in substantial interest. [Campos, 725]
conflict with their duty;
g. Willfully and knowingly vote for and assent to GENERAL RULE: It is unlawful for an insider to sell or buy
patently unlawful acts of the corporation. a security of the issuer or the security that is not generally
available to the public.
When Personal Liability Attaches
EXCEPTIONS:
GENERAL RULE: The officer cannot be held personally
liable with the corporation, whether civilly or otherwise, b. The insider proves that the information was not
for the consequences of his acts, if acted for and in behalf gained from such relationship; or
of the corporation, within the scope of his authority and in
good faith. [Rodolfo Laborte, et al. v. Pagsanjan Tourism c. If the other party selling to or buying from the
Consumers’ Coop., et al., G.R. No. 183860, Jan. 15, 2014] insider (or his agent) is identified, the insider
proves:
EXCEPTIONS: Personal liability of corporate directors,
trustees or officers attaches only when: • That he disclosed the information to the
other party; or
• they assent to a patently unlawful act of the
corporation, or when they are guilty of bad • That he had reason to believe that the other
faith or gross negligence in directing its party otherwise is also in possession of the
affairs, or when there is a conflict of interest information. [Sec. 27, Securities Regulation
resulting in damages to the corporation, its Code]
stockholders or other persons;
Note: A purchase or sale of a security of the issuer made
• they consent to the issuance of watered by an insider or such insider’s spouse or relatives by
down stocks or when, having knowledge of affinity or consanguinity within the second degree,
such issuance, do not forthwith file with the legitimate or common-law, shall be presumed to have been
corporate secretary their written objection; effected while in possession of material nonpublic
information if transacted after such information came into

63
existence but prior to dissemination of such information

to the public and the lapse of a reasonable time for market 4. To amend its articles of incorporation in
to absorb such information. [Ibid.] accordance with the provisions of this Code;
When a director-majority stockholder, who is the 5. To adopt by-laws, not contrary to law, morals,
administrator of corporate affairs directly negotiating the or public policy, and to amend or repeal the
sale of corporate landholdings to the Government at great same in accordance with this Code;
prices, purchases the stocks of a shareholder without
informing the latter of the on-going negotiations, such 6. In case of stock corporations, to issue or sell
director is deemed to have fraudulently acquired the stocks to subscribers and to sell stocks to
shareholdings by way of deceit practiced by means of subscribers and to sell treasury stocks in
concealing his knowledge of important corporate affairs. accordance with the provisions of this Code;
[Strong v. Repide, 213 U.S. 419, May 3, 1909] and to admit members to the corporation if it
be a nonstock corporation;
E. POWERS OF CORPORATIONS 7. To purchase, receive, take or grant, hold,

convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
Express and Implied Powers property, including securities and bonds of
A corporation has only such powers as are expressly other corporations, as the transaction of the
granted to it by law and by its articles of incorporation lawful business of the corporation may
(express powers), those which may be incidental to such reasonably and necessarily require, subject to
conferred powers, those reasonably necessary to the limitations prescribed by law and the
accomplish its purposes (implied powers) and those which Constitution;
may be incident to its existence as a juridical entity
(incidental powers). [Pilipinas Loan Company Inc. v. SEC, When the corporation’s primary
G.R. No. 104720, April 4, 2001] purpose is to market, distribute, export
and import merchandise, the sale of
Doctrine of Necessary Implication land is not within the actual or
In the determination of what businesses may be carried on apparent authority of the corporation
by a corporation, reference must be had to its charter, and acting through its officers, much less
unless the power to carry on a particular business is either when acting through the treasurer.
expressly or impliedly conferred thereby, it does not exist. Articles 1874 and 1878 of Civil Code
[SEC-OGC Opinion No. 11-33, 2011] requires that when land is sold through
an agent, the agent’s authority must be
Theory of General Capacity in writing, otherwise the sale is void.
A corporation may exercise any and all powers that may be [San Juan Structural and Steel
exercised by persons. [Aquino, 53] Fabricators v. CA, G.R. No. 129459,
September 29, 1998]
Theory of Limited Capacity
The corporation’s capacity is limited to such express, 8. To enter into merger or consolidation with
implied and incidental powers. [Ibid.] other corporations as provided in this Code;
General Powers 9. To make reasonable donations,

Every corporation incorporated has the power and including those for the public welfare
capacity: or for hospital, charitable, cultural,
scientific, civic, or similar purposes:
1. To sue and be sued in its corporate name; Provided, That no corporation,
domestic or foreign, shall give
Under Sec. 36 in relation to Sec. 23 of donations in aid of any political party
Corporation Code, where a or candidate or for purposes of
corporation is an injured party, its partisan political activity;
power to sue is lodged with its Board of
Directors. A minority stockholder who 10. To establish pension, retirement, and
is a member of the Board has no such other plans for the benefit of its
power or authority to sue on the directors, trustees, officers and
corporation’s behalf. [Tam Wing Tak v. employees; and
Makasiar, G.R. No. 122452, January 29,
2001] 11. To exercise such other powers as may
be essential or necessary to carry out
2. Of succession by its corporate name for the its purpose or purposes as stated in the
period of time stated in the articles of articles of incorporation:
incorporation and the certificate of
incorporation; • Extension or shortening of corporate term;
[Sec. 37, Corporation code]
3. To adopt and use a corporate seal;

64
• Increase or decrease capital stock or incur creating, or increasing of any bonded

bonded indebtedness; [Sec. 38, Corporation indebtedness and of the time and place of the
Code] stockholder's meeting is to be considered, must be
addressed to each stockholder.
• Deny Pre-Emptive Right [Sec. 39, • A certificate in duplicate must be signed by a
Corporation Code] majority of the directors of the corporation and
countersigned by the chairman and the secretary
• Sell, dispose, lease, encumber all or of the stockholders' meeting, setting forth:
substantially all of corporate assets; [Sec. 40,
Corporation Code] a. That the requirements of this section have
been complied with;
• Acquire own shares; [Sec. 41, Corporation
Code] b. The amount of the increase or diminution of
the capital stock;
• Declare dividends out of unrestricted
retained earnings; [Sec. 43, Corporation c. If an increase of the capital stock, the amount
Code] of capital stock or number of shares of no-par
stock thereof actually subscribed, the names,
• Invest corporate funds in another nationalities and residences of the persons
corporation or business or for any other subscribing, the amount of capital stock or
purpose other than the primary purpose. number of no-par stock subscribed by each,
[Sec. 44, Corporation Code] and the amount paid by each on his
subscription in cash or property, or the
Note: The general powers granted by Section 36 amount of capital stock or number of shares
are, under Section 23, to be exercised by the of no-par stock allotted to each stock-holder
Board of directors, unless otherwise provided by if such increase is for the purpose of making
the Code. Thus, the power to decide whether the effective stock dividend therefor authorized;
corporation should sue or not properly belongs
to the board, but the power to amend the Articles d. Any bonded indebtedness to be incurred,
of Incorporation and the by-laws are by express created or increased;
provision of the Code to be exercised by the
stockholders or members. [Campos, 284] e. The actual indebtedness of the corporation
on the day of the meeting;
Specific Powers
f. The amount of stock represented at the
Power to Extend or Shorten Corporate Term meeting; and
Requisites:
g. The vote authorizing the increase or
• Approval by a majority of the board of directors or diminution of the capital stock, or the
trustees and; incurring, creating or increasing of any
bonded indebtedness.
• Written notice of the proposed action and of the
time and place of the meeting shall be addressed to • Prior approval of the Securities and Exchange
each stockholder or member at his place of Commission;
residence;
• From and after approval by the Securities and
• Ratified at a meeting by the stockholders Exchange Commission and the issuance by the
representing at least two-thirds 2/3 of the Commission of its certificate of filing, the capital
outstanding capital stock or by at least 2/3 of the stock shall stand increased or decreased and the
members in non-stock corporations; incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of
A copy of the amended articles including the extended filing may declare;
shortened corporate term is submitted to SEC for
approval. It is deemed approved by SEC inaction for 6 • Non-stock corporations may incur or create
months; (Sec 37) bonded indebtedness, or increase the same, with
Note: Dissenting stockholder may exercise appraisal right; the approval by a majority vote of the board of
[Sec. 81, Corporation Code] trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the
Power to Increase Bonded Indebtedness purpose;
Requisites:
• Bonds issued by a corporation shall be registered
• Approval by a majority of the board of directors with the Securities and Exchange Commission,
and, at a stockholder's meeting duly called for the which shall determine the sufficiency of the
purpose, 2/3 of the outstanding capital stock; terms thereof.
• Written notice of the proposed increase or
diminution of the capital stock or of the incurring,

65
Corporate Bond – It is an obligation to pay a definite sum payment of a previously contracted debt;
of money at a future time at a fixed rate of interest,
whether secured or unsecured, evidenced by a written 4. Shares issued with the approval of stockholders
debt instrument called a bond or debenture. representing 2/3 of the outstanding capital
stock, in payment of previously contracted
Bonded Indebtedness – It is a loan secured by a mortgage debts;
on corporate property. [Villanueva, 248]
5. Additional issues of originally authorized shares;
Debenture – It is a debt secured only by the debtor’s
earning power, not by a lien on any specific asset. [Dizon, • If the shares of a corporation are offered and
10] not subscribed or purchased by the
Note: No stock may be issued in excess of the amount stockholders and the shares are again being
provided in the articles of incorporation; offered, there is not pre-emptive right with
the latter offer. [Benito v. SEC, G.R. No. L-
In case of an increase in capital stock, there must also be a 56655, July 25, 1983]
Treasurer’s affidavit showing compliance with the
minimum subscribed and paid-up capital. [SEC Opinion, • There is a pre-emptive right when only a
February 19, 1981] specified portion of the authorized capital
stock was offered for subscription upon the
The required 25% minimum subscription shall be based on corporation’s inception.
the additional amount by which the capital stock is
increased. [SEC Opinion, July 29, 1993] 6. Waiver by the stockholder.
Power to Increase or Decrease Capital Stock Remedies When Right is Wrongfully Ignored or
Denied
Methods:
▪ Aggrieved stockholder may obtain an
1. Retiring its own shares; injunction against the issue;
2. Redeeming redeemable shares; ▪ Aggrieved stockholder may obtain a

mandamus to allow him to exercise the
3. Accepting surrender of shares; right;
4. Cancelling unissued shares;

▪ SEC or the court may order the cancellation
of the shares, provided no innocent third
5. Increasing or decreasing the par value of existing
parties are prejudiced;
shares;
6. Increasing or decreasing the number of shares. [De ▪ Derivative suit when the violation resulted
Leon, 342] in waste and management of the
corporation assets or in giving fraudulent
Power to Deny Pre-Emptive Right directors control of the corporation.
This is the right of existing stockholders of a [Campos, 63]
corporation to subscribe to or purchase shares of stock in
proportion to their respective shareholdings, before the Power to Sell or Dispose or Corporate Assets
shares of the corporation are offered to the general public. Requisites
[Suarez, 242]
▪ Written notice of the proposed action and
GENERAL RULE: All stockholders of a stock corporation of the time and place of the meeting shall be
shall enjoy a pre-emptive right to subscribe to all issues or addressed to each stockholder or member;
disposition of shares of any class, in proportion to their
respective shareholdings. ▪ Majority vote of its board of directors or
trustees;
EXCEPTIONS:
▪ Authorized by the vote of the stockholders
1. When such right is denied by the articles of
representing at least 2/3 of the outstanding
incorporation or an amendment;
capital stock, or in case of non-stock
corporation, by the vote of at least 2/3 of
2. Shares to be issued in compliance with laws
the members;
requiring stock offerings or minimum stock
ownership by the public;
▪ Dissenting stockholder may exercise his
3. Shares to be issued in good faith with the appraisal right. [Sec 40, Corporation Code]
approval of the stockholders representing 2/3 of
the outstanding capital stock, in exchange for A Sale or Other Disposition Shall Be Deemed to Cover
property needed for corporate purposes or in Substantially All the Corporate Property and Assets If:

66
5. To effect a decrease of capital stock;

a. The corporation would be rendered
incapable of continuing the business; or 6. To acquire redeemable shares
regardless of existence of retained
b. Accomplishing the purpose for which it was earnings;
incorporated. [Caltex v. PNOC Shipping,
G.R. no. 150711, August 10, 2006] 7. Deadlock in the management of close
corporations; [Aquino, 363]
Note:
Provided, the corporation has unrestricted
After approval by the stockholders or members, the board retained earnings in its books to cover the shares
of directors or trustees may, abandon such sale, lease, to be purchased or acquired.
exchange, mortgage, pledge or other disposition of
property and assets, subject to the rights of third parties Limitations
under any contract relating thereto, without further action
or approval by the stockholders or members. • Capital must not be impaired;
Sec. 40 is not intended to restrict the power of a • Legitimate corporate purpose;

corporation to sell or otherwise dispose of any of its
property and assets without stockholders’ or members’ • Available unrestricted retained earnings;
approval if the same is in the regular course of business of
the corporation or if the proceeds of the disposition be There may be redemption in the absence of
appropriated for the conduct of its remaining business. unrestricted retained earnings as long as
the corporation has sufficient assets to
Sec. 40 only covers the sale or disposition of all or meet its liabilities. [Republic Planters Bank v.
substantially all of the corporate assets or properties. Agana, G.R. No. 51765, March 3, 1997]
In non-stock corporations where there are no members • Good faith and without prejudice to the
with voting rights, the vote of at least a majority of the rights of creditors and stockholders;
trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by • Power to Invest Corporate Funds in
this section. another Corporation
The Corporation Code defines a sale or disposition of Requisite to invest pursuant to primary purpose:
substantially all assets and property of a corporation as Approval of the majority of the board.
one by which the corporation “would be rendered
incapable of continuing the business or accomplishing the Requisites to invest pursuant to secondary purpose
purpose for which it was incorporated” – any sale or
disposition short of this will not need stockholder • Approval by a majority of the board of
ratification, and may be pursued by the majority vote of the directors or trustees;
Board of Directors. [Strategic Alliance Dev. Corp. v.
Radstock Securities Ltd., G.R. No. 178158, December 4, 2009] • Ratified by the stockholders representing at
least 2/3 of the outstanding capital stock,
Power to Acquire Own Shares or by at least two thirds 2/3 of the members
in the case of nonstock corporations;
GENERAL RULE: A stock corporation may acquire its own
shares for a legitimate corporate purpose or purposes • Written notice of the proposed investment
including but not limited to the following: and the time and place of the meeting shall
be addressed to each stockholder or
1. To pay dissenting or withdrawing member;
stockholders entitled to payment for
their shares under the provisions of • Any dissenting stockholder shall have
this Code. [Sec. 41] appraisal right.
2. To eliminate fractional shares arising Note:

out of stock dividends; [Sec. 41]
▪ Where the investment by the corporation is
3. To acquire treasury shares; reasonably necessary to accomplish its
primary purpose as stated in the articles of
4. To collect or compromise an incorporation, the approval of the
indebtedness to the corporation, stockholders or members shall not be
arising out of unpaid subscription, in a necessary.
delinquency sale, and to purchase
delinquent shares sold during said sale;
▪ Dissenting stockholders may exercise their
[Sec. 41]
appraisal right. A stockholder may be

67
exposed to a line of business not being

pursued when he first invested in the Requisites for Declaration of Dividends
company. [Aquino¸367]
• Availability of unrestricted retained
Power to Declare Dividends earnings; and
Dividends • Resolution by the Board of Directors;

Corporate profits allocated, lawfully declared and ordered
by the directors to be paid to the stockholders on Retained Earnings - The accumulated profits realized out
demand or at a fixed time. [SEC Memorandum Circular of normal and continuous operations of the business after
No. 11, 2008] deduction therefrom distributions to stockholders and
transfers to capital stock and other accounts. [SEC
Types of Dividends Which a Corporation May Memorandum Circular No. 11, 2008]
Declare:
Unrestricted Retained Earnings - The amount of
• CASH – Payable in cash; accumulated profits and gains realized out of the normal
and continuous operations of the company after deducting
Cash dividends due on delinquent stock therefrom distributions to stockholders and transfers to
shall first be applied to the unpaid balance capital stock or other accounts, and which is:
on the subscription plus costs and
expenses, while stock dividends shall be a. Not appropriated by its Board of Directors for
withheld from the delinquent stockholder corporate expansion projects or programs;
until his unpaid subscription is fully paid;
b. Not covered by a restriction for dividend
• PROPERTY – Payable in real or personal declaration under a loan agreement; and
property;
c. Not required to be retained under special
• STOCK– Payable in unissued or additional circumstances obtaining in the corporation such
shares out of the unrestricted retained as when there is a need for a special reserve for
earnings. probable contingencies; [SEC Memorandum
Circular No. 11, 2008]
Declaration of stock dividends must be approved by
stockholders representing not less than two-thirds (2/3) GENERAL RULE: Dividends cannot be declared out of the
of the outstanding capital stock at a regular or special corporation’s capital.
meeting;
It is a distribution to the stockholders of the EXCEPTIONS:

company’s own stock. The corporate profits or
earnings are transferred to capital stock and shares of • Dividends to utilize a lease or patents;
stock representing the increase in capitalization are
distributed. New shares are issued in proportion to • Liquidating dividends;
their existing interest. [Campos, 209]
• Dividends from investments wasting
• BOND – Payable in bonds of the assets corporations.
corporations;
Note: Stock dividends cannot be applied as
• LIQUIDATING – Actual distributions of the payment for unpaid subscription due to the trust
corporation assets upon dissolution; fund doctrine; Further, the corporation would be
otherwise acquiring its own shares to be applied
• OPTIONAL– Stockholder is given an option to the unpaid subscription balance which is
to receive cash or stock dividend; prohibited under the Code. [SEC Opinion, July 4,
1984]
• COMPOSITE – Payable partly in cash and
partly in stocks; Power to Enter Into Management Contracts
• CUMULATIVE – Payable at a certain rate at
Management Contract – Contract to manage
given periods; the day-to-day affairs of the corporation just like
a general manager does, in accordance with the
• PREFERRED – Payable to one class of policies laid down by the Board of Directors of
stockholders prioritized over another;
the managed corporation. [Campos, 628]
• SCRIP – Certificate issued to stockholders
GENERAL RULE: All corporate powers are to be
in lieu of cash dividends, entitling them to a
exercised by the board. [Campos, 628]
certain amount at some future date.
[Campos, 210]

68
EXCEPTION: The Board can and usually must HOW POWERS ARE EXERCISED
delegate may of its functions, it cannot abdicate
its responsibility to act as the governing body By the Shareholders
by giving absolute powers to officers or others,
by way of a management contract or otherwise. Both shareholders with voting and non-voting
[Campos, 628] rights are entitled to vote on the following
matters:
Requirements:
• Amendment of the articles of incorporation;
a. Approval by the board of directors and by
stockholders owning at least majority of the • Adoption and amendment of by-laws;
outstanding capital stock, or by at least the
majority of the members in the case of a non- • Sale, lease, exchange, mortgage, pledge or
stock corporation, of both the managing and the other disposition of all or substantially all of
managed corporation; the corporate property;
b. Management contract must be approved by the • Incurring, creating or increasing bonded

stockholders of the managed corporation indebtedness;
owning at least 2/3 of the total outstanding
capital stock entitled to vote, or by at least 2/3 • Increase or decrease of capital stock;
of the members in the case of a non-stock
corporation on these instances: • Merger or consolidation of the corporation
with another corporation or other
o Where a stockholder or corporations;
stockholders representing the
same interest of both the • Investment of corporate funds in another
managing and the managed corporation or business in accordance with
corporations own or control more this Code; and
than 1/3 of the total outstanding
capital stock entitled to vote of • Dissolution of the corporation. [Sec. 6,
the managing corporation; or Corporation Code]
Except in the above cases, the vote necessary to

o Where a majority of the members
approve a particular corporate act as provided in
of the board of directors of the
the Corporation Code shall be deemed to refer
managed corporation also
only to stocks with right to vote. [Ibid]
constitute a majority of the
members of the board of directors
of the managed corporation; By the Board of Directors
• No management contract shall be entered GENERAL RULE: The corporate powers of all
into for a period longer than five years for corporations formed under this Code shall be
any one term. exercised, all business conducted and all
property of such corporations controlled and
Note: held by the board of directors or trustees to be
elected from among the holders of stocks, or
where there is no stock, from among the
• Sec. 43 (1) shall apply to any contract whereby a
members of the corporation, who shall hold
corporation undertakes to manage or operate all
office for 1 year until their successors are elected
or substantially all of the business of another
and qualified. [Sec. 23, Corporation Code]
corporation, whether such contracts are called
service contracts, operating agreements or
EXCEPTIONS:
otherwise
• Close Corporations – shareholders may
• Instead of appointing an individual general
actively manage the business if so provided
manager, the Board of Directors may decide to
in the articles of incorporation [Sec. 97,
enter into a management contract with another
corporation, under which the latter will perform Corporation Code]
all the managerial functions usually pertaining to a
general manager. [Campos, 626] • Executive Committee [Sec. 35, Corporation
Code]
b. The Board of the managed corporation retains
control of the basic corporate policies and the • Management Contracts [Sec. 33,
power to recall the contract where the Corporation Code]
corporation’s interest would greatly suffer from
its continuance. [ibid.]

69
By the Officers
A corporation has no power except those expressly
GENERAL RULE: The general rule is that, in the conferred on it by the Corporation Code, its charter, and
absence of authority from the board of directors, those that are implied or incidental to its existence. In
no person, not even its officers, can validly bind turn, a corporation exercises said powers through its
a corporation. Board of Directors and /or its duly authorized officers and
agents. [Hermanos Agricultural Development Corporation
EXCEPTION: However, a corporate officer or v. Monfort III, G.R. no. 152542, July 8, 2004]
agent may represent and bind the corporation in
transactions with third persons to the extent
that the authority to do so has been conferred Types of Ultra Vires Acts:
upon him. This includes powers which have been
intentionally conferred, and also such powers
a. Acts done beyond the powers of the
incidental to the usual course of business,
corporation as provided for in the law or its
powers added by custom and usage, as usually
articles of incorporation;
pertaining to the particular officer or agent, and
b. Acts or contracts entered into in behalf of the
such apparent powers as the corporation has
corporation by persons who have no corporate
caused persons dealing with the officer or agent
authority; and
to believe that it has conferred. [Cebu Mactan
c. Acts or contracts which are per se illegal as
Members Inc. v. Tsukahara, G.R. No. 159624, July
being contrary to law.
17, 2009]
Theory of Estoppel and Ratification Applicability of Ultra Vires Doctrine
The principle of estoppel precludes a corporation and its

TEST: It is a question, therefore, in each case of the logical
Board of Directors from denying the validity of the
relation of the act to the corporate purpose expressed in
transaction entered into by its officer with a third party
the charter. If that act is one which is lawful in itself, and
who in good faith, relied on the authority of the former as
not otherwise prohibited, is done for the purpose of
manager to act on behalf of the corporation. [Lipat v.
serving corporate ends, and is reasonably tributary to the
Pacific Banking Corporation, G.R. No. 142435, April 30,
promotion of those ends, in a substantial, and not in a
2003]
remote and fanciful sense, it may fairly be considered
within charter powers. The test to be applied is whether
Doctrine of Laches
the act in question is in direct and immediate furtherance
of the corporation's business, fairly incident to the express
The principle of laches or “stale demands” provides that
powers and reasonably necessary to their exercise. If so,
the failure or neglect, for an unreasonable and unexplained
the corporation has the power to do it; otherwise, not.
length of time, to do that which by exercising due diligence
[Montelibano v. Bacolod-Murcia Milling Co, Inc., G.R. No.
could or should have been done earlier, or the negligence
15092, May 18, 1962]
or omission to assert a right within a reasonable time,
warrants a presumption that the party entitled to assert it
either has abandoned it or declined to assert it. [Rovels Consequences of Ultra Vires Acts
Enterprises Inc. v. Ocampo, G.R. No. 136821, October 17,
2002]
On the Corporation
a. Under the rules of court, it can be dissolved
Doctrine of Apparent Authority
under quo warranto proceeding;
b. Enjoin further commission of the ultra vires
It is a familiar doctrine that if a corporation knowingly
acts;
permits one of its officers, or any other agent, to act within
c. Suspend or revoke the certificate of
the scope of an apparent authority, it holds him out to the
registration of any corporation. [Campos, 288]
public as possessing the power to do those acts; and thus,
the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from On The Immediate Parties To The Ultra Vires Contract
denying the agents authority. [Lapu-Lapu Foundation Inc. a. Where the contract has been fully executed on
v. CA, G.R. No. 126006, January 29, 2004] both sides, the parties will be left as they are and
no resolution or rescission of the contract will be
granted;
ULTRA VIRES ACT DOCTRINE b. Where one party has performed his part, and the
An ultra vires act is one committed outside the object for other has not, the latter, having benefited from the
which a corporation is created as defined by the law of its former’s performance, is stopped from claiming
organization and therefore beyond the power conferred that the contract is ultra vires and the contract will
upon it by law. The term “ultra vires” is “distinguished from be enforced provided it is not illegal. [Ibid.]
an illegal act for the former is merely voidable which may
be enforced by performance, ratification, or estoppel,
while the latter is void and cannot be validated. [Atrium
Management Corporation v. Ca, G.R. no. 109491, February
28, 2001]

70
On The Rights Of Stockholders Applicability

GENERAL RULE: Dividends cannot be declared out of the
corporation’s capital.
1. A stockholder may bring either an individual or
derivative suit to enjoin a threatened ultra vires act or
The requirement of unrestricted retained earnings to
contract;
cover the shares is based on the trust fund doctrine which
means that the capital stock, property and other assets of
2. Ultra vires acts may become binding by the
a corporation are regarded as equity in trust for the
ratification of all the stockholders, unless third parties
payment of corporate creditors. The reason is that
are prejudiced thereby, or unless the act is illegal.
creditors of a corporation are preferred over the
[Campos, 289]
stockholders in the distribution of corporate assets. There
can be no distribution of assets among the stockholders
Note:
without first paying corporate creditors. Hence, any
Acts which are merely ultra vires, or acts which are
disposition of corporate funds to the prejudice of creditors
not illegal, may be ratified by the stockholders of the
is null and void. Creditors of a corporation have the right
corporation. Ratification obliterates the infirmity, thereby
to assume that so long as there are outstanding debts and
making the act perfectly valid and enforceable. [Pirovano
liabilities, the board of directors will not use the assets of
et al., v. De La Rama Steamship Co., G.R. No. L-5377,
the corporation to purchase its own stock. [Turner v.
December 29, 1954]
Lorenzo Shipping Corporation, G.R. No. 157479, November
24, 2010]
While as a rule an ultra vires act is one committed
outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond EXCEPTIONS:
the powers conferred upon it by law, there are however
certain corporate acts that may be performed outside of ▪ Dividends to utilize a lease or patents;
the scope of the powers expressly conferred if they are
necessary to promote the interest or welfare of the ▪ Liquidating dividends;
corporation. [Republic of the Philippines v. Acoje Mining
Company, G.R. no. L-18062, February 28, 1963] ▪ Dividends from investments wasting assets
corporations.
Remedies to an Ultra Vires Contract
1. By the State: Retained Earnings – The accumulated profits realized out
of normal and continuous operations of the business after
o Obtain a judgment of forfeiture;
deduction therefrom distributions to stockholders and
o Quo Warranto; transfers to capital stock and other accounts. [SEC
o Suspension or revocation of certificate Memorandum Circular No. 11, 2008]
by SEC;
Unrestricted Retained Earnings – The amount of
2. By Stockholders: accumulated profits and gains realized out of the normal
o Injunction; and continuous operations of the company after deducting
therefrom distributions to stockholders and transfers to
o Derivative suit;
capital stock or other accounts, and which is:
3. By Creditors: Nullification of contract.
a. Not appropriated by its Board of
Directors for corporate expansion
TRUST FUND DOCTRINE projects or programs;
Subscription to the capital stock of a corporation
constitute a fund to which creditors have a right to look up b. Not covered by a restriction for
to for satisfaction of their claims, and that the assignee in dividend declaration under a loan
insolvency can maintain an action upon any unpaid stock agreement; and
subscription in order to realize assets for the payment of
its debts. [Halley v. Printwell Inc., G.R. No. 157459, May 30,
c. Not required to be retained under
2011]
special circumstances obtaining in the
corporation such as when there is a
Until the liquidation of the corporation, no part of the need for a special reserve for probable
subscribed capital stock may be turned over or released to contingencies; [Ibid.]
the stockholder (except in the redemption of redeemable
shares) without violating this principle. Thus, dividends
must never impair the subscribed capital stock;
subscription commitments cannot be condoned or
remitted; nor can the corporation buy its own shares using
the subscribed capital as consideration therefore. [NTC v.
CA, G.R. No. 127937, July 28, 1999]

71
F. STOCKHOLDERS AND MEMBERS DOCTRINE OF EQUALITY OF SHARES
RIGHTS OF A STOCKHOLDER AND MEMBER Doctrine of Equality of Shares – Except as otherwise

provided in the articles of incorporation and stated in the
a. Direct or indirect participation in management; certificate of stock, each share shall be equal in all respects
[Sec. 6] to every other share. [Sec. 6, Corporation Code]
b. Voting rights; [Sec. 6] The default rule is that all stockholders have equal rights
expressed in the last paragraph of Sec. 6 that provides:
c. Right to remove directors; [Sec. 28] “each share shall be equal in all respects to every other
share.” (Villanueva, 2018)
d. Proprietary rights;
Note: The doctrine applies when the articles of
e. Right to dividends; [Sec. 43 and 71] incorporation and the certificate of stock do not make a
distinction between the shares. The presumption is that
f. Appraisal right; [Sec. 81] they have the same rights, privileges and liabilities.
g. Right to issuance of stock certificate for fully GENERAL RULE: That all stockholders have equal rights
paid shares; [Sec.64]
EXCEPTION: Unless when authorized by the Articles of
h. Proportionate participation in the distribution of Incorporation, the Board of Directors may classify the
assets in liquidation; [Sec. 122] shares for the purpose of insuring legal compliance or may
fix the terms and conditions of the preferred shares of
i. Right to transfer of stocks in corporate books; stock or any series thereof.
[Sec. 74]
HOWEVER: The preference, restriction, or classification
j. Pre-emptive right; [Sec. 69] must be formally registered with the SEC in order to be
valid and effective.
k. Right to inspect books and records; [Sec. 74]
PROPRIETARY RIGHTS
l. Right to be furnished with the most recent
financial statements/reports; [Sec. 75] Right to Dividends –
m. Right to recover stocks unlawfully sold for a. Stockholders have no individual or property
delinquent payment of subscription; [Sec. 69] interest in the profits of the corporation and are
not entitled to any portion of the accumulated
n. Right to file individual suit, representative suit earning until the declaration of dividend or its
and derivative suits. equivalent. [Suarez, 255]
Note: Heirs do not automatically become stockholders of b. Declaration of a dividend creates a debt from the
the corporation and acquire the rights and privileges of the corporation to the stockholder, who becomes a
deceased as shareholder of the corporation. The stocks general creditor until fund is actually set aside
must be distributed first to the heirs in estate proceedings, for payment of the dividend, when he becomes a
and the transfer of the stocks must be recorded in the preferred creditor. [Suarez, 256]
books of the corporation. Section 63 of the Corporation
Code provides that no transfer shall be valid, except as c. The term “dividend” in its technical sense and
between the parties, until the transfer is recorded in the ordinary acceptation is that part of portion of the
books of the corporation. During such interim period, the profits of the enterprise which the corporation,
heirs stand as the equitable owners of the stocks, the by its governing agents, sets apart for ratable
executor or administrator duly appointed by the court division among the holders of its capital stock—it
being vested with the legal title to the stock. Until a is a payment, and the right thereto is an incident
settlement and division of the estate is effected, the stocks of ownership of stock. [Cojuangco v.
of the decedent are held by the administrator or executor. Sandiganbayan, G.R. No. 183278, April 24, 2009]
Consequently, during such time, it is the administrator or
executor who is entitled to exercise the rights of the d. Dividends are payable to the stockholders of
deceased as stockholder. [Joselito Musni Puno vs. Puno record as of the date of the declaration of
Enterprises, Inc., et. al., G.R. No. 177066, Sept. 11, 2009] dividends or holders of record on a certain
future date, as the case may be, unless the
parties have agreed otherwise. And a transfer of
shares which is not recorded in the books of the
corporation is valid only as between the parties,
hence, the transferor has the right to dividends
as against the corporation without notice of
transfer but it serves as trustee of the real owner
of the dividends, subject to the contract between

72
the transferor and transferee as to who is

entitled to receive the dividends. [Ibid.]
Right to Inspect
Place of Examination
GENERAL RULE: Stockholders are entitled to inspect
corporate books and records at a proper time and place ▪ Sec. 74 enjoins the corporation to keep all
and for a proper purpose. [Suarez, 323] its records in the principal office. By
implication, the inspection has to take place
EXCEPTION: When the stockholder has made no effort to at such office. A stockholder cannot
prove or even allege that the information he desired to demand that he be allowed to take
obtain was necessary to protect his interests as a corporate books out of the corporation’s
stockholder, or that it was for a specific and honest principal office for the purpose of
purpose, and not to gratify curiosity, nor for speculative or inspecting them. [Ibid.]
vexatious purposes. Neither can secret formulas be
examined by stockholders. [Suarez, 323] Exercised by whom
Note: The stockholder’s right of inspection of corporate ▪ Such right could be exercised by
books and records is based on his ownership of the assets stockholders or their personal
and property of the corporation. It is therefore an incident
representatives, and either with or without
of ownership of the corporate property, whether this
the presence of the stockholder [Suarez,
ownership or interest be termed an equitable ownership,
324]
a beneficial ownership or a quasi-ownership. The right of
inspection is predicated upon the necessity of self-
protection on the part of the stockholder. [Gokongwei v. ▪ Where there is a voting trust agreement,
SEC, G.R. No. L-45911, April 11, 1979] both the voting trustee as well as the
transferor have the right of inspection.
Extent – [Campos, 791]
a. Due to bank secrecy, stockholders of a bank do Elements for application of Sec 144 penal provision in
not have access to the records of depositors; relation to violation of right to inspect books/records:
Except upon written consent of the depositor or
in cases or impeachment, bribery, dereliction or ▪ A director, trustee, stockholder or member
where the money deposited is the subject matter has made a prior demand in writing for a
of litigation. copy of excerpts from the corporation’s
records or minutes
b. A stockholder is entitled to know the basis for
the amounts in the financial reports. Considering ▪ Any officer or agent of the concerned
that records may be voluminous and he may find corporation shall refuse to allow the said
them difficult to interpret, a stockholder may director, trustee, stockholder or member of
make copies, extracts and memoranda of such the corporation to examine and copy said
records. excerpts;
c. The minutes of directors’ meetings would inform

▪ If such refusal is made pursuant to a
the stockholder of all policies laid down by the
resolution or order of the board of directors
board. However, the stockholder does not have a
or trustees, the liability under this section
right to a copy until the minutes have been
for such action shall be imposed upon the
approved.
directors or trustees who voted for such
refusal; and
d. A stockholder cannot demand that he be
furnished with such list but that he should
instead directly examine the books of the ▪ Where the officer or agent of the
corporation. [Campos¸784] corporation sets up the defense that the
person demanding to examine and copy
Time of Examination excerpts from the corporations records and
minutes has improperly used any
information secured through any prior
▪ The stockholder can exercise his right only
examination of the records or minutes of
at reasonable hours on business days
such corporation or of any other
throughout the year. Further, the
corporation OR was not acting in good faith
inspection should be made in such a manner
or for a legitimate purpose in making his
as not to impede the efficient operations of
demand, the contrary must be shown or
the corporation. [Campos, 786]
proved. [Ma. Belen Flordeliza Ang-Abaya, et.
al. vs. Eduardo G. Ang, G.R. No. 178511, Dec. 4,
2008]

73
Note: a. Any prior waiver or denial should appear in the

articles of incorporation. A waiver through an
▪ This is the right of existing stockholders of a amendment to the articles would only need a
corporation to subscribe to or purchase shares 2/3 vote of the outstanding capital stock, and
of stock in proportion to their respective would bind not only the other 1/3 who may have
shareholdings, before the shares of the dissented, but also all subsequent stockholders.
corporation are offered to the general public. It should be made part of the articles, otherwise
[Suarez, 242] it may be possible for future stockholders to
disrupt subsequent financial plans of the
corporation by exercising their pre-emptive
▪ Its basis is to preserve the existing proportional right. [Campos, 58]
rights of the stockholders. [Campos, 56]
b. The stockholders must be given a reasonable
Pre-Emptive Right time within which to exercise their pre-emptive
rights. Upon the expiration of said period, any
a. When the capital stock of a corporation is stockholder who has not exercised such right
increased and new shares are issued; will be deemed to have waived it. [Ibid.]
b. When shares from the unsubscribed portion of

Note:
the original or authorized capital stock are
issued. [Suarez, 242] a. Where the shares are issued in exchange for
property needed for corporate purposes, or for a
Note: The right includes the disposition of not only new debt previously contracted, the stockholder
shares issued in pursuance of an increase of capital stock, cannot demand his pre-emptive right.
but would cover the issue of previously unissued shares Otherwise, it might greatly prejudice the interest
which form part of the existing authorized capital stock, as of the corporation. [Campos, 55]
well as treasury shares. [Campos, 54]
b. Where the shares are issued by one corporation
EXCEPTIONS: in exchange for shares in another corporation in
pursuance of a merger, the pre-emptive right
▪ When such right is denied by the articles of does not exist, provided of course that the issue
incorporation or an amendment; is made with the approval of the stockholders
representing 2/3 of the authorized capital stock,
▪ Shares to be issued in compliance with laws and is not made in bad faith. [Ibid.]
requiring stock offerings or minimum stock
ownership by the public; c. The pre-emptive right of stockholders in close
corporations is broadened to include all issues,
without exception, unless otherwise denied or
▪ Shares to be issued in good faith with the
limited by the articles of incorporation.
approval of the stockholders representing 2/3 of
[Corporation Code, Sec. 102]
the outstanding capital stock, in exchange for
property needed for corporate purposes or in
Remedies When Wrongfully Ignored or Denied –
payment of a previously contracted debt;
1. Aggrieved stockholder may obtain an injunction against
▪ Shares issued with the approval of stockholders the issue;
representing 2/3 of the outstanding capital
stock, in payment of previously contracted 2. Aggrieved stockholder may obtain a mandamus to allow
debts; him to exercise the right;
▪ Additional issues of originally authorized shares; 3. SEC or the court may order the cancellation of the
shares, provided no innocent third parties are
1. If the shares of a corporation are offered prejudiced;
and not subscribed or purchased by the
stockholders and the shares are again being 4. Derivative suit when the violation resulted in waste and
offered, there is not pre-emptive right with management of the corporation assets or in giving
the latter offer. [Benito v. SEC, G.R. No. L- fraudulent directors control of the corporation.
56655, July 25, 1983] [Campos, 63]
2. There is a pre-emptive right when only a

specified portion of the authorized capital Right of First Refusal
stock was offered for subscription upon the
corporation’s inception. Section 63 contemplates no restriction as to whom the
stocks may be transferred. It does not suggest that any
1. Waiver by the stockholder; discrimination may be created by the corporation in
favor of, or against a certain purchaser. The owner of
shares, as owner of personal property, is at liberty, under

74
said section to dispose them in favor of whomever he number of his shares is immaterial because
pleases, without limitation in this respect, than the he is not suing in his own behalf. [Campos,
general provisions of law. [Fleischer v. Botica Nolasco Co. 821]
Inc., G.R. No. L-23241, March 14, 1925]
c. He exerted all reasonable efforts, and
alleges the same with particularity in the
3. INTRA-CORPORATE DISPUTES complaint, to exhaust all remedies available
under the articles of incorporation, by-laws,
Individual suit laws or rules governing the corporation or
It is an action filed in court by a stockholder against the partnership to obtain the relief he desires;
corporation seeking redress of a wrong which is a direct
violation of his rights as a stockholder. The following are d. No appraisal rights are available for the act
some instances: or acts complained of; and
▪ When a stockholder is denied of his right to e. The suit is not a nuisance or harassment
inspect corporate books; suit. [Rule 8, Interim Rules of Procedure
Governing Intra-Corporate Controversies]
▪ When a stockholder is denied of his right to vote;
Nuisance and harassment suits are prohibited, and in
▪ When a stockholder is deprived of his share in determining whether a suit is a nuisance or harassment
the dividends declared by the corporation; suit, the court shall consider:
[Suarez, 292]
• The extent of the shareholding or interest of the
Representative Suit
initiating stockholder or member;
Where the wrong is done to a group of stockholders, as
where preferred stockholders’ rights are violated, a class
or representative suit will be proper for the protection of • Subject matter of the suit;
all stockholders belonging to the same group. [Campos,
819] • Legal and factual basis of the complaint;
Derivative Suit • Availability of appraisal rights for the act or acts

It is an action filed by a stockholder on behalf of himself complained of; and
and other stockholders and for the benefit of the
corporation, to redress a wrong which is primarily to the
• Prejudice or damage to the corporation. In case of
corporation, and for which it has a cause of action [Suarez, nuisance or harassments suits, the court may motu
293]
proprio or upon motion dismiss the case. [Ang v. Ang,
G.R. No. 201675, June 19, 2013]
A derivative action is a remedy designed by equity and has
been the principal defense of the minority shareholders
against abuses by the majority. It is enough that a member
or a minority of stockholders file a derivative suit for and G. FOREIGN CORPORATIONS
in behalf of a corporation. An individual stockholder is
permitted to institute a derivative suit on behalf of the Foreign Corporation: “as one formed, organized or
corporation wherein he holds stock in order to protect or existing under any laws other than those of the Philippines
vindicate corporate rights, whenever officials of the and whose laws allow Filipino citizens and corporations to
corporation refuse to sue or are the ones to be sued or do business in its own country or state.” (Sec. 123 of the
hold the control of the corporation. In such actions, the Corporation Code)
suing stockholder is regarded as the nominal party, with
the corporation as the party in interest. [Maj. Stockholders 1. WHAT CONSTITUTES AS DOING
of Ruby Ind’l. Corp. vs. Miguel Lim, et. al., G.R. No. 165887, BUSINESS:
June 6, 2011]
The determination of whether a foreign corporation is
Requisites: doing business in the Philippines must be based on the
facts of each case. (Cargill Inc. v. Intra Strata Assurance
A stockholder or member may bring an action in the name Corporation)
of a corporation or association, as the case may be,
provided, that: “Isolated Transactions” even when perfected or
consummated within Philippine Territory are not
a. He was a stockholder or member at the time considered as doing business in the Philippines as stated
the acts or transactions subject of the in the case of of Marshall-Wells Co. v. Henry W. Elser & Co.
action occurred and at the time the action
was filed; The true test is whether the foreign corporation is
continuing a body or substance of the business or
b. Bona fide ownership by a stockholder of enterprise for which it was organized or whether it has
stock in his own right suffices to invest him substantially retired from it and turned it over to another.
with standing to bring a derivative suit. The

75
TWIN CHARACTERIZATION TEST The object of the statute is not to prevent the foreign
corporation from performing single acts, but to prevent
A. Nature of the Act or the Transaction: whether the the foreign corporation from acquiring a domicile for the
foreign corporation is continuing a body or substance purpose of business without taking the steps necessary to
of the business or enterprise for which it was render it amenable to suit in the local courts.
organized.
However, where there is a stipulation that all legal
B. Existence of Continuing Intent: that in doing an act settlements within the contract entered into shall fall
or transaction, there was an intent on the part of the under the jurisdiction of Philippine courts, the Supreme
foreign corporation to undertake a continuity of Court has held that foreign corporations could be sued in
commercial dealings and arrangements in the the jurisdiction of the Philippines despite the fact that it
Philippines as distinguished from an isolated was not doing business in the Philippines, and in such
transaction. cases summons on it could be made by publication.
[Lingner & Fisher GMBH v. IAC, G.R. No. L-63557, October
CONTRACT TEST: 28 1983]
a. The test is whether salient points of the

contract are performed within Philippine Contracts entered into by a foreign corporation doing
territory. If they are performed outside, it is not business here without a license are not necessarily null
considered as doing business. and void, and that the lack of capacity to sue at the time of
the execution of the contracts is cured by the subsequent
a. So long as the perfection and consummation of registration and licensing of said corporation. Such
a series of transactions are done outside contracts may therefore become enforceable after such
Philippine territory, the same would not subsequent registration. [Campos, 499]
constitute doing business in the Philippines,
even if the products themselves should be Foreign Corporations as Plaintiffs:
manufactured or processed in the Philippines
by locals. (doctrine in the case of Pacific The procedural doctrine is that the lack of authority of a
Vegetable Oil) foreign corporation to sue in Philippine Courts for failure
to obtain a license may be pleaded as an affirmative
GENERAL RULE: A foreign corporation will not be regarded defense.
as doing business in the host state simply because it enters
into contracts with residents of the host state, where such
contracts are consummated outside the host state. The burden of proof is on the party relying on such
defense to show that:
▪ Plaintiff is a foreign corporation
2. PERSONALITY TO SUE OR BE SUED ▪ It is doing business in the Philippines
▪ It has not obtained the license required by law
▪ A foreign corporation doing business in the
Philippines whether with or without a license, DOCTRINE OF ISOLATED TRANSACTIONS:
can be sued before Philippine courts.
1. Foreign Corporations may not be denied a right to file
an action in Philippine Courts for Isolated Transactions.
▪ And since a counterclaim partakes of the nature If a foreign corporation is not doing business in the
of a complaint against the plaintiff, even if the Philippines, it is not barred from seeking redress in
latter is a foreign corporation doing business in Philippine courts in proper cases, as when it sues on an
the Philippines without a license, the defendant
isolated transaction. (Atlantic Mutual Ins. Co. v. Cebu
who has questioned the plaintiffs’ capacity to sue
Stevedoring Co. Inc.)
will not, by filing the counterclaim be deemed to
have admitted such legal capacity.
2. HOWEVER, the fact of a foreign corporation not doing
business in the Philippines must be disclosed if it
▪ If a foreign corporation is not doing business in wishes to sue in Philippine Courts under the isolated
the Philippines, it cannot be sued here because transactions rule.
Philippine courts cannot acquire jurisdiction
over it. 3. A foreign corporation must show that it is exempt from
registration in order to sue under an isolated
transaction, otherwise, as in the case of Atlantic
▪ It needs no license to sue before Philippine Mutual, the Court may dismiss the case if there is
courts on an isolated transaction for failure to show exemption from license registration.
infringement of trademark and unfair
competition, or on a cause of action entirely GENERAL RULE: Local Courts cannot obtain jurisdiction
independent of any business transaction. over the person of a foreign corporation on isolated
[Campos, 498] transactions.

76
EXCEPTION: Unless there is “consent” or voluntary

surrender of its person to the jurisdiction of the local
courts by invoking its power. Neither Merger or Consolidation is deemed to be within
the inherent powers of the corporations, and the power
to merge or consolidate must be expressly granted by
Foreign Corporations as Respondent/Defendants: law. (PNB v. Andrada Electric and Engineering Co.)
When a foreign corporation engages in business in the Mergers and consolidations may not be entered into to
Philippines without obtaining a license to do so, it may be circumvent the law.
sued as stated in Sec. 133 of the Corporation Code.
Any dissenting stockholder in stock corporations may
A foreign corporation is deemed “present” when it engages exercise his appraisal right, provided that after the
in business within Philippine territory and therefore our approval of the stockholders of such plan, the Board of
local courts have jurisdiction over them. Directors should decide to abandon the plan, the
appraisal right shall be extinguished. (SEC Opinion)
However, a foreign corporation is deemed as “not present”
within Philippine territory when it merely enters into an A merger does not become effective upon the mere
isolated transaction. Local courts or administrative agreement of the constituent corporations and shall only
tribunals cannot obtain jurisdiction coercively through be effective upon the issuance of the SEC of a certificate
summons or other legal processes including service of of merger. (Associated Bank v. CA)
summons through publication. (Villanueva, 2018)
If upon investigation, the SEC has reason to believe that
When it is shown that a foreign corporation is doing the proposed merger is contrary or inconsistent to
business in the Philippines, summons may be served on: existing law, the SEC shall set a hearing to give the
corporations concerned the opportunity to be heard.
a. Its resident agent designated in (Sec. 79, Corporation Code)
accordance with law
b. if there is no resident agent, the
government official designated by law When Acquisition or Transfers May be Effected
to that effect
c. Or any of the officers or agent within 1. Assets-Only – Purchaser is only interested in in
the Philippines. the raw assets and properties of the business. He
would not be liable for the debts and liabilities of
The mere allegation in the complaint that a local his transferor since there is no privity of contract
company is an agent of a foreign corporation is not over debt obligations between the transferee
sufficient to allow proper service to such alleged agent, and the transferor’s creditors.
2. Business-Enterprise - The transferee merely

H. MERGERS AND CONSOLIDATIONS continues the same business of the transferor
since he obtains the earning capability of the
venture. He is liable for the debts and liabilities
1. CONCEPTS of the transferor.
3. Equity – The purchaser takes control and

MERGER CONSOLIDATION ownership of the business by purchasing the
shareholdings of the corporate owner. He
Union whereby one or The union of two or obtains the ability to elect the members of the
more existing more existing board of the corporation who runs the business.
corporations are corporations to form a [Villanueva, 646]
absorbed by another new corporation called
corporation which the consolidated As a rule, a corporation that purchases the assets of
survives and continues corporation. another will not be liable for the debts of the selling
the combined business. corporation, provided the former acted in good faith and
All constituent All constituent paid adequate consideration for such assets, except when
corporations are corporations are any of the following circumstances is present:
dissolved and absorbed dissolved except the
by the new consolidated surviving one. a. Where the purchasers expressly or impliedly
enterprise. agrees to assume the debts;
No liquidation of assets
b. Where the selling corporation fraudulently enters
into the transactions to escape liability for those
The surviving or consolidated corporation assumes debts;
the liabilities of the dissolved corporations, regardless
of whether the creditors consented to such merger or c. Where the purchasing corporation is merely a
consolidation continuation of the selling corporation; and

77
d. Where the transaction amounts to a consolidation set forth in the articles of incorporation for
or merger of the corporations. [Edward J. Nell corporations organized under this Code; and
Company v. Pacific Farms Inc., G.R. No. L-20850,
November 29, 1965] 4. Such other provisions with respect to the
proposed merger or consolidation as are
Note: The mere fact that a stockholder sells his shares of deemed necessary or desirable
stock in the corporation during the pendency of a
collection case against the corporation does not make (2) Upon approval of the majority vote of each Board of
such stockholder personally liable for the corporate debt. Directors of the constituent corporations of the plan of
The disposing stockholder has no personal obligation to merger and consolidation, the same shall be submitted for
the creditor and it is the inherent right of the stockholder approval by the stockholders or members of each of such
to dispose of his shares of stock anytime he so desires. corporations at separate corporate meetings duly called
[Remo v. IAC, G.R. No. L-67626, April 18, 1989] for that purpose
Non-Assumption of Liabilities (3) Notice of such meetings shall be given to all

stockholders or member of the respective corporations, at
GENERAL RULE: When one corporation buys all the least 2 weeks prior the date of the meetings, either
shares, stocks or property of another, this will not dissolve personally or by registered mail.
the other and as the two corporations still maintain their
separate corporate entities, one will not answer for the (4) The affirmative vote of stockholder representing at
debts of another. least 2/3 of the outstanding capital stock of each
corporation in case of stock corporations or at least 2/3 of
EXCEPTIONS: the members in the case of non-stock corporations shall
§ Purchase was in fraud of creditors; be necessary for the approval of the plan.
§ Express assumption of liabilities; (5) Articles of merger or articles shall be executed by each
of the constituent corporations, to be signed by the
§ Consolidation or merger; president or Vice president and certified by the secretary
or assistant secretary of each corporation setting forth:
§ Purchaser is merely a continuation of the seller.
1. The plan of the merger of the plan of the
consolidation
Constituent Corporations
Parties to a merger or consolidation
2. As to stock corporations, the number of
shares outstanding or in the case of non-stock
Consolidated Corporations
corporations, the number of members;
The surviving corporation in a merger or consolidation
acquiring all properties, rights and franchises and their
3. As to each corporation, the number of shares
stock holders usually become its stockholders. It assumes
or members voting for and against such plan,
automatically the liabilities of the dissolved corporations,
respectively.
regardless whether the creditor consented or not in the
merger or consolidation. [Campos, 441]
(6) The applying constituent corporations are required to
submit their respective financial statements which serve
as the basis of fixing the shares to be issued in favor of the
PROCEDURE OF MERGER or CONSOLIDATION:
merged corporation vis-a-vis the net assets to be absorbed
by the surviving corporation of a specific date.
(1) Plan of Merger or Consolidation Under Sec. 76 of the
Corporation Code: (7) The articles of merger and consolidation, signed and
certified as required by law, shall be submitted to the SEC
The board of directors or trustees of each corporation, in quadruplicate for its approval.
party to the merger or consolidation, shall approve a plan
of merger or consolidation setting forth the following:
2. EFFECTS and LIMITATION
o The names of the corporations
proposing to merge or consolidate, EFFECTS
hereinafter referred to as the
constituent corporations; Under Sec. 80 of the Corporation Code, the merger or
consolidation shall have the following effects:
2. The terms of the merger or consolidation and
the mode of carrying the same into effect; 1. The constituent corporations shall become a
single corporation which, in case of merger, shall
3. A statement of the changes, if any, in the be the surviving corporation designated in the
articles of incorporation of the surviving plan of merger; and, in case of consolidation,
corporation in case of merger; and,with respect shall be the consolidated corporation designated
to the consolidated corporation in case of in the plan of consolidation;
consolidation, all the statements required to be

78
2. The separate existence of the constituent

corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated corporation

shall possess all the rights, privileges, immunities
and powers and shall be subject to all the duties
and liabilities of a corporation organized under
this Code
4. The surviving or the consolidated corporation

shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of
each of the constituent corporations; and all
property, real or personal, and all receivables
due on whatever account, including
subscriptions to shares and other choses in
action, and all and every other interest of, or
belonging to, or due to each constituent
corporation, shall be deemed transferred to and
vested in such surviving or consolidated
corporation without further act or deed; and
5. The surviving or consolidated corporation shall

be responsible and liable for all the liabilities and
obligations of each of the constituent
corporations in the same manner as if such
surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any
pending claim, action or proceeding brought by
or against any of such constituent corporations
may be prosecuted by or against the surviving or
consolidated corporation. The rights of creditors
or liens upon the property of any of such
constituent corporations shall not be impaired
by such merger or consolidation.
LIMITATIONS
The favorable recommendation of the appropriate

government agency must first be obtained in the case of
merger or consolidation of the following:
a. Banking institutions;
b. Building and loan associations;
c. Trust companies;
d. Insurance companies;
e. Public utilities;
f. Educational institutions;
g. Other special corporations governed by special
laws.

79
Green Notes 2019 Securities Regulation Code
STATE POLICY AND PURPOSE
DECLARED STATE POLICY

The State shall:
1. Establish a socially conscious, free market

that regulates itself;
2. Encourage the widest participation of

ownership in enterprises;
3. Enhance the democratization of wealth;
4. Promote the development of the capital

market;
5. Protect investors;
6. Ensure full and fair disclosure about

securities;
7. Minimize if not totally eliminate insider
SECURITIES
trading and other fraudulent or
manipulative devices and practices which
create distortions in the free market. [Sec. 2,
REGULATION SRC]
PURPOSE
CODE The Securities Regulation Code (SRC) is termed as a “Blue
(REPUBLIC ACT
Sky Law”, enacted to protect the public from unscrupulous
promoters, who stake business or venture claims which
have no real basis, and sell shares or interests therein to
NO. 8799) investors, who are then left holding certificates

representing nothing more than a claim to a square of the
blue sky. [Villanueva, 860]
SECURITIES AND EXCHANGE

COMMISSION
SEC AS A COLLEGIAL BODY
The SRC is administered by the SEC as a collegial body

composed of 1 Chairperson and 4 Commissioners,
appointed by the President, with a term of 7 years.
Qualifications:
§ At least 40 y/o for the Chairperson,

and 35 y/o for the Commissioners;
§ Of good moral character;
§ Of unquestionable integrity;
§ Of known probity and patriotism;
§ Recognized competence in social and
economic disciplines.
Note: Majority of the Commissioners, including the

Chairperson, must be lawyers. [Sec. 4, SRC]
POWERS AND FUNCTIONS

80
a. Have jurisdiction and supervision over all achieve the objectives and purposes of these laws.
corporations, partnerships or associations who are [Sec. 5.1, SRC]
the grantees of primary franchises and/or a license
or permit issued by the Government; Note:
b. Formulate policies and recommendations on issues a. The intention of the lawmakers is to make
concerning the securities market, advise Congress the registration and issuance of securities
and other Government agencies on all aspects of the dependent, to a certain extent, on the
securities market and propose legislation and merits of the securities themselves, and of
amendments thereto; the issuer, to be determined by the
Securities and Exchange Commission. This
c. Approve, reject, suspend, revoke or require measure was meant to protect the interest
amendments to registration statements, and of the investing public against fraudulent
registration and licensing applications; and worthless securities, and the SEC is
mandated by law to safeguard these
d. Regulate, investigate or supervise the activities of interests, following the policies and rules
persons to ensure compliance; therefore provided. [PSE v. Court of Appeals,
G.R. No. 125469, October 27, 1997]
e. Supervise, monitor, suspend or take over the
activities of exchanges, clearing agencies and other b. The SEC cannot reverse the decision of the
SROs; Philippine Stock Exchange in matters of
application for listing in the market unless
f. Impose sanctions for the violation of laws and the judgment is attended by bad faith. [PSE v.
rules, regulations and orders issued pursuant thereto; Court of Appeals, G.R. No. 125469, October 27,
1997]
g. Prepare, approve, amend or repeal rules, regulations
and orders, and issue opinions and provide guidance DEFINITION OF SECURITIES
on and supervise compliance with such rules,
regulations and orders;
DEFINITION
h. Enlist the aid and support of and/or deputize any and
all enforcement agencies of the Government, civil or Securities are shares, participation or interests in a
military as well as any private institution, corporation, corporation or in a commercial enterprise or profit-
firm, association or person in the implementation of making venture and evidenced by a certificate, contract,
its powers and functions under this Code; instrument, whether written or electronic in character. It
includes:
i. Issue cease and desist orders to prevent fraud or
injury to the investing public; a. Shares of stocks, bonds, debentures, notes,
evidences of indebtedness, asset-backed
j. Punish for contempt of the Commission, both direct securities;
and indirect, in accordance with the pertinent
provisions of and penalties prescribed by the Rules of b. Investment contracts, certificates of interest or
Court; participation in a profit sharing agreement,
certificates of deposit for a future subscription;
k. Compel the officers of any registers corporation or
association to call meetings of stockholders or c. Fractional undivided interests in oil, gas or other
members thereof under its supervision; mineral rights;
l. Issue subpoena duces tecum and summon witnesses d. Derivatives like option and warrants;
to appear in any proceedings of the Commission and
in appropriate cases, order the examination, search e. Certificates of assignments, certificates of
and seizure of all documents, papers, files and participation, trust certificates, voting trust
records, tax returns, and books of accounts of any certificates or similar instruments;
entity or person under investigation as may be
necessary for the proper disposition of the cases f. Propriety or non-propriety membership
before it, subject to the provisions of existing laws; certificates in corporations; and
m. Suspend, or revoke, after proper notice and hearing g. Other instruments as may in the future be
the franchise or certificate of registration of determined by the Commission. [Sec. 3, SRC]
corporations, partnerships or associations, upon any
of the grounds provided by law;
n. Exercise such other powers as may be provided by

law as well as those which may be implied from, or HOWEY TEST
which are necessary or incidental to the carrying out
of, the express powers granted the Commission to

81
An investment contract is a contract, transaction or

scheme whereby a person invests his money in a common b. The prospectus is a document made by or on
enterprise and is led to expect profits primarily from the behalf of an issuer, underwriter or dealer to sell
efforts of others. or offer securities for sale to the public. [Sec. 3,
SRC]
Under the Howey Test, it requires a transaction, contract,
or scheme whereby a person: 2. Upon filing of the registration statement, the issuer
shall pay to the Commission a fee of not more than
a. Makes an investment of money; one-tenth 1/10 of one per centum 1%of the maximum
aggregate price at which such securities are proposed
b. In a common enterprise; to be offered.
c. With the expectation of profits; 3. Notice of the filing of the registration statement shall
be immediately published by the issuer, at its own
d. To be derived solely from the efforts of expense, in 2 newspapers of general circulation in the
others. [Power Homes Unlimited v. SEC, G.R. Philippines, once a week for 2 consecutive weeks, or in
no. 164182, February 26, 2008] such other manner as the Commission by the rule shall
prescribe, reciting that a registration statement for the
PARTIES/ENTITIES INVOLVED sale of such securities has been filed, and that aforesaid
registration statement, as well as the papers attached
• Issuer – The originator, maker, obligor, or creator of thereto are open to inspection at the Commission
the security; during business hours, and copies thereof, photostatic
or otherwise, shall be furnished to interested parties at
• Promoter – A person who, acting alone or with others, such reasonable charge as the Commission may
takes initiative in founding and organizing the business prescribe.
or enterprise of the issuer and receives consideration
therefor; 4. Within 45 days after the date of filing of the
registration statement, or by such later date to which
• Broker – A person engaged in the business of buying the issuer has consented, the Commission shall declare
the registration statement effective or rejected, unless
and selling securities for the account of others;
the applicant is allowed to amend the registration
statement;
• Dealer – Any person who buys and sells securities for
his/her own account in the ordinary course of
5. Issuance of order declaring the registration statement
business.
to be effective if it finds that the registration statement
together with all the other papers and documents
• Exchange – An organized market place or facility that
attached thereto, is on its face complete and that the
brings together buyers and sellers and executes trade
requirements have been complied with. [Sec. 12, SRC]
of securities and/or commodities;
Note:
• Underwriter – A person who guarantees on a firm
commitment and/or declared best effort basis the
a. The Commission may impose such terms and
distribution and sale of securities of any kind by
conditions as may be necessary or appropriate
another company. [Sec. 3, SRC]
for the protection of the investors.
b. An uncertificated security is one evidenced by

PROCEDURE FOR REGISTRATION OF electronic or similar records. [Sec. 3, SRC]
SECURITIES
REGISTRATION STATEMENT
MANDATORY REGISTRATION
The registration statement shall be signed by:
Securities shall not be sold or offered for sale or
distribution within the Philippines, without a registration 1. Issuer’s executive officer;
statement duly filed with and approved by the 2. Principal operating officer;
Commission. [Sec. 8.1, SRC] 3. Principal financial officer;
4. Comptroller
5. Principal accounting officer
PROCEDURE 6. Corporate secretary; o
7. Other persons performing similar functions
1. Filing by the issuer in the main office of the
accompanied by a duly verified resolution of
Commission of a sworn registration statement with
the board of directors of the issuer
the respect to such securities;
corporation.
a. The registration statement shall include any
prospectus required or permitted to be
Other accompanying documents:
delivered. [Sec. 12, SRC]

82
a. Written consent of the expert named as having A registration statement may be withdrawn by the issuer
certified any part of the registration statement only with the consent of the SEC. [Sec. 13.6, SRC]
or any document used in connection therewith;
EXEMPTIONS TO REGISTRATION
b. Written certification by selling shareholders as
to the accuracy of any part of the registration
statement contributed to by such selling EXEMPT SECURITIES
shareholders shall be filed.
The following securities may be sold or offered for sale or
Note: Upon affectivity of the registration statement, the distribution without the need for registration:
issuer shall state under oath in every prospectus that all
registration requirements have been met and that all a. Any security issued or guaranteed by the
information are true and correct as represented by the Government of the Philippines, or by any political
issuer or the one making the statement. Any untrue subdivision or agency thereof, or by any person
statement of fact or omission to state a material fact controlled or supervised by law, and acting as an
required to be stated herein or necessary to make the instrumentality of said Government;
statement therein not misleading shall constitute fraud.
[Sec. 12, SRC] b. Any security issued or guaranteed by the
government of any country with which the
Philippines maintains diplomatic relations, or by any
GROUNDS FOR REJECTION AND state, province or political subdivision thereof on the
REVOCATION OF REGISTRATION OF basis of reciprocity. Provided: that the Commission
SECURITIES may require compliance with the form and content
of disclosures the Commission may prescribe;
a. The issuer:
c. Certificates issued by a receiver or by a trustee in
§ Has been judicially declared insolvent; bankruptcy duly approved by the proper
adjudicatory body;
§ Has violated any of the provision of the SRC,
rules promulgate pursuant thereto, or any SEC d. Any security or its derivatives the sale or transfer of
order of which the issuer has notice in which, by law, is under the supervision and
connection with the offering for which a regulation of the Office of the Insurance
registration statement has been filed; Commission, Housing and Land Use Regulatory
Board, or the Bureau of Internal Revenue;
§ Has been or is engaged or is about to engage in
fraudulent transactions; e. Any security issued by a bank except its own shares
of stock;
§ Has made any false or misleading representation
of material facts in any prospectus concerning f. The Commission may, by rule or regulation after
the issuer or its securities; public hearing, add to the foregoing any class of
securities if it finds that the enforcement of this
§ Has failed to comply with any requirements that Code with respect to such securities is not necessary
the Commission may impose as a condition for in the public interest and for the protection of the
registration of the security for which the investors. [Sec. 9, SRC]
registration statement has been filed; or
EXEMPT TRANSACTIONS
b. The registration statement is on its face incomplete
or inaccurate in any material respect or includes any § Any judicial sale, or sale by an executor, administrator,
untrue statements of a material fact required to be guardian or receiver or trustee in insolvency or
stated therein or necessary to make the statement bankruptcy;
therein not misleading; or
§ By or for the account of a pledge holder, or mortgagee
c. The issuer, any officer, director or controlling person or any of a pledge lien holder selling of offering for sale
performing similar functions, or any under writer has or delivery in the ordinary course of business and not
been convicted, by a competent judicial or for the purpose of avoiding the provision of this Code,
administrative body, upon plea of guilty, or otherwise, to liquidate a bona fide debt, a security pledged in good
of an offense involving moral turpitude and /or fraud faith as security for such debt;
or is enjoined or restrained by the Commission or
other competent or administrative body for violations § An isolated transaction in which any security is sold,
of securities, commodities, and other related laws. offered for sale, subscription or delivery by the owner
[Sec. 13.1, SRC] therefore, or by his representative for the owner’s
account, such sale or offer for sale or offer for sale,
subscription or delivery not being made in the course
WITHDRAWAL of repeated and successive transaction of a like
character by such owner, or on his account by such

83
representative and such owner or representative not other remuneration is paid or given directly or
being the underwriter of such security; indirectly for soliciting such exchange;
§ Distribution by a corporation actively engaged in the § The sale of securities by an issuer to fewer than 20
business authorized by its articles of incorporation, of persons in the Philippines during any twelve-month
securities to its stockholders or other security holders period;
as a stock dividend or other distribution out of surplus;
§ The sale of securities to any number of the following
§ Sale of capital stock of a corporation to its own qualified buyers:
stockholders exclusively, where no commission or
other remuneration is paid or given directly or a. Bank;
indirectly in connection with the sale of such capital b. Registered investment house;
stock; c. Insurance company;
d. Pension fund or retirement plan maintained by
§ Issuance of bonds or notes secured by mortgage upon the Government of the Philippines or any
real estate or tangible personal property, when the political subdivision thereof or manage by a bank
entire mortgage together with all the bonds or notes or other persons authorized by the Bangko
secured thereby are sold to a single purchaser at a Sentral to engage in trust functions;
single sale; e. Investment company or;
f. Such other person as the Commission may rule
§ Issue and delivery of any security in exchange for any by determine as qualified buyers, on the basis of
other security of the same issuer pursuant to a right of such factors as financial sophistication, net
conversion entitling the holder of the security worth, knowledge, and experience in financial
surrendered in exchange to make such conversion: and business matters, or amount of assets under
Provided, That the security so surrendered has been management.
registered under this Code or was, when sold, exempt
from the provision of this Code, and that the security § Other transactions found by the SEC not necessary in
issued and delivered in exchange, if sold at the the public interest or for the protection of the
conversion price, would at the time of such conversion investors such as by the reason of the small amount
fall within the class of securities entitled to registration involved or the limited character of the public offering.
under this Code. Upon such conversion the par value [Sec. 10, SRC]
of the security surrendered in such exchange shall be
deemed the price at which the securities issued and Note: Exemption from the registration does not exempt an
delivered in such exchange are sold; entity from complying with the reasonable disclosure
regulations issued by the SEC. [Union Bank v. SEC, G.R. No.
§ Broker’s transaction, executed upon customer’s 138949, June 6, 2001]
orders, on any registered Exchange or other trading
market; FORMAL APPLICATION FOR EXEMPTION
§ Subscriptions for shares of the capitals stocks of a Any person applying for an exemption shall file with the
corporation prior to the incorporation thereof or in SEC a notice identifying the exemption relied upon on
pursuance of an increase in its authorized capital such form and as such time as the SEC, by rule, may
stocks under the Corporation Code, when no expense prescribe, and with such notice, shall pay to the SEC a
is incurred, or no commission, compensation or corresponding fee. [Villanueva, 874]
remuneration is paid or given in connection with the
sale or disposition of such securities, and only when
the purpose for soliciting, giving or taking of such
NON-EXEMPT
subscription is to comply with the requirements of
such law as to the percentage of the capital stock of a § An investment contract that is a security under R.A.
corporation which should be subscribed before it can No. 8799 must be registered with the Securities and
be registered and duly incorporated, or its authorized, Exchange Commission before its sale or offer for sale
capital increase; or distribution to the public.
§ The strict regulation of securities is founded on the

Note: The exemption refers to the issuance of shares
premise that the capital markets depend on the
of stock in the course of increasing the authorized
investing public’s level of confidence in the system.
capital stock- not the already authorized but unissued
[Power Homes Unlimited Corporation vs. SEC, G.R. No.
stock. Otherwise, there may still be an exemption if
164182, February 26, 2008]
registration is not necessary where issuance involves
only a small mount of stock or the potential buyers are
very limited in number and are capable of protecting
themselves. [Nestle Philippines v. Court of Appeals, G.R.
no. 86738, November 13, 1991] PROHIBITIONS ON FRAUD,
MANIPULATION AND INSIDER
§ Exchange of securities by the issuer with the existing TRADING
security holders exclusively, where no commission or

84
MANIPULATION OF SECURITY PRICES § Scalping – Where a person, like an investment

advisor, purchases securities for his own
account before recommending that security, and
It shall be unlawful for any person acting for himself or
then sells the share at a profit upon the rise in
through a dealer or broker, directly or indirectly:
the market price following the recommendation.
a. Wash Sales – To create a false or misleading
appearance of active trading in any listed § Daisy Chain – A pattern of fictitious trading
security traded in an Exchange of any other activity by a group of persons who lures innocent
people into the scheme.
trading market:
§ By effecting any transaction in such § Flipping – Operated where one office buys a
security which involves no change in the particular stock for customers, while another
beneficial ownership thereof; office simultaneously recommends that its
customers sell the stock, with the stock being
§ By entering an order or orders for the shifted from one office to another, and the firm
purchase or sale of such security with the makes a profit, and the brokers earn their
knowledge that a simultaneous order or commissions.
orders of substantially the same size, time
and price, for the sale or purchase of any § Such Other Similar Devices. [Villanueva, 889-
such security, has or will be entered by or 890]
for the same or different parties; or
c. To circulate or disseminate information
§ By performing similar act where there is no that the price of any security listed in an
change in beneficial ownership. Exchange will or is likely to rise or fall
because of manipulative market operations
b. To effect, alone or with others, a securities of any one or more persons conducted for
or transactions in securities that: (I) Raises the purpose of raising or depressing the
their price to induce the purchase of a price of the security for the purpose of
security, whether of the same or a different inducing the purpose of sale of such
class of the same issuer or of controlling, security;
controlled, or commonly controlled
company by others; or (iii) Creates active d. To make false or misleading statement with
trading to induce such a purchase or sale respect to any material fact, which he knew
through manipulative devices such as: or had reasonable ground to believe was so
false or misleading, for the purpose of
§ Marking the Close – Buying and selling inducing the purchase or sale of any
securities at the close of the market in an effort security listed or traded in an Exchange.
to alter the closing price of the security.
e. To effect, either alone or others, any series
§ Painting the Tape – Engaging in a series of of transactions for the purchase and/or
transactions that are reported publicly to give sale of any security traded in an Exchange
the impression of activity or price movement in for the purpose of pegging, fixing or
a security. stabilizing the price of such security; unless
otherwise allowed by this Code or by rules
of the Commission.
§ Squeezing the Float – Taking advantage of a
shortage of securities in the market by
controlling the demand side, and exploiting Note: No person shall use or employ, in connection with
market congestion during such shortages in a the purchase or sale of any security any manipulative or
way as to create artificial prices. deceptive device or contrivance. Neither shall any short
sale be effected nor any stop-loss order be executed in
connection with the purchase or sale of any security
§ Hype and Dump – Engaging in buying activity at
except in accordance with such rules and regulations as
increasingly higher prices and the selling the
the Commission may prescribe as necessary or
securities in the market at higher prices.
appropriate in the public interest for the protection of
investors. [Sec. 24, SRC]
§ Boiler Room Operations – A well-organized
operation where in a room, there would be well-
trained salesmen operating over several phones
and using high-pressure sales talk to get
investors to invest in securities offered.
§ Improper Matched Orders – Engaging in

FRAUDULENT TRANSACTION
transactions where both the buy and sell orders
It shall be unlawful for any person, directly or indirectly, in
are entered at the same time with the same price
connection with the purchase or sale of any securities to:
and quantity by different but colluding parties.

85
1. Employ any device, scheme, or artifice to and the lapse of a reasonable time for market to
defraud; absorb such information. [Villanueva, 892]
2. Obtain money or property by means of any Note: This presumption shall be rebutted upon a
untrue statement of a material fact of any showing by the purchaser or seller that he was
omission to state a material fact necessary in aware of the material nonpublic information at
order to make the statements made, in the light the time of the purchase or sale.
of the circumstances under which they were
made, not misleading; or § To communicate material nonpublic
information about the issuer or the security
3. Engage in any act, transaction, practice or to any person who, by virtue of the
course of business which operates or would communication, becomes an insider, where
operate as a fraud or deceit upon any person. the insider communicating the information
[Sec. 26, SRC] knows or has reason to believe that such
person will likely buy or sell a security of the
INSIDER TRADING issuer whole in possession of such
information;
Who are considered insiders?
§ It shall be unlawful Where a tender offer has
a. Issuer;
commenced or is about to commence for:
b. Director or officer (or person performing similar
functions) of, or a person controlling the issuer;
a. Any person (other than the tender
c. Person whose relationship to the issuer gives or
offeror) who is in possession of
gave him access to material information about
material nonpublic information
the issuer or the security that is not generally
relating to such tender offer, to buy or
available to the public;
sell the securities of the issuer that are
d. Government employee, or director, or officer of
sought or to be sought by such tender
an exchange, clearing agency and/or self-
offer if such person knows or has
regulatory organization who has access to
reason to believe that the information
material information about an issuer or a
is nonpublic and has been acquired
security that is not generally available to the
directly or indirectly from the tender
public; or
offeror, those acting on its behalf, the
e. Person who learns such information by a
issuer of the securities sought or to be
communication from any of the foregoing
sought by such tender offer, or any
insiders. [Sec. 3.8, SRC]
insider of such issuer; and
Rules Regarding Insider Trading b. Any tender offeror, those acting on its
It shall be unlawful for an insider: behalf, the issuer of the securities
sought or to be sought by such tender
§ To sell or buy a security of the issuer, while
offer, and any insider of such issuer to
in possession of material information with
communicate material nonpublic
respect to the issuer or the security that is
information relating to the tender offer
not generally available to the public, unless:
to any other person where such
communication is likely to result in a
§ The insider proves that the information was
violation of Subsection 27.4 (a)(I).
not gained from such relationship; or
• For purposes of this subsection the term
§ If the other party selling to or buying from
"securities of the issuer sought or to be sought
the insider (or his agent) is identified, the
by such tender offer" shall include any securities
insider proves:
convertible or exchangeable into such securities
or any options or rights in any of the foregoing
1. That he disclosed the information to
securities.
the other part; or
Note: The insider’s misuse of nonpublic and undisclosed
2. That he had reason to believe that the
information is the gravamen of illegal conduct. The intent
other party otherwise is also in
of the law is the protection of investors against fraud,
possession of the information.
committed when an insider, using secret information,
takes advantage of an uninformed investor. Insiders are
Presumption: A purchase or sale of a security of
obligated to disclose material information to the other
the issuer made by an insider or such insider’s
party or abstain from trading the shares of his corporation.
spouse or relatives by affinity or consanguinity
This duty to disclose or abstain is based on two
within the second degree, legitimate or
factors: first, the existence of a relationship giving access,
common-law, shall be presumed to have been
directly or indirectly, to information intended to be
effected while in possession of material
available only for a corporate purpose and not for the
nonpublic information if transacted after such
personal benefit of anyone; and second, the inherent
information came into existence but prior to
unfairness involved when a party takes advantage of such
dissemination of such information to the public

86
information knowing it is unavailable to those with whom

he is dealing. [SEC vs. Interport Resources Corporation, G.R. c. 35% of the outstanding voting shares or such
No. 135808, October 6, 2008] outstanding voting shares sufficient to gain
control of the board in a public company directly
Material Nonpublic Information from one or more stockholders;
a. Information that has not been generally
disclosed to the public and would likely affect the d. Any acquisition that would result in ownership of
market price of the security after being over 50% of the total outstanding equity
disseminated to the public and the lapse of a securities of a public company. [Sec. 19.2, SRC
reasonable time for the market to absorb the IRR]
information; or
Public company:
b. Information that would be considered by a
reasonable person important under the a. Any corporation with a class of equity securities
circumstances in determining his course of listed on Exchange; or
action whether to buy, sell or hold a security.
b. With assets in excess of Php 50,000,000.00 and
Note: has 200 ore more shareholders each holding at
least 100 shares of a class of its equity securities.
a. Under the law, what is required to be disclosed [Sec. 3.1. 16, SRC IRR]
is a fact of “special significance” which may be:
Exemptions from Mandatory Tender Offer Requirement
a. a material fact which would be likely, on
being made generally available, to affect the a. Any purchase of securities from the unissued
market price of a security to a significant capital stock;
extent; or Note: Acquisition must not result to a 50% or
more ownership of securities sufficient to gain
b. one which a reasonable person would control of the board;
consider especially important in
determining his course of action with b. Any purchase of securities from an increase in
regard to the shares of stock. authorized capital stock;
c. Purchase in connection with foreclosure
b. A fact is material if it induces or tends to induce proceedings involving a duly constituted pledge
or otherwise affect the sale or purchase of its or security arrangement where the acquisition is
securities. [SEC vs. Interport Resources made by the debtor or creditor;
Corporation, G.R. No. 135808, October 6, 2008] d. Purchases in connection with a privatization
undertaken by the government;
e. Purchases in connection with corporate
PROTECTION OF INVESTORS rehabilitation under court supervision;
f. Purchases in the open market at the prevailing
market price; and
TENDER OFFER RULE g. Merger or consolidation.
Definition Note: The rule is applicable if the acquisition is intended to

Tender offer is a publicly announced intention by a person circumvent or defeat the objects of the tender offer rules.
acting alone or in concert with other persons to acquire [Sec. 19.3, SRC IRR
equity securities of a public company. The coverage of the
mandatory tender offer rule covers not only direct How Tender Offer is Made:
acquisition but also indirect acquisition or “any type of
acquisition.” [Cemco Holdings, Inc. vs. National Life a. Filling with the Commission a declaration to that
Insurance Company of the Philippines, Inc. G.R. No. effect;
171815. August 7, 2007]
b. Furnishing the issuer a statement containing
Obligations for Tender Offers such of the information required in Section 17 of
It is mandatory upon the following acquisitions by a person this Code as the Commission may prescribe,
or group of persons: including subsequent or additional materials;
and
a. 15% of equity securities in a public company in
one or more transactions within a 12-month Note: This includes annual reports and
period; periodical reports for interim fiscal periods.
b. 35% of the outstanding voting shares or such c. Publishing all requests or invitations for tender,
outstanding voting shares that are sufficient to or materials making a tender offer or requesting
gain control of the board in a public company in or inviting letters of such security. [Villanueva,
one or more transactions within a 12-month 884]
period;

87
Withdrawal of Securities Deposited Pursuant to Tender as a fraud or deceit upon any person. [Sec.
Offer 19.23, SRC IRR]
A tender offer shall, unless withdrawn, remain open until PROXY SOLICITATION
the expiration of:
1. Proxies must be issued and proxy solicitation must
a. At least 20 business days from its be made in accordance with rules and regulations to
commencement; Provided that an offer as be issued by the Commission;
much as possible be completed within 60
days from the date of the intention to make 2. Proxies must be in writing, signed by the stockholder
such offer is publicly announced; or his duly authorized representative and file before
the scheduled meeting with the corporate secretary;
b. At least 10 business days from the date the
notice of change in the percentage of the 3. Unless otherwise provided in the proxy, it shall be
class of securities being sought or in the valid only for the meeting for which it is intended. No
consideration offered is first published, sent proxy shall be valid only for the meeting for which it
or given to security holders. [Sec. 19.9, SRC] is intended. No proxy shall be valid and effective for
a period longer than 5 years at one time;
Dissemination Requirements
4. No broker or dealer shall give any proxy, consent or
§ Offeror or Issuer shall publish the terms and any authorization, in respect of any security carried
condition of the tender offer in 2 national for the account of the customer, to a person other
newspapers of general circulation in the than the customer, without written authorization of
Philippines on the date of commencement of the such customer;
tender offer and for 2 consecutive days after
sending a report to security holders; 5. A broker or dealer who holds or acquire the proxy for
at least 10% or such percentage as the commission
§ If a material change occurs in the information may prescribe of the outstanding share of such
published, sent or given to security holders, the issuer, shall submit a report identifying the beneficial
Offerror shall disseminate promptly a disclosure owner of ten days after such acquisition, for its own
of such change in a manner reasonable calculated account or customer, to the issuer of security, to the
to inform the security holders. [Sec. 19.8, SRC IRR] exchange where the security is traded and to the
Commission. [Sec. 20, SRC]
When Securities Offered Exceed Offer Made
Where securities offered exceed that which person or Solicitation includes:
group of persons are bound or willing to take up and pay
for, the securities that are subject of tender offer shall be 1. Any request for a proxy or authorization;
taken up as nearly as may be pro rata, disregarding
fractions, according to the number of securities deposited 2. Any request to execute or not to execute, or
by each depositor. [Villanueva, 885] to revoke, a proxy or authorization; or
When the Term of Tender Offer Vary 3. The furnishing of a form of proxy or other
Where the terms of the tender offer vary before the communication to security holders under
expiration thereof by increasing consideration offered to circumstances reasonable calculated to
holders of such securities, such person shall pay increased result in the procurement, withholding or
consideration to each security holder whose securities are revocation of a proxy; [Sec. 20.2.2., SRC IRR]
taken up and paid for, whether or not such securities have
been taken up by such person before the variation of the
tender offer or request or invitation. [Villanueva, 885] FULL DISCLOSURE RULE
Unlawful and Prohibited Acts Relating to Tender Offers All companies, listed or applying for listing, are required to
The following acts are prohibited in any tender offer: divulge truthfully and accurately, all material information
about themselves and the securities they sell, for the
a. To employ any device, scheme, or artifice to protection of the investing public, under the pain of
defraud any person; administrative, criminal and civil sanctions. [PSE v. Court
of Appeals, G.R. No. 125469, October 27, 1997]
b. To make any untrue statement of a material
fact or to omit to state a material fact
necessary in order to make the statements
made, in the light of the circumstances
under which they were made, not
misleading; or
c. To engage in any act, practice or course of

business which operates or would operate

88
Green Notes 2019 Banking
THE NEW CENTRAL BANK ACT
STATE POLICIES
a. The State shall maintain a central monetary
authority that shall function and operate as an
independent and accountable body corporate in
the discharge of its mandated responsibilities
BANKING
concerning money, banking and credit. [Sec. 1,
R.A. No. 7653]
LAWS b. In line with this, the Bangko Sentral ng Pilipinas

(BSP) is:
§ The central monetary authority
§ An independent and accountable body; and
§ A government-owned corporation that enjoys

fiscal and administrative autonomy. [Secs. 1 and
2, R.A. No. 7653]
RESPONSIBILITY AND PRIMARY

OBJECTIVE OF THE BSP
Primary Objectives
§ To maintain price stability conducive to balanced

and sustainable economic growth.
§ To promote and maintain monetary stability and

the convertibility of the peso.
Other Responsibilities
§ To provide policy directions in the areas of

money, banking and credit;
§ To supervise operations of banks;
Regulates finance companies and non-bank financial

institutions performing quasi-banking functions. [Sec. 3,
R.A No. 7653]
MONETARY BOARD - POWERS AND

FUNCTIONS
The Monetary Board (MB)
§ The body through which the powers and

functions of the BSP are exercised. (R.A. No. 7653,
Sec. 6)
Powers and Functions
§ Issue rules and regulations it considers

necessary for the effective discharge of the
responsibilities and exercise of the powers
vested in it;

89
§ Direct the management, operations, and 2. Substantial interest in any private bank in
administration of the BSP, reorganize its the PH, within 1 year prior to his
personnel and issue such rules and regulations appointment. [Sec. 8, R.A. No. 7653]
as it may deem necessary or desirable for this
purpose;
LEGAL TENDER POWER
§ Establish a human resource management system
which governs the selection, hiring, All notes and coins issued by the BSP shall be fully
appointment, transfer, promotion, or dismissal guaranteed by the Government of the Republic of the
of all personnel; Philippines and shall be legal tender in the Philippines for
all debts, both public and private. [Sec. 52, R.A. No. 7653]
§ Adopt an annual budget for and authorize such
expenditures by BSP as are in the interest of the
Limitation: Coins shall be legal tender in amounts not
effective administration and operations of BSP in
exceeding Php 50 for denominations of 25 centavos and
accordance with applicable laws and regulations;
above, and in amounts not exceeding Php 20 for
denominations of 10 centavos or less.
§ Indemnify its members and other officials of the
BSP, including personnel of the departments
Exception: Monetary Board may fix otherwise.
performing supervision and examination
functions, against all costs and expenses
BSP Circular 537, Series of 2006
reasonably incurred by such persons in
Maximum amount of coins to be considered as legal tender
connection with an civil or criminal action, suit
is:
or proceeding, to which any of them may be
made a party by reason of the performance of his
a. P1000 – for denominations of 1-Piso, 5-Piso and
functions or duties, unless such members or
other officials is found to be liable for negligence 10-Piso coins; and
or misconduct. [Sec. 15, R.A. No. 7653]
b. P100 – for denominations of 1-sentimo, 5-
Composition sentimo, 10-sentimo, and 25-sentimo coins.
§ The MB shall be composed of 7 members

appointed by the President with a 6-year term. FOREIGN EXCHANGE OPERATIONS
[Sec. 6, R.A. No. 7653]
Purchases and Sales of Foreign Exchange
Members
The BSP:
a. The BSP Governor or his designated
alternate; a. May buy and sell foreign notes and coins, and
b. A Cabinet member to be designated by the documents and instruments of types
President; customarily employed for the international
c. 5 Members from the private sector transfer of funds;
(bankers). [Sec. 6, R.A. No. 7653]
b. May engage in future exchange operations;
Qualifications
c. May engage in foreign exchange transactions
1. Natural born-citizen; with the following entities only:
2. Governor – at least 40 y/o; members –
Other members at least 35 y/o; a. Banking institutions operating in the
3. Of good moral character; Philippines;
4. Of unquestionable integrity;
5. Of known probity and patriotism; b. The Government, its political subdivisions
6. With recognized competence in social and and instrumentalities;
economic disciplines. [Sec. 8, R.A. No. 7563]
c. Foreign or international institutions;
Disqualifications
d. Foreign governments and their
a. In addition to the disqualifications under instrumentalities; and
the Code of Conduct and Ethical Standards
for Public Officials and Employees (R.A. No. e. Other entities or persons, which the MB is
6713), a member of the MB is disqualified by: hereby, empowered to authorize as foreign
exchange dealers. [Sec. 70, R.A. No. 7653]
1. Direct connection with any multilateral
banking or financial institution;

90
Convertibility of the Peso other corporations authorized to perform banking

functions in the Philippines.
In order to maintain the convertibility of the peso, the BSP
may, at the request of any banking institution operating in b. Closed Bank – A bank placed under liquidation by the
the PH, buy any quantity of foreign exchange offered, and Monetary Board.
sell any quantity of foreign exchange demanded, by such
institution, provided that the foreign currencies so offered c. Liquidation – Refers to the proceedings under
or demanded are freely convertible into gold or United Sections 12 to 16 of R.A. No 3591, as amended.
State dollars. This requirement shall not apply to demands
for foreign notes and coins. [Sec. 70, R.A. No. 7653] d. Liquidation Court – Refers to the Regional Trial Court
of general jurisdiction where the petition for
Emergency Restrictions assistance in the liquidation of a closed bank is filed
and given due course.
In order to:
e. Petition for Assistance in the Liquidation of a Closed
a. Achieve the primary objective of the BSP; or Bank – Refers to the petition filed by the receiver with
the RTC in accordance with Sec. 16 of R.A. No. 3591 as
b. Protect the international reserves of the BSP, in amended.
the imminence of, or during an exchange crisis;
or f. Receiver – Refers to the Philippine Deposit Insurance
Corporation (PDIC) or any of its duly constituted
c. In time of national emergency and to give the MB agents acting as receiver of a closed bank. [Sec. 5, R.A.
and the Government time in which to take No. 3591, as amended]
constructive measures to forestall, combat, or
overcome such crisis or emergency the MB, with
CONSERVATORSHIP
the concurrence of at least five (5) of its
members, and with the approval of the President,
Conservatorship involves the appointment of a
may:
conservator to preserve the assets of a bank or quasi-bank
and take measures whenever the latter is in a state of
• Temporarily suspend or restrict sales of
continuing liability or is unwilling to maintain a condition
exchange by the BSP;
of liquidity deemed adequate to protect the interest of
depositors and creditors for a period not exceeding 1 year.
• May subject all transactions in gold and
foreign exchange to license by the BS;
Requisites:
• May require that any foreign exchange
1. A report must be submitted by the
thereafter obtained by any person residing
appropriate supervising or examining
or entity operating in the PH be delivered to
department of the BSP;
the BS or to any bank or agent designated
by the BS, for the purpose, at the effective
2. A positive finding of the grounds for
exchange rate.
conservatorship;
Except: The foreign currency deposits made
3. The Board of Directors must be informed in
under RA 6426 shall be exempt from these
writing the Order of the MB.
requirements.
Grounds for Conservatorship:
BANKS IN DISTRESS
(R.A. NO. 10846) § In a state of continuing inability;
§ Unwillingness to maintain a condition of liquidity

Note: Republic Act No. 3591, otherwise known as the
deemed adequate to protect the interest of
Philippine Deposit Insurance Corporation Act (PDIC Act)
depositors and creditors. [Sec. 29, R.A. No. 7653]
has been amended by R.A. Nos. 7400, 9302, and 9576. R.A.
No. 10846 further amends the PDIC Act, as amended, as
well as other laws. Termination:
1. When the Monetary Board is satisfied that

DEFINITION OF TERMS UNDER R.A. NO. the institution can continue to operate on
3591 AS AMENDED its own and the conservatorship is no longer
necessary;
a. Bank and Banking Institution – Includes banks,
commercial banks, savings banks, mortgage banks, 2. When, on the basis of the report of the
rural banks, development banks, cooperative banks, conservator or its own findings, the MB
stock savings and loan associations and branches and determines that the continuance in
agencies in the Philippines of foreign banks and all business of the institution would involve
probable loss to its depositors or creditors.

91
Special Rule: In this case, the MB may act

Note: In such case, the institution will be placed summarily and without hearing. [Sec. 30, R.A. No.
under receivership. 7653]
Powers and Duties of Conservator:

RECEIVERSHIP
a. To take charge of the assets, liabilities, and the
management thereof; Refers to the stage within which the PDIC manages the
affairs of the closed bank and preserves its assets for the
b. To reorganize the management; benefit of creditors. [Sec. 10 (a, b), R.A. No. 9302]
c. To collect all monies and debts due said Requisites:

institution;
§ Report of the head of the supervising
d. To exercise all powers necessary to restore its department involving the bank;
viability;
§ Finding of the MB of the existence of any of the
e. To report and be responsible to the MB; grounds for receivership;
f. To overrule or revoke the actions of the previous § Order by the MB to forbid the institution from
management and board of directors of the doing business (may be summary);
institution. [Sec. 29, R.A. No. 7653]
§ Notice in writing, informing the Board of
Directors of the institution of the order.
CLOSURE
Grounds for Receivership:
“Close now, hear later” Doctrine
a. Unable to pay its liabilities as they become due in
The MB may summarily and without need for prior hearing the ordinary course of business, except for
close a bank and place it under receivership. inability to pay caused by extraordinary demands
induced by financial panic in the banking
Grounds: community;
a. Notifies the BSP or publicly announces a b. Has insufficient realizable assets, as determined
bank holiday; or by the BSP, to meet its liabilities;
b. Suspends the payment of its deposit c. Cannot continue in business without involving
liabilities continuously for more than 30 probable losses to its depositors or creditors;
days in any manner. [Sec. 53, R.A. 8791]
d. Has willfully violated a Cease and Desist Order
c. Persistence in conducting business in an under Sec. 37 (NCBA) that has become final,
unsafe or unsound manner. [Sec. 56, R.A. No. involving acts or transactions which amount to
8791] fraud or a disposition of assets of the institution.
d. Unable to pay its liabilities as they become Special Rule: In this case, the MB may act
due in the ordinary course of business, summarily and without hearing. [Sec. 30, R.A. No.
except for inability to pay caused by 7653]
extraordinary demands induced by financial
panic in the banking community; Power and Duties of Receiver:
e. Has insufficient realizable assets, as § Immediately gather and take charge of all
determined by the BSP, to meet its the assets and liabilities of the institution;
liabilities;
§ Administer the assets for the benefit of the
f. Cannot continue in business without creditors;
involving probable losses to its depositors
or creditors; § Exercise the general powers of a receiver
under the Rules of Court;
g. Has willfully violated a Cease and Desist
Order under Sec. 37 of R.A. No. 7653 that has § Not to pay or commit any act that will
become final, involving acts or transactions involve the transfer or disposition of any
which amount to fraud or a disposition of asset of the institution.
assets of the institution.
Except:

92
a. Administrative expenditures; which the bank has equitable

interest;
b. Receiver may deposit or place funds in non-
speculative investments. § Appoint or hire persons or entities
of recognized competence in
§ Subject to prior approval of the MB, banking, finance, asset
determine, as soon as possible, but not later management or remedial
than 90 days from the take-over, whether management, as its deputies,
the institution may be rehabilitated or assistants or agents, to perform
otherwise placed in such a condition so that such powers and functions of the
it may be permitted to resume business PDIC as receiver of the closed
with safety to its depositors and creditors bank, or assist in the performance
and the general public. thereof;
Except: § Appoint or hire persons or entities

of recognized competence in
a. Administrative expenditures; forensic and fraud investigations;
b. Receiver may deposit or place funds in non- § Pay accrued utilities, rentals and
speculative investments. [Sec. 30, R.A. No. salaries of personnel of the closed
7653] bank for a period not exceeding 3
months, from available funds of
Main duty: Within 90 days from takeover, the closed bank;
determine WON the institution can be
rehabilitated, otherwise, it will be liquidated. § Collect loans and other claims of
the closed bank and for this
Authorities of the Receiver Under R.A. No. 3591, as purpose, modify, compromise or
amended by R.A. No. 10846 restructure the terms and
conditions of such loans or claims
as may be deemed advantageous
§ The receiver is authorized to adopt and
to the interests of the creditors of
implement, without need of consent of the
the closed bank;
stockholders, board of directors, creditors
or depositors of the closed bank, any or a
§ Hire or retain private counsel as
combination of the following modes of
may be necessary;
liquidation:
§ Borrow or obtain a loan, or
§ Conventional liquidation; and
mortgage, pledge or encumber
any asset of the closed bank, when
§ Purchase of assets and/or assumption of
necessary to preserve or prevent
liabilities.
dissipation of the assets, or to
redeem foreclosed assets of the
§ In addition to the powers of a receiver
closed bank, or to minimize losses
provided under existing laws, the PDIC, as
to its depositors and creditors;
receiver of a closed bank, is empowered to:
§ If the stipulated interest rate on
§ Represent and act for and on deposits is unusually high
behalf of the closed bank; compared with prevailing
applicable interest rates, the PDIC
§ Gather and take charge of all the as receiver, may exercise such
assets, records and affairs of the powers which may include a
closed bank, and administer the reduction of the interest rate to a
same for the benefit of its reasonable rate;
creditors;
Note: Any modifications or reductions shall
§ Convert the assets of the closed
apply only to earned and unpaid interest;
bank to cash or other forms of
liquid assets, as far as practicable;
§ Utilize available funds of the bank,
including funds generated by the
§ Bring suits to enforce liabilities of
receiver from the conversion of
the directors, officers, employees,
assets to pay for reasonable costs
agents of the closed bank and
and expenses incurred for the
other entities related or
preservation of the assets, and
connected to the closed bank or
liquidation of, the closed bank,
to collect, recover, and preserve
without need for approval of the
all assets, including assets over
liquidation court;

93
Note: For banks with insufficient funds, the Upon the designation of the PDIC as receiver of a closed
PDIC is authorized to advance the foregoing bank, it shall serve a notice of closure to the highest-
costs and expenses, and collect payment, as ranking officer of the bank present in the bank premises,
and when funds become available. or in the absence of such officer, post the notice of closure
in the bank premises or on its main entrance. The closure
§ Charge reasonable fees for the of the bank shall be deemed effective upon the service of
liquidation of the bank from the the notice of closure. Thereafter, the receiver shall
assets of the bank; takeover the bank and exercise the powers of the receiver
as provided by R.A. No. 3591, as amended.
Note: Payment of these fees, including any
The receiver shall have authority to use reasonable force,
unpaid advances under the immediately
including the authority to force open the premises of the
preceding paragraph, shall be subject to
bank, and exercise such acts necessary to take actual
approval by the liquidation court; physical possession and custody of the bank and all its
assets, records, documents, and take charge of its affairs
§ Distribute the available assets of upon the service of the notice of closure.
the closed bank, in cash or in kind,
to its creditors in accordance with Directors, officers, employees or agents of a bank hold
the Rules on Concurrence and money and other assets of the bank in trust or under
Preference of Credits under the administration or management by them for the bank in
Civil Code or other laws; their fiduciary capacity.
§ Dispose records of the closed Upon service of the notice of closure to the bank, all
bank that are no longer needed in directors, officers, employees or agents of the closed bank
the liquidation in accordance with shall have the duty to immediately account for, surrender
guidelines set by the PDIC Board and turn over to the receiver, and provide information
of Directors, notwithstanding the relative to, the assets, records, and affairs of the closed
laws on archival period and bank in their possession, custody, administration or
disposal of records; and management.
§ Exercise such other powers as are When the circumstances so warrant, the local government
inherent and necessary for the unit and law enforcement agencies concerned shall, upon
effective discharge of the duties request, immediately provide assistance to the receiver
of the Corporation as receiver. during the service of notice of closure and actual takeover
operations to ensure the orderly conduct thereof and the
Note: The Board of Directors shall adopt security and safety of the personnel of the receiver and the
such policies and guidelines as may be employees of the closed bank. [Sec. 14, R.A. No. 3591, as
necessary for the performance of the above amended by R.A. No. 10846]
powers by personnel, deputies, assistants
and agents of the Corporation. LIQUIDATION
§ After the payment of all liabilities and claims Refers to the recovery and conversion of assets into cash
against the closed bank, the PDIC shall pay for distribution to all creditors in accordance with the
surplus, if any, dividends at the legal rate of rules on concurrence and preference of credits.
interest from date of takeover to date of
distribution to creditors and claimants of After undergoing conservatorship, closure, and/or
the closed bank in accordance with the receivership, if the bank cannot be rehabilitated, it shall be
Rules on Concurrence and Preference of liquidated.
Credits under the Civil Code or other laws
before distribution to the shareholders of
the closed bank. Liquidation of a Closed Bank:
§ The officers, employees, deputies, a. Whenever a bank is ordered closed by the MB,
assistants and agents of the receiver shall the PDIC shall be designated as receiver and it
have no liability and shall not be subject to shall proceed with the takeover and liquidation
any action, claim or demand in connection of the closed bank in accordance with the
with any act done or omitted to be done by provisions of R.A. No. 3591, as amended.
them in good faith in connection with the
exercise of their powers and functions b. Banks closed by the MB shall no longer be
under R.A. No. 3591, as amended, and other rehabilitated. [Sec. 12, R.A. No. 3591, as amended
applicable laws, or other actions duly by R.A. No. 10846]
approved by the court. [Sec. 13 (a-d), R.A. No.
3591, as amended by R.A. No. 10846] Kinds:
Notice of Closure and Takeover Activities

94
§ Voluntary Liquidation – refer to proceedings a. It shall continue as a body corporate until the
initiated by the debtor; termination of the winding-up period under Sec.
16 of R.A. No. 3591, as amended.
§ Involuntary Liquidation – refers to proceedings
initiated by creditors. b. Such continuation as a body corporate shall only
be for the purpose of liquidating, settling and
Modes of Liquidation Under R.A. No. 3591, as amended closing its affairs and for the disposal,
conveyance or distribution of its assets.
1. Conventional liquidation; and
c. The receiver shall represent the closed bank in
2. Purchase of assets and/or assumption of all cases by or against the closed bank and
liabilities. [Sec. 13 (a), R.A. No. 3591, as amended by prosecute and defend suits by or against it.
R.A. No. 10846]
d. In no case shall the bank be reopened and
Stages in Conventional Liquidation permitted to resume banking business after
being placed under liquidation.
a. Asset Management and Conversion;
B. On the powers and functions of its directors,
b. Petition for Assistance in the Liquidation of officers and stockholders
a Closed Bank; and
1. The powers, voting rights, functions and
c. Winding-Up. [Sec. 16, R.A. No. 3591, as duties, as well as the allowances,
amended by R.A. No. 10846] remuneration and perquisites of the
directors, officers, and stockholders of such
Grounds for Liquidation: bank are terminated upon its closure.
§ The institution is insolvent; 2. The directors, officers, and stockholders

shall be barred from interfering in any way
§ Continuance would involve probable loss to with the assets, records, and affairs of the
creditors; bank.
§ Monetary Board determines that the institution 3. The receiver shall exercise all authorities as
cannot be rehabilitated. may be required to facilitate the liquidation
of the closed bank for the benefit of all its
Effects of Liquidation: creditors.
a. Retention of juridical personality; C. On the assets
b. Suspension of operations; Upon service of notice of closure as provided in Sec. 14 of

R.A. No. 3591, as amended, all the assets of the closed bank
c. Assets are deemed in custodia legis; shall he deemed in custodia legis in the hands of the
receiver, and as such, these assets may not be subject to
d. Stay of execution of judgment to prevent attachment, garnishment, execution, levy or any other
depletion of bank assets; court processes.
e. Bank is not liable to pay interest on deposits A judge, officer of the court or any person who shall issue,
which accrued during the period of suspension order, process or cause the issuance or implementation of
of operations; the garnishment order, levy, attachment or execution,
shall be liable under Sec. 27 of R.A. No. 3591, as amended.
f. Restriction of bank’s capacity to conduct new
business, but with obligation to collect pre- Note:
existing obligations; Collaterals securing the loans and advances granted by the
BSP shall not be included in the assets of the closed bank
g. Deposits do no become preferred credits. for distribution to other creditors.
Effects of the Placement of a Bank Under Liquidation as The proceeds in excess of the amount secured shall be
Provided by R.A. No. 8591, as amended by R.A. No. 10846 returned by the BSP to the receiver.
The placement of a bank under liquidation shall have the Any preliminary attachment or garnishment on any of the
following effects: assets of the closed bank existing at the time of closure
shall not give any preference to the attaching or garnishing
A. On the corporate franchise or existence party.
Upon motion of the receiver, the preliminary attachment

or garnishment shall be lifted and/or discharged.

95
J. Final decisions against the closed bank

D. On labor relations
The execution and enforcement of a final decision of a
Notwithstanding the provisions of the Labor Code, the court other than the liquidation court against the assets of
employer-employee relationship between the closed bank a closed bank shall be stayed.
and its employees shall be deemed terminated upon
service of the notice of closure of the bank. The prevailing party shall file the final decision as a claim
with the liquidation court and settled in accordance with
Payment of separation pay or benefits provided for by law the Rules on Concurrence and Preference of Credits under
shall be made from available assets of the bank in the Civil Code or other laws.
accordance with the Rules on Concurrence and
Preference of Credits under the Civil Code or other laws. K. Docket and other court fees
E. On contractual obligations Payment of docket and other court fees relating to all cases
or actions filed by the receiver with any judicial or quasi-
The receiver may cancel, terminate, rescind or repudiate judicial bodies shall be deferred until the action is
any contract of the closed bank that is not necessary for terminated with finality.
the orderly liquidation of the bank, or is grossly
disadvantageous to the closed bank, or for any ground Any such fees shall constitute as a first lien on any
provided by law. judgment in favor of the closed bank or in case of
unfavorable judgment, such fees shall be paid as
F. On interest payments liquidation costs and expenses during the distribution of
the assets of the closed bank.
The liability of a bank to pay interest on deposits and all
other obligations as of closure shall cease upon its closure L. All assets, records, and documents in the possession
by the Monetary Board without prejudice to the first of the closed bank at the time of its closure are
paragraph of Section 85 of the NCBA. presumed held by the bank in the concept of an owner
Note: The receiver shall have the authority, without need M. The exercise of authority, functions, and duties by the
for approval of the liquidation court, to assign, as payment receiver under R.A. No. 3591, as amended, shall be
to secured creditors, the bank assets serving as collaterals presumed to have been performed in the regular
to their respective loans up to the extent of the course of business.
outstanding obligations, including interest as of date of
closure of the hank, as validated by the receiver. The N. Assets and documents of the closed bank shall retain
valuation of the asset shall be based on the prevailing their private nature even if administered by the
market value of the collaterals as appraised by an receiver. Matters relating to the exercise by the
independent appraiser on an ‘as is where is’ basis. receiver of the functions under R.A. No. 3591, as
amended, shall be subject to visitorial audit only by
G. Liability for penalties and surcharges for late the Commission on Audit. [Sec. 13 (e), R.A. No. 3591, as
payment and nonpayment of taxes amended by R.A. No. 10846]
From the time of closure, the closed bank shall not be liable Conventional Liquidation
for the payment of penalties and surcharges arising from
the late payment or nonpayment of real property tax, Asset Management and Conversion
capital gains tax, transfer tax and similar charges.
1. The assets gathered by the receiver shall be
H. Bank charges and fees on services evaluated and verified as to their existence,
ownership, condition, and other factors to
The receiver may impose, on behalf of the closed bank, determine their realizable value.
charges and fees for services rendered after bank closure,
such as, but not limited to, the execution of pertinent Note: In the management, preservation and
deeds and certifications. disposition of assets, the receiver shall be guided
by cost-benefit considerations, resources of the
I. Actions pending for or against the closed bank closed bank, and potential asset recovery.
Except for actions pending before the Supreme Court, 2. The conversion of the assets of the closed bank
actions pending for or against the closed bank in any court shall be carried out in a fair and transparent
or quasi-judicial body shall, upon motion of the receiver, manner in accordance with the rules and
be suspended for a period not exceeding 180 days and procedures as may be determined by the
referred to mandatory mediation. receiver.
Upon termination of the mediation, the case shall be 3. In the management and/or conversion of the
referred back to the court or quasi-judicial body for assets of the closed bank, the receiver shall have
further proceedings. the authority to:

96
• Represent the closed bank before the Land the closed bank without the consent of the
Registration Authority (LRA), the Bureau of receiver.
Lands, the Register of Deeds, the Land
Transportation Office (LTO), the Assessor’s § Upon issuance by the Monetary Board of the
Office or other appropriate office of the resolution ordering the closure of a bank, any
local government unit, the Securities and person or entity in custody or possession of
Exchange Commission (SEC), or such other assets or records of the closed bank, including,
similar government agencies or private but not limited to, the closed bank’s deposit
entities in: accounts, titles to real property, collaterals,
promissory notes, evidence of indebtedness or
§ Verifying the authenticity of ownership investments shall immediately turn over custody
documents; of said assets and records to the receiver. Such
obligation shall cover evidence of deposit such as
• Registering the interest of the closed bank passbooks or certificates of deposit issued by the
on a specific property; bank to its depositors. Pending turnover, all
persons or entities in custody or possession of
§ Consolidating ownership over an asset of any asset or record of the closed bank shall hold
the closed bank; the said assets or records in trust for the
receiver.
§ Securing certified true copies of documents
held by the foregoing agencies/entities in § The persons or entities in custody or possession
relation to an asset of the closed bank; of such asset shall not allow, authorize or cause
the withdrawal, transfer, disposition, removal,
§ Securing the appropriate certification from conversion, concealment, or other transaction
the foregoing agencies/entities in relation involving or relating to the subject asset, unless
to an asset of the closed bank; and otherwise directed by the receiver.
§ Performing other related activities; 5. The receiver shall have the authority to invest
funds received from the conversion of the assets
• Conduct a physical or ocular inspection of of the closed bank in government securities,
the properties owned by, or mortgaged to, other government-guaranteed marketable
the closed bank, to determine their securities or investment-grade debt
existence and present condition; instruments.
• Determine the disposal price of assets in 6. The proceeds of the sale of the bank and branch
accordance with generally accepted licenses shall be for the benefit of the creditors
of the closed bank which shall be distributed in
valuation principles, standards and
practices, subject to such guidelines as the accordance with this Act and the Rules on
Concurrence and Preference of Credits under
receiver may determine;
the Civil Code or other laws. [Sec. 16 (a-f), R.A. No.
• Dispose real or personal properties of the 3591, as amended by R.A. No. 10846]
closed bank through bidding, negotiated
sale or any other mode including lease with Petition for Assistance in the Liquidation of a Closed
option to purchase, whether by piece or by Bank
lot, as may be reasonably determined by the
receiver based on cost-benefit 1. A petition for assistance in the liquidation is a
considerations and to allow efficient special proceeding for the liquidation of a closed
distribution of assets to creditors; and bank, and includes the declaration of the
concomitant right of its creditors and the order
• Engage third parties to assist in the of payment of their valid claims in the disposition
liquidation, manage and/or dispose the of its assets.
assets, handle cases filed against or by the
closed bank, subject to such guidelines as Note: Any proceeding initiated under Sec. 16 of
determined by the receiver. R.A. No. 3591, as amended, shall be considered in
rem. Jurisdiction over all persons affected by the
4. Notwithstanding any provision of law to the proceeding shall be considered as acquired upon
contrary, the following rules shall apply to the publication of the order setting the case for
management and/or conversion by the receiver initial hearing in any newspaper of general
of the assets of the closed bank: circulation in the Philippines.
§ Upon notification of the closure of a bank, the 2. The liquidation court shall have exclusive
LRA, the Bureau of Lands, the Register of Deeds, jurisdiction to adjudicate disputed claims against
the LTO, the assessor’s office or other the closed banks, assist in the enforcement of
appropriate office of the local government unit, individual liabilities of the stockholders,
or such other similar government agencies shall directors and officers and decide on all other
not allow any transaction affecting the assets of issues as may be material to implement the

97
distribution plan adopted by the PDIC for surplus dividends. During this 6-month period,
general application to all closed banks. the receiver shall hold as trustee the assets
allocated in the final asset distribution plan for
3. The provisions of the Securities Regulation Code said creditors.
(SRC), and Supreme Court Administrative Matter
No. 00-8-10-SC, titled, ‘The Rules of Procedure Note: Failure by the creditor to comply with the
on Corporate Rehabilitation’, shall not be documentary requirements within the
applicable to the petition for assistance in the prescribed period and/or refusal to accept the
liquidation of the closed bank. asset as payment shall be deemed as
abandonment or waiver of his or her right to
4. The petition shall be filed in the RTC which has payment.
jurisdiction over the principal office of the closed
bank or the principal office of the receiver, at the 2. The individual stockholders of record or their
option of the latter. duly-authorized representative or the court-
appointed stockholders’ representative shall
5. The petition shall be filed ex parte within a have a period of 6 months from publication of
reasonable period from receipt of the MB notice of the approval by the court of the final
Resolution placing the bank under liquidation. asset distribution plan of the closed bank within
which to claim the residual assets. During this 6-
6. All persons or entities with claims against the month period, the receiver shall hold as trustee
assets of the closed bank shall file their claims the assets allocated in the final asset distribution
with the receiver within 60 days from the date of plan for said stockholders of record.
publication of the notice of closure. Claims filed
outside the foregoing prescribed period shall be Note: Failure by the individual stockholders of
disallowed. record or their duly-authorized representative
or the court-appointed stockholders’
Note: Claims denied by the receiver shall be filed representative to comply with the documentary
with the liquidation court within 60 days from requirements within the prescribed period
receipt of the final notice of denial of claim. and/or refusal to accept the residual assets in
kind shall be deemed as abandonment or waiver
7. A claim whose validity has not yet been of right to receive the residual assets.
determined with finality at the time of the
submission of the final asset distribution plan, 3. After the lapse of the 6-month period, all assets
either by reason of a pending suit or for whatever which remain unclaimed by the creditors and/or
reason, shall be considered as contingent claim stockholders of record shall be turned over to
and shall not be paid under the proposed final the Bureau of Treasury (BoT).
asset distribution plan.
4. The receiver shall continue to keep all the
8. Upon finality of the order approving the final pertinent records of the closed bank for a period
asset distribution plan, the petition for of 6 months from the date of publication of the
assistance in the liquidation of a closed bank approval of the final asset distribution plan.
shall be, for all intents and purposes, considered
closed and terminated and the receiver, its Note: After the lapse of this period, the receiver
officers, employees or agents, are forever is authorized to dispose of the same in
discharged from any and all claims and/or accordance with the rules and regulations to be
liability arising from or in connection with the prescribed by the receiver.” [Sec. 16, (q-t), R.A. No.
liquidation of the closed bank. 3591, as amended by R.A. No. 10846]
9. The receiver shall submit a final report on the Purchase of Assets and Assumption of Liabilities
implementation of the approved final asset
distribution plan to the Monetary Board and the 1. The receiver shall have the authority to facilitate
SEC after the expiration of the winding-up and implement the purchase of the assets of the
period. closed bank and the assumption of its liabilities
by another insured bank, without need for
10. The Supreme Court shall promulgate the approval of the liquidation court.
appropriate procedural rules to implement this
section. [Sec. 16 (g-p), R.A. No. 3591, as amended Note:
by R.A. No. 10846]
1. The exercise of this authority shall be in accordance
Winding-Up with the Rules on Concurrence and Preference of
Credits under the Civil Code or other laws, subject to
1. The creditors shall have a period of 6 months
such terms and conditions as the PDIC may prescribe.
from the date of publication of notice of the
approval by the court of the final asset
2. The disposition of the branch licenses and other bank
distribution plan of the closed bank within which
licenses of the closed bank shall be subject to the
to claim payment of the principal obligations and
approval of the BSP.

98
2. Such action of the receiver to determine Not an exception: Power of the Ombudsman to
whether a bank may be the subject of a purchase examine and have access to bank accounts and
of assets and assumption of liabilities transaction records under Sec. 15, par. 8, RA 6770. (See
shall be final and executory, and may not be set Marquez v. Desierto)
aside by any court. [Sec. 15, R.A. No. 3591, as
amended by R.A. No. 10846] Others:
• The Commissioner of Internal Revenue can

inquire into the bank accounts of the following
taxpayers:
LAW ON SECRECY OF BANK DEPOSITS
(R.A. NO 1405, AS AMENDED) a. A decedent in order to determine his gross
estate; or
Purpose
b. A taxpayer who has filed an application to
1. To encourage the people to deposit their money in compromise his tax liability on the ground
banks;
of financial incapacity;
2. To discourage private hoarding, so that the funds can
c. A taxpayer, information on whose account
be used by the bank to grant loans to assist in is requested by a foreign tax authority.
economic development.
• Unexplained wealth under Sec. 8 of R.A. No. 3019;
3. To protect people and banking officials from undue
pressures from government agencies and private
• Cases under the AMLA (R.A. No. 9194)
individuals to make disclosure
• Under the Human Security Act of 2007:
Note: The absolute confidentiality rule in R.A. No. 1405
actually aims at protection from unwarranted inquiry or a. Kidnapping for Ransom;
investigation if the purpose of such inquiry or investigation
is merely to determine the existence and nature, as well as b. Dangerous Drug;
the amount of the deposit in any given bank account.
[China Banking Corp v. Ortega, G.R. No. L-34964, January c. Hijacking and other violations of RA
31, 1973] 6235;
d. Destructive arson and murder.

Deposits Covered
• BSP inquiry or examination in the course of its
GENERAL RULE: All deposits of whatever nature with
periodic or special examination of the bank. [Sec.
banks or banking institutions in the Philippines are
11, R.A. No. 9160]
considered as of an absolute confidential nature. [Sec. 2,
R.A. No. 1405]
• Disclosure of certain information about bank
deposits which have been dormant for at least 10
Note: This includes investments in bonds issued by the
years, to the Treasurer of the Philippines in a
Government of the Philippines, its political subdivisions
sworn statement, a copy of which is posted in the
and its instrumentalities. Note that investments in bonds
bank premises. [Sec. 2, Act No. 3926]
in foreign currency are still covered by RA 1405, and have
not been exempted by the Foreign Currency Deposit Act.
• The PDIC and/or the BSP can inquire into or
Also includes Trust receipts. The phrase “of whatever examine deposit accounts and all information
nature” prescribes any restrictive interpretation of related thereto in case there is a finding of unsafe
“deposits”. The law applies not only to money which is and unsound banking practice. [Sec. 8, par. 8, R.A.
deposited but also to those which are invested (Ejercito v. No. 3591, as amended by R.A. No. 9586]
Sandiganbayan)
Garnishment of Deposits, including Foreign Deposits
EXCEPTIONS
GENERAL RULE: The prohibition against examination of
or inquiry into a bank deposit under RA 1405 does not
a. Upon written permission of the depositor;
preclude its being garnished to insure satisfaction of a
judgment.
b. In cases of impeachment;
c. Upon order of competent court in cases of EXCEPTION: Foreign Currency Deposits

bribery and dereliction of duty;
§ The foreign currency deposits shall be
d. In cases where the money deposited or invested exempt from attachment, garnishment, or
any other order or process of any court,
is the subject matter of litigation.

99
legislative body, government agency or any h. BSP inquiry or

administrative body whatsoever. [Sec. 8, examination in the
Foreign Currency Deposit Act] course of its periodic or
special examination of
EXCEPTION TO THE EXCEPTION: When the foreign the bank
deposit made by a transient or tourist, who commits a i. Dormant for at least 10
crime is subject to garnishment when there is no other years
recourse but to go after said foreign deposit (Salvacion, et. j. Finding of BSP of
al. v. Central Bank)
unsafe and unsound
banking practice
FOREIGN CURRENCY DEPOSIT ACT

(R.A. NO 6426, AS AMENDED) GENERAL BANKING LAW OF 2000
(R.A. NO. 8791)
Deposits Covered
Banks refer to entities engaged in the lending of funds
obtained in the form of deposits. [Sec. 3, par. 1, R.A. No.
GENERAL RULE: All foreign currency deposits are
8791]
considered absolutely confidential in nature. In no
instance shall foreign currency deposits be examined,
Rationale for the passage of this Act
inquired or looked into by any person, government official,
bureau or office whether judicial or administrative or
§ State recognizes the vital role of banks in
legislative, or any other entity whether public or private.
providing an environment conducive to the
sustained development of the national and
EXCEPTION:
a. Upon written permission of the depositor. fiduciary nature of banking that requires
high standards of integrity and
NOTE: Instances where the court relaxed the application performance
of the such rule:
Classification of Banks
Where the owner of the funds unlawfully taken and which
are indisputable now deposited with the Bank, he has the § Universal Bank - A universal bank shall have the
right to inquire into said deposits. The allowance of the authority to exercise, in addition to the powers
inquiry would be in accord with the instrument with the authorized for a commercial bank in Sec. 29, the
rudiments of fairplay, the upholding of fairness in our powers of an investment house as provided in
judicial system and would be an avoidance of delay and existing laws and the power to invest in non-
time-wasteful and circuitous way of administering justice. allied enterprises.
(China Banking Corp., v. CA)
§ Commercial Bank – A commercial bank shall
R.A. NO. 1405 R.A. NO. 6426 have, in addition to the general powers incident
A writ of garnishment can General Rule: A writ of to corporations, all such powers as may be
be issued garnishment cannot be necessary to carry on the business of
issued against foreign commercial banks such as:
currency
§ Accepting drafts and issuing letters of
Exception: When there is credit;
no other recourse but to
go after foreign account § Discounting and negotiating PNs, drafts,
of a transient bills of exchange, and other evidence of
alien/tourist. debts;
There are 10 exceptions: There is only 1 exception:
§ Accepting or creating demand deposits;
a. Upon written Upon written permission.
permission of depositor
§ Receiving other types of deposits and
b. Impeachment cases
deposit substitutes;
c. Order of Competent
court in cases of bribery § Buying and selling foreign exchange and
and dereliction of duty gold or silver bullion;
d. Subject Matter of
Litigation § Acquiring marketable bonds and other debt
e. Order of Commission of securities;
Internal Revenue
f. Unexplained wealth § Extending credit, subject to such rules as
g. Cases under AMLA the MB may promulgate. These rules may
include the determination of bonds and

100
other debt securities eligible for § Quasi-Banks – refer to entities engaged in the
investment, the maturities and aggregate borrowing of funds through the issuance,
amount of such investment. [Sec. 29, R.A. No. endorsement or assignment with recourse or
8791] acceptance of deposit substitutes as defined in Sec.
95 of the NCBA for the purposes of re-lending or
In addition to the operations authorized, a bank may purchasing of receivables and other obligations.
perform the following services:
§ Trust Entities – refer to a bank or a non-bank
§ Receive in custody funds, documents and financial institution, through its specifically
valuable objects; designated business unit to perform trust functions;
or a trust corporation, authorized by the BSP to
§ Act as financial agent and buy and sell, by engage in trust and other fiduciary business under the
order of and for the account of their GBL or to perform investment management services
customers, shares, evidence of under Sec. 53 of GBL.
indebtedness and all types of securities;
Bank Powers and Liabilities
§ Make collections and payments for the
account of others and perform such other
services for their customers as are not Corporate Powers:
incompatible with banking business;
§ Sue and be sued in its corporate name;
§ Upon prior approval of the MB, act as
managing agent, adviser, consultant or § Succession;
administrator of
investment/management/advisory/consu § Adopt and use a corporate seal;
ltancy accounts; and
§ Amend its AOI;
§ Rent out safety deposit boxes. [Sec. 53, R.A.
§ Adopt and amend By-Laws;
No. 8791]
§ For stock corporations – issue or sell stocks to
§ Thrift Bank – Thrift Banks are banks that focus
subscribers and sell treasury stocks; for non-
on basic banking services for their clients, with
profit corporation – admit members to the
an emphasis on individuals and small businesses;
corporation.
primarily governed by R.A. No. 7906 or the Thrift
§ Purchase, receive, take or grant, hold, convey,
Bank Act. Thrift Bank includes;
sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, pursuant
1. Savings and mortgage banks; to its lawful business;
2. Savings and loan associations; § Enter into merger or consolidation with other
corporations as provided in the Code;
3. Private development banks.
§ Make reasonable donations, including those for
§ Rural Banks – Banks that are formed for the the public welfare or for hospital, charitable,
purpose of providing adequate credit facilities to cultural, scientific, civic or similar purposes:
farmers and merchants, or to cooperatives of Provided, no corporation, domestic or foreign,
such farmers and merchants in general, the shall give donations in aid of any political party
people of the rural communities. Primarily or candidate or for purposes of partisan political
governed by R.A. No. 7353, or the Rural Bank Act. activity;
§ Cooperative Banks – Banks which are organized § Establish pension, retirement, and other plans
as cooperatives under R.A. No. 6938, the for the benefit of its directors, trustees, officers
Cooperatives Code. and employees; and
§ Islamic Banks – Banks that aims to provide § Exercise such other powers as may be essential
banking under the Shari’a principles governing or necessary to carry out its purposes.
banking. TRIVIA: There is only one Islamic Bank
in the PH – the Al-Amanah Islamic Bank Banking and Incidental Powers:
§ Other Banks Classified by the BSP – Land Bank § Accepting drafts and issuing letters of credit;
of the Philippines, Veteran’s Bank, and the
Development Bank of the Philippines § Discounting and negotiating PNs, drafts, bills of
exchange, and other evidence of debts;
Distinction of Banks from Quasi-Banks and Trust Entities
§ Accepting or creating demand deposits;

101
GENERAL RULE: Only Universal and their income and expenditure and such
Commercial Banks can accept or create demand information as may be prescribed by law or by
deposits. rules and regulations of MB to enable the bank to
properly evaluate the credit application which
EXCEPTION: Banks with prior approval of, and includes the corresponding financial statements
submitted for taxation purposes to the BIR. [Sec.
subject to such conditions and rules as may be
40, GBL]
prescribed by the MB. [Sec. 33, GBL]
§ Receiving other types of deposits and deposit Material Misrepresentation:

substitutes;
If there is Material Misrepresentation, the bank:
a. Types of Deposits:
a. May terminate any loan or other credit
§ Time Deposit – Interest rate stipulated accommodation granted on the basis of said
depending on the number of days. During statements;
this period, the money deposited may not
be withdrawn without incurring penalty. b. Shall have the right to demand immediate
High interest rates. repayment or liquidation of the obligation. [Sec.
40, GBL]
§ Savings Deposit – bank pays an interest
rate, but not as high as time deposits. Limits on Loans, Credit Accommodation and Guarantees
–
§ Demand Deposit/Current Deposit – All
those liabilities of the BSP and of other o Against Real Estate:
banks which are denominated in Philippine
currency and are subject to payment in legal GENERAL RULE: Not exceed 75% of the appraised
tender upon demand by the presentation of value of the respective real estate security, plus 60%
checks. [Sec. 58, NCBA] No interest is paid of the appraised value of the insured improvements,
by the bank because the depositor can take and such loans may be made to the owner of the real
out his funds any time. [Villanueva, estate or to his assignees.
Commercial Law Review, 2012]
EXCEPTION: Where the MB otherwise prescribes.
§ Negotiable Order of Withdrawal Accounts – [Sec. 37, GBL]
Interest-bearing deposit accounts that
combine the payable on demand feature of o On Security of Chattels and
checks and investment feature of savings Intangible Properties (IPS)
accounts. [Manual of Regulations for Banks]
GENERAL RULE: Not exceed 75% of the appraised
§ Deposit substitute - are funds obtained
value of the appraised value of the security, and such
from the public other than in the form of
loans and other credit accommodations may be made
deposits.
to the title holder of the chattels and intangible
properties or to his assignees.
§ Buying and selling foreign exchange and gold or
EXCEPTION: Where the MB otherwise prescribes.
silver bullion;
[Sec. 38, GBL]
§ Acquiring marketable bonds and other debt
securities; Grant of Loans:
§ Extending credit, subject to such rules as the MB a. Only in amounts and for the periods of time
may promulgate. These rules may include the essential for the effective completion of the
determination of bonds and other debt operations to be financed; and
securities eligible for investment, the maturities
and aggregate amount of such investment. [Sec. b. Consistent with safe and sound banking
29, GBL] practices. [Sec. 39, GBL]
“Know Your Customer” Rule: Purpose of Loans:

The purpose shall be stated in the application and in the
b. Before granting a loan or other credit contract between the bank and the borrower. [Sec. 39,
accommodation, a bank must ascertain that the GBL]
debtor is capable of fulfilling its commitments to
the bank.
c. The bank may demand from its credit applicants

a statement of their assets and liabilities and of

102
Effect of Usage of Loan Proceeds for Purposes Other prescribe the maturities, as well as related terms and
than Those Agreed Upon with the Bank conditions for various types of bank loans and other credit
The bank shall have the right to terminate the loan or other accommodations. Any change by the Board in the
credit accommodation and demand immediate repayment maximum maturities shall apply only to loans and other
of the obligation. [Sec. 39, GBL] credit accommodations made after the date of such action.
The Monetary Board shall regulate the interest imposed on

DILIGENCE REQUIRED OF BANKS micro-finance borrowers by lending investors and similar
lenders such as, but not limited to, the unconscionable
§ The State recognizes the vital role of banks providing rates of interest collected on salary loans and similar credit
an environment conducive of the sustained accommodations. [Sec. 43, GBL]
development of the national economy and the
fiduciary nature of banking that requires high GRANT OF LOANS AND SECURITY
standards of integrity and performance. In
furtherance thereof, the State shall promote and
REQUIREMENTS A SINGLE BORROWER’S
maintain a stable and efficient banking and financial LIMITS
system the is globally competitive, dynamic and
responsive to the demands of a developing economy. Ratio of Net Worth to Total Risk Assets
[Sec. 2, GBL]
• The MB shall prescribe the minimum ratio which the
§ BSP Circular 857 provides that financial institutions net worth of a bank must bear to its total risk assets
must adhere to the highest service standards. which may include contingent accounts.
§ These standards apply not only to the bank per se, but • For purposes of this section, the MB may require such
also to its employees. [Cadiz v. CA, G.R. No. 153784, ratio be determined on the basis of the net worth and
October 25, 2005] risk assets of a bank and its subsidiaries, financial or
otherwise, as well as prescribe the composition and
§ The fiduciary nature of banking requires banks to manner of determining the net worth and total risk
assume a degree of diligence higher than that of a assets of banks and their subsidiaries: Provided, that
good father of a family. [People v. Go, G.R. No. 168539, in the exercise of this authority, the MB shall, to the
March 25, 2014] extent feasible conform to the internationally
accepted standards, including those of the Bank for
§ The banking is so impressed with public interest International Settlements (BIS), relating to risk-based
where the trust and confidence of the public in capital requirements: Provided further, that it may
general is of paramount importance such that the alter or suspend compliance with such ratio
appropriate standard of diligence must be a high whenever necessary for a maximum period of one
degree of diligence, if not the utmost diligence. [Bank year: Provided, finally, that such ratio shall be applied
of America v. Philippine Racing Club, G.R. No. 150228, uniformly to banks of the same category.
June 30, 2009]
• In case a bank does not comply with the prescribed
NATURE OF BANK FUNDS AND BANK DEPOSITS minimum ratio, the MB may limit or prohibit the
distribution of net profits by such bank and may
§ The contract between the bank and its depositor is require that part or all of the net profits be used to
governed by the provisions of the NCC on simple loan. increase the capital accounts of the bank until the
[Consolidated Bank and Trust Corporation v. CA, G.R. minimum requirement has been met. The MB may,
No. 138569, September 11, 2003] furthermore, restrict or prohibit the acquisition of
major assets and the making of new investments by
§ Bank deposits are in the nature of irregular deposits, the bank, with the exception of purchases of readily
thus, the prohibition on compensation when one of marketable evidence of indebtedness of the Republic
the debts arises from depositum does not apply. of the Philippines and of the BSP and any other
evidence of indebtedness or obligations the servicing
[Serrano v. Central Bank, G.R. No. L-30511, February 14,
and repayment of which are fully guaranteed by the
1980]
Republic of the Philippines, until the minimum
§ The relationship being contractual in nature, required capital ratio has been restored.
mandamus is therefore not an available remedy since
mandamus does not lie to enforce the performance of • In case of a bank merger or consolidation, or when a
contractual obligations. [Maclaring Lucman v. bank is under rehabilitation under a program
approved by the BSP, MB may temporarily relieve the
Alimantar Malawi, G.R. No. 159794, December 19, 2006]
surviving bank, consolidated bank, or constituent
bank or corporations under rehabilitation from full
STIPULATION ON INTERESTS compliance with the required capital ratio under such
conditions as it may prescribe. [Sec. 34, GBL]
The Monetary Board, may, similarly in accordance with the
authority granted to it in Section 106 of the New Central Single Borrower’s Limit
Bank Act, and taking into account the requirements of the
economy for the effective utilization of long-term funds,

103
a. General Rule: The total amount of loans, credit 2. The liabilities were incurred for the
accomodations and guarantees that may be accommodation of the parent corporation
extended by a bank to any person, partnership, or another subsidiary or of the partnership
association, corporation, or other entity shall at or association or entity or such individual;
no exceed 25% of the net worth of such bank. or
(previously 20%, amended by MB Circular No.
425). The basis for determining compliance with 3. The subsidiaries though separate entities
single borrower limit (SBL) is the total credit operate merely as departments or divisions
commitment of the bank to the borrower. of a single entity.
• Net worth - the total of the For purposes of this Section, loans, other credit
unimpaired paid-in capital, including accommodations and guarantees shall exclude:
paid-in surplus, retained earnings, and
undivided profit, net of valuation 1. Loans and other credit accommodations
reserves and other adjustments as may secured by obligations of the BSP or of the
be required by BSP. Philippine Government;
b. Exception: The SBL can be modified by the MB 2. Loans and other credit accommodations
for reasons of national interest. covered by assignment of deposits
maintained in the lending bank and held in
• Additional liabilities of the borrower the Philippines;
are adequately secured by documents
of title of goods; 3. Loans and other credit accommodations
covered by assignment of deposits
• The goods covered are readily maintained in the lending bank and held in
marketable, non-perishable, and fully the Philippines;
insured.
4. Loans, credits accommodations and
c. The above prescribed ceilings shall include; acceptances under letters of credit to the
extent covered by margin deposits;
• The direct liability of the maker or acceptor
of paper discounted with or sold to such 5. Other loans or credit accommodations
bank and the liability of a general endorser, which the Monetary Board may from time
drawer or guarantor who obtains a loan or to time, specify as non-risk items.
other credit accommodation from or
discounts paper with or sells paper to such Loans and other credit accommodations,
bank; deposits maintained with, and usual
guarantees by a bank to any other bank or
• In the case of an individual who owns or non-bank entity, whether locally or abroad,
controls a majority interest in a shall be subject to the limits as herein
corporation, partnership, association or any prescribed.
other entity, the liabilities of said entities to
such bank; Certain types of contingent accounts of
borrowers may be included among those
• In the case of corporation, all liabilities to subject to these prescribed limits as may be
such bank of all subsidiaries in which such determined by the Monetary Board. [Sec. 35,
corporation owns or controls a majority GBL]
interest; and
Restrictions on Bank Exposure to DOSRI (Directors,
• In the case of a partnership, association or Officers, Stockholders and Their Related Interests)
other entity, the liabilities of the members
thereof to such bank. General Rule: No director or officer of any bank shall,
directly and indirectly, for himself or as the representative
Even if a parent corporation, partnership, association, or agent of others, borrow from such bank nor shall he
entity or an individual who owns or controls a majority become a guarantor, endorser or surety for loans from
interest in such entities has no liability to the bank, the MB such bank to others, or in any manner be an obligor or
may prescribe the combination of the liabilities of incur any contractual liability to the bank except with the
subsidiary corporations or members of the partnership, written approval of the majority of all the directors of the
association entity or such individual under certain bank (Sec. 36)
circumstances, including but not limited to, any of the
following situations: Exception: if there is a written permission from a majority
of the members of the board. In the computation of the
1. The parent corporation, partnership, majority, the one borrowing is a directory should not be
association, entity or individual guarantees included.
the repayment of the liabilities;

104
Exception to the Exception: Such written approval shall not by way of providing permanent and continuing
be required for loans, other credit accommodations and insurance coverage on all insured deposits.
advances granted to officers of the bank under a fringe
benefit plan approved by the BSP Compulsory Insurance Coverage
Purpose of the rule: Dealings of a bank with any of its 1. It is obligatory for banks to insure their deposits with
directors, officers or stockholders and their related
and pay premiums thereon to, the PDIC, with the
interests shall be upon terms not less favorable to the bank
Deposit Insurance Fund (DIF) created as permanent
than those offered to others.
insurance fund.
After due notice to the board of directors of the bank, the
office of any bank director or officer who violates the 2. PDIC is mandated not to terminate insured status of
provisions of this Section may be declared vacant and the any bank which continues to operate or receive
director or officer shall be subject to the penal provisions deposits but with authority to file appropriate
of the NCBA. collection suits and impost administrative sanctions
in case of bank’s failure to remit premiums.
The Monetary Board may regulate the amount of loans,
credit accommodations and guarantees that may be a. Deposit – unpaid balance of money or its
extended, directly or indirectly, by a bank to its directors, equivalent received by a bank in the usual
officers, stockholders and their related interests, as well as course of business and for which it has
investments of such bank in enterprises owned or given or is obliged to give credit to a
controlled by said directors, officers, stockholders and
commercial, checking, savings, time or
their related interests.
thrift account; BUT NOT: an obligation of
the bank payable at an office outside the
Prohibited Transactions
Philippines, unless Philippine bank
specifically seeks insurance coverage.
Under Sec. 55.1, no director officer, employee, or agent of
any bank shall –
a. Make false entries in any bank report or statement b. Insured Deposit – amount due to bona fide
or participate in any fraudulent transaction, depositor for legitimate deposits in insured
thereby affecting the financial interest of, or bank, net of depositor’s obligation to
causing damage to, the bank or any person; insured bank as of closure date, including
b. Without order of a court of competent jurisdiction, FCDU accounts, which should not exceed
disclose to any unauthorized person any P500,000.00, but which may be adjusted
information relative to the funds or properties in upward or downward:
the custody of the bank belonging to private
individuals, corporations, or any other entity: i. in case of a condition that
Provided, That with respect to bank deposits, the threatens monetary and financial
provisions of existing laws shall prevail; stability of banking system that
c. Accept gifts, fees or commissions or any other form may have systematic
of remuneration in connection with the approval of consequences as determined by
a loan or other credit accommodation from said MB;
bank;
d. Overvalue or aid in overvaluing any security for the ii. Adjustment shall be in such
purpose of influencing in any way the actions of the amount, for such a period, and/or
bank or any bank; or for such deposit products, as may
e. Outsource inherent banking functions. be determined by :
1. A unanimous vote of
PHILIPPINE DEPOSIT INSURANCE PDIC BOD, chaired by
DOF Secretary;
CORPORATION ACT
(R.A. NO. 3591, as amended) 2. Approved by the
President of the
Declared Policy Philippines
1. It is the State-declared policy to strengthen the 3. “Net amount due” to each depositor – as determined
Philippine mandatory deposit insurance coverage as follows:
system to generate, preserve, maintain faith and
confidence in the country’s banking system, and o Add together all deposits in the bank
protect it from illegal schemes and machinations. maintained in the same right and capacity
for his benefit, either in his own name or in
2. Act created and empowered the PDIC, to promote the names of others.
and safeguard the interests of the depositing public

105
o A joint account regardless of whether the preceding or during a bank-declared holiday, or

conjunction “and,” “or,” “and/or” is used, immediately preceding a closure order.
shall be insured separately from any
individually owned deposit account. Note: PDIC’s denial is final and executor, and may
not be restrained or set aside by the courts,
PROVIDED: except on appropriate Petition for Certiorari,
and filed within 30 days from notice of denial of
o If account is held jointly by 2 or more claim.
natural persons, or by 2 or more
judicial entities, maximum insured
deposit shall be divided into as many
equal shares as there are individuals,
juridical entitles, unless a different
sharing is stipulated in the document
of the deposit.
o If account is held by a juridical entity

jointly with one or more natural
persons, maximum insured deposit is
presumed to belong entirely to such
juridical entity.
o Aggregate of interests of each co-

owner over several joint accounts,
whether owned by the same or
different combinations of individuals,
juridical entitles, shall likewise be
subject to the maximum insured
deposit of P500,000.00
o No owner/holder of any negotiable

certificate shall be recognized as
deposit entitled unless his name is
registered as owner/holder in bank’s
book
Ineligible Deposit Accounts – PDIC shall not pay

insurance for the following accounts/transactions or
booked as deposits:
1. Investment products such as bonds and

securities, trust accounts, and other similar
instruments;
2. Unfunded, fictitious or fraudulent deposit

accounts or transaction;
3. Those that constitute or are emanating from

unsafe and unsound banking practices, as
determined by PDIC after due notice and
hearing, and publication of CDO issued against
such accounts;
4. Those proceeding from unlawful activity as

defined by AMLA;
5. Products of Splitting of Deposits – occurs

whenever a deposit with an outstanding balance
of more than P500,000.00 maintained under the
name of natural or juridical entity is broken
down and transferred into 2 or more accounts in
the different names within 120 days immediately

106
Green Notes 2019 Intellectual Property Code
INTELLECTUAL PROPERTY
Intellectual property rights include the following:
a. Patents;
b. Trademarks and Service (Topographies) Marks;
c. Copyrights;
d. Geographic Indications;
e. Industrial Designs;
f. Layout-Designs for Integrated Circuits;
g. Protection of Undisclosed Information
A copyright is a right granted by

statute to the author or originator of
literary, scholarly, scientific, or artistic
productions, including computer
programs. A copyright gives him the
Copyright
legal right to determine how the work
is used and to obtain economic
benefits from the work. [Rule 2,
Copyright Safeguards and Regulations]
§ A trademark is any visible
sign capable of distinguishing
the goods (trademark) or
services (service mark) of an
enterprise and shall include a
stamped or marked
container of goods. [Sec. 121.1,
Trademark IPC]
§ In relation thereto, a trade

name means the name or
designation identifying or
distinguishing an enterprise.
[Sec. 121.3, IPC]
A patent is a protection or right given
INTELLECTUAL Patent
to any technical solution of a problem
in any field of human activity which is
new, involves an inventive step, and is
PROPERTY LAW industrially applicable. [Sec. 21, IPC]
PATENT
Patentable vs. Non-Patentable

Inventions
PATENTABLE INVENTIONS
Definition
Any technical solution of a problem in a field of human
activity, which may be related to a product, a process, or
an improvement of any of the foregoing: new, involves an
inventive step, and is industrially applicable.
Requisites:
1. Must be new (novelty);
2. Must involve an inventive step; and
3. Must be industrially applicable.

107
Note: a. Note: Microorganisms and non-biological

§ Novelty is an essential requisite of patentability of an and microbiological processes are
invention of discovery. If a devise or process has been patentable.
known or used by others prior to its invention or 5. Aesthetic creations;
discovery by applicant, the patent application should 6. Anything which is contrary to public order or
be denied. If application has been granted, the court, morality. [Villanueva, 1146]
in a judicial proceeding, in which the validity of the
patent is drawn in question, will hold it void and NOVELTY AND NON-PREJUDICIAL DISCLOSURE
ineffective. An invention must possess the elements
of novelty, originality and precedent, and for the Disclosure of information in the application during the 12
patentee to be entitled to the protection, the months preceding filing date or priority date of application
invention must be new to the world. [Manzano v. shall not prejudice applicant on the ground of lack of
Court of Appeals, G.R. No. 113388, September 5, 1997] novelty if such disclosure was made by:
§ An inventor must possess the essential elements of a. Inventor;

novelty, originality and precedence to be entitled to b. A patent officer and the information was
protection. No injunction will issue unless validity of contained:
patent in relation to issue of novelty and originality of 1. In another application filed by inventor and
invention is clear and beyond question. [Maguan v. should not have been disclosed by the
Court of Appeals, G.R. No. L-45101, November 28, 1986] office; or
2. In an application filed without the
§ Inventive Step connotes that the invention should knowledge or consent of the inventor by a
not be obvious not to the general public but to a third party which obtained the information
person “skilled in the art” for it to be patented. [Salao, directly or indirectly from the inventor;
64] c. Third party who obtained information directly
from the inventor. [Villanueva, 1146]
§ Test in determining obviousness and non-
obviousness:
Ownership of a Patent
Graham Factors [Graham et al. v. John Deere Co. of
Kansas City, et al. 383 U.S. 1 (1966)]
The US Supreme Court held that the obviousness Right to Patent
should be determined by looking at: The right to patent belongs to the inventor, his heirs, or
1. The scope and content of the prior art; assigns. When two or more persons have jointly made an
2. The level of ordinary skill in the art; invention, rights shall belong to them jointly. [Villanueva,
3. The differences between the claimed 1147]
invention and the prior art;
4. Objective evidence of non-obviousness; First to File Rule
NOTE: Examples of factors that show “objective § If two or more persons have made the same invention
evidence of non-obviousness”: separately and independently from each other, right
1. Commercial success; shall belong to the applicant who has the earliest filing
date or earliest priority date.
2. Long-felt but unsolved needs; and
§ If filed in a foreign country which by treaty,
3. Failure of others [Salao, 65]
convention, or law affords similar privileges to
Filipino citizens, it shall be considered as filed as of
§ For an invention to be Industrially Applicable, it has the date of filing the foreign application, provided
to have some practical application for it to be useful that:
[Salao, 65] a. Local application expressly claims priority;
b. Filed within 12 months from date earliest foreign
application was filed;
NON-PATENTABLE INVENTIONS c. Certified copy of foreign application together
with English translation field within 6 months
The following are non-patentable inventions: from date of Philippine filing. [Villanueva, 1147]
1. Discoveries, scientific theories and mathematical Inventions Created Pursuant to Commission

methods;
2. Schemes, rules and methods of performing mental § The person who commissions the work shall own
acts, playing games or doing business, and programs
the patent, unless the contract otherwise
for computers; provides.
3. Methods for treatment of human or animal body by
§ If employee made the invention in the course of
surgery or therapy, and diagnostic methods practiced
his employment contract, the patent shall belong
on the human or animal body; to:
a. Note: Products and composition for use in
any of these methods are patentable. a. Employee – if the inventive activity is not
4. Plant varieties or animal breeds or essentially part of his regular duties even if employee
biological process for the production of plants or uses time, facilities and materials of the
animals; employer.

108
b. Employer – if invention results from the b. File new patent application in respect of same
performance of his regularly-assigned invention;
duties, unless there is an agreement, c. Request that application be refused; or
express or implied, to the contrary. d. Seek cancellation of patent, if already been
[Villanueva, 1147] issued. [Villanueva, 1150-1151]
Procedure of Granting Patent Remedies of True and Actual Inventor
1. Application – patent application must be in Filipino When the true and actual inventor is deprived of patent
or English. The inventor must be identified. If without his consent or through fraud, and so declared by
inventor is not resident, applicant may appoint and final court order:
maintain a resident agent/representative upon a. Court shall order for his substitution as patentee;
whom notice will be served. or
b. At the option of the true inventor, cancel patent;
2. Publication and Search – must be published in the and
IPO Gazette together a search document established c. Award actual and other damages in his favor as
by or on behalf of the IPO. warranted.
Note: Such action must be filed within 1 year from date of
3. Grant of Letter of Patent – shall take effect on the publication. [Villanueva, 1151]
date of publication of grant of patent in IPO Gazette.
Rights conferred by a Patent
4. Maintenance of Patent through Annual Fees – to be
paid upon expiration of 4 years from the date The following are the exclusive rights conferred by patent
application was published, and on each subsequent on its owner:
anniversary date. If not paid, patent application
a. Where Patent Covers Product - to restrain,
deemed withdrawn or lapsed. [Villanueva, 1148-1150]
prohibit and prevent any unauthorized person or
entity from making, using, offering for sale,
Grounds for Cancellation of a Patent selling or importing that product;
An interested party may, upon petition and payment of b. Where Patent is a Process – to restrain, prevent,
required fee, petition to cancel patent or any claim, or or prohibit any unauthorized person or entity
parts of claim on any of the following grounds: from using process, and from manufacturing,
a. What is claimed as an invention is not new nor dealing in, using, selling or offering for sale, or
patentable; importing any product obtained directly or
b. Patent does not disclose invention in a manner indirectly from such process;
sufficiently clear or complete for it to be carried out c. To assign, or transfer by succession, conclude
by any person skilled in the art; or licensing contracts on, the patent.
c. Patent is contrary to public order or morality. § Entitlement to All Property Right Under
the Civil Code – Patents or applications for
Note: patents and invention to which they relate,
shall be protected in the same way as the
§ Where grounds for cancellation relate to some of rights of other property under the Civil
claims or parts of claim, cancellation may be effected Code.
to such extent only. a. If joint owners – each co-owner of the patent
§ Cancellation shall terminate, with notice of and invention covered shall be entitled to
cancellation published in the IPO Gazette, the rights personally make use, sell, or import the invention
conferred by patent or any specified claim(s). for his own profit. But neither may grant licenses
§ GENERAL RULE: A decision or order to cancel by the or assign his right, title or interest or part
Director of Legal Affairs is immediately executory, thereof, without consent of other owner(s), or
even pending appeal. without proportionally dividing proceeds
§ EXCEPTION: Unless restrained by the Director therewith. [Villanueva, 1151-1152]
General. [Villanueva, 1150]
ASSIGNMENT OF PATENTS
Remedy of the True and Actual Inventor What May Be Assigned?

Assignment may be of:
Application by Person Not Having the Right to Patent a. entire patent and invention covered; or
b. an undivided share of entire patent and
If a person other than the applicant is declared by final invention, in which event parties become joint
court order or decision as having the patent right, such owners; or
person may, within 3 months after decision has become c. assignment to specified territory
final:
a. Prosecute application as his own in place of Form
applicant; Assignment must be in:
a. writing;

109
b. notarized;
c. and recorded with the IPO. What Constitutes Patent Infringement?
Note: Otherwise it is void against any subsequent Patent infringement constitutes:

purchaser or mortgage without notice, unless recorded in a. Making, using, offering for sale, selling, or
IPO within 3 months from date of instrument, or prior to importing patented products, or obtained
subsequent purchase or mortgage. [Villanueva, 1152] directly or indirectly from patented process; or
b. Use of patented process without authorization
Limitation on Patent Rights of patentee. [Villanueva, 1153]
Note:
Limits
§ No patent means no patent rights can be conferred to
Patent owners have no right to prevent third parties from
protect an invention. Lacking a patent, the
performing the following:
contraption is not legally protected from the
a. Using patent products which has been put on
manufacture or commercial use of third persons
Philippine market by owner of the product, or
[Pearl & Dean v. Shoemart, G.R. No. 148222, August 15,
with his express consent, insofar as such use is
performed after the product has been put out; 2003]
b. Where act is done privately and on a non-
§ A patentee shall have exclusive rights to make, use or
commercial scale for a non-commercial purpose:
sell patented machine, article or product for purpose
provided it does not significantly prejudice
of industry or commerce, throughout the Philippines.
owner’s economic interest;
The making, using or selling by any person without
c. Where act consists of making or using
authorization for patentee shall constitute
exclusively for purpose of experiments that
relate to subject matter of patent invention; infringement. [Del Rosario v. Court of Appeals, G.R. No.
d. Where act consists of preparation for individual 115206, March 15, 1996]
cases, in a pharmacy or by a medical
professional, or a medicine in accordance with a § To infringe a patent, machine or device must perform
medical prescription or acts concerning the same function, or accomplish the same result by
medicine so prepared; identical or substantially identical means and the
e. Where invention is used in any ship, vessel, principle or mode of operation must be substantially
aircraft, or land vehicle of any other country the same. [Del Rosario v. Court of Appeals, G.R. No.
entering Philippine territory temporarily or 115206, March 15, 1996]
accidentally. [Villanueva, 1152-1153]
Rights of Patentee in Case of Infringement
Prior User
In case of infringement, the patentee has the following
§ Any prior user, who, in good faith was using the
rights:
invention or has undertaken serious preparations to
a. Bring civil action before courts to recover from
use the invention in his enterprise or business, before
infringer such damages sustained thereby, plus
filing date or priority date of application on which a
attorney’s fees and other expenses of litigation;
patent is granted, shall have the right to continue use
and
thereof.
b. Secure an injunction for the protection of his
§ Right of prior user may only be transferred or
assigned together with the enterprise or business, or rights. [Villanueva, 1153]
with the part of the enterprise or business in which c. If foreign national – may bring action of
use or preparations for use have been made. infringement, but must meet requirement of
[Villanueva, 1153] Section 3 of IPC and must not be engaged in
business in the Philippines. [Villanueva, 1156]
Use of Invention of the Government
Courts may:
A government agency or a third person authorized by the
Government may exploit invention even without a. If damages are inadequate or cannot be
agreement of patent owner where: reasonably ascertained – may award by way of
a. Public interest, national security, nutrition, damages a sum equivalent to reasonable royalty.
health or the development of other sectors, as b. According to the circumstances of the case –
determined by the appropriate government award damages in a sum above the amount found
agency, so requires; or as actual damages sustained; but not to exceed
b. Judicial or administrative body has ruled anti- three (3) times the amount of actual damages.
competitive exploitation of patent by owner or c. In its discretion, order that infringing goods,
licensee. [Villanueva, 1153] materials and implements predominantly be
disposed of outside the channels of commerce or
destroyed without compensation. [Villanueva
1153-1154]
d. If infringement is repeated – offender may be
held criminally liable without prejudice to the
institution of civil action for damages. Criminal
Patent Infringement

110
action shall prescribe in three (3) years from date 2. Guarantee that those articles come up to
of commission of the crime. [Villanueva, 1156] certain standard of quality; and
3. Advertise articles they symbolize.
Burden of Proof
§ Burden of proof to substantiate patent infringement Today a trademark is an effective agent for actual creation
rests on the plaintiff [Smith Kline Beckman Corp. v. and protection of goodwill. [Mirpuri v. Court of Appeals,
Court of Appeals, G.R. No. 126627, August 14, 2003] G.R. No. 114508, November 19, 1999]
§ Burden of proof is upon the producer of identical or
fake product to show that his product was produced IN SUMMARY:
without the use of patented process [Tañada v. Trademark, copyright and patents are different
Angara, G.R. No. 118295, May 2, 1997] intellectual property rights that cannot be interchanged
with one another. A trademark is any visible sign capable
Tests to Determine Infringement of distinguishing the goods (trademark) or services
a. Literal Infringement – courts must juxtapose the (service mark) of an enterprise and shall include a stamped
claims of patent and accused product within the or marked container of goods. In relation thereto, a trade
overall context of claims and specification, to name means the name or designation identifying or
determine whether there is exact identity of all distinguishing an enterprise. Meanwhile, the scope of a
material elements. copyright is confined to literary and artistic works which
b. Doctrine of Equivalents – infringement also occurs are original intellectual creations in the literary and artistic
when a device appropriates a prior invention by domain protected from the moment of their creation.
incorporating its innovative concept and, albeit with Patentable inventions, on the other hand, refer to any
some modification and change, performs technical solution of a problem in any field of human
substantially the same function in substantially the activity which is new, involves an inventive step and is
same way to achieve substantially the same result industrially applicable. [Pearl and Dean v. Shoemart, 2003]
(Function-Means-and-Result Test). [Godines v.
Court of Appeals, G.R. No. L-97343, September 13, 1993] Acquisition of Ownership
Defenses in Action for Infringement Rules and Principles
The defendant may show invalidity of the patent, or any • Rights in the mark shall be acquired through
claim thereof, on any grounds on which a petition for
registration made in accordance with the legal
cancellation can be brought. [Villanueva, 1156]
provisions.
• Any person who shall procure registration of mark by
a false or fraudulent declaration or representation, or
TRADEMARK by any false means, shall be liable in civil action by any
person injured thereby for any damages sustained as
Mark vs. Collective Marks vs. a consequence thereof.
Tradenames • Once registered, the mark’s validity and the
registrant’s ownership are prima facie presumed.
Mark [Ong v. People, G.R. No. 169440, November 23, 2011]
Any visible sign capable of distinguishing goods • Ownership of a mark or trade name may be acquired
(trademark) or services (service mark) of an enterprise and not necessarily by registration but by adoption and
shall include a stamped or marked container of goods. use in trade or commerce. As between actual use of a
mark without registration, and registration of the
A trademark refers to a word, name, symbol, emblem, sign mark without actual use thereof, the former prevails
or device or any combination thereof adopted and used by over the latter. For a rule widely accepted and firmly
a merchant to identify, and distinguish from others, his entrenched, because it has come down through the
goods of commerce. [Distilleria Washington v. CA, 1996] years, is that actual use in commerce or business is a
pre-requisite to the acquisition of the right of
Collective Mark ownership. [Shangri-La Int’l Hotel v. Developers Group
Any visible sign capable of distinguishing the origin or any of Companies, G.R. No. 159938]
other common characteristic, including the quality of
goods or services of different enterprises which use the Test of Ownership
sign under the control of the registered owner of the
• In order to register a trademark, one must be the
collective mark.
owner thereof and must have actually used the mark
in commerce in the Philippines for two (2) months
Trade Name
Name or designation identifying or distinguishing an prior to the application for registration. [Sec. 2, RA No.
enterprise. [Villanueva, 1165] 166]
There are three distinct functions of a trademark. They • One may be an owner of a mark due to its actual use
are to: but may not yet have the right to register such
1. Indicate origin of ownership of articles to which ownership here due to the owner’s failure to use the
they are attached; same in the Philippines for 2 months prior to
registration.

111
where such use would result in a likelihood of

• Note: Under the Paris Convention to which the confusion.
Philippines is a signatory, a trade name of a national
of a State that is a party to the Paris Convention, In case of the use of an identical sign for identical goods or
whether or not the trade name forms part of a services, a likelihood of confusion shall be presumed.
trademark, is protected “without the obligation of
filing or registration". [Cordon Blue of the Philippines Non-Registrable marks
v. Renaud Cointreau & Cie, G.R. No. 185830, June 5,
2013] A mark cannot be registered if it:
First-to-File Rule a. Consists of:

• IPC espouses the first-to-file rule, and removed the 1. Immoral, deceptive or scandalous matter.
previous requirement of proof of actual use prior to the 2. Matter which may disparage or falsely
filing of an application for registration of a mark, proof suggest a connection with persons, living or
of prior and continuous use is necessary to establish dead, institutions, beliefs, or national
ownership of a mark. In fact, the prior and continuous symbols, or bring them into contempt or
disrepute;
use of a mark may even overcome the presumptive
3. Flag, coat of arms, or other insignia of the
ownership of the registrant and be held as the owner
Philippines or any of its political
of the mark. [E.Y. Industrial Sales v. Shen Dar
subdivisions, or of any foreign nation, or any
Electricity, G.R. No. 184850, October 20, 2010] simulation thereof;
• It is the registration of the mark that is the operative 4. Name, portrait or signature identifying:
act. IPC no longer provides for the doctrine of prior § A particular living individual except by his
use as the basis for priority right or registration of a written consent;
right of a trademark or service mark [Shangri-La Int’l § Of a deceased Philippine President, during
Hotel v. Developers Group of Companies, G.R. No. the life of his widow, if any, except by
159938] written consent of the widow;
5. Shapes that may be necessitated by
technical factors, by nature of goods
Concept of Actual Use themselves, or factors that affect their
intrinsic value;
The applicant or the registrant shall file a declaration of 6. Color alone, unless defined by a given form.
actual use (DAU) of the mark with evidence to that effect,
as prescribed by the Regulations within three (3) years b. Consists exclusively of signs or of indication that:
from the filing date of the application. Otherwise, the 1. Are generic for the goods or services that they
application shall be refused or the mark shall be removed seek to identify;
from the Register by the Director. 2. Have become customary or usual to designate
goods or services in everyday language, or in a
A certificate of registration shall remain in force for ten (10) bona fide and established trade practice;
years: Provided, That the registrant shall file a declaration 3. May serve in trade to designate the kind, quality,
of actual use and evidence to that effect, or shall show valid quantity, intended purpose, value, geographic
reasons based on the existence of obstacles to such use, as origin, time or production of goods or rendering
prescribed by the Regulations, within one (1) year from the of services.
fifth anniversary of the date of the registration of the mark.
Otherwise, the mark shall be removed from the Register by c. Is identical with registered mark belonging to
the Office. different proprietor or mark with an earlier filing or
priority date, in respect of:
Failure to file a Declaration of Actual Use (DAU) within the 1. Same goods;
required period results in the automatic cancellation of 2. Closely-related goods or services; or
registration of a trademark. In turn, such failure is 3. If it nearly resembles such mark as to be
tantamount to the abandonment or withdrawal of any likely to deceive or cause confusion.
right or interest the registrant has over his trademark.
[Birkenstock Orthopaedie GMBH and Co. KG v. Philippine d. Is identical with, or confusingly similar to, or
Shoe Expo Marketing Corporation, G. R. No. 194307, constitutes a translation of, a mark which is
November 20, 2013] considered:
1. By Philippine competent authority whether
or not it is registered here, as being already
Effect of Registration
the mark of a person, and used for identical
or similar goods or services;
The owner of a registered mark shall have the: 2. Well-known, and registered in the
1. Exclusive right to the use of the registered mark; Philippines with respect to goods or
2. Prevent all third parties not having the owner's services which are not similar to those with
consent from using in the course of trade respect to which registration is applied for.
identical or similar signs or containers for goods
or services which are identical or similar to those
in respect of which the trademark is registered

112
e. Is likely to mislead public, particularly as to nature, Stamped Containers, in determining whether a mark is
quality, characteristics or geographical origin of well-known, the following criteria or any combination
goods or services; thereof may be taken into account:
f. Is contrary to public order or morality. [Villanueva, 1. the duration, extent and geographical area of any use of
1168-1169] the mark, in particular, the duration, extent and
geographical area of any promotion of the mark,
Note: including advertising or publicity and presentation, at
§ Nature of the goods to which the mark is applied fairs or exhibitions, of the goods and/or services to
will not constitute an obstacle to registration. which the mark applies;
§ The name and container of a beauty cream 2. the market share in the Philippines and in other
product subject to trademark, and neither countries, of the goods and/or services to which the
patent nor copyright. [Kho v. Court of Appeals, mark applies;
G.R. No. 115758, March 19, 2002] 3. the degree of the inherent or acquired distinction of the
§ Distinctiveness is a requirement for a valid mark;
registration of a trademark. A name may not be 4. the quality-image or reputation acquired by the mark;
registered if it lacks such element. [Ang v. 5. the extent to which the mark has been registered in the
Wellington Department Store, G.R. No. L-4531, world;
January 10, 1953] 6. the exclusivity of the registration attained by the mark
in the world;
§ Whether or not a trademark is ‘well-known’ or 7. the extent to which the mark has been used in the
not is factual in nature. Hence decisions of quasi- world;
administrative agencies like the IPO are not only 8. the exclusivity of use attained by the mark in the world;
accorded with respect, but sometimes finality
because of their expertise. [Sehwani v. In-N-Out 9. the commercial value attributed to the mark in the
Burger, G.R. No. 171053, October 15, 2007] world;
§ Application for registration of trademark or label 10. the record of successful protection of the rights in the
which is almost the same or that very closely
mark;
resembles one already used and registered by
11. the outcome of litigations dealing with the issue of
another should be rejected and dismissed
whether the mark is a well-known mark; and
outright [Dermaline v. Myra Pharmaceuticals,
12. the presence of absence of identical or similar marks
G.R. No. 190065, August 16, 2010]
validly registered for or used on identical or similar
§ A mark is valid if it is distinctive, and not barred
goods or services and owned by persons other than
by registration under Sec. 4 of R.A. 166. But once
the person claiming that his mark is a well-known
registered, not only the mark’s validity but also
mark.
the registrant’s ownership of the mark is prima
(246 Corporation v. Daway, 416 SCRA 315 (2003))
facie presumed. [McDonald’s v. L.C. Big Mak
Burger, G.R. No. 143993, August 18, 2004]
§ Moreover, a registered trademark can be used Priority Rights
for other products of the registrant. [Dermaline
v. Myra Pharmaceuticals, G.R. No. 190065, August PRIORITY RIGHT OF FOREIGN APPLICANT
16, 2010]
An application of a foreign person who previously duly filed
Well-known marks an application for registration of the same mark, shall be
considered as filed as of the day the application was first
filed in the foreign country. However:
A well-known mark is protected in a country even if the
mark is neither registered nor used in that country.
a. No registration of mark in the Philippines shall
be granted until such mark has been registered
Article 6bis of the Paris Convention, which governs the in the applicant’s country of origin.
protection of well-known trademarks, is a self-executing
provision and does not require legislative enactment to b. Nothing shall entitle owner of registration to sue
give it effect in the member country. for acts committed prior to date on which his
The essential requirement under this Article is that the mark was registered.
trademark to be protected must be “well-known” in the
country where protection is sought. The power to Notwithstanding foregoing, owner of a well-known mark
determine whether a trademark is well-known lies in the not registered in the Philippines may oppose the
“competent authority of the country of registration or registration of an identical or confusingly similar mark by:
use.” This competent authority would be either the a. Opposing the registration; or
registering authority if it has the power to decide this, or b. Petition the cancellation of its registration; or
the courts of the country in question if the issue comes c. Sue for unfair competition. [Villanueva, 1172-1173]
before a court. [Sehwani, Incorporated vs. In-N-Out
Burger, Inc., G. R. No. 171053, October 15, 2007]
Under Rule 102 of the Rules and Regulations on Rights conferred by registration
Trademarks, Service Marks, Trade Names and Marked or

113
Under the IPC, the elements of trademark infringement

The owner of a registered mark shall have the: are as follows:
1. Exclusive right to the use of the registered mark; 1. Trademark infringed is registered in the IPO, however
2. Prevent all third parties not having the owner's in infringement of trade name, the same need not be
consent from using in the course of trade registered;
identical or similar signs or containers for goods 2. Trademark or trade name is reproduced,
or services which are identical or similar to those counterfeited, copied, or colourably imitated by the
in respect of which the trademark is registered infringer;
where such use would result in a likelihood of 3. Infringing mark or trade name is used in connection
confusion. with the sale, offering for sale, or advertising of any
goods, business or services, or is applied to labels,
In case of the use of an identical sign for identical goods or signs, prints, packages, wrappers, receptacles or
services, a likelihood of confusion shall be presumed. advertisements intended to be used upon or in
connection with such goods, business or services;
4. Use or application of the infringing mark or trade
Cancellation of Registration name is likely to cause confusion or mistake or to
deceive purchasers or others as to the goods or
A petition to cancel a mark registration may be filed with services themselves or as to the source or origin of
the Bureau of Legal Affairs by any person who believe that such goods or services or the identity of such
he is or will be damaged by the registration of mark as business; and
follows: 5. It is without the consent of the trademark or trade
name owner or the assignee. [Prosource International
a. Within five (5) years from the date of the registration v. Horphag Research Management, G.R. No. 180073,
of the mark; November 25, 2009]
b. At any time, if the registered mark: Remedies: Actions, Damages, and Injunction
1. Becomes generic name; Owner of a registered mark that has been infringed has the
2. Has been abandoned; following remedies:
3. Its registration was obtained fraudulently or
contrary to the IPC; a. Recover damages from any person who infringes
4. If the registered mark shall not be deemed to be his rights, and the measure of the damages
generic name of goods and services solely suffered shall be either:
because such mark is also used as a name of or 1. Reasonable profit which the complaining
to identify a unique product or service; party would have made, had the defendant
not infringed his rights; or
c. At any time, if the registered owner of the mark, 2. Profit which the defendant actually made
without legitimate reason, fails to use the mark within out of the infringement.
the Philippines by virtue of a license during an
uninterrupted period of 3 years or longer. [Villanueva, Note:
1176-1177] § If measure of damages cannot be readily ascertained
with reasonable certainty, court may award as
Trademark Infringement damages a reasonable percentage based up the
amount of gross sales of the defendant or the value of
How Committed the services in connection with which the mark or
§ Infringement takes place at any moment any of the trade name was used in the infringement.
specified acts are committed regardless of whether § Owner of the registered mark shall not be entitled to
there is actual sale of goods or services using the recover profits or damages unless the acts have been
infringing material. committed with knowledge that such imitation is
likely to cause confusion, or to cause mistake, or to
§ There is infringement when, any person who shall, deceive.
without the consent of the owner of the registered
mark: b. On complainant’s application, the court may
a. Use in commerce any reproduction, counterfeit, impound sales invoices and other documents
copy or colorable imitation of a registered mark evidencing sales/
or the same container or a dominant feature
thereof in connection with the sale or other c. In cases where actual intent to mislead the
commercial dealings; or public or to defraud the complainant is shown,
b. Apply such reproduction, counterfeit, copy of damages may be doubled.
colorable imitation to labels, signs, prints,
packages, wrappers, receptacles or d. The complainant, upon proper showing, may
advertisements intended to be used in also be granted injunction.
commerce upon or in connection with the sale
or other commercial dealings. e. The court may order that goods found to be
infringing be, without compensation of any sort,
Elements disposed of outside the channels of commerce in

114
such a manner as to avoid any harm caused to Unfair Competition

the right holder, or destroyed.
Definition
Note: With regard to counterfeit goods, simple removal of
Act of any person who employs deception or any other
the trademark affixed shall not be sufficient other than in
means contrary to good faith by which he shall pass-off the
exceptional cases which shall be determined by the
goods manufactured by him or in which he deals, or his
Regulations, to permit the release of the goods into the
business, or services for those of the one having
channels of commerce. [Villanueva, 1186-1187]
established such goodwill, or who shall commit any acts
calculated to produce such results. [Villanueva, 1191]
Requirement of Notice
Unfair Competition v. Trademark Infringement
§ In any suit for infringement, the owner of the
registered mark shall not be entitled to recover
Unfair Competition Trademark Infringement
profits or damages unless the acts have been
committed with knowledge that such imitation is § Passing off of one’s § Unauthorized use of
likely to cause confusion, or to cause mistake, or to goods as those of a trademark
deceive. another § Fraudulent intent is
§ Fraudulent intent is unnecessary
essential § Prior registration of
§ Such knowledge is presumed if the registrant gives
§ Registration is not the trademark is a
notice that his mark is registered by displaying with
necessary prerequisite to the
the mark the words "Registered Mark" or the letter R
action
within a circle or if the defendant had otherwise
actual notice of the registration. [Sec. 158, IPC] [Mighty Corp. v. E&J Gallo Winery, G.R. No. 154342, July 14,
2004]
TEST TO DETERMINE CONFUSING SIMILARITY
BETWEEN MARKS COPYRIGHT
1. Dominancy Test – focuses on the similarity of the Copyright is the right of literary property as recognized
prevalent features of the competing trademarks and sanctioned by positive law. An intangible, incorporeal
which might cause confusion or deception, and thus right granted by statute to the author or originator of
infringement. certain literary or artistic productions, whereby he is
2. Holistic Test – requires that the entirely of the marks invested, for a limited period, with the sole and exclusive
in question be considered in resolving confusing privilege of multiplying copies of the same and publishing
similarity. [Mighty Corp. v. E&J Gallo Winery, G.R. No. and selling them.
154342, July 14, 2004] Copyright vests from the moment of creation.
COLORABLE IMITATION Copyrightable Works

§ Colourable imitation is such a close or ingenious 1. Original literary or artistic works;
imitation as to be calculated to deceive ordinary
2. Derivative works;
purchasers, or such resemblance of the
3. Published Edition of work
infringing mark to the original as to deceive an
ordinary purchaser giving such attention as a
Original Works
purchaser usually gives, and to cause him to
Literary and artistic works, hereinafter referred to as
purchase the one supposing it to be the other.
"works", are original intellectual creations in the literary
[Emerald Garment v. Court of Appeals, G.R. No.
and artistic domain protected from the moment of their
100098, December 29, 1995]
creation and shall include in particular:
1. Books, pamphlets, articles and other writings;
§ The following factors shall be used in
2. Periodicals and newspapers;
determining whether goods are related:
a. Classification of the goods; 3. Lectures, sermons, addresses, dissertations prepared
b. Nature of the goods; for oral delivery, whether or not reduced in writing or
c. Descriptive properties, physical attributes, or other material form;
essential characteristics of the goods, with 4. Letters;
reference to their form, composition, texture or 5. Dramatic or dramatico-musical compositions;
quality; and choreographic works or entertainment in dumb
d. Style of distribution and marketing of the goods, shows;
including how the goods are displayed and sold 6. Musical compositions, with or without words;
[Societe De Produits Nestle S.A. v. Dy, Jr., G.R. No. 7. Works of drawing, painting, architecture, sculpture,
172276, August 8, 2010] engraving, lithography or other works of art; models
or designs for works of art;
8. Original ornamental designs or models for articles of
manufacture, whether or not registrable as an
industrial design, and other works of applied art;

115
9. Illustrations, maps, plans, sketches, charts and three-

dimensional works relative to geography, topography, Works are protected by copyright by the sole fact of their
architecture or science; creation, irrespective of their mode or form of expression,
10. Drawings or plastic works of a scientific or technical as well as of their content, quality and purpose.
character;
11. Photographic works including works produced by a 1. Economic Rights
process analogous to photography; lantern slides; 2. Moral Rights
12. Audiovisual works and cinematographic works and 3. Droit de Suite or Follow Up Rights/Resale Rights
works produced by a process analogous to 4. Neighboring Rights
cinematography or any process for making audio- a. Rights of Performers;
visual recordings; b. Right of Producers for Sound Recording;
13. Pictorial illustrations and advertisements; c. Right of Broadcasters
14. Computer programs; and
15. Other literary, scholarly, scientific and artistic works. Economic Rights
Consists of the exclusive right to carry out, authorize or
Derivative Works prevent the following acts:
1. Dramatizations, translations, adaptations,
abridgments, arrangements, and other alterations of 1. Reproduction of the work or substantial portion
literary or artistic works; and thereof;
2. Collections of literary, scholarly or artistic works, and 2. Dramatization, translation, adaptation, abridgment,
compilations of data and other materials which are arrangement or other transformation of the work;
original by reason of the selection or coordination or 3. The first public distribution of the original or other
arrangement of their contents. forms of transfer of ownership;
4. Rental of the original or a copy of an audiovisual or
Derivative Work shall be protected as a new works. cinematographic work;
Provided that such new work shall not affect the force of 5. Public display of the original or a copy of the work;
any subsisting copyright upon the original works. 6. Public performance of the work; and
7. Other communication to the public of the work.
Published Edition of Work
In addition to the right to publish granted by the author, Moral Rights
his heirs or assigns, the publisher shall have a copy right 1. Right to attribution – require that authorship of works
consisting merely of the right of reproduction of the be attributed to him; that his name be indicated in a
typographical arrangement of the published edition of the prominent way on copies of his work;
work. 2. Right to Alteration - Make any alterations of his work
prior to, or to withhold it from publication;
Non-Copyrightable works 3. Right to Preserve Integrity - Object to any distortion,
mutilation or other modification of, or other
1. Idea, procedure, system, method or operation, derogatory action in relation to, his work which would
concept, principle, discovery or mere data as such; be prejudicial to his honor or reputation; and
2. News of the day and other items of press information 4. Right to Restrain - Restrain use of his name with
3. Any official text of a legislative, administrative or legal respect to any work not of his own creation or in a
nature, as well as any official translation thereof; distorted version of his work.
4. Any work of the Government of the Philippines;
Note: An author may waive his moral rights by a written
Idea/Expression Dichotomy instrument, but no such waiver shall be valid where its
Only the expression of an idea is protected by copyright, effects is to permit another:
not the idea itself. 1. Use the name of the author, title of his work, or his
reputation with respect to any version/adaptation of his
Government Work work, which because of alterations, substantially tend to
GR: Conditions imposed prior the approval of the injure literary/artistic reputation of another author
government agency or office wherein the work is created 2. Use name of author in a work that he did not create
shall be necessary for exploitation of such work for profit.
Such agency or office, may, among other things, impose as Droit de Suite/Resale Rights
condition the payment of royalties. In every sale or lease of an original work of painting or
XPN: No prior approval or conditions shall be required for sculpture or of the original manuscript of a writer or
the use of any purpose of statutes, rules and regulations, composer, subsequent to the first disposition thereof by
and speeches, lectures, sermons, addresses, and the author, the author or his heirs shall have an inalienable
dissertations, pronounced, read, or rendered in courts of right to participate in the gross proceeds of the sale or
justice, before administration agencies, in deliberative lease to the extent of five percent (5%). This right shall
assemblies and in meetings of public character. exist during the lifetime of the author and for fifty (50)
years after his death.
Neighboring Rights
Rights Conferred by a copyright

116
3. The use of such records for fresh transmissions or for

Rights of Performers fresh recording.
"Performers" are actors, singers, musicians, dancers, and
other persons who act, sing, declaim, play in, interpret, or Term of Protection
otherwise perform literary and artistic work; 1. Original and Derivative Work - during the life of the
author and for fifty (50) years after his death;
Performers shall enjoy the following exclusive rights: 2. Joint Authorship – protected during the life of the last
1. As regards their performances, the right of authorizing: surviving author, and for 50 years after his death;
a. The broadcasting and other communication to 3. Anonymous or Pseudonymous Works – 50 years from
the public of their performance; and date on which work was first lawfully published;
b. The fixation of their unfixed performance. 4. Works of Applied Art – 25 years from date of making.
2. The right of authorizing the direct or indirect
5. Photographic Works – 50 years from publication; if
reproduction of their performances fixed in sound
unpublished, 50 years from the making.
recordings, in any manner or form;
6. Audiovisual Works – 50 years from publication; if
3. The right of authorizing the first public distribution of
the original and copies of their performance fixed in the unpublished, 50 years from the making.
sound recording through sale or rental or other forms of
transfer of ownership; Ownership of a Copyright
4. The right of authorizing the commercial rental to the
public of the original and copies of their performances Sole Authorship
fixed in sound recordings, even after distribution of them For original literary and artistic works, copyright shall
by, or pursuant to the authorization by the performer; and belong to the author of the work.
5. The right of authorizing the making available to the
public of their performances fixed in sound recordings, by An individual claiming to be an author for copyright
wire or wireless means, in such a way that members of the purposes must show "the existence of those facts of
public may access them from a place and time individually originality, of intellectual production, of thought, and
chosen by them. conception."
Moral Rights of Performers. — Joint Authorship

The performer, shall, as regards his live aural General Rule: The co-authors shall be the original owners
performances or performances fixed in sound recordings, of the copyright and in the absence of agreement, their
have the right to claim to be identified as the performer of rights shall be governed by the rules on co-ownership.
his performances, except where the omission is dictated Exception: If a work of joint authorship consists of parts
by the manner of the use of the performance, and to object that can be used separately and the author of each part can
to any distortion, mutilation or other modification of his be identified, the author of each part shall be the original
performances that would be prejudicial to his reputation. owner of the copyright in the part that he has created;
Rights of Producers of Sound Recordings Two approaches for determining if someone was a co-
"Producer of a sound recording" means the person, or the author:
legal entity, who or which takes the initiative and has the 1. The de minimis test, where everyone who contributed
responsibility for the first fixation of the sounds of a even a tiny bit to the whole is considered a -co-author.
performance or other sounds, or the representation of 2. The copyrightable subject matter test, which says that a
sounds; contributor is only a co-author if that person's
contribution would be theoretically copyrightable by itself.
Producers of sound recordings shall enjoy the following
exclusive rights: Works Made for Hire
1. The right to authorize the direct or indirect a. Work belongs to the employee – if the creation of the
reproduction of their sound recordings, in any manner or object of copyright is not a part of his regular duties even
form; the placing of these reproductions in the market and if the employee uses the time, facilities and materials of the
the right of rental or lending; employer.
2. The right to authorize the first public distribution of the b. Work belongs to the employer – if the work is the result
original and copies of their sound recordings through sale of the performance of his regularly-assigned duties, unless
or rental or other forms of transferring ownership; and there is an agreement, express
3. The right to authorize the commercial rental to the or implied, to the contrary.
public of the original and copies of their sound recordings,
even after distribution by them by or pursuant to Commissioned Work
authorization by the producer. The person who so commissioned the work shall have
ownership of the work, but the copyright thereto shall
Right of Broadcasting Organizations remain with the creator, unless there is a written
Broadcasting organizations shall enjoy the exclusive right stipulation to the contrary.
to carry out, authorize or prevent any of the following acts:
1. The rebroadcasting of their broadcasts; Audiovisual Work
2. The recording in any manner, including the making of General Rule: Producer, the author of the scenario, the
films or the use of video tape, of their broadcasts for the composer of the music, the film director, and the author of
purpose of communication to the public of television the work so adapted
broadcasts of the same; and

117
Exception: Unless otherwise provided in an agreement, the b. Transfer or assignment of the sole
producers shall exercise the copyright to an extent company, or of one or several copies of the
required for the exhibition of the work in any manner, work, shall not imply transfer or assignment
except for the right to collect performing license fees for of the copyright.
the performance of musical compositions, with or without 6. Copyright owners of their heirs may designate a
words, which are incorporated into the work society of artists, writers or composers to enforce
their economic rights and moral rights on their
Letters behalf. [Villanueva, 1205]
The copyright shall belong to the writer subject to the
provisions of Article 723 of the Civil Code.
(Letters and other private communications in writing are Limitations on Copyright
owned by the person to whom they are addressed and
delivered, but they cannot be published or disseminated The following shall not constitute Copyright
without the consent of the writer or his heirs) Infringement:
• Recitation or performance once it has been lawfully
Anonymous Work made accessible to the public, if done privately and
The publisher shall be deemed to represent the authors of free of charge or if made strictly for a charitable or
articles and writings published without their names or
religious institution or society;
under pseudonyms except:
• Making of quotations from a published work that is
1. When contrary appears;
compatible with fair use. Provided the source and
2. Pseudonyms or adopted name leaves no
name of author, if appearing on the work, are
doubt as to author’s identity; or
mentioned;
3. If author of anonymous works discloses his
• Reproduction or communication to the public by
identity.
mass media of articles on current political, social,
Collective Work economic, scientific or religious topic, lectures,
When an author contributes to a collective work, his right addresses and other works of the same nature, which
to have his contribution attributed to him is deemed are delivered in public if such use is for information
waived unless he expressly reserves it. purposes and has not been expressly reserved.
Provided, that the source is given;
Government Work • Reproduction and communication to the public of
No copyright shall subsist in any work of the Government literary, scientific or artistic works as part of reports
of the of current events by means of photography,
Philippines cinematography or broadcasting to the extent
necessary for the purpose;
Presumption of Authorship • Inclusion of a work in a publication, broadcast, or
The natural person whose name is indicated on a work in other communication to the public, sound recording
the usual manner as the author shall, in the absence of or film, if such inclusion is made by way of illustration
proof to the contrary, be presumed to be the author of the
for teaching purposes and is compatible with fair use.
work.
Provided that source and name of the author, if
Note: If the pseudonym leaves no doubt as to the identity
appearing in the work, are mentioned;
of the author, the aforementioned presumption likewise
applies. • Recording made in school universities or educational
institutions. Provided such recordings must be
Transfer or Assignment deleted within a reasonable period after they were
1. Copyright may be assigned in whole or in part, which first broadcast;
would entitle assignee to all rights and remedies • Making of ephemeral recordings by a broadcasting
which assignor had with respect to the copyright. organization by means of its own facilities and for the
2. Copyright is not deemed assigned inter vivos, unless use of its own broadcast;
there is a written indication of such intention. • Use made by or under the direction or control of the
3. Unless greater right is expressly granted, submission Government, by National Library or by educational,
of a literary, photographic or artistic work to a scientific or professional institutions where such use
newspaper, magazine or periodical for publication is in the public interest and is compatible with fair
shall constitute only a license to make a single use;
publication. • Public performance or communication to the public,
4. If two or more persons jointly own a company or any in a place where no admission fee is charged by a club
part thereof, neither of owners shall be entitled to or institution for charitable or educational purpose
grant licenses without prior written consent of other only, whose aim is nor profit-making;
owner(s). • Public display of the original or a copy of the work not
5. Since copyright is distinct from the material object made by means of film, slide, television image or
subject to it: otherwise on screen or by means of any other devise
a. Transfer or assignment of copyright shall of process. Provided, when either work has been
not itself constitute a transfer of the published or original or the copy displayed has been
material object; sold, given away or otherwise transferred to another
person by author or his successor in title;

118
• Use made for purpose of any judicial proceeding or anything the sole right to do which is conferred by statute
for giving of professorial advice by legal practitioner. on the owner of the copyright.
It does not necessarily require that the entire copyrighted
work, or even a large portion of it, be copied. If so much is
Doctrine of Fair Use taken that the value of the original work is substantially
diminished, there is an infringement of copyright and to an
• Fair use of a copyrighted work for criticism, injurious extent, the work is appropriated.
comment, news reporting, teaching, including
multiple copies for classroom use, scholarship, The essence of a copyright infringement is the similarity
research, and similar purposes, is not an infringement or at least substantial similarity of the purported pirated
of copyright. works to the copyrighted work. [20th Century Fox v. CA,
• Fair use includes decompilation or the reproduction 1998]
of the code of translation of the forms of the
Two elements to establishing infringement:
computer program to achieve the inter-operability of
1. There must be evidence that the defendant had access
an independently-created computer program with
to the copyrighted work.
other programs.
2. There must be evidence that the works are substantially
• The idea behind the fair use is that one using a similar.
copyrighted work should not have to get a copyright If two works are almost identical, then there is no
holder’s permission to use the copyrighted work in a requirement that the copyright owner establish access.
case where a reasonable copyright holder would in
fact grant permission. Proof of access requires “an opportunity to view or to copy
plaintiff's work.” This is often described as providing a
Factors to consider: “reasonable opportunity” or “reasonable possibility” of
a. The purpose and character of the use, including viewing the plaintiff's work.
whether such use is of a commercial nature or is for Circumstantial evidence of reasonable access is proven in
non-profit education purposes; one of two ways:
b. The nature of the copyrighted work; 1. a particular chain of events is established between the
c. The amount and substantiality of the portion used in plaintiff's work and the defendant's access to that
relation to the copyrighted work as a whole; and work (such as through dealings with a publisher or
record company), or
NOTE: 2. the plaintiff's work has been widely disseminated.
When is there a substantial reproduction of a book? It
does not necessarily require that the entire NOTE:
copyrighted work, or even a large portion of it, be • The presentation of the master tapes of the
copied. If so much is taken that the value of the copyrighted films from which the pirated films
original work is substantially diminished, there is an were allegedly copied, was necessary for the
infringement of copyright and to an injurious extent, validity of search warrants against those who
the work is appropriated have in their possession the pirated films. [20th
Century Fox v. CA, 1988]
In determining the question of infringement, the • The mere sale of the illicit copies of the software
amount of matter copied from the copyrighted work programs was enough by itself to show the
is an important consideration. To constitute existence of probable cause for copyright
infringement, it is not necessary that the whole or infringement. There was no need for the
even a large portion of the work shall have been petitioner to still prove who copied, replicated or
copied. If so much is taken that the value of the reproduced the software programs. [Microsoft
original is sensibly diminished, or the labors of the v.Manansala, 2015]
original author are substantially and to an injurious
extent appropriated by another, that is sufficient in Remedies available to the Copyright Owner
point of law to constitute piracy. 1. File an injunction restraining such infringement;
[Habana v. Robles, 1999] 2. Payment of actual damages, including legal costs and
d. The effect of the use upon the potential market for or other expenses, as well as the profits the infringer
value of the copyrighted work. may have made due to such infringement;
3. Impounding during the pendency of the action all
articles and their packaging alleged to infringe a
copyright and implements for making them.
4. Destruction without any compensation all infringing
copies or devices used to make the infringing copies;
5. Payment of moral and exemplary damages.
Copyright Infringement
Copyright Infringement consists in doing by any person,

without the consent of the owner of the copyright, of

119
Green Notes 2019 Anti-Money Laundering Act
COVERED INSTITUTIONS
Covered persons, natural or juridical, refer to:
a. BSP-regulated entities: Banks, non-banks, quasi-

banks, trust entities, foreign exchange dealers,
pawnshops, money changers, remittance and
transfer companies and other similar entities
and all other persons and their subsidiaries and
affiliates supervised or regulated by the BSP;
b. Insurance companies, pre-need companies and

all other persons supervised or regulated by the
Insurance Commission;
c. SEC-regulated entities:
a. Securities dealers, brokers, salesmen,

investment houses and other similar persons
ANTI-MONEY managing securities or rendering services as

investment agent, advisor, or consultant;
LAUNDERING ACT b. Mutual funds, close-end investment companies,

common trust funds, and other similar persons;
(R.A. No. 9160, as

and
c. Other entities administering or otherwise
amended by R.A. dealing in currency, commodities or financial

derivatives based thereon, valuable objects, cash
substitutes and other similar monetary
No. 9194) instruments or property supervised or regulated

by the SEC;
d. Jewelry dealers in precious metals, who, as a

business, trade in precious metals, for
transactions in excess of Php 1 million;
e. Jewelry dealers in precious stones, who, as a

business, trade in precious stones, for
transactions in excess of Php 1 million;
f. Company service providers which, as a business,

provide any of the following services to third
parties:
o acting as a formation agent of juridical

persons;
o acting as (or arranging for another

person to act as) a director or
corporate secretary of a company, a
partner of a partnership, or a similar
position in relation to other juridical
persons;
o providing a registered office, business

address or accommodation,
correspondence or administrative
address for a company, a partnership
or any other legal person or
arrangement; and

120
o acting as (or arranging for another

person to act as) a nominee a. Report all covered and suspicious transactions to
shareholder for another person; and the AMLC within 5 working days from
occurrence thereof unless the AMLC prescribes
g. Persons who provide any of the following a different period not exceeding 15 workings
services: days;
• Managing of client money, securities b. Lawyers and accountants acting as independent

or other assets; legal professionals are not required to report if
information is subject to professional secrecy;
• Management of bank, savings or
securities accounts; c. Covered institutions, including officers and
employees thereof, are prohibited from
• Organization of contributions for the communicating any information in relation to
creation, operation or management of the report to any other person or entity. [Sec. 9,
companies; and AMLA]
• Creation, operation or management of COVERED TRANSACTIONS

juridical persons or arrangements, and
buying and selling business entities. a. These are transactions involving a total amount in
[Sec. 3(a), AMLA] excess of Php 500k in one day whether in cash or any
other money instrument. [Sec. 3(b), AMLA]
Note: Lawyers and accountants, authorized to practice in
the Philippines, acting as independent legal professionals b. Monetary Instrument refers to the following:
in relation to information concerning their clients are
excluded. They are subject to the provisions of their § Coins or currency of legal tender of the
respective codes of conduct. [Villanueva, 1071-1072] Philippines or of any other country;
OBLIGATIONS OF COVERED § Drafts, checks and notes;

INSTITUTIONS § Securities, negotiable instruments, bonds,
commercial papers, deposit certificates, trust
§ Customer Identification certificates, custodial receipts or deposit
substitute instruments, trading orders,
a. Establish and record the true identity of its transaction tickets and confirmations of sale or
clients based on official documents; investments and money marked instruments;
and
b. Maintain a system of verifying the true identity
of their clients; and § Other similar instruments where title thereto
passes to another by endorsement, assignment
or delivery. [Sec. 3(c), AMLA]
c. In case of corporate clients, require a system of
verifying the following:
SUSPICIOUS TRANSACTION
§ legal existence;
These are transactions with covered institutions where
§ organizational structure; any of the following circumstances exist:
§ authority and identification of all a. No underlying legal or trade obligation, purpose

persons purporting to act on their or economic justification;
behalf;
b. Client is not property identified;
§ Record Keeping c. Amount involved is not commensurate with the
business or financial capacity of the client;
a. Maintain and safely store records of all
transactions for 5 years from the date thereof;
d. Client’s transaction is structured to avoid being
the subject of reporting requirements based on
b. Preserve and safely store records of all closed the known circumstances;
accounts on customer identification, account
files and business correspondence for at least 5
e. Any circumstance relating to the transaction
years from the date they were closed.
which deviates from the client profile and/or
past transactions;
§ Reporting of Covered and
Suspicious Transactions

121
f. Transaction is in a way related to an unlawful

activity or offense under the AMLA that is about § Jueteng and Masiao;
to be, is being or has been committed;
§ Piracy on the high seas;
g. Similar or analogous to the foregoing; [Sec. 3(b-
1), AMLA] § Qualified theft;
SAFE HARBOR PROVISION § Swindling;
Any person reporting any of the covered transactions § Smuggling;

shall be absolved from any administrative, criminal, or
civil proceedings whether such reporting results in any § Violations of the E-Commerce Act of 2000;
criminal prosecution under AMLA or any other Philippine
Law, provided that: § Hijacking and other violations under R.A. 6235
(Civil Aviation); destructive arson and murder;
a. Report made in the regular
performance of his duties; and § Terrorism and conspiracy to commit terrorism;
b. In good faith
§ Financing of terrorism;
MONEY LAUNDERING: WHEN § Bribery and corruption of public officers;

COMMITTED
§ Frauds and illegal exactions and transactions;
It is committed by any person who, knowing that the
money instrument or property represents, involves, or § Malversation of public funds and property;
relates to the proceeds of any unlawful activity:
§ Forgery and counterfeiting;
§ Transacts said monetary instrument or property;
§ Trafficking of persons;
§ Converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or § Illegal logging;
property;
§ Illegal fishing;
§ Conceals or disguises the true nature, source,
§ Illegal mining;
location, disposition, movement, ownership, or
rights with respect to said monetary instrument
§ Illegal trading in wildlife;
or property;
§ Illegal extraction and altering of national caves;
§ Attempts or conspires to commit money
laundering offenses referred to in (a), (b) or (c);
§ Carnapping;
§ Aids the commission of the money laundering
§ Illegal possession of firearms;
offenses referred to in (a), (b) or (c); and
§ Fencing;
§ Performs or fails to perform any act as a result of
which he facilitates the offense of money § Illegal recruitment;
laundering referred to (a), (b) or (c). [Sec. 4,
AMLA] § Violation of the Intellectual Property Code;
§ Photo and video voyeurism;

UNLAWFUL ACTIVITIES OR PREDICATE
CRIMES § Child pornography;
They are acts or omissions or combinations thereof § Child abuse;

involving the following:
§ Fraudulent practices under the SRC;
§ Kidnapping for ransom;
§ Offenses of a similar nature punishable under the
§ Drug trafficking; penal laws of other countries. [Sec. 3(i), AMLA]
§ Graft and corrupt practices; Note:

§ Plunder; a. A person may be charged and convicted of both
money laundering and the offense constituting
§ Robbery and extortion; unlawful activity. The prosecution of a violation

122
under the AMLA shall proceed independently.

[Sec. 6, AMLA]
b. A charge for an unlawful activity shall be given

precedence over the money laundering charge,
without prejudice to freeze orders and other
remedies. [Villanueva, 1075]
AUTHORITY TO INQUIRE INTO BANK

DEPOSITS
1. The AMLC may inquire into or examine any particular
deposit or investment with any banking institution or
non-bank financial institution.
2. GENERAL RULE: There must be a court order with a

finding that there is probable cause that the deposits
are related to unlawful activity or a money laundering
offense.
3. EXCEPTION: No court order is necessary in cases

involving the following:
1. Kidnapping for ransom;
2. Drug trafficking;
3. Terrorism. [Sec. 11, AMLA]
4. No ex parte bank inquiry –Both the freeze order (Sec.

10) and bank deposit inquiry (Sec. 11) are extraordinary
provisional reliefs. Sec. 11, however, does not
generally authorize ex parte issuance of orders unless
notice is given to the owners of the account, allowing
them opportunity to contest the issuance.
5. The general principle that all deposits are of

confidential nature remains. [Republic v. Eugenio, G.R.
No. 174629, Feb. 14, 2008]
6. BSP may inquire into any deposit or investment when

made in the course of a periodic or special
examination in accordance with the rules of
examination of BSP. [Sec. 11, AMLA]

123
Green Notes 2019 Electronic Commerce Act
LEGAL RECOGNITION
Electronic Data Message

Information shall not be denied legal effect, validity or
enforceability solely on the grounds that:
A. it is in the data message purporting to give

rise to such legal effect; or
B. it is merely referred to in that electronic

data message. [Sec. 6, R.A. No. 8792]
Electronic Document
Electronic documents shall have the legal effect, validity or
enforceability as any other document or legal writing, and
–
ELECTRONIC
A. Where the law requires a document to be in
writing, that requirement is met by an electronic
document if the said electronic document
COMMERCE ACT maintains its integrity and reliability and can be

authenticated so as to be usable for subsequent
reference;
(R.A. No. 8792) B. Applies whether the requirement is in the form

of an obligation or whether the law simply
provides consequences for the document not
being presented or retained in its original from;
C. Where the law requires that a document be

presented or retained in its original form, that
requirement is met by an electronic document if
–
• There exists a reliable assurance as to the

integrity of the document from the time when it
was first generated in its final form; and
• That document is capable of being displayed to

the person to whom it is to be presented;
D. For evidentiary purposes, an electronic

document shall be the functional equivalent of a
written document under existing laws. [Sec. 7,
R.A. No. 8792]
Electronic Signatures
An electronic signature on the electronic document shall
be equivalent to the signature of a person on a written
document if proved by showing that a prescribed
procedure is followed which is not alterable by the parties
interested in the electronic document. [Sec. 8, R.A. No.
8792]
PRESUMPTION RELATING TO
ELECTRONIC SIGNATURES

124
GENERAL RULE: In any proceedings involving an Note: The Supreme Court may adopt other authentication
electronic signature, it shall be presumed that such procedures, including the use of electronic notarization
signature: systems as necessary and advisable, as well as the
certificate of authentication on printed or hard copies of
A. is the signature of the person to whom it the electronic document or electronic data messages by
correlates; and electronic notaries, service providers and other duly
recognized or appointed certification authorities. [Sec. 11,
B. was affixed by that person with the intention of R.A. No. 8792]
signing or approving the electronic document.
Burden of Proof
EXCEPTION: The person relying on the electronically
signed electronic document knows or has noticed of a. The person seeking to introduce an electronic
defects in or unreliability of the signature or reliance on data message or electronic document in any
the electronic signature is not reasonable under the legal proceeding has the burden of proving its
circumstances. [Sec. 9, R.A. No. 8792] authenticity by evidence capable of supporting a
finding that the electronic data message or
Rule on Original Documents electronic document is what the person claims it
be.
Where the law requires information to be presented or
retained in its original form, that requirement is met by an b. In the absence of evidence to the contrary, the
electronic data message or electronic document if: integrity of the information and communication
system in which an electronic data message or
A. the integrity of the information from the time electronic document is recorded or stored may
when it was first generated in its final form, as an be established in any legal proceeding by:
electronic data message or electronic document
is shown by evidence aliunde or otherwise; and • Evidence that at all material times the
information and communication system or
B. where it is required that information be other similar device was operating in a
resented, that the information is capable of being manner that did not affect the integrity of
displayed to the person to whom it is to be the electronic data message and/or
presented. electronic document, and there are no
other reasonable grounds to doubt the
Note: This rule applies whether the requirement is in the integrity of the information and
form of an obligation or whether the law simply provides communication system;
the consequences for the information not being presented
or retained in its original form. [Sec. 10, R.A. No. 8792] • Showing that the electronic data message
and/or electronic document was recorded
Authentication or stored by a party to the proceedings who
is adverse in interest to the party using it; or
A. Electronic Signature - authenticated by proof
than a letter, character, number or other symbol • Showing that the electronic data message
in electronic form representing the persons and/or electronic document was recorded
named in and attached to or logically associated or stored in the usual and ordinary course
with an electronic data message, electronic of business by a person who is not a party to
document, or that the appropriate methodology the proceedings and who did not act under
or security procedures, when applicable, were the control of the party using the record.
employed or adopted by such person, with the [Sec. 11, R.A. No. 8792]
intention of authenticating or approving in an
electronic data message or electronic document;
ADMISSIBILITY AND EVIDENTIARY
B. Electronic Data Message or Electronic WEIGHT
Document - authenticated by proof that an
appropriate security procedure, when applicable In any legal proceedings, nothing in the application of the
was adopted and employed for the purpose of Rules on Evidence shall deny the admissibility of an
verifying the originator of an electronic data electronic data message or electronic document in
message and/or electronic document, or evidence on the ground that:
detecting error or alteration in the
communication, content or storage of an • it is in electronic form; or
electronic document or electronic data message
from a specific point, which, using algorithm or • it is not in the standard written form, and the
codes, identifying words or numbers, electronic data message or electronic document
encryptions, answers back or acknowledgement meeting, and complying with the requirements
procedures, or similar security devices. under Sections 6 or 7 of the Act shall be the best
evidence of the agreement and transaction
contained therein.

125
Note: In assessing the evidentiary weight of an electronic

data message or electronic document, due regard shall be
given to:
§ the reliability of the manner in which it was

generated, stored or communicated;
§ the reliability of the manner in which its

originator was identified; and
§ other relevant factors. [Sec. 12, R.A. No. 8792]
Retention
The requirement in any provision of law that certain
documents be retained in their original form is satisfied by
retaining them in the form of an electronic data message
or electronic document which:
• Remains accessible so as to be usable for

subsequent reference;
• Is retained in the format in which it was

generated, sent or received, or in a format which
can be demonstrated to accurately represent the
electronic data message or electronic document
generated, sent or received;
• Enables the identification of its originator and

addressee, as well as the determination of the
date and the time it was sent or received. [Sec. 13,
R.A. No. 8792]
OBLIGATION OF CONFIDENTIALITY
GENERAL RULE: Any person who obtained access to any

electronic key, electronic data message or electronic
document, book, register, correspondence, information,
or other material pursuant to any powers conferred under
the Act, shall not convey to or share the same with any
other person.
EXCEPTION: Except for the purposes authorized by the

Act. [Sec. 32, R.A. No. 8792]
Reciprocity
All benefits, privileges, advantages or statutory rules
established under the Act, including those involving
practice of profession, shall be enjoyed only by parties
whose country origin grants the same benefits and
privileges or advantages to Filipino citizens. [Sec. 39, R.A.
No. 8792]

126
Green Notes 2019 Data Privacy Act
PERSONAL V. SENSITIVE
PERSONAL INFORMATION
Personal Information
Definition - It is any information whether recorded in a
material form or not, from which the identity of an
individual is apparent or can be reasonably and directly
ascertained by the entity holding the information, or when
put together with other information would directly and
certainly identify an individual [Data Privacy Act of 2012,
Republic Act 10173 (2012)]
Sensitive Personal Information

It refers to the following:
4. About an individual’s race, ethnic origin, marital
status, age, color, and religious, philosophical or
DATA PRIVACY
political affiliations;
5. About an individual’s health, education, genetic
or sexual life of a person, or to any proceeding
ACT (R. A. 10173)

for any offense committed or alleged to have
been committed by such person, the disposal of
such proceedings, or the sentence of any court
in such proceedings;
6. Issued by government agencies peculiar to an
individual which includes, but not limited to,
social security numbers, previous or current
health records, licenses or its denials,
suspension or revocation, and tax returns; and
7. Specifically established by an executive order or
an act of Congress to be kept classified. [Data
Privacy Act of 2012]
Any information that can be categorized under any of the
enumerated items are considered sensitive personal
information.
Personal Sensitive Personal

Information Information
May be processed, Processing these are
provided that the generally prohibited
requirements of except in cases allowed
Data Privacy Act are by law.
complied with.
SCOPE
The law covers the processing of all types of personal
information to any person in personal information
processing including those personal information
controllers and processors who, although not found
or established in the Philippines, use equipment that
are in the Philippines, or those who maintain an office,
branch or agency in the Philippines subject to the
immediately succeeding paragraph: Provided, that
the requirements of the Protection Afforded to
Journalists and their Sources (Sec. 5) are complied
with. [Data Privacy Act of 2012, Republic Act 10173
(2012)]
This Act does not apply to the following:

127
C. Information about any individual who is or

was an officer or employee of a government Processing of Personal Information
institution that relates to the position or
functions of the individual, including: This refers to any operation or any set of operations
1. The fact that the individual is or performed upon personal information including, but not
was an officer or employee of the limited to, the collection, recording, organization, storage,
government institution; updating or modification, retrieval, consultation, use,
2. The title, business address and consolidation, blocking, erasure or destruction of data.
office telephone number of the [Sec. 3(j) Data Privacy of Act of 2012, Republic Act 10173
individual; (2012)]
3. The classification, salary range
and responsibilities of the It is any operation where personal information is involved.
position held by the individual; Whenever your information is, among other things,
and collected, modified, or used for some purpose, processing
4. The name of the individual on a already takes place.
document prepared by the
individual in the course of
employment with the
General Data Privacy Principles
government;
D. Information about an individual who is or Personal Information must, be:
was performing service under contract for E. Collected for specified and legitimate purposes
a government institution that relates to the determined and declared before, or as soon as
services performed, including the terms of reasonably practicable after collection, and later
the contract, and the name of the individual processed in a way compatible with such
given in the course of the performance of declared, specified and legitimate purposes only;
those services; F. Processed fairly and lawfully;
E. Information relating to any discretionary G. Accurate, relevant and, where necessary for
benefit of a financial nature such as the purposes for which it is to be used the
granting of a license or permit given by the processing of personal information, kept up to
government to an individual, including the date; inaccurate or incomplete data must be
name of the individual and the exact nature rectified, supplemented, destroyed or their
of the benefit; further processing restricted;
F. Personal information processed for H. Adequate and not excessive in relation to the
journalistic, artistic, literary or research purposes for which they are collected and
purposes; processed;
G. Information necessary in order to carry out I. Retained only for as long as necessary for the
the functions of public authority which fulfillment of the purposes for which the data
includes the processing of personal data for was obtained or for the establishment, exercise
the performance by the independent, or defense of legal claims, or for legitimate
central monetary authority and law business purposes, or as provided by law; and
enforcement and regulatory agencies of J. Kept in a form which permits identification of
their constitutionally and statutorily data subjects for no longer than is necessary for
mandated functions. Nothing in this Act the purposes for which the data were collected
shall be construed as to have amended or and processed: Provided, That personal
repealed Republic Act No. 1405, otherwise information collected for other purposes may lie
known as the Secrecy of Bank Deposits Act; processed for historical, statistical or scientific
Republic Act No. 6426, otherwise known as purposes, and in cases laid down in law may be
the Foreign Currency Deposit Act; and stored for longer periods: Provided, further, That
Republic Act No. 9510, otherwise known as adequate safeguards are guaranteed by said laws
the Credit Information System Act (CISA); authorizing their processing.
H. Information necessary for banks and other
financial institutions under the jurisdiction The personal information controller must ensure
of the independent, central monetary implementation of personal information processing
authority or Bangko Sentral ng Pilipinas to principles set out herein.
comply with Republic Act No. 9510, and
Republic Act No. 9160, as amended,
otherwise known as the Anti-Money
Laundering Act and other applicable laws;
and
I. Personal information originally collected
from residents of foreign jurisdictions in
accordance with the laws of those foreign
jurisdictions, including any applicable data
privacy laws, which is being processed in Criteria for Lawful Processing of
the Philippines. [Data Privacy Act of 2012,
Republic Act 10173 (2012)]
Personal Information

128
The processing of personal information shall be permitted sensitive personal information are not
only if not otherwise prohibited by law, and when at least transferred to third parties: Provided,
one of the following conditions exists: finally, That consent of the data subject was
obtained prior to processing;
G. The processing is necessary for purposes of
C. The data subject has given his or her consent;
medical treatment, is carried out by a medical
D. The processing of personal information is
practitioner or a medical treatment institution,
necessary and is related to the fulfillment of a
and an adequate level of protection of personal
contract with the data subject or in order to take
steps at the request of the data subject prior to information is ensured; or
H. The processing concerns such personal
entering into a contract;
E. The processing is necessary for compliance with information as is necessary for the protection of
lawful rights and interests of natural or legal
a legal obligation to which the personal
information controller is subject; persons in court proceedings, or the
establishment, exercise or defense of legal
F. The processing is necessary to protect vitally
important interests of the data subject, including claims, or when provided to government or
life and health; public authority.
G. The processing is necessary in order to respond
to national emergency, to comply with the Subcontract of Personal Information
requirements of public order and safety, or to
fulfill functions of public authority which
necessarily includes the processing of personal A personal information controller may subcontract the
data for the fulfillment of its mandate; or processing of personal information: Provided, That the
H. The processing is necessary for the purposes of personal information controller shall be responsible for
the legitimate interests pursued by the personal ensuring that proper safeguards are in place to ensure the
information controller or by a third party or confidentiality of the personal information processed,
parties to whom the data is disclosed, except prevent its use for unauthorized purposes, and generally,
where such interests are overridden by comply with the requirements of this Act and other laws
fundamental rights and freedoms of the data for processing of personal information. The personal
subject which require protection under the information processor shall comply with all the
Philippine Constitution. requirements of this Act and other applicable laws.
Sensitive Personal Information and Extension of Privileged Communication

Privileged Information
Personal information controllers may invoke the principle
of privileged communication over privileged information
The processing of sensitive personal information and
that they lawfully control or process. Subject to existing
privileged information shall be prohibited, except in the
laws and regulations, any evidence gathered on privileged
following cases:
information is inadmissible.
C. The data subject has given his or her consent,

specific to the purpose prior to the processing,
or in the case of privileged information, all Rights of Data Subject
parties to the exchange have given their consent
prior to processing; The data subject is entitled to:
D. The processing of the same is provided for by
existing laws and regulations: Provided, That C. Be informed whether personal information
such regulatory enactments guarantee the pertaining to him or her shall be, are being or
protection of the sensitive personal information have been processed;
and the privileged information: Provided, D. Be furnished the information indicated
further, That the consent of the data subjects are hereunder before the entry of his or her personal
not required by law or regulation permitting the information into the processing system of the
processing of the sensitive personal information personal information controller, or at the next
or the privileged information; practical opportunity:
E. The processing is necessary to protect the life 1. Description of the personal
and health of the data subject or another person, information to be entered into the
and the data subject is not legally or physically system;
able to express his or her consent prior to the 2. Purposes for which they are being or
processing; are to be processed;
F. The processing is necessary to achieve the lawful 3. Scope and method of the personal
and noncommercial objectives of public information processing;
organizations and their 4. The recipients or classes of recipients
associations: Provided, That such processing is to whom they are or may be disclosed;
only confined and related to the bona 5. Methods utilized for automated
fide members of these organizations or their access, if the same is allowed by the
associations: Provided, further, That the

129
data subject, and the extent to which inaccuracy and its rectification upon reasonable
such access is authorized; request of the data subject;
6. The identity and contact details of the G. Suspend, withdraw or order the blocking,
personal information controller or its removal or destruction of his or her personal
representative; information from the personal information
7. The period for which the information controller’s filing system upon discovery and
will be stored; and substantial proof that the personal information
8. The existence of their rights, i.e., to are incomplete, outdated, false, unlawfully
access, correction, as well as the right obtained, used for unauthorized purposes or are
to lodge a complaint before the no longer necessary for the purposes for which
Commission. they were collected. In this case, the personal
information controller may notify third parties
who have previously received such processed
Any information supplied or declaration made to
personal information; and
the data subject on these matters shall not be
H. Be indemnified for any damages sustained due to
amended without prior notification of data
such inaccurate, incomplete, outdated, false,
subject: Provided, That the notification under
unlawfully obtained or unauthorized use of
subsection (b) shall not apply should the personal
personal information.
information be needed pursuant to
a subpoena or when the collection and
processing are for obvious purposes, including Transmissibility of Rights of Data Subject
when it is necessary for the performance of or in
relation to a contract or service or when
necessary or desirable in the context of an The lawful heirs and assigns of the data subject may invoke
employer-employee relationship, between the the rights of the data subject for, which he or she is an heir
collector and the data subject, or when the or assignee at any time after the death of the data subject
information is being collected and processed as or when the data subject is incapacitated or incapable of
a result of legal obligation; exercising the rights as enumerated in the immediately
preceding section.
E. Reasonable access to, upon demand, the

following: Right to Data Portability
1. Contents of his or her personal
information that were processed; The data subject shall have the right, where personal
2. Sources from which personal information is processed by electronic means and in a
information were obtained; structured and commonly used format, to obtain from the
3. Names and addresses of recipients of personal information controller a copy of data undergoing
the personal information; processing in an electronic or structured format, which is
4. Manner by which such data were commonly used and allows for further use by the data
processed; subject. The Commission may specify the electronic
5. Reasons for the disclosure of the format referred to above, as well as the technical
personal information to recipients; standards, modalities and procedures for their transfer.
6. Information on automated processes
where the data will or likely to be made
as the sole basis for any decision Limitations
significantly affecting or will affect the
data subject;
The immediately preceding sections are not applicable if:
7. Date when his or her personal
information concerning the data
subject were last accessed and • The processed personal information are used
modified; and only for the needs of scientific and statistical
8. The designation, or name or identity research; and
and address of the personal • On the basis of such, no activities are carried out
information controller; and no decisions are taken regarding the data
F. Dispute the inaccuracy or error in the personal subject: Provided, that the personal information
information and have the personal information shall be held under strict confidentiality and shall
controller correct it immediately and be used only for the declared purpose.
accordingly, unless the request is vexatious or • Processing of personal information gather for
otherwise unreasonable. If the personal the purpose of investigations in relation to any
information have been corrected, the personal criminal, administrative or tax liabilities of a data
information controller shall ensure the subject.
accessibility of both the new and the retracted
information and the simultaneous receipt of the
new and the retracted information by recipients
thereof: Provided, That the third parties who
have previously received such processed
personal information shall he informed of its

130
Green Notes 2019 Financial Rehabilitation, Insolvency,
Liquidation and Suspension of Payments
BASIC CONCEPTS
Insolvency
It is a financial condition wherein a debtor is generally
unable to pay its or his liabilities as they fall due in the
ordinary course of business or has liabilities that are
greater than its or his assets. [Sec. 4(p), FRIA]
Rehabilitation
It refers to a restoration of the debtor to condition of
successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and its
creditors can recover by way of the present value of
payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately
liquidated. [Pacific Wide Realty v. Puerto Azul Land, G.R. No.
178768, November 25, 2009]
Rehabilitation is available to a corporation who, while

illiquid, has assets that can generate more cash if used n
FINANCIAL intis daily operations than when sold. It should be denied

to corporations whose insolvency appears to be
REHABILITATION
irreversible and whose sole purpose is to delay the
enforcement of the rights of the creditors which is
indicated by the following:
AND INSOLVENCY a. Absence of a sound and workable business

plan;
ACT (R.A. No. b. Baseless and unexplained assumptions,

targets and goals;
10142) c. Speculative capital infusion or complete

lack thereof for the execution of the
business plan;
d. Cash flow cannot sustain daily operations;

and
e. Negative net worth and the assets are near

full depreciation or full depreciated.
[Wonder Book v. Philippine Bank of
Communications, G.R. No. 187316, July 16,
2012]
Liquidation
It is defined as the process of settling the affairs of a
corporation, which consists of adjusting the debts and
claims, that is, collecting all that is due to the corporation,
the settlement, and adjustment of claims against it and
payment of its just debts. [Yu v. Yukayguan, et al., G.R. No.
177549, June 18, 2009]
Suspension of Payments
It is the postponement by court order of the payment of
debts of one who, while possessing sufficient property to
cover his debts, foresees the impossibility of meeting them
when they respectively fall due.

131
MODES OF REHABILITATION
3. At least one creditor, other than petitioners,
has initiated foreclosure proceedings
Court Supervised Rehabilitation
against the debtor that will prevent the
debtor from paying its debts as they
a. Voluntary or Debtor-Initiated Proceedings become due or will render it insolvent. [Sec.
5, Rule 2, FR Rules of Procedure]
§ Persons who may file a petition for voluntary
rehabilitation: c. COMMENCEMENT ORDER
1. Sole proprietorship – owner; The rehabilitation proceedings shall be deemed to have

commenced from the date of filing of the petition. The
2. Partnership – approved by a majority of the Order shall:
partners;
State the following:
3. Corporation
1. Name, address, and business of
§ Majority vote of the board of the debtor;
directors/trustees; and 2. Nature of the business and
principal activities;
§ Authorized by the vote of at least 2/3 3. Summary of grounds for
of the outstanding capital stock or of initiating the proceedings;
the entire membership; [Sec. 12, FRIA] 4. Relief sought and any
requirement or procedure
4. Group of debtors particular to the relief sought;
5. Legal effects of the
§ One or more of its members foresee Commencement Order;
the impossibility of meeting debts as
they fall due; and • Declare that the debtor is under
rehabilitation;
§ Financial distress would adversely
affect the operations or financial • Direct the the publication of the notice of
condition of other members or their the Commencement order and the
participation is essential under the Commencement Order in a newspaper of
proposed rehabilitation plan. [Sec. 12, general circulation once a week for at
FRIA] least 2 consecutive weeks;
Note: The petition must be verified with allegations • If petitioner is the debtor, direct service
establishing the (1) insolvency of the debtor and (2) by personal delivery, a copy of the
viability of its rehabilitation. [Villanueva, 1279-1280] petition on:
b. Involuntary Proceedings 1. Each creditor holding at least ten

percent 10% of the total liabilities
§ Persons who may petition for involuntary of the debtor;
rehabilitation:
2. BIR; and
Any creditor or group of creditors with a
claim of, or the aggregate of whose claims 3. Appropriate regulatory agencies
is, whichever is higher of: such as the SEC, BSP and HLURB
within 5 days from the issuance of
1. At least Php 1,000,000.00; the order;
2. At least 25% of the subscribed capital • If petitioners are creditors, direct

stock or partners’ contributions. [Sec. service by personal delivery a copy of
13, FRIA] the petition on the debtor within five 5
days from the issuance of the order;
§ Grounds:
• Direct the petitioner to ensure that
1. There is no genuine issue of fact or law on foreign creditors with no known
the claims of the petitioners and that the addresses in the Philippines be served
due and demandable payments thereon a copy of the Commencement Order at
have not been made for at least 60 days; or their foreign addresses in such a
manner that will ensure that the
2. Debtor has failed generally to meet its foreign creditor will receive a copy of
liabilities as they fall due; or

132
the order at least 15 days before the

initial hearing; • Include a Stay or Suspension Order.
[Sec. 8, Rule 2, FR Rules of Procedure]
• Appoint a rehabilitation receiver;
Effects of Commencement Order
• Summarize the requirements and
deadlines for creditors to establish a. On the rehabilitation receiver – vest the
their claims against the debtor; rehabilitation receiver with all the powers and
functions provided for by FRIA;
• Direct creditors to file their verified
notices of claims with the court at least b. On claims and proceedings against the debtor
5 days before the initial hearing date, outside of the rehabilitation proceedings –
with a warning that their failure to do prohibit or otherwise served as the legal basis
so on time will bar them from rendering void the following which occurred
participating in the rehabilitation after the commencement date:
proceedings but will not prejudice
their right to receive distributions if 1. Results of any extrajudicial activity or
recommended by the rehabilitation process to seize property or otherwise
receiver and approved by the court; attempt to enforce a claim against the
debtor;
• Direct all creditors, BIR, and all
interested parties to file and serve on 2. Set-off of debt;
the debtor a verified comment on or
opposition with supporting affidavits 3. Perfect of any lien against the debtor’s
and documents; property;
• Prohibit the debtor's suppliers from c. Consolidates the resolution of legal proceedings
withholding the supply of goods and by and against the debtor to the rehabilitation
services in the ordinary course of court;
business for as long as the debtor
makes payments for the services or d. Waiver of taxes and fees – All taxes and fees due
goods supplied after the issuance of to the national government or LGUs are waived
the commencement Order; until the approval of the Rehabilitation Plan or
dismissal of the petition, whichever is earlier.
• Authorize the payment of [Villanueva, 1285-1286]
administrative expenses as they
become due; GENERAL RULE: The Commencement Order shall be
effective for the duration of the rehabilitation proceedings
• Set the case for initial hearing at a date
no later than 40 days from the date of
EXCEPTIONS: Unless –
filing of the petition for the purpose of
determining whether there is c. Earlier lifted by court;
substantial likelihood for the debtor to
be rehabilitated;
d. Rehabilitation plan is seasonably confirmed or
approved; or
• Make available copies of the petition
and rehabilitation plan for examination
e. Rehabilitation proceedings are terminated. [Sec.
and copying by any interested party;
11, Rule 2, FR Rules of Procedure]
• Indicate exact addresses at which
documents regarding the debtor and
the proceedings may be reviewed and Common provisions
copied;
§ Venue: RTC which has jurisdiction over the principal
• State that any creditor or debtor who office of the debtor as specified in its articles of
is not the petitioner, may submit the incorporation or partnership or registration papers.
name or nominate any other qualified [Sec. 6, Rule 2, FR Rules of Procedure]
person to the position of rehabilitation
receiver; § Court action upon filing:
• State that all contracts not confirmed 1. Issue a Commencement Order within 5 days
in writing by the debtor within 90 days from filing if petition is found to be sufficient in
following the issuance of the form and substance;
commencement order shall be
considered automatically terminated; 2. Give petitioners a maximum of 5 working days
and from receipt of notice within which to amend or

133
supplement the petition or submit necessary Pre-Negotiated Rehabilitation

documents;
§ Petition for approval of Pre-Negotiated
3. Dismiss if deficiency not complied within the Rehabilitation Plan – Any insolvent debtor, by
extended 5-day period. [Sec. 7, Rule 2, FR Rules of itself or jointly with any of its creditors, may file
Procedure] a verified petition endorsed or approved by
creditors holding at least 2/3 of the total
§ Court action on petition within 10 days from liabilities of the debtor which includes:
receipt of the report of the rehabilitation
receiver: a. Secured creditors holding more than 50%
of the total secured claims of the debtor;
1. Give due course upon a finding that debtor and
is insolvent and there is substantial
likelihood for the debtor to be successfully b. Unsecured creditors holding more than
rehabilitated; 50% of the total unsecured claims; [Sec. 76,
FRIA]
2. Dismiss upon a finding that:
§ A secured claim is one secured by a lien. [Sec.
§ Debtor is not insolvent; 4(jj), FRIA]
§ Petition is intended to delay the § If the court finds the petition sufficient in form
enforcement of the rights of creditors; and substance, it shall issue an order within 5
working days from the date of filing which shall:
§ Petition, Plan and attachments thereto
contain materially false or misleading a. Identify the debtor, its principal business
statements; and its principal place of business;
§ Debtor has committed acts of b. Declare the debtor is under rehabilitation;

misrepresentation or fraud of its
creditors; c. Summarize the grounds for the filing;
3. Convert the proceedings into one for d. Direct the publication of the order in a
liquidation upon a finding that debtor is newspaper of general circulation in the
insolvent and there is failure of Philippines once a week for at least 2
rehabilitation. [Sec. 25, FRIA] consecutive weeks;
§ Confirmation: The court shall issue an order e. Direct the service by personal delivery of a
confirming the Rehabilitation Plan if: copy of the petition on each creditor
holding at least 10% of the total liabilities of
1. No objections are filed within the relevant the debtor;
period;
f. State that copies of the petition and the Plan
2. Objections are lacking in merit; are available for examination and copying
by any interested party;
3. Basis for objection has been cured;
g. State that the court shall approve the Pre-
§ The Plan may be confirmed notwithstanding Negotiated Rehabilitation Plan if there is no
unresolved disputes over claims if there are verified objection to the petition or
adequate provisions for their payment. [Sec. 68, Rehabilitation plan within 8 days from the
FRIA] date of the second publication of the order;
§ Period for confirmation: 1 year from the date of h. Creditors and other interested parties may
filing of the petition; submit their comments within a period of
not later than 20 days from the second
§ The proceedings may be converted into one for publication of the order;
liquidation if the Plan is not confirmed within the
said period. [Sec. 72, FRIA] i. Appoint a rehabilitation receiver, if not
provided in the Rehabilitation Plan;
j. Impose a Suspension or Stay Order; [Sec. 2,

Rule 3, FR Rules of Procedure]
§ Effectivity of order – It shall retroact to the date

of filing and shall be effective for 120 days from
the filing of the petition unless earlier lifted due
to:

134
a. Approval of the Pre-Negotiated • Approval by creditors representing more

Rehabilitation Plan; or than 50% of the total liabilities of the
debtor;
b. Termination of the rehabilitation
proceedings; [Sec. 4, Rule 3, FR Rules of • Publication of notice in newspaper of
Procedure] general circulation in the Philippines, once
a week for 2 consecutive weeks;
§ Court action:
• Cannot exceed 120 days from date of
a. Convert rehabilitation proceedings into effectivity; [Sec. 2, Rule 4, FR Rules of
liquidation if court determines that: Procedure]
1. Debtor or creditors supporting the Expiration of standstill period:

Pre-Negotiated Rehabilitation Plan
acted in bad faith; • Lapse of 120 days from the effectivity;
2. Objection is non-curable;
• Effectivity of the OCRA; or
b. Approve the Rehabilitation Plan within 120
days from the filing of the petition; • Termination of the negotiations for OCRA
as declared by creditors representing more
c. Rehabilitation Plan deemed approved if: than 50% of the total liabilities. [Sec. 3, Rule
4, FR Rules of Procedure]
1. Objection has no merit or has been
cured; § An OCRA approved pursuant to an informal
2. Inaction within 120-day period; Court workout framework shall have the same legal
shall certify that no action was made effect as a confirmation of a Plan under Court-
and the Plan is deemed approved; [Rule Supervised Rehabilitation. [Sec. 86, FRIA]
3, FR Rules of Procedure]
§ No amendment of modification shall be valid
§ Effect of Approval – Same legal effect as unless it conforms to the terms specified by the
confirmation of a Plan under Court-Supervised parties for its modification and it complies with
Rehabilitation. [Sec. 82, FRIA] the basic requirements of OCRA. [Sec. 6, Rule 4,
FR Rules of Procedure]
Out of Court or Informal Restructuring § Venue: RTC has jurisdiction over a petition for
Agreements or Rehabilitation Plans court assistance to execute a standstill
agreement and a petition for annulment of the
(OCRA)
standstill agreement or OCRA.
§ Requirements:
§ Only the Court of Appeals can issue a temporary
restraining order or preliminary prohibitory
a. Approval by:
injunction. [Sec. 7, Rule 4, FR Rules of Procedure]
1. Debtor;
§ The insolvent debtor and/or creditor may seek
2. Creditors representing 67% of the court assistance for the execution or
secured obligations;
implementation of the OCRA. The court may
3. Creditors representing 75% of the issue a writ of execution to enforce its terms or
unsecured obligations;
any other form of additional assistance as may be
4. Creditors holding at least 85% of the
necessary. [Sec. 9-10, Rule 4, FR Rules of
total liabilities, secured and unsecured;
Procedure]
and
§ The debtor or creditor may file a petition to
b. Publication of notice of OCA once a week annul the standstill agreement or OCRA based on
for at least 3 consecutive weeks in a the following grounds:
newspaper of general circulation in the
Philippines. [Sec. 1, Rule 4, FR Rules of
• Non-compliance with the requirements;
Procedure]
• Vitiation of consent due to fraud,
§ Standstill Period – A period agreed upon by the intimidation, or violence committed against
debtor and creditors to enable them to negotiate such number of creditors required for the
and enter into an agreement or Rehabilitation
approval of the agreement. [Sec. 11, Rule 4,
Plan. [Sec. 5, Rule 1, FR Rules of Procedure]
FR Rules of Procedure]
Requisites for standstill period:

REHABILITATION RECEIVER

135
Definition 3. No conflict of interest;
It refers to the person or persons, natural or juridical, 4. Not been earlier dismissed as a
appointed as such by the court pursuant to the Act and rehabilitation receiver;
which shall be entrusted with such powers, duties, and
responsibilities as set forth in the law. Where the 5. Submit the name of the representative
rehabilitation receiver is a juridical entity, the term designated to discharge the responsibilities
includes the juridical entity's designated representative. and powers of a rehabilitation receiver and
[Sec. 5(p), Rule 1, FR Rules of Procedure] the names of the persons authorized to
assist the representative, together with a
Note: sworn certification that these persons
possess the qualifications and none of the
§ He shall be deemed an officer of the court; [Sect. disqualifications enumerated above;
26 Rule 2, FR Rules of Procedure]
6. Submit a sworn undertaking binding itself
§ The court shall initially appoint the rehabilitation to be solidarily liable with the persons
receiver, who may or may not be among the designated by it to discharge the functions
nominees of the petitioner; However, creditors and responsibilities of a rehabilitation
and debtors who are not petitions may nominate receiver;
other persons. [Villanueva, 1296]
7. Willing and able to file a bond in such
amount as may be determined by the court;
Qualifications
8. Not disqualified to discharge the duties of a
a. Natural Person – rehabilitation receiver under the
Constitution and other relevant laws.
1. Citizen of the Philippines or a resident of
the Philippines for at least 6 months
c. Designated Representative of Juridical Person
immediately preceding his nomination;
–The designated representative must be:
2. Of good moral character and with 1. Be duly designated and authorized to act for
acknowledged integrity, impartiality and and on behalf of the juridical entity;
independence;
2. Be a director, officer, stockholder or
3. As far as practicable, he has expertise and
partner of the juridical entity; and
acumen to manage and operate a business
similar in size and complexity to that of the
3. Submit a sworn undertaking that he shall be
debtor;
solidarily liable with his firm for all the
obligations and responsibilities of a
4. Has operating knowledge in management,
rehabilitation receiver. [Sec. 21, Rule 2, FR
finance and rehabilitation of distressed
Rules of Procedure]
companies;
5. Has a general familiarity with the rights of Principal Duties

creditors subject to suspension of payments
or rehabilitation and a general a. Preserving and maximizing the value of the
understanding of the duties and obligations assets of the debtor during the rehabilitation
of a rehabilitation receiver; proceedings;
6. Not been earlier dismissed as a b. Determining the viability of the rehabilitation of

rehabilitation receiver; the debtor;
7. No conflict of interest; and c. Preparing and recommending a Rehabilitation

Plan to the court; and
8. Willing and able to file a bond in such
amount as may be determined by the court. d. Implementing the approved Rehabilitation Plan.
b. Juridical Person – Note: The receiver is also tasked to study the

Rehabilitation Plan proposed by the debtor or any other
1. Duly authorized to do business in the Plan submitted during the proceedings. [Sec. 26, Rule 2, FR
Philippines for at least 6 years prior to its Rules of Procedure]
appointment;
2. Of good standing as certified by the Conflict of Interest

appropriate regulatory agencies;

136
Refers to a situation wherein one is so situated as to be

materially influenced in the exercise of judgment for or f. Manifest lack of independence that is
against any party to the proceedings. Deemed conflict of detrimental to the general body of the
interest: stakeholders;
a. Creditor, owner, partner or stockholder of the g. Failure, without just cause, to perform any of his
debtor; powers and functions; or
b. Engaged in line of business which competes with h. On any of the grounds for removing a trustee
the debtor; under the general principles of trusts. [Sec. 27,
c. Director, officer, owner, partner, or employee or
auditor or accountant of the debtor within 5 Note: In case of vacancy, the court shall direct the debtor
years from the filing of the petition; and creditors to submit nominees to the position. [Sec. 35,
FRIA]
d. Underwriter of the outstanding securities of the
debtor within 2 years from the filing of the
petition;
MANAGEMENT COMMITTEE
e. Related by consanguinity or affinity within the
4th civil degree to any individual creditor, Composition
owner/s of a sole proprietorship-debtor,
partners of a partnership-debtor, or to any One nominee by the debtor, another by creditors holding
stockholder, director, officer, employee, or more than 50% of the total obligations of the debtor and
underwriter of the corporation-debtor; or the last member nominated by the first and second
members; The court shall appoint a member in case of
f. Any other direct or indirect material interest in failure to nominate. [Sec. 34, Rule 2, FR Rules of Procedure]
the debtor or any creditor.
Role
Note: Conflict of interest must be disclosed at all times
through the proceedings to the court and to the creditors. a. Take custody and control all assets and
[Sec. 22-23, Rule 2, FR Rules of Procedure] properties owned or possessed by the debtor;
Compensation b. Take the place of the management and

governing body of the debtor;
a. Reasonable fees and expenses according to
terms approved by the court after such notice c. Assume the powers, rights and responsibilities of
and hearing; the debtor. [Sec. 33, Rule 2, FR Rules of Procedure]
b. Prior To Hearing – Quantum meruit. [Sec. 28, Qualification

§ Same as a rehabilitation receiver.
Removal of the Rehabilitation Receiver
Any time by the court, either motu proprio or upon motion REHABILITATION PLAN
by debtor or creditors holding more than 50% of the total
obligations. Grounds may include but not limited to: Definition
a. Incompetence, gross negligence, failure to It refers to a plan by which the financial well-being and
perform or failure to exercise the proper degree viability of an insolvent debtor can be resorted through:
of care in the performance of his duties and
powers; a. Various means (such as debt rescheduling,
reorganization, debt-equity conversion, sale and
b. Lack of a particular or specialized competency dacion en pago) as a going concern;
required by the specific case;
b. Setting-up of a new business entity; or
c. Illegal acts or conduct in the performance of his c. Other similar arrangements as may be approved
duties and powers; by court or creditors. [Sec. 4(ii), FRIA]
d. Lack of qualification or presence of any

Creditor Approval
disqualification;
§ Rehabilitation Plan shall be deemed rejected
e. Conflict of interest that arises after his
unless approved by all classes of creditors whose
appointment;

137
rights are adversely modified or affected by the total liabilities of the debtor if the rehabilitation of the
Plan. debtor is feasible and the opposition is manifestly
unreasonable.
§ It is deemed approved by a class if the members
holding more than 50% of the total claims of the § The court shall consider the following:
said class vote in favor of the Plan. [Sec. 62, Rule
2, FR Rules of Procedure] a. That the plan would provide the objecting class
of creditors with compensation greater than that
Objections to a Rehabilitation Plan which they would have received if the assets
were sold by a liquidator;
a. Creditor’s support was induced by fraud;
b. That the shareholders lose at least their
b. Documents or data relied upon are materially controlling interest as a result of the plan; and
false or misleading;
c. The rehabilitation receiver has recommended
c. The Rehabilitation Plan is not supported by the the approval of the plan. [Sec. 62, Rule 2, FR Rules
voting creditors. [Sec. 66, FRIA] of Procedure]
§ The cram-down clause is necessary to curb the

Objections to a Pre-Negotiated majority creditors’ natural tendency to dictate their
Rehabilitation Plan own terms and conditions to the rehabilitation,
absent due regard to the greater long-term benefit of
Shall be limited to the following: all stakeholders. [BPI v. Sarabia Manor, G.R. No.
175844, July 29, 2013]
a. Allegations or attachments to the petition are
materially false or misleading;
Liquidation
b. Majority of any class of creditors do not support
the Rehabilitation Plan; A. Kinds of Debtors
c. Rehabilitation Plan fails to accurately account for a. Juridical Debtors –

a claim against debtor and claim is not
categorically declared as a contested claim; or
1. Voluntary Liquidation:
d. Support of creditors was induced by fraud; [Sec.
§ Insolvent debtor may file a petition for
79, FRIA]
liquidation containing the following:
Effects of Confirmation of Plan Ø Schedule of debtor’s debt and

liabilities and list of creditors;
a. Plan is binding upon the debtors and all persons
who may be affected by it, whether or not such Ø Inventory of all its assets;
persons participated in the proceedings; or their
claims have been scheduled; Ø Names of at least 3 nominees as
liquidator;
b. Debtor shall comply and take all actions
necessary to carry it out; § Debtor may file a motion to convert the
rehabilitation proceedings into
c. Payments shall be made to creditors in liquidation proceedings at any time
accordance with the provisions of the Plan; during the pendency of the
rehabilitation proceedings. [Sec. 90,
d. Any compromise on amounts or rescheduling of
FRIA]
payments by the debtor shall be binding on
creditors regardless of whether or not the Plan
2. Involuntary Liquidation:
is successfully implemented; and
§ A petition for liquidation or a motion to the
e. Claims arising after its approval not treated by
convert rehabilitation proceedings is filed
the Plan are not subject to any Suspension
by 3 or more creditors, the aggregate of
Order. [Sec. 69, FRIA]
whose claims is at least either (a) Php
1,000,000 or (b) 25% of the subscribed
capital stock or partner’s contributions,
whichever is higher.
CRAM DOWN EFFECT
§ Petition must show that:
§ The court may approve a rehabilitation plan even over
the opposition of creditors holding a majority of the

138
Ø There is no genuine issue of fact or law least one of such acts on of insolvency of the
on their claims and: debtor:
o Demandable payments thereon § Debtor is about to depart or has

not made for at least 180 days; or departed from the Philippines, with
intent to defraud creditors;
o Debtor has generally failed to
meet its liabilities as they fall due; § Remains absent from the Philippines,
and with intent to defraud his creditors;
Ø There is no substantial likelihood that § Conceals himself to avoid the service of

the debtor may be rehabilitated. [Sec. legal process for the purpose of
91, FRIA] hindering or delaying the liquidation or
of defrauding his creditors;
b. Individual Debtors
§ Conceals or removes any of his
§ A petition to be declared in state of property to avoid its being attached or
suspension of payments may be made by an taken on legal process;
individual debtor who possesses sufficient
property to cover all his debts but foresees § Property of debtor to remain under
the impossibility of meeting them when attachment or legal process for 3 days
they fall due. for the purpose of hindering or
delaying the liquidation or of
§ The petition must include: defrauding his creditors;
Ø a schedule of debts and liabilities; § Confessed or offered to allow

judgment in favor of any creditor or
claimant for the purpose of hindering
Ø an inventory of assets; and
or delaying the liquidation or of
defrauding any creditors or claimant;
Ø a proposed agreement with his
creditors. [Sec. 94, FRIA]
§ Willfully suffered judgment to be taken
against him by default for the purpose
§ The court may, upon motion, issue a
of hindering or delaying the liquidation
suspension order against any pending
or of defrauding his creditors;
execution against the debtor:
§ Procured his property to be taken on
Ø Properties held as security by secured
legal process with intent to give a
creditors shall not be the subject of
preference to one or more of his
such suspension order;
creditors and thereby hinder or delay
the liquidation or defraud any one of
Ø The suspension order shall lapse after
his creditors;
3 months without acceptance of the
proposed agreement by the creditors;
§ Made any assignment, gift, sale,
conveyance or transfer of his estate,
Ø The suspension order shall lapse as property, rights or credits with intent
soon as the proposed agreement is
to hinder or delay the liquidation or
denied. [Sec. 96, FRIA] defraud his creditors;
1. Voluntary Liquidation – A petition to be § Made any payment, gift, grant, sale,

discharged from debts is filed by a debtor conveyance or transfer of his estate,
whose: property, rights or credits in
contemplation of insolvency;
§ Properties are insufficient to cover
liabilities; and § Being a merchant or tradesman, he has
generally defaulted in the payment of
§ Debts exceed Php 500k. his current obligations for a period of
30 days;
Note: A schedule of debts and liabilities and an
inventory of assets must be attached. The filing § Failed after demand to pay any moneys
of such petition is an act of insolvency. [Sec. 103, deposited with him or received by him
FRIA] in a fiduciary for a period of 30 days;
and
2. Involuntary Liquidation – Creditors with
§ Found to be without sufficient
claims aggregating to at least Php 500k may
property subject to execution to satisfy
filed a petition for liquidation, alleging at

139
the judgment after execution having 2. Order the liquidation of the debtor
been issued against him on final and, if juridical debtor, declare it as
judgment for money. dissolved;
Note: Petitioning creditors must post a bond and 3. Order the sheriff to take possession
pay for all costs occasioned by the proceedings and control of all the property of the
in the event that the debtor is not declared an debtor, except those exempt from
insolvent. [Sec. 105, FRIA] execution;
B. Procedure 4. Order the publication of the petition or

motion in a newspaper of general
circulation once a week for 2
a. Conversion of Rehabilitation Proceedings to consecutive weeks;
Liquidation Proceedings
5. Direct payments of any claims and
§ The court may order the conversion of conveyance of any property due the
court-supervised or pre-negotiated debtor to the liquidator;
rehabilitation proceedings to liquidation
proceedings during their pendency. 6. Prohibit payments by the debtor and
the transfer of any property by the
§ Grounds: debtor;
1. Debtor is insolvent, no likelihood for 7. Direct all creditors to file their claims
successful rehabilitation and failure of with the liquidator within the period
rehabilitation; [Sec. 17, Rule 2, FR Rules set by the rules of procedure;
of Procedure]
8. Authorize the payment of
2. Debtor acted in bad faith or it is not administrative expenses as they
feasible to cure the defect with respect become due;
to objections made by creditors to the
Rehabilitation Plan; [Sec. 65, Rule 2, FR 9. State that the debtor and creditors
Rules of Procedure] who are not petitioners may submit
the names of other nominees to the
3. No Rehabilitation Plan is confirmed position of liquidator; and
within 1 year from the date of filing of
the petition; [Sec. 70, Rule 2, FR Rules of 10. Set the case for hearing for the election
Procedure] and appointment of the liquidator,
which date shall not be less than 30
4. Termination of rehabilitation days nor more than45days from the
proceedings due to breach or failure of date of the last publication. [Sec. 112,
Rehabilitation Plan; [Sec. 73, Rule 2, FR FRIA]
Rules of Procedure]
c. Effects of the Liquidation Order
5. Debtor or creditors supporting the
Pre-Negotiated Rehabilitation Plan 1. Juridical debtor deemed dissolved and its
acted in bad faith; existence terminated;
6. Objection to Pre-Negotiated 2. Legal title and control of all the assets of the
Rehabilitation Plan is non-curable; debtor, except those exempt from
[Sec. 7, Rule 3, FR Rules of Procedure] execution, shall be deemed vested in the
liquidator or, pending his election or
7. Motion for the liquidation of insolvent appointment, with the court;
juridical debtor; [Sec. 90-91, FRIA]
3. All contracts of the debtor shall be deemed
§ Conversion may also be done at any other terminated and/or breached, unless the
time upon the recommendation of the liquidator, within 90 days from the date of
rehabilitation receiver that rehabilitation of his assumption of office, declares otherwise
the debtor is not feasible. [Sec. 92, FRIA] and the contracting party agrees;
b. Liquidation Order 4. No separate action for the collection of an

unsecured claim shall be allowed:
§ The liquidation order shall:
§ Pending actions will be transferred to
1. Declare the debtor insolvent; the Liquidator for him to accept and
settle or contest.

140
§ Liquidator contests or disputes the § Court appointment – The court may appoint
claim – Court will resolve such contest the liquidator if:
except when the case is already on
appeal. 1. Creditors do not attend the election;
5. No foreclosure proceeding shall be allowed 2. Creditors who attend fail or refuse to elect
for a period of one hundred eighty 180 days. a liquidator;
[Sec. 113, FRIA]
3. Elected liquidator fails to qualify; or
d. Rights of Secured Creditors
4. Vacancy occurs.
§ The Liquidation Order shall not affect the
right of a secured creditor to enforce his § A rehabilitation receiver may also be appointed
lien in accordance with the applicable as liquidator. [Sec. 116, FRIA]
contract or law. A secured creditor may:
§ Qualifications – Same as rehabilitation receiver:
1. Waive his right under the security or
lien, prove his claim in the liquidation § Powers, duties and responsibilities – The
proceedings and share in the liquidator has the right and duty to take all
distribution of assets; or reasonable steps to manage and dispose of the
debtor’s assets with a view of maximizing the
2. Maintain his rights under the security proceeds:
or lien:
1. Sue and recover all the assets, debts and
§ Value of property may be fixed by claims, belonging or due to the debtor;
the creditor and the liquidator;
2. Take possession of all the property of the
§ Value < claim – liquidator may debtor except property exempt by law from
convey the property to the execution;
secured creditor who will still be
admitted the proceedings as a 3. Sell, with the approval of the court, any
creditor for the balance; property of the debtor which has come into
his possession or control;
§ Value > claim – liquidator may
convey the property to the 4. Redeem all mortgages and pledges, and so
creditor and wavier debtor’s right satisfy any judgement which may be an
of redemption upon receiving the encumbrance on any property sold by him;
excess from the creditor;
5. Settle all accounts between the debtor and his
§ Liquidator may sell the property creditors, subject to the approval of the court;
and satisfy the secured creditor’s
entire claim from the proceeds of 6. Recover any property or its value,
the sale; or fraudulently conveyed by the debtor;
§ Secured creditor may enforce the 7. Recommend to the court the creation of a
lien or foreclose on the property. creditors' committee which will assist him
[Sec. 114, FRIA] in the discharge of the functions and which
shall have powers as the court deems just,
e. Powers, Duties, and Responsibilities of the reasonable and necessary; and
Liquidator
8. Upon approval of the court, to engage such
§ Election: Creditors entitled to vote will elect professional as may be necessary and
the liquidator in open court. The nominee reasonable to assist him in the discharge of
receiving. Only creditors who have filed his duties. [Sec. 119, FRIA]
their claims within the given period and
whose claims are not barred by the statute
of limitations are allowed to vote
§ A secured is not allowed to vote, unless he:

(a) waives his security or lien; or (b) has the
value of the property subject of his security Determination of Claims
or lien fixed by agreement with the
liquidator, and is admitted for the balance of Registry of Claims - The liquidator shall prepare a
his claim. [Sec. 115, FRIA] preliminary registry of claims of secured and secured
creditors:

141
1. Unsecured creditors include secured

creditors who (1) waived their security 1. Enumeration of all the assets of the
or (2) have a fixed value of the property debtor;
subject of their security and are
admitted as creditors for the balance; 2. Schedule of liquidation of the assets;
and
2. Registry is available for public
inspection; 3. Schedule of payment of claims. [Sec.
129, FRIA]
3. There must be publication notice to
creditors, individual debtors/owners § Exempt Property – A petition may be filed to
of the sole proprietorship-debtor, the exempt and set apart, for the use and benefit of
partners of the partnership-debtor the said insolvent, such real and personal
and shareholders or members of the property as is by law exempt from execution and
corporation-debtor, on where and also a homestead.
when they may inspect it;
§ No such petition shall be heard until it is first
All claims must be duly proven before being paid. [Sec. 123, proved that:
FRIA]
1. Notice of the hearing of the application has
Right of Set-Off – One debt shall be set off against the been duly given by the clerk;
other if the debtor and creditor are mutually debtor and
creditor of each other. Only the balance, if any, shall be 2. Notice was posted to at least 3 public places
allowed in the liquidation proceedings. [Sec. 124, FRIA] in the province/city at least 10 days prior to
the time of such hearing; [Sec. 130, FRIA]
Opposition or Challenge to Claims – The debtor and other
interested parties may submit a challenge to the claims. § Sale of Assets in Liquidation – The liquidator
may sell the unencumbered assets of the debtor
1. Made within 30 days from the at a public auction.
expiration of the period for filing of
applications for recognition of claims, § Private sale may be allowed with the approval of
creditors and debtors; court if:
2. The rehabilitation receiver shall submit 1. Goods to be sold are of a perishable nature;
to the court the registry of claims
containing the undisputed claims that 2. Goods are liable to quick deterioration in
have not been subject to challenge; value;
3. Claims become final upon the filing of 3. Goods are disproportionately expensive to
the register. They are set aside only on keep;
grounds of fraud, accident, mistake or
inexcusable neglect. [Sec. 125, FRIA] 4. Private sale is for the best interest of the
debtor and his creditors.
§ The liquidator shall resolve disputed claims
and submit his findings thereon to the court § Unencumbered property of the debtor may also
for final approval. The liquidator may be conveyed to a creditor in satisfaction of his
disallow claims. [Sec. 126, FRIA] claim or part thereof. [Sec. 131, FRIA]
f. Liquidation Plan Suspension of Payments
§ The liquidator submits a Liquidation Plan A petition to be declared in state of suspension of payments
within 3 months from his assumption into may be made by an individual debtor who possesses
office. sufficient property to cover all his debts but foresees the
impossibility of meeting them when they fall due.
§ Contents:

142
The petition must include:

c. Enforcement of claims against sureties and other
Ø a schedule of debts and liabilities; persons solidarily liable with the debtor, and
third party or accommodation mortgagors as
Ø an inventory of assets; and well as issuers of letters of credit when the
property is necessary for the rehabilitation of the
Ø a proposed agreement with his debtor;
creditors. [Sec. 94, FRIA]
d. Any form of action of customers of clients of a
The court may, upon motion, issue a suspension order Securities Market Participant (SMP) to recover
against any pending execution against the debtor: moneys and securities entrusted in the ordinary
course of the latter’s business as well as any
Ø Properties held as security by secured action of such SMP or the appropriate agency or
creditors shall not be the subject of organization to settle such claims.
such suspension order;
e. Actions of a licensed broker or dealer to sell
Ø The suspension order shall lapse after pledged securities of a debtor pursuant to a
3 months without acceptance of the securities pledge or margin agreement for the
proposed agreement by the creditors; settlement of securities transactions in
accordance with the SRC.
Ø The suspension order shall lapse as
soon as the proposed agreement is f. Clearing and settlement of financial transactions
denied. [Sec. 96, FRIA] through the facilities of a clearing agency or
similar entities duly authorized, registered or
recognized by the appropriate regulatory agency
STAY OR SUSPENSION ORDER as well as their actions to reimburse themselves
for transactions settled for the debtor;
§ An order issued in conjunction with the
commencement order that shall:
g. Any criminal action against individual debtor or
owner, partner, director, or officer of a debtor.
a. Suspend all actions or proceedings for the
[Villanueva, 1287-1288]
enforcement of claims against the debtor;
h. Sale of debtor’s assets due to its nature as
b. Suspend all actions to enforce any judgment,
perishable, costly to maintain, susceptible to
attachment or other provisional remedies
devaluation or it is otherwise in jeopardy;
against the debtor;
Note: There must be an application filed by the
c. Prohibit the debtor from selling, encumbering,
rehabilitation receiver, with notice to the debtor
transferring or disposing in any manner any of its
and creditors. [Sec. 48, Rule 2, FR Rules of
properties except in the ordinary course of
Procedure]
business; and
§ The court may also authorize the disposal of
d. Prohibit the debtor from making any payment of
encumbered property of debtor and 3rd party assets
its liabilities outstanding as of the
held by debtor upon a showing that:
commencement date except as may be provided.
[Sec. 16, FRIA]
a. Application by rehabilitation receiver;
§ The issuance of a stay order does not affect the right
b. Consent given by the affected owner or secured
to commence action of proceedings in order to
creditors;
preserve ad cautelam a claim against the debtor and
to toll the running of the prescriptive period to file the
c. Necessary for continued business operations;
claim. [Sec. 8, Rule 2, FR Rules of Procedure]
d. Debtor has made arrangements to provide a
§ EXCEPTIONS: The Order does not apply to: substitute lien or ownership that provides an
equal level of security. [Sec. 49, Rule 2, FR Rules of
a. Cases already pending appeal in the SC as of Procedure]
commencement date; Any final and executory
judgment thereon is referred to the
rehabilitation court;
Remedies
b. Subject to the discretion of the court, cases Motion for Reconsideration

pending or filed at a specialized court or quasi-
judicial agency which is capable of resolving A party may file a Motion for Reconsideration of any order
claims more quickly, fairly and efficiently; Any issued by the court prior to approval of the rehabilitation
final and executory judgment thereon is referred plan. [Rules of Procedure on Corporate Rehabilitation, A.M.
to the rehabilitation court; No. 00-8-10-SC, December 2, 2008]

143
Petition for Certiorari

No relief can be given to the aggrieved party by the court’s
order on the motion through Petition for Certiorari. [Rules
on Corporate Rehabilitation, Id.]
The aggrieved party can question the order of the court as

an assigned error in the petition for review of the decision
or order approving the rehabilitation plan.
Petition for Certiorari can be availed only after the

approval of the rehabilitation plan.

144

5 - Mercantile Law - Green Notes PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

5 - Mercantile Law - Green Notes PDF

Uploaded by

Copyright:

Available Formats

DE LA SALLE UNIVERSITY COLLEGE OF LAW

Lasallian Commission on Bar Operations

Letters of Credit and Trust Receipt ........................................................................................................................................................................... 1

Basic Concepts ............................................................................................................................................................................................................. 1

Parties and Contracts Involved ............................................................................................................................................................................. 3

Trust Receipts Law .................................................................................................................................................................................................... 4

Rights and Obligations ............................................................................................................................................................................................. 5

Remedies Available .................................................................................................................................................................................................... 5

Negotiable Instruments Law........................................................................................................................................................................................ 8

Requisites of Negotiability ...................................................................................................................................................................................... 8

Material Alteration ................................................................................................................................................................................................... 14

Lasallian Commission on Bar Operations

Negotiation v. Assignment ................................................................................................................................................................................. 15

Rights of the Holder ................................................................................................................................................................................................ 20

Insurance Law ................................................................................................................................................................................................................. 28

Concept of Insurance .............................................................................................................................................................................................. 28

Perfection of Contract of Insurance .................................................................................................................................................................. 34

Lasallian Commission on Bar Operations

Rights and Obligations Of Parties ...................................................................................................................................................................... 37

Rescission of Insurance Contracts..................................................................................................................................................................... 38

Common Carriers ..................................................................................................................................................................................................... 42

Obligations of the Carriers ................................................................................................................................................................................... 43

Vigilance over Goods ............................................................................................................................................................................................... 43

Bill of Lading .............................................................................................................................................................................................................. 46

Safety of Passengers ................................................................................................................................................................................................ 47

Lasallian Commission on Bar Operations

Defenses Available to Common Carriers ......................................................................................................................................................... 47

Extent of Liability ..................................................................................................................................................................................................... 50

Warsaw Convention ................................................................................................................................................................................................ 53

Corporation Law ............................................................................................................................................................................................................. 55

General Principles ................................................................................................................................................................................................... 55

Stock v. Non-Stock Corporations ....................................................................................................................................................................... 59

De Facto Corporations and Corporations by Estoppel ................................................................................................................................ 60

Board of Directors and Trustees ..........................................................................................................................................................................61

Powers of Corporations ......................................................................................................................................................................................... 64

Lasallian Commission on Bar Operations

Theory of General Capacity ............................................................................................................................................................................. 64

Stockholders and Members Rights of a Stockholder And Member .........................................................................................................72

Foreign Corporation ................................................................................................................................................................................................ 75

Mergers and Consolidations ................................................................................................................................................................................. 77

Securities Regulation Code ........................................................................................................................................................................................ 80

State Policy and Purpose ....................................................................................................................................................................................... 80

Securities and Exchange Commission .............................................................................................................................................................. 80

Definition of Securities .......................................................................................................................................................................................... 82

Procedure for Registration of Securities ......................................................................................................................................................... 82

Exemptions to Registration .................................................................................................................................................................................. 83

Prohibitions On Fraud, Manipulation and Insider Trading ...................................................................................................................... 85

Lasallian Commission on Bar Operations

Manipulation of Security Prices ...................................................................................................................................................................... 85

The New Central Bank Act .................................................................................................................................................................................... 89

Banks In Distress ......................................................................................................................................................................................................91

Law On Secrecy of Bank Deposits ...................................................................................................................................................................... 99

Foreign Currency Deposit Act ........................................................................................................................................................................... 100

General Banking Law ............................................................................................................................................................................................ 100

Philippine Deposit Insurance Corporation Act ........................................................................................................................................... 105

Intellectual Property Code ....................................................................................................................................................................................... 107

Patents ....................................................................................................................................................................................................................... 107

Lasallian Commission on Bar Operations

Mark vs. Collective Marks vs. Tradenames .................................................................................................................................................. 111

Anti-Money Laundering Act .................................................................................................................................................................................... 120

Covered Institutions ............................................................................................................................................................................................. 120

Obligations of Covered Institutions ................................................................................................................................................................. 121

Covered Transactions ............................................................................................................................................................................................ 121