ATENEO

CENTRAL
I EAR OPERATIONS 2019

JORGE ALFONSO C. MELO

Bar Review Coordinator

LEILA S. LIM
Bar Review Secretariat

ATENEO CENTRAL BAR OPERATIONS

PATRICK EDWARD BALISONG

Chairman

KATRINA Y. COSCOLLUELA JONATHAN VICTOR NOEL CZARINA CHER CUERPO

GENICA THERESE ENDALUZ JOHN STEPHEN PANGILINAN BENIGNO ENCISO
Administration Committee Heads Academics Committee Heads Hotel Operations Committee Heads

DEAN JOSE MARIA HOFILENA

ATTY. ROEL REFRAN
ATTY. IVY PATDU
ATTY. FELICISIMO AGAS III
COMMERCIAL LAW Faculty Advisers

ISABELLA NAGUIAT
CHRISTINE LEONG
CLAUDINE BERNAS
PAOLO GABRIEL BAUTISTA
COMMERCIAL LAW Subject Heads

EUNICE A. MALAY()
FRANCES CHRISTINE F. SAYSON
Central Bar Operations
Academics Understudies

GIA MORDENO
MOIRA SARMIENTO NICKI VINE CAPUCHINO
JEBEL CLAUDIO
MAE SAMPANG ELDEN ROCAMORA
RE! LUIS DOMINGO
REMEDIAL LAW Volunteers
ATENEO CENTRAL
BAR OPERATIONS 2019 MERCANTILE LAW

I. LETTERS OF CREDIT AND TRUST RECEIPTS

A. Basic Concepts 1
1. Doctrine of Independence 4
2. Fraud Exception Principle 4
3. Doctrine of Strict Compliance 5
4. Warehouseman's lien 5
B. Rights and Obligations of Parties 10
1. Entruster/entrustee 10
2. Applicant/banks/beneficiaries 4
C. Remedies Available 12

II. NEGOTIABLE INSTRUMENTS LAW

A. Requisites of Negotiability 13
B. Forgery and Material Alteration 19
C. Negotiation 23
D. Rights of the Holder 26
1. Holder in Due Course 26
2. Defense Against the Holder 26
E. Checks 37

III. INSURANCE CODE

A. Basic Concepts 39
1. What may be insured 39
2. Insurable interest 41
3. Double insurance and Over insurance 44
4. Reinsurance 44
5. No fault, suicide, and incontestability clauses 45
B. Perfection of the Insurance Contract 48
C. Rights and Obligation of the Parties 53
1. Insurer 53
2. Insured 54
3. Beneficiary 54
D. Rescission of Insurance Contracts 54
1. Concealment 54
2. Misrepresentation or omissions 56
3. Breach of warranties 57
E. Loss 59
 IV. TRANSPORTATION

A. Common Carriers 72
1. Concept 72
2. Common Carrier v. Private Carrier 72
3. Diligence Required 73
B. Obligations and Liabilities 73
1. Vigilance over goods 74
2. Safety of passengers 77
C. Defenses available to a common carrier .80
1. Proof of negligence 80
2. Due diligence in the selection and supervision of employees .80
3. Fortuitous event 80
4. Contributory negligence .80
5. Doctrine of last clear chance 80
D. Extent of liability 81
1. Recoverable damages 81
2. Stipulations limiting liability 82
3. Limitations under the Warsaw Convention 96

V. CORPORATION LAW (Provisions of BP 68, not affected by RA 11232)

A. General Principles 98
1. Nationality of corporations 102
a. Place of incorporation test 102
b. Control test 102
c. Grandfather rule 103
2. Doctrine of separate juridical personality 104
3. Doctrine of piercing the corporate veil 106
B. De facto corporations and corporations by estoppel
C. Powers of corporations 114
1. How powers are exercised 117
2. Ultra vires doctrine 117
3. Trust fund doctrine 120
D. Board of Directors and Trustees 121
1. Basic principles 121
a. Doctrine of centralized management 121
b. Business judgment rule 121
2. Duties, liabilities, and responsibility for unlawful acts 124
E. Stockholders and Members 127
1. Doctrine of equality of shares 127
2. Property rights 129
a. Right to dividends 129
b. Right to inspect 130
c. Pre-emptive right 131
 d. Right of first refusal 131
3. Intra-corporate disputes
a. Concept
b. Individual vs. representative vs. derivative suit 133
F. Stock vs. non-stock corporations 147
G. Foreign Corporations 148
1. What constitutes "doing business" 148
2. Personality to sue and suability 150
H. Mergers and Consolidation 151
1. Concept 151
2. Effects and limitations 152

VI. SECURITIES REGULATION CODE R.A. No. 8799

A. Registration requirement; exemptions 157

B. Prohibition on fraud, manipulation, and insider trading 161
C. Protection of investors 163
1. Tender offer rule 163
2. Rules on proxy solicitation 163
3. Disclosure rule 164

VII. BANKING LAWS

A. The New Central Bank Act (RA 7653, as amended by RA 11211) 166
1. Handling of banks in distress 166
a. Conservatorship 166
b. Closure 167
c. Receivership 169
d. Liquidation 169
B. Secrecy of bank deposit (RA 1405, as amended, and RA 6426, as amended) 173
1. Prohibited acts 173
2. Exceptions from coverage 174
3. Garnishment of deposits, including foreign deposits 176
C. General Banking Law of 2000 (RA 8791) 176
1. Nature of bank funds and bank deposits 178
2. Diligence required of banks 179
3. Prohibited transactions by bank directors and officers 179
D. Philippine Deposit Insurance Corporation Act (RA 3591, as amended) 180
1. Maximum deposit insurance coverage 180
2. Meaning of insured deposit 180
3. Splitting of deposits .180

VIII. INTELLECTUAL PROPERTY LAW

A. Patents 182
 1. Patentable vs. non-patentable 182
2. Ownership of a patent 184
3. Grounds for cancellation of a patent 186
4. Remedy of the true and actual inventor 186
5. Rights conferred by a patent 186
6. Limitations on patent rights 187
7. Patent infringement 187
B. Trademarks 195
1. Marks vs. collective marks vs. trade names 196
2. Acquisition of ownership 197
a. Concept of actual use 197
b. Effect of registration 198
3. Non-registerable marks 197
4. Well-known marks 199
5. Priority right 200
6. Rights conferred by registration 200
7. Trademark infringement 201
8. Cancellation of registration 204
9. Unfair competition 203
C. Copyrights 205
1. Copyrightable works 205
2. Non-copyrightable works 206
3. Rights conferred by copyright 207
4. Ownership of a copyright 207
5. Limitations on copyright 210
6. Doctrine of fair use 211
7. Copyright infringement 211

IX. ANTI-MONEY LAUNDERING ACT (R.A. 9160, as amended by R.A. 9194)

A. Covered institutions and their obligations 212

B. Covered and suspicious transactions 214
C. When is money laundering committed (including predicate crimes) 214
D. Safe harbor provision 216
E. Authority to inquire into bank deposits 217
F. Freezing and forfeiture 217

X. ELECTRONIC COMMERCE ACT OF 2000 (R.A. 8792) and A.M. No. 01-7-01-SC or the
Rules on Electronic Evidence

A. Legal recognition of electronic data messages, documents, and signature 219

B. Presumption relating to electronic signatures 220
C. Admissibility and evidential weight of electronic data message or electronic
document 220
D. Obligation of confidentiality 221
 Xl. DATA PRIVACY ACT (R.A. No. 10173

A. Personal vs. Sensitive personal information 226

B. Scope 227
C. Processing of Personal Information 228
D. Rights of Data Subject 229

XII. FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 R.A. No. 10142

A. Basic Concepts 231

1. Rehabilitation 231
2. Insolvency 231
3. Liquidation 242
4. Suspension of Payment
B. Modes of rehabilitation 232
1. Court-supervised rehabilitation 232
a. Voluntary vs. involuntary 232
b. Commencement order (including stay order) 235
c. Rehabilitation receiver and management committee 236
d. Determination of claims
e. Rehabilitation plan 238
i. i. Concept of feasibility
ii. Material financial commitments
iii. Liquidation analysis
f. Creditor approval and confirmation 238
g. Failure of rehabilitatior 239
2. Pre-negotiated rehabilitation 240
a. How initiated 240
b. Period and effect of approval 241
3. Out-of-Court or Informal Restructuring Agreement of Rehabilitation Plan .241
a. Minimum requirements 241
b. Standstill period 241
c. Cram down effect 241
C. Liquidation 243
1. Voluntary liquidation vs. involuntary liquidation vs. conversion 243
2. Procedure 246
a. Liquidation order; effects 246
3. Determination of claims 249
D. Suspension of Payments; Suspension of Payment Order ..244
E. Remedies 250
1. Motion for reconsideration
2. Petition for certiorari
ATENEO CENTRAL
BAR OPERATIONS 2019
I. LETTERS OF CREDIT AND TRUST
RECEIPTS
TOPIC OUTLINE UNDER THE SYLLABUS
I. LETTERS OF CREDIT AND TRUST RECEIPTS
A. Basic Concepts
1. Doctrine of Independence
2. Fraud Exception Principle
3. Doctrine of Strict Compliance
4. Warehouseman's lien
B. Rights and Obligations of Parties
1. Entruster/entrustee
2. Applicant/banks/beneficiary
C. Remedies available
Letter of Credit
A letter from a merchant or a bank or banker in one place,
addressed to another, in another place or country,
requesting the other bank to pay money or deliver goods
to a third party named therein, the opening bank under
taking to provide him the money for the goods or to repay
him.
It is a letter requesting one person to make advances to a
third person on the credit of the writer who assumes
responsibility for payment of the debt therefor to the
addressee
Nature of Letter of Credit
a. A financial device developed by merchants as a
convenient and relatively safe mode of payment to
satisfy the seemingly irreconcilable interest of the
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 (Transfield Philippines v. Luzon
Hydro Corp., G.R. No. 146717, 2004).
b. It is a commitment by the bank that the seller will be
paid.
Purpose of Letters of Credit
a. As to the SELLER
• Insures to a seller payment of a definite amount
upon presentation of documents
Enables the seller to release his inventory or stock in
trade without seeking credit facilities from his own bank
for the buye
b. As to the BUYER
• Gives the buyer the opportunity to levy goods even
without money but on his credit standing with the
opening bank
Page 1 of 250
COMMERCIAL LAW
Kinds of Letters of Credit
Commercial Letter of Credit
An instrument by which a bank, for the account of the
buyer, gives formal evidence to a seller, of its willingness
to permit him, the seller, to draw bills against it, on certain
terms, and stipulates in legal form that all such bills will be
honored.
1. According to Methods of Transmission
a) Circular Letter of Credit
It is addressed to persons in general in which the
opening bank undertakes to honor the
beneficiary's drafts under certain stipulated
conditions. This may either be mailed or by the
issuing bank to the beneficiary or delivered by the
issuing bank to the accredited buyer, to be mailed
by him to the beneficiary.
b) Specially Advised Letter of Credit
It is transmitted to the beneficiary by the opening
bank through the medium of its correspondent in
the vicinity of the beneficiary.
2. According to Duration
a) Revocable Letter of Credit
The opening bank leaves the duration of the credit
open for subsequent consideration and thus
reserves the right to withdraw from the transaction
by stating that it is "good as cancelied" or good
until a stipulated date "unless sooner revoked".
b) Irrevocable Letter of Credit
The issuing bank does not reserve its right to
revoke the credit. The consent of the party who
sought the opening of the letter of credit and the
beneficiary must be obtained before it may be
revoked. This gives the seller certainty of payment.
Issuing bank may not, without the consent of the
beneficiary (seller) and the applicant (buyer),
revoke his undertaking under the letter
3. According to Obligation
a) Unconfirmed Letter of Credit
The notifying bank is requested merely to act as
the medium through which the opening bank's
obligation is transmitted to the beneficiary. Its letter
of advice shall guarantee the authenticity of the
message it is transmitting on behalf of the opening
bank.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

b) Confirmed Letter of Credit a) Simple

The notifying bank gives an absolute assurance A letter of credit where an opening bank instructing
that the opening bank's obligation will be a correspondent to act as the paying bank carries
performed. an account in the currency to be paid with the
paying bank. The amount of payment made to the
rrevocable v. Confirmed Letters of Credit beneficiary and the paying bank's commission for
IRREVOCABLE CONFIRMED LETTERS the service performed is debited to his account.
LETTERS OF CREDIT OF CREDIT
Refers to the duration of Refers to the kind of b) Reimbursement
the letter of credit obligation assumed by the Occasionally, the opening bank doesn't have an
correspondent bank account with the correspondent it chooses as a
paying bank or, having an account, may prefer not
The issuing bank made The correspondent bank
no reservation of his right gives an absolute to have it debited. In the latter case, the paying
to revoke. Hence, it assurance that it will bank will draw a draft for the amount of its
cannot do so without the undertake the issuing payment, with commission and interest for the
consent of the bank's obligation as its own period elapsing until reimbursement, either on the
beneficiary. according to the terms and opening bank or the correspondent with which the
conditions of the credit opening bank carries an account.

4. According to Method of Payment 6. According to Provision for Renewal

a) Negotiation
The beneficiary is to draw his drafts in a foreign
currency either in the opening foreign bank or in
another opening foreign bank, which drafts so
drawn the beneficiary may sell to the notifying
bank or any other bank in his locality. The
beneficiary negotiates his foreign currency drafts
drawn under the credit to the bank in his locality
offering him the best rate.
b) Straight
The beneficiary is paid by a bank local to him and
designated by the opening bank. The drafts are
usually drawn in the currency of the beneficiary.
Sight and Acceptance Letter of Credit
Under a sight credit, the beneficiary's drafts are drawn
payable at sight. Once paid, the drafts serve simply as
receipts for payment and are without value for any other
purpose.
a) Revolving Credits
The opening bank who may be willing to finance
aggregate shipments which will exceed the
amount of credit is willing to have outstanding at
one time for the accredited buyer.
A single commercial letter of credit may be given a
life sufficient to cover the period of time necessary
to complete the transaction, with the restriction
that the amount shall not exceed the limit set. '
There should be a proviso that, upon notice from
the opening •bank that any draft which the
beneficiary has drawn within that, limit has been
paid and retired by the accredited buyer, the like
sum becomes available to the beneficiary.
b) Cumulative
Amounts not used in one month are available in
succeeding months.

In an acceptance credit, it is stipulated that the drafts be c) Non-Cumulative

drawn at time, for acceptance, upon some well-reputed
bank in a center of international finance. This is used if the
accredited buyer and the opening bank want to use the
drafts as a means by which to obtain funds for financing
the transaction in a discount market. The draft is
discounted after acceptance and the beneficiary is placed
in funds. The accredited buyer need not furnish funds to
pay the draft until its maturity.
Amounts unused during the month lapses.
7. According to Source of Payment
a) Local Currency
A credit that stipulates that drafts are to be drawn
in the currency of the domicile of the beneficiary.

5. According to Method of Reimbursement

Page 2 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

b) Foreign Currency c. The approximate value of the goods to be shipped

A credit which stipulates that drafts are to be and the general nature of the goods
drawn in a foreign currency, whether that of the d. The issuance of the drafts which the seller must
accredited buyer or not. draw and the name of the bank on which the drafts
are to be drawn
Commercial v. Standby Letters of Credit e. The terms of sale
COMMERCIAL LETTERS STANDBY LETTERS OF f. A statement as to whether the drafts are to be drawn
OF CREDIT CREDIT for 100% of the cost of the merchandise or for a
NATURE lesser percentage
A payment mechanism A security mechanism 9- The shipping route
Payable upon It is payable to seller h. The exact shipping and other documents which
presentation by seller- upon certification of a must be attached to the drafts of the seller
beneficiary of documents party's non-performance I. The outside date of the shipment and the outside
showing that he has of an agreement. date by which the seller is to negotiate his drafts to
complied with sales which the specified documents are attached
agreement. j. Clear indication upon the part of the issuing bank
DOCUMENTATION
that the seller's drafts will be duly honored
Seller-beneficiary must Seller-beneficiary must
show documents that he show that applicant has
has performed his NOT performed his Buyer (Applicant)
contract contract. Procures the letter of credit and obliges himself to
CERTIFICATION reimburse the issuing bank upon receipt of the document
Seller-beneficiary need Seller-beneficiary must of title.
not make any certification, certify obligor has not
performed his contract. Issuing Bank
Undertakes to pay the seller upon receipt of the draft and
Traveler's Letter of Credit proper documents of titles and to surrender the documents
A letter from a bank addressed to one or more of its to the buyer upon reimbursement. Issuing bank's
correspondents stating that drafts up to a certain sum obligation is solidary with that of the buyer (Insular Bank v.
drawn by the beneficiary will be honored by the bank. IAC, G.R. No. 74834, 1988).

Note:
• The purpose of a traveler's letter of credit is to provide
the traveler with funds en route
• OR just bring a credit card.
Specially Advised Letter of Credit
It is addressed to only one bank.
Circular Letter of Credit
It is addressed to a number of correspondents.
Essential Conditions (Art. 568)
a. To be issued in favor of a definite person
b. To be limited to a fixed and specified amount, or to
one or more undetermined amounts, but within a
maximum of limits of which has to be stated exactly
Contents of Letters of Credit (SAINTS-SCOE)
a. Signature of the writer
b. Name of the individual or concern for whose account
it is issued
Page 3 of 250
Note: Usually the issuing bank merely substitutes its own
promise to pay for that of its customer, who in turn
promises to pay the bank the amount of the credit and the
fees mutually agreed upon. "Once the issuing bank shall
have paid the beneficiary after the latter's compliance with
the terms of the letters of credit, the issuing bank is entitled
to reimbursement for the amount it paid under the letter of
credit." (Galvez and Guy v. CA and Asia United Bank, G.R.
No. 187919, 2012).
Seller (Beneficiary)
Who in compliance with the contract of sale ships the
goods to the buyer and delivers the documents of title and
draft to the issuing bank to recover payment.
The Number of Parties May Include:
1. Advising (Notifying) Bank
May be utilized to convey to the seller the existence of
the credit, but does not assure that the issuing bank
will pay and may refuse to accept the drafts without
being liable (Bank of America v. CA, G.R. No. 105395,
1993)
ATENEO CENTRAL
BAR OPERATIONS 2019
2. Confirming Bank
Which will lend credence to the letter of credit issued
by a lesser known issuing bank; the confirming bank is
directly liable to pay the seller-beneficiary
3. Paying Bank
Which undertakes to encash the drafts drawn by the
exporter/seller
4. Negotiating Bank
Instead of going to the place of the issuing bank to
claim payment, the buyer may approach the
negotiating bank to have the draft discounted; Its
liability is dependent upon the stage of the negotiation
— if before negotiation, no liability (Charles Lee v. CA,
G.R. No. 117913, 2002).
Obligations of the Parties: (See above for Buyer,
Beneficiary, and Issuing Bank)
1. DRAWER of the letter of credit
• Liable to the person on whom it was issued for
the amount paid (Code of Commerce, Art. 569,
par. 1)
• In case of revocation, he must inform the
bearer and the person to whom it is addressed
(Code of Commerce, Art. 570)
BEARER of letter of credit
• Pay the amount received without delay (Code
of Commerce, Art. 571, par. 1)
3. ADVISING/NOTIFYING BANK — the bank which
conveys to the seller the existence of the credit
• To notify and/or transmit the documentary of
credit to the seller-beneficiary
• Assumes no liability
4. NEGOTIATING BANK — the bank which discounts the
draft presented by the seller.
• Buys/discounts a draft under the letter of
credit
• Liability depends upon the negotiation
o Before negotiation, it has no liability
with respect to the seller
o After negotiation, there is a contractual
relationship prevailing between the
negotiating and the seller
5. CONFIRMING BANK — the bank which lends
credence to the letter of credit issued .by a lesser
known issuing bank
• Assumes a direct obligation to the seller and
its liability is a primary (Feat! Bank and Trust Co.
v. CA, G.R. No. 94209, 1991)
A. BASIC PRINCIPLES
1. Doctrine of Independence
Page 4 of 250
COMMERCIAL LAW
In a letter of credit, transaction means that a bank, in
determining compliance with the terms of a letter of credit,
is required to examine only the shipping documents
presented by the seller and is precluded from determining
whether or not the main contract is actually accomplished
or not.
It assures the seller or the beneficiary of prompt payment
independent of any breach of the main contract and
precludes the issuing bank from determining whether the
main contract is actually accomplished or not (Transfield
Philippines v. Luzon Hydro Corp., G.R. No. 146717, 2004).
Three Distinct and Independent Contracts in a Letter
of Credit
a. Sale between the seller and the buyer;
b. Contract of buyer with issuing bank; and
c. The letter of credit itself, wherein the bank promises to
pay pursuant to the terms and conditions of the letters
of credit. This assures seller of prompt payment,
independent of any breach of the main sales contract.
In a state of perpetual separation — they are treated
independently. Any discrepancy between the amount of
goods stipulated in the sale and that of the LOC will not
affect the validity and enforceability of the carriage
contract. As the bank is not expected to go beyond the
documents in the LOC, so is the shipper not expected to
look beyond the representations of the seller.
The carrier is not even charged w/ knowledge of the cargo.
That being the case, the remedy of the buyer K would be
against the seller— and not against the carrier. (Keng Hua
Paper Products Co., Inc. v. Court of Appeals, G.R. No.
116863, 1998)
Independent Nature of a Letter of Credit May Be:
a. In foto where the credit is independent from the
justification aspect and is a separate obligation from
the unaerlying agreement like for instance a typical
standby; or
b. Only as to the justification aspect like in commercial
letter of credit or repayment standby, which is identical
with the obligations under the underlying agreement
(Transfield Philippines v. Luzon Hydro Corp., GR No.
146717, 2004).
2. Fraud Exception Principle
Fraud is an exception to the independence principle. That
is, the untruthfulness of a certificate accompanying a
demand for payment under a standby credit may qualify as
fraud sufficient to support an injunction against payment
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

(Transfield Philippines v. Luzon Hydro Corp.. G.R. No. (Be/man Compania v. CB of the Philippines, G.R. No. L-
146717, 2004). 10195, 1958).

In letters of credit transactions, fraud is an exception to the

independent Principle. Fraud can also justify the issuance
of an injunction against payment.

The requirements for such injunction to the issue are

the following: (PAI)
a. there is clear Proof of fraud;
b. the fraud constitutes fraudulent Abuse of the
independent purpose of the letter of credit and not only
fraud under the main agreement; and
c. irreparable Injury might follow if injunction is not
granted or the recovery of damages would be seriously
damaged (Transfield Philippines v. Luzon Hydro
Corp., G.R. No. 146717, 2004).

Nature or Legal Relations Arising From Letters of

Credit:
It may be made conditional, but for purposes of protecting
the banking and mercantile community, all conditions must
be complied with, however onerous. It is unaffected by any
breach of contract on the part of the seller or the buyer or
by any controversy which may arise between the buyer
and seller or by any other transactions between the buyer
and the seller (NAMARCO v. Atlas Trading, G.R. No.
21911, 1957).

3. Doctrine of Strict Compliance

In a letter of credit transaction, it means that the documents
tendered by the seller or beneficiary must strictly conform
to the terms of the letters of credit, i.e., they must include
all documents required by the letter of credit. Thus, a
correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a
faulty tender, acts on its own risk and may not thereafter
be able to recover from the buyer or the issuing bank, as
the case may be, the money thus paid to the beneficiary
(Feati Bank vs. CA, G.R. No. 94209, 1991).

When Letter of Credit Considered Consummated

Contract:
It is the date of payment if the amount of the foreign
currency to the creditor in his country by the agent or
correspondent bank in the country of the debtor that turns
from executory lo executed or consummated contract. It is
not the date of payment by the debtor to the bank in his
country of the amount of foreign exchange sold that makes
the contract executed or consummated, because the bank
may grant the debtor extension of time to pay such debt

Page 5 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
4. WAREHOUSEMAN'S LIEN
Warehouseman's Lien, In General
A warehouseman's lien over the goods deposited with him
is his security for the payment of the charges, money
advanced, and other expenses owed to the
warehouseman. Clearly, the lien exists for the benefit of
the warehouseman.
Section 27 of the Warehouse Receipts Law (Act. No.
2137) 1 provides the claims included in the
warehouseman's lien.
General rule: a warehouseman shall have a lien on goods
deposited or on the proceeds thereof in his hands, for:
a. All lawful charges for storage and preservation of the
goods;
b. All lawful claims for money advanced, interest,
insurance, transportation, labor, weighing, coopering
and other charges and expenses in relation to such
goods;
c. All reasonable charges and expenses for notice, and
advertisements of sale, and for sale of the goods
where default had been made in satisfying the
warehouseman's lien. (WRL, Sec. 27)
• Exception: if a negotiable receipt is issued for goods,
the warehouseman shall have no lien thereon except
for charges for storage of goods subsequent to the
date of the receipt. (WRL, Sec. 30)
• Exception to the exception: a warehouseman shall
have a lien insofar as the negotiable receipt expressly
enumerated other charges for which said lien is
claimed. In such case, there shall be a lien for the
charges enumerated so far as they are within the terms
of Sec. 27, 2 even if amount of the charges so
enumerated is not stated in the receipt.
For the purposes of this Addendum, the referenced Sections
refer to the Warehouse Receipts Law (WRL), unless otherwise
indicated.
2 See general rule.
3 Sec. 28. Against what property the lien may be enforced. —
Subject to the provisions of section thirty, a warehouseman's lien
may be enforced:
a) Against all goods, whenever deposited, belonging to the
person who is liable as debtor for the claims in regard to
which the lien is asserted, and
b) Against all goods belonging to others which have been
deposited at any time by the person who is liable as debtor
for the claims in regard to which the lien is asserted if such
person had been so entrusted with the possession of
goods that a pledge of the same by him at the time of the
Page 6 of 250
COMMERCIAL LAW
Enforcement of Warehouseman's Lien
The lien may be enforced against all goods belonging to:
a. The depositor, or
b. His principal. (WRL, Sec. 28)3
Loss of Warehouseman's Lien
The lien may be lost either by:
a. Surrendering the possession thereof; or
b. Refusing to deliver the goods when a lawful dernand4
upon him is made. (WRL, Sec. 29)
Note:
A warehouseman's lien is possessory in nature. Where the
warehouseman surrenders possession of the goods
without requiring the payment of his lien, the lien Is lost.
(PNB v. Noah's Ark Sugar Refinery, G.R. No. 119231,
1996)
Where a valid demand by the lawful holder of
the warehouse receipts for the delivery of the goods is
refused by the warehouseman, despite the absence of a
lawful excuse provided by the statute itself, the
warehouseman's lien Is deemed lost. (PNB v. Hon. Sayo,
Jr., G.R. No. 129918, 1998)
As to what the law deems a valid demand, Sec. 8
enumerates what must accompany a demand. (PNB v.
Hon. Sayo, Jr., G.R. No. 129918, 1998)
The Following Reasons May Be Invoked By A
Warehouseman To Legally Refuse To Effect Delivery
Of The Goods Covered By The Warehouse Receipts:
deposit to one who took the goods in good faith for value
would have been valid.
4 Sec 8. Obligation of warehousemen • to deliver. — A
warehouseman, in the absence of some lawful excuse provided
by [the Warehouse Receipts Law], is bound to deliver the goods
upon a demand made either by the holder of a receipt for the
goods or by the depositor, if such demand is accompanied with:
a) An offer to satisfy warehouseman's lien;
b) An offer to surrender the receipt, if negotiable, with such
indorsements as would be necessary for the negotiation of
the receipt; and
c) A readiness and willingness to sign, when the goods are
delivered, an acknowledgment that they have been
delivered, if such signature is requested by the
warehouseman.
ATENEO CENTRAL
BAR OPERATIONS 2019
a. The Holder Of The Receipt Does Not Satisfy The
Conditions Prescribed In Section 8 Of The Act. (Sec.
8)
b. The Warehouseman Has Legal Title In Himself On The
goods, such title or right being derived directly or
indirectly from a transfer made by the depositor at the
time of or subsequent to the deposit for storage, or
from the warehouseman's lien. (Sec. 16)
c. The warehouseman has legally set up the title or right
of third persons as lawful defense for non-delivery of
the goods as follows:
i. Where the warehouseman has been requested, by
or on behalf of the person lawfully entitled to a right
of property of or possession in the goods, not to
make such delivery (Sec. 10), in which case, the
warehouseman may, either as a defense to an
action brought against him for non-delivery of the
goods, or as an original suit, whichever is
appropriate, require all known claimants to
interplead (Sec. 17);
ii. Where the warehouseman had information that
the delivery about to be made was to one not
lawfully entitled to the possession of the
goods (Sec. 10), in which case, the
warehouseman shall be excused from liability for
refusing to deliver the goods, either to the
depositor or person claiming under him or to the
adverse claimant, until the warehouseman has
had a reasonable time to ascertain the validity of
the adverse claims or to bring legal proceedings to
compel all claimants to interplead (Sec. 18); and
iii. Where the goods have already been lawfully sold
to third persons to satisfy a warehouseman's lien,
or have been lawfully sold or disposed of because
of their perishable or hazardous nature. (Sec. 36).
d. The warehouseman having a lien valid against the
person demanding the goods refuses to deliver the
goods to him until the lien is satisfied. (Sec. 31)
e. The failure was not due to any fault on the part of the
warehouseman, as by showing that, prior to demand
for delivery and refusal, the goods were stolen or
destroyed by fire, flood, etc., without any negligence
on his part, unless he has contracted so as to be liable
in such case, or that the goods have been taken by the
mistake of a third person without the knowledge or
implied assent of the warehouseman, or some other
justifiable ground for non-delivery. (PNB v. Hon. Sayo,
Jr., G.R. No. 129918, 1998)
Page 7 of 250
COMMERCIAL LAW
Warehouseman's Remedies
The following are the remedies available to a
warehouseman having a valid lien against the -person
demanding the goods:
a. To refuse to deliver the goods until the lien is satisfied
(Sec. 31);
b. To cause the extrajudicial sale of the goods and apply
the proceeds to the value of the lien (Secs. 33 & 34);
and
c. By other means allowed by law to a creditor against his
debtor, for the collection from the depositor of all the
charges which the depositor has bound himself to pay.
(Sec. 32); or other remedies allowed by law for the
enforcement of lien against personal property (Sec.
35) [for instance, by way of counterclaim in an action
to recover the property from the warehouseman]. The
third remedy is sought judicially by filing a civil action
for unpaid charges.
Note: Warehouse receipts are also known as quedans.
Where a warehouse receipt or quedan is transferred or
endorsed to a creditor only to secure the payment of a loan
or debt, the transferee or endorsee does not automatically
become the owner of the goods covered by the warehouse
receipt or quedan but he merely retains the right to keep
and with the consent of the owner to sell them so as to
satisfy the obligation from the proceeds of the sale, this for
the simple reason that the transaction involved is not a sale
but only a mortgage or pledge, and that if the property
covered by the quedans or warehouse receipts is lost
without the fault or negligence of the mortgagee or pledgee
or the transferee or endorsee of the warehouse receipt or
quedan, then said goods are to be regarded as lost on
account of the real owner, mortgagor or pledgor. (Martinez
v. PNB, G.R. No. L-4080, 1953)
B.. Rights and Obligations of the Parties
Rights of the Parties
• The person paying shall have the right to demand
proof of identity of the person in whose favor the
letter of credit was issued (Code of Commerce,
Art. 569(3))
• In case of non-payment, person to whom the letter
of credit is addressed may institute an action
involving execution (Code of Commerce, Art.
571(2)).
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Page 8 of 250

1
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

TRUST RECEIPTS LAW 1 b. The total invoice value of the goods and the amount of
the draft to be paid by the entrustee
A. DEFINITION/ CONCEPT OF A TRUST RECEIPT c. An undertaking or a commitment of the entrustee:
TRANSACTION i. To hold in trust for the entruster the goods,
documents or instruments therein described
Trust Receipt ii. To dispose of them in the manner provided for in
A written/printed document signed and delivered by the the trust receipt
entrustee in favor of the entruster, whereby the latter Turn over the proceeds of the sale of goods,
releases the goods, documents or instruments over which documents or instruments to the entruster or as
he holds absolute title or a security interest to the appears on the trust receipt or to return the
possession of the former, upon the entrustee's promise to goods, documents or instruments in the event of
hold said goods in trust of the entruster, and to sell or their non-sale within the period specified therein
otherwise dispose of the goods, etc. with the obligation to
turn over the proceeds thereof to the extent of what is 1. Loan/Security Feature
owing to the entruster, or to return the goods if UNSOLD,
or for other purposes. • A trust receipt agreement is merely a collateral
agreement, the purpose of which is to serve as a
Trust Receipt Transaction security
any transaction by and between the entruster and the • In relation to a letter of credit, the trust receipt is a
entrustee, where the entruster, who owns and holds separate document. While the trust receipt may
absolute title to or security interest over certain specified have been executed as a security to the letter of
goods, documents or instruments, releases the same to credit, still the two documents involve different
the possession of the entrustee upon the latter's execution undertakings and obligations.
and delivery to the entruster and the trust receipt (Trust
Receipts Law, P.D. No. 115, [hereinafter TRI] Sec. 4) Obligations in the Trust Receipt
FOR GOODS OR FOR INSTRUMENTS
Note: DOCUMENTS
• Currency in which trust receipt may be 1. To sell them 1. To sell them
denominated: 2. To manufacture for the 2. To deliver them to a
o Philippine currency purposes of sale principal
o Any foreign currency acceptable and eligible as 3. To unload/ship or deal 3. To effect the
part of the national reserves of the Philippines. with them in a manner consummation of a
- Payment shall be made in its equivalent in preliminary to their sale transaction involving
Philippine currency, computed at the delivery to a depositary or
prevailing exchange rate on the date of the a register
proceeds of sale of goods, documents or 4. To effect their
instruments held in trust by the entrustee are presentation, collection or
turned over or on such date as stipulated renewal
(TRL, Sec. 6)
In a trust receipt transaction, it is fundamental "that the Distinguish Between Trust Receipt and Letter of Credit
person who advanced the payment for the (Bank of Commerce v. Serrano, G.R. No. 151895, 2005)
merchandise becomes the absolute owner of said TRUST RECEIPT LETTER OF CREDIT
merchandise and continues as owner until he or she is The trustee executes a It is an engagement by the
paid in full, or if the goods had already been sold, the trust receipt binding bank or other person
proceeds should be turned over to him or her." (Land himself to hold the goods, made at the request of a
Bank of the Philippines v. Perez, et. al., G.R. No. documents or instruments customer that the issuer
166884, 2012). in trust for the entruster will honor drafts or other
and to dispose them with demands of payment after
the obligation to turn over the conditions specified in
Contents of a Trust Receipt the proceeds to the extent the credit have been
a. A description of goods, documents or instruments of of the debtor the unsold complied with.
the trust receipt goods, documents or

Page 9 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
instruments in accordance
with the terms of the trust
receipt.
Note: When the debtor receives goods subject of the trust
receipt before the trust receipt was entered into, the
transaction is a simple loan (Colinares and Veloso v. CA,
G.R. No. 90828, 2000).
Purpose of the Law
a. To encourage and promote the use of trust receipts as
an additional and convenient aid to commerce and
trade;
b. To provide for the regulation of trust receipts
transactions in order to assure the protection of the
rights and enforcement of the obligation of the parties
involved therein; and,
c. To declare the misuse 'and/or misappropriation of
goods or proceeds realized from the sale of goods,
documents or instruments released under trust receipt
as acriminal offense punishable as estafa. (TRL,Sec.
2)
Note:
A Trust receipt transaction imposes two obligations on the
entrustee:
(1) to deliver the price of the sale OR
(2) return the same to the entruster.
The Trust Receipts law, as supported by Article 315 of the
RPC, provides that failure to comply constitutes ESTAFA.
In Gonzales v HSBC, Petitioner Gonzalez, as Chairman
and and CEO of MLRC acknowledged receipt on behalf of
MLRC various golfing equipments and assorted Walt
Disney items and signed the two Trust Receipt
Agreements. Upon due dates of the Trust Receipts,
respondent HSBC demanded from MLRC the turnover of
the proceeds of the sale of the assorted goods OR its
return. MLRC failed to comply with either option, hence
HSBC filed estafa for violation of the Trust Receipts Law
against Gonzalez.
Evidence shows that Gonzalez executed an affidavit
acknowledging receipt of the trust receipt on behalf of
MLRC. No payment or returns have been made. Further,
the crime is male prohibitum, where mere failure makes
him LIABLE. Though he signed the Trust Receipts as a
corporate officer and had no physical possession over
them, he cannot avoid responsibility. The rationale is that
they are vested with authority to devise means to ensure
compliance with the Trust Receipts Law. (Gonzales v
HSBC, G. R. No. 164904, 2007)
Page 10 of 250
COMMERCIAL LAW
2. Ownership of the Goods, Documents, and
Instruments Under the Trust Receipt
Entruster holds absolute title to the goods, documents, and
instruments (TRL, Sec. 4)
• Accordingly, in order to secure that the banker shall be
repaid at the critical point - that is, when the imported
goods finally reach the hands of the intended vendee
- the banker takes the full title to the goods at the very
beginning; he takes it as soon as the goods are
brought and settled for by his payments or
acceptances in the foreign country, and he continues
to hold that title as his indispensable security until the
goods are sold and the vendee is called upon to pay
for themn (People vs Yu Chai Ho, G.R. No. L-29278,
1928).
Entrustee only holds the goods, documents and
instruments in trust or as security in favor of the entruster
(TRL, Sec. 4)
• This security is not an ordinary pledge by the importer
to the banker, for the importer has never owned the
goods, and moreover he is not able to deliver the
possession; but the security is the complete title vested
originally in the bankers, and this characteristics of the
transaction has again and again been recognized and
protected by the courts. Of course, the title is at bottom
a security title, as it has sometimes been called, and
the banker is always under the obligation to reconvey;
but only after his advances have been fully repaid and
after the importer has fulfilled the other terms of the
contract (People vs. Yu Chai Ho, G.R. No. L-29278,
1928).
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

B. Rights and Obligations of Parties Any purchaser of goods from an entrustee with right to sell,
or of documents or instruments through their customary
form of transfer, who buys the goods, documents, or
1. RIGHTS OF THE ENTRUSTER instruments for value and in good faith from the entrustee,
acquires said goods, documents or instruments free from
Entruster v. Entrustee the entruster's security interest. (TRL, Sec. 11)
ENTRUSTER ENTRUSTEE
1. Entitled to the proceeds 1. To receive surplus Note:
from the sale of goods, from the public sale General Rule: The law warrants the validity of petitioner's
documents or instruments security interest in the goods pursuant to the written terms
of the trust receipt as against all creditors of the trust
2. Entitled to the return of 2. To have possession receipt agreement.
the goods, etc. In case of of the goods as a
non-sale condition for his liability Exception: When the properties are in the hands of an
under TRL. (Ramos V. innocent purchaser for value and in good faith (Prudential
CA, G.R. No. L-39922- Bank v. NLRC, G.R. No. 112592, 1995). The entruster
25, 1987). wins against any of the entrustee's creditors except one is
3. To enforce all other rights an innocent purchaser for value and in good faith.
conferred to him under TRL.
4. To cancel the trust, take 2. OBLIGATIONS AND LIABILITIES OF THE
possession of the goods or ENTRUSTEE
instruments or of proceeds
realized therefrom upon the 1. Payment/Delivery of the Proceeds of Sale or
default of the entrustee. Disposition of Goods, Documents, or Instruments
5. To sell the goods in a
public or private sale upon The entruster shall be entitled to the proceeds from the
notice to the entrustee in sale of the goods, documents or instruments released to
case of default. the entrustee to the extent of the amount owing to the
entruster or as appears in the trust receipt. (TRL, Sec. 7)
6. May purchase at the
intended public sale (TRL, 2. Return Of Goods, Documents, Or Instruments In
Sec. 7) Case Of Non-Sale (TRL, Sec. 7)
7. Extent of security
interest: The entruster shall be entitled to the return of the goods,
a. As against innocent documents or instruments in case of non-sale
purchaser for value: not
preferred (TRL, Sec. 11) Entruster v. Entrustee
b. As against creditors of ENTRUSTER ENTRUSTEE
the entrustee: preferred 1. To give possession of 1. To hold the goods or the
(TRL, Sec. 12) the goods to the proceeds of the sale in trust
entrustee for the entruster
1. Validity of the Security Interest as Against the 2. To give at least 5 days 2. To comply with his
Creditors Of The Entrustee/Innocent Purchasers notice to the entrustee of alternative obligation
For Value the intention to sell the
goods at the intended
As Against Creditors of the Entrustee public sale
The entruster's security interest in goods, documents, or 3. To ensure against loss
instruments pursuant to the written terms of a trust receipt the goods for their total
shall be valid as against all creditors of the entrustee for value
the duration of the trust receipt agreement. (TRL, Sec. 12)

As Against Innocent Purchasers for Value

Page 11 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
4. To keep the goods or
sale proceeds separate
and identifiable
5. To return the goods in
the event of non-sale or
upon demand of the
entruster
6. To observe the
conditions of the trust
receipt not contrary to the
provisions of the TRL
Entruster's option to cancel the Trust Receipt:
• The entruster may cancel the trust and take
possession of the goods, documents or instruments or
of the proceeds realized therefrom at any time upon
default or failure of the entrustee to comply with any of
the terms and conditions of the trust receipt.
o The entruster in possession of the goods,
documents or instruments may sell the goods at
a public or private sale, provided he/she gave
due notice to the entrustee at least 5 days before
such sale.
o The entruster may, at a public sale, become a
purchaser.
• The proceeds, in case of any public or private sale,
shall be applied in the following manner
a. To the payment of the expenses thereof
b. To the payment of the expenses of re-taking,
keeping and storing the goods, documents or
instruments
c. To the satisfaction of the entrustee's
indebtedness to the entruster.
Note:
• The entrustee shall receive any surplus but shall be
liable to the entruster for any deficiency.
• Notice of sale shall be deemed sufficiently given if in
writing, and either personally served on the entrustee
or sent by post-paid ordinary mail to the entrustee's
last known business address.
3. Liability for Loss of Goods, Documents or
Instruments
• The risk of loss shall be borne by the entrustee.
• Loss of goods, documents or instruments, pending
their disposition, shall not extinguish the obligation of
the entrustee to the entruster for the value thereof,
whether or not the said loss was due to the fault or
negligence of the entrustee.
Page 12 of 250
COMMERCIAL LAW
Liability of the Entruster in Any Sale or Contract Made
by the Entrustee
The entruster is not responsible as principal or as vendor
under any sale or contract to sell made by the entrustee by
virtue of such interest or having given the entrustee the
liberty to sell or otherwise dispose of the goods, documents
or instruments under the terms of the trust receipt
transaction.
Note: The repossession of the goods under the trust
receipt does not suffice to satisfy the principal loan
obligation. The entrustee remains liable for the deficiency
after the proceeds of the sale have been applied to the
payment of expenses and debt (Land! & Company, et. al
v. MBTC, G.R. No. 159622, 2004).
Failure of the Entrustee to Turn Over the Proceeds of
the Sale
It shall constitute the crime of estafa and may also be a
cause for damages under Art. 33 of the Civil Code
(Prudential Bank v. IAC, G.R. No. 74886, 1992).
Novation of the Trust Agreement
A Memorandum of Agreement entered into between the
bank-entruster and entrustee extinguished the obligation
under the existing trust receipt because the agreement did
not only reschedule the debts of the entrustee but it
provided principal conditions which are incompatible with
the trust agreement. Hence, the liability for breach of the
Memorandum of Agreement would be purely civil in nature
and no criminal liability under the TRL can be imposed
(Philippines Bank v. Alfredo T. Ong, G.R. No. 133176,
2002).
Note: The criminal liability arising from the loan agreement
secured by a trust receipt is not extinguished absent the
incompatibility of the obligations under the first and second
agreements (PNB v. Lilian Soriano, G.R. No. 164051,
2012).
4. Penal Sanction if Offender is a Corporation
If the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the
penalty shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible
<
for the offense, without prejudice to the civil liabilities
arising from the criminal case (TRL, Sec. 13)
Note: (BERNABE) As for civil liability, directors, officers
and employees acting as corporate agents will not be
directly liable for the debts incurred. Liability shall fall upon
the hands of the corporation UNLESS they stipulate or
 ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

assume to be personally liable for the debts. (Ildefonso under fraud (Prudential Bank v. IAC, G.R. No. 74886,
Crisologo v. People of the Philippines and China Banking December 8, 1992; See also Sarmiento and Limpin v. CA,
Corporation, G.R. No. 199481, 2012). G.R. No. 122502, 2002).

C.REMEDIES AVAILABLE
end of topic
Criminal
The failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a
trust receipt to the extent of the amount owing of the
entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa (TRL, Sec. 13)

In order to be validly prosecuted for estafa in relation to

Sec. 13, they:
a. Have the obligation to sell and remit the proceeds
thereof to the entruster, or return the goods if not sold;
b. Misappropriated the goods and/or the proceeds of the
sale;
c. Performed such acts with abuse of confidence to the
prejudice of the entruster; and,
d. Demand was made on the entrustee (Metropolitan
Bank and Trust Company v. Jimmy Go and Benjamin
Go, G.R. No. 155647, 2007).

Note:
Even if the accused did not receive the merchandise for
deposit, he is nevertheless, covered by article 315(I)(b)
because after receiving the price of the sale, he did not
)
deliver the money to the bank or, if he did not sell the
merchandise, he did not return It to the bank. (People v.
Cuervo, G.R. No. 27607, 1981).

When both parties enter into an agreement knowing fully

well that the return of the goods subject of the trust receipt
is not possible, even without any fault on the part of the
trustee, it is not a trust receipt transaction penalized under
Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the
RPC (Hur Tin Yang v. People of the Philippines, G.R. No.
195117, 2013).

Civil
After commencing criminal action for violation of the Trust
Receipts Law, the entruster may enforce civil liability
arising out of the trust receipt in a separate civil
action. 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
Page 13 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

H. NEGOTIABLE INSTRUMENTS LAW cashed. (Roman Catholic Bishop of Malolos vs. IAC, 191
SCRA 411)
TOPIC OUTLINE UNDER THE SYLLABUS
Postdated checks does not operate as payment until after
III. NEGOTIABLE INSTRUMENTS LAW the same has been cashed. (BPI Express Card
A. Requisites of negotiability Corporation vs. CA, 296 SCRA 260)
B. Forgery and material alteration
C. Negotiation While a non-negotiable instrument may not be negotiated,
D. Rights of the holder it may be assigned or transferred in the absence of an
1. Holder in due course express prohibition in the face of the instrument. The
promissory note, while marked "non-negotiable" was not
2. Defenses against the holder
stamped as "non-transferrable" or "non-assignable."
E. Checks
Assuming that there was such a prohibition, it still cannot
be invoked against an assignee or transferee of the
FORMS AND INTERPRETATION promissory note in good faith & w/o -notice of such
prohibition. The rights of an assignee are not any greater
Negotiable Instrument
than the rights of the assignor, since the assignee is merely
It is a written contract for the payment of money; by its
substituted in the place of the assignor and that the
form, intended as a substitute for money and intended to
assignee acquires his rights subject to the equities — i.e.
pass from hand to hand, to give the holder in due course
the defenses — w/c the debtor could have set up against
the right to hold the same free from defenses available to
the original assignor before notice of the assignment was
prior parties and collect the sum due.
given to the debtor. (Sesbreno v CA, .GR 89252, 1993)
A. Requisites of Negotiability
Sum
The sum payable is a sum certain within the meaning of
An instrument to be negotiable, must conform to the
this Act, although it is to be paid: (ISDC)
following-requirements: (SUDOC)
a. With interest; or
a. It must be in writing and Signed by the maker or
b. By stated installments; or
drawer;
c. By stated installments, with a ,provision that, upon
b. Must contain an Unconditional promise or order to pay
default in payment of any installment or of interest,
a sum certain in money;
the whole shall become due; or
c. Must be payable on Demand, or at a fixed or
d. With costs of collection or an attorney's fee, in
determinable future time;
case payment shall not be made at maturity. (NIL,
d. Must be payable to Order or to 'bearer; and
Sec. 2)
e. Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
Unconditional Order/Promise to Pay
reasonable Certainty. (Negotiable Instruments Law
("NIL"), Sec. 1)
Effect of a Conditional Promise or Order
Note: A promise or order should not depend on a contingent
event. If it is conditional, it is non-negotiable.
Tender of payment cannot be presumed based on the
circumstances; it must be proven by credible evidence.
There must be a positive and unconditional act of offering There is no "promise" if there is a mere acknowledgment
of debt. However, an acknowledgment may become a
the legal currency as payment for the debt, demanding its
promise by the addition of words by which a promise of
acceptance. Just because one is capable of paying doesn't
mean that he, in fact, actually paid. payment is naturally implied, such as "payable," "payable
on a given day", "payable on demand," and "paid when
called for (Jimenez v. Bucoy, G.R. No. L-10221, 1958)
Even assuming the check was indeed offered, checks —
whether ordinary or manager's checks — are not legal
When Promise Is Unconditional
tender. They are only substitutes for money and mere
An unqualified order or promise to pay is unconditional
delivery thereof does not operate as payment until they are
within the meaning of the NIL, though coupled with —

Page 14 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
a. An indication of a particular fund out of which
reimbursement is to be made, or a particular
account to be debited with the amount; or
b. A statement of the transaction which gives rise to
the instrument.
But an order or promise to pay out of a particular fund is
not unconditional. (NIL, Sec. 3)
Note: The treasury warrant is not a negotiable instrument
if in its face, the words "payable from the appropriation for
food administration" appear. It is an order for payment out
of a particular fund; thus the payment is not unconditional,
which is one of the essential elements of a negotiable
instrument. (Abubakar vs. Auditor General 81 Phil. 359)
Demand/Fixed Determinable Future Time
An instrument is payable at a determinable future time,
within the meaning of this Act, which is expressed to be
payable —
a. At a fixed period after date or sight; or
b. On or before a fixed or determinable future time
specified therein; or
c. On or at a fixed period after the occurrence of a
specified event, which is certain to happen, though
the time of happening be uncertain.
An instrument payable upon a contingency is not
negotiable, and the happening of the Event does not cure
the defect. (NIL, Sec.4)
Order/ Bearer, Payable To: Instruments Payable to
Order
The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his
order. It may be drawn payable to the order of:
a. A payee who is not maker, drawer, or drawee; or
b. The drawer or maker; or
c. The drawee; or
d. Two or more payees jointly; or
e. One or some of several payees; or
f. The holder of an office for the time being. (NIL,
Sec. 8)
Note: The promissory note contained the words "promise
to pay to the Industrial Products Marketing the sum of.." It
did not contain "words of negotiability." It was not payable
to order (or to bearer) and was thus non-negotiable.
The consent of the payer that the note be payable to
order is indispensable. The words "or order" or "to the
order of" must be present. In this case, the note was
payable to Industrial only. Thus, any subsequent
Page 15 of 250
COMMERCIAL LAW
purchaser or assignee thereof merely steps into the shoes
of Industrial and is open to all defenses available against
the latter. The note being non-negotiable, it only follows
that IFC Leasing was not a holder in due course.
Further, IFC Leasing knew well enough that the right of
Industrial was not unconditional — the same being subject
to warranty. It was not a holder in good faith and knew the
infirmity of Industrial's title thereto.
DD: If the instrument is negotiable, the indorsee or
transferee can actually acquire a better right than the
indorser. Provided he is a holder in due course, he is
immune from whatever defenses there are as between the
original parties — such as breach of warranty in this case.
(Consolidated Plywood vs. IFC Leasing, Gr 72593, 1987)
At the onset, it is obvious that the check issued by Nell
was equivocal and very ambiguous. The payee was
not indicated therein to any reasonable certainty. And
as a rule, the ambiguity is construed against the party
who caused it — in this case, Nell. It couldn't be
ascertained whether the payee was Equitable or Casville.
The Bank teller construed it as payable to the account of
Casville Enterprises and thus allowed the same to be
deposited. (Equitable Banking vs. IAC, 161 SCRA 518)
Instruments Payable to Bearer
The instrument is payable to bearer:
a. When it is expressed to be so payable; or
b. When it is payable to a person named therein or
bearer; or
c. When it is payable to the order of a fictitious or
non-existing person, and such fact was known to
the person making it so payable; or
d. When the name of the payee does not purport to
be the name of any person; or
e. When the only or last indorsement is an
indorsement in blank. (NIL, Sec. 9
Note: A check drawn payable to the order of "cash" is a
check payable to bearer; the Bank may pay it to the person
presenting it for payment even w/o the drawer's
indorsement. The word "cash" does not purport to be the
name of any person — thus the instrument is payable to
bearer. Although there are some times when the Banks
would require indorsement, this altogether is not a
requirement. The Bank would not be negligent in not
holding the bearer to be identified. (Ang Tek Lian vs. CA
87 Phil. 383)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Payable to Order v. Payable to Bearer
Payable to Order Payable to Bearer
Payee must be named or Payee need not be
indicated with reasonable indicated; it is enough that
certainty (NIL, Sec. 8) it is expressed to be
payable to bearer (NIL,
Sec. 9[a])
Negotiated by Negotiated by mere
indorsement coupled by delivery (NIL, Sec. 30)
delivery (NIL, Sec. 30)
Instrument originally Instrument originally
payable to order can be payable to bearer cannot
converted into a bearer be converted into an order
instrument through blank instrument. A bearer
indorsement (NIL, Sec. instrument always remains
We]) as such and can be
negotiated by mere
delivery, even if specially
indorsed. (NIL, Sec 40)
Certainty
Where the instrument is payable to order the payee must
be named or otherwise indicated therein with reasonable
certainty. (NIL, Sec. 1[e])
How Negotiability Is Determined
a. By the provisions of the Negotiable Instrument Law,
particularly Section 1 thereof;
b. By considering the whole instrument;
c. By what appears on the face of the instrument and not
elsewhere. (Caltex v. CA, G.R. No. 97753, 1992)
In determining whether the instrument is negotiable, only
the instrument itself and no other, must be examined and
compared with the requirements stated in Sec. 1.
If it appears on the instrument that it lacks one of the
requirements, it is not negotiable and the provisions of the
NIL do not govern the instrument. The requirement lacking
cannot be supplied by using a separate instrument in which
that requirement appears.
Note: The language of negotiability which characterizes a
negotiable paper as a credit instrument is its freedom to
circulate as a substitute for money. Hence, freedom of
negotiability is the touchstone relating to the protection of
holders in due course, and the freedom of negotiability is
the foundation for the protection which the law throws
around a holder in due course.
This freedom in negotiability is totally absent in a
certificate of indebtedness as it merely to pay a sum of
money to a specified person or entity for a period of
time. (Traders Royal Bank v. CA, G.R. No. 93397, 1997)
When the documents provide that the amounts deposited
shall be repayable to the depositor, such instrument is
negotiable because it is payable to the "bearer" (Caltex
Philippines v. CA, G.R. No. 97753, 1992)
Kinds of Negotiable Instruments
Promissory Note
An unconditional promise in writing made by one person to
another, signed by thernaker, engaging to pay on demand,
or at a fixed or determinable future time, a sum certain in
money to order or to bearer. Where the note is drawn to
the maker's own order, it is not complete until indorsed by
him. (NIL, Sec. 184)
Bill of Exchange
An unconditional order in writing addressed by one person
to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a
fixed or determinable future time a sum certain in money
to order or to bearer. (NIL, Sec. 126)
Check
It is a bill of exchange drawn on a bank and payable on
demand. (NIL, Sec. 185)
Characteristics of Negotiable Instruments
a. Negotiability
• Allows the transfer from one person to another
so as to constitute the transferee as a holder
in due course that is free from personal
defenses.
b. Accumulation of secondary contracts
• Instrument is negotiated from person to
person resulting to secondary liability, making
more and more persons liable to the holder
Negotiable v. Non-Negotiable Instrument
Negotiable Non-Negotiable
Contains all requisites of Does not have all
Section 1 requisites from Section 1
Governed by NIL NIL does not apply except
by analogy.
Transferred by Transferred only by
negotiation or assignment assignment
Transferee can be a Transferee can never be a
holder in due course holder in due course

Page 16 of 250

tI
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Transferee who is a Transferee is subject to all COMPLETION AND DELIVERY

holder in due course is not defenses to prior parties
subject to all defenses 1. Insertion of Date

Promissory Note v. Bill of Exchange Presumption as to Date

Promissory Note Bill of Exchange If the instrument bears a date, it is presumed that the said
Unconditional promise Unconditional order date is the date when it was made or drawn. (NIL, Sec. 11)
Involves 2 parties (maker, Involves 3 parties (drawer,
payee) payee, drawee) Effect of Ante-Dating and Post-Dating
Maker primarily liable Drawer only secondarily It does not render invalid or non-negotiable by that fact
liable alone, provided it is not done for an illegal or fraudulent
Only 1 presentment - for Generally two purpose. The person to whom the instrument so dated is
payment presentments - for delivered the title as of the date of delivery. (NIL Sec. 12)
acceptance and for
payment Instances When a Date May Be Inserted In an
Instrument
Check V. Bill of Exchange Where an instrument expressed to be payable at a fixed
period after date is issued undated, or where the
Check Bill of Exchange
acceptance of an instrument payable at a fixed period after
Always drawn upon a May or may not be drawn
sight is undated, any holder may insert therein the true
bank or banker against a bank date of issue or acceptance, and the instrument shall be
Always payable on May be payable on payable accordingly. The insertion of a wrong date does
demand demand or at a fixed or not avoid the instrument in the hands of a subsequent
determinable future time holder in due course; but as to him, the date so inserted is
Not necessary that it be Necessary that it be to be regarded as the true date. (NIL, Sec. 13)
presented for acceptance presented for acceptance
Drawn on a Deposit Not drawn on a deposit 2. Completion of Blanks
The death of a drawer of The death of the drawer of
a check, with knowledge the ordinary bill of Where an Instrument Is Wanting In Any Material
by the banks, revokes the exchange does not revoke Particular
authority of the banker to the authority of the banker a. The holder has prima facie authority to fill up the blanks
pay to pay therein.
Must be presented for May be presented for b. It must be filled up strictly in accordance with the
payment within a payment within a authority given and within a reasonable time.
reasonable time after its reasonable time after its c. If negotiated to a holder in due course, it is valid and
issue (6 months) last negotiation. effectual for all purposes as though it was filled up
strictly in accordance with the authority given and
Promissory Note v. Check within reasonable time. (NIL, Sec. 14)
Promissory Note Check
2 parties: the maker and 3 parties: the drawer, the Where Only a Signature on a Blank Paper Was
the payee drawee bank and the Delivered
payee If a signature on blank paper is delivered by the person
May be drawn against any Always drawn against a making it in order that it may be converted into a negotiable
person, not necessarily a bank instrument, the holder has prima facie authority to fill it up
bank as such for any amount. (NIL, Sec. 14)
May be payable on Always payable on
demand or at a fixed or demand 3. Incomplete and Undelivered Instruments
determinable future time
A promise to pay An order to pay When an Instrument Is Incomplete and Undelivered
Where an incomplete instrument has not been delivered, it
will not, if completed and negotiated without authority, be
a valid contract in the hands of any holder, as against any
Page 17 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

person whose signature was placed thereon before
delivery. (NIL, Sec. 15)
Note:
• An incomplete and undelivered instrument is a real
defense. Thus, it can be interposed against a holder
in due course.
• Delivery is not conclusively presumed where the
instrument is incomplete. The defense of the maker is
to prove non-delivery of the incomplete instrument.
4. Complete but Undelivered Instruments
When an Instrument Is Complete but Undelivered
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the
purpose of giving effect thereto.
As between immediate parties, and as regards a remote
party other than a holder in due course, the delivery, in
order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or
indorsing, as the case may be; and in such case the
delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of
transferring the property in the instrument.
But where the instrument is in the hands of a holder in due
course, a valid delivery thereof by all parties prior to him so
as to make them liable to him is conclusively presumed.
And where the instrument is no longer in the possession of
a party whose signature appears thereon, a valid and
intentional delivery by him is presumed until the contrary is
proved. (NIL, Sec. 16)
Rules on Delivery of Negotiable Instruments
• Delivery is essential to the validity of any negotiable
instrument
• As between immediate parties or those in like cases,
delivery must be with the intention of passing title
• An instrument signed but not completed by the drawer
or maker and retained by him is invalid as to him for
want of delivery even in the hands of a holder in due
course
• But there is prima facie presumption of delivery of an
instrument signed but not completed by the drawer or
maker and retained by him if it is in the hands of a
holder in due course. This may be rebutted by proof
of non-delivery.
• An instrument entrusted to another who wrongfully
completes it and negotiates it to a holder in due course,
delivery to the agent or custodian is sufficient delivery
to bind the maker or drawer.
• If an instrument is completed and is found in the
possession of another, there is prima facie evidence of
delivery and if it be a holder in due course, there is
conclusive presumption of delivery.
• Delivery may be conditional or for a special purpose
but such do not affect the rights of a holder in due
course.

Delivery of Instruments
Section 14 Section 15 Section 16

• Delivery

Delivered Undelivered Undelivered

Completeness
(1) Wanting in any material
particular; Mechanically incomplete Mechanically incomplete
(2) Blank paper with signature
Authority of Person in Possession
(1) Prima facie authority to
May negotiate if delivered to him by or
complete it by filling up the blanks;
No authority to complete and/or under the authority of the party
(2) Signature operates as a prima
negotiate making, indorsing, drawing, or
facie authority to fill it up for any
accepting
amount
Page 18 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
When Enforceable
Filled up strictly in accordance with
authority given and within a Not Enforceable
reasonable time
Kind of Defense
Personal Real
Rights of Holder
(1) If HDC, he can enforce the
instrument as completed as against
parties prior or subsequent to the
completion;
None in the hands of any holder.
(2) If not a HDC, he can enforce the
instrument as completed only
against parties subsequent to the
completion but not against those
prior thereto.
SIGNATURE
General Rule: Only persons whose signatures appear
on an instrument are liable thereon. A person whose
signature does not appear on the instrument is not liable.
Exception: When an agent is liable on the instrument
Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of
a principal, or in a representative capacity, he is not liable
on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling
a representative character, without disclosing his principal,
does not exempt him from personal liability. (NIL, Sec. 20)
Signature by Procuration
A signature by procuration operates as a notice that the
agent has a limited authority to sign. Hence:
• The principal is bound only if the agent acted within the
limits of the authority given;
• The person who takes the instrument is bound to
inquire into the extent and nature of the authority given.
(NIL, Sec. 21)
1. Trade Name
A person who signs in a trade or assumed name shall be
liable in the same manner as if he signed his name,
Page 19 of 250
COMMERCIAL LAW
Delivery is made by or under authority
of the party making, indorsing,
drawing, or accepting, as the case
may be
Personal
Can enforce instrument. Here, the
instrument is in the hands of a HDC, a
valid delivery thereof by all parties
prior to him so as to make them liable
to him is conclusively presumed.
Where the instrument is no longer in
the possession of a party whose
signature appears thereon, a valid and
intentional delivery to him is presumed
until the contrary is proved.
provided that the party intends to bound by the same. (NIL,
Sec. 1812])
2. Liability of Infants and Corporations for Their
Indorsement or Assignment
The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein,
notwithstanding that from want of capacity the corporation
or infant may incur no liability thereon. (NIL, Sec. 22)
Generally, contracts entered into by a minor are voidable.
(Civil Code, Art. 1327) A minor shall not be bound by his
indorsement for lack of legal capacity, but he may be
allowed to transfer rights.
As regards corporations, incapacity to indorse shall apply
in cases where the corporation, through its agents or
officers, has committed ultra vires acts.
3. Effect of a Forged Signature or One Made Without
Authority
When a signature is forged, or made without the authority
of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give
a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to
ATENEO CENTRAL
BAR OPERATIONS 2019
enforce such right is precluded from setting up the forgery
or want of authority. (NIL, Sec. 23)
B. Foruery And Material Alteration
Governing Provisions
Sec. 23 applies only to forged signatures or signatures
made without authority.
Alterations, such as to amounts or the like, fall under Sec.
124.
General Rule: When a signature is forged or made without
the authority of the person, only the forged signature (not
the instrument itself and the other genuine signatures) is
wholly inoperative
Only the signature forged or made without authority is
inoperative. The instrument or other signatures which are
genuine are not affected. (Republic v. Ebrada, G.R. No. L-
40796, 1975)
Effects of Forgery
1. No right to retain the instrument
2. No right to give a discharge thereof
3. No right to enforce payment thereof against any party
thereto can be acquired through or under such signature
Exception: The party against whom it is sought to be
enforced is precluded from setting up forgery or want of
authority as a defense (NIL, Sec. 23)
a. Those who warrant or admit the genuineness of the
signature;
b. Those who are estopped thru negligence.
Persons who are precluded by warranting are
a. Indorsers;
b. Persons negotiating by delivery;
c. Acceptors.
Forms of forgery
a. Fraud in Factum;
b. Duress amounting to Fraud;
c. Fraudulent Impersonation.
Doctrines: Liability in Forgery
• The instrument can be enforced by holders to whose
title the forged signature is not necessary.
• A drawee bank is conclusively presumed to know the
signature of its drawer.
• If an indorser's signature is forged, the loss will be
borne by the forger and the parties subsequent
Page 20 of 250
COMMERCIAL LAW
thereto. Since under said provision, a forged signature
is "wholly inoperative," no one can gain title to the
instrument through such forged indorsement. Such
indorsement prevents any subsequent party from
acquiring any right as against any party whose name
appears prior to the forgery. (Gempesaw v. CA, G.R.
No. 92244, 1993)
• Where a depositor (drawer) is using its own
personalized checks, its failure to provide adequate
security measures to prevent forgeries of checks
constitutes gross negligence and bars it from setting
up the defense of forgery (MWSS v. CA, -G.R. No. L-
62943, 1986)
• However, the mere fact that a cheek was removed and
stolen in a checkbook without the knowledge and
consent of the owner is not negligence (PNB v.
Quimpo, G.R. No. L-53194, 1988)
• If there was no negligence on the 'part of the drawer,
the drawee bank bears the risk of loss in case of a
forged check (Samsung Construction Co. v. Far East
Bank & Trust Co., G.R. No. 129015, 2004)
• If there is a collecting bank, the collecting bank bears
the loss, because it has the duty to ascertain the
genuineness of all prior indorsements (BDO Savings
and Mortgage Bank v. Equitable Banking Corp., G.R.
No. 74917, 1988)
Last Clear Chance and Contributory Negligence in
Forgery
In instances where both parties are at fault, the Doctrine of
Last Clear Chance must be applied in order to assign
liability. Drawee cannot evade responsibility for the loss by
attributing responsibility for the loss by attributing
negligence to the drawer because the former had no last
clear chance to avoid the loss. Drawee's liability is
mitigated by the drawer's negligence (Bank of America
•NT&SA v. Philippine Racing Club, G.R. No. 150228, 2009)
24-Hour Clearing Rule
The drawee bank receiving the check for clearing from the
Central Bank Clearing House must return the check to the
collecting bank within the 24-hour period if the check is
defective for any reason. Otherwise, the drawee bank
forever loses the right to claim against the presenting /
collecting bank if the check is not returned at the next
clearing day or within 24 hours. (Metrobank v. The First
National City Bank and CA, G.R. No. L-55079, 1982)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Rules on Forgery: Promissory Notes Indorsers subsequent to Indorsers may be made

Order Instrument I Bearer Instrument forgery (such as collecting liable to those persons
Maker's Signature Forged bank or last endorser) are who obtain title through
Maker is not liable because liable. their indorsements.
Same.
he never became a party to Payee's Signature Forged
the instrument. Drawer, drawee and payee Drawer liable (his
Indorsers subsequent to Indorsers may be made not liable. indorsement not
forgery are liable because
liable to those persons necessary to pass title).
of their warranties, who obtain title through Cut-off rule applies.
their indorsements. Drawee is liable (no
Indorsers subsequent to privity between drawer
Payee's Signature Forged
forgery (such as collecting and payee because
Maker and payee not Maker is liable.
bank) are liable without indorsement of payee is
liable.
prejudice to their right to not necessary).
Indorsers subsequent to Indorsers may be made
proceed against the forger.
forgery are liable because liable to those persons
Payee is not liable.
of their warranties. who obtain title through
their indorsements.
Collecting bank is liable
Indorser's Signature Fcrged
because of warranty.
Maker, payee and indorser Maker is liable.
However, it may recover
whose signature was Indorsement is not
from the person who
forged are not liable, necessary to pass title
forged the indorsement
and the maker engages to
on the check and
pay any bearer of the
deposited or encashed
instrument.
the same.
Indorsers subsequent to Only the indorser whose
Indorser's Signature Forged
forgery are liable because signature was forged can
Drawer, payee and Drawer is liable even if
of their warranties. raise the defense of
indroser whose signatures special indorsement was
forgery against a HDC.
were forged are not liable. forged because
indorsement is not
Rules on Forgery: Bills of Exchange
Cut-off rule N/A necessary to title.
Order Instrument I Bearer Instrument Drawee liable if it paid. Drawee is liable.
Maker's Signature Forged Indorsers subsequent to Indorser whose signature
Drawer is not liable Same. forgery (such as collecting was forged is liable
because he was never a bank) are liable. because indorsement is
party to the instrument. not necessary.
Drawee-acceptor is liable, Drawee-acceptor is liable
without recourse to drawer, if it paid. It cannot recover MATERIAL ALTERATION
if it paid because he from the collecting bank
admitted the genuiness of because it is bound to 1. Concept
the drawer's signature. know the drawer's There is a material alteration if it alters the effect of the
signature since the latter instrument. It means an unauthorized change in an
Drawee also cannot is its depositor. instrument that purports to modify in any respect the
recover from the collecting obligation of a party or an unauthorized addition of words
bank because there is no The drawee may recover or numbers or other change to an incomplete instrument
privity of contract between from the drawer when the relating to the obligation of a party.
the collecting bank and the latter's negligence is the
drawer. The collecting bank proximate cause of the In other words, a material alteration is one which changes
does not give any warranty loss or contributed the items which are required to be stated under Sec. 1 of
regarding the signature of thereto. the NIL. (PNB v. al, G.R. No. 107507, 1996)
the drawer.

Page 21 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
General Rule: When materially altered, without the
consent of all parties liable, the instrument is avoided.
Except as against:
1. The party who has made the alteration
2. The party who authorized or assented to the alteration.
Exceptions:
a. In the hands of a HDC, it may be enforced
according to its original tenor.
b. With respect to a drawee's liability for a negotiable
instrument that has been altered prior to its
acceptance, the original tenor is liable. (Areza v.
Express Savings Bank, G.R. No. 72764, 2014)
First View: The drawee should be liable for the altered
amount. Section 62 of the Negotiable Instruments Law
(NIL) should be strictly construed and the drawee should
be liable for the amount indicated at the time of his
acceptance for he accepts no other instrument than the
one presented to him-the altered form- and he alone
engages to pay it. This is supported by the practical fact
that the drawee has authenticated the instrument in a
certain form and the commercial policy that favors the
protection of a HDC who changes his position on the faith
of that authentication.
Second View: The drawee despite the tenor of his
acceptance is liable only to the extent of the bill prior to
alteration. This is in consonance with Section 124 of the
NIL. Thus, when the drawee pays a materially altered
check, it violates the terms of the check, as well 4its duty
to charge its client's account only for bona fide
disbursements he -had made. If the drawee did not pay
according to the 'original tenor of the instrument, as
directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to
deduct the erroneous payment it made from the drawer's
account which it was expected to treat with utmost fidelity.
The drawee, however, still has recourse to recover its loss,
such as passing liability back to other responsible parties
(i.e. collecting bank).
Note: Generally, the collecting bank bears the loss
when it guarantees a forged indorsement; however,
the drawee bank has lost its right of reimbursement
from the collecting bank by virtue of the 24-hour house
clearing rule if It failes to return the check wii he said
period. Therefore, the collecting bank, is now .solved
from liability. The remedy now of the drawee b cwould
have to go after the person responsible for the f iery or
age 22 of 250
COMMERCIAL LAW
alteration, assuming that the drawer was itself not guilty of
negligence. (Republic Bank vs. CA 196 SCRA 100)
2. Effect of Material Alteration
An instrument shall be AVOIDED except as against a party
who has himself made, authorized, or assented to the
alteration and subsequent indorsers. (NIL, Sec. 124)
3. What Constitutes Material Alteration: (DSTNPA -
Daylight Savings Time Naman Po Ah)
Any alteration which changes:
a. The Date;
b. The Sum payable, either for principal or interest;
c. The Time or place of payment;
d. The Number or the relations of the parties;
e. The medium or currency in which Payment is to be
made;
f. Or which adds a place of payment where no place
of payment is specified, or Any other change or
addition which alters the effect of the instrument in
any respect, is a material alteration. (NIL, Sec.
125; Bank of America NT & SA v. Philippine
Racing Club, G.R. No. 150228, 2009)
Innocent Alteration
Changes on items other than those required under Sec. 1
of the NIL, and spoliation, which refers to alterations done_
by a stranger, will not avoid the instrument but the holder
may enforce it only according to its original tenor (PNB v.
CA, G.R. No. 107507, 1996)
Note: An alteration on the serial number of the check , an
item which is not an essential requisite for negotiability, did
not change the relations between the parties. (The
International Corporate Bank vs Court of Appeals and
PNB, G.R. No. 129910, 2006)
With Respect To the Obligation of a Drawee Bank to
Return a Materially Altered Check
Generally, a check may only be returned within the 24-hour
clearing rule.
As the rule now stands, the 24-hour rule is still in force, that
is, any check which should be refused by the drawee bank
in accordance with long standing and accepted banking
practices shall be returned through the PCHC/local
clearing office, as the case may be, not later than the next
regular clearing (24-hour). The modification, however, is
that items which have been the subject of material
alteration or bearing forged endorsement may be returned
even beyond 24 hours so long that the same is returned
within the prescriptive period fixed by law. The consensus
ATENEO CENTRAL
BAR OPERATIONS 2019
among lawyers is that the prescriptive period is ten (10)
years because a check or the endorsement thereon is a
written contract. Moreover, the item need not be returned
through the clearing house but by direct presentation to the
presenting bank. - (Areza v. Express Savings Bank, G.R.
No. 72764, 2014)
When a BOE may be treated as PN
a. The drawer and the drawee are one and the same
b. The drawee is a fictitious person
c. The drawee has no capacity to contract.
CONSIDERATION
Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration; and every person
whose signature appears thereon to have become a party
thereto for value. (NIL, Sec. 24)
Presumption of Consideration
Since the consideration is presumed, it need not be alleged
and proved, but since there is only a prima facie
presumption it can be rebutted by evidence to the contrary.
(Pineda v. De La Rama, G.R. No. L-31831, 1983)
The evidence must be convincing and not a mere denial of
the receipt of the consideration. (Bayani v. People, G.R.
No. 154847, 2004)
Valuable Consideration
Value is any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt constitutes
value; and is deemed such whether the instrument is
payable on demand or at a future time. (NIL, Sec. 25)
It is prestation to support any contract in favor of the party
to an instrument, such as the maker or indorser, and it may
consist of giving, doing or not doing. (Civil Code, Art. 1156)
Pre-Existing Debt
An antecedent/pre-existing debt is a valuable
consideration. In other words, the holder can give up his
pre-existing debt, or his right to sue thereon for the
negotiable instrument.
Love and Affection
"Love and affection" is not valuable consideration as
contemplated in Section 25.
Holder for Value
c) What Constitutes A Holder For Value
Page 23 of 250
COMMERCIAL LAW
Where value has at any time been given for the instrument,
the holder is deemed a holder for value in respect to all
parties who became such prior to that time. (NIL, Sec. 26)
d) When A Lien Constitutes A Holder For Value
Where the holder has a lien on the instrument arising either
from contract or by implication of law, he is deemed a
holder for value to the extent of his lien. (NIL, Sec. 27)
Absence of Consideration v. Failure of Consideration
ABSENCE OF FAILURE OF
CONSIDERATION CONSIDERATION
No consideration was Consideration was
intended to pass. intended but that it failed to
pass.
There is a total lack of There was something
consideration for the agreed upon as
contract, as consequence consideration between the
the alleged contract must two parties, but the agreed
fail, upon consideration did not
materialize.
Effects of Want of Consideration
Absence or failure of consideration is matter of defense as
against any person not a holder in due course; and partial
failure of consideration is a defense pro tanto, whether the
failure is an ascertained and liquidated amount or
otherwise. (NIL, Sec. 28)
Effects of Failure or Absence of Consideration:
a. The defense of want of consideration is ineffective
against a holder in due course.
b. A drawee who accepts the bill cannot allege want
of consideration against the drawer.
Note:
• Every negotiable instrument is presumed to have been
acquired for value.
• He who alleges that there was no consideration has
the burden to prove it with convincing evidence. (Yang
v. CA, GR No. 138074, 2003)
• Since consideration is presumed, the maker is liable to
pay under a negotiable promissory note. (Samson v.
CA, GR No. 139983, 2008)
• When the presumption has not been overcome, the
drawer of the must be ordered to pay its value. (Villaluz
v. Court of Appeals, G.R. No. 100571, 1992)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

ACCOMODATION PARTY as an accommodation party. (Bautista v. Auto Plus

Traders, Inc., G.R. No.166405, 2008)
An accommodation party is one who signs the instrument • To be entitled to recover from an Accommodation
as maker, drawer, acceptor, or indorser without receiving Party, the Holder of a negotiable instrument must be a
• value for it and for the purpose of lending his name to some holder in due course except for the notice of want of
other person. (NIL, Sec. 29) consideration. (Prudenclo v. Court of Appeals, G.R.
No. 34539, 1986)
Liability of an Accommodation Party • A party who signed a promissory note as
Such a person is liable on the instrument to a holder for accommodation maker in favor of the payees, cannot
value, notwithstanding such holder at the time of taking the raise the defense that he did not receive any value but
instrument (NIL, Sec. 29) is entitled to reimbursement from the party
accommodated. (Caneda v. CA, GR No. 81322, 1990)
Even if the accommodated party receives an extension of • Where a party indorsed several checks as
the period for payment without the consent of the accommodation endorser, she is liable to the holder for
accommodation party, the latter is still liable for the whole the payment of the checks. (People v. Maniego, G.R.
obligation, and such extension does not release him No 30910, 1987)
because as far as a holder for value is concerned, he is a
solidary co-debtor (Aglibot v. Santia, G.R. No. 185945, Accommodation Party v. Regular Party
2012) ACCOMODATiON
REGULAR PARTY
PARTY
The corporation is not liable for its acts as an Signs an instrument Signs the instrument for
accommodation party, because the issue or indorsement without receiving value value
of negotiable paper by a corporation without consideration thereof
and for the accommodation of another is ultra vires. One Must always show by Cannot disclaim or limit his
who has taken the instrument with knowledge of the• parol evidence that he is personal liability as
accommodation nature thereof cannot recover against a only such appearing on the
corporation where it is only an accommodation party instrument by parol
evidence
(Crisologo-Jose v. CA, G.R. No. 80599, 1989)
Cannot avail of the May avail of said defense
defense of absence or against a holder not in due
Right to Reimbursement failure of consideration course
The Accommodated Party cannot recover from the against a holder not in
Accommodation Party. (PNB v. Maze and Macenas, G.R. due course
No. L-242224, 1925) After paying the holder, After paying the holder,
may seek reimbursement may not sue any
Want of consideration cannot be interposed by the against the subsequent party for
Accommodation Party. accommodated party reimbursement
An Accommodation Maker may seek reimbursement from (HECTOR DE LEON, THE PHILIPPINE NEGOTIABLE
a co-maker even in the absence of any provision in the NIL; INSTRUMENTS LAW, 150 (2013))
the deficiency is supplied by the New Civil Code (Art. 1216)
(Sadaya v. Sevilla, G.R. No. L-17845, 1967) C. Negotiation

He may do this even without first proceeding against the
debtor provided:
a. He paid by virtue of judicial demand, and
b. Principal debtor is insolvent.
Note:
• The Accommodation Party is permitted to show by
parol evidence which party he accommodated. In
absence of concrete evidence showing when one
issued the subject check and in what capacity, it
cannot be assumed that he intended to lend his name
Page 24 of 250
An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the
transferee the holder thereof. If payable to bearer, it is
negotiated by delivery; if payable to order, it is negotiated
by the indorsement of the holder completed by delivery.
(NIL, Sec. 30)
Note: For a valid negotiation, it requires both delivery and
indorsement. In Caltex v CA, Even though the
certificates of deposits were bearer instruments, still,
they were not delivered in payment for the fuel
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

purchases. They were delivered merely as a security
or guarantee therefor and not to constitute Caltex as a
holder thereof.
were in reality delivered to it as a security for De la Cruz'
purchases of its fuel products. Any doubt as to whether the
CTDs were delivered as payment for the fuel products or
as a security has been dissipated and resolved in favor of
the latter by petitioner's own authorized and responsible
representative himself. (Caltex v CA, GR No. 97753, 1992)
latter may acquire a better title than that of the transferor.
Negotiation By Indorsement
If the instrument is payable to order, two steps are needed
to effect negotiation:
a. Indorsement by the payee of the present holder
b. The delivery to the next holder.
Indorsement

Negotiation v. Assignment How Indorsement Is Made

NEGOTIATION ASSIGNMENT The indorsement must be an indorsement of the entire
Pertains only to More comprehensive; instrument. An indorsement which purports to transfer to
negotiable instruments, pertains to contracts in the indorsee a part only of the amount payable, or which
general. purports to transfer the instrument to two or more
Transferee takes it free Instrument is subject to indorsees severally, does not operate as a negotiation of
from personal defenses defenses obtaining among the instrument. But where the instrument has been paid in
available among parties. the original parties. part, it may be indorsed as to the residue. (NIL, Sec. 32)
Consideration is It is necessary to allege
presumed and need not and prove consideration to Kinds of Indorsement (NIL, Sec. 33)
be alleged and proved, maintain an action on a
common law instrument. Special
The general indorser is The assignor in good faith It specifies the person to whom, or to whose order, the
secondarily liable for any does not warrant the instrument is to be payable. (NIL, Sec. 34)
cause for which the party solvency of the debtor
primarily liable does not or unless it has been Blank
cannot pay; he warrants expressly stipulated or It specifies no indorsee and can be negotiated by mere
the solvency of the person unless the insolvency was delivery. (NIL, Sec. 34) A blank indorsement can be
primarily liable, prior to the assignment converted to a special indorsement by writing over the
and of common signature of the indorser in blank in any contract which is
knowledge. consistent with the character of the indorsement (NIL, Sec.
35).
A qualified indorser and a
person negotiating by
Conditional
mere delivery have limited
The indorser imposes some other condition to his liability,
secondary liability.
or the indorsee's right to collect the proceeds of the
The indorser is not liable
instrument. However, the party liable to pay can disregard
on his indorsement unless
the condition and can pay or indorse the instrument even
there be presentment for
though the condition has not been fulfilled. (NIL, Sec. 39)
payment at maturity and
prompt notice of dishonor
Restrictive
in case of dishonor.
An indorsement that:
a. Prohibits either the further negotiation of an
Modes of Negotiation
instrument; or
b. Restricts further negotiation to a particular person
Negotiation By Delivery
or for a particular purpose; or
If the instrument is payable to bearer, then the instrument
c. Modifies the rights of the holders or the liabilities
is negotiated by mere delivery. Any person in possession
of the indorser. (NIL, Sec. 36)
of an instrument payable to bearer is always the bearer
thereof, even if he has no legal right to it. Consequently, if
However, the absence of words of negotiability does not
the instrument is negotiated to a holder in due course, the
make an indorsement restrictive.

Page 25 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Effect of Restrictive Indorsement
It confers upon the indorsee three rights:
a. To receive payment of the instrument;
b. To bring any action thereon that the indorser could
bring;
c. To transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so.
Furthermore, all subsequent indorsees cannot have rights
greater than the restrictive indorsee. (NIL, Sec. 37)
Qualified
Constitutes indorser as mere assignore of title
Made by adding the words "without recourse" "sans
recourse" indorser not holder" "at the indorser's own risk"
and other terms of similar import. (NIL, Sec. 38)
Joint
If there are two or more payees or indorsees who are not
partners, all must indorse unless the one indorsing is given
authority to indorse for the others. (NIL. Sec. 41)
Irregular
When a person not otherwise a party to the instrument
places his signature in blank before delivery, he is liable as
an indorser, subject to the following rules:
a. If the instrument is payable to the order of a third
person, he is liable to the payee and to all
subsequent parties.
b. If the instrument is payable to the order of the
maker or drawer, or is payable to bearer, he is
liable to all parties subsequent to the maker or
drawer.
c. If he signs for the accommodation of the payee, he
is liable to all parties subsequent to the payee.
(NIL, Sec. 64)

Summary of Indorsements and Effects

TYPE OF INDORSEMENT EXAMPLE OF NIL PROVISIONS ON INDORSER'S
INDORSMENT LIABILITY
Blank "Juan Dela Cruz" Secondary Liability: Liability of General indorser
(NIL, Sec. 66)
Special "Pay to Pedro Santos Secondary Liability: Liability of General indorser
- Juan Dela Cruz" (NIL, Sec 66)
Qualified "without recourse No secondary liability: but with liability for breach
- Juan Dela Cruz" of warranty under Sec. 65
Qualified "Pay to Pedro Santos, No secondary liability: but with liability for breach
(Special for further negotiation) without recourse of warranty under Sec. 65
- Juan Dela Cruz"
Conditional "Pay to Pedro Santos, on Secondary liability only if condition is met. If
(Special for further negotiation) the condition that he condition is met, liabilities under Sec 66 apply.
completes to repair my
house gate on or before
October 2008.
- Juan Dela Cruz"
Restrictive "Pay to Pedro Santos only Secondary Liability but to Pedro Santos only
(prevents further negotiation) - Juan Dela Cruz"
Restrictive "For deposit The indorser is the principal of the indorsee and
(endorsee is an agent) - Juan Dela Cruz" is not liable to subsequent persons who may
acquire it. If the agent-restrictive indorsee
further indorses it, the subsequent indorsee's
right is limited to that of an agent
Restrictive "Pay to Pedro Santos in The indorser is the principal of the indorsee and
(in trust) trust for John Cruz is generally not liable to subsequent persons
-Juan Dela Cruz" who may acquire it. If the trustee-restrictive
indorsee further negotiates it, the subsequent
indorsee's right is limited to that of a trustee.

Page 26 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
D. Rights Of The Holder
The holder of a negotiable instrument may sue thereon in
his own name; and payment to him in due course
discharges the instrument. (NIL, Sec. 51)
1. Rights of a Holder In Due Course
A holder in due course holds the instrument free from any
defect of title of prior parties, and free from defenses
available to prior parties among themselves, and may
enforce payment of the instrument for the full amount
thereof against all parties liable thereon. (NIL, Sec. 57)
2. Defenses
Personal or Equitable Defenses
Those which grow out of the agreement or conduct of a
particular person in regard to the instrument which renders
it inequitable for him through legal title to enforce it. It can
be set up against holders not HDC.
a. Absence or failure of consideration
b. Want of delivery of complete instrument
c. Insertion of wrong date where payable at a fixed period
after date and issued undated; or at a fixed period after
sight and acceptance is undated
d. Filling up the blanks contrary to authority given or not
within reasonable time
e. Fraud in inducement
f. Acquisition of the instrument by force, duress or fear
g. Acquisition of the instrument by unlawful means
h. Acquisition of the instrument for an illegal
consideration
i. Negotiation in breach of faith
j. Negotiation under circumstances amounting to fraud
k. Mistake
I. Intoxication
m. Ultra Vires acts of corporations
n. Want of Authority of the agent where he has Apparent
Authority
o. Illegality of Contract where form or consideration is
illegal
p. Insanity where there is no notice of Insanity
Legal or Real Defenses
Those which attach to the instrument itself and can be set
up against the whole world, including a HDC. (FlEU ADM2
WIWI)
a. Forgery
b. Fraud in factum or in esse contractus
c. Execution of instrument between public enemies
Page 27 of 250
COMMERCIAL LAW
d. Ultra Vires acts of a corporation where its charter or by
statue, it is prohibited from issuing commercial paper
e. Alteration
f. Duress amounting to forgery
g. Minority
h. Marriage in case of a wife
Want of Authority of agent
J. Insanity, where the insane person has a guardian
appointed by the court
k. Want of delivery of incomplete instrument
Illegality of contract made by statute
Requisites for a Holder in Due Course ("HDC")
A holder in due course is a holder who has taken the
instrument under the following conditions: (COGI)
a. That it is Complete and regular upon its face;
b. That he became the holder of it before it was
Overdue, and without notice that it had been
previously dishonored, if such was the fact;
c_ That he took it in Good faith and for value;
d. That at the time it was negotiated to him he had no
notice of any Infirmity in the instrument or defect in
the title of the person negotiating it. (NIL, Sec. 52)
When Subject To Original Defenses
In the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable.
But a holder who derives his title through a holder in due
course, and who is not himself a party to any fraud or
illegality affecting the instrument, has all the rights of such
former holder in respect of all parties prior to the latter.
(NIL, Sec. 58)
Rights of a Holder Not a HDC (SRSR)
a. May sue in his own name.
b. May receive payment and if it is in due course, the
instrument is discharged.
c. Holds the instrument subject to the same defenses as
if it were non-negotiable.
d. If he derives his title through a HDC and is not a party
to any fraud or illegality thereto, has all the rights of
such HDC.
Who Is a Holder In Due Course (HDC)
Every holder is deemed prima facie to be a holder in due
course; but when it is shown that the title of any person
who has negotiated the instrument was defective, the
burden is on the holder to prove that he or some person
under whom he claims acquired the title as holder in due
course.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

• Acquisition of the transferee or indorsee must be in

But the last-mentioned rule does not apply in favor of a good faith.
party who became bound on the instrument prior to the • Good faith means the lack of knowledge or notice of
acquisition of such defective title. (NIL, Sec. 59) defect or infirmity.

A payee may be a [HDC]. Hence, the presumption that he A holder is not a HDC where an instrument payable on
is a prima facie [HDC] applies. Said presumption may be demand is negotiated at an unreasonable length of time
rebutted. (Cely Yang v. CA, G.R. No. 138074, 2003) after its issue. (NIL, Sec. 53)

Presumption of HDC
• Every holder is presumed to be a HDC. (NIL, Sec. 59)
• The person who questions such has the burden of
proving the contrary. If one of the requisites are not
present, the holder is not a HDC.
• An instrument is considered complete and regular on
its face if:
a. The omission is immaterial; OR
b. The alteration on the instrument was not
apparent on its face
• An instrument is overdue after the date of maturity.
• On the date of maturity, the instrument is not overdue
and the holder is a HDC.
One who became a holder without any, some, or all of the
requisites under Sec. 52 is not a holder in due course. He
holds the instrument subject the same defenses as if it
were non-negotiable (Chan Wan v. Tan, G.R. No. L-15380,
1960)
It is presumed that every party to an instrument acquires
the same for a consideration or for value. It devolved upon
the party who claims that there is no consideration to
present convincing evidence to overthrow the presumption
and prove that the checks were in fact issued without
valuable consideration. (Cayanan v. North Star
International Travel, G.R. No. 172954, 2011)

Summary: Rules and Requirements for Status of HDC

REQUIREMENT BASIC RULES
Must he a holder (1) A payee or indorsee who is in possession of an instrument payable to order; or
(2) The person in possession of an instrument payable to bearer
Must take the instrument Notice exists if an instrume;nt is so incomplete, bears such visible evidence of forgery or
complete and regular alteration, or is so irregular that a reasonable person would be put on notice from
upon its face examination of from facts surrounding the transaction
Must take for value There is value when the consideration given is sufficient to support a simple contract (NIL.
Sec. 25)

A holder is not obliged to show that there was valuable consideration, since the same is
presumed. (Yang v. CA, G.R. No. 138074, 2003)
Must take in good faith Good faith is presence of honesty in act in the conduct or transaction concerned or if he
has knowledge of circumstances that will show that the taking amounts to bad faith
Must take notice that: 1. Instruments payable on specified dates are overdue the moment due date for payment
a. Instrument is (NIL, Sec. 53)
over due
b. Instrument has 2. Demand instruments are overdue after a reasonable time has lapsed from issue
been dishonored
c. Knowledge of "Reasonable time" is determined by the nature of the instrument, the usage of trade, or
infirmity or business with respect to such instrument, and the facts of the particular case (NIL, Sec.
defect of title of 193)
prior parties
3. Instruments with acceleration clause, the instrument is overdue if any cause for
acceleration of a time instrument has taken place.

Actual knowledge or knowledge of any irregularity in the instrument and must have no
notice that a prior party has obtained the instrument, or any signature thereto, by fraud,
Page 28 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
duress, or force and fear, or other unlawful means, or for an illegal consideration, or when
he negotiates it in breach of faith, or under circumstances amounting to fraud
Holder in Due Course is a holder who has taken the
instrument under the if conditions:
a. That it is complete and regular upon its face;
b. That he became the holder of it before it was
overdue, and without notice that it had been
previously dishonored, if such was the fact;
c. That he took it in good faith and for value;
d. That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in
the title of the person negotiating it
Defective Title
Title is defective when:
a. Instrument or signature was obtained by fraud,
duress, force or fear or other unlawful means OR
for an illegal consideration; or
b. Instrument is negotiated in breach of faith, or
fraudulent circumstances
Title is not defective when at the time it was negotiated to
him, he had no notice of:
a. Any infirmity in the instrument; or
b. Any defect in title of the person negotiating
A check with 2 parallel lines in the upper left hand corner
means that it could only be deposited and may not be
converted to cash. Consequently, such circumstance
should put the payee on inquity and upon him devolves the
duty to ascertain the holders' title to the check or the nature
of his possession. Failing in this respect, the payee is
declared guilty of gross negligence amounting to legal
absence of good faith and as such the consensus of
authority is to the effect that the holder of the check is not
a holder in good faith. (State Investment House v. IAC,
G.R. No. 72764, 1989)
When a collecting bank allowed the depositor to withdraw
a check which has not been cleared, it is not a HDC and
cannot recover from the drawer in case the check is
dishonored. (Banco Atlantico v. Auditor General, G.R. No.
33549, 1978)
Note:
• Every holder is presumed to be a HDC.
• The payee is presumed to be a holder in due course
and the drawer cannot invoke want of consideration
between the drawer and the payee as a defense. (Id.)
Page 29 of 250
COMMERCIAL LAW
LIABILITIES OF PARTIES
1. Maker
The maker of a negotiable instrument, by making it,
engages that he will pay it according to its tenor, and
admits the existence of the payee and his then capacity to
indorse. (NIL, Sec. 60)
Note:
• A maker's liability is primary and unconditional.
• One who has signed as such is presumed to have
acted with care and to have signed with full knowledge
of its contents, unless fraud is proved.
• The payee's interest is only to see to it that the note is
paid according to its terms.
• When two or more makers sign jointly, each is
individually liable for the full amount even if one did not
receive the value given.
• The maker is precluded from setting up the defense
that a) the payee is fictional, b) that the payee was
insane, a minor or a corporation acting ultra vires.
Note: Fictitious Payee Rule
As a rule, when the payee is fictitious or not intended to be
the true recipient of the proceeds, the negotiable
instrument is considered as a bearer instrument.
It is not necessary that the person referred to in the
instrument is really non-existent or fictitious to make the
instrument payable to bearer. The person to whose order
the instrument is made payable may in fact be existing but
he is still fictitious or non-existent under Sec. 9(c) of the
NIL if the person making it so payable does not intend to
pay the specified persons. (PNB v. Rodriguez, G.R. No.
170325, 2008)
In a fictitious-payee situation, the drawee bank is absolved
from liability and the drawer bears the loss. One cannot
expect a fictitious payee to negotiate the check by placing
his indorsement thereon. And since the drawer knew this
limitation, he must have intended for the instrument to be
negotiated by mere delivery.
However, the drawee bank shall also become liable when
it acts dishonestly and when it is a party to the fraud.
ATENEO CENTRAL
BAR OPERATIONS 2019
2. Drawer
A drawer is secondarily liable. By drawing the instrument,
the drawer:
a. Admits the existence of the payee,
b. Admits the capacity of the payee to indorse,
C. Engages that on due presentment, the instrument
will be accepted or paid or both according to its
tenor. (NIL, Sec. 61)
If the instrument is dishonored, and the necessary
proceedings on dishonor duly taken:
a. The drawer will pay the amount thereof to the
holder; AND
b. Will pay any subsequent indorser who .may be
compelled to pay it. (NIL, Sec. 61)
A drawer may insert an express stipulation to negative or
limit his liability.
3. Acceptor
By accepting the instrument, an acceptor:
a. Engages that he will pay according to the tenor of
his acceptance
b. Admits the existence of the drawer, the
genuineness of his signature and his capacity and
authority to draw the instrument
c. Admits the existence•of the payee and his capacity
indorse
Note: The liability of the acceptor is based on the tenor of
his acceptance.
QUESTION: When an acceptor has accepted an altered
instrument, which shall govern? Section 62 or Section
124?
Sec. 62(a). The acceptor shall be liable based on the
alteration.
Page 30 of 250
COMMERCIAL LAW
Sec. 124. If an instrument that has been materially altered
and is in the hands of a holder in due course, the holder
can enforce payment thereof according to its original tenor.
ANSWER: The original tenor. (see Areza v. Express
Savings Bank, G.R. No. 72764, 2014)
Note: On one hand, Sec. 63 of the NIL provides that a
drawee that accepts an instrument engages that he will
pay it according to the tendor of his acceptance.
On the other hand, Sec. 124 of the NIL provides that a
material alteration avoids an instrument except as against
an assenting party and subsequent indorsers, but a holder
in due course may enforce payment according to its
original tenor.
The Court, in Areza, upheld the view that the
acceptor/drawee, despite the tenor of his acceptance, is
liable only to the extent of the bill prior to alteration. (Id.)
4. Indorser
When Are Persons Deemed Indorsers
Any person who places his signature upon a negotiable
instrument who does not appear to be a
maker/drawer/acceptor is deemed to be an indorser
UNLESS he indicates that he is bound in some other
capacity. (NIL, Sec. 63)
Liability of Indorser of a Bearer Instrument
Where a person places his indorsement on an instrument
negotiable by delivery, he incurs all the liability of an
indorser. (NIL, Sec. 67)
e) Order In Which Indorsers Are Liable
Amongst fellow indorsers they are liable, prima facie, in the
order in which they indorse. However, evidence can be
shown that they have another agreement amongst
themselves. Joint payees or joint indorsees who indorse
are deemed to indorse jointly and severally. (NIL, Sec. 68)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Liabilities of Maker, Drawer, and Acceptor

Sec. 62: Acceptor [Drawee], upon
Sec. 60: Maker, upon making the Sec. 61: Drawer, upon drawing the
accepting
Promissory Note Bill of Exchange
Bill of Exchange
(a) He will pay the bill according to the
tenor of his acceptance;
(a) He admits the existence of the
payee and his capacity to indorse;
(b) He admits the existence of the
drawer;
(b) He engages that, on due
(a) He will pay the promissory note
presentment, the bill will be accepted or
according to its tenor; (c) He admits the signature of the
paid, or both, according to its tenor;
drawer is genuine;
(b) He admits the existence of the
(c) That if it is dishonored by non-
payee; (d) He admits the capacity of the
acceptance or non-payment, he will pay
drawer;
to the holder of the bill or to any
(c) He admits that the payee has the
subsequent holder who was compelled
capacity to indorse (e) He admits the drawer has the
to pay it,
authority to draw the instrument;
Provided: necessary proceedings on
(f) He admits the existence of the
dishonor were taken
payee and his then capacity to
indorse

Liabilities of Indorsers
Sec. 65: Negotiation by Delivery,
Sec. 64: Irregular Indorser Sec. 66: General Indorsers
Qualified Indorsements
Where a person, not otherwise a party
Every person negotiating an instrument Every indorser who indorses without
to an instrument, places thereon his
by delivery or by a qualified qualification, warrants to all
signature in blank before delivery, he is
indorsement warrants: subsequent holders in due course:
liable as indorser, in accordance with
the following rules:
(a) That the instrument is genuine and (a) 1 he matters and things
in all respects what it purports to be; mentioned in Sec. 65(a-c); and
(a) If the instrument is payable to the
order of a third person, he is liable to
(b) That he has a good title to it; • (b) That the instrument is, at
the payee and to all subsequent
the time of his indorsement,
parties.
(c) That all prior parties had capacity to valid and subsisting
contract;
(b) If the instrument is payable to the
order of the maker or drawer, or is
(d) That he has no knowledge of any NOTE: If the Negotiable Instrument is
payable to bearer, he is liable to all
fact which would impair the validity of dishonored, a qualified indorser is not
parties subsequent to the maker or
the instrument or render it valueless, liable if he did not violate his
drawer,
warranties
NOTE: an agent, if he did not disclose
(c) If he signs for the accommodation
his principal and the fact that he is an Cf: a general indorser is liable due to
of the payee, he is liable to all parties
agent, is liable under Sec. 65 Sec. 66(b)
subsequent to the payee.

Page 31 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
5. Warranties
Warranties Of An Irregular Indorser
If the indorser is not otherwise a party to the instrument,
and he places his signature in blank before delivery, he is
liable as indorser, in accordance with the following rules:
a. If the instrument is payable to the order of a third
person, he is liable to the payee and to all
subsequent parties.
b. If the instrument is payable to the order of the
maker or drawer, or is payable to bearer, he is
liable to all parties subsequent to the maker or
drawer.
c. If he signs for the accommodation of the payee, he
is liable to all parties subsequent to the payee.
(NIL, Sec. 64)
Warranties When Instrument Is Negotiated By Delivery
Every person negotiating an instrument by delivery or by a
qualified indorsement warrants:
a. That the instrument is genuine and in all respects
what it purports to be;
b. That he has a good title to it;
c. That all prior parties had capacity to contract;
d. That he has no knowledge of any fact which would
impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the warranty
extends in favor of no holder other than the immediate
transferee.
The provisions of subdivision (c) of this section do not
apply, to persons negotiating public or corporation
securities, other than bills and notes. (NIL, Sec. 65)
Note:
• A qualified indorser is one who indorses without
recourse.
• Recourse - Resort to a person secondarily liable after
default of person primarily liable.
• A qualified indorser cannot raise the defense of:
a. Forgery
b. Defect of his title or that it is void
c. The incapacity of the maker, drawer or
previous indorsers
• A qualified indorsement makes the indorser a mere
assignor of title of instrument, and relieves him of the
general obligation to pay if the instrument is
dishonored, but he is still liable for the warranties
arising from the instrument only up to the warranties of
a general indorser.
Page 32 of 250
COMMERCIAL LAW
• The warranty is to the capacity of prior parties at the
time the instrument was negotiated. Subsequent
incapacity does not breach the warranty.
• Lack of Knowledge of the Indorser as to any fact that
would impair the validity or the value of the instrument
must be subsisting all throughout.
• A person Negotiating by Delivery warrants the same
as those of qualified indorser and extends to
immediate transferees only
Warranties Of A General Indorser
Every indorser who indorses without qualification warrants,
to all subsequent holders in due course:
a. The matters and things mentioned in subdivisions
(a), (b), and (c) of the next preceding section; and
b. That the instrument is at the time of his
indorsement valid and subsisting.
In addition, he engages that on due presentment, it shall
be accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it. (NIL, Sec. 66)
Collecting Bank has No Right of Recourse Against
Payee-Depositor
When the payee-depositor deposits the check to the
collecting bank, the latter becomes the agent of the former
for the collection of the amount of the check. The collecting
bank cannot invoke the warranty of the payee-depositor
who indorsed the check because said indorsement is only
for the collection, which is a restrictive endorsement under
Sec. 36 of the NIL, unless when negligence is attributed to
the payee-depositor. (Far East Bank & Trust Co. v. Gold
Pa/lace Jewelry, G.R. No. 168274, 2008)
Note:
• The indorser under Sec. 66 warrants the solvency of a
prior party.
• The indorser warrants that the instrument is valid and
subsisting regardless of whether he is ignorant of that
fact or not.
• Warranties extend in favor of:
a. HDC
b. Persons who derive their title from HDC
c. Immediate transferees even if not HDC
• The indorser does not warrant the genuineness of the
drawer's signature.
• General indorser is only secondarily liable.
ATENEO CENTRAL
BAR OPERATIONS 2019
PRESENTMENT FOR PAYMENT
Requisites for Proper Presentment
Presentment for payment, to be sufficient, must be made
a. By the holder, or by some person authorized to receive
payment on his behalf;
b. At a reasonable hour on a business day;
c. At a proper place as herein defined;
d. To the person primarily liable on the instrument, or if
he is absent or inaccessible, to any person found at
the place where the presentment is made. (NIL, Sec.
72)
If The Instrument Is Payable On Demand
a. Presentment must be made within reasonable
time after issue (if a note).
b. Presentment must be made within reasonable
time after last negotiation (if a bill).
1. Necessity of Presentment for Payment
Presentment for Payment
Presentment for payment is not necessary in order to
charge the person primarily liable on the instrument; but if
the instrument is, by its terms, payable at a special place,
and he is able and willing to pay it there at maturity, such
ability and willingness are equivalent to a tender of
payment upon his part.
But, except as herein otherwise provided, presentment for
payment is necessary in order to charge the drawer and
indorsers. (NIL, Sec. 70)
Presentment for payment is the production of a BOE to
the drawee for his acceptance, or to a drawee or acceptor
for payment. Also presentment of a PN to the party liable
for payment of the same.
• It consists of:
a. A personal demand for payment at a proper
place; and
b. The bill or note must be ready to be exhibited
if required and surrendered upon payment.
• Parties primarily liable — persons whom by the terms
of the instrument are absolutely required to pay the
same. E.g. maker and acceptors. They can be sued
directly.
• If payable at the special place, and the person liable is
willing to pay there at maturity, such willingness and
ability is equivalent to tender of payment.
• Presentment is necessary to charge persons
secondarily liable; otherwise, they are discharged.
Page 33 of 250
COMMERCIAL LAW
• Acts needed in order to charge persons secondarily
liable:
a. Presentment for payment/acceptance
b. Dishonor by non-payment/non-acceptance;
d. Notice of dishonor to secondary parties.
• Acts needed to charge persons secondarily liable in
other cases:
a. Protest for non-payment by the drawee;
b. Protest for non-payment by the acceptor for
honor.
2. To Whom Presentment Must Be Made
To A Bank
Presentment must be made during banking hours, unless
the person to make payment has no funds there to meet it
at any time during the day, in which case presentment at
any hour before the bank is closed on that day is sufficient.
The maker of the not shall not be discharged in any way
due to presentment after the date of maturity. He shall
have the duty to pay even if the holder does not demand
at that time. (NIL, Sec. 75)
To A Personal Representative
If the principal debtor dies, and no place Of payment is
specified, presentment for payment must be made to his
personal representative, if he can be found. (NIL, Sec. 76)
To Partners
Each partner is an agent of the partnership and his co-
partners. Presumption must be had as regards his
authority to act on behalf of the others. Presentment may
be made to any one of them or to the agent of one of them.
However, a dishonor by one partner does not amount to
the dishonor by all. (NIL, Sec. 77)
To Joint Debtors
If there are several persons, not being partners, primarily
liable on the instrument, presentment must be made to
them all. (NIL, Sec. 78)
3. Dispensation with Presentment for Payment
• Presentment is not required to charge the drawer
where: (NIL, Sec. 79)
a. He has no right to expect that the drawee or
acceptor will pay the instrument, or
b. He has no right to require that the drawee or
acceptor will pay the instrument.
• Presentment is not required to charge the indorser
where: (NIL, Sec. 80)
ATENEO CENTRAL
BAR OPERATIONS 2019
a. The instrument was made or accepted for his
accommodation, and
b. He has no reason to expect that the instrument
will be paid if presented.
• When excused under Sec. 82
a. If after the exercise of due diligence,
presentment cannot be made
b. Presentment is waived
c. The drawee is a fictitious person
d. When the instrument has been dishonored by
non-acceptance under Sec. 83
4. Dishonor by Non-Acceptance or Non-Payment
How Dishonored By Non-Acceptance:
a) The instrument was duly presented but payment is
refused or cannot be obtained
b) Presentment is excused and the instrument is overdue
and unpaid (NIL, Sec. 83)
Effect of Dishonor By Non-Payment
An immediate right of recourse to all parties secondarily
liable accrues to the holder. (NIL, Sec. 84)
NOTICE OF DISHONOR
1. Parties to be Notified
Notice of Dishonor - It brings, either verbally or in writing,
to the knowledge of the drawer or indorser that the
instrument was dishonored by non-acceptance or non-
payment by the drawee/maker.
Who Must Be Given Notice
The drawer and each indorser. The party not notified is
discharged from any liability. (NIL, Sec. 89)
Who May Be Given Notice
To the party himself or to an agent in that behalf. (NIL,
Sec. 97) Notice of dishonor is a liability, so the agent must
have been authorized to do so.
Notice When Party Is Dead
Notice must be given to a personal representative, if there
is one, and if with reasonable diligence he can be found. If
he cannot be found, notice may be sent to the last
residence or last place of 'business of the deceased. (NIL,
Sec. 98)
Notice To Partners
Page 34 of 250
COMMERCIAL LAW
When parties to be notified are partners, notice to any one
of them is sufficient, even if there was a dissolution. (NIL,
Sec. 99)
Notice To Persons Jointly Liable
However, if joint parties, each party must be given notice,
unless one of them has been given authority to receive
such notice. (NIL, Sec. 100)
Notice To Insolvent Parties
If parties are adjudged bankrupt or insolvent, notice may
be given to the party or his trustee or his assignee. (NIL,
Sec. 101)
2. Where Notice Can Be Given
Notice must be given, in this order:
a. Either to the post-office nearest to his place of
residence or to the post-office where he is
accustomed to receive his letters;
b. If he lives in one place and has his place of
business in another, notice may be sent to either
place;
c. If he is sojourning in another place, notice may be
sent to the place where he is so sojourning. (NIL,
Sec. 108)
3. Parties Who May Give Notice of Dishonor
The notice may be given by or on behalf of the holder, or
by or on behalf of any party to the instrument who might be
compelled to pay it to the holder, and who, upon taking it
up, would have a right to reimbursement from the party to
whom the notice is given. (NIL, Sec. 90)
When An Agent Can Give Notice For Dishonor:
If the instrument has been dishonored in the hands of an
agent,.he can give notice either to his principal or to parties
secondarily liable thereon, even without notifying his
principal.
4. Form of Notice
Ihe notice may be in writing or merely oral and may be
given in any terms which sufficiently identify the instrument
and indicate that it has been dishonored by non-
acceptance or non-payment. It may in all cases be given
by delivering it personally or through the mails. (NIL, Sec.
96)
When Notice Is Sufficient
A written notice need not be signed and an insufficient
written notice may be supplemented and validated by
verbal communication. A misdescription of the instrument
does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby. (NIL, Sec. 95)
ATENEO CENTRAL
BAR OPERATIONS 2019
5. Effect of Notice of Dishonor
General rule: Any drawer or indorser to whom such notice
is not given is discharged.
Exceptions:
a. Waiver (Sec. 109)
b. Notice is dispensed with (Sec. 112)
c. Not necessary to Drawer (Sec. 114)
d. Not necessary to Indorser (Sec. 115)
Waiver
Notice of dishonor may be waived, either before the time
of giving notice has arrived or after the omission to give
due notice, and the waiver may be express or implied.
(NIL, Sec. 109)
Note:
• Protest may be waived. It is also deemed a waiver of
presentment and notice of dishonor. (NIL, Sec. 111)
• Where notice is waived, presentment is not waived.
• Where presentment is waived, notice is also waived.
• Where protest is waived, notice and presentment is
waived.
Parties Affected by the Waiver
Where the waiver is embodied in the instrument itself, it is
binding upon all parties; but, where it is written above the
signature of an indorser, it binds him only. (NIL, Sec. 110)
6. Dispensation Of Notice
Notice of dishonor is dispensed with when, after the
exercise of reasonable diligence, it cannot be given to or
does not reach the parties sought to be charged. (NIL, Sec.
112)
When Notice Need Not Be Given To the Drawer
Notice of dishonor is not required to be given to the drawer
in either of the following cases:
a. Drawer and drawee are the same person;
b. Drawee is a fictitious person or a person not
having capacity to contract;
c. Drawer is the person to whom the instrument is
presented for payment;
d. Drawer has no right to expect or require that the
drawee or acceptor will honor the instrument;
e. Drawer has countermanded payment. (NIL, Sec.
114)
When Notice Need Not Be Given To the Indorser
Notice of dishonor is not required to be given to an indorser
in either of the following cases:
Page 35 of 250
COMMERCIAL LAW
a. Drawee is a fictitious person or a person not
having capacity to contract, AND the indorser was
aware of the fact at the time he indorsed the
instrument;
b. Indorser is the person to whom the instrument is
presented for payment;
c. Instrument was made or accepted for his
accommodation. (NIL, Sec. 115)
7. Effect Of Failure To Give Notice
a. Omission to give notice of dishonor by non-
acceptance does not prejudice a HDC. (NIL, Sec.
117)
b. Protest only necessary for a foreign bill of
exchange. Protest for other negotiable
instruments is optional. (NIL, Sec. 118)
Note:
• A drawee bank is liable for damages to a drawer
whose checks were dishonored for lack of funds
because it did not give him notice that the check he
deposited in his account was dishonored. (Associated
Bank v. Tan, G.R. No. 156940, 2004)
• Where two checks which were dishonored because
the drawer withdrew the funds from the bank, the
holder can hold the drawer liable even if no notice of
dishonor was given to the drawer, since the drawer
had no right to expect that the drawee bank would
honor the checks.
DISCHARGE OF A NEGOTIABLE INSTRUMENT
1. Causes of Discharge of Instrument
A negotiable instrument is discharged:
a. By payment in due course by or on behalf of the
principal debtor;
b. By payment in due course by the party
accommodated, where the instrument is made or
accepted for accommodation;
c. By the intentional cancellation thereof by the
holder;
d. By any other act which will discharge a simple
contract for the payment of money;
e. When the principal debtor becomes the holder of
the instrument at or after maturity in his own right.
(NIL, Sec. 119)
Note:
• Discharge of the instrument discharges all the
parties thereto.
• Payment must be in due course, and by the principal
debtor or on his behalf.
ATENEO CENTRAL
BAR OPERATIONS 2019
• If payment is not made by the principal debtor,
payment only cancels the liability of the payor and
those obligated after him, but it does not discharge the
instrument.
• Payment by an accommodation party does not
discharge the instrument.
2. Discharge of Parties Secondarily Liable
A person secondarily liable on the instrument is
discharged:
a. By any act which discharges the instrument;
b. By the intentional cancellation of his signature by
the holder;
c. By the discharge of a prior party;
d. By a valid tender of payment made by a prior party;
e. By a release of the principal debtor, unless the
holder's right of recourse against the party
secondarily liable is expressly reserved;
f. By any agreement binding upon the hoider to
extend the time of payment, or to postpone the
holder's right to enforce the instrument, unless
made with the assent of the party secondarily
liable, or unless the right of recourse against such
party is expressly reserved. (NIL, Sec. 120)
3. Rights of a Party Secondarily Liable Who Already
Performed His Obligation to Pay:
a. The instrument is not discharged
b. The party is remitted to his former rights as to all prior
parties
c. The party may strike out his own and all subsequent
indorsements
d. The party may negotiate the instrument again
Exceptions:
a. An instrument cannot be renegotiated where it is
payable to order of a 3rd person AND has been
paid by the drawer
b. Instrument cannot be renegotiated where it was
made or accepted for accommodation AND it has
been paid by the party accommodated. (Sec. 121)
4. Renunciation by Holder
Renunciation, Defined
It is the act of surrendering the right or claim with or
without recompense. Renunciation by a holder shall
apply only to renunciation by a unilateral act of the holder,
and can be released without compensation.
When Renunciation by a Holder Discharges an
Instrument
Page 36 of 250
COMMERCIAL LAW
b. Made in favor of a person primarily liable
C. Made at or after maturity of the instrument
d. In writing or the instrument is delivered up to the
person primarily liable.
Note:
• If renounced in favor of a party secondarily liable, only
he is exonerated from liability and all parties
subsequent to him.
• Discharge by novation is allowed.
• Mere expression of intent to discharge the instrument
is not enough.
ACCEPTANCE
Acceptance
The signification by the drawee of his assent to the order
of the drawer. It is an act by which a person on whom the
BOE is drawn assents to the request of the drawer to pay
it.
1. Requisites of an Actual Acceptance
a. In writing
b. Signed by the drawee
c. Must not express that the drawee will perform his
promise by any other means than payment of
money
d. Communicated or delivered to the holder
2. Manner of Acceptance
a. Actual
b. Constructive
c. General
d. Qualified
3. Time for Acceptance
24 Hour Rule
The drawee has 24 hours after presentment for
acceptance within which to act upon the bill, the
acceptance shall be dated as of the day of presentation or
the date when he first saw the bill.
4. Rules Governing Acceptance
a) Rights Of A Holder
a. Require that acceptance be written on the bill and
if refused, treat it as if dishonoured (NIL, Sec. 133)
Refuse to accept a qualified acceptance and may
treat it as dishonored (NIL, Sec. 142)
ATENEO CENTRAL
BAR OPERATIONS 2019
Constructive Acceptance
Where a drawee to whom a bill is delivered for acceptance
destroys the same, or refuses within twenty-four hours
after such delivery, or within such other period as the
holder may allow, to return the bili accepted or non-
accepted to the holder, he will be deemed to have
accepted the same. (NIL, Sec. 137)
5. Presentment for Acceptance
a. If necessary to fix the maturity of the bill
b. If it is expressly stipulated that it shall be presented for
acceptance
c. If the bill is drawn payable elsewhere than the
residence or place of business of the drawee.
Summary on Presentment for Acceptance of BOE:
a. To make the drawee primarily liable and for the accrual
of secondary liability. (NIL, Sec. 144)
b. Necessary to fix maturity date, where bill expressly
stipulates presentment, bill payable other than place of
drawee. (NIL, Sec. 143)
c. When presentment is excused:
i. Drawee is dead, hides, is fictitious, incapacitated
person,
ii. After due diligence presentment cannot be
made,
iii. Presentment is refused on another ground
although presentment is irregular (NIL, Sec.
148)
6. Protest, Defined.
A formal declaration, drawn and signed by a notary, that
he has presented the instrument for acceptance for
payment and that acceptance or payment is refused.
7. When Protest Is Necessary
a. If a foreign bill has been dishonored by non-
acceptance
b. If a foreign bill has been dishonored by non-payment
(NIL, Sec. 152)
PRESENTMENT FOR ACCEPTANCE
Presentment
The production/exhibition of a bill of exchange to the
drawee for his acceptance or payment.
Presentment for acceptance must be made:
a. Where the bill is payable after sight, or in any
other case, where presentment for
acceptance is necessary in order to fix the
Page 37 of 250
COMMERCIAL LAW
maturity of the instrument; or
b. Where the bill expressly stipulates that it shall
be presented for acceptance; or
c. Where the bill is drawn payable elsewhere
than at the residence or place of business of
the drawee.
In no other case is presentment for acceptance necessary
in order to render any party to the bill liable. (NIL, Sec. 143)
1. Time of Presentment
Days Presentment May Be Made
A bill may be presented for acceptance on any day on
which negotiable instruments may be presented for
payment under the provisions of Sections 72 and 85 of this
Act. When Saturday is not otherwise a holiday,
presentment for acceptance may be made before twelve
o'clock noon on that day. (NIL, Sec. 146)
Presentment in Case Time Is Insufficient
Where the holder of a bill drawn payable elsewhere than
at the place of business or the residence of the drawee has
no time, with the exercise of reasonable diligence, to
present the bill for acceptance before presenting it for
payment on the day that it falls due, the delay caused by
presenting the bill for acceptance before presenting it for
payment is excused and does not discharge the drawers
and indorsers. (NIL, Sec. 147)
2. Place of Presentment
Presentment for acceptance must be made:
• Where the bill is payable after sight, or in any
other case, where presentment for acceptance is
necessary in order to fix the maturity of the
instrument; or
• Where the bill expressly stipulates that it shall be
presented for acceptance; or
• Where the bill is drawn payable elsewhere than
at the residence or place of business of the
drawee.
In no other case is presentment for acceptance necessary
in order to render any party to the bill liable. (NIL, Sec. 143)
3. Manner of Presentment
Presentment for acceptance must be made by or on behalf
of the holder at a reasonable hour, on a business day and
before the bill is overdue, to the drawee or some person
authorized to accept or refuse acceptance on his behalf;
and
a. Where a bill is addressed to two or more drawees
ATENEO CENTRAL
BAR OPERATIONS 2019
who are not partners, presentment must be made
to them all unless one has authority to accept or
refuse acceptance for all, in which case
presentment may be made to him only;
b. Where the drawee is dead, presentment may be
made to his personal representative;
c. Where the drawee has been adjudged a bankrupt
or an insolvent or has made an assignment for the
benefit of creditors, presentment may be made to
him or to his trustee or assignee.
(NIL, Sec. 145)
4. When Presentment May Be Excused
General rule: Except as herein otherwise provided, the
holder of a bill which is required [under Sec. 143] to be
presented for acceptance must either present it for
acceptance or negotiate it within a reasonable time. If he
fails to do so, the drawer and all indorsers are discharged.
(NIL, Sec. 144)
Exception: Presentment for acceptance is excused and a
bill may be treated as dishonored by non-acceptance in
either of the following cases:
a. Where the drawee is dead, or has absconded, or
is a fictitious person or a person not having
capacity to contract by bill.
b. Where, after the exercise of reasonable diligence,
presentment cannot be made.
c. Where, although presentment has been irregular,
acceptance has been refused on some other
ground.
5. Dishonor by Non-Acceptance
A bill is dishonored by non-acceptance:
a. When it is duly presented for acceptance and such
an acceptance as is prescribed by this Act is refused
or cannot be obtained; or
b. When presentment for acceptance is excused and
the bill is not accepted. (NIL, Sec. 149)
PROMISSORY NOTES
Promissory Note
An unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand,
or at a fixed or determinable future time, a sum certain in
money to order or to bearer. Where the note is drawn to
the maker's own order, it is not complete until indorsed by
him. (NIL, Sec. 184)
Page 38 of 250
COMMERCIAL LAW
Note:
• A PN payable to the maker's order is not complete until
it is indorsed by him.
• However, absence of any such indorsement does not
bar recovery on the debt for which the instrument was
given by the maker.
E.Checks
Check
It is a bill of exchange drawn on a bank and payable on
demand. (NIL, Sec. 185)
1. Kinds of Checks
Manager's Check
One drawn by the bank's manager upon the bank itself;
and it is similar to a cashier's check both as to effect and
use. (Int'l Corporate Bank v. Gueco, G.R. No. 141968,
2001)
Note:
• A manager's check is regarded to be as good as the
money it represents.
• When a bank fails to exercise the diligence required, it
must be held liable for such loss. However, it may
pursue an action against the person responsible or
who may have been unjustly benefited. (BPI Family
Savings Bank v. Manikan, G.R. No. 148789, 2003)
• General rule: a manager's check is not legal tender.
Exception: Payment may be accepted as valid if no
prompt objection is made. (Pabugias v. Sahijwani,
G.R. No. 156846, 2004)
Crossed Check
Though the NIL is silent as to crossed checks, courts can
take judicial cognizance of the practice that a check
crossed with two parallel lines in the upper left hand corner
means that it can only be deposited and not converted to
cash. The effects of a crossed check thus relate to the
mode of payment — meaning that the drawer intends it to
be only for deposit by the rightful person, the named
payee.
A check is crossed specially when the name of a particular
banker or company is written between parallel lines drawn
transversally on the face of the check.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

A check is crossed generally when the words "and
company" or nothing is written between the parallel lines.
(Go v. Metrobank, G.R. No. 168842, 2010)
Jurisprudence provides the following effects of crossing a
check:
a. The check may not be encashed but only
deposited in the bank
b. The check may be negotiated only once — to one
who has an account with a bank
c. The act of crossing the check serves as 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,
otherwise, he is not a holder in due course (Bataan
Cigar v. CA, G.R. No. 93048, 1994)
Note:
• A holder of crossed-checks is obliged to inquire as to
the purpose for which the checks were issued. (Bataan
Cigar v. CA, G.R. No. 93048, 1994)
• The law does not require the payee to be interested in
the obligation in consideration for which the check was
issued. The cause or reason of issuance is
inconsequential (in connection with BP 22) in
determining criminal liability. (Ngo v. People, G.R. No.
155815, 2004)
• When a payee of a crossed check issued with the
notation "for payee's account only" the proceeds of the
said check belong only to the payee. Failure of the
collecting bank to follow said notation will make it liable
in case it allows it to be withdrawn by an unauthorized
individual. (Associated Bank v. CA, G.R. No. 89802,
1992)
b. It operates as an assignment of the funds of the
drawer in the hands of the drawee bank;
c. If obtained by the holder, it discharges the persons
secondarily liable.
2. Presentment for Payment
A check must be presented for payment within a
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the loss
caused by the delay. (NIL, Sec. 186)
Innumerable decisions have already been rendered in the
state courts of the United States to the effect that although
the drawer of a check is discharged only to the extent of
loss caused by unreasonable delay in presentment, an
indorser is wholly discharged thereby irrespective of any
question of loss or injury. (Philippine National Bank v.
Seeto, G.R. No. L-4388, 1952)
When a Check Operates as an Assignment of Fund
A check of itself does not operate as an assignment of any
part of the funds to the credit of the drawer with the bank,
and the bank is not liable to the holder unless and until it
accepts or certifies the check. (NIL, Sec. 189)
end of topic

Memorandum Check
Check on which the word "memorandum" is written,
signifying that the drawer engages to pay the bona fide
holder absolutely and not upon a condition to pay upon
presentment or non-payment.

Certified Check
A check on which the drawee bank has written an
agreement whereby it undertakes to pay the check at any
future time when presented for payment, such as by
stamping on the check the word "certified" and underneath
it is written the signature of the cashier.

Effects of Certification:
a. Equivalent to acceptance and is the operative act
that makes the drawee bank liable;

Page 39 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

III. INSURANCE CODE I A. Basic CONCEPTS

TOPIC OUTLINE UNDER THE SYLLABUS Governing Laws

1. P.D. No. 612, as amended by R.A. No. 10607
III. INSURANCE CODE (hereinafter Insurance Code);
A. Basic concepts 2. Special Laws, such as R.A. No. 1161 (Social Security
1. What may be insured Act)
2. Insurable interest 3. Civil Code, for matters not expressly provided for in #1
3. Double insurance and Over insurance and #2
4. Reinsurance
5. No fault, suicide, and incontestability Contract of Insurance
clauses 1. An agreement;
B. Perfection of the insurance contract 2. Whereby one undertakes for a consideration;
C. Rights and obligations of parties 3. To indemnify another against loss, damage or liability
1. Insurer 4. Arising from an unknown or contingent event.
2. Insured (Insurance Code, Sec. 2[a]).
3. Beneficiary
D. Rescission of insurance contracts
1. What may be insured?
1. Concealment
Any contingent or unknown event, whether past or future,
2. Misrepresentation or omissions
which may damnify a person having an insurable interest,
3. Breach of warranties
E. Loss or create a liability against him, may be insured against,
subject to the provisions of this chapter.

The consent of the spouse is not necessary for the validity

of an insurance policy taken out by a married person on his
or her iife or
that of his or her children.

All rights, title and interest in the policy of insurance taken

out by an original owner on the life or health of the person
insured shall automatically vest in the latter upon the death
of the original owner, unless otherwise provided for in the
policy. (Insurance Code, Sec. 3)

Note:
A contingent event is one that is not certain to take place.

An unknown past event is one which had already

happened, but one is unaware if it happened or not.

An unknown past event may be a designated event only in

cases where it has happened already but the parties do not
know about it, e.g., prior loss of a ship at sea (applicable
only to marine insurance). (De Leon, The Insurance Code
of the Philippines Annotated [2014])

Contract of Suretyship
A contract of suretyship is also considered an insurance
contract, if made by a surety who is doing insurance
business. (P.D. No. 612, as amended by R.A. No. 10607
[hereinafter Insurance Code], Sec. 2[a]).

Page 40 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
Suretyship is an agreement whereby a party called the
"surety" guarantees the performance by another party
called the "principal obligor" of an obligation or undertaking
in favor of a third party called the "obligee." It includes
official recognizances, stipulations, bonds or undertakings
issued by any company by virtue of and under the
provisions of Act No. 536, as amended by Act No. 2206.
(Insurance Code, Sec. 177)
Doing or Transacting an Insurance Business
1. Making or proposing to make, as insurer any insurance
contract; Making, or proposing to make, as surety, any
contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of
the surety;
2. Doing any kind of business including a reinsurance
business, specifically recognized as constituting the
doing of an insurance business within the meaning of
this Code;
3. Doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed
to evade the provisions of this Code. (Insurance Code,
Sec. 2[b])
Consideration Required in Insurance
General Rule: An insurance business consists in
undertaking, for a consideration, to indemnify another
against loss, damage or liability arising from an unknown
or contingent event.
Exception: Those not formally designated as insurance
businesses but are deemed "doing or transacting an
insurance business"
The fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no
separate or direct consideration is received therefor, shall
not be deemed conclusive to show that the making thereof
does not constitute the doing or transacting of an insurance
business. (Insurance Code, Sec. 21b1)
Protection and Indemnity Club — Doing Insurance
Business
A protection and indemnity club is an association
composed of shipowners generally formed for the specific
purpose of providing insurance cover against third-party
liabilities of its members. It is a mutual insurance
association. (Steamship Mutual v. Sulpicio Lines, G.R. No.
196072, 2017)
Page 41 of 250
COMMERCIAL LAW
SUBJECT MATTER
Risks or Perils That May be Insured
a. Any contingent or unknown event, whether past or
future, which may damnify (cause damage to) a pei-son
having an insurable interest; or
b. Any contingent or unknown event, whether past or
future, which may create a liability against the person
insured (Insurance Code, Sec. 3)
Past Events — Marine Insurance
A past event which may be insured against is peculiar to
Marine Insurance. A person insured by a contract of
marine insurance is presumed to have knowledge, at the
time of insuring, of a prior loss, if the information might
possibly have reached him in the usual mode of
transmission and at the usual rate of communication.
(Insurance Code, Sec. 111)
Contingent Liability
Example: Reinsurance
Note: Sec. 3 does not authorize an insurance for or against
the drawing of any lottery, or for or against any chance or
ticket in a lottery drawing a prize. (Insurance Code, Sec. 4)
Elements of a Lottery
a. Consideration;
b. Prizes; and
c. Chance
There is no lottery where a company, to promote the sale
of certain products, resorts to a scheme which envisions
the giving away for free of certain prizes for the purchase
of said products, for the participants are not required to pay
more than the usual price of the products. Here, prizes can
be obtained without any additional consideration (Phil.
Refining Co v. Palomar, G.R. No. L-29062, 1987)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Insurance Contract v. Gambling Contract Insurable interest in different classes of insurance:

Insurance Contract Gambling Contract
The parties seek to The parties contemplate 1. In Life Or Health
distribute possible loss by gain through mere a. Himself, of his spouse and of his children;
reason of mischance. chance.
The insurer seeks to avoid The gambler courts If a person will insure the life of another payable to
misfortune. fortune. himself, he must have insurable interest on the life
The contract tends to of the person whose life he is insuring.
The contract tends to
increase the inequality of
equalize fortune.
fortune. b. Any person on whom he depends wholly or in
party for education or support, or in whom he has
Whatever one person
What one insures against pecuniary interest;
wins from a wager is lost
is not at the expense of
by the other wagering
another insured person. Note: Persons obliged to support each other: See
party.
Family Code, Art. 195
The purchase of insurance
does not create a new, and
As soon as a party makes c. Any person under a legal obligation to him for the
therefore, non-existing risk
a wager, he creates a risk payment of money, or respecting property or
of loss to the purchaser.
of loss to himself where services, of which death or illness might delay or
The purchaser faces an
no suck risk existed prevent the performance; and
already existing risk of
previously.
economic loss ("insurable
Note: A creditor may insure his debtor's life for the purpose
interest").
of protecting his debt, but only to the extent of the amount
In both cases, one party promises to pay a given sum to
of the debt and the cost of carrying the insurance on the
the other upon the occurrence of a given future event,
debtor's life
the promise being conditioned upon the payment of, or
agreement to pay, a stipulated amount by the other
d. Any person upon whose life any estate or interest
party to the contract. In either case, one party may
vested in him depends. (Insurance Code, Sec. 10)
receive more, or much more, than he paid or agreed to
pay.
Life Insurance Policy v. Civil Donation
Life Insurance Policy Civil Donation
2. Insurable Interest
This is also founded on An act ot liberality
liberality, as the whereby a person
Interest which the law requires the owner of an insurance
policy to have in the thing or person insured. beneficiary will receive the disposes gratuitously a
proceeds of the said thing or right in favor of
insurance another who accepts it
General Rule: It is pecuniary in nature.
As a consequence, the proscription in Civil Code, Art. 739
A person is deemed to have an insurable interest in the
should equally operate in life insurance contracts (Insular
subject matter ins! wed where he has a relation or Life v. Ebrado, G.R. No. L-44059, 1977)
connection with or concern in it that he will derive
pecuniary benefit or advantage from its preservation and Beneficiary
will suffer pecuniary loss or damage from its destruction, Person who is named or designated in a contract of life,
termination or injury by the happening of the event insured health, or accident insurance as the one who is to receive
against. (Lalican v. Insular Life Insurance Co, G.R. No. the benefits which become payable, according to the terms
183526, 2009) of the contract, upon the death of the insured (44 Am. Jur.
2d. 639 cited in de Leon, 2010, p. 96).
Exception: Life Insurance

The expectation of benefit from the continued life of that

person need not necessarily be of pecuniary nature.

Page 42 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
Designation of Beneficiary
General rule: When one insures his own life, he may
designate any person as the beneficiary, whether or not
the beneficiary has an insurable interest in the life of the
insured.
Exceptions: Persons specified in Article 739 of the Civil
Code cannot be designated:
a. Those made between persons who were guilty of
adultery or concubinage (conviction is not a condition
precedent);
b. Those made between persons found guilty of the same
criminal offense, in consideration thereof;
c. Those made to a public officer or his wife, descendants
or ascendants by reason of his office.
In order for Article 739 to apply, it is not required that
there be a previous conviction for adultery or
concubinage, due to the wording of "preponderance of
evidence" (Insular Life v. Ebrado, G.R. No. L-44059, 1977)
When is the estate entitled to the proceeds of the
insurance?
a. Where the insured has not designated any
beneficiary; or
b. When the designated beneficiary is disqualified by
law to receive the proceeds (Heirs of Maramag v.
Maramag, G.R. No. 181132, 2009)
Note:
• The designation is revocable unless the right to revoke
is expressly waived in the policy.
• If the insured or beneficiary is a minor, and the amount
involved does not exceed P50,000.00, the father or,in
his absence or incapacity, the mother may exercise the
minor's rights under the policy, without the need of a
court authority or a bond.
• If the premiums are paid out of the conjugal funds, the
proceeds are considered conjugal.
If the beneficiary is other than the insured's estate, the
source of premiums would not be relevant (BPI v.
Posadas, G.R. No. L-34583, 1931).
Right of Insured to Change Beneficiary in Life
Insurance
General Rule: The insured shall have the right to change
the beneficiary he designated in the policy. (Insurance
Code, Sec. 11)
Exception: If the insured expressly waived his right to
change the beneficiary, this makes the latter an
Page 43 of 250
COMMERCIAL LAW
irrevocable beneficiary. But despite the waiver, he can
still change the beneficiary, provided that he obtains the
beneficiary's consent. (Insurance Code, Sec. 11)
Forfeiture by Beneficiary of Interest in Insurance
Policy
The interest of a beneficiary in a life insurance policy shall
be forfeited when the beneficiary is the principal,
accomplice, or accessory in willfully bringing about the
death of the insured; in which event, the nearest relative of
the insured shall receive the proceeds of said insurance if
not otherwise disqualified.
The share forfeited shall be paid as follows:
a. To the other beneficiaries if not disqualified;
b. If no other beneficiaries, in accordance with the
policy contract; (e.g. to the contingent or substitute
of beneficiaries)
c. If policy contract is silent, to the estate of the
insured. (Insurance Code, Sec. 12)
2. In Property
Coverage of Insurable Interest in Property
a. Property itself;
b. Any relation thereto; or
c. Liability in respect thereof (Insurance Code, Sec.
13)
It may consist of:
a. An existing interest;
b. An inchoate interest founded on an existing
interest; or
c. An expectancy, coupled with an existing interest in
that out of which the expectancy arises
Measure of Insurable Interest in Property
The extent to which the insured might be damnified by loss
or injury thereof.
In general, a person has an insurable interest in the
property, if he derives pecuniary benefit or advantage from
its preservation or would suffer pecuniary loss, damage or
prejudice by its destruction whether he has or has no title
in, or lien upon, or possession of the property. Hence,
pecuniary interest over the property is always necessary.
Existence of insurable interest is a matter of public policy.
Hence, the principle of estoppel cannot be invoked.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Insurable Interest in Life vs. in Property Change of Interest That Suspends an Insurance
LIFE PROPERTY Contract
The change -of interest contemplated by law is an absolute

I
Basis
May be based on Based on pecuniary transfer of the insured's entire interest in the property
pecuniary interest, affinity, interest insured to one not previously interested or insured. In the
or consanguinity following cases, the policy is not suspended: (ML2R2)
When Interest Must Exist
In life insurance (save that Must exist when the a. Execution of a Mortgage
effected by creditor on life insurance takes effect and b. Lease of the insured property
of debtor), it is enoughs when the loss occurs, but c. Vendor who has a Lien on the property sold until the
that insurable interest need not exist in the purchase price is paid or the conditions of the sale are
exists at the time the policy meantime performed
takes effect and need not
d. Judgment debtor whose property has been sold on
exist at the time of the loss
execution (Eight to redeem)
Amount of Insurable Interest
Limited to the actual value e. Mortgagor whose property has been foreclosed (Hight
General Rule: no limit
Except: if insurable of damage/ injury/ loss of redemption)
interest is based on
creditor-debtor relationship Note: In a chattel mortgage, there is no alienation within
(only to the extent of the the meaning of the insurance law until the mortgagee
credit or debt) acquires a right to take possession of the property by
default of the mortgagor under the terms of the mortgage.
Change in Interest of Thing (Bachrach v. British American Ass'n. Co., G.R. No. L-5715,
General rule: A change in interest in the thing insured 1910)
without a change in insurance does not transfer the policy
but suspends it until the interest in the thing and the interest Extent of Insurable Interest in a Mortgage Situation
in the insurance are vested in the same person. • Interest is separate and distinct from the other. In case
both of them take out separate insurance policies on
Exceptions the same property, or one policy covering their
SEC. EXCEPTION respective interests, there is no double insurance.
20 Life, health, and accident insurance • Mortgagor, as owner, may insure the property
A change of interest in the thing insured after mortgaged to the full value of such property.
21 the occurrence of an injury which results in a • Mortgagee can insure the same only to the extent of
loss the amount of his credit.
A change of interest in one or more of
22 several things, separately insured by one Insurance by Mortgagor for the Benefitof Mortgagee,
policy or Policy Assigned to the Mortgagee:
A change of interest by will or succession on • The insurance is still deemed to be upon the interest
23
the death of the insured of the mortgagor who does not cease to be a party to
A transfer to interest by one of several the original contract.
24 partners, joint owners, or owners in common, • Any act of the mortgagor, prior to the loss, which would
who are jointly insured, to the others otherwise avoid the insurance, will have the same
When a policy is so framed that it will inure effects, although the property is in the hands of the
to the benefit of whomsoever, during the mortgagee.
57
continuance of the risk, may become the
• Any act, which under the contract of insurance is to be
owner of the interest insured
performed by the mortgagor, may be performed by the
mortgagee with the same effect as if it has been
Note: When there is an express prohibition against performed by the mortgagor.
alienation in the policy, in case of alienation, the contract
• Upon the occurrence of the loss, the mortgagee is
of insurance is not merely suspended but is avoided.
entitled to recover to the extent of his credit and the
(Civil Code, Art. 1306)
balance, if any, is payable to the mortgagor since such
policy is for the benefit of both the mortgagor and
mortgagee.
Page 44 of 250

f
ATENEO CENTRAL
BAR OPERATIONS 2019
• Upon recovery of the mortgagee to the extent of his
credit from the insurer, the mortgagor is released from
his indebtedness.
Insurance by Mortgagee of His Own Interest
• The mortgagee may collect from the insurer upon the
occurrence of the loss to the extent of his credit.
• Unless otherwise stated in the policy, the mortgagor
has no right to collect the balance of the proceeds of
the policy after payment of the interest of the
mortgagee.
• The insurer, upon payment to the mortgagee-insured,
becomes subrogated to the rights of the mortgagee
against the mortgagor and may collect the debt of the
mortgagor to the extent of the amount paid to the
mortgagee.
Standard or Union Mortgage Clause
If a fire insurance policy contains this, the acts of the
mortgagor do not affect the mortgagee. It makes a
separate and distinct contract of insurance on the interest
of the mortgagee.
Open or Loss-Payable Mortgage Clause
It is a contract which provides that the payment of loss to
the mortgagee, if any, will be according to his interest as it
may appear in the contract. Under such clause, the acts of
the mortgagor will affect the mortgagee.
3. Double Insurance and Over Insurance
Double Insurance
• Exists where the same person is insured by several
insurers separately in respect to same subject and
interest.
• Not prohibited by law.
• But it may be prohibited by another insurance clause.
When there is double insurance and over insurance
results, the insured can claim in case of loss only up to
the agreed valuation or up to the full insurable value
from any, some or all insurers, without prejudice to the
insurers ratably apportioning the payments. Insured
can also recover before or after the loss, from both
insurers the excess premium he has paid.
Requisites of Double Insurance:
a. The person injured is the same;
b. There are two or more insurers insuring separately;
c. The subject matter is the same;
d. The interest insured is also the same;
Page 45 of 250
COMMERCIAL LAW
e. The risk or peril insured against is likewise the same.
(Malayan Insurance v. Philippine First Insurance, G.R.
No. 184300, 2012)
Over insurance
• Amount of insurance is beyond the value of the
insured's insurable interest.
• In case of over-insurance by double insurance, insurer
is not liable for total amount of insurance taken, his
liability is limited to the amount of insurable interest on
property insured. Insurer is not entitled to portion of
premium corresponding to the excess of insurance
over the insurable interest of the insured
• Premiums to be returned where there is over-
insurance by several insurers shall be proportioned to
the amount by which aggregate sum insured in all
policies exceeds the insurable value of the thing at risk.
Double Insurance v. Over Insurance
DOUBLE INSURANCE OVER INSURANCE
There may be no over Amount of insurance is
insurance as when the beyond the value of the
sum total of the amounts of insured's insurable
the policies issued does interest
not exceed the insurable
interest of the insured.
Several insurers involved May have only one
insurer involved
4. Reinsurance
One by which an insurer procures a third person to insure
him against loss or liability by reason of such original
insurance. In every reinsurance contract, the original
contract of insurance and the contract of reinsurance are
separate and distinct and covered by separate policies.
Policy of Insurance v. Reinsurance
POLICY OF REINSURANCE
INSURANCE
Written document Any contract by which an
embodying the terms and insurer procures a 3'
stipulations of the person to insure him
contract of insurance against loss or liability by
between the insured and reason of an original
insurer insurance
Formal written The original contract of
instrument evidencing insurance and the contract
the contract of insurance of reinsurance are covered
by separate policies
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Double Insurance v. Reinsurance tractors, trailers and traction engines of all kinds used
DOUBLE INSURANCE REINSURANCE exclusively for agricultural purposes.
Involves the same Insurance of different
interest interests Scope of Coverage Required
Insurer remains in such Insurer becomes an insured OWNERS OF OPERATORS OF
capacity in relation to insurer PRIVATE MOTOR LAND
VEHICLES TRANSPORTATION
Insured in the 1st Original insured has no
in reinsurance Comprehensive against 3rd
contract is a party in interest
interest in the 2nd contract party liability for death or -
Comprehensive against
contract bodily injuries 3rd
party liability for death
Subject of insurance is Subject of insurance is the or bodily injuries
property original insurer's risk In case a private motor
Insured has to give his Consent of original insured, vehicle is being used to
The insurer may extend
consent not necessary transport passengers for
additional other risks at its
compensation, such
option
The reinsurance contracts were correctly issued in favor of coverage shall, in addition,
Plaridel. By its nature, reinsurance contracts are issued in include passenger liability
favor of the direct insurer because the subject of such
contracts is the direct insurer's risk, in this case, Plaridel's Rules of Comprehensive Third Party Liability
contingent liability to MSAPL, and not the risk assumed Insurance (CTPL):
under the original policy. With or without reinsurance, the • Registration of any vehicle will not be made or
obligation of the surety to the party against whom writ of renewed without complying with the requirements
attachment is issued remains the same (Communication • The protection may be complied with using any of the
and Information Systems Corporation v. Mark Sensing following:
Australia, G.R. No. 192159, 2016). a. Insurance policy
b. Surety bond
5. No fault clause, suicide, and incontestability clause c. Cash bond
• The purpose of CTPL is to give immediate financial
No fault clause assistance to victims of motor vehicle accidents and/or
their dependents, especially if they are poor regardless
Compulsory Motor Vehicle Liability Insurance (CMVLI) of the financial capability of motor vehicle owners or
A protection coverage that will answer for legal liability for operators responsible for the accident. (First
losses and damages for bodily injuries and/or property Integrated Bonding and Ins. Co., Inc. v. Hernando,
damage that may be sustained by another arising from the G.R. No. 51221, 1991).
use and operation of a motor vehicle by its owner.
"No Fault" Clause
It is unlawful for any land transportation operator or owner The injured third party or passenger or heirs of the
of a motor vehicle to operate the same in public highways deceased is given the option to file a claim for death or
unless there is an insurance or guaranty to indemnify the injury without the necessity of proving fault or negligence
death or bodily injury of a third party or passenger arising of any kind.
from the use thereof. (Insurance Code, Sec. 387)
Conditions for application of no fault clause:
Motor Vehicle a. The claim must be for death or bodily injuries only
Shall mean any vehicle propelled by any power other than (property damage/liability not included).
muscular power using the public highways (R.A. No. 4136, b. The total indemnity in respect of any person shall not
Sec. 3[a]) exceed five thousand pesos — this is the minimum
legal limit. Insurance companies issue policies for
Exceptions: road rollers, trolley cars, street sweepers, more than five thousand pesos The legal limit under
sprinklers, lawn mowers, bulldozers, graders, forklifts, the New Insurance Code is 15,000 pesos.
amphibian trucks, and cranes if not used in public c. The following proofs of loss, when submitted under
highways, vehicles which run only on rails or tracks, and oath, shall be sufficient evidence to substantiate the
claim;
Page 46 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
i. Police report of accident; and
ii. Death certificate and evidence sufficient to
establish the proper payee; or,
iii. Medical report and evidence or medical or
hospital disbursement in respect of which
refund is claimed.
d. Claim may be made against one motor vehicle only;
i. Against the insurer of the vehicle where one is
a passenger
ii. in any other case, the offending vehicle
Claimant
The claimant or victim may be a "passenger" or a "third
party" (Insurance Code, Sec. 391)
a. Passenger
Any fare paying person being transported and
conveyed in and by a motor vehicle for transportation
of passengers for compensation, including persons
expressly authorized by law or by the vehicle's
operator or his agents to ride without fare. (Insurance
Code, Sec. 386114]
b. Third Party
Any person other than a passenger as defined in this
section and shall aiso exclude a member of the
household, or a member of the family within the
second degree of consanguinity or affinity, of a motor
vehicle owner or land transportation operator, as
likewise defined herein, or his employee in respect of
death, bodily injury, or damage to property arising out
of and in the course of employment (Insurance Code,
Sec. 3861-c])
Proper Insurer to Claim From
• In the case of an occupant of a vehicle, claim shall lie
against the insurer of the vehicle in which the occupant
is riding, mounting or dismounting from.
• If not an occupant, claim shall lie against the insurer of
the directly offending vehicle.
The claimant is not free to choose from which insurer he
will claim the "no-fault indemnity" as the law, by using the
word "shall," makes it mandatory that the claim be made
against the insurer of such vehicle. That said vehicle might
not be the one that caused the accident is of no moment
since the law itself provides that the party paying the claim
may recover against the owner of the vehicle responsible
for the accident. (Perla Compania de Seguros v. Ancheta,
G.R. No. L-49699 August 8, 1988)
Page 47 of 250
COMMERCIAL LAW
Note: In all cases, the right of the party paying the claim to
recover against the owner of the vehicle responsible for the
accident shall be maintained. (Insurance Code, Sec. 391)
Periods in Claims Settlement
Notice of Claim: must be presented within six (6) months
from the date of the accident
Otherwise the claim is deemed waived.
Bringing an Action or Suit: The action must be filed in
court of the Insurance Commission within one (1) year from
denial of the claim.
Prescription starts to run from the denial of the claim by the
Insurance Company (Summit Guaranty and Insurance Co.
v. Arnaldo, G.R. No. L-48546, 1988)
Payment of Claims
If there is an agreement, the insurance company shall
forthwith ascertain the truth and extent of the claim and
make payment within five (5) working days after reaching
an agreement.
If no agreement is reached, the insurance company shall
pay only the no-fault indemnity without prejudice to the
claimant from pursuing his claim further, in which case, he
shall not be required or compelled by the insurance
company to execute any quit claim or document releasing
it from liability under the policy of insurance or surety bond
issued.
Note: If the policy provides for indemnity against liability,
the insurer can be sued directly by a third person. But, if
the policy provides for "reimbursement after actual
payment by the insured", or for the indemnity against loss,
a third person has no cause of action against the insurer
(Bonifacio Brothers v. Mora, G.R. No. 20853, 1967).
While insurer's liability may be direct, it does not mean that
the insurer can be held solidarily liable with the insured.
The insurer's liability is based on contract; that of the
insured is based on torts. Furthermore, the insurer's
liability is limited to the amount of the insurance coverage
(Pan Malayan Insurance Corp. v. CA, G.R. No. 81026,
1990).
Authorized Driver Clause
A stipulation in a motor vehicle insurance which provides
that the driver, other than the insured owner, must be duly
licensed to drive the motor vehicle otherwise the insurer is
excused from liability. The clause means that the insurer
indemnifies the insured owner against loss or damage to
ATENEO CENTRAL
BAR OPERATIONS 2019
the car but limits the use of the insured vehicle to the
insured himself or any person who drove on his order or
with his permission.
Authorized driver refers to:
a. The insured;
b. Any person driving on the insured's order or with
his permission, provided that the person driving is
permitted in accordance with the licensing, or
other laws or regulations to drive the motor vehicle
and is not disqualified from driving such motor
vehicle by order of a court of law or by reason of
any enactment or regulation in that behalf
Note: If the claimant was able to present a driver's license,
the same is presumed to be genuine. The license will still
be sustained in the absence of proof that it was not validly
issued (CCC Insurance Corporation v. CA, G.R. No.
26167, 1970).
A driver (not the insured himself) who holds an expired
driver's license is not an authorized driver (Gutierrez v.
Capital Insurance Co., G.R. No. 30892, 1984).
Theft Clause
The risks insured against in the policy may include theft. If
there is such a provision and the vehicle was unlawfully
taken, the insurer is liable under the theft clause and the
authorized driver clause does not apply. The insured can
recover even if the thief has no driver's license. (Perla
Compania de Seguros v. CA. G.R. No. 96452, 1992)
Suicide
Life Insurance
Scope
a. Insurance on human life
b. Insurance appertaining thereto or connected therewith
may be payable:
i. On the death of the insured;
ii. On his surviving a specified period
(endowment/annuities); and
iii. Otherwise, contingently on the continuance or
cessation of life (endowment/annuities)
Note: Life insurance policies are always VALUED policies.
Classification of Life Insurance
a. Individual Life
Insurance on human lives and insurance appertaining
thereto or connected therewith;
Page 48 of 250
COMMERCIAL LAW
b. Group Life
A blanket policy covering a number of individuals
c. Industrial Life
A form of life insurance under which the premiums are
payable either monthly or oftener, if the face amount of
insurance provided in any policy is not more than five
hundred times that of the current statutory minimum
daily wage in the City of Manila and if the words
"industrial" policy are printed upon the policy as part of
the descriptive matter.
Kinds of Life Insurance
a. Whole Life or Ordinary Policies
The insured agrees to pay annual, semi-annual or
quarterly premiums while he lives. The insurer agrees
to pay the face value of the policy upon the death of
the insured.
b. Limited Payment Life Policies
A whole life or ordinary policy where premiums are
paid only for a specified period of years.
c. Term Policy
Insured pays only once and insurer's liability arises
only upon the death of the insured within the agreed
term as period. If the latter survives the period, the
contract terminates and the insurer is not liable.
d. Endowment Policy
Insurer agrees to pay a certain sum to the insured if
the latter outlives a designated period; if he dies before
thattime, the proceeds are paid to the beneficiary
e. Life Annuity
Debtor binds (the insurer) himself to pay an annual
pension or income during the life of one or more
persons in consideration of a capital consisting of
money or other property, whose ownership is
transferred to him with the burden of income.
Variable Contract
Any policy or contract on either a group or individual basis
issued by an insurance company providing for benefits or
other contractual payments or values thereunder to vary so
as to reflect investment results of any segregated portfolio
of investment.
Rules on Transferability of Life Insurance Contracts
A policy of insurance upon life or health may pass by
transfer, will or succession to any person, whether he has
an insurable interest or not, and such person may recover
upon it whatever the insured might have recovered.
(Insurance Code, Sec. 184)
All life insurance policies are declared by law to be
assignable regardless of whether the assignee has an
)
ATENEO CENTRAL
BAR OPERATIONS 2019
insurable interest in the life of the insured or not (Sun Life
Assur. Co. of Canada v. Ingersoll, G.R. No. 16475, 1921)
Necessity of Beneficiary's Consent to Assignment
The consent of the beneficiary depends if there is a waiver
of the right to change the beneficiary
See discussion on Parties To An Insurance Contract (c)
Liability of Insurer in Case of Death or Suicide
1. Suicide
The insurer is LIABLE in the following cases:
a. Suicide was committed after the policy has been in
force for a period of two years from the date of its
issue or its last reinstatement;
b. Suicide committed in a state of insanity regardless
of the date of the commission of the suicide; or
c. If committed after the lapse of a shorter period in the
policy (Insurance Code, Sec. 183)
Note: Any stipulation extending the two-year period is void.
The insurer is NOT LIABLE in the following cases:
a. The suicide is not by reason of insanity and is
committed within the two-year period;
b. The suicide is by reason of insanity but is not among
the risks assumed by the insurer regardless of the
date of commission; and
c. The insurer can show that the policy was obtained
with the intention to commit suicide even in the
absence of any suicide exclusion in the policy.
2. Killing by the Beneficiary
General Rule: The interest of a beneficiary in a life
insurance policy shall be forfeited when the beneficiary is
the principal, accomplice, or accessory in willfully bringing
about the death of the insured. In such a case, the share
forfeited shall pass on to the other beneficiaries, unless
otherwise disqualified. In the absence of other
beneficiaries, the proceeds shall be paid in accordance
with the policy contract. If the policy contract is silent, the
proceeds shall be paid to the estate of the insured.
(Insurance Code, Sec. 12)
Exceptions:
b. Accidental killing;
c. Self-defense; and
d. Insanity of the beneficiary at the time he killed the
insured
Incontestability Clause
Page 49 of 250
COMMERCIAL LAW
Requisites of Incontestability Clause:
a. The insurance is a life insurance policy.
b. It is payable on the death of the insured.
c. It has been in force during the lifetime of the insured
for at least 2 years from its date of issue or of its last
reinstatement. The period of 2 years may be shortened
but it cannot be extended by stipulation.
When incontestability clause sets in
Whichever is earlier, between:
• Within 2 years from the date of issuance or its last
reinstatement; or
• Upon the insurer's death (Sun Life v. Sibya, G.R. No.
211212, 2016)
Note: In an earlier ruling, the Supreme Court ruled that the
insured dying eleven months after the effectivity of the
insurance policy allows the insurer to contest any
misrepresentation made in the policy due to the one year
incontestability clause (Florendo vs. Philam Plans, Inc.,
G.R. No. 186983, 2012).
Defenses Not Barred by Incontestability Clause:
a. Person taking the insurance lacked insurable interest
as required by law;
b. Cause of the death of the insured is excepted risk;
c. Premiums have not been paid;
d. Conditions of the policy relating to military or naval
service have been violated;
e. The fraud is of a particularly vicious type, wherein:
i. The policy was taken in furtherance of a scheme
to murder the insured;
ii. The insured instituted another person for the
medical examination; and,
iii. The beneficiary feloniously killed the insured;
f. Beneficiary failed to furnish proof of death or to comply
with any condition imposed by the policy after the loss
has happened; or,
9. Action was not brought within the time specified.
B. Perfection Of The Insurance Contract
1. Offer and Acceptance / Consensual
Consensual Nature of Contract
A contract of insurance must be assented to by both
parties, either in person or through their agents and so long
as an application for insurance has not been either
accepted or rejected, it is merely a proposal or an offer to
make a contract. (Perez v. CA, G.R. No. 112329, 2000)
ATENEO CENTRAL
BAR OPERATIONS 2019
Also, according to Enriquez v. Sun Life Assurance (G.R.
No. L-15895, 1920):
(1) Submission of application, even with premium
payment is a mere offer on the part of the applicant, and
does not bind the insurer;
(2) An insurance contract is also not perfected where the
applicant dies before the approval of his application or it
does not appear that the acceptance of the application
ever came to the knowledge of the applicant;
(3) An acceptance made by letter shall not bind the person
making the offer except from the time it came to his
knowledge.
a. Delay in Acceptance — A contract of insurance, like
other contracts, must be assented to by the parties
either in person, or by their agents. Under the law,
assent or consent is manifested by the meeting of the
offer and the acceptance upon the thing and the cause
which are to constitute the contract. If an application
has not been either accepted or rejected, there is no
contract yet as it is merely and offer or proposal
(Insurance, de Leon, p.176).
b. Delivery of Policy — The delivery of a policy is not,
however, a prerequisite to a valid contract of
insurance. The contract may be completed prior to
delivery of the policy or even without -delivery of the
policy depending on the intention of the parties
(Insurance, de Leon, p.180).
FORM OF THE CONTRACT
Form NOT REQUIRED to perfect a contract of
insurance
The policy is the formal written instrument evidencing the
contract of insurance entered into between the insured and
the insurer. No form is required to perfect a contract of
insurance.
Form of Insurance Contracts
4. No policy, certificate or contract of insurance shall be
issued or delivered within the Philippines unless in the
form previously approved by the Commissioner; and
5. No application form shall be used with, and no rider,
clause, warranty or endorsement shall be attached to,
printed or stamped upon such policy, certificate or
contract unless the form of such application, rider,
clause, warranty or endorsement has been approved
by the Commissioner. (Insurance Code, Sec. 232)
Page 50 of 250
COMMERCIAL LAW
Note: The policy is the formal written instrument
evidencing the contract of insurance entered into between
the insured and the insurer. No form is required to perfect
a contract of insurance.
Cover-Note
It is a contract for temporary insurance for a reasonable
time until the policy or policies can be written or issued by
the insurer.
Alsc called: Binding Receipt or Slip, Interim, Temporary
or Provisional Policy
Rules on Cover Notes:
a. Insurance companies doing business in the
Philippines may issue cover notes to bind insurance
temporarily, pending the issuance of the policy.
b. A cover note shall be deemed to be a contract of
insurance within the meaning of Section 1(1) of the
Code.
c. No cover note shall be issued or renewed unless in the
form previously approved by the Insurance
Commission.
d. A cover note shall be valid and binding for a period not
exceeding sixty (60) days from the date of its,issuance,
whether or not the premium therefor has been paid,
but such cover note may be cancelled by either party
upon at least seven (7) days notice to the-other party.
e. If a cover note is not so cancelled, a policy of insurance
shall, within sixty (60) days after the issuance of such
cover note, be issued in lieu thereof. Such policy shall
include within its terms the identical insurance bond
under the cover note and the premium therefor.
f. A cover note may be extended or renewed beyond the
aforementioned ,period written approval provided that
with upon the certification of sixty (60) days with the of
the Insurance Commission, such written approval may
be dispensed of the president, vice-president, or
general manager of the insurance company concerned
that the risks involved, the values of such risks and/or
the premiums therefor have not as yet been
determined or established and that such extension or
renewal is not contrary to and is not for the purpose of
violating any provisions of the Insurance Code, or of
any of the rulings, instructions, circulars, orders or
decisions of the Insurance Commissioner. (Ins. Memo.
Cir. No. 3-75, Sept. 29,1975, effective Oct. 21,1976.)
g. Insurance companies may impose on cover notes a
deposit premium equivalent to at least 25% of the
estimated premium of the intended insurance
coverane Nit in no case less than P500.00. (Ins. Cir.
ATENEO CENTRAL
BAR OPERATIONS 2019
Letter, Jan. 17,1980.) (De Leon, The Insurance Code
of the Philippines Annotated [2014])
The fact that no separate premium was paid on the cover
note before the loss insured against occurred, does not
militate against its binding effect as an insurance contract.
By their nature, cover notes do not contain particulars that
would serve as basis for the computation of the premiums
and consequently, no separate premiums are intended or
required to be paid therefor (Pacific Timber Export Corp. v.
CA, G.R. No. L-38613, 1982)
Insurance Policy
A written document issued by the insurer to the insured,
embodying the terms and conditions of their contract of
insurance.
The policy is not necessary for the perfection of the
contract. The Policy is only the formal written instrument
evidencing the contract. It is required, however, that all
policies issued or delivered must be in the form previously
approved by the Insurance Commission.
The BEST EVIDENCE that a contract has been entered
into between the insurer and the insured is the DELIVERY
of the policy by the insurer to the insured.
Rider
Attachment to an insurance policy that modifies the
conditions of the policy by expanding or restricting its
benefits or excluding certain conditions from the coverage.
Formal requirements of riders
Riders, together with other attachments to the policy, like
clause, warranty or endorsements, are not binding on the
insured unless:
1. The descriptive title or name thereof is mentioned and
written on the blank spaces provided in the policy and;
2. Countersigned by the insured or owner.
Exception: No need to countersign if the rider or other
attachment is applied for by the insured or owner of the
policy
A rider containing an "Automatic Increase Clause" — one
that increases the coverage subject to the attainment of a
certain age of the insured — is not a separate contract. It is
part of the original policy which is in the nature of a
conditional obligation (Commissioner of Internal Revenue
v. Lincoln Philippine Life Insurance Company, G.R. No.
119176, March 19, 2001).
Page 51 of 250
COMMERCIAL LAW
Note: If there is inconsistency between the policy and the
rider, the rider prevails, it being the later and a more
deliberate expression of the agreement of the parties.
Formal Requirements of a Policy
a. In printed form which may contain blank spaces;
b. Any word, phrase, clause, mark, sign, symbol,
signature, number or word necessary to complete the
contract of insurance shall be written in the blank
spaces provided therein. (Insurance Code, Sec. 50)
Contents of an Insurance Policy
a. The parties between whom the contract is made;
b. The amount to be insured except in the cases of open
or running policies;
c. The premium, or if the insurance is of a character
where the exact premium is only determinable upon
the termination of the contract, a statement of the basis
and rates upon which the final premium is to he
determined,
d. The property or life insured;
e. The interest of the insured in property insured, if he is
not the absolute owner thereof;
f. The risks insured against; and
g. The period during which the insurance is to continue.
(Insurance Code, Sec. 51)
Kinds of Policies
a. Open or Unvalued Policy
Value of thing insured is not agreed upon, but left to be
ascertained in case of loss;(ex. Marine and Fire
Insurances) (Insurance Code, Sec. 60)
In an open policy, the value of the property insured is
not agreed upon, although the parties may agree on
the maximum amount of recovery or limit to the liability
of the insurer. In case of loss, this amount must be
considered, by agreement of the insurer and the
insured, the actual value of the property in the absence
of evidence of greater or lesser value. (Dev't Ins. Corp.
v. IAC, G.R. No. L-71360, 1986).
b. Valued Policy
Definite valuation is agreed upon by both parties, and
written on the face of the policy; (ex. Marine and Fire
Insurances) (Insurance Code, Sec. 51)
C. Running Policy
Also called Floating, Adjustable, Blanket or
Declaration Policy; Contemplates successive
insurances and which provides that the subject of the
ATENEO CENTRAL
BAR OPERATIONS 2019
policy may from time to time be defined. (Insurance
Code, Sec. 62)
Void Stipulations in an Insurance Contract
a. Stipulations for the payment of loss whether the person
insured has or has not any interest in the property
insured; or
b. The policy shall be received as proof of such interest,
Or
c. Policies executed by way of gaming or wagering.
2. Premium Payment
Premium is the consideration paid to an insurer for
undertaking to indemnify the insured against a specified
peril.
An insurer is entitled to payment of the premium as soon
as the thing insured is exposed to the peril insured against.
Effect of Non-Payment of Premium
General Rule:
Non-payment of first premium - prevents the contract
from becoming binding notwithstanding the acceptance of
the application or the issuance of the policy.
But non-payment of the balance of the premium due does
not produce the cancellation of the contract. (Phil. Phoenix
Surety & Insurance v. Woodworks, G.R. No. L-22684, Aug.
31, 1967).
Subsequent premiums - does not affect the validity of the
contracts unless, by express stipulation, it is provided that
the policy shall in that event be suspended or shall lapse.
Exceptions to General Rule as to Payment of Premiums:
a. In case of life and industrial life whenever the grace
period provision applies.
Individual Life or Endowment Insurance and
Group Life Insurance
Grace period of either thirty (30) days or one (1) month
within which the payment of any premium after the first
may be made
Industrial Life Insurance
Grace period is four (4) weeks, and where premiums
are payable monthly, either thirty (30) days or one (1)
month.
b. Where the insurer acknowledged in the policy or
contract of insurance itself the receipt of premium,
Page 52 of 250
COMMERCIAL LAW
even if premium has not been actually paid, as
expressly provided by Section 78 itself. (Insurance
Code, Sec. 78)
c. Where the parties agreed that premium payment shall
be in installments and partial payment has been made
at the time of loss (Makati Tuscany Condominium v.
Court of Appeals, G.R. No. 95546, 1992; Gaisano v.
Development Insurance and Surety Corp., G.R. No.
190702, 2017)
Cf. Where the policy provides for payment in premium
in full before the "policy shall be deemed effective,
valid, and binding upon the company" — the partial
payment is merely treated as a deposit and does not
make the policy binding. (Sps. Tibay v. CA, G.R. No.
119655, 1996)
d. Where the insurer granted the insured a credit term for
the payment of the premium, and loss occurs before
the expiration of the term (Makati Tuscany
Condominium v. Court of Appeals, G.R. No. 95546,
1992; Gaisano v. Development Insurance and Surety
Corp., G.R. No. 190702, 2017)
e. Where the insurer is in estoppel as when it has
consistently granted a 60 to 90-day credit term for the
payment of premiums. (Gaisano v. Development
Insurance and Surety Corp., G.R. No. 190702, 2017).
Authority of Agent to Receive Premium
Where an insurer authorizes an insurance agent or broker
to deliver a policy to the insured, it is deemed to have
authorized said agent to receive the premium in its behalf.
The insurer is also bound by its agent's acknowledgement
of receipt of payment of premium (American Home
Assurance Co. v. Chua, G.R. No. 130421,1999).
Given the provisions of the Insurance Code, which is a
special law, the applicable rate of interest shall be that
imposed in a loan or forbearance of money as imposed by
the BSP. The unpaid amount due from insurer is a
forbearance of money. So the proper rate applies
(Stronghold Insurance Co., Inc. V. Pamana Island Resort
Hotel and Marina Club, Inc., G.R. No. 174838, 2016).
3. Non-Default Options In Life Insurance
The options available to a policyholder in case of non-
payment of premium after three full annual premiums have
been paid are:
a. Received the cash surrender value
ATENEO CENTRAL
BAR OPERATIONS 2019
b. Apply such value as the premium for an extended
insurance
c. Apply such value as the premium for a paid-up
insurance
d. Secure from such value an automatic premium loan
before the expiration of the grace period
Cash Surrender Value
An amount to be paid to the insured upon surrender of the
policy contract.
An amount which the insurance company holds in trust for
the insured to be delivered to him upon demand. It is
therefore a liability of the company to the insured.
(Manufacturer's Life Insurance v. Meer, G.R. No. L-2910,
1951)
Alternatives to Cash Surrender Value
a) Extended Insurance/Term Insurance
Where insurance is "extended," the insured is given the
right, upon default, after the payment of at least three full
annual premiums (see Sec. 227[f].), to have the policy
continued in force from the date of default for a time either
stated or equal to the amount as the net value of the policy
taken as a single premium, will purchase. In case of death
of the insured within the extended term, he may recover
the face value of the policy. Extended insurance is
sometimes called "term insurance," "temporary insurance,"
or "paid-up extended insurance." (De Leon, The Insurance
Code of the Philippines Annotated [2014])
b) Paid-up Insurance
Where insurance is "paid-up," the insured is given the right,
upon default, after the payment of at least three annual
premiums (Ibid.) to have the policy continued in force from
the date of default for the whole period of the insurance
without further payment of premiums. In case of death of
the insured, he may recover only the "paid-up" value of the
policy, usually less than the "paid-up" premiums, under the
same conditions as the original policy. Technically, the
term "paid-up" insurance is often referred to as "reduced
paid- up" insurance. (De Leon, The Insurance Code of the
Philippines Annotated [2014])
c) Automatic Premium Loan
This provision protects against the unintentional lapse of
the contract by advancing, in the form of policy loan, the
unpaid amount of a premium due. The automatic premium
loan is advantageous to the policy owner because it helps
to continue the contract and all its features in full force and
effect.
Page 53 of 250
COMMERCIAL LAW
Conditions:
1) In the event of default in premium payment, the
Premium Loan provision shall only apply if
requested in writing by thepolicyholder either in the
application or at any time before the expiration of
the grace period.
2) The moment there is default in premium payment
andno option has been elected either in the
application or within thetime specified in the policy,
one of the paid-up options specified therein shall
automatically take effect. (De Leon, The Insurance
Code of the Philippines Annotated 120141)
4. Reinstatement Of A Lapsed Policy Of Life
Insurance
A provision that the policyholder shall be entitled to have
the policy reinstated at any time within three years from the
date of default of premium payment unless the cash
surrender value has been duly paid, or the extension
period has expired, upon production of evidence of
insurability satisfactory to the company and upon payment
of all overdue premiums and any indebtedness to the
company upon said policy, with interest rate not exceeding
that which would have been applicable to said premiums
and indebtedness in the policy years prior to reinstatement.
Requisites for Reinstatement of Lapsed Life Insurance
Policy
a. Application shall be made within three years from the
date of lapse;
b. There should be a production of evidence of the good
health of the insured:
c. If the rate of premium depends upon the age of the
Beneficiary, there should likewise be a production of
evidence of his or her good health;
d. There should be presented such other evidence of
insurability at the date of application for reinstatement;
e. There should be no change which has taken place in
such good health and insurability subsequent to the
date of such application and before the policy is
reinstated; and
f. All overdue premiums and other indebtedness in
respect of the policy, together with interest at six per
cent, compounded annually, should first be paid.
(Andres v. Crown Life Insurance Co., G.R. No. L-
10874, 1958)
Insular Life's argument was that the two-year contestability
period of the reinstated insurance policy had not lapsed
inasmuch as the insurance policy was reinstated only on
December 27, 1999. The Court notes that the
reinstatement was conditioned upon the payment of
additional premium not only prospectively, that is, to cover
ATENEO CENTRAL
BAR OPERATIONS 2019
the remainder of the annual period of coverage, but also
retroactively, that is for the period starting June 22, 1999.
An insurance contract is a contract of adhesion which must
be construed liberally in favor of the insured and strictly
against the insurer in order to safeguard the latter's interest
(The Insular Life Assurance Company v. Paz Khu, G.R.
No. 195176, 2016).
5. Refund Of Premiums
The insured is entitled to return of premiums paid if the
follow requisites are met:
a. The thing insured was never exposed to the risks
insured against;
b. Contract is voidable due to the fraud or
misrepresentation of insurer;
c. Insurer never incurred liability;
d. When the insurance is for a definite period and the
insured surrenders his policy before the termination
thereof (pre-termination);
e. Contract is voidable because of the existence of facts
of which the insured was ignorant without his fault;
f. When there is over-insurance; and
9. When rescission is granted due to the insurer's breach
of contract.
Payment of Interest on Refund of Premium:
Sections 243 and 244 of the Insurance Code explicitly
provide for payment of interest when there is unjustified
refusal or withholding of payment of claim by the insurer.
Article 2209 of the Civil Code likewise provides for
payment of interest when the debtor is in delay. However,
in cases where the refusal to refund insurance premiums
is because the insurer wants to rescind the insurance
contract on account of concealment, the insurance
company did not unreasonably deny or withhold the
insurance proceeds (Sun Life v. Tan Kit, G.R. No. 183272,
2014).
Premium Necessary for Suretyship
General rule: Premium is also necessan/ in order for the
contract of suretyship or bond to be binding.
Exception: Where the obligee has accepted the bond, it
is binding even if the premium has not been paid subject
to the right of the insurer to recover the premium from its
principal (Philippine Pryce Assurance Corporation v. CA,
G.R. No. 107062, 1994).
Note:
• The official receipts in question serve as proof of
payment of the premium for one year on each surety
bond. It does not, however, automatically mean that
Page 54 of 250
COMMERCIAL LAW
the surety bond is effective for only one (1) year. In
fact, the effectivity of the bond is not wholly dependent
on the payment of premium (Country Bankers
Insurance Corporation v. Antonio Legman, G.R. No.
165487, 2011).
• A policy of insurance upon life or health may pass by
transfer, will or succession to any person, whether he
has an insurable interest or not, and such person may
recover upon it whatever the insured might have
recovered.
• On the other hand, property insurance cannot be
transferred without the consent of the insurer because
the insurer approved the policy based on the personal
qualification and the insurable interest of the insured.
If there is transfer of property insurance without such
consent, the insurance policy is suspended and will not
be avoided until the interest in the thing and the
interest in the insurance are vested in the same
person.
C. Rights And Obligations Of The Party
PARTIES TO AN INSURANCE CONTRACT
1. Insurer
The party who assumes or accepts the risk of loss and
undertakes for a consideration to indemnify the insured or
to pay him a certain sum on the happening of a specified
contingency or event;
An insurer may be:
i. A foreign or domestic company or corporation; or
ii. A partnership or an association
Insurance Corporations are corporations formed or
organized:
i. To save any person or persons or other
corporations harmless from loss, damage, or
liability from any unknown or future or contingent
event, or
ii. To indemnify or to compensate any person or
persons or other corporations for any such loss,
damage, or liability, or
iii. To guarantee the performance of, or compliance
with, contractual obligations or the payment of
debt of others.
An Insurance Corporation must have:
i. Sufficient Capital and assets required under the
Insurance Code and pertinent regulations issued
by the Commission; and
.11
ATENEO CENTRAL
BAR OPERATIONS 2019
ii. A Certificate of Authority to operate issued by
the Insurance Commission which should be
renewable every 3 years. (New Insurance Code,
Sec. 193)
2. Insured
The person in whose favor the contract is operative and
who is indemnified against or is to receive a sum upon the
happening of a specified event.
Requisites in Order that a Person May Be Insured
Under a Contract of Insurance: (CIP) (Insurance Code,
Sec. 3)
i. He must be competent to enter into a contract;
ii. He must possess an insurable, interest in the
subject of the insurance; and
iii. He must not be a public enemy (citizen or subject
of a country with whom the Philippines is at war)
(Insurance Code, Sec. 7)
Effect of War on Existing Insurance Contracts
i. Property Insurance
An insurance policy ceases to become valid and
enforceable as soon as the insured becomes a public
enemy.
However, premium paid by the insured (public enemy)
shall be returned by the insurer (Filipinas Compania de
Seguros v. Christem Huenefield & Co., G.R. No. L-2294,
1951)
ii. Life Insurance
The contract is abrogated but the insured is entitled to the
case or reserve value of the policy (if any), which is the
excess of the premiums paid over the actual risk carried
during the years when the policy had been in force
(Constantino v. Asia Life Insurance, G.R. No. L-1669,
1950)
Note: Where the loss occurs after the end of the war, the
contract is not revived.
Rule on Married Persons
The consent of the spouse is not necessary for the validity
of an insurance policy taken out by a married person on his
or her life or that or his or her children (Insurance Code,
Sec. 3, 112) or that of her husband (Insurance Code, Sec.
10)
She may also take out insurance on her paraphernal or
separate property, or on property given to her by her
Page 55 of 250
COMMERCIAL LAW
husband (Harding v. Commercial Union Assurance, G.R.
No. L-12707, 1918)
Note: Family Code, Art. 73: While either spouse may
exercise any legitimate activity without the consent of the
other, the latter may object on valid, serious, and moral
grounds.
3. Beneficiary
Person designated to receive proceeds of policy when risk
attaches since it is possible that the insured may assign
the proceeds of the insurance to someone else.
Note: There are only two parties to a contract of insurance,
the insured and the insurer. The beneficiary is NOT a party
to the contract unless he is the party to be insured.
D. Rescission Of Insurance Contracts
Primary Concerns of the Insurer
a. Correct estimation of risk which enables insurer to
determine if he will approve the policy application and
if so at what premium rate;
b. Delimitation of the risk;
c. Control of risk to guard against increase in risk;
d. Determine if loss occurs and if so the amount thereof.
Devices of Insurer in Ascertaining and Controlling
Risks
a. Concealment
b. Representations
c. Warranties
Statements or promises by the insured, whether
expressed, implied, affirmative or promissory, set forth
in the policy itself or incorporated in it by proper
reference, the untruth or non-fulfilment of which in any
respect, and without reference to whether the insurer
was in fact prejudiced by such untruth or non-fulfilment
renders the policy voidable by the insurer.
d. Conditions
e. Exceptions
Stipulations excluding certain specified risks that
otherwise would be included under the general
language describing the risks assumed.
1. Concealment
A neglect to communicate that which a party knows and
ought to communicate (Insurance Code, Sec. 26)
ATENEO CENTRAL
BAR OPERATIONS 2019
Requisites of Concealment
a. A party knows the fact which he neglects to
communicate or disclose to the other;
b. Such party concealing is duty-bound to disclose such
fact to the other;
c. Such party concealing makes no warranty of the fact
concealed; and
d. The other party has not the means of ascertaining the
fact concealed
Good faith is no defense in concealment. The Insurance
Code dispenses with proof of fraudulent intent in cases of
rescission due to concealment, but not so in cases of
rescission due to false representations. (VcIa. De Canilang
v. CA, G.R. Na 92492, 1993; The Insular Life Assurance
Co., Ltd. v. Heirs of Alvarez, G.R. Nos. 207526 & 210156,
2018)
Proof of Fraud in Concealment
General Rule: Fraud need not be proven in order to prove
concealment. Good faith is not a defense. (Satumino v.
Phil. American Life Insurance, G.R. No. L-16163, 1963)
Exception: When the concealment is made by the insured
in relation to the falsity of a warranty, the non-disclosure
must be intentional and fraudulent in order that the contract
may be rescinded. (Insurance Code, Sec. 29)
Effect of Concealment
General Rule: Concealment, whether intentional or not,
entitles the injured party to rescind a contract of-insurance,
even if the death or loss is due to a cause not related to
the concealed matter (Insurance Code, Sec. 27)
Exceptions:
a. Incontestability Clause (Insurance Code, Secs. 48 and
233[b])
b. Concealment made after the contract has become
effective;
c. Waiver or estoppel;
d. In marine insurance, in situations where concealment
does not vitiate the entire contract, but merely
exonerates the insurer from a loss resulting from the
risk concealed (Insurance Code, Sec. 112)
Instances When Concealment Made by an Agent
Procuring Insurance Binds Principal
a. Where it was the duty of the agent to acquire and
communicate information of the facts in question;
b. Where it was possible for the agent, in the exercise of
have made the
reasonable diligence, to
Page 56 of 250
COMMERCIAL LAW
communication before the making of the insurance
contract.
Failure on the part of the insured to disclose such facts
known to his agent, or wholly due to the fault of the agent,
will avoid the policy, despite the good faith of the insured.
Rules on Disclosure of Information
Items to disclose to the other, in good faith, even
without inquiry
• Party concealing must have knowledge of the facts
concealed;
• Facts concealed must be material to the risk;
• Party is duty bound to disclose such fact to the other;
• Party concealing makes no warranty as to the facts
concealed;
• Other party has no other means of ascertaining the
facts concealed.
Items to disclose upon inquiry
General Rule: Neither party to the insurance contract is
bound to communicate information on the following
matters
Exception: Except in answer to the inquiries of the other:
a. Those of which the other knows;
b. That which, in the exercise of ordinary care, the other
ought to know and of which the former has no reason
to suppose his ignorance, i.e. political situation,
general usages of trade;
c. Those of which the other waives communication;
d. Those which prove or tend to prove the existence of
the risk excluded by a warranty and which are not
otherwise material;
e. Those which relate to a risk excepted from the policy
and which are not otherwise material.
Disclosure of Insurable Interest
General rule: The insured is not required to communicate
the nature (or kind) or the amount of his insurable interest
in the life or property insured to the insurer.
Exceptions:
a. When the insurer makes inquiry from the insured of the
nature or amount of the latter's insurable interest,
whether in life or property insurance;
b. Insurance policy must specify the interest of the
insured in the property insured, if he is not the absolute
owner thereof.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Waiver of Disclosure of Material Facts The withholding by the applicant, father of one- year-old
a. By the terms of the insurance (express waiver); or insured, of the fact that his daughter was typically a
b. By the neglect to make inquiry as to such facts, where mongoloid child, of which he was fully aware, as such a
they are distinctly implied in other facts which congenital physical defect could never be ensconced nor
information is communicated (implied waiver). (Sec. disguised, in supplying essential data for the insurance
33, Insurance Code) application form which fact is material to the contract,
constitutes fraudulent concealment (Great Pacific v. CA,
No duty to disclose opinions G.R. No. L-31845, 1979)
Neither party is bound to communicate his mere opinion,
speculation, intention or expectation even upon inquiry, Exception: Imprecise description of information is not
because such pinion would add nothing to the appraisal of concealment
the application. (Insurance Code, Sec. 35)
Where the insured lacked sufficient medical knowledge as
Materiality
to enable him to distinguish between "peptic ulcer" and
Materiality is to be determined not by the event, but solely
"tumor" the insured cannot claim that he was deceived into
by the probable and reasonable influence of the facts upon
entering into the contract.
the party to whom the communication is due:
a. In forming his estimate of the disadvantages of the
In the absence of evidence that the insured had sufficient
proposed contract; or
medical knowledge as to enable him to distinguish
b. In making his inquiries. (Insurance Code, Sec. 31)
between "peptic ulcer" and a "tumor," his statement that
said tumor was "associated with peptic ulcer of the
Test of Materiality
stomach" should be construed as an expression made in
Was the insurer misled or deceived into entering a contract
good faith of his belief as to the nature of his ailment and
obligation or in fixing the premium of insurance by a
operation. Such statement must be presumed to have
withholding of material information or facts within the
been made by him without knowledge of its incorrectness
assured's knowledge or presumed knowledge? (Araente v.
and without any deliberate intent on his part to mislead the
West Coast Life, G.R. No. L-24899, 1928)
insurer. (Ng Zee v. Asian Crusader, G.R. No. L-30685,
1983)
It is sufficient that his non-disclosure misled the insurer in
forming his estimates of the risks of the proposed
2. Misrepresentation or Omissions
insurance policy or in making inquiries (Sunlife Assurance
Company v. CA, G.R. No. 105135, 1995).
Definition
It is a factual statement made by the insured at the time of,
The materiality of the existence of other insurance
or prior to, the issuance of the policy, to give information to
contracts against fire upon the same property insured,
the insurer and otherwise induce him to enter into the
when its disclosure is one of the conditions specified in the
insurance contract.
fire insurance policy, is not open to doubt (Union Mfg. v.
Phil. Guaranty, G.R. No. L-27932, October 30, 1972)
A representation cannot qualify an express provision in a
contract of insurance but it may qualify an implied
Materiality in Medical Examinations
warranty. (Insurance Code, Sec. 40)
General rule: non-disclosure is concealment
In non-medical insurance (which does away with the usual
Form
medical examination before the policy is issued), the
Oral or written. (Insurance Code, Sec. 36)
waiver by said insurance company makes the previous
health conditions of the insured more material (Satumino
When made
v. Phil. American Life Ins., G.R. No. L-16163, 1963)
It may be made orally or in writing. It may be made at the
time of, or before, the issuance of the policy. (Insurance
Where the applicant concealed the fact that he had
Code, Sec. 37)
pneumonia, diabetes or syphillis, the policy is avoided
although the cause of the death (e.g., plane crash) be
It may be altered or withdrawn before the insurance is
totally unconnected with the material fact concealed or
effected, but not afterwards. (Insurance Code, Sec. 41)
misrepresented.

Page 57 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
Requisites for Misrepresentations
1. The insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it is untrue
and with intent to deceive or which he states positively
as true without knowing it to be true and which has a
tendency to mislead;
3. Such fact in either case is material to the risk.
Misrepresentation as Affirmative Defense
Misrepresentation is an affirmative defense. To avoid
liability, the insurer has the duty to establish such a
defense by satisfactory and convincing evidence. (Ng Gan
Zee v. Asian Crusader, G.R. No. L-30685, 1983)
The fraudulent intent on the part of the insured must be
established to entitle the insurer to rescind the contract.
Misrepresentation as a defense of the insurer to avoid
liability is an affirmative defense and the duty to establish
such defense by satisfactory and convincing evidence
rests upon the insurer. (Manulife Philippines v. Ybanez,
G.R. No. 204736, 2016)
Kinds of Representation:
a. Affirmative - an affirmation of a fact existing when the
contracts begins; or
b. Promissory - a statement by the insured concerning
what is to happen during the term of the insurance.
Effect of Expressions of Opinion or Expectation on
Insurance Policy
A representation of the expectation, intention, belief,
opinion or judgment of the insured, although false, WILL
NOT AVOID a policy of insurance if there is no actual fraud
in inducing the acceptance of the risk, or its acceptance at
a lower rate of premium (Phi/am Health Systems v. CA,
G.R. No. 125678, 2002);
Adoption of Misrepresentation
An insured who signed the pension plan application,
adopted as his own the written representations and
declarations embodied in it (Ma. Lourdes S. Florendo vs.
Phi/am Plans, Inc., Perla Abcede, et al., G.R. No. 186983,
2012).
Effect of Misrepresentation
If there is misrepresentation, the injured party is entitled to
rescind from the time when the representation becomes
false. (Insurance Code, Sec. 45)
The injured party can rescind the contract when:
a. The representation fails to correspond with the facts
(Insurance Code, Sec. 44); and
Page 58 of 250
COMMERCIAL LAW
b. It is false in a material point (Insurance Code, Sec. 45)
Note: The materiality of a representation is determined
by the same rules as the materiality of concealment.
(Insurance Code, Sec. 46)
Concealment v. Misrepresentation
CONCEALMENT MISREPRESENTATION
The insured withholds The insured makes erroneous
information of material statements of facts with .the
facts from the insurer; intent of inducing the insurer to
enter into the insurance
contract;
Passive form of the Active form of the act
act
Usually occurs prior to Maybe made at the time of the
making of the issuance of the contract
insurance contract
3. Breach of Warranties
Warranty
A statement or promise set forth in the policy or by
reference incorporated therein, the untruth or non-
fulfillment of which in any respect, and without reference to
whether insurer was, in fact prejudiced by such untruth or
non-fulfillment, renders the policy VOIDABLE by the
insure' .
Kinds of Warranties
a. Express — An agreement contained in the policy or
clearly incorporated therein as part thereof whereby
the insured stipulates that certain facts relating to the
risk are or shall be true or certain acts relating to the
same subjects have been or shall be done.
b. Implied — Warranties that are,deemed included in the
contract, although not expressly mentioned. They are
found usually in marine insurance.
c. Affirmative — Asserts the existence of a fact or
condition at the time it is m.de;
d. Promissory — The insured stipulates that certain facts
or conditions shall exist or thin shall be done or
omitted.
0
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Warranty v. Representations indicative of a clear intent to waive such right. There must
WARRANTY REPRESENTATION be clear showing that the insurer knew about the violation
Part of the contract Collateral Inducement of the clause (General Insurance and Surety Corp. v. Ng
Written on the policy or in Need not be written Hua, G.R. No 14373, 1960).
a valid rider or attachment
EXERCISE OF THE RIGHT TO RESCIND
Generally conclusively Should be established to
presumed to be material be material Time to Exercise the Right to Rescind
Falsity or non-fulfilment Falsity renders the policy a. Non-Life Policy — Prior to the commencement of an
operates as a breach of voidable or rescissible on action on the contract
contract the ground of fraud b. Life Policy — Before the incontestability clause sets in
Fact warranted must be Requires only to be
strictly complied with substantially true
Cancellation of Non-Life Insurance
Where express warranty must be contained
Grounds for Cancellation of a Non-Life Policy by the
a. The policy itself; or
Insurer
b. In another instrument signed by the insured and
a. Non-payment of premium;
referred to in the policy as making a part of it
b. Conviction of a crime out of acts increasing the hazard
insured against;
Effect of Breach of Warranty
c. Fraud or material misrepresentation;
General Rule: The violation of a material warranty or other
d. Willful or reckless acts or omissions increasing the risk
material provision of the policy gives the insurer the right
to rescind the insurance policy (Insurance Code, Sec. 74) insured against;
e. Physical changes in the property insured making it
Note: A policy may declare that a violation of specified uninsurable; and
f. Determination by the Insurance Commissioner that the
provisions thereof shall avoid it. Otherwise, the breach of
an immaterial provision does not avoid the policy. policy would violate the Insurance Code. (Sec. 64,
(Insurance Code, Sec. 75) Insurance Code)

Requisites for Cancellation by Insurer (Other Than Life

Exception: The below instances of warranties relating to
the future
a. Loss occurs before the time of performance of the
warranty;
b. The performance becomes unlawful;
c. Performance becomes impossible. (Insurance Code,
Sec. 73)
Note: Waiver or estoppel may also prevent the insurer
from being discharged from liability (Pioneer v. Yap, G.R.
No. L-36232, 1974)
Insurance Contracts)
a. Prior notice of cancellation to insured;
b. Notice must be based on the occurrence after effective
date of the policy of one or more of the grounds
mentioned;
c. Notice must be in writing, mailed or delivered to the
insured at the address shown in the policy; and
d. Notice must state the grounds relied upon and upon
request of insured, to furnish facts on which
cancellation is based.

Prior Notice is required to prevent the cancellation of the

Other Insurance Clause — This is a clause in the policy
that provides that the policy shall be void if the insured
procures additional insurance without the consent of the
insurer. The purpose is to prevent over-insurance and thus
to avert the possibility of a perpetration of fraud. It is a
warranty that entitles the insurer to rescind in case of
breach.
The "other insurance clause" may be subject to waiver but
the waiver must either be express or if it is to be implied
from conduct mainly, said conduct must be clearly
Page 59 of 250
policy, without allowing the insured ample opportunity to
negotiate for other insurance in its stead for his own
protection (Saura Import & Export v. Phil. International
Surety, G.R. No. L-15184, 1963).
Renewal of Non-Life Insurance
The insured shall be entitled to renew the policy upon
payment of the premium due on the effective date of the
renewal. Policy written:
• Term of less than one (1) year - considered as if
written for a term of one (1) year
• Term longer than one (1) year or any policy with
ATENEO CENTRAL
BAR OPERATIONS 2019
no fixed expiration date - considered as if written
for successive policy periods or terms of one (1)
year
Exception: The insurer at least forty-five (45) days_ in
advance of the end of the policy period mails or delivers to
the named insured at the address shown in the policy
notice of its intention not to renew the policy or to condition
its renewal upon reduction of limits or elimination of
coverages (Insurance Code, Sec. 66)
E. Loss
1. Notice and Proof of Loss
When Insurer is Liable for Loss
• Unless otherwise provided by the policy, an insurer is
liable for a loss of which a peril insured against was the
proximate cause, although a peril not contemplated by
the contract may have been a remote cause of the loss
(Insurance Code, Sec. 86)
• The thing insured is rescued from a peril insured
against that would otherwise have caused a loss, if, in
the course of such rescue, the thing is exposed to a
peril not insured against, which permanently deprives
the insured of its possession, in whole or in part; or
where a loss is caused by efforts to rescue the thing
insured from a peril insured against (Insurance Code,
Sec. 87)
Insurer is Liable if:
a. Loss, the proximate cause of which is the peril insured
against;
b. Loss, the immediate cause of which is the peril insured
against except where proximate cause is an excepted
peril;
C. Loss through the negligence of insured except where
there was gross negligence amount to willful act; and
d. Loss caused by efforts to rescue the thing from peril
insured against — if during the course of rescue, the
thing is exposed to a peril not insured against, which
permanently deprives the insured of its possession, in
whole or in part.
When Insurer is Not Liable for Loss
• Loss of which the peril insured against was only a
remote cause. (Insurance Code, Sec. 86)
• Loss caused by the willful act or through the
connivance of the insured; but he is not exonerated by
the negligence of the insured, or of the insurance
agents or others (Insurance Code, Sec. 89)
Page 60 of 250
COMMERCIAL LAW
Insurer is Not Liable if:
a. Loss by insured's willful act or gross negligence;
b. Loss due to connivance of the insured;
c. Loss where the excepted peril is the proximate cause.
Mandatory Requirement of Notice of Loss and Proof of
Loss
The requirement of the notice of loss and obligation to file
a proof of loss are condttions with which the insured MUST
comply before there is any liability on the part of the
insurer.
When to Give Notice of Loss
Without unnecessary delay or within a reasonable time.
A requirement of the policy that notice of loss be given
immediately or fortwith requires the giving of notice within
a reasonable time (Bachrach v. Britain Am. Assur. Co.,
G.R. No. L-5715, 1910)
Form of Notice or Proof of Loss
In case of loss upon fire insurance, the law requires written
notice. (Insurance Code, Sec. 90)
For other kinds of insurance, absent any stipulation in the
policy, notice or proof may be given orally or in writing.
When defects in a notice of loss are waived
All defects in a notice of loss, or in preliminary proof
thereof, which the insured might remedy, and which the
insurer omits to specify to him, without unnecessary delay,
as grounds of objection, are waived. (Insurance Code,
Sec. 92)
When Delay in the Presentation of Notice or Proof of
Loss is Deemed Waived
Delay in the presentation to an insurer of notice or proof of
loss is waived if caused by any act of him, or if he omits to
take objection promptly and specifically upon that ground.
(Insurance Code, Sec. 93)
Payment of Proceeds
Life Insurance
• The proceeds shall be paid immediately upon the
maturity of the policy (survival benefits) if there is such
a maturity date.
• If the policy matures by the death of the insured, within
sixty (60) days after presentation of the claim and filing
of the proof of the death of the insured.
ATENEO CENTRAL
BAR OPERATIONS 2019
Property Insurance
• Proceeds shall be paid within thirty (30) days after
proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by
agreement or by arbitration.
• If no ascertainment is made within 60 days after receipt
of proof of loss, the loss shall be paid within 90 days.
2. Guidelines on Claims Settlement
a. Unfair Claims Settlement And Sanctions
Any of the following acts by an insurance company, if
committed without just cause and performed with such
frequency as to indicate a general business practice, shall
constitute unfair claim settlement practice. It shall be
considered sufficient cause for the suspension or
revocation of the company's certificate of authority:
• Knowingly misrepresenting to claimants' pertinent
facts or policy provisions relating to coverage at issue;
• Failing to acknowledge with reasonable promptness
pertinent communications with respect to claims
arising under its policies;
• Failing to adopt and implement reasonable standards
for the prompt investigation of claims arising under its
policies;
• Not attempting in good faith to effectuate prompt, fair
and equitable settlement of claims submitted in which
liability has become reasonable clear; or
• Compelling policyholders to institute suits to recover
amounts due under its policies by offering without
justifiable reason substantially less than the amounts
ultimately recovered in suits brought by them.
b. Prescription of Action
Nature of Condition for Filing Claim
The condition contained in the insurance policy that claims
must be presented within one year after rejection is not
merely a procedural requirement. The condition is an
important matter, essential to a prompt settlement of
claims against insurance companies, as it demands that
insurance suits be brought by the insured while the
evidence as to the origin and cause of destruction have not
yet disappeared.
It is in the nature of a condition precedent to the liability of
the insurer, or in other terms, a resolutory cause, the
purpose of which is to terminate all liabilities in case the
action is not filed by the insured within the period
stipulated. (Sun Insurance v. CA, G.R. No. 8974, 1991)
Page 61 of 250
COMMERCIAL LAW
Time to Commence Actions
If there is a stipulation in the policy: The stipulation in
the policy, if not contrary to Sec. 63, will prevail. (Teal
Motor v. Orient Insurance, G.R. No. 39797, 1934)
If there is no express stipulation in the policy
As the policy is a written contract, the action prescribes in
10 years. (Civil Code, Art. 1144)
Limitation to Period to File Claim
A condition, stipulation, or agreement in any policy of
insurance, limiting the time for commencing an action
thereunder to a period of less than one year from the time
when the cause of action accrues, is void. (Insurance
Code, Sec. 63)
Note: In Industrial life insurance, the period cannot be less
than 6 years after the cause of action accrues. (Insurance
Code, Sec. 231[d])
When does the insured's cause of action begin to run?
The prescriptive period for an insured's action for
indemnity should be reckoned from the "final rejection" of
the claim (H.H. Hollero Construction v. GSIS, G.R. No.
152334, 2014).
Rationale: Before such final rejection, there is no real
necessity for bringing suit (Eagle Star v. Chia Yu,G.R. No.
L-5915, 1955).
Action or suit must be brought in proper cases, with
Commission or the courts within one year from the denial
of the claim, otherwise, the claimant's right of action shall
prescribe (Jacqueline Jimenez Vda. De Gabriel v. CA,
G.R. No. 103883, 1996).
c. Subrogation
Legal Bass vi Subrogation
if the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the
injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated
to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid
by the insurance company does not fully cover the injury
or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury (Civil
Code, Art. 2207)
ATENEO CENTRAL
BAR OPERATIONS 2019
Definition
Subrogation: Substitution of one person in place of
another with reference to a lawful claim or right, so that he
who is substituted succeeds to the rights of the other in
relation to a debt or claim, including its remedies and
securities (LSC v. Chubb, G.R. No. 147724, 2004)
The right of subrogation has its roots in equity. It is
designed to promote and to accomplish justice and is the
mode which equity adopts to compel the ultimate payment
of a debt by one who in justice and good conscience ought
to pay. (Delsan Transport v. CA, G.R. No. 127897, 2001)
Subrogation only applies to property insurance
If the plaintiffs property is insured... (Civil Code, Art. 2207)
Note: Subrogation also applies in reinsurance. A reinsurer,
on payment of a loss, acquires the same rights by
subrogation as in similar cases where the original insurer
pays a loss. (Pioneer Insurance Co v. CA, G.R. Nos. 84197
& 84157, 1989)
When subrogation occurs
1. If the plaintiff's property has been insured, and
2. He has received indemnity from the insurance
company for the injury or loss arising out of the wrong
or breach of contract complained of (Civil Code, Art.
2207)
It is not dependent upon, nor does it grow out of, any privity
of contract or upon written assignment of claim. It accrues
simply upon payment by the insurance company of the
insurance claim. (Delsan Transport v. CA, G.R. No.
127897, 2001)
The presentation of the marine insurance policy is not
necessary for the exercise of the insurer's right to
subrogation. It accrues upon payment of insurance claim
(Asian Terminals, Inc. v. Malayan Insurance, G.R. No.
171406, 2011).
The subrogation receipt, by itself, is sufficient to establish
not only the relationship of insurer and the assured shipper
of the lost cargo, but also the amount paid to settle the
insurance claim. The right of subrogation accrues simply
upon payment by the insurance company of the insurance
claim. (Asian Terminals, Inc. v. Malayan Insurance, G.R.
No. 171406, 2011).
As subrogee of the rights and interest of the consignee,
R&B Insurance has the right to seek reimbursement from
either Loadmasters or Glodel or both for breach of contract
Page 62 of 250
COMMERCIAL LAW
and/or tort (Loadmasters Customs Services, Inc. v. Glodel
Brokerage Corporation and R & B Insurance Corporation,
G.R. No. 179446, 2011).
Effect of Subrogation on Prescriptive Period to Sue the
Person Causing the Loss or Injury
The insurer acquires a fresh 10-year period arising from
law. (Vector Shipping v. AHAC, G.R. No. 159213, 2013)
Right of insurer to recover from 3rd party is limited to
the amount recoverable from the latter by the insured
The insurer cannot recover in full the amount it paid to the
insured if it is greater than that to which the insured could
lawfully lay claim against the person causing the loss (Rizal
Surety v. Manila Railroad, G.R. No. L-24043, 1968)
Cases When There is No Right of Subrogation:
a. The insured by his own act releases the
wrongdoer/third person liable for the loss;
b. Where the insurer pays the insured for a loss or risk
not covered by the policy;
c. In life insurance;
d. For recovery of loss in excess of insurance coverage.
(Malayan Insurance v. CA, G.R. No. 81026, 1990)
SPECIAL CLASSES OF INSURANCE
1. Marine Insurance
Scope of Marine Insurance
1. Insurance Against Loss or Damage
a. Vessels, craft, aircraft, vehicles, goods, freights,
cargoes, merchandise, effects, disbursements, profits,
moneys, securities, choses in action, instruments of
debts, valuable papers, bottomry, and respondentia
interests and all other kinds of property and interests
therein, in respect to, appertaining to or in connection
with any and all risks or perils of navigation, transit or
transportation, or while being assembled, packed,
crated, baled, compressed or similarly prepared for
shipment or while awaiting shipment, or during any
delays, storage, transhipment, or reshipment incident
thereto, including war risks, marine builder's risks, and
all personal property floater risks;
b. Person or property in connection with or appertaining
to a marine, inland marine, transit or transportation
insurance, including liability for loss of or damage
arising out of or in connection with the construction,
repair, operation, maintenance or use of the subject
matter of such insurance (but not including life
insurance or surety bonds nor insurance against loss
by reason of bodily injury to any person arising out of
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

ownership, maintenance, or use of automobiles); Accidents peculiar to the Damage or losses

c. Precious stones, jewels, jewelry, precious metals, sea which do not happen resulting from:
whether in course of transportation or otherwise; and by intervention of man nor
d. Bridges, tunnels and other instrumentalities of are to be prevented by 1. Natural and inevitable
transportation and communication (excluding human prudence. action of the sea
Casualties due to the: 2. Ordinary wear and tear
buildings, their furniture and furnishings, fixed contents
1. Unusual violence; or of a ship, or
and supplies held in storage); piers, wharves, docks 2. Extraordinary action of 3. Negligent failure of the
and slips, and other aids to navigation and wind and wave; or ship owner to provide
transportation, including dry docks and marine 3. Other extraordinary the vessel with proper
railways, dams and appurtenant facilities for the causes connected equipment to convey
control of waterways. with navigation the cargo under
ordinary conditions
2. Marine Protection and Indemnity Insurance
Insurance against, or against legal liability of the insured All-Risks Policy
for loss, damage, or expense incident to ownership, It is insurance against all causes of conceivable loss or
operation, chartering, maintenance, use, repair, or damage.
construction of any vessel, craft or instrumentality in use of
ocean or inland waterways, including liability of the insured Except:
for personal injury, illness or death or for loss of or damage 1. As otherwise excluded in the policy; or
to the property of another person. 2. Due to fraud or intentional misconduct on the part of
the insured (Choa Tek Seng v. CA, G.R. No. 84507,
Risk Insured Against 1990)
General Rule: It is only PERILS OF THE SEA which may
be insured against Barratry
Willful misconduct on the part of the master or crew in
The insurer does undertake to insure against perils of the pursuance of some unlawful or fraudulent purpose without
ship. The purpose of a marine insurance is to secure an the consent of owners, and to the prejudice of owner's
indemnity against accidents which may happen and interest. This may be expressly covered by the policy.
against events which must happen. (La Razon Social Go When so covered, proof of wiliful and intentional act is
Taico Hermanos v. Union Insurance Society of Canton, necessary. No honest error or judgment or mere
G.R. No. 13983, 1919) negligence, unless criminally gross, can be barratry.
(Roque v. IAC, G.R. No. L-66935, 1985)
Rusting of steel pipes in the course of the voyage is a peril
of the sea in view of the effects of the wind, water, and salt Insurable Interest in Marine Insurance
conditions. (Cathay Insurance v. CA, G.R. No. 76415,
1987) (i) Shipowner
• Over the VALUE OF THE VESSEL, (even if
Exception: Unless perils of the ship are covered by an chartered and the charterer agreed to pay the
ALL-RISK POLICY. shipowner the value of the vessel in case of loss,
however, the shipowner can recover only the
Note: The perils of the sea must be the proximate cause amount not recoverable from the charterer).
of the loss in order that the insurer may be held liable. (Insurance Code, Sec. 102)
• However, if the ship is hypothecated by a
Perils of the Sea v. Perils of the Ship bottomry loan, the insurable interest is only up to
PERILS OF THE SEA PERILS OF THE SHIP the excess of the value of the vessel over the loan
Covered by marine Not covered by marine (Insurance Code, Sec. 103)
insurance insurance • Over EXPECTED FREIGHTAGE. (Insurance
Code, Sec. 105)

Note: Freightage may be derived from:

• The chartering of the ship;
• Its employment for the carriage of his own goods;
Page 63 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
and
• Its employment for the carriage of the good of
others (Insurance Code, Sec. 104)
(ii) Shipper/Cargo Owner
• Over the CARGO AND EXPECTED PROFITS.
(Insurance Code, Sec. 107)
(iii) Charterer
• Over the VESSEL up to the extent of the amount
he is liable to the shipowner, if the ship is lost or
damaged during the voyage. (Insurance Code,
Sec. 108)
• Over his EXPECTED PROFITS OR
FREIGHTAGE if he accepts cargoes from other
persons for a fee. (Insurance Code, Sec. 105)
• Over his OWN CARGO OR CLIENT'S CARGO.
Bottomry, Respondentia, and Charter Party
Loan on Bottomry or Respondentia
A loan in which under any condition whatsoever, the
repayment of the sum loaned, and of the premium
stipulated, depends upon the safe arrival in port of the
goods on which it is made or of the price they may receive
in case of accident. -It is a loan on bottomry when the
security is a vessel, and respondentia when the security is
cargo.
Charter Party Contract
A contract by virtue of which the owner or the agent of a
vessel binds himself to transport merchandise or persons
for a fixed price. It has also been defined as a contract by
virtue of which the owner or the agent of the vessel lets the
vessel or some principal part thereof for the transportation
of goods or persons from one port to another.
Different Types of Charter Parties:
1. Contracts of Affreightment — use of shipping space
on vessels leased by the shipowner in part or as a
whole, to carry goods for others
a. Time Charter — vessel is leased for a fixed period
of time
b. Voyage Charter — vessel is leased for a single
voyage
2. Charter by Demise or Bareboat Charter — the whole
vessel is leased to the charterer with a transfer to him
of its entire command and possession and consequent
control over its navigation including the master and
crew
Concealment in Marine Insurance
Page 64 of 250
COMMERCIAL LAW
To constitute concealment, it is sufficient that the insured
is in possession of the material fact concealed although he
may not be aware of it.
Each -party in a marine insurance contract is bound to
communicate the following:
1. All facts within his knowledge which are material
to the contract and as to which he makes no
warranty, and which the other has not the means
of ascertaining.
2. All the information which he possesses, material to
the risk
Exception:
a) Those which the other knows;
b) Those which, in the exercise of ordinary
care, the other ought to know, and of
which the former has no reason to
suppose him ignorant;
c) Those of which the other waives
communication;
d) Those which prove or tend to prove the
existence of a risk excluded by a warranty,
and which are not otherwise material; and
e) Those which reiate to a risk excepted from
the policy and which are not otherwise
material
3. State the exact and whole truth in relation to all
matters that he represents, or upon inquiry
discloses or assumes to disclose (Insurance
Code, Sec. 109)
In marine insurance, there are instances when matters,
although concealed, will not vitiate the contract but merely
exonerates the insurer from the loss resulting from the risk
concealed:
a. National character of the insured;
b. Liability of insured thing to capture (or) and
detention;
c. Liability to seizure from breach of foreign laws of
trade;
d. Want of necessary documents; and
e. Use of false or simulated papers. (Insurance
Code, Secs. 109-112)
ATENEO CENTRAL
BAR OPERATIONS 2019
Concealment in Marine Insurance vs. Other Property
nsurance
Marine Insurance Other Property
Insurance
Information Of Third Persons
The information of the The information or belief of
belief or expectation of a third party is not material
third persons in reference and need not be
to a material fact is communicated unless it
material and must be proceeds from an agent of
communicated (Insurance the insured whose duty is
Code, Sec. 110) to give information.
(Insurance Code, Sec. 43)
Effect of Concealment
The concealment of any Concealment of an
fact in relation to any of the material fact will vitiate the
matters states in Sec. 112 entire contract, whether or
does not vitiate the entire not the loss results from
contract but merely the risk concealed.
exonerates the insurer
from a risk resulting from
the fact concealed.
Representation in Marine Insurance
If a representation by a person insured by a contract of
marine insurance, is intentionally false in any material
respect, or in respect of any fact on which the character
and nature of the risk depends, the insurer may rescind the
entire contract. The eventual falsity of a representation as
to expectation does not, in the absence of fraud, avoid a
contract of marine insurance. (Insurance Code, Secs. 113
and 114)
Implied Warranties in Marine Insurance
a. That the ship is seaworthy at the inception of the
insurance (Sec. 115);
b. That the ship will not deviate from agreed voyage
unless deviation is proper (Secs. 125-127);
c. That the ship will not engage in an illegal venture;
d. Warranty of possession of documents of neutrality;
that the ship will carry the requisite documents of
nationality or neutrality of the ship or cargo where such
nationality or neutrality is expressly warranted (Sec.
122);
e. Presence of insurable interest.
Seaworthiness
Seaworthiness relates to the vessel's ACTUAL
CONDITION at the time of the commencement of the
voyage. The issuance of the certificate neither negates the
presumption of unseaworthiness triggered by an
Page 65 of 250
COMMERCIAL LAW
unexplained sinking or establishes seaworthiness. (Delsan
Transport Lines v. CA, G.R. No. 127897, 2001)
Test of Seaworthiness
Whether or not the ship is reasonably fit to perform the
service and to encounter the ordinary perils of the voyage
(Insurance Code, Sec. 117)
Note: The implied warranty of seaworthiness also applies
to a cargo owner.
Since the law provides for an implied warranty of
seaworthiness in every contract of ordinary marine
insurance, it becomes the obligation of a cargo owner to
look for a reliable common carrier which keeps its vessels
in seaworthy condition. The shipper of cargo may have no
control over the vessel but he has full control in the choice
of the common carrier that will transport his goods. Or the
cargo ownei may enter into a contract of insurance which
specifically provides that the insurer answers not only for
the perils of the sea but also provides for coverage of perils
of the ship. (Roque v. IAC, G.R. No. L-66935, 1985)
When A Ship Should Be Seaworthy:
General Rule: Implied warranty of seaworthiness is
complied with if the ship be seaworthy at the time of the
commencement of the risk
Exceptions:
1. Time Policy — When the insurance is made for a
specified length of time, the implied warranty is not
complied with unless the vessel is seaworthy at the
commencement of every voyage it undertakes during
that time; (Insurance Code, Sec. 117[4)
2. Cargo Policy — When the insurance is upon the cargo
which, by the terms of the policy, description of the
voyage, or established custom of trade, is to be
transshipped at an intermediate port, at the
commencement of each particular voyage; (Insurance
Code, Sec. 117[4])
3. Voyage Policy — Where different portions of the
voyage are contemplated, at the commencement of
each portion; (Insurance Code, Sec. 119)
4. When the ship was seaworthy at the commencement
of the voyage but becomes unseaworthy during the
voyage to which an insurance related, unreasonable
delay in repairing the defect exonerates the insurer on
ship or shipowner's interest from liability from any loss
arising therefrom. (Insurance Code, Sec. 120)
ATENEO CENTRAL
BAR OPERATIONS 2019
Coverage of the Warranty of Seaworthiness
1. Condition of the structure of the ship itself, but requires
that it be properly laden, and provided with a
competent master
2. Sufficient number of competent officers and seamen
3. Requisite appurtenances and equipment, such as
ballasts, cables and anchors, cordage and sails, food,
water, fuel and lights, and other necessary or proper
stores and implements for the voyage. (Insurance
Code, Sec. 118)
Deviation
Departure of vessel from course of voyage, or an
unreasonable delay in pursuing voyage, or the
commencement of an entirely different voyage. (Insurance
Code, Sec. 125)
Instances of Deviation
SEC. DEVIATION
- Departure from the agreed voyage
Departure from the course of sailing fixed by
123 mercantile usage between the places of
beginning and ending specified in the policy
Departure from the most natural, direct, and
advantageous route between the places
124
specified if the course of sailing is not fixed by
mercantile usage
125 Unreasonable delay in pursuing the voyage
The commencement of an entirely different
125
voyage
Kinds of Deviations
1. Proper Deviations
a. If due to circumstances outside the control of the
master or ship owner;
b. If done to comply with a warranty or to avoid a peril,
whether or not the peril is insured against;
c. If made in good faith, and upon reasonable ground of
belief in its necessity to avoid a peril;
d. If made in good faith, for the purpose of saving human
life or relieving another distressed vessel. (Insurance
Code, Sec. 125)
Effect in case of loss or injury: Insurer is still liable,
as if there was no deviation.
2. Improper Deviations
Every deviation not specified in the last section is improper.
(Insurance Code, Sec. 127)
Page 66 of 250
COMMERCIAL LAW
Effect in case of loss or injury: Insurer is not liable
(Insurance Code, Sec. 128)
Kinds of Losses in Marine Insurance
(i) Actual Total Loss
• Total Destruction;
• Irretrievable loss by sinking or by being broken up;
• Damage rendering the thing valueless for the
purpose held; or
• Total Effective deprivation of owner of possession
of thing insured at the port of destination.
(Insurance Code, Sec. 132)
Note: Complete physical destruction of the subject matter
is not essential to constitute an actual total loss. Such a
loss may exist where the form and specie of the thing is
destroyed, although the materials of which it consisted still
exist as where the cargo by the process of decomposition
or other chemicai agency no longer remains the same kind
of thing as before (Pan Malayan Insurance Corp v. CA,
G.R. No. 95070, 1991)
(ii) Constructive Total Loss
• Actual loss or more than three-fourths (3/4) of the
value of the object;
• Damage reducing value by more than three-
fourths (3/4) of the value of the vessel and of
cargo; and
• Expenses of shipment exceed three-fourths (3/4)
of value of cargo. (Insurance Code, Sec. 141)
In case of constructive total loss, insured may:
1. Abandon the goods or vessel to the insurer and claim
for whole insured value (Insurance Code, Sec. 141); or
2. He may, without abandoning vessel, claim for partial
actual loss (Insurance Code, Sec. 157).
The word "may" in Section1 141 is intended to grant the
insured the option or direction to make the choice. This option
or discretion is expressed as a right in Section 133. (Keppel
Cebu Shipyard v. Pioneer Ins. & Surety, G.R. Nos.
180880-81, 2009)
Effect of Total Loss
Underwriter is liable for the whole amount insured.
(iii) Partial Loss (Insurance Code, Sec. 130)
Abandonment
The act of the insured by which, after a constructive total
loss, he may declares the relinquishment to the insurer of
)
ATENEO CENTRAL
BAR OPERATIONS 2019
his interest in the thing insured. (Insurance Code. Sec.
140)
Requisites for Valid Abandonment
SEC. REQUISITE
There must be an actual relinquishment by the
140 person insured of his interest in the thing
insured
141 There must be a constructive total loss
The abandonment be neither partial nor
142
conditional
It must be made within a reasonable time after
143
receipt of reliable information of the loss
144 It must be factual
It must be made by giving notice thereof to the
145
insurer which may be done orally or in writing
The notice of abandonment must be explicit
146 and must specify the particular cause of the
abandonment
Abandonment where the insurance is divisible or
indivisible
In a case, the policy in question showed that the subject
matter insured was the entire shipment of 2,000 cubic
meters of logs.
SC held that the fact that the logs were loaded in two
different barges did not make the contract of insurance
several and divisible as to the items insured because the
logs on the two barges were not separately valued or
separately insured, for only one premium was paid for the
entire shipment making only one cause or consideration.
The logs having been insured as one inseparable unit, the
totality of the shipment of logs should be the basis for the
existence of constructive total loss (Oriental Assurance
Corp v. CA, G.R. No. 94052, 1991)
Effects of Abandonment
1. Transfer of Interest
An abandonment is equivalent to a transfer by the
insured of his interest to the insurer, with all the
chances of recovery and indemnity. (Insurance Code,
Sec. 148)
2. Transfer of Agency
Upon an abandonment, acts done in good faith by
those who were agents of the insured in respect to the
thing insured, subsequent to the loss, are at the risk of
the insurer, and for his benefit. (Insurance Code, Sec.
150)
Page 67 of 250
COMMERCIAL LAW
Acceptance of Abandonment
It is not necessary if abandonment is properly made.
Effects of Acceptance
1. Insurer admits the existence of the loss;
2. Insurer admits the sufficiency of the abandonment;
3. Abandonment becomes irrevocable, unless the upon
which it was made prove to be unfounded;
4. Freightage earned previous to the loss belongs to the
insurer of said freightage; and
5. Freightage subsequently earned belongs to the insurer
of the ship (Insurance Code, Secs. 153-155)
Rights of Insurer Who Pays Partial Loss as Actual
Total Loss
If a marine insurer pays for a loss as if it were an actual
total loss, he is entitled to whatever may remain of the thing
insured, or its proceeds or salvage, as if there had been a
formal abandonment (Insurance Code, Sec. 149)
Insurer's Liability for Refusal of Abandonment
If an insurer refuses to accept a valid abandonment, he is
liable as upon an actual total loss, deducting from the
amount any proceeds of the thing insured which may have
come to the hands of the insured. (Insurance Code, Sec.
156)
Measure of Indemnity
1. Valued Policy
The parties are bond by the valuation if the insured had
some interest at risk and there is no fraud (Insurance
Code, Sec. /58)
Exception: When a thing has been hypothecated by
bottomry or respondentia , before its insurance, and
without the knowledge of the person actually procuring the
insurance, he may show the real value (Insurance Code,
Sec. 158)
2. Open Policy
The following rules shall apply in estimating a loss:
1. Value of the ship — value at the beginning of the risk;
b. Value of the cargo — actual cost when laden on board,
or market value at the time and place of lading;
c. Value of freightage — gross freightage exclusive of
primage; and
d. Cost of insurance— in each case, to be added to the
estimated value (Insurance Code, Sec. 163)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Loss of Profits Separately Insured 3. From the expenses or damages caused follows the
(Value of property lost / Value of whole property insured) * successful saving of the vessel and cargo.
amount of insurance = Amount of recovery 4. Expenses or damages should have been incurred or
inflicted after taking proper legal steps and authority
Presumption of Loss of Profits (A/lagsaysay v. Agan, G.R. No. L-6393, 1955)
When profits are valued and insured by a contract of
marine insurance, a loss of them is conclusively presumed Right of the Insured in General Average
from a loss of the property out of which they are expected Where it has been agreed that an insurance upon a
to arise, and the valuation fixes their amount. (Insurance particular thing, or class of things, shall be free from
Code, Sec. 162) particular average, a marine insurer is not liable for any
particular average loss not depriving the insured of the
Average possession, at the port of destination, of the whole of such
Any extraordinary or accidental expense incurred during thing, or class of things, even though it becomes entirely
the voyage for the preservation of the vessel, cargo, or worthless; but such insurer is liable for his proportion of all
both; and all damages to the vessel and cargo from the general average loss assessed upon the thing insured.
time it is loaded and the voyage commenced, until it ends (Insurance Code, Sec. 138)
and the cargo is unloaded.
When a person insured by a contract of marine insurance
Kinds of Averages: has a demand against others for contribution, he may claim
GROSS / GENERAL SIMPLE/PARTICULAR the whole loss from the insurer, subrogating him to his own
AVERAGE AVERAGE right to contribution. But no such claim can be made upon
Includes all damages and the insurer after the separation of the interests liable to
expenses caused to the contribution, nor when the insured, having the right and
These damages and opportunity to enforce contribution from others, has
vessel or to her cargo
expenses are deliberately neglected or waived the exercise of that right. (Insurance
which have not inured to
caused by the master of Code, Sec. 167)
the common benefit and
the vessel or upon his
profit of all the persons
authority, in order to save Freightage Benefit
interested in the vessel
the vessel, her cargo, or Which is to accrue to the owner of the vessel from its use
and her cargo The owners
both at the same time in the voyage contemplated or the benefit derived from the
are not entitled to receive
from a real and known employment of the ship.
contribution from other
risk.
owners concerned in the
venture. Right to Freightage:
Must be borne equally by These are suffered by and • Freightage earned before loss - Belongs to the insurer
all of the interests borne alone by the owner of freightage
concerned in the venture of the cargo or of the • Freightage earned after loss Belongs to insurer of
in proportion to the value vessel, as the case may ship
of the property saved. be.
Co-Insurance
Requisites to Claim General Average A form of insurance in which a person who insures his
1. There must be a common danger. This means, that property for less than the entire value is understood to be
both the ship and the cargo, after has been loaded, are his own insurer for the difference which exists between the
subject to the same danger, whether during the true value of the property and the amount of insurance.
voyage, or in the port of loading or unloading; that the Also applicable to Fire Insurance if stipulated.
danger arises from the accidents of the sea,
dispositions of the authority, or faults of men, provided When Co-Insurance Applies
that the circumstances producing the peril should be a. Insurance taken is less than the actual value of the
ascertained and imminent or may rationally be said to thing insured; and
be certain and imminent. This last requirement exclude b. Loss is partial (Insurance Code, Sec. 159)
measures undertaken against a distant peril.
2. For the common safety part of the vessel or of the
cargo or both is sacrificed deliberately.
Page 68 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

"New for Old" Rule
In the case of a partial loss of ship or its equipment, the old
materials are to be applied towards payment for the new.
Unless otherwise stipulated in the policy, a marine insurer
is liable for only 2/3 of the remaining cost of repairs after
such deduction, except that anchors must be paid in full.
(Insurance Code, Sec. 168)
2. Fire Insurance
It is a contract of indemnity by which the insurer for a
consideration agrees to indemnify the insured against loss
of, or damage to, property by fire. (Insurance Code, Sec.
169)
May include loss by lightning, windstorm, tornado or
earthquake and other allied risks, when such risks are
covered by extension to fire insurance policies or under
separate policies.
Ocean Marine Policy vs. Fire Policy
A policy of insurance on a vessel engaged in navigation is
a contract of ocean marine insurance although it insures
against fire risks only.
However, where the hazard is fire alone and the subject is
an unfinished vessel, never afloat for a voyage, the
contract to insure is a fire risk, especially in the absence of
an express agreement that it shall have the incidents of
marine policy, or where it insures materials in a shipyard
for use in constructing vessels.
Importance of Distinction
1. The rules on constructive total loss and abandonment
only apply in marine insurance; and
2. In case of partial loss of a thing insured for less than
its actual value, the insured in a marine policy is a co-
insurer of the uninsured portion (Sec. 159), while the
insured may only become a co-insurer in fire insurance
if expressly agreed upon by the parties. (Sec. 174)

Nature of Fire Alteration

Fire may not be considered a natural disaster or calamity The use of condition of a thing insured from that to which it
since it almost always arises from some act of man or by is limited by the policy made without the consent of the
human means. It cannot be an act of God unless caused insurer, by means within the control of the insured, and
by lightning or a natural disaster or casualty not attributable increasing the risks, entitles the insurer to rescind a
to human agency (Phil. Home Assurance Corp v. CA, G.R. contract of fire insurance.
No. 106999. June 20, 1996)
Effect of an Alteration in the Use or Condition of a
Friendly Fire vs. Hostile Fire Thing Insured from that Limited by the Policy
FRIENDLY FIRE HOSTILE FIRE The insurer may rescind a contract of fire insurance,
When the fire occurs provided the following are present:
So long as a fire burns in a 1. The use or condition of the thing insured is specially
outside of the usual
place where it was limited or stipulated in the policy;
confines or begins as a
intended to burn, and 2. Such use or condition is altered;
friendly fire and becomes
ought to be, it is merely an 3. The alteration is made without the consent of the
hostile by escaping from
agency for the insurer;
the place where it ought to
accomplishment of some 4. The alteration is made by means within the control of
be to some place where it
purpose; not a hostile peril, the insured;
ought not to be.
Insurer is liable. Insurer is not liable. 5. The alteration increases the risk; and
6. There must be a violation of a material policy provision.
Fire Insurance Policy
Instead of paying for actual loss or the valuation stated on Alterations with DO NOT AVOID the policy
the face of the policy, the policy may stipulate a: 1. Where risk of loss is not increased; or
a. Co-insurance clause; or 2. Where the insured property would be useless if
b. Option to rebuild clause - the insurer is given the questioned acts were prohibited
option to reinstate or replace the building damaged
or destroyed or any part thereof, in the same Even though the policy contains certain provisions
condition as it was at the time of the loss. prohibiting specified articles from being kept in the insured
premises, the policy will not be avoided by a violation of
these provisions if the articles are necessary or ordinarily
used in the business conducted in the insured premises,
Page 69 of 250
 ATENEO CENTRAL
BAR OPERATIONS 2019
like benzine kept in a furniture factory for purposes of
operating or for cleaning machinery (Bachrach v. British
American Assur. Co., G.R. No. L-5715, 1910).
- Comparative Table: Alteration in Insurance Code —
Sec. 171 vs. Sec. 77
SEC. 171 SEC. 77
Alteration in the risk or
condition of the thing The insurer is given the
insured which does not right to insert Ts and Cs in
increase the risk will not the policy which, if
affect a contract of fire violated, would avoid it.
insurance
Sec. 171 applies if the policy is silent as to breach of
immaterial provisions.
Sec. 77 applies if the policy stipulates that breach of an
immaterial policy will void the insurance.
3. Casualty Insurance
It is an insurance covering loss or liability arising from
accident or mishap,
Excluding those falling under those types of insurance
such as fire, suretyship, life or marine.
Accident or Health Insurance
Insurance against specified perils which may affect the
person and/or property of the insured. (ex. Personal
Accident, Robbery/Theft Insurance)
Third Party Liability Insurance
Insurance against specified perils which may give rise to
liability on the party of the insured for claims for injuries to
or damage to property of others. (ex. Motor Vehicle
Liability, Professional Liability, Product Liability)
Where the contract is one of indemnity against liability, it
becomes operative as soon as the liability of the person
indemnified arises irrespective of whether or not he has
suffered actual loss (Republic Glass Corp v. Qua, G.R. No.
144413, 2004)
In a third-party liability insurance contract, the insurer
assumes the obligation of paying the injured third party to
whom the insured is liable. 20 The insurer becomes liable
as soon as the liability of the insured to the injured third
person attaches. Prior payment by the insured to the
injured third person is not necessary in order that the
obligation of the insurer may arise. From the moment that
the insured became liable to the third person, the insured
acquired an interest in the insurance contract, which
Page 70 of 250
COMMERCIAL LAW
interest may be garnished like any other credit. (Perla
Compania de Seguros v. Ramolete, G.R. No. L-60887,
1991)
Right of the Injured Person to Sue Insurer of the Party
at Fault
SCENARIO EFFECT
The contract provides for 3rd persons, to whom the
indemnity against liability to insured is liable, CAN
3rd persons sue the insurer
The contract is for 3rd persons CANNOT
indemnity against actual proceed against the
/oss or payment insured
(Guingon v. Del Monte, G.R. No. L-22042, 1967)
Note: The injured person may sue the insurer and the
person at fault, notwithstanding the stipulation against
suing the insurer ("no-action" clause) in the policy.
(Guingon v. Del Monte, G.R. No. L-22042, 1967)
Rules as to Death or Injury Resulting from Accidental
Means
"Intentional"
Implies the exercise of the reasoning faculties,
consciousness and volition
Where the provision of the policy excludes intentional
injury, the intention of the person inflicting is the controlling
factory.
However, if the injuries suffered by the insured clearly
resulted from the intentional act of a third person, the
insurer is relieved from liability as stipulated (Biagtan V.
The Insular Life Assurance Co. Ltd., G.R. No. 26194,
1972).
"Accidental"
That which happens by chance or fortuitously, without
intention or design, which is unexpected, unusual and
unforeseen (Sun Insurance v. CA, G.R. No. 92383, 1992)
The terms "accident" and "accidental" do not, without
qualification, exclude events resulting in damage or loss
due to fault, recklessness or negligence of third parties.
(Pan Malayan Insurance v. CA, G.R. No. 81026, 1990)
"No Fault"
The concept of accident is not necessarily synonymous
with "NO FAULT". It may be utilized simply to distinguish
intentional or malicious acts from negligent or careless acts
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

of man (Pan Malayan Insurance Corp. v. CA, G.R. No. Surety agreement as ancillary contract
81026, 1990). Such undertaking makes a surety agreement an ancillary
contract as it presupposes the existence of a principal
4. Suretyship contract.
An agreement whereby one undertakes to answer, under
specified terms and conditions, for the debt, default or Although the contract of a surety is in essence secondary
miscarriage of another in favor of a third party. (Insurance only to a valid principal obligation, the surety becomes
Code, Sec. 177) liable for the debt or duty of another although it possesses
no direct or personal interest over the obligations nor does
Under Sec. 177, a suretyship is: it receive any benefit therefrom.
a. As a contract or agreement
b. Whereby a party, called the surety, guarantees And notwithstanding the fact that the surety contract is
c. The performance by another party, called the principal secondary to the principal obligation, the surety assumes
or obligor, liability as a regular party to the undertaking.
d. Of an obligation or undertaking in favor of a third party,
called the obligee. Liability of Surety
The extent of a surety's liability is determined by the
Suretyship v. Property Insurance language of the suretyship contract or bond itself. It cannot
SURETYSHIP PROPERTY be extended by implication, beyond the terms of the
INSURANCE contract. Thus, to determine whether petitioner is liable to
Accessory contract Principal contract respondent under the surety bond, it becomes necessary
Parties: Parties: to examine the terms of the contract itself (First Lepanto-
[1] Surety, [1] Insurer, and Taisho Insurance Corporation (now known as FLT Prime
[2] Principal Debtor / [2] Insured Insurance Corporation) vs. Chevron Philippines, inc.
Obligor, and (formerly known as Caltex Philippines, Inc.), G.R. No.
[3] Creditor / Obligee 177839, 2012).
Credit transaction, where Contract of indemnity
the surety assumes
Nature of Liability of Surety
primary liability
a. The liability of the sureties under a bond is joint and
Surety is entitled to In subrogation, the 3rd
reimbursement from the party against whom the severalIsolidary (Arts. 1207-1208, NCC)
principal and his insurer may proceed is not b. The liability is limited to the amount of the bond
guarantors for the loss it a party to the contract (Republic v. CA, G.R. No. 103073, 2001).
may suffer under the c. The liability is contractual as it is determined strictly
contract by the terms of the contract of suretyship in relation to
Generally, can only be May be cancelled the principal contract between the obligor and the
cancelled with the consent unilaterally either by the obligee (Zenith Insurance Corp v. CA, G.R. No. L-
of the oblige or by the insured or by the insurer 57957, Dec. 29, 1982.).
Comm'r or by a court of on grounds provided by
competent jurisdiction law (Sec. 64)
Note: In Suretyship, the obligee accepts the surety's
The obligee murt accept The insurance contract
solidary undertaking to pay if the obligor does not
before the suretyship does not need the
becomes valid and acceptance of any 3rd pay. Such acceptance, however, does not change in any
enforceable party material way the obligee's relationship with the principal
obligor. Neither does it make the surety an active party to
Nature of Suretyship the principal obligee-obligor relationship.
It includes official recognizances, stipulations, bonds or
undertakings issued under Act 536, as amended. Thus, the acceptance does not give the surety the right to
intervene in the principal contract. (Asset Builders
When does Suretyship arise? Corporation vs. Stronghold Insurance Co., Inc., G.R. No.
Suretyship arises upon the solidary binding of a person — 187116, 2010).
deemed the surety — with the principal debtor, for the
purpose of fulfilling an obligation.

Page 71 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Continuing Suretyship Suretyship v. Guaranty

By executing such an agreement, the principal places itself GUARANTY I SURETY
in a position to enter into the projected series of Promise to answer for the debt, default, or miscarriage
transactions with its creditor; with such suretyship of another
agreement, there would be no need to execute a separate Insurer of the debtor's Insurer of the debt —
surety contract or bond for each financing or credit solvency — bound to pay obligates himself to pay
accommodation extended to the principal debtor. A when the principal is when the principal does
continuing suretyship covers current and future loans, unable to pay not pay
provided that, with respect to future loan transactions, they
Undertaking that the Undertaking that the debt
are within the description or contemplation of the contract
debtor shall pay shall be paid
of guaranty (Aniceto G. Saludo, Jr. v. Security Bank
Liable based on an
Corporation, G.R. No. 184041, 2010). independent agreement Liable as a regular party to
to pay if the primary the undertaking
Rules on Payment of Premium debtor fails to do so
The premium is the consideration for furnishing the bond Surety is charged as an
or the guaranty and the obligation to pay the same subsists Guaranty is a collateral
original promisor and
for as long as the liability of the surety shall exist. undertaking
debtor from the beginning
(Reparations Commission v. Universal Deep-Sea Fishing Secondarily or subsidiarily Primary, although a surety
Corporation, A.M. No. 219091-96, 1978) liable is secondary to a valid
1. The premium becomes a debt as soon as the principal obligation
contract of suretyship or bond is perfected and Guarantor contracts to
delivered to the obligor (Insurance Code, Sec. 78) pay if, by use of due Surety undertakes -directly
2. The contract of suretyship or bonding shall not be diligence, the principal the payment w/o reference
valid and binding unless and until the premium cannot pay the debt to principal's solvency
therefor has been paid; Not bound to take notice Ordinarily held to know
3. Where the obligee has accepted the bond, it shall of the non-performance of every default of his
the principal principal
be valid and enforceable notwithstanding that the
Discharged by the mere
premium has not been paid (Philippine -Pryce -
indulgence of the creditor
Assurance v. CA, G.R. No. 107062, 1994); Usually not discharged by
or principal
4. If the contract of suretyship or bond is not the mere indulgence of the
accepted by, or filed with the obligee, the surety creditor or principal
Usually not liable unless
shall collect only a reasonable amount; notified of the principal's
5. If the non-acceptance of the bond be due to the default
fault or negligence of the surety, no service fee, Art. 2080 is applicable to Surety cannot claim
stamps, or taxes imposed shall be collected by the Guarantors release from his obligation
surety; and Statute of Frauds does not
Statute of Frauds applies
6. In the case of a continuing bond (for a term longer apply — suretyship is an
— special promise
original promise
than one year or with no fixed expiration date), the
obligor shall pay the subsequent annual premium
as falls due until the contract is cancelled
end of topic
(Insurance Code, Sec. 179)

Note: Where a contract of surety is terminated under its

terms, the liability of the principal for premiums after such
termination ceases notwithstanding the pendency of a
lawsuit to enforce a liability that accrued during its
stipulated lifetime (Capital Insurance & Surety Co v.
Ronquillo Trading, G.R. No. L-36488, 1983).

Page 72 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

IV. TRANSPORTATION
b) Passenger: One who travels in a public conveyance by
TOPIC OUTLINE UNDER THE SYLLABUS virtue of an express or implied contract with the
common carrier, paying fare or what is the equivalent
IV. TRANSPORTATION thereof (Jesusa Vda. de Nueca v. Manila Railroad
A. Common Carriers Company, G.R. No. 31731-R, 1968)
1. Concept
2. Common Carrier v. Private Carrier Carriage of Goods
3. Diligence Required
a) Shipper: The person who delivers the goods to the
B. Obligations and Liabilities
1. Vigilance over goods carrier for transportation and pays the consideration,
2. Safety of passengers or on whose behalf payment is made (AouiNo &
C. Defenses available to a common carrier HERNANDO AT 4).
a. Proof of negligence b) Carrier: (see earlier discussion)
b. Due diligence in the selection and C) Consignee: The party who receives the goods or
supervision of employees
cargo. The consignee and the shipper may be the
c. Fortuitous event
d. Contributory negligence same.
e. Doctrine of last clear chance
D. Extent of liability 2. Common Carrier vs. Private Carrier
a. Recoverable damages COMMON CARRIER PRIVATE CARRIER
b. Stipulations limiting liability
Required to exercise Required to exercise only
c. Limitations under the Warsaw Convention
extraordinary diligence ordinary diligence
Holds out service to the Holds out service to a
public single person or entity
A. Common Carriers There is presumption of There is no presumption of
fault or negligent in case of fault or negligence
1. Concept loss destruction or
Contract of Transportation deterioration of goods or
It is a contract where natural or juridical persons bind death or injury of
themselves to transport persons, goods or both for passengers
compensation offering their services to the public. Stipulations limiting Stipulations limiting
liability are governed by liability are governed by
Governing Laws: law principle of "autonomy of
a. New Civil Code contracts"
b. Code of Commerce
c. Special Laws A private carrier is one which, without being engaged in the
business of carrying as a public employment, undertakes
to deliver goods or passengers for compensation (Home
In all matters not regulated by the Civil Code, the rights and
Insurance v. American Steamship, G.R. No. L-25599,
obligations of common carriers shall be governed by the
Code of Commerce and by special laws. (Civil Code, Art. 1968)
1766)
The distinction between a common carrier and private
Parties to the Contract of Transportation character lies in the character of the business, such that if
the undertaking is a single transaction, not a part of the
general business or occupation, although involving the
Carriage of Passenger
a) Carrier: The party who binds himself to transport carriage of goods for a fee, the person or corporation
persons, goods or both. The carrier may be a common offering such service is a private carrier. (Schmitz
carrier or a private carrier. Transport v. Transport Venture, G.R. No. 150255, 2005)
o Corporations, firms or associations engaged in the
business of carrying or transporting passengers or Does it mean that if a carrier does not transport
passengers, goods, or both as its principal business it
goods or both, by land, water, or air, for
compensation, offering their services to the public is not a common carrier but a private carrier?
(Civil Code, Art. 1732) No. Art. 1732 of the Civil Code makes no distinction
between one, whose principal business activity is the
Page 73 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
carrying of persons or goods or both, and one who does
such carrying only as an ancillary activity ("sideline"). (De
Guzman vs. Court of Appeals, G.R. No. L-47822, 1988)
Instance When There is Conversion of a Common
Carrier into a Private Carrier
A charter party may transform a common carrier into a
private carrier. However, it must be a bareboat or demise
charter where the charterer mans the vessel with his own
people and becomes, in effect, the owner for the voyage
or service stipulated (Caltex v. Sulpicio Lines, G.R. No.
131166, 1999)
Requisites to be a Common Carrier (PECC)
a. Engaged in business of carrying or transporting goods
or passengers whether as principal or ancillary
business and whether on regular/scheduled or
occasional/unscheduled basis.
b. Offers its services to the Public whether to the general
population or narrow segment of general population
c. For Compensation or fixed price or rate
d. Control of operation or cargo (De Guzman v. CA, G.R.
No. L-47822, 1988)
Instances Where the Supreme Court Held a Person,
Partnership, Firm or Corporation as a Common Carrier
A customs broker is a COMMON CARRIER due to
transportation of goods being integral to the nature of th'e
business (Celt/0 v. UCPB, G.R. No. 148496, 2002)
Under the Petroleum Act of the Philippines (R.A. No. 387),
oil pipeline operators are considered common carriers
(First Philippine Industrial Corp v. CA, G.R. No. 125948,
1998)
The operator of a beach resort that accepts clients by
virtue of a tour package — contracts that included
transportation to and from the resort and the point of
departure is considered as a common carrier. Its services
are so intertwined with its main business as to be properly
considered ancillary thereto. (Cruz v. Sun Holidays, G.R.
No. 186312, 2010)
The bus principally used as a bus service for school
children, and which was hired by a grout) of persons
although the owners were not engaged in the business of
public transportation is a common carrier (Fabre, Jr. v. CA,
G.R. No. 11127, 1996)
A freight forwarder's liability is limited to damages arising
from its own negligence, including negligence in choosing
the carrier; however, where the forwarder contracts to
Page 74 of 250
COMMERCIAL LAW
deliver goods to their destination instead of merely
arranging for their transportation, it becomes liable as a
common carrier for loss or damage to goods. (Unsworth
Transport v. CA, G.R. No. 166250, 2010)
Instance Where the Supreme Court Held a Person,
Partnership, Firm or Corporation NOT as a Common
Carrier
A travel agency is NOT a common carrier. Its covenant
with its customers is simply to make travel arrangements
in their behalf. The relationship between the travel agency
and the passenger is, at most, one of agency (Crisostomo
v. CA, G.R. No. 138334, 2003)
An exclusive contractor and hauler, rendering or offering
its services to an individual or entity (FGU Insurance v.
G.P. Sarmiento Trucking, G.R. No. 141910. 2002)
3. Diligence Required of Common Carriers
Extraordinary Diligence or Responsibility of Common
Carrier Regarding Passengers
a. To carry passengers safely as far as human care and
foresight can provide,
b. Using utmost diligence of a very cautious person,
c. With due regard for all the circumstances (Sulpicio v.
First Lepanto, G.R. No. 140349, 2005).
The Common Carrier Is Not an Insurer of Absolute
Safety
The common carrier is not required to exercise all the care,
skill or diligence the human mind can conceive nor does it
free the passenger from all possible risks. (Japan Airlines
v. CA, G.R. No. 118664, 1998)
B. Obligations Arid Liabilities
Liabilities of Common Carriers
See below discussion in V.B. (Vigilance over Goods) and
V.C. (Safety of Passengers).
Apportioning Of Liability
While the Court ruled in previous cases that the registered
owner or operator of a passenger vehicle is jointly and
severally liable with the driver of the said vehicle for
damages incurred by passengers or third persons as a
consequence of injuries or death sustained in the operation
of the said vehicle, in no case is the actual owner of the
passenger vehicle exempted from liability. In fact, the
registered owner or operator has the right to be
indemnified by the real or actual owner of the amount that
ATENEO CENTRAL
BAR OPERATIONS 2019
he may be required to pay as damage for the injury caused.
(R Transport vs. Luisito Yu, G.R. No 174161, 2015)
1. Vigilance over Goods
Exempting Causes
Extraordinary Diligence or Responsibility of Common
Carrier Regarding Transport of Goods
a. To transport with greatest skill and utmost foresight
b. Utmost vigilance of very cautious person, according to
all circumstances
General Rule: The common carrier is presumed to have
been at fault or to have acted negligently when the goods
transported are lost, destroyed or deteriorated, or when a
passenger dies or is injured.
This is not a conclusive but disputable presumption, and it
may be overcome by contrary evidence of defenses.
Exceptions (Civil Code, Art. 1734): When the same is
due to any of the following causes only: (FESCO)
a. Flood, Earthquake, Storm, lightning or Other natural
disaster or Calamity
Conditions To Avail Of Defense:
1. Natural disaster was the proximate & only cause
2. Exercise of diligence to prevent or minimize loss
before, during and after the occurrence of the
natural disaster
3. No delay (Civil Code, Art. 1740)
Requisites for Caso Fortuito Which Would Exempt
the Carrier from Liability (HIFI)
a. The event must be independent of Human will
b. The occurrence must render it Impossible for the
debtor to fulfill the obligation in a normal manner
c. The obligor must be Free of participation in, or
aggravation of, the injury to the creditor, and
d. The event must have been Impossible to foresee,
or if it could be foreseen, must have been
impossible to avoid.
Fire may not be considered a natural disaster or
calamity, unless it is caused by lightning or by other
natural disasters or calamities (Eastern Shipping Lines
v. IAC, G.R. No. 69044, 1987)
Heavy seas and rains are not case fortuito, but normal
occurrences that an ocean-going vessel would
encounter (Id.)
Page 75 of 250
COMMERCIAL LAW
Mechanical defects are not force majeure if the same
were discoverable by regular and adequate inspections
(Necesito v. Paras, G.R. No. L-10605, 1958)
A tire blow-out is not considered a fortuitous event, as
there are human factors involved in the situation (Yobido
v. CA, G.R. No. 113003, 1997)
Highjacking is not an exempting cause under Art. 1734.
However, common carriers are riot held liable for the acts
or events which cannot be foreseen or are inevitable,
provided that they exercised extraordinary diligence (De
Guzman v. CA, G.R. No. L-47822, 1988)
b. Act of the public Enemy in war, whether international
or civil.
Conditions to Avail of Defense:
1. Act was the proximate & only cause
2. Exercise of diligence to prevent or minimize loss
before, during and after the act
3. No delay (Civil Code, Art. 1740)
c. Act or omission of the Shipper or owner of the goods.
Conditions to Avail of Defense:
1. If proximate cause, exempting
2. If contributory negligence, mitigating
3. Immediate protest by the carrier; otherwise,
carrier may be in estoppel
When the private respondent did furnish the common
carrier with an inaccurate weight of the payloader, the
common carrier is nonetheless liable, for the damage
caused to the machinery could have been avoided by the
exercise of reasonable skill and attention on its part in
overseeing the unloading of such a heavy equipment. It
was the duty of its Chief Officer to determine the weight of
heavy cargoes before accepting them (Compania Maritime
v. CA, G.R. No. 31379, 1997)
d. The Character of the goods or defects in the packing
or in the containers.
Conditions to Avail of Defense:
1. Exercise of due diligence to forestall or prevent
loss
2. Immediate protest by the carrier if the problem
with the goods or the packing or containers is
visible; otherwise, carrier may be in estoppel
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Even granting, for the sake of argument, that the
subject cargo was already in a damaged condition at
the time it was accepted for transportation, the carrier
is not relieved from its responsibility to exercise due
care in handling the merchandise and in employing the
necessary precautions to prevent the cargo from
further deteriorating. (Iron Bulk Shipping PhiIs. Co., v.
Remington Industrial, G.R. No. 136960, 2003)
e. Order or act of competent authority.
Is delivery of the common carrier to the customs
authorities considered as delivery to the consignee so
as to end the carrier's extraordinarily responsibility
over the goods?
No. Delivery of the cargo to the customs authorities is not
delivery to the consignee or "to the person who has a right
to receive them," The goods are still in the hands of the
government and the owner cannot exercise dominion over
them. However, the parties may agree to limit the liability
of the carrier. (Lu Do v. Binamira, G.R. No. L-9840, 1957)

Conditions to Avail of Defense: with or without Contributory Negligence

power to issue order (Ganzon v. CA, G.R. No. L-
48757, 1988)
Note: Mere proof of delivery of the goods in good order to
a common carrier and of their arrival in bad order at their
destination constitutes a prima facie case of fault or
negligence against the carrier. (Eastern Shipping Lines vs.
BPI, G.R. No 182864, 2015)
Summary Table: Art. 1734 and Defenses
DEFENSES CONDITIONS TO AVAIL
Natural disaster, like flood, Proximate and only
storm, earthquake, cause;
lightning (1734111)
Exercise of diligence to
Act of public enemy in war, prevent or minimize loss;
whether international or and
civil (1734[2])
No delay(/ 739, 1740)
If owner or shipper is the
proximate cause,
exempting
Act or omission of owner or If there is contributory
shipper of goods (1734[3]) negligence, mitigating
(1741)
Immediate protest by
carrier; else: estoppel
Exercise of due diligence
to forestall or prevent loss
Character of goods or
(1742)
defect in the packing or • •
container (173414])
Immediate protest by
carrier; else: estoppel
S
Said public authority had
Order or act of competent
the power to issue the
public authority (173415])
order (1743)
The contributory negligence of the passenger does not bar
recovery of damages for his death or injuries, if the
proximate cause thereof is the negligence of the common
carrier, but the amount of damages shall be equitably
reduced.
Are there exceptions to Article 1741 which provides:
"If the shipper or owner contributed to the loss,
destruction, or deterioration of the goods, the
proximate cause thereof being the negligence of the
carrier, the latter shall be liable on damages, which
however, shall be equitably reduced?"
Yes. In collision cases (moving object strikes another
moving object) and allision cases (moving object strikes a
stationary object). In such cases, the parties are liable for
their own damage.
Duration of Liability
In transportation of goods, duration of extraordinary
responsibility:
Lasts from the time the goods are unconditionally
placed in the possession of, and receivedby the carrier
for transportation until the same are delivered, actually
or constructively, by the carrier to the consignee or to
the person who has a right to receive them or to his
duly authorized agent and a reasonable time is given
him to remove the goods. (Nedlloyd B. V. Rotterdam v
Glow Laks, G.R. No. 156330, 2014)
Even when the goods are temporarily unloaded or
stored in transit, unless shipper used right of stoppage
in transitu.
Stoppage In Transitu
Right of an unpaid seller to stop delivery and regain
possession of the goods while they are in transit to the
buyer who has been declared bankrupt/insolvent

Page 76 of 250

)
ATENEO CENTRAL
BAR OPERATIONS 2019
• Even during the time of the storage at warehouse of
common carrier at place of destination, until consignee
is advised of good's arrival and has had opportunity to
remove or dispose of them.
Surrender of the original Bill of Lading is NOT a
condition precedent for a Common Carrier to be
discharged of its contractual obligation. If surrender of the
original Bill of Lading is not an option,
acknowledgment of the delivery by signing the
delivery receipt suffices (National Trucking and
Forwarding v. Lorenzo Shipping, G.R. No. 153563, 2005)
Stipulations for Limitations of Liability
Requisites For A Valid Stipulation In Transportation Of
Goods Contract Between The Common Carrier And
The Shipper Or Owner Limiting The Liability Of The
Former To Less Than The Extraordinary Diligence
(WVR)
a. In Writing
b. Supported by a Valuable consideration other than
the service rendered by the common carrier
c. Reasonable, just, and not contrary to public policy.
Valid Stipulations
a) Limited to value of goods appearing in Bill of Lading
(Civil Code, Art. 1749);
b) Fixed sum that is reasonable and just and agreed upon
(Civil Code, Art. 1750)
o Reasonable and just under the circumstances; and
o It is fairly and freely agreed upon
c) Liability for delay due to strike or riot (Civil Code, Art.
1748)
Factors to be considered when refusing stipulations
limiting liability
a) Refusal to carry goods, UNLESS stipulation limiting
liability is signed by shipper (Civil Code, Art. 1746)
b) Delay or deviation, without just cause (Civil Code, Art.
1747)
c) Lack or presence of competition (Civil Code, Art. 1751)
A Stipulation in Transportation is of Goods Contract
Limiting Liability is Void if: (UUC)
a. Unreasonable
b. Unjust
c. Contrary to public policy
Page 77 of 250
COMMERCIAL LAW
Prohibited Stipulations in a Contract of Carriage (OLD-
FETUs)
a) That the goods are transported at the risk of the Owner
or shipper;
b) That the common carrier will not be Liable for any loss,
destruction, or deterioration of the goods;
c) That the common carrier need not observe any
Diligence in the custody of the goods;
d) That the common carrier shall exercise a degree of
diligence less than that of a good Father of a family, or
of a man of ordinary prudence in the vigilance over the
movables transported;
e) That the common carrier shall not be responsible for the
acts or omission of his or its Employees;
f) That the common carrier's liability for acts committed by
Thieves, or of robbers who do not act with grave or
irresistible threat, violence or force, is dispensed with or
diminished;
That the common carrier is not responsible for the loss,
destruction, or deterioration of goods on account of the
defective condition of the car, vehicle, ship, airplane or
other equipment Used in the contract of carriage.
Liability in the Absence of a Rejection Clause in a
Contract of Carriage of Goods
In the absence of a "rejection clause" in a contract of
carriage of goods, Articles 361, 362, 364, 365 of the Code
of Commerce become applicable. The aforementioned
provisions, in summary, state that if the goods are
delivered but arrived at the destination in damaged
condition, the remedies to be pursued by the consignee
depend on the extent of damage on the goods. (Loadstar
Shipping Company, Incorporated v. Malayan Insurance
Company, Incorporated, G.R. No. 185565, 2014)
Liability for Baggage of Passengers
The checked-in baggage is considered "goods" and the
passenger is considered the shipper/consignee.
For hand-carried baggage, the responsibility of the carrier
will be governed by the Civil Code provisions on
hotelkeepers and innkeepers. The carrier is required to
exercise ordinary diligence and is considered a depositary
(Civil Code, Art. 1754)
Inspection Duties
a) General Rule: Carrier may only inquire into the nature
of the passenger's baggage, but not search nor inspect
its contents
Inquiry may be made as to the nature of passengers'
baggage, but beyond this, constitutional boundaries are
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

already in danger of being transgressed (Nocum V.
Laguna Tayabas, G.R. No. L-23733, October 31,
1969).
b) Exception: Airline companies are required to inspect
each and every cargo brought into the aircraft (R.A. No.
6235, Sec. 8)
Kinds of Baggage
c) Checked-In: Those that are delivered to carrier
d) Hand-Carried: Those in the passenger's custody
Distinctions between Hand-Carried Baggage and
Checked-In Baggage
HAND-CARRIED I CHECK-IN
Applicable Rule
Civil Code, Arts. 1998, Civil Code, Arts. 1733-
2000-2003 1753
Legal Nature of Baggage
Necessary deposit "Goods"
Diligence by Common Carrier
Diligence of a depositary
Extraordinary diligence
(ordinary diligence)
Requisites for Common Carrier's Liability for Hand-
Carried Baggage (Necessary Deposit)
a) Notice was given to the common carrier, or to their
employees, of the baggage brought by the
passengers; and
b) Passenger took precautions which the common
carrier advised relative to the care and vigilance of
their baggage (Civil Code, Art. 1998)
Instances When Common Carrier is Not Responsible
for the Loss and Injury to Passengers' Hand-Carried
Baggage (FAT)
a) Those which may proceed from any Force Majeure
(Civil Code, Art. 2000)
b) Loss due to the Act of passenger or his agents or if the
loss arises from the character of the things (Civil Code,
Art. 2000); and
c) Acts of Thief or robbers, done with the use of arms or
through irresistible force (Civil Code, Art. 2001)
The relationship between the consignee and the arrastre
operator is bailor-bailee or depositor- depositary. An
arrastre operator does not render any service of a maritime
nature. (Unknown Owner ofMV China vs. Asian Terminals,
G.R. No 195661, 2015)
Page 78 of 250
Thus, an arrastre operator should adhere to the same
degree of diligence as that legally expected of a
warehouseman or a common carrier as set forth in
Warehouse Receipts Act and Article 1733 of the Civil
Code. As custodian of the shipment discharged from the
vessel, the arrastre operator must take good care of the
same and turn it over to the party entitled to its possession.
(Marina Port Service, Inc. v. American Home Assurance
Corporation, G.R. 201822, 2015)
Multi- Carriers
When there are several carriers who successively
transport goods, or there is a single "through bill of lading"
issued by one carrier and honored by other carriers, the
following are the rules:
1. Last carrier assumes the obligation of the previous
carriers.
2. Butlast carrier, if not directly responsible, may proceed
against previous carriers.
3. Shipper/ccnsignee has cause of action against carrier
who executed the contract or other carriers who
received goods without reservation.
4. Carriers who made a reservation may still be liable for
their own acts.
Note: Carriers with reservations are NOT relieved of
responsibilities for their own acts
2. Safety Of Passengers
Passenger
One who travels in a public conveyance by virtue of an
express or implied contract with the common carrier paying
fare or what is equivalent thereof. (Jesusa Vda. De Nueca
v. Manila Railroad Company, G.R. No. 31731-R, 1968)
The following are NOT passengers
1. One who has not yet boarded any part of a vehicle
regardless of whether or not he has a ticket;
2. One who remains on a carrier for an unreasonable
length of time after he has been afforded every safe
opportunity to alight;
3. One who has boarded by fraud, stealth, or deceit;
4. One who attempts to board a moving vehicle,
although he has a ticket, unless he attempt be with
the knowledge and consent of the carrier;
5. One who has boarded a wrong vehicle, has been
properly informed of such fact, and on alighting, is
injured by the carrier; or
6. One who rides any part of the vehicle which is
unsuitable or dz.ngerous or which he knows is not
designed or intended for passengers
ATENEO CENTRAL
BAR OPERATIONS 2019
Presumption of Negligence
If the passenger is injured or killed, there is a presumption
of negligence against a carrier. (Civil Code, Art. 1756)
It is presumed that a person driving a motor vehicle has
been negligent if at the time of the mishap, he was violating
a traffic regulation, unless there is proof to the contrary.
(Sps. Estrada v. Philippine Rabbit, G.R. 203902, 2017)
Defenses Available To Common Carrier: (FEPNG)
a. Fortuitous event
b. Extraordinary diligence
c. Passenger is proximate cause of death or injury
d. Employees could not have prevented by ordinary
diligence the willful act or negligence of other
passengers or strangers (which caused the death)
e. If the contract of carriage is gratuitous and there is no
wiilful act or negligence on the part of the carrier, a
stipulation limiting liability is valid
Void Stipulations
General Rule: The responsibility of a common carrier
cannot be dispensed with or lessened by stipulation, by
posting of notices, or by statements on tickets. A reduced
fare cannot justify limited liability.
Exception: If the carriage is gratuitous or for free, a
stipulation limiting liability is valid.
Exception to the Exception: The stipulation does not
cover willful acts or gross negligence of the carrier. (Civil
Code, Arts. 1757-1759)
Reason: Waiver of future fraud or gross negligence is
invalid (Civil Code, Art. 1172)
Note: Moral damages may be recovered in an action for
breach of contract of transportation when death results.
Even if the passenger does not die, the passenger can
recover moral damages if the carrier is guilty of fraud or
bad faith. However, only the passenger is entitled to moral
damages not anyone else.
Duration of Liability
As to the commencement of the duty to exercise
extraordinary diligence, there are two views:
Page 79 of 250
COMMERCIAL LAW
Liberal View v. Strict View
When the passenger places himself in the
LIBERAL care and control of the common carrier
VIEW who accepts him as a passenger
(Philippine law adopts this view)
STRICT When the passenger actually boards or
VIEW places a part of his body inside the carrier
For buses, a bus slowing down means that it is offering
itself to prospective passengers as a common carrier. A
passenger who signals for a ride with his thumb signifies
that he is offering himself as a passenger. (Dangwa v. CA,
G.R. No. 95582, 1991)
Note:
• Do not confuse perfection of the contract of carriage
with the start or commencement of the duty to exercise
extraordinary diligence. The contract of carriage may
be perfected in January while the duty to exercise
extraordinary diligence may only start or commence in
March.
• The duty to exercise extraordinary diligence
terminates, when the passenger alights from the
vehicle at the place of destination and has reasonable
opportunity to leave the common carrier's premises.
• For passengers of ships, the Supreme Court has ruled
that a reasonable time to leave and, pick up baggage
is an hour after arrival (Aboitiz Shipping v. CA, G.R.
No. 84458, 1989).
Liability for Acts of Others
(a) Employees
Common carriers are liable even if the employees may
have acted beyond the scope of their authority or in
violation of the orders of the common carrier.
Note: The defense of the exercise of all the diligence of a
good father in the selection and supervision of their
employees is appropriate only in quasi-delict or cu/pa
aquiliana. Such defense is not available in cu/pa
contractual and therefore, a common carrier cannot raise
such defense in action brought by its passengers based on
contract.
The driver and the owner of the vehicle, regardless of
relationship, are solidary liable to the injuries caused to a
victim of an accident involving the vehicle owner and driven
by 2 different persons. (Dela Cruz v. Octaviano, G.R.
219649, 2017)
ATENEO CENTRAL
BAR OPERATIONS 2019
(b) Passengers
Common Carriers are liable if its employees could have
prevented by ordinary diligence the willful act or negligence
of other passengers or strangers.
Extent of Liability for Damages
Recovery of Moral Damages
a) In breach of contract of carriage, there must be fraud,
bad faith, or death (Sps. Estrada v. Philippine Rabbit
Bus Lines, G.R. No. 203902, 2017)
b) Only injured passengers are entitled to moral damages
due to injuries (Sulpicio Lines v. Curso, G.R. No.
175100, 2010)
0 In case of death, heirs are entitled to moral damages
A passenger brought into the bus a box which he
declared to contain clothes and other harmless items.
It turned out that the box contained firecrackers. A
passenger was injured when the firecrackers
exploded. Is the carrier liable?
No. The carrier is not liable. It exercised extraordinary
diligence. It is to be presumed that a passenger will not
take with him anything dangerous to the life and limbs of
his co-passengers, not to speak of his own. Not to be
considered lightly is the right to privacy to which each
passenger is entitled. (Nocum v. Laguna Tayabas Bus Co.,
G.R. No. L-23733, 1969)
Note: The Supreme Court ruled in Fortune Express v. CA
(G.R. No. 119756, 1999) that: "Under the circumstances,
simple precautionary measures to protect the safety of
passengers, such as frisking passengers and inspecting
their baggages, preferably with non-intrusive gadgets such
as metal detectors, before allowing them on board could
have been employed without violating the passenger's
constitutional rights. In Gacal v. Philippine Air Lines, Inc.,
a common carrier can be liable for failing to prevent a
hijacking by frisking passengers and inspecting their
baggages."
What if the carrier is an airplane?
While there is no law that authorizes bus operators to open
the luggage of their passengers, RA 6235 (Acts Inimical to
Civil Aviation) gives airline companies authority to open
and investigate packages and cargoes loaded on board.
Should the personnel of the airline fail to discover
explosives, it could only be due to their failure to exercise
the utmost diligence of very cautious persons for which the
carrier may be held liable.
Page 80 of 250
COMMERCIAL LAW
Registered Owner Rule for Common Carriers
• General rule: The registered owner is liable directly
and primarily to the general public or to third persons
and not the actual owner or driver of the vehicle.
• Reason: For easy identification.
• Recourse: The registered owner may seek
reimbursement from the actual owner or driver of the
vehicle (the real party at fault) by filing a cross-claim or
third-party complaint in the same case. (BA Finance v.
CA, G.R. No. 98275, 1992)
• Exception: In case of a stolen vehicle, the registered
owner may not be held liable. The Supreme Court has
ruled that to rule otherwise would be absurd (Duavit v
CA, G.R. No. 82318, 1989)
Registered Owner Rule Still Applies -Even in Sales /
Leases
The Registered Owner is not allowed to escape
responsibility by proving that a 3 rd person is the actual and
real owner (Villanueva v. Domingo, G.R. No. 144274,
2004)
The registered owner rule applies even if the registered
owner leased the vehicle to another who is the actual
operator.
Defense: The lessor-owner should register the lease
contract with the LTO in order for the lessor-owner to be
free from liability (PCI Leasing and Finance v. UCPB
General Insurance, G.R. No. 162267, 2008)
What is the "kabit system"?
Kabit system is an arrangement whereby a person who
has been granted a certificate of public convenience allows
other persons who own motor vehicles to operate under
his license sometimes for a fee or percentage of the
earnings.
This is contrary to public policy and therefore void and
inexistent under Art. 1409 of the Civil Code. This
arrangement is a circumvention of the requirement for
license.
Registered owner and buyer who enter into said
transaction are in pani delicto. Therefore, the courts will not
help either of them. (Clean hands doctrine)
0
)
ATENEO CENTRAL
BAR OPERATIONS 2019
C. Defenses Available To A Common Carrier
1. Proof of negligence
There is presumption of fault or negligent in case of loss
destruction or deterioration of goods or death or injury of
passengers because common carriers are required to
exercise extraordinary diligence.
2. Due diligence in the selection and supervision of
employees
The defense of the exercise of all the diligence of a good
father in the selection and supervision of their employees
is appropriate only in quasi-delict or culpa aquiliana. Such
defense is not available in culpa contractual and therefore,
a common carrier cannot raise such defense in action
brought by its passengers based on contract.
The driver and the owner of the vehicle, regardless of
relationship, are solidary liable to the injuries caused to a
victim of an accident involving the vehicle owner and driven
by 2 different persons. (Dela Cruz v. Octaviano, G.R.
219649, 2017)
3. Fortuitous event
Requisites for Caso Fortuito Which Would Exempt the
Carrier from Liability (HIFI)
a. The event must be independent of Human will
b. The occurrence must render it Impossible for the
debtor to fulfill the obligation in a normal manner
c. The obligor must be Free of participation in, or
aggravation of, the injury to the creditor, and
d. The event must have been Impossible to foresee,
or if it could be foreseen, must have been
impossible to avoid.
Conditions To Avail Of Defense:
a. Natural disaster was the proximate & only cause
b. Exercise of diligence to prevent or minimize loss
before, during and after the occurrence of the
natural disaster
c. No delay (Civil Code, Art. 1740)
Fire may not be considered a natural disaster or
calamity, unless it is caused by lightning or by other
natural disasters or calamities (Eastern Shipping Lines
v. IAC, G.R. No. 69044, 1987)
Page 81 of 250
COMMERCIAL LAW
Heavy seas and rains are not caso fortuito, but normal
occurrences that an ocean-going vessel would
encounter (Id.)
Mechanical defects are not force majeure if the same
were discoverable by regular and adequate inspections
(Necesito v. Paras, G.R. No. L-10605, 1958)
A tire blow-out is not considered a fortuitous event, as
there are human factors involved in the situation (Yobido
v. CA, G.R. No. 113003, 1997)
Highjacking is not an exempting cause under Art. 1734.
However, common carriers are not held liable for the acts
or events which cannot be foreseen or are inevitable,
provided that they exercised extraordinary diligence (De
Guzman v. CA, G.R. No. L-47822, 1988)
4. Contributory negligence
Contributory Negligence
The contributory negligence of the passenger does not bar
recovery of damages for his death or injuries, if the
proximate cause thereof is the negligence of the common
carrier, but the amount of damages shall be equitably
reduced.
Are there exceptions to Article 1741 which provides:
"If the shipper or owner contributed to the loss,
destruction, or deterioration of the goods, the
proximate cause thereof being the negligence of the
carrier, the latter shall be liable on damages, which
however, shall be equitably reduced?"
Yes. In collision cases (moving object strikes another
moving object) and allision cases (moving object strikes a
stationary object). In such cases, the parties are liable for
their own damage.
5. Doctrine of last clear chance
That the person who has the last fair chance to avoid the
impending harm and fails to do so is chargeable with the
consequences, without reference to the prior negligence of
the other party. (Picart v. Smith, G.R. No. L-12219, 1918)
The doctrine of last clear chance states that where both
parties are negligent but the negligent act of one is
appreciably later than that of the other, or where it is
impossible to determine whose fault or negligence caused
the loss, the one who had the last clear opportunity to avoid
the loss but failed to do so is chargeable with the loss.
ATENEO CENTRAL
BAR OPERATIONS 2019
(Lapanday Agricultural and Development Corporation v.
Angala, G.R. No. 153076, 2007)
The rule is that the antecedent negligence of a person
does not preclude recovery of damages caused by the
supervening negligence of the !atter, who had the last fair
chance to prevent the impending harm by the exercise of
due diligence. (PNR v. Vizcara, G.R. No. 190022, 2012)
Note: Last Clear Chance Doctrine does not apply in
maritime law. Neither does the concept of contributory
negligence. (Reason: Code of Commerce provides for
specific rules on allocation of liabilities — see Art. 827)
D. Extent Of Liability
1. Recoverable Damages
Recovery of Moral Damages
a) In breach of contract of carriage, there must be fraud,
bad faith, or death (Sps. Estrada v. Philippine Rabbit
Bus Lines, G.R. No. 203902, 2017)
b) Only injured passengers are entitled to moral damages
due to injuries (Sulpicio Lines v. Curso, G.R. No.
175100, 2010)
o In case of death, heirs are entitled to moral damages
A passonger brought into the bus a box which he
declared to contain clothes and other harmless items.
It turned out that the box contained firecrackers. A
passenger was injured when the firecrackers
exploded. Is the carrier liable?
No. The carrier is not liable. It exercised extraordinary
diligence. It is to be presumed that a passenger will not
take with him anything dangerous to the life and limbs of
his co-passengers, not to speak of his own. Not to be
considered lightly is the right to privacy to which each
passenger is entitled. (Nocum v. Laguna Tayabas Bus Co.,
G.R. No. L-23733, 1969)
Note: The Supreme Court ruled in Fortune Express v. CA
(G.R. No. 119756, 1999) that: "Under the circumstances,
simple precautionary measures to protect the safety of
passengers, such as frisking passengers and inspecting
their baggages, preferably with non-intrusive gadgets such
as metal detectors, before allowing them on board could
have been employed without violating the passenger's
constitutional rights. In Gacal v. Philippine Air Lines, Inc.,
a common carrier can be liable for failing to prevent a
hijacking by frisking passengers and inspecting their
baggages."
Page 82 of 250
COMMERCIAL LAW
What if the carrier is an airplane?
While there is no law that authorizes bus operators to open
the luggage of their passengers, RA 6235 (Acts Inimical to
Civil Aviation) gives airline companies authority to open
and investigate packages and cargoes loaded on board.
Should the personnel of the airline fail to discover
explosives, it could only be due to their failure to exercise
the utmost diligence of very cautious persons for which the
carrier may be held liable.
Registered Owner Rule for Common Carriers
General rule: The registered owner is liable directly
and primarily to the general public or to third persons
and not the actual owner or driver of the vehicle.
• Reason: For easy identification.
• Recourse: The registered owner may seek
reimbursement from the actual owner or driver of the
vehicle (the real party at fault) by filing a cross-claim or
third-party complaint in the same case. (BA Finance v.
CA, G.R. No. 98275, 1992)
• Exception: In case of a stolen vehicle, the registered
owner may not be held liable. The Supreme Court has
ruled that to rule otherwise would be absurd (Duavit v
CA, G.R. No. 82318, 1989)
Registered Owner Rule Still Applies Even in Sales /
Leases
The Registered Owner is not allowed to escape
responsibility by proving that a 3rd person is the actual and
real owner (Villanueva v. Domingo, G.R. No. 144274,
2004)
The registered owner rule applies even if the registered
owner leased the vehicle to another who is the actual
operator.
Defense: The lessor-owner should register the lease
contract with the LTO in order for the lessor-owner to be
free from liability (PCI Leasing and Finance v. UCPB
General Insurance, G.R. No. 162267, 2008)
What is the "kabit system"?
Kabit system is an arrangement whereby a person who
has been granted a certificate of public convenience allows
other persons who own motor vehicles to operate under
his license sometimes for a fee or percentage of the
earnings.
This is contrary to public policy and therefore void and
inexistent under Art. 1409 of the Civil Code. This
arrangement is a circumvention of the requirement for
license.
ATENEO CENTRAL
BAR OPERATIONS 2019
Registered owner and buyer who enter into said
transaction are in pan delicto. Therefore, the courts will not
help either of them. (Clean hands doctrine)
2. Stipulations limiting liability
General Rule: The responsibility of a common carrier
cannot be dispensed with or lessened by stipulation, by
posting of notices, or by statements on tickets. A reduced
fare cannot justify limited liability.
Exception: If the carriage is gratuitous or for free, a
stipulation limiting liability is valid.
Exception to the Exception: The stipulation does not
cover willful acts or gross negligence of the carrier. (Civil
Code, Arts. 1757-1759)
Reason: Waiver of future fraud or gross negligence is
invalid (Civil Code, Art. 1172)
Note: Moral damages may be recovered in an action for
breach of contract of transportation when death results.
Even if the passenger does not die, the passenger can
recover moral damages if the carrier is guilty of fraud or
bad faith. However, only the passenger is entitled to moral
damages not anyone else.
Duration of Liability
As to the commencement of the duty to exercise
extraordinary diligence, there are two views:
Liberal View v. Strict View
When the passenger places himself in the
LIBERAL care and control of the common carrier
VIEW who accepts him as a passenger
(Philippine law adopts this view)
STRICT When the passenger actually boards or
VIEW places a part of his body inside the carrier
For buses, a bus slowing down means that it is offering
itself to prospective passengers as a common carrier. A
passenger who signals for a ride with his thumb signifies
that he is offering himself as a passenger. (Dangwa v. CA,
G.R. No. 95582, 1991)
Note:
• Do not confuse perfection of the contract of carriage
with the start or commencement of the duty to exercise
extraordinary diligence. The contract of carriage may
be perfected in January while the duty to exercise
Page 83 of 250
COMMERCIAL LAW
extraordinary diligence may only start or commence in
March.
• The duty to exercise extraordinary diligence
terminates, when the passenger alights from the
vehicle at the place of destination and has reasonable
opportunity to leave the common carrier's premises.
• For passengers of ships, the Supreme Court has ruled
that a reasonable time to leave and pick up baggage
is an hour after arrival (Aboitiz Shipping v. CA, G.R.
No. 84458, 1989).
Liability for Acts of Others
(a) Employees
Common carriers are liable even if the employees may
have acted beyond the scope of their authority or in
violation of the orders of the common carrier.
Note: The defense of the exercise of all the diligence of a
good father in the selection and supervision of their
employees is appropriate only in quasi-delict or cu/pa
aquiliana. Such defense is not available in cu/pa
contractual and therefore, a common carrier cannot raise
such defense in action brought by its passengers based on
contract.
The driver and the owner of the vehicle, regardless of
relationship, are solidary liable to the injuries caused to a
victim of an accident involving the vehicle owner and driven
by 2 different persons. (Dela Cruz v. Octavian°, G.R.
219649, 2017)
(b) Passengers
Common Carriers are liable if its employees could have
prevented by ordinary diligence the willful act or negligence
of other passengers or strangers.
Factors to be considered when refusing stipulations
limiting liability
a) Refusal to carry goods, UNLESS stipulation limiting
liability is signed by shipper (Civil Code, Art. 1746)
b) Delay or deviation, without just cause (Civil Code, Art.
1747)
C) Lack or presence of competition (Civil Code, Art. 1751)
A Stipulation in Transportation is of Goods Contract
Limiting Liability is Void if: (UUC)
a. Unreasonable
b. Unjust
c. Contrary to public policy
ATENEO CENTRAL
BAR OPERATIONS 2019
3. Limitations under the Warsaw Convention
Liability
Causes of action against the carrier
a. Damage sustained in the event of the death or
wounding of a passenger taking place on board the
aircraft or in the course of any of the operations of
embarking or disembarking
b. Loss or damage to any checked in baggage or goods
sustained during the transport by air
c. Delay in the transport by air of passengers, baggage,
or goods
Note:
• The enumeration of causes of action is not an
exclusive list. The Warsaw Convention does not
preclude operation of the Civil Code and other
pertinent taws. (Cathay Pacific Airways, LTD. v. Court
of Appeals, G.R. No. 60501, 1993)
• in the carriage of passengers and baggage, if the
carrier proves that the damage was caused by or
contributed to by the negligence of the persons
suffering the damage the court may, in accordance
with the provisions of its own law, exonerate the carrier
wholly or partly from his liability. (Warsaw, Art. 21(1))
• In the carriage of cargo, if the carrier proves that the
damage was caused by or contributed by the
negligence or other wrongful act or omission of the
person claiming compensation, or the person whom he
derives his rights, the carrier shall be wholly or partly
exonerated from his liability to the claimant to the
extent that such negligence or wrongful act or omission
caused or contributed to the damage. (Warsaw, Art.
21(2))
• The Warsaw Convention allows the carrier to use
contributory negligence as a defense.
Transport by Air
It is the period during which the baggage or goods are in
the charge of the carrier, whether in an airport or on board
an aircraft, or in the case of landing outside an airport, in
any place whatsoever.
Plaintiff's Optional Action for Damages
It must be brought, either at the: (DPCDR)
• Domicile of the carrier;
• Principal place of business of carrier;
• Place where the contract has been made;
• Place of destination
Page 84 of 250
COMMERCIAL LAW
• Residence of plaintiff (added by Montreal Convention)
2. Limitation on Liability
a. For each passenger - limited to 250,000 francs
b. For goods and checked in baggage - limited to 250
francs per kilogram
c. For hand carry - limited to 5,000 francs per
passenger
When Limitations on Liability are Not Applicable
When can a common carrier not avail of this
limitation? (WDWW)
a. Willful misconduct
b. Default amounting to willful misconduct
c. Accepting passengers without ticket
d. Accepting goods without airway bill or baggage
without baggage check
Extinguishment of Right to Damages
The right to damages shall be extinguished if an action is
not brought within 2 years counted from date of arrival
at the place of destination or from date on which the aircraft
ought to have arrived or from date on which the
transportation stopped. (Warsaw, Art. 29)
When 2-Year Period Does Not Apply
If the cause of action is based on the Civil Code such as 4
years if the action is based on tort or quasi-delict (United
Airlines v. Uy, G.R. No. 127768, 1999)
Where the plaintiff was forestalled from filing an action
because of the defendant-airline's delaying tactics (United
Airlines v. Uy, G.R. No. 127768, 1999)
Notice Requirement
• Damage to baggage: within 3 days from receipt
• Damage to goods: within 7 days from receipt
• Delay: within 21 days from receipt
Source: The Montreal Convention, Article 31(2), to
wit:
"In the case of damage, the person entitled to delivery
must complain to the carrier forthwith after the
discovery of the damage, and, at the latest, within
seven days from the date of receipt in the case of
checked baggage and fourteen days from the date of
receipt in the case of cargo. In the case of delay, the
complaint must be made at the latest within twenty-one
days from the date on which the baggage or cargo
have been placed at his or her disposal."
)
ATENEO CENTRAL
BAR OPERATIONS 2019
This is an amendment to article 26(2) of the Warsaw
Convention which states that notice should be done
within 14 days from the delay.
Note: The notice requirement constitutes a condition
precedent. Failure to comply with a condition precedent
constitutes failure to state a cause of action as a ground
for a motion to dismiss. (Federal Express Corp. v.
American Home Insurance Co., GR No. 150094, 2004)
Recall:
Code of Commerce — notice of claim is a condition
precedent to filing an action
COGSA — notice of claim is not a condition precedent to
filing an action
Warsaw Convention — notice of claim is a condition
precedent to filing an action
B. BILL OF LADING
Bill Of Lading
A written acknowledgment of receipt of goods, their
quantity and condition, and an agreement to transport and
deliver them to a specific place to a person named or his
order. It is signed by the captain and shipper, and furnished
to the consignee.
Note: It is not indispensable to the creation of a contract of
carriage. The contract itself arises from the moment goods
are delivered by shipper to carrier and the carrier agrees
to carry them.
1. Threefold Character (RCS)
a. It is a Receipt for the goods shipped
The issuance of a B/L carries the presumption that the
goods were delivered to the carrier issuing the bill and
is prima facie evidence of the receipt of the goods by
the carrier (Saludo v. CA, G.R. No. 95536, 1992)
As a receipt, it recites the date and place of shipment,
describes the goods as to quantity, weight,
dimensions, identification marks, condition, quality,
and value. (Unsworth Transport v. CA, G.R. No.
166250, 2010)
b. It is a Contract between the parties; and
Page 85 of 250
COMMERCIAL LAW
The three parties, namely the shipper, the carrier, and
the consignee undertake specific responsibilities and
assume stipulated obligations. (Keng Hua Paper
Products v. CA, G.R. No. 116863, 1998)
c. It is a Symbolic representation of the goods, i.e., it is a
document of title.
In case of charter of the entire vessel, the B/L issued
by the master to the charterer, as shipper, is in fact and
in legal contemplation merely a receipt and a
document of title, not a contract, for the contract is the
charter party. (Home Insurance Co. v. American
Steamship, G.R. No. L-25599, 1968)
Kinds of Bill Of Lading:
a. Negotiable — goods to be delivered to the bearer or to
the order of the person named
b. Non-negotiable — goods to be delivered to specified
person only
c. Clean — goods received in good condition and/or
correct quantity
d. Foul — goods received in bad condition and/or short
quantity
e. Through — issued by first carrier and honored by the
successive carriers
f. On board— goods received on board the vessel which
will transport the goods
g. Received shipment — goods received for shipment
with or without specifying the vessel which will
transport the goods
Contents of a Bill of Lading
a. The name, surname, and domicile of the shipper.
b. The name, surname, and domicile of the carrier.
c. The name, surname and domicile of the person to
whom or to whose order the effects are sent, or
whether such effects are to be delivered to the bearer
of said bill.
d. The description of the effects, with statement of their
kind, weight, and the exterior marks or signs of the
packages containing the same.
e. The cost of transportation
f. The date on which shipment is made
g. The place of delivery to the carrier
h. The place and time of delivery to the consignee.
I. The indemnity to be paid by the carrier in case of delay,
should there be any agreement on this point. (Code of
Commerce, Art. 350)
ATENEO CENTRAL
BAR OPERATIONS 2019
Jurisprudence on Bill of Lading
• A bill of lading, when properly executed and delivered
to a shipper, is evidence that the carrier received the
goods for shipment.
• Acceptance of a bill of lading without dissent raises the
presumption that all terms were brought to the
knowledge of the shipper and agreed to by him, and in
the absence of fraud or mistake, the shipper is
estopped from denying that he assented to such terms
• A bill of lading is an actionable document, which must
be properly pleaded, and the genuineness and due
execution thereof are deemed admitted unless
specifically denied by the adverse party in the answer
to the complaint.
(Magellan Mftg. Marketing Corp v. CA, G.R. No.
95529, 1991)
Note:
A contract of carriage is a consensual contract. It is not a
real contract. Therefore, delivery of the goods is not
needed to perfect the contract. It is also not a formal or
solemn contract. Therefore, a written contract (such as a
bill of lading) is not needed for perfection of the contract.
The Code does not require a bill of lading to be delivered
to the shipper for the perfection of a contract of
transportation, however, the law grants both the carrier and
the shipper the right to mutually demand from each other
a bill of lading.
If the bill of lading was issued to the order of shipper,
the carrier was under a duty NOT to deliver the
merchandise mentioned in the bill of lading, except upon
presentation of the bill of lading duly indorsed by the
shipper.
The carrier that issued the through bill of lading is
responsible for the carriage of goods by successive
carriers up to the final destination. The carrier may be held
liable even if the goods were not in its actual possession
or custody.
Bill of Lading as Evidence
Code of Commerce, Art. 353. The legal evidence of the
contract between the shipper and the carrier shall be the
bills of lading, by the contents of which all disputes which
may arise with regard to their execution and fulfillment shall
be decided, No exceptions being admissible other than
falsity and material error in the drafting thereof.
After the contract has been comp'ied with, the bill of lading
shall be returned to the carrier who may have issued it, and
Page 86 of 250
COMMERCIAL LAW
by virtue of the exchange of this bill for the object
transported, the respective obligations and actions shall be
considered as cancelled, unless in the same act the claims
which the contracting parties desire to reserve are
manifested in writing, exception being made of the
provisions of Article 366.
In case the consignee cannot return, upon receiving the
merchandise, the bill of lading subscribed by the carrier,
due to its loss or for any other cause, he must give the said
carrier a receipt for the goods delivered, this receipt
producing the same effect as the return of the bill of lading.
Upon the carrier rests the burden of proof to establish
the actual delivery of the merchandise called for in the bill
of lading.
Proof in Absence of Bill of Lading
In the absence of a bill of lading, claims shall be
determined by legal proofs which each of the contracting
parties may present in conformity with the general
provisions established in this Code for commercial
contracts. (Code of Commerce, Art. 354)
Three Kinds of Stipulations in the Bill Of Lading
Limiting Carrier's Liability:
a. Exempting the carrier from any and all liability for the
loss or damage occasioned by its own negligence.
b. Unqualified limitation of such liability to an agreed
valuation
c. Limiting the liability of the carrier to an agreed valuation
unless the shipper declare a higher value and pays a
higher rate of freight. (Provident Insurance v. CA, G.R.
No. 118030, 2004)
Note: Only the third is valid and enforceable. The first and
second kinds of stipulations are void for being contrary to
public policy.
2. Delivery of Goods
The carrier must deliver the goods in the same condition
and quantity in which they were received according to the
bill of lading.
(a) Period of Delivery
When no period fixed: carrier must forward goods in the
first shipment of same or similar goods (Code of
Commerce, Art. 358)
When period fixed: carrier must deliver goods within time
fixed (Code of Commerce, Art. 370)
ATENEO CENTRAL
BAR OPERATIONS 2019
(b) Liability of Carrier When There Is Delay In Delivery
• Indemnity stipulated in the bill of lading (Code of
Commerce, Art. 370)
• If no stipulation, damages due to delay which may
not exceed the current price of the goods on the
day and place of destination (Code of Commerce,
Art. 371)
• Special damages, like unrealized profit, if carrier
foresaw or had notice of circumstances leading to
the probable occurrence of such damage. (Code
of Commerce, Art. 371)
• Full value of goods, if consignee should exercise
abandonment of the goods by advising carrier in
writing prior to arrival at destination. (Code of
Commerce, Art. 371)
(c) Partial/Defective Delivery
• In case of partial delivery, consignee may refuse
to receive those delivered if they cannot be used
independently of those not delivered.
• If the goods delivered were rendered useless for
sale or consumption, consignee may refuse to
receive.
• If the goods delivered are damaged to such an
extent that their value is diminished, carrier must
pay the difference in value as judged by experts.
In the first two cases, consignee may exercise
abandonment and be entitled to the full value of the goods.
3. Period for Filing Claims
a. If the damage is apparent from the exterior of
the package, the claim must be made upon
receipt of the package.
b. If the damage cannot be known from the
exterior, the claim must be made within 24 hours
following the receipt of the merchandise.
i. A longer period may be stipulated but not a
shorter one.
c. After the periods have elapsed, or after the
transportation charges have been paid, no claim
whatsoever shall be admitted against the carrier
with regard to the condition in which the goods
transported were delivered.
(Code of Commerce, Art. 366)
A provisional claim NEED NOT state in detail the list of
goods lost or damaged, so long as the carrier can make a
reasonable verification (Esso v. Manila Railroad, G.R. No.
L-25488, 1979)
Page 87 of 250
COMMERCIAL LAW
A claim made beyond the 24-hour period was valid, where
the consignee made a call to the carrier within 24 hours of
receipt of the goods, then the written notice of claim was
received by the carrier two days after (Aboitiz Shipping
Corporation v. CA, G.R. No. 168402, 2008)
4. Period for Filing Actions / Suit
Claim is a condition precedent to right of action, which
must be filed within 1 year from delivery of goods or denial
of claim.
Distinguish Claim from Suit
File a CLAIM against the carrier, within 24
CLAIM
hours following the receipt of the merchandise
The CLAIM is a condition precedent to the
filing of a SUIT.
SUIT The consignee shall file a suit within 1 year
from either:
- Delivery of the goods; or
- Denial of the claim
Inspection of the Goods by the Carrier
If by well-founded suspicions of the falsity in the
declaration of the contents of a package, the carrier
decides to examine it, he shall make his investigation in the
presence of witnesses, with the assistance of the shipper
or consignee:
Should the shipper and consignee who had to be notified
do not appear, the examination shall be made before a
notary who shall write the memorandum of the result of the
examination, for such purposes which may be proper.
Should the declaration of the shipper appear to be true, the
expenses occasioned by the examination and by the
careful repacking of said package shall be paid by the
carrier, and, in a contrary case, by the shipper. (Code of
Commerce, Art. 357)
Period to Deliver Goods When Not Stipulated
Should there be no period of time previously fixed for the
delivery of the goods, the carrier shall be under the
obligation to forward them with the first shipment of the
same or similar merchandise he may make to the point
where he must deliver them, and should he not do so, the
damages occasioned by the delay shall be suffered by him.
(Code of Commerce, Art. 358)
Change of Route
General Rule: The carrier cannot change the route to be
taken by the vessel (Code of Commerce, Art. 359)
ATENEO CENTRAL
BAR OPERATIONS 2019
Exception: When the carrier and shipper agree due to
force majeure. In this situation, the shipper must pay the
carrier any increase in transportation charges.
Note: If the carrier changes the route without just cause,
the carrier shall be liable for all damages which may be
suffered by the goods. If no route was agreed upon, carrier
must select the shortest, least expensive and practically
passable route (Civil Code, Art. 1747)
Change in the Consignment of Goods
The shipper may change the consignee as long as the
place of delivery is not changed. The change is
considered a novation. The shipper will have to return the
bill of lading to the carrier and a new one issued. The
expenses shall be shouldered by the shipper. (Code of
Commerce, Art. 360)
Instances When the Consignee Can Refuse To Accept
the Goods (DEPADAM)
a. When there is DELAY on account of the fault of the
carrier. (Code of Commerce, Art. 371) In this case,
there will be abandonment. The consignee will have to
inform in writing the carrier of its desire to abandon the
goods before the goods arrive at the point of its
destination.
b. Only a -PART of the goods transported are delivered
and the consignee is able to prove that he cannot
make use of the part without the others (Code of
Commerce, Art. 363)
c. If the goods are DAMAGED and such damage renders
the goods useless for the particular purpose for which
they are to be used. (Code of Commerce, Art. 365)
Claims Brought Against The Carrier On Account Of
Damage Found In The Goods Delivered
There are three periods:
a. Until the time of the receipt of the goods if
delivered uncovered or in packages with
indications of damage or average — consignee has
to immediately give notice to the carrier regarding
the damage of the goods or else his claim will be
barred.
b. Until the payment of its freight charges — Upon
paying freight charges, one forecloses his right to
claim for damages since it would mean that there
is condonation. This however does not apply if the
freight charges were prepaid.
c. During the 24 hours following the delivery of the
goods if the average or damage can only be
ascertained by opening the packages — Failure to
Page 88 of 250
COMMERCIAL LAW
file the notice within 24 hours also bars the claim
with regard to the condition in which the goods
transported were delivered.(Code of Commerce,
Art. 366)
Note: A claim is condition precedent to a right of action,
which must be filed within 1 year from delivery of goods or
denial of claim. (Public Act No. 521, Carriage of Goods by
Sea Act (COGSA), Sec. 3161)
Disputes With Regard to the Condition of the Goods
Transported at the Time of their Delivery to the
Consignee
The goods shall be examined by an expert appointed by
the parties and, in case of disagreement, by a third one to
be appointed by judicial authority, the result of the
examination being reduced to writing; and if the person
interested should not agree to the report of the experts and
do not settle their disputes, said judicial authority shall
order the deposit of the merchandise in a safe warehouse,
and the parties interested shall make use of their rights in
the proper manner. (Code of Commerce, Art. 367)
If the consignee cannot be found or if he refuses to pay the
transportation charges and expenses or to receive the
goods, the deposit of said goods shall be ordered by the
municipal judge, where there is no judge of the first
instance, to be placed at the disposal of the shipper or
sender, without prejudice to third persons having a better
right, this deposit having all the effects of a delivery. (Code
of Commerce. Art. 369)
If the consignee cannot be found or refuses to accept,
it is the duty of the carrier to exercise due diligence to give
the consignor/shipper notice, within a reasonable time, of
the consignee's failure or refusal to accept the goods. The
shipper then will give a directive to the carrier whether to
deposit the goods with the court, to hold the goods or to
return the goods.
If the consignor/shipper cannot be found, the carrier
can deposit the goods with the court (consignation).
Legal Effect of Deposit: There is delivery by the carrier
to the consignee.
Note: A claim is not a condition precedent to an
independent action, which must be filed within 6 years if
there is no written contract or 10 years if there is a written
contract.
 ATENEO CENTRAL
BAR OPERATIONS 2019
Transportation Charges
The consignee has 24 hours within which to pay the
transportation charges following the time of delivery. In
case of delay in making payment, the carrier may demand
judicial sale of the goods to answer for the transportation
charges. (Code of Commerce, Art. 374)
Transportation charges (during transportation and until
delivery) are considered a lien on the goods. This preferred
lien shall not be affected by insolvency of the consignee.
However, it shall be valid for only 30 days. After 30 days,
the lien is extinguished but the carrier can still file an action
as an ordinary creditor. (Code of Commerce, Art. 375)
In a combined or successive transportation services
agreement, who shall be directly liable against the
consignee and/or the shipper?
The carrier that delivered the goods or the carrier that
executed the contract or the carrier that received the goods
(without reservation) shall be liable. However, the carrier
that delivered the goods may proceed against the carrier
at fault for reimbursement. (Code of Commerce, Art. 373)
The goods transported shall be especially obliged to
answer for transportation charges until delivery. This
preferred right shall prescribe eight days from the time of
delivery of the goods. Thereafter, the carrier may ,only be
considered an ordinary creditor. (Code of Commerce, Art.
375)
Note: The 8-day limitation has been amended by Art. 2242
(9) of the New Civil Code providing as follows: With
reference to specific movable property of the debtor, the
following claims or liens shall be preferred: credits for
transportation, upon the goods carried, for the price of the
contract and incidental expenses until their delivery and for
thirty days thereafter."
The carrier shall be liable for non-compliance with laws and
regulations during the entire course of the trip until arrival
at the point of destination except when the non-compliance
is due to false statements of the shipper in the declaration
of the merchandise.
If the carrier acted in accordance with a formal order
received from the shipper or consignee, both shall incur
liability. (Code of Commerce, Art. 377)
Commercial Transactions for Transportation Overland
and Waterways
A contract of trpnsportation overland or waterways of any
kind shall be considered commercial:
Page 89 of 250
J
COMMERCIAL LAW
a. When its object is merchandise or any commercial
effects
b. When, no matter what its object may be, the carrier
is a merchant or is habitually engaged in
transportation for the public.
(Code of Commerce, Art. 349)
Bay and River Licenses are issued by the Collector of
Customs to vessels engaged in the business of towing or
carrying of articles or passengers in bays, harbors, rivers
and inland waters navigable from the sea.
To be eligible for such license, a Vessel must be:
a. Built in the Philippines, and
b. Owned by Philippine citizens or domestic corporations
with capital stock 75% of which is owned by Philippine
citizens.
(RA 1937, Sec. 911)
Exemption: The following vessels are not required to
procure such licenses:
a. Vessels of 3 tons net or less;
b. Yachts, launches, and other crafts used
exclusively for pleasure and recreation;
c. Ship's boats and launches bearing the name and
home port of the vessel plainly marked thereon;
and
d. Vessels owned by the Philippine government
The exemption shall cease if the vessel engages
in the business of transporting cargo or
passengers, for hire.
Note: The State can seize Philippine-registered vessels,
even in the high seas, for violations of the Revised
Administrative Code (or violation of any Philippine law) in
accordance with the State's right to protect itself and its
revenues and this right is not limited within its own territory.
(Asaali v. Commissioner of Customs, G.R. No. L-24170,
1968)
C. MARITIME COMMERCE
Vessels
Those engaged in navigation, whether coastwise or in the
high seas, including floating docks, pontoons, dredges,
scows and any other floating apparatus destined for
maritime commerce. It includes those with motive power
and used as means of water transportation. Vessels are
personal properties.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

navigation of the vessel. In this kind of charter, the

The following are not considered vessels:
a. Local and foreign military vessels;
b. Bancas and watercraft less than 3 tons gross capacity;
and
c. Small watercraft engaged in river and bay traffic.
Requisites of Maritime or Merchant Vessel (NLS)
a. Not an accessory to another vessel
b. Must be Licensed to engage in the transportation of
passengers and/or freight
c. By Sea (not merely in rivers, inlets, lakes coves or
bays) whether in foreign or in coastwise trade
charterer mans and equips the vessel and assumes all
responsibility for its navigation, management and
operation. He thus acts as the owner of the vessel in all
important aspects during the duration of the charter.
b. Time Charter — It is a contract to use the vessel for a
period of time. Liability for damages: ship owner (acts as a
common carrier)
c. Voyage Charter— it is a contract to use a vessel for one
or a series of voyages. Liability for damages: ship owner
(acts as a common carrier)

Special Contracts Of Maritime Commerce 2. Liability of Ship Owners and Ship Agents
a. Charter Parties
b. Bills of lading and contracts of transportation of Persons Participating In Maritime Commerce (SCOS)
passengers on sea voyages a. Ship owner and/or ship agent — the ship agent is the
person entrusted with the provisioning of a vessel or
c. Loans on bottomry and loans on respondentia
d. Marine insurance who represents her in the port in which she may be
found
1. Charter Parties b. Captain or master —the-person in charge of the vessel
and navigates it
A charter party is a contract by which an entire ship or
some principal part thereof is leased by the ship owner to c. Other officers of the vessel (i.e. sailing mate, second
another person for a specified time or voyage. mate, third mate, marine engineer)
d. Supercargo — the person specially employed by the
General Categories or Kinds of Charter Party owner of cargo to take charge of and sell to the best
advantage merchandise which has been shipped, and
a. Bareboat and Contract of Affreightment to purchase returning cargoes and to receive freight
CONTRACT OF
DEMISE / BAREBOAT Ship Captain and Ship Agent
AFFREIGHTMENT
The charterer mans the Roles of the Captain
vessel with its own
a. General agent of the ship owner
people, and is considered The owner of a vessel
b. Technical director of the vessel
the owner pro hac vice (for leases the whole or part of
c. Represents the government of the country under
this occasion only). her to another person to
whose flag he navigates
haul goods for another.
Created by owner
Qualifications of the Captain
completely and Owner retains possession,
a. Filipiro citizen
exclusively relinquishing command, and navigation
b. With skill and capacity to command and direct vessel
possession, command, of the ship.
and navigation to the c. Duly licensed by MARINA
charterer.
Civil Liabilities of the Captain
Charterer is liable for Shipowner •is liable for
damages damages a. Damage to vessel due to lack of skill/negligence
remains as b. Theft, robberies, mutiny by crew
Carrier is converted to Carrier
private carrier — ordinary common carrier — c. Abuse of power
diligence extraordinary diligence d. Unjustified deviation
e. Losses, fines and confiscation imposed due to
Owner Pro Hac Vice — bareboat/demise charterer to violation of law and regulations
whom the owner of the vessel has completely and
Roles of the Ship Agent
exclusively relinquished possession, command and
Page 90 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

a. Maintains and provisions the vessel g. In case of the expenses for Equipping, repairing or
b. Represents vessel in port where she is provisioning the vessel before the loss of the ship.
c. Represents ship owner in judicial/extrajudicial acts
Note: The limited liability rule also applies for claims due
Liabilities of Ship Owners and Ship Agents to death or injuries to passengers, aside from claims for
a. Civil liability for acts of the captain goods. In abandoning the vessel, there is no procedure to
b. Civil liability for contracts entered into by the captain to be followed. There is neither a prescriptive period within
repair, equip and provision the vessel; provided, the which the ship owner can abandon the vessel, provided he
latter were used for the benefit of the vessel is neither estopped from invoking the same nor performs
c. Civil liability for indemnities in favor of 3 rd persons acts inconsistent with abandonment.
arising from the conduct of the captain in the care of
goods and/or safety of passengers Who can exercise the right of abandonment
d. Damages in case of collision by reason of fault, • General rule: Only the ship owner and the ship agent
negligence or lack of skill of the captain or crew. can make an abandonment.
• Exception: in cases of co-ownership of a vessel, a
Note: The ship owner and ship agent are not liable for co-owner may exempt himself from liability by the
obligations contracted by the captain if the latter exceeded abandonment of the part of the vessel belonging to
his powers unless the amount was used to benefit the him.
vessel. • A charterer cannot abandon the vessel since a
charterer does not have rights of ownership over the
Real and Hypothecary Nature of Maritime Law vessel.
To offset against the innumerable hazards and perils in sea
voyages and to encourage ship building in maritime Abandonment may be done to avoid liability in the
commerce, it was deemed necessary to confine the liability following cases:
of the owner or agent arising from the operation of a ship a. For civil liability to third persons arising from the
to the vessel, equipment, and freight or insurance, if any, conduct of the captain in the vigilance over the goods
so that if the ship owner or agent abandon the ship, which the vessel carried;
equipment and freight, his liability would be extinguished. b. For the proportionate contribution of co-owners of the
vessel to a common fund for the results of the acts of
Exceptions: (MESS) the captain referred to in Art. 587 of the Code of
a. Voyage is not Maritime Commerce; and
b. Expenses for equipping, repairing or provisioning of c. For the civil liability incurred by the ship owner in case
the vessel of collision.
C. Vessel is not a common but a Special Charter
d. Vessel would totally Sink or be a total loss due to ship Comparative Table: Abandonment
owner's or ship agent's own fault SHIPOWNER /
CONSIGNEE
SHIP AGENT
Doctrine of Limited Liability What May Be Abandoned?
The liability of the ship owner is limited to the value of the Vessel Goods Shipped
vessel, its equipment and freight. The rule is "no vessel, no Instances When Abandonment
liability." May Be Availed
a) In case of civil liability a) Partial non-delivery,
Exceptions: (AUWDIRE) from indemnities; where the goods are
a. Vessel is not Abandoned (when the ship owner does b) SEC. 138, Insurance useless without the
acts inconsistent with abandonment e.g. salvage) Code; others (363)
b. Ship owner agent/ agent allows his vessel to embark c) In case of leakage of at b) Goods are rendered
least 3/4 of the contents useless for the sale or
in an Unseaworthy condition.
of a cargo containing consumption for the
c. Claims under Workmen's compensation liquids (687) purposes for which
d. Injury/Damage due to ship owner's fault they are properly
e. Vessel is Insured destined (365); and
f. In case the voyage is not maritime but only in River or
gulf
Page 91 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

c) In case of delay • Neither can the captain contract a loan on bottomry for
through the fault of the his own transactions, except on the portion of the
carrier (371) vessel he owns, provided,
Effects o there is no previous loan secured by the entire
a) Transfer of ownership a) Transfer of ownership vessel and
of the vessel from the on the goods on the o no other lien or obligation chargeable against
ship owner to the goods from the
the vessel.
shippers or insurer shipper to the carrier
b) In case of SEC. 138, b) Carrier should pay the • If the captain contracts the loan, the captain must
Insurance Code, the shipper the market disclose his interest in the vessel.(Code of Commerce,
insurer must pay the value of the goods at Art. 617)
insured as if there was the point of destination
actual total loss of the Ordinary Loan v. Loan on Bottomry/Respondentia
vessel ORDINARY LOAN LOAN ON BOTTOMRY
OR RESPONDENTIA
Loans May or may not have a Must have a collateral
A loan on bottomry is an ordinary loan secured by the collateral
vessel while a loan on respondentia is an ordinary loan The collateral of an Must be a vessel or cargo -
secured by the cargo. ordinary loan may be any subject to maritime risks
property, real or personal
Requisites of a Loan on Bottomry/Respondentia: Absolutely repayable Depends upon the safe
(BTPS) arrival at the port of the
a. Ship owner borrows money for use, equipment or collateral of the loan
repair of vessel. subject to usury law not subject to usury law
b. Loan has a term and with extraordinary interest called First lender is the first Last lender is the first
priority priority
premium.
Need not be in writing but Must be in writing
c. Loan is secured by a pledge of the vessel if bottomry
interest shall not be due
loan or pledge of the goods if respondentia loan.
unless expressly
d. Payment depends on the safe arrival of the vessel for stipulated in writing
bottomry loan or safe arrival of the goods for To be binding on third Must be recorded in the
respondentia loan. If the vessel or cargo is lost, persons, need not be registry of vessels of the
obligation to pay is extinguished. registered port of registry of the
vessel
Note: This means the loan is actually subject to a Loss of the collateral if Loss of the collateral
resolutory condition and is not really a secured loan. any, does not extinguish extinguishes the same
•the same
Parties to the Loan
a. Ship owner or ship agent Rules Regarding Loss of Collateral (Code of
b. Owner of the cargo Commerce, Art. 731)
c. Lender
General Rule: If the collateral is lost the loan is
Formal Requirements of Loans on Bottomry or extinguished.
Respondentia
Loans of bottomry or respondentia may be executed: Exceptions:
a. By means of a private instrument; a. Perished due to inherent defects;
b. By means of a policy signed by the contracting parties b. Brought about by malicious conduct of the ship owner;
and the broker taking part therein; c. Barratry of the captain;
c. By means of a public instrument. d. Engaged in unlawful transaction;
e. The vessel in which the cargo was loaded is different
Rules Regarding the Captain from that agreed upon (except if the change was
• The captain is not allowed to contract loans on brought about by force majeure)
respondentia, and if he does, the contract shall be
void.
Page 92 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Instances When the Contract is Considered a Simple The insurers (859) and
Loan and Not a Loan Bottomry or Respondentia lenders on bottomry and
a. When the amount of the loan is larger than the value respondentia shall
of the vessel due to fraudulent means employed by the likewise contribute (732)
borrower, the amount in excess of the value of the Number of Interests Involved
vessel as appraised by experts is a simple loan. (Code One interest involved Several interests involved
of Commerce, Art. 726) Share in the Damage or Expense
b. If the full amount of loan contracted to lead the vessel In proportion to the value
should not be used for the cargo, the balance, if any, 100% share of the owner's property
shall be a simple loan. (Code of Commerce, Art. 727) saved
c. If the collateral is not subject to risk, the contract shall Right to Recover
be a simple loan, with the obligation on the part of the There may be
No reimbursement
borrower to return the principal and interest at the legal reimbursement
rate if that agreed upon should not be lower. (Code of Kinds of Averages (NOTE: Not Exclusive)
Commerce, Art. 729) Code of Commerce, Art. Code of Commerce, Art.
810 811
3. Accidents and Damages in Maritime Commerce
a. Averages Requisites: (CAP-DISL)
b. Collisions a. Common danger present
That both the ship and the cargo, after it has been
a. General and Particular Averages loaded, are subject to the same danger, whether
during the voyage or in the port of loading or
Averages unloading (Magsaysay v. Agan, G.R. No. L-6393,
(1) All extraordinary or accidental expenses which may be 1955)
incurred during the voyage for the preservation of the b. Arising from Accidents of sea, disposition of authority
vessel or cargo or both; c. Peril imminent and ascertained
Expenses incurred to refloat a vessel, which
(2) All damages or deterioration which the vessel may accidentally ran aground, in order to continue its
suffer from the time it puts to sea at the port of voyage, do not constitute general average. Not
departure until it casts anchor at the port of destination, only is there absence of a marine peril, common
and those suffered by the merchandise from the time safety factor, and deliberateness, it is the safety of
they are loaded in the port of shipment until they are the property, and not the voyage, which
unloaded in the port of consignment constitutes the true foundation of general average
(Magsaysay v. Agan, G.R. No. L-6393, 1955)
Simple v. Gross Averages d. Part of vessel or cargo Deliberately sacrificed
PARTICULAR / SIMPLE I GROSS / GENERAL General Rule: Sacrifice is made through the
Definition jettison of the cargo or part of the ship is thrown
overboard during the voyage
Damages or expenses
Damages or expenses Exceptions:
caused to the vessel or deliberative caused in
cargo that did not inure to - Where the sinking of a vessel is necessary to
order to save the vessel, extinguish a fire in a port, roadsteads, creek or bay
the common benefit, and
i ts cargo, or both from real (Code of Commerce, Art. 818)
borne by respective
and known risk (811) - Where cargo is transferred to lighten the ship on
owners (809)
Liability account of a storm to facilitate entry into a port
All the persons having an (Code of Commerce, Arts. 816-818)
interest in the vessel and e. Intended to save vessel and cargo or both
The owner of the goods f. Successful saving of vessel or cargo
the cargo therein at the
which gave rise to the g. Proper legal steps and authority taken.
time of the occurrence of
expense or suffered the the average shall
damage shall bear this Order by Which Items Should Be Jettisoned
contribute to satisfy this
average (810) • Those which are on deck, beginning with those which
average (812)
embarrass the maneuver or damage the vessel,
Page 93 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
preferring, if possible, the heaviest ones with the least
utility and value.
• Those which are below the upper deck, always
beginning with those of the greatest weight and
smallest value, to the amount and number absolutely
indispensable. (Code of Commerce, Art. 815)
Formalities to Incur Gross Average
a. There must be an assembly of the sailing mate and
other officers with the captain including those with
interests in the cargo
b. There must be a resolution of the captain
c. The resolution shall be entered in the log book, with
the reasons and motives and the votes for and against
the resolution
d. The minutes shall be signed by the parties
e. Within 24 hours upon arrival at the first port the captain
makes, he shall deliver one copy of these minutes to
the maritime judicial authority thereat
Arrival Under Stress
'Arrival Under Stress' at the nearest and most convenient
port, when the captain believes the vessel cannot continue
the voyage to the point of destination (Code of Commerce,
Art. 819)
Once the cause of arrival under stress ceases, the captain
must continue with his voyage; otherwise, he is liable for
damage caused by the delay (Code of Commerce, Art.
825, 111)
An arrival of the vessel at a port not of destination on
account of:
a. Lack of provisions;
b. Well-founded fear of seizure; or
c. By reason of accident of the sea disabling it to navigate
Unlawful when:
a. Lack of provisions due to negligence to carry according
to usage and customs
b. Risk of enemy not well known or manifest
c. Defect of vessel due to improper repair
d. Malice, negligence, lack of foresight or skill of captain
Note: Once cause of arrival under stress ceases, captain
must continue voyage; otherwise, he is liable for damage
caused by delay.
Page 94 of 250
COMMERCIAL LAW
Procedure for Making Arrival under Stress
a) The captain believes that the vessel cannot continue
the trip to the port of destination because of:
o Lack of provisions;
o Well-founded fear of seizure, privateers, or pirates;
or
o By reason of any accident of the sea disabling it to
navigate
b) The captain shall assemble the officers and shall
summon the persons interested in the cargo who may
be present, and who may attend the meeting without
the right to vote
c) The officers may agree on the arrival at the nearest and
most convenient port after examining the
circumstances of the case and upon considering the
reason therefor to be well-founded.
o The captain shall have the deciding vote
d) The agreement shall be drafted and entered into the
proper minutes which shall be signed by all in the log
book;
e) The persons interested in the cargo may make the
objections and protests they may deem proper; and
f) The protests shall also be entered in the minutes in
order that the protestants may make use of them in the
manner they may consider advisable.
Rules on Who Will Bear Expenses Arising From an
Arrival under Stress:
The ship owner/agent will always bear the expenses of an
arrival under stress.
If the arrival under stress is legal or lawful, the ship
owner/agent will not be liable for damages caused to the
shippers.
If the arrival under stress is illegal or unlawful, the ship
agent and captain are jointly liable for the damages caused
to the shippers.
b. Collisions
Collision
The impact of two vessels both of which are moving
Allision
The striking of a moving vessel against one that is
stationary.
In case of risk of collision, each vessel must alter course to
starboard (right) to as to pass on the portside (left) of the
other vessel [Rule 18, International Rules of the Road]
ATENEO CENTRAL
BAR OPERATIONS 2019
Cases of Collision
a. Culpable fault - if due to the fault, negligence or lack
of skill of the captain, sailing mate or the complement
of the vessel, ship owner is liable for the losses and
damages (Code of Commerce, Art. 826)
b. Fortuitous - due to fortuitous event or force majeure,
each vessel and its cargo shall bear its own damages
(Code of Commerce, Art. 830)
c. Inscrutable fault - if cannot be determined which of
the 2 vessels caused the collision - each vessel shall
suffer its own damages, and both shall be solidarily
responsible for the losses and damages occasioned to
their cargoes (Code of Commerce, Art. 828)
Error in Extremis
When a collision is imminent through no fault of the vessel
and, due to the confusion and excitement of the situation,
something is done which contributed to the collision or
there is an omission to do something that could have
avoided the collision, the act or omission is a valid defense
against liability since it was done during an extreme
situation.
Note: Last Clear Chance Doctrine does not apply in
maritime law. Neither does the concept of contributory
negligence. (Reason: Code of Commerce provides for
specific rules on allocation of liabilities— see Art. 827)
Shipwreck
It covers all types of loss/wreck of a vessel at sea either by
being swallowed up by the waves or by running against
another vessel or thing at sea or at the coast and the vessel
is rendered incapable of navigation.
Liability in Shipwrecks
General rule: each owner, whether of the vessel or cargo,
shall bear his own loss.
Exception: ship owner or ship agent and/or the shippers
may demand indemnity from the captain if tne shipwreck
was due to his malice, negligence or lack of skill or the
vessel was insufficiently repaired and equipped by the
captain,
Maritime Protest
It is a written statement under oath, made by the master of
a vessel, after the occurrence of an accident or disaster in
which the vessel or cargo is lost or injured, with respect to
the circumstances attending such occurrence.
It is intended to show that the loss or damage resulted from
a peril of the sea, or some other cause for which neither
Page 95 of 250
COMMERCIAL LAW
master nor owner was responsible, and concludes with a
protest against any liability of the owner for such loss or
damage.
It is a condition precedent or prerequisite to recovery of
damages arising from collisions and other maritime
accidents (Code of Commerce, Art. 835)
Made By Whom: Captain
When Made: Within 24 hours from the time the collision
took place (Code of Commerce, Art. 835)
Upon arrival at the place of destination, the captain shall
ratify the protest within 24 hours.
Before Whom Made: Competent authority at the point of
collision or at the first port of arrival, if in the Philippines
and to the Philippine consul, if the collision took place
abroad (Code of Commerce, Art. 835)
Maritime Protest Is Required In The Following Cases
(CASH):
a. Collision;
b. Arrival under stress;
c. Shipwreck; and
d. In case the vessel has gone through a hurricane
or when the captain believes that the cargo has
suffered damages.
Maritime Protest shall also be done if the vessel having
been wrecked, the captain is saved alone or with part of
the crew, in which case, the captain shall appear before
the nearest authority and make a sworn statement of the
facts.
Salvage — it is the compensation allowed to persons by
whose voluntary assistance a ship at sea or her cargo or
both have been saved in whole or in part from an
impending peril, or such property recovered from actual
peril or loss.
In case of shipwreck, derelict or recapture; a service which
one person renders to the owner of a ship or goods by his
own labor, preserving the goods or ship which the owner
or those entrusted with the care of them either abandoned
in distress at sea or are unable to protect and secure.
Note: A permit is required to engage in the salvage
business.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Derelict
It is a ship or cargo which is abandoned and deserted at
sea by those who are in charge of it, without any hope of
recovering it, or without any intention of returning to it.
Elements of a Valid Salvage (MVS)
a. A marine peril
b. Service voluntarily rendered when not required as an
existing duty or from special contract
c. Success, in whole or in part, or that the services
rendered contributed to such success
(Barrios vs. Go Thong, G.R. No. L-17192, 1963)
Contract of Towage
It is a contract to render service whereby a vessel pulls or
tows another from one place to another for compensation.
It is not a contract of carriage or transportation. Only the
owner of the towing vessel can ask for compensation.
(portside). It ceases only when the goods cross the other
side (starboard side). This is also known as the "tackle to
tackle" rule.
Requisites of Contracts Covered By COGSA
a. Contracts for the carriage of goods
b. By sea
c. To and from Philippine ports
d. In foreign trade
Shipper's Guaranty upon Delivery of the Goods to
Carrier for Shipment
The shipper guarantees at the time of shipment the
accuracy of the marks, number, quantity and weight of the
goods. The shipper shall indemnify the carrier against all
losses, damages and expenses arising from errors or
inaccuracies.

Salvage v. Towage The carrier shall be bound before and at the beginning
SALVAGE TOWAGE of the voyage, to exercise due diligence to —
Crew of salvaging ship is Crew of the towing ship 1. Make the ship seaworthy
entitled to salvage, and can does not have any 2. Properly man, equip, and supply the ship
look to the salvaged vessel interest or rights with the 3. Make the holds, refrigerating and cooling
for its share remuneration pursuant to chambers, and all other parts of the ship in which
the contract goods are carried, fit and safe for -reception,
Salvor takes possession Tower has no possessory carriage and, preservation.
and may retain possession lien; only an action for
until he is paid recovery , of sum of Procedure to Recover Loss or Damage to Cargo
money
Court has power to reduce Court has no power to
(b) Notice of Loss or Damage
the amount of remuneration change amount in
towage even if There must be written notice of loss or damage and the
if unconscionable
unconscionable general nature of such loss or damage should be given in
writing to the carrier or his agent at the port of discharge or
at the time of-the removal of the goods.
4. Carriage of Goods by Sea Act (COGSA)
If the loss or damage is not apparent, the notice must be
(a) Application given within 3 days from delivery. The notice of loss or
COGSA only applies to foreign trade. (COGSA, Sec. 1) damage may be endorsed upon the receipt for the goods
However, it may also apply to domestic trade when there given by the person taking delivery thereof.
is a paramount clause in the contract.
The notice or writing need not be given if the state of the
Paramount Clause goods at the time of their receipt has been the subject of
It is a clause which attracts the application of another law Joint Survey Inspection. (COGSA, Sec. 3(6))
to govern the rights and obligations of the parties. Hence,
the parties can stipulate that the COGSA will apply to the Under COGSA, the filing of a notice of claim is NOT a
contract of carriage and not the Civil Code or Code of condition precedent to filing a suit (UCPB v. Aboitiz
Commerce. Shipping G.R. No. 168433, 2009)

Responsibility of the Carrier under the COGSA "Loss" contemplates merely a situation where no delivery
The responsibility of the carrier begins when the goods are at all was made by the shipper of the goods because the
brought to the carrier and crosses one side of the vessel same had perished, gone out of commerce, or
Page 96 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
disappeared in much a way that their existence is unknown
or they cannot be recovered. It does not include a situation
where there was indeed delivery — but delivery to the
wrong person, or a misdelivery (Ang. V. American
Steamship, G.R. No. L-22491, 1967) and damage arising
from delay or late delivery (Mitsui O.S.K. Lines v. CA, G.R.
No. 119571, 1998). In such instance, the Civil Code rules
on prescription shall apply.
(c) Period of Prescription
The prescriptive period is 1 year counted from delivery or
when goods should have been delivered.
In case of misdelivery, prescriptive period is 10 years for
breach of written contract or 4 years for quasi-delict.
Note: COGSA's coverage include insurer of goods. This
means that the prescriptive period applies to suits by the
shipper against insurer. Otherwise, what is prohibited
directly can be done indirectly, and the one-year limitation
would be rendered useless (Filipino Merchants Insurance
Co., Inc. v. Alejandro, G.R. No. 54140, 1986)
Instances When the One-Year Period Applies:
a. Amendment of the pleadings (lack of jurisdiction).
• However, if the dismissal is based on the merits,
the one-year period shall begin from the date of
dismissal of the action
b. Filing of a third party complaint
c. Loss or damage to cargo, excluding delay or
misdelivery.
• Counted from the day the carrier had the last
opportunity to deliver the goods
d. Subrogation (Civil Code, Art. 2207)
The insurer exercising its right of subrogation is bound by
the one-year prescriptive period. However, it does not
apply to the claim against the insurer for the insurance
proceeds because the claim against the insurer is based
on contract — which expires in 10 years (Mayer Steel Pipe
Corp v. CA, G.R. No. 124050, 1997)
The one-year period shall run from delivery to the arrastre
operator and not to the consignee (Union Carbide Phil. v.
Manila Railroad Co., G.R. No. L-27798, 1977)
When The One-Year Period In COGSA Is Interrupted:
a. When an action is filed in court; (Universal Shipping
Lines v. IAC, G.R. No. 74125, 1990); and
b. When there is a contrary agreement between the
parties. (Stevens v. Norddeuscher, G.R. No. L-17730,
1962)
Page 97 of 250
COMMERCIAL LAW
(d) Limitation of Liability under the COGSA
• Maximum of $500 per package or, if not shipped in
packages, per customary freight unit (e.g. metric
ton).
• Nature and value of goods may be declared by
shipper and inserted in bill of lading; declaration is
prima facie evidence and not conclusive on carrier.
• Shipper and carrier may agree on another maximum
amount, but not more than amount of damage
actually sustained.
Note: When packages are shipped in a container supplied
by carrier and the number of such units is stated in the bill
of lading, each "unit" constitutes the "package".
The package/container contemplated by the law to limit the
liability of the carrier should be sensibly related to the unit
in which the shipper packed the goods and described
them, not a large metal object, functionally a part of the
ship, in which the carrier used them to be contained. Such
"container" must be given the same meaning and
classification as a "package" and "customary freight unit."
(Aboitiz Shipping Corporation v. CA, General Accident Fire
and Life Assurance Corp., G.R. No. 89757, 1990)
When Carrier Is Exempt From Liability Under COGSA
a. If nature or value of goods knowingly and fraudulently
misstated by shipper
b. If damage resulted from dangerous nature of shipment
loaded without consent of carrier
c. If unseaworthiness not due to negligence of carrier
d. If deviation was to save life or property at sea
D. THE WARSAW CONVENTION
1. Applicability
The Convention applies to all international carriage of
persons, baggage or cargo performed by aircraft for
reward. It applies equally to gratuitous carriage by aircraft
performed by an air transport undertaking. (Warsaw, Art.
1(1))
"International Transportation By Air" Under The
Warsaw Convention
Under the Warsaw Convention, there are two categories of
"international transportation by air":
1. Where place of departure and place of destination are
situated within the territories of two High Contracting
Parties regardless whether or not there is a break in
transportation or transshipment; and
ATENEO CENTRAL
BAR OPERATIONS 2019
2. Where place of departure and place of destination are
within the territory of a single High Contracting Party if
there is an agreed stopping place within a territory
subject to the sovereignty, mandate or authority of
another power, even though the power is not a party to
the Convention (Warsaw, Art. 1(2))
Requisites for the Application of the Warsaw
Convention
a. It must be an international flight, and
b. The two countries must both be signatories,
except if the international flight is that
contemplated in (2) above.
Carriage to Be Performed By Several Successive Air
Carriers
Carriage to be performed by several successive air carriers
is deemed to be one undivided carriage if it has been
regarded by the parties as a single operation, whether it
had been agreed upon under a single contract or a series
of contracts and it-does not lose its international character
merely because one contract or a series of contracts is to
be performed entirely within the territory of the same State.
(Warsaw, Art. 1(3))
The carrier issuing the passenger's ticket is considered the
principal party and other carriers merely subcontractors
or agents. Hence, the principal may be liable for damages
even when the breach of contract had occurred not on its
own flight but on that of another airline. (British Airways v.
CA, GR No. 121824, 1998)
Reason: The principal, in issuing a ticket with several trips
to be performed by various carriers, guarantees the
performance of the successive carriers (i.e. they have a
space for him and will transport him on a particular
segment of the trip). (Lufthansa German Airlines v. CA, GR
No. 83612, 1994)
Remedy: The remedy of the principal is to file a third-party
complaint or cross-claim against the guilty carrier. (China
Airlines v. Chiok, GR No. 152122, 2003)
Right of Disposition
Subject to his liability to carry out all his obligations under
the contract of carriage, the consignor has the right to
dispose the cargo by withdrawing it at the airport of
departure of destination, or by stopping it in the course of
the journey on any landing, or by calling for it to be
delivered at the place of destination or in the course of the
journey to a person other than the consignee originally
designated, or by requiring it to be returned to the airport
Page 98 of 250
COMMERCIAL LAW
of departure. He must not exercise this right of disposition
in such a way as to prejudice the carrier or other
consignors and he must repay any expenses occasioned
by the exercise of this right.
The right conferred on the consignor ceases at the moment
that of the consignee begins in accordance with Art. 13.
Nevertheless, if the consignee declines to accept the
cargo, or if he cannot be communicated with, the consignor
resumes his right of disposition. (Warsaw, Art. 12)
Except when the consignor exercised his right of
disposition, the consignee is entitled, on arrival of the cargo
at the place of destination, to require the carrier to deliver
the cargo to him, on payment of the charges due and on :
complying with the conditions of carriage. If the carrier
admits the loss of the cargo, or it the cargo has not arrived
at the expiration of 7 days after the date on which it ought
to have arrived, the consignee is entitled to enforce against
the carrier the rights which flow from the contract of
carriage. (Warsaw, Art. 13)
Liability
Causes of action against the carrier
d. Damage sustained in the event of the death or
wounding of a passenger taking place on board the
aircraft or in the course of any of the operations of
embarking or disembarking
e. Loss or damage to any checked in baggage or goods
sustained during the transport by air
f. Delay in the transport by air of passengers, baggage,
or goods
Note:
• The enumeration of causes of action is not an
exclusive list. The Warsaw Convention does not
preclude operation of the Civil Code and other
pertinent laws. (Cathay Pacific Airways, LTD. v. Court
of Appeals, G.R. No. 60501, 1993)
• In the carriage of passengers and baggage, if the
carrier proves that the damage was caused by or
contributed to by the negligence of the persons
suffering the damage the court may, in accordance
with the provisions of its own law, exonerate the carrier
wholly or partly from his liability. (Warsaw, Art. 21(1))
• The Warsaw Convention allows the carrier to use
contributory negligence as a defense.
Transport by Air
It is the period during which the baggage or goods are in
the charge of the carrier, whether in an airport or on board
.L.J
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

an aircraft, or in the case of landing outside an airport, in

any place whatsoever.
Plaintiffs Optional Action for Damages
It must be brought, either at the: (DPCDR)
• Domicile of the carrier;
• Principal place of business of carrier;
• Place where the contract has been made;
• Place of destination
• Residence of plaintiff (added by Montreal Convention)
"In the case of damage, the person entitled to delivery
must complain to the carrier forthwith after the
discovery of the damage, and, at the latest, within
seven days from the date of receipt in the case of
checked baggage and fourteen days from the date of
receipt in the case of cargo. In the case of delay, the
complaint must be made at the latest within twenty-one
days from the date on which the baggage or cargo
have been placed at his or her disposal."

2. Limitation on Liability This is an amendment to article 26(2) of the Warsaw

d. For each passenger - limited to 250,000 francs
e. For goods and checked in baggage - limited to 250
francs per kilogram
f. For hand carry - limited to 5,000 francs per
passenger
When Limitations on Liability are Not Applicable
When can a common carrier not avail of this
limitation? (WDWW)
e. Willful misconduct
f. Default amounting to willful misconduct
9. Accepting passengers without ticket
h. Accepting goods without airway bill or baggage
without baggage check
Convention which states that notice should be done
within 14 days from the delay.
Note: The notice requirement constitutes a condition
precedent. Failure to comply with a condition precedent
constitutes failure to state a cause of action as a ground
for a motion to dismiss. (Federal Express Corp. v.
American Home Insurance Co., GR No. 150094, 2004)
Recall:
Code of Commerce — notice of claim is a condition
precedent to filing an action
COGSA — notice of claim is not a condition precedent to
filing an action

Extinguishment of Right to Damages Warsaw Convention — notice of claim is a condition

The right to damages shall be extinguished if an action is precedent to filing an action
not brought within 2 years counted from date of arrival
at the place of destination or from date on which the aircraft end of topic
ought to have arrived or from date on which the
transportation stopped. (Warsaw, Art. 29)

When 2-Year Period Does Not Apply

If the cause of action is based on the Civil Code such as 4
years if the action is based on tort or quasi-delict (United
Airlines v. Uy, G.R. No 127768, 1999)

Where the plaintiff was forestalled from filing an action

because of the defendant-airline's delaying tactics (United
Airlines v. Uy, G.R. No. 127768, 1999)

Notice Requirement
• Damage to baggage: within 3 days from receipt
• Damage to goods: within 7 days from receipt
• Delay: within 21 days from receipt

Source: The Montreal Convention, Article 31(2), to

wit:

Page 99 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

V. CORPORATION LAW (Provisions of BP 68, A. General Principles

not affected by RA 11232)
Definition of Corporation
TOPIC OUTLINE UNDER THE SYLLABUS An artificial being created by operation of law, having the
right of succession and the powers, attributes and
a. General principles properties expressly authorized by law or incident to its
1. Nationality of corporations existence. (Corporation Code,5 Sec. 2)
a. Place of incorporation test
b. Control test Attributes of a Corporation (Sec. 2)
c. Grandfather rule a. Artificial Being
2. Doctrine of separate juridical personality b. Created by operation of law
3. Doctrine of piercing the corporate veil c. Has right of succession — A corporation has the
b. Stock vs. non-stock corporations capacity for continuous existence despite changes in
c. De facto corporations and corporations by
stockholders/members
estoppel
d. Has only the powers, attributes, and properties
d. Board of Directors and Trustees
1. Basic principles authorized by law or incident to its existence.
a. Doctrine of centralized management
b. Business judgment rule Corporate Fiction
2. Duties, liabilities, and responsibility for
A corporation has a personality separate and distinct from
unlawful acts
e. Powers of corporations the persons composing it. (Civil Code, Arts. 44-47; PNB
t How powers are exercised v. Andrada Electric & Eng'ring Co., G.R. No. 142936,
2. Ultra vires doctrine 2002).
3. Trust fund doctrine
f. Stockholders and Members CLASSES OF CORPORATIONS
1. Doctrine of equality of shares In Relation To The State
2. Proprietary rights
a. Private corporations — Formed by private persons
a. Right to dividends
alone, by or with the State pursuant to a special
b. Right to inspect
c. Pre-emptive right charter or through a general enabling act such as the
d. Right of first refusal Corporation Code.
3. Intra-corporate disputes b. Public corporations - Formed or organized for the
a. Concept government of a portion of the state (e.g., barangay,
b. Individual vs. representative vs. derivative municipality, city and province)
suits Created for political purposes connected with the
g. Foreign Corporations public good in the administration of the civil
1. What constitutes "doing business" government
2. Personality to sue and suability Public Corporation v. Private Corporation
h. Mergers and Consolidations PRIVATE
1. Concept PUBLIC CORPORATION
CORPORATION
2. Effects and limitations
Government holds the Government may hold
controlling interest the controlling interest
Created under the
Corporation Code
Created by its charter
However, GOCC's may
also be created by
special charter

5 For purposes of this part of the reviewer, unless otherwise

specified, all references refer to The Corporation Code, Batasang
Pambansa 68. (hereinafter Corporation Code)
Page 100 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
Created for a public
purpose
Exists primarily for the
government of a portion of Generally created for
the state profit generation
Subject to control and
supervision by the State or
its agency
Note:
• Ownership of the government of the majority of the
shares of a corporation does not by itself constitute
such entity as a public corporation (National Coal Co.,
v. Collector of Internal Revenue, G.R. No. L-22619,
1994).
• When the law vests corporate powers in a government
instrumentality, it does not necessarily become a
corporation; a GOCC must be organized as a stock or
non-stock corporation. (MIAA v. CA, G.R. No. 155650,
2006)
• Test to determine whether a corporation is public
or private: If the corporation is created by the State as
the latter's own agency or instrumentality to help it in
carrying out its governmental functions, then that
corporation is considered public; otherwise it is private.
(Philippine Society for the Prevention of Cruelty to
Animals v. COA, G.R. No. 169752, 2007)
c. Quasi-public corporation
A species of private corporations created by special
law and required to render public service or supply
public wants. (Id.)
Usually covers school districts, water districts and the
like.
d. Government owned and controlled corporations
(GOCCs)
Created under a special law or charter, or
Any agency organized as a stock or non-stock
corporation, vested with functions relating to public
needs whether governmental or proprietary in nature,
and owned by the Government of the Republic of the
Philippines directly or through its instrumentalities
either wholly or, where applicable as in the case of
stock corporations, to the extent of at least a majority
of its outstanding capital stock (R.A. No. 10149)
Note: A GOCC when organized under the Corporation
Code is still a private corporation. But being a GOCC
makes it subject to laws and provisions applicable to the
Government or its entities and subject to the control of the
Page 101 of 250
COMMERCIAL LAW
Government (Cervantes v. Auditor General, G.R. No. L-
4043, 1952).
In order to qualify as a GOCC, one must be organized
either as a stock or non-stock corporation. Section 31
defines a stock corporation as one whose "capital stock is
divided into shares and ... authorized to distribute to the
holders of such shares dividends." Although BCDA has an
authorized capital of P100 Billion, however, it is not divided
into shares of stock; it has no voting shares; and has no
provision which authorizes the distribution of dividends and
allotment of surplus and profits to BCDA's stockholders. It
cannot qualify also as a non-stock corporation because its
primary purpose do not fall within the purposes
enumerated under Section 88. (BCDA v. CIR, G.R. No.
205925, 20 June 2018)
As to Place of Incorporation
a. Domestic — one incorporated under laws of the
Philippines
b. Foreign— one formed, organized or existing under any
laws other than those of the Philippines, and whose
laws allow Filipino citizens and corporations to do
business in its own country. (Sec. 123)
As To Legal Status
a. De jure corporation
7 • Corporation organized in accordance with
requirements of law;
• Every corporation is deemed de jure until proven
otherwise
b. De facto corporation (Sec. 20)
• A corporation claiming in good faith to be a
corporation under the Corporation Code but where
there exists a flaw in its incorporation or it falls
short of the requirements provided by law.
• It is the result of an attempt to incorporate under
an existing law coupled with the exercise of
corporate powers.
• A de facto corporation will incur the same
obligations; have the same powers and rights as a
de jure corporation.
• The due incorporation of any corporation claiming
in good faith to be a corporation under the
Corporation Code, and its right to exercise
corporate powers, shall not be inquired into
collaterally in any private suit.
Under the Rules of Court Rule 66, inquiry must be done by
the Solicitor General in a quo warranto proceeding where
the main issue is the right to exist as a corporation
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
Elements of a de facto corporation d. Corporation by prescription
a. Valid law under which incorporated; The Roman Catholic Church is a corporation by
b. Attempt in good faith to incorporate or "colorable prescription, with acknowledged juridical personality
compliance;" inasmuch as it is an institution which antedated by almost
c. Assumption of corporate powers; and a thousand years any other personality in Europe (Bar/in v
d. Issuance of certificate of incorporation. Ramirez, G.R. No. L-2832, 1906).
(Arnold Hall v. Piccio, G.R. No. L-2598, 1950)
As To Existence of Stocks
Note: A corporation which has failed to file its by-laws a. Stock corporation
within the prescribed period does not ipso facto lose its • Corporation in which capital stock is divided into
powers as such (Sawadjaan v. CA, G.R. No. 141735, shares and is authorized to distribute to holders of
2005). such shares, dividends or allotments of the surplus
profits on the basis of the shares held. (Sec. 3)
c. Corporation by estoppel (Sec. 21)
• Persons, who assume to act as a corporation b. Non-stock corporation (Secs. 87-88)
(exercising corporate functions, entering into • A corporation where no part of its income is
business relations with others) knowing it has no distributable as dividends to members, trustees or
authority to do so shall be liable as general officers
partners. • Any profit obtained as an incident to its operations
• Ostensible corporation cannot use as its defense shall, whenever necessary or proper, be used for
to avoid an obligation or liability its lack of the furtherance of the purpose for which the
corporate personality corporation was organized.
• Third party who assumes an obligation to an
ostensible corporation cannot resist performance As To Control
by alleging the ostensible corporation's lack of a. Holding company — one that controls another as a
personality subsidiary or affiliate by the power to elect its
management; one which holds shares in other
Certain features compared companies for purposes of control rather than for mere
DE JURE DE FACTO investment. (SEC Opinion No. 15-15)
Actually exists for all b. Affiliate company — one that is subject to common
Created in strict or practical purposes as a control of a parent or holding company and operated
substantial conformity with corporation but has no as part of a system. (SEC Opinion No. 15-15)
the statutory requirements legal right to corporate c. Parent and subsidiary companies — when a
for incorporation existence as against the corporation has a controlling financial interest in one or
State more corporations, the one having control is known as
Right to exercise powers the "parent company" and the controlled corporations
are known as the `!subsidiary companies".
Right to exist cannot be cannot be inquired into
successfully attacked even collaterally in any private
in a direct proceeding by suit. But such inquiry may As To Purpose of Incorporation
the State be made by the State in a a. Municipal corporation
proper court proceeding. b. Religious corporation
c. Educational corporation
DE FACTO ESTOPPEL
d. Charitable, Scientific or Vocational corporation
Existence in Law
e. Business corporation
Yes None
Dealings Among Parties on a Corporate Basis As To Number of Members
Not required Required a. Aggregate - a corporation which consists of many
Effect of Lack of Requisites persons united to form a body politic and corporate
Could be a corporation by Not a corporation in any (IEMELIF v. Lazaro, G.R. No. 184088, 2010).
estoppel shape or form b. Corporation sole — Formed by one person who may
be the chief archbishop, bishop, minister, rabbi, or
other presiding elder of any religious denomination,
sect or church.
Page 102 of 250
Li
ATENEO CENTRAL
BAR OPERATIONS 2019
Purpose: created to administer and manage the affairs,
properties, temporalities of the church to which the holder
of the office belongs and also to transmit the same to his
successor in office.
1. NATIONALITY OF CORPORATIONS
Nationality of Corporation
Serves as a legal basis for subjecting the enterprise or its
activities to the laws, the economic and fiscal powers, and
various social and financial policies of the state to which it
is supposed to belong.
Tests:
1. Place of Incorporation
2. Control Test
3. Grandfather Rule
4. War-time — in times of war, nationality of corporation is
determined by the character or citizenship of its
controlling stockholders
5. Investment Test
6. Place of Principal Business
General rule: Nationality of a corporation is ordinarily
determined by the country under whose laws it is
incorporated (Place of Incorporation Test).
Exception: Test of Controlling Ownership
A. Place of Incorporation Test
A corporation is a national of the country under whose laws
it has been organized and registered
B. Control Test
In cases involving properties, business or industries
reserved for Filipinos, in addition to the place of
incorporation test, the nationality of a corporation is
determined by the nationality of the "controlling
stockholders".
Absent any doubt, the Control Test shall be used in
determining the nationality of a corporation specially in
cases where foreign ownership restrictions apply. (SEC
OGC Opinion No. 16-19)
[T]here are two cases in determining the nationality of the
Investee Corporation. The first case is the 'liberal rule',
later coined by the SEC as the Control Test in its 30 May
1990 Opinion, and pertains to the portion in said Paragraph
7 of the 1967 SEC Rules which states, '(s)hares belonging
to corporations or partnerships at least 60% of the capital
of which is owned by Filipino citizens shall be considered
as of Philippine nationality.' Under the liberal Control Test,
Page 103 of 250
COMMERCIAL LAW
there is no need to further trace the ownership of the 60%
(or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at least 60%
Filipino-owned is considered as Filipino. (Narra Nickel
Mining and Development Corp. v. Redmont Consoidated
Mines Corp., G.R. No. 195580, 2014).
The required percentage of Filipino ownership shall be
applied to both:
a. The total number of outstanding shares of stock
entitled to vote in the election of directors, and
b. The total number of outstanding shares of stock,
whether or not entitled to vote in the election of
directors. (SEC Memorandum Circular No. 8, s. 2013,
Sec. 2)
Mere legal title is not enough. Full beneficial ownership of
60 percent of the outstanding capital stocks, coupled with
60 percent of the voting rights, is constitutionally required
for State's grant of authority to operate a public utility.
Thus, voting rights of stocks which have been assigned or
transferred to aliens cannot be considered held by
Philippine citizens or nationals (cannot give proxies to
vote). (Roy Ill v. Herbosa, et al., G.R. No. 207246, 2016)
The definition of "beneficial owner or beneficial ownership
in the SRC-1RR, which is in consonance with the concept
of "full beneficial ownership" in the FIA-IRR, is relevant is
resoling only the question of who is the beneficial owner or
has beneficial ownership of each "specific stock" of the
public utility whose stocks are under review. If the Filipino
has the voting power of the "specific stock", i.e., he can
vote the stock or direct another to vote for him, or the
Filipino has the investment power over the "specific stock",
i.e., he can dispose of that "specific stock" or direct another
to vote or dispose it for him, then such Filipino is the
"beneficial owner" of that "specific stock." Being considered
Filipino, that "specific stock" is them to be counted as part
of the 60% Filipino ownership requirement under the
Constitution. The right to the dividents, jus fruendi—a right
emanating from ownership of that "specific stock"
necessary accrues to its Filipino "beneficial owner." (Roy
III v. Herbosa, G.R. No. 207246 (Resolution), 18 April
2017.)
General rule: The Control Test cannot overcome the
Place of Incorporation Test.
Exception: A corporation organized abroad and registered
as doing business in the Philippines under the Corporation
Code, whose capital outstanding stock and entitled to vote
is wholly owned by Filipinos is a Philippine National. (SEC
ATENEO CENTRAL
BAR OPERATIONS 2019
Opinion No. 04-14 in reference to the Foreign Investments
Act)
Some instances wherein the control test applies:
a. Exploitation of natural resources (> 60%)
• Sec 2, Art XII, 1987 Constitution — policy of the
State is to ensure that the exploitation of natural
resources or the pursuit of the activities deemed to
be of public or national interest are in the control
of the Filipinos
• The State may directly undertake such activities,
or it may enter into co-production, joint venture, or
production sharing agreements with:
o Filipino citizens; or
o Corporations or associations, at least 60%
owned by such citizens
b. Public Utilities (> 60%)
• Sec 11, Art XII, 1987 Constitution — requires that
only domestic corporations with at least 60% of the
capital stock owned by Filipinos may own and
operate public utilities in the Philippines
c. Mass Media (100%)
• Sec 11, Art XVI, 1987 Constitution — ownership of
mass media shall be limited to the citizens of the
Philippines, or to corporations, cooperatives or
associations, wholly-owned and managed by such
citizens (100% Filipino management of the entity)
• Cable Industry - CATV as "a form of mass media
which must, therefore, be owned and managed by
Filipino citizens, or corporations, cooperatives or
associations, wholly-owned and managed ,by
Filipino citizens pursuant to the mandate of the
Constitution." (DOJ Opinion No. 95, series of
1999).
d. Advertising Industry (> 70%)
• Sec 11, Art XVI, 1987 Constitution — only Filipino
citizens or corporations or associations at least
70% of the capital of which is owned by such
citizens shall be allowed to engage in the
advertising agency
C. Grandfather Rule
Where corporate shareholders are present (and when the
Filipino-foreign equity ownership is in doubt), the
percentage of the Filipino equity in corporations is
computed by attributing the nationality of the second or
subsequent tier of ownership to determine the nationality
of the corporate shareholder
Example: MV Corporation and AC Corporation have equal
interest in XYZ Company. MV Corporation is 60% owned
by Filipinos, while AC Corporation is 50% owned by
Filipinos. By the grandfather rule, MV Corporation would
Page 104
COMMERCIAL LAW
have a 30% Filipino interest in XYZ Company (60% of
50%), while AC Corporation would have a 25% Filipino
interest in XYZ Company (50% of 50%). Hence, the total
Filipino interest is only 55%.
The Control test is still the prevailing mode of determining
whether or not a corporation is a Filipino corporation within
the ambit of the natural resources provisions of the
Constitution. But when in the mind of the court there is
doubt based on attendant facts and circumstances, in the
60-40 Filipino equity ownership in the corporation, then it
may apply the grandfather rule (Narra Nickel Mining and
Development Corp. v. Redmont Consoidated Mines Corp.,
G.R. No. 195580, 2014).
War-Time Test
In times of war, nationality of corporation is determined by
the character or citizenship of its controlling stockholders
Investment Test
"P.hilippine_National"
a. A corporation organized under Philippine laws of which
at least 60% of the outstanding capital stock entitled to
vote is owned and held by Filipino citizens; and
b. A corporation organized abroad and registered as
"doing business" in the Philippines under the
Corporation Code of which 100% of the capital stock
entitled to vote belong to Filipinos (P.A. No. 7042, Sec.
3[a], as amended)
Double 60% Rule
Where a corporation and its non-Filipino stockholders own
stock in a SEC-registered enterprise, at least 60% of the
outstanding capital stock and entitled to vote of both
corporations and at least 60% of the members of the Board
of Directors of both corporations must be Filipino citizens
(R.A. No. 7042, Sec. Nal as amended)
Place of Principal Business Test
Residence of a corporation is the place where its principal
office is located, as stated in its Articles of Incorporation.
The place where the principal office of the corporation is to
be located is one of the required contents of the articles of
incorporation to be filed with the SEC (Hyatt Elevators v.
Goldstar, G.R. No. 161026, 2005).
Applied to determine whether a state has jurisdiction over
the existence and legal character of a corporation, its
capacity or powers, internal organization, capital structure,
the rights and liabilities of directors, officers, and
of 250
C
C)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
shareholders towards each other and to creditors and third Entering Into Partnerships
persons. The authority to enter into a partnership relation is
expressly conferred by the charter or the articles of
Corporation v. Partnership incorporation of the corporation;
CORPORATION I PARTNERSHIP
Manner of Creation The nature of the business venture to be undertaken by the
Commences only from the By mere agreement partnership is in line with the business authorized by the
issuance of a Certificate of charter or articles of incorporation of the corporation
Incorporation by the SEC, involved; and
or, in proper cases,
passage of a special law The agreement on the articles of the partnership must
Number of Organizers provide that all the partners shall manage the partnership,
At least 5 persons to a At least 2 and the articles of partnership must stipulate that all the
maximum of 15 partners shall be jointly and severally liable for all the
obligations of the partnership
Powers
Restricted due to limited Subject to the agreement
Can a defective corporation result into a partnership?
powers of partners
(Two Views)
Authority of Those Who Compose It
Stockholders are not Mutual agency between
No Partnership: When investors intended only to invest in
agents of the corporation in partners
a corporate venture with no intention of participating in its
the absence of express
corporate affairs, and the corporation was not formed, no
authority
partnership relation is established by the failure to
Transfers of Interest
incorporate, such investors cannot even be held liable for
Freely transferable without Cannot be transferred the contracts and transactions sued upon. (Pioneer
the consent of other without the consent of the
Insurance v. CA, G.R. No. 84197, 1989)
stockholders (unless there other partners
is a stipulation to the Partnership Exists: However, when there Was a clear
thntrary)
intention to form a partnership veraire through a corporate
Succession vehicle (there was intention to be active participants in the
Existence continues even Death of a partner ends corporation's business), even those who did not directly
as persons who compose it the partnership participate in the contract or transaction being sued upon,
change but benefitted therefrom may be held liable as general
partners. (Lim Tong Lim v. Philippine Fishing Gear, G.R.
Corporations as partners in a partnership No. 136448, 1999)
Old rule: 2. CORPORATE JURIDICAL PERSONALITY
Although a corporation cannot enter into a partnership
contract, it may engage in a joint venture with others 1. Doctrine of Separate Juridical Personality
(Aurbach v. Sanitary Wares Manufacturing, G.R. No. A corporation is a juridical entity with a legal personality
75875, 1989). separate and distinct from those acting for and on its
behalf, and, in general, from the people comprising it; the
The SEC has maintained this stand on the ground that the obligations incurred by the corporation, acting through its
management of a partnership is vested in the partners directors, officers and employees are its sole liabilities
which is contrary to the idea that any exposure of the (Santos v NLRC, G.R. No. 101699, 1996).
corporation should be within the control of the directors.
While a share of stock represents a proportionate or aliquot
Current rule: SEC Guidelines re: Corporations (SEC interest in the property of the corporation, it does not vest
Opinion 16-22) the owner thereof with any legal right or title to any of the
corporate property, his interest in such property being
equitable or beneficial in nature. Shareholders are in no
legal sense the owners 0' corporate property, which is
Page 105 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
owned by the corporation as a distinct legal person
(Magsaysay-Labrador v CA. G.R. No. 58168, 1989).
Corporate Liability
a. Liability for Torts and Crimes
On Torts
A corporation is civilly liable in the same manner as natural
persons for torts, because the rules governing the liability
of a principal for a tort committed by an agent are the same
whether the principal be a natural person or a corporation,
and whether the agent be a natural or artificial person. That
a principal is liable for every tort which he expressly directs
or authorizes, is just as true of a corporation as a natural
person (PNB v. CA, G.R. No. L-27155, 1978).
A corporate officer who caused the tort act to be committed
in the name of the corporation is also personally liable as
a joint-tortfeasor.
The failure of the corporate employer to comply with a legal
duty, such as under the Labor Code to grant separation
pay to employees constitutes tort and its stockholder who
was actively engaged in the management of the business
should be held personally liable (Naguiat v. NLRC, G.R.
No. 116123, 1997).
A corporation can be held liable for the tortuous acts of a
corporate officer, in the absence of a prior express
direction from the BOD, if such was a connected to the
business of the corporation.
The remedy of the corporation is to recover damages
against the acting corporate officer responsible for the
tortuous act.
On Crimes
General rule: Corporations cannot commit felonies under
the RPC for it is incapable of the requisite intent to commit
these crimes.
It also cannot commit crimes that are punishable under
special laws because crimes are personal in nature
requiring personal performance of overt acts.
A corporation cannot be arrested and imprisoned; hence,
cannot be penalized for a crime punishable by
imprisonment.
Exceptions: If the crime is committed by a corporation, the
directors, officers, employees or other officers thereof
responsible for the offense shall be charged and penalized
Page 106 of 250
COMMERCIAL LAW
for the crime, precisely because of the nature of the crime
and the penalty therefore. However, the corporation may
be charged and prosecuted for a crime if the imposable
penalty is fine (Ching v. Secretary of Justice, G.R. No.
164317, 2006).
When a law expressly provides that a corporation may be
proceeded against criminally, the responsible officer will be
held personally liable for the crimes committed by the
corporation. However, such liability will only attach to the
officer when the corporation is directly required by law to
do an act in a given manner, and the same law makes the
person who fails to perform the act in the prescribed
manner expressly liable 'criminally (Sia v. Court of Appeals,
G.R. No. 108222, 1997).
• For example, under the Anti-Money Laundering Act,
juridical persons are also defined as offenders.
b. Recovery of Moral Damages
General rule: A corporation cannot recover moral
damages as it cannot suffer physical suffering and mental
anguish (Prime White Cement v IAC, G.R. No. L-68555,
1993).
Exception: A corporation with a good reputation, if
besmirched, is allowed to recover moral damages upon
proof of existence of factual basis of damage (actual injury)
and its causal relation (Crystal v. BPI, G.R. No. 172428,
2008).
The following Constitutional rights apply to a
corporation:
a. Due process - The due process clause is universal in
its application to all persons without regard to any
differences of race, color, or nationality. Private
corporations, likewise, are "persons" within the scope
of the guaranty insofar as their property is concerned."
(Smith Bell & Co. v. Natividad, G.R. No. 15574, 1919).
b. Equal protection of the law (Smith Bell & Co. v.
Natividad, G.R. No. 15574, 1919)
c. Unreasonable searches and seizures - (Stonehill v.
Diokno, G.R. No. L-19550, 1967).
In organizing itself as a collective body, the corporation
waives no constitutional immunities applicable to it. Its
property cannot be taken without compensation; can only
be proceeded against by due process of law; and is
protected against unlawful discrimination (Bache & Co.
(Phil.), Inc. v. Ruiz, G.R. No. 32409, 1971, citing Hale v.
Henkel, 201 U.S. 43, 50 L.Ed. 652.).
ATENEO CENTRAL
BAR OPERATIONS 2019
Note: The right against self-incrimination has no
application to juridical persons. (Bataan Shipyard v.
PCGG, G.R. No. 75885, 1987)
• The right against self-incrimination refers only to
testimonial compulsion;
• A corporation cannot testify; and
• The State can freely open the books of the
corporation to ensure that it does not exceed its
powers
On Jurisdiction of RTC in Intra-Corporate Disputes:
Section 5 of the Securities Regulation Code transferred the
jurisdiction of the (SEC) over intra-corporate disputes to
RTCs designated by the Supreme Court as commercial
courts. The existence of an intra-corporate dispute must be
clearly alleged in the complaint.
Two tests to determine existence of intra-corporate
dispute
Relationship Test
A dispute is intra-corporate if it is:
1. Between the corporation, partnership or
association and the public;
2. Between the corporation, partnership or
association and the state insofar as its franchise,
permit or license to operate is concerned;
3. Between the corporation, partnership or
association and its stockholders, partners,
members or officers; and
4. Among the stockholders, partners or associates
themselves (Philippine Communications Satellite
Corp. v. Sandiganbayan, G.R. No. 203023, 2015)
Nature of the Controversy Test
The dispute itself must be intrinsically connected with the
regulation of the corporation, partnership or association.
The controversy "must not only be rooted in the existence
of an intra-corporate relationship, but must also refer to the
enforcement of the parties' correlative rights and
obligations under the Corporation Code as well as the
internal and intra-corporate regulatory rules of the
corporation." (Dy Teban Trading Inc. V. Dy, G.R. No.
161803, 2008)
3. Doctrine of Piercing the Veil of Corporate Fiction
Under certain circumstances, the courts may disregard the
separate and distinct personality of the corporation from its
members or stockholders and treat the corporation as a
mere collection of individuals or an aggregation of persons
undertaking business as a group such as when the
Page 107 of 250
COMMERCIAL LAW
corporate legal entity is used as a cloak for fraud or
illegality (Kukan v Reyes, G.R. No. 182729, 2010).
It is an equitable doctrine used as a last resort only when
the objective is to hold the officers and/or stockholders
liable. Thus, in one case, it cannot be applied in order to
declare a foreclosure proceeding a nullity (Umali v. CA, GR
No. 89561, 1990).
a. Grounds for Possible Application of Doctrine
• The parent corporation owns all or most of the capital
of the subsidiary.
• The parent and subsidiary corporations have common
directors or officers.
• The parent company finances the subsidiary.
• The parent company subscribed to all the capital stock
of the subsidiary or otherwise causes its incorporation.
• The subsidiary has grossly inadequate capital.
• The parent corporation pays the salaries and other
expenses or losses of the subsidiary.
• The subsidiary has substantially no business except
with the parent corporation or no assets except those
conveyed to or by the parent corporation.
• The papers of the parent corporation or in the
statements of its officers, the subsidiary is described
as a department or subdivision of the parent
corporation, or its business or financial responsibility is
referred to as the parent corporation's own.
• The parent corporation uses the property of the
subsidiary as its own.
• The directors or executives of the subsidiary do no act
independently in the interest of the subsidiary but take
their orders from the parent corporation.
• The formal legal requirements of the subsidiary are not
observed (Phil. National Bank v. Ritratto Group, Inc.,
GR No. 142616, 2001).
Note: Mere ownership by a single stockholder or by
another corporation of all or substantially all of the capital
stock of the corporation does not justify the application of
the doctrine (Francisco v. Mejia, G.R. No. 141617, 2001).
Classification of piercing cases:
a. Fraud piercing — when corporate entity is used to
commit fraud or justify a wrong or to defend a crime.
b. Alter-ego piercing — when corporate entity is used to
defeat public convenience or is merely a farce since
the corporation is merely the alter ego, business
conduit, or instrumentality of a person or another
entity.
c. Equity cases — when piercing the corporate fiction is
necessary to achieve justice or equity.
Note: The three cases may appear together in one
application (R.F. Sugay & Co. v. Reyes, G.R. No. L-20451,
1964).
ATENEO CENTRAL
BAR OPERATIONS 2019
Implications of the Existence of the Corporate Veil
a) Controlling interest of and/or dealings in
shareholdings
Ownership of a majority of capital stock and the fact that
majority of directors of a corporation are the directors of
another corporation creates no employer-employee
relationship with the latter's employees (DBP v. NLRC,
G.R. No. 86932, 1990; Francisco, et al. v. Mejia, G.R. No.
141617, 2001).
The mere fact that a stockholder sells his shares of stock
in the corporation during the pendency of a collection case
against the corporation, does not make such stockholder
personally liable for the corporate debt, since the disposing
stockholder has no personal obligation to the creditor, and
it is the inherent right of the stockholder to dispose of his
shares of stock anytime he so desires (Remo, Jr. v. IAC,
G.R. No. L-67626, 1989).
Mere substantial identity of the incorporators of the two
corporations does not necessarily imply fraud, nor warrant
the piercing of the veil of corporate fiction. In the absence
of clear and convincing evidence to show that the
corporate personalities were used to perpetuate fraud, or
circumvent the law, the corporations are to be treated as
distinct and separate from each other (Laguio v. NLRC,
G.R. No. 108936, 1996).
b) Transaction amongst the corporation and
stockholders
The transfer of the corporate assets to the stockholder is
not in the nature of a partition but is a conveyance from
one party to another (Stockholders of F. Guanzon and
Sons, Inc. v. Register of Deeds of Manila, G.R. No. L-
18216, 1962).
Note: A corporation may not be made to answer for acts
or liabilities of its stockholders or those of the legal entities
which it may be connected and vice-versa (ARB
Constructions Co., Inc. v. Court of Appeals, G.R. No.
126554, 2000).
c) Pertaining to privileges enjoyed
The tax privileges enjoyed by a corporation do not extend
to its stockholders. A corporation has a personality distinct
from that of its stockholders, enabling the taxing power to
reach the latter when they receive dividends from the
corporation. It must be considered as settled in this
jurisdiction that dividends of a domestic corporation which
are paid and delivered in cash to foreign corporations as
stockholders are subject to the payment of the income tax,
the exemption clause to the charter [of the domestic
corporation] notwithstanding. (Manila Gas Corporation. v.
Collector of Internal Revenue, G.R. No.L-42780, 1936).
Page 108 of 250
COMMERCIAL LAW
d) Assumption as a corporate officer
Being an officer or stockholder of a corporation does not
by itself make one's property also of the corporation, and
vice-versa, for they are separate entities, and that
shareholders are in no legal sense the owners of corporate
property which is owned by the corporation as a distinct
legal person (Good Earth Emporium, Inc. v. CA, G.R. No.
82797, 1991).
The mere fact that one is president of the corporation does
not render the property he owns or possesses the property
of the corporation, since that president, as an individual,
and the corporation, are separate entities (Cruz v. Dalisay,
A.M. No. R-181-D, 1987).
e) Properties, obligations and debts
A corporation has no legal standing to file a suit for
recovery of certain parcels of land owned by its members
in their individual capacity, even when the corporation is
organized for the benefit of the members (Subo ng Bayan
v. Araneta, Inc., G.R. No. L-31061, 1976).
The corporate debt or credit is not the debt or credit of the
stockholder nor is the stockholder's debt or credit that of
the corporation (Traders Royal Bank v. CA, G.R. No. L-
78412, 1989).
Stockholders have no personality to intervene in a
collection case covering the loans of the corporation on the
ground that the interest of shareholders in corporate
property is purely inchoate (Saw v. CA, G.R. No. 90580,
1991).
The interests of payees in promissory notes cannot be off-
set against the obligations between the corporations to
which they are stockholders absent any allegation, much
less, even a scintilla of substantiation, that the parties
interest in the corporation are so considerable as to merit
a declaration of unity of their civil personalities (CKH
Industrial and Development Corp. v. CA, G.R. No. 111890,
1997).
Even when the foreclosure on the assets of the corporation
was wrongful and done in bad faith, the stockholders of the
corporation have no standing to recover for themselves
moral damages. Otherwise, it would amount to the
appropriation by, and the distribution to, such stockholders
of part of the corporation's assets before the dissolution of
the corporation and the liquidation of its debts and liabilities
(APT v. CA, G.R. No. 121171, 1998).
Where real properties included in the inventory of the
estate of a decedent are in the possession of and are
registered in the name of the corporations, in the absence
of any cngency to shred the veil of corporate fiction, the
presumption of conclusiveness of said titles in favor of said
ATENEO CENTRAL
BAR OPERATIONS 2019
corporations should stand undisturbed (Lim v. CA, G.R.
No. 124715, 2000).
f) Third-parties to corporate acts
The fact that respondents are not stockholders of the
disputed corporations does not make them non-parties to
the case. In this case, it is alleged that the aforementioned
corporations are mere alter egos of the directors-
petitioners, and that the former acquired the properties
sought to be reconveyed to FGSRC in violation of
directors-petitioners' fiduciary duty to FGSRC.
The notion of corporate entity will be pierced or
disregarded and the individuals composing it will be treated
as identical if, as alleged in the present case, the corporate
entity is being used as a cloak or cover for fraud or
illegality; as a justification for a wrong; or as an alter ego,
an adjunct, or a business conduit for the sole benefit of the
stockholders (Gochan v. Young, G.R. No. 131889, 2001).
Elements to justify piercing on the ground that the
corporation is a mere alter ego: (CUP)
a. Control — not mere stock control but Complete
Domination — not only of finances, but of policy and
business practice in respect to •the transaction
attacked and must have been such that the corporate
entity as to this transaction had at the time no
separate mind, will or existence of its own.
b. Such control must have been Used by the defendant
to commit a fraud or wrong to perpetuate the
violation of a statutory or other positive legal breach
of duty, or a dishonest and an unjust act in
contravention of the plaintiffs legal right; and,
c. The said control and breach of duty must have
Proximately caused the injury or unjust loss
complained of (PNB v. Andrada Electric &
Engineering Company, GR No. 142936, 2002).
The veil may not always be pierced, especially in the
following circumstances:
(a) Piercing is remedy of last resort and is not available
when other remedies are still available (Umali v. CA,
G.R. No. 89561, 1990).
(b) Piercing is forbidden unless the remedy sought is to
make the stockholder, officer or another
corporation pecuniarily liable for corporate debts
(Umali v. CA, G.R. No. 89561, 1990; Indophil Textile
Mill Workers Union-PTGWO v. Calica, G.R. No.
96490, 1992).
Note: However, piercing in alter ego cases may prevail
even when no monetary claims are sought to be
enforced against the stockholders or officers of the
corporation. (e.g. piercing for other purposes such as
laborer's rights)
Page 109 of 250
COMMERCIAL LAW
(c) Piercing is forbidden when the personal obligations
of an individual are sought to be enforced against
the corporation (Robledo v. NLRC, G.R. No. 110358,
1994).
(d) To disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed
(DBP vs. CA, G.R. No. 126200, 2001).
(e) Piercing of the veil of corporate fiction is not allowed
when it is resorted to justify under a theory of co-
ownership the continued use and possession by
stockholders of corporate properties (Boyer-Roxas
v. Court of Appeals, G.R. No. 100866, 1992).
(f) The piercing doctrine cannot be availed of in order to
dislodge from the jurisdiction of the SEC the
petition for suspension of payments filed under Section
5(e) of Pres. Decree No. 902-A, on the ground that the
petitioning individuals should be treated as the real
petitioners to the exclusion of the petitioning corporate
debtor (Union Bank v. CA, G.R. No. 131729, 1998).
(9) Changing of the petitioner's subsidiary liabilities by
converting them to guarantors of bad debts cannot be
done by piercing the veil of corporate identity (Ramoso
v. CA, G.R. No. 117416, 2000)
(h) Piercing doctrine is meant to prevent fraud, and
cannot be employed to perpetrate fraud or a wrong
(Araneta, Inc. v. Tuason, G.R. No. L-2886, 1952).
(i) Corporate persons are entitled to due process
protection. Thus, failure to implead a corporation in
a suit for recovery of ill-gotten wealth against its
stockholders cannot bind, the corporation itself;
otherwise, its fundamental right to due process will be
violated. (COCOFED v. Republic, G.R. No. 177857-
58, 2016)
(j) Mere ownership of all or nearly all of the capital stocks
of a corporation is not in itself a sufficient reason for
disregarding the fiction of separate corporate
personalities. The probate court applied doctrine of
piercing the corporate veil since Rosario had no other
properties that comprise her estate other than her
shares. Although the intention to protect the shares
from dissipation is laudable, it is still an error to order
tenants to remit payments to the estate. Also, court has
not acquired jurisdiction over Primrose and its
properties. Piercing applies to the determination of
liability not of jurisdiction. It is not available to
confer jurisdiction over a party not impleaded in a
case. (Mayor v. Tiu, G.R. No. 203770, 2016)
Parameters to Illuminate the Piercing Process
For Fraud Cases:
(a) There must have been fraud or an evil motive in the
affected transaction, and the mere proof of control of
the corporation by itself would not authorize piercing;
and
ATENEO CENTRAL
BAR OPERATIONS 2019
(b) The main action should seek for the enforcement of
pecuniary claims pertaining to the corporation against
corporate officers or stockholders.
For Alter-ego Cases:
a) Where the stock of a corporation is owned by one
person whereby the corporation functions only for the
benefit of such individual owner, the corporation and
the individual should be deemed the same (Arnold v.
Whets and Patterson, Ltd., G.R. No. L-20214, 1923).
b) When the corporation is merely an adjunct, business
conduit or alter ego of another corporation, the fiction
of separate and distinct corporation entities should be
disregarded (Tan Boon Bee & Co. v. Jarencio, G.R.
No. L-41337, 1988).
c) Employment of same workers; single place of
business, etc. (La Campana Coffee Factory v.
Kaisahan ng Manggagawa, G.R. No. L-5677, 1953).
d) Use of nominees (Marvel Building v. David, G.R. No.
L-508, 1951)
e) Avoidance of tax. (Yutivo Sons Hardware v. Court of
Tax Appeals, G.R. No. L-13203, 1981; Liddell& Co. v.
Collector ofInternal Revenue, G.R. No. L-9687, 1961).
f) Mixing of bank deposit accounts. (Ramirez Telephone
Corp. v. Bank of America, G.R. No. L-22614, 1969).
g) Where it appears that two business enterprises are
owned, conducted, and controlled by the same parties,
both law and equity will, when necessary to protect the
rights of third persons, disregard the legal fiction that
two corporations are distinct entities and treat them as
identical (Sibagat Timber Corp. v. Garcia, G.R. No.
98185, 1992)
h) Thinly-capitalized corporations (McConnel v. Court of
Appeals, G.R. No. L-10510, 1961).
i) Parent-subsidiary relationship. (Koppel (Phil.), Inc. v.
Yatco, G.R. No. L-47673,1946; Philippine Veterans
Investment Development Corporation v. CA, G.R. No.
85266, 1990)
l) Affiliated companies (Guatson International Travel and
Tours, Inc. v. NLRC, G.R. No. 100322, 1994)
k) Summary of Probative Factors (Philippine National
Bank vs. Ritratto Group, Inc., et al., G.R. No. 142616,
2001; Concept Builders, Inc. v. NLRC, G.R. No.
108734, 1996): Whether the separate personality of
the corporation should be pierced depends on
questions of facts, appropriately pleaded. Mere
allegation that -a corporation is the alter ego of the
individual stockholders is insufficient. The presumption
is that the stockholders or officers and the corporation
are distinct entities. The burden of proving otherwise is
on the party seeking to have the court pierce the veil
of corporate entity (Ramoso v. CA, G.R. No. 117416,
2000).
I) The doctrine applies in this case even in the absence
of evil intent; it applies because of the direct violation
of a central corporate law principle of separating
ownership from management.
Page 110 of 250
COMMERCIAL LAW
m) The doctrine in such cases is based on estoppel: if
stockholders do not respect the separate entity, others
cannot also be expected to be bound by the separate
juridical entity.
n) Piercing in alter ego cases may -prevail even when no
monetary claims are sought to be enforced against the
stockholders or officers of the corporation.
For Equity Cases:
a) When used to confuse legitimate issues (Telephone
Engineering and Service Co., inc. V. WCC, G.R. No.
L-28694, 1981).
b) When used to raise technicalities (Emilio Cano Ent. v.
C1R, G.R. No. L-20502, 1965).
INCORPORATION AND ORGANIZATION
1. Number and Qualifications of Incorporators
Promoter
A person who, acting alone or with others, takes initiative
in founding and organizing the business or enterprise of
the issuer and receives consideration therefor. (Securities
Regulation Code, Sec. 3.10. [R.A. 8799])
Liability of a Promoter
General rule: Promoter is personally liable in the event the
corporation is not_duly incorporated.
Exception: Investors who were not the "moving spirit"
behind the organization of the corporation, but who were
merely convinced to invest in the proposed corporate
venture on the basis of the feasibility study undertaken, are
not liable personally with the corporation for the cost of
such feasibility study.(Caram, Jr. v. CA, G.R. No. L-48627,
1987)
Liability of Corporation for Promoter's Contracts
General Rule: Corporation is not bound to a contract
made by a promoter before its incorporation (Cagayan
Fishing v. Sandiko, G.R. No. L-43350, 1937)
Exceptions:
a) Adopts or ratifies the contract; or
b) Accepts its benefits with knowledge of the terms
thereof (Rizal Light v. Morong, G.R. No. L-20993,
1968)
Ratification is the key element in upholding the validity
and enforceability of promoter's contracts. Without
ratification by a corporation after its due incorporation, a
ccntract entered into in behalf of a corporation yet to be
organized or still in the process of incorporation is void as
0
ATENEO CENTRAL
BAR OPERATIONS 2019
against the corporation (Cagayan Fishing Development
Co., Inc. V. Teodoro Sandiko, G.R. No. L-43350, 1937).
Although a franchise may be treated as a contract,
1. The eventual incorporation of the applicant
corporation after the grant of the franchise; and
2. Its acceptance of the franchise as shown by its
action in prosecuting the application filed with the
Commission for the approval of said franchise,
...not only perfected a contract between the respondent
municipality and Morong Electric but cured the deficiency
in the application of Morong Electric (Rizal Light & Ice Co.,
v. Municipality of Morong, Rizal, G.R. No. L-20993, 1968).
Persons Relevant to the Corporation and their
Qualifications
1) Incorporators — those mentioned in the articles of
incorporation as originally forming and composing the
corporation, having signed the articles and
acknowledged the same before the notary public. They
must be
a. Natural persons (but under RA 720 or Rural
Banks Act, cooperatives can be
incorporators);
b. At least five (5) but not more than fifteen (15);
c. Of Legal Age;
d. :-Majority must be residents of the Philippines;
and
e. Each must own or subscribe to at least one
share (for stock corporations). (Sec. 10)
2) Corporators — All the stockholders and members of a
corporation including the incorporators who are still
stockholders. (Sec. 5)
3) Stockholders — Corporators in a stock corporation
4) Members — Corporators in a non-stock corporation
5) Directors and trustees — The Board of Directors is
the governing body in a stock corporation while the
Board of Trustees is the governing body in a non-stock
corporation.
6) Corporate officers — They are the officers who are
identified as such in the Corporation Code, the Articles
of Incorporation or the By-laws of the corporation.
7) Promoter — A self-constituted organizer who finds an
enterprise or venture and helps to attract investors,
forms a corporation and launches it in business, all
with a view to promotion profits.
2. Corporate Name
A corporation's right to use its corporate and trade name is
a property right, it is a right in rem which it may assert or
protect against the whole world in the same manner aF it
Page 111 of 250
COMMERCIAL LAW
may protect its tangible property against trespass or
conversion (Philips Export v. CA, G.R. No. 96161, 1992)
Statutory Limitations on Use of Corporate Name
The proposed name must not be:
a. Identical;
b. Deceptively or confusingly similar to that of any
existing corporation, including internationally known
foreign corporation though not used in the Philippines,
or to any other name already protected by law; or
c. Patently deceptive, confusing, or contrary to law (Sec.
18)
d. Name already protected by law;
e. Name which is contrary to law, morals or public policy
Other Limitations
a. Must contain the word "Incorporated" or "Inc" unless it
includes the word "Corporation" or "Corp"
b. Those prohibited under special laws
c. Use of generic, geographical, and descriptive terms
and names;
d. Use of trade name of another corporation; and
e. Other policies provided by the SEC Memorandum No.
14, Series of 2000
A corporation has the power to change its name by
following the procedure laid down by law. However, such
,
change would not result in its dissolution.
Doctrine of Secondary Meaning
General Rule: A corporation whose corporate name is a
word or phrase which is generally descriptive or
geographical cannot prevent another corporation, which
uses the same or phrase as its corporate name, from using
such.
Exception: A word or phrase originally incapable of
exclusive appropriation with reference to an article on the
market because geographically or otherwise descriptive,
might nevertheless have been used so long and so
exclusively by one producer with reference to his article
that, in that trade and to that branch of the purchasing
public, the word or phrase has come to mean that the
article was his product. (Lyceum v. CA, G.R. No. 101897,
1993)
Change of Corporate Name
A corporation may change its name by the amendment of
its articles of incorporation, but the same is not effective
until approved by the SEC (Philippine First Insurance Co.
v. Hartigan, G.R. No. L-26370, 1970).
ATENEO CENTRAL
BAR OPERATIONS 2019
A change in the corporate name does not make a new
corporation, and whether affected by special act or under
a general law, has no effect on the identity of the
corporation, or on its property, rights, or liabilities (Republic
Planters Bank v. CA, G.R. No. 93073, 1992).
Other Doctrines: Corporate Name
Similarity in corporate names between two corporations
would cause confusion to the public especially when the
purposes stated in their charter are also the same type of
business (Universal Mills Corp. v. Universal Textile Mills
Inc., G.R. No. L-28351, 1977).
A corporation has no right to intervene in a suit using a
name other than its registered name; if a corporation
legally and truly wants to intervene, it should have used its
corporate name as the law requires and not another name
which it had not registered (Laureano Investment &
Development Corp. v. CA, G.R. No. 100468, 1997).
There would be no denial of due process when a
corporation is sued and judgment is rendered against it
under its unregistered trade name, holding that a
corporation may be sued under the name by which it
makes itself known to its workers (Pison-Arceo Agricultural
Development Corp. v. NLRC, G.R. No. 117890, 1997).
To determine the existence of confusing similarity in
corporate names, the test is whether the similarity is
such as to mislead a person, using ordinary care and
discrimination. In so doing, the court must examine the
record as well as the names themselves. Proof of actual
confusion need not be shown. It suffices that
confusion is probably or likely to occur. (Indian
Chamber of Commerce PhiIs, Inc. v. Filipino Indian
Chamber of Commerce in the Philippines, Inc., G.R. No.
184008, 2016)
3. Corporate Term
General Rule: The Corporation shall exist for the term
specified in the articles of incorporation
Limitations:
a. The corporate term shall not exceed 50 years; unless:
i. Sooner dissolved, or
ii. Extended for periods not exceeding 50 years in
any instance
iii. The extension cannot be made earlier than 5
years prior to the expiration date (Sec. 11)
Page 112 of 250
COMMERCIAL LAW
Exception:
There are justifiable reasons, as determined by the SEC,
for an earlier extension.
How to extend — amend articles of incorporation during
the life of the corporation before the expiry of its term
Upon expiration of the period fixed in the articles of
incorporation, in the absence of compliance with the legal
requisites for the extension of the period, the corporation
ceases to exist and is dissolved ipso facto (PNB v. CFI
Rizal, G.R. No. 63201, 1992)
Doctrine of Relations or Relating Back Doctrine
Where the delay in affecting the amendment is due to the
neglect of the officer with whom the certificate is required
to be filed, or to a wrongful refusal on his part to receive it,
the same will be treated as having been filed before the
expiry date. The doctrine does not apply where the delay
is attributable to the corporation (Alhambra Cigar v. SEC,
G.R. No. L-23606, 1968)
4. Minimum Capital Stock And Subscription
Requirements
At the time of incorporation:
• At least 25% of authorized capital stock as stated in
the articles of incorporation must be subscribed
• At least 25% of total subscription must be paid upon
subscription, the balance to be payable on a date or
dates fixed in the contract of subscription without need
of call, or in the absence of a fixed date or dates, upon
call for payment by the board of directors.
No minimum authorized capital stock required except if
required by special laws (Sec 12 and 13). However, since
the law requires the minimum paid —up capital to be not
less than P5,000, all corporations must have a minimum
authorized capital stock of P5,000.
Call
Term used when the Board formally asks for payment of
the balance of your subscriptions or a part thereof
5. Articles of Incorporation
a. Nature and Function of Articles
The Articles of Incorporation is a basic contract document
in Corporate Law which defines the charter of the
corporation. Section 14 of the Corporation Code provides
that the Articles of Incorporation do not become binding as
the charter of the corporation unless they have been filed
with and registered with the SEC.
ATENEO CENTRAL
BAR OPERATIONS 2019
Note: The Articles of Incorporation defines the contractual
relationships between the State and the corporation, the
stockholders and the State, and between the corporation
and its stockholders (Lanuza v. CA, G.R. No. 131394,
2005).
b. Contents (Sec. 14)
All corporations organized under the Corporation Code
shall file with the Securities and Exchange Commission
Articles of Incorporation in any of the official languages
duly signed and acknowledged by all of the incorporators,
containing substantially the following matters, except as
otherwise prescribed by the Corporation Code or by
special law:
a. The name of the corporation;
b. The specific purpose or purposes for which the
corporation is being incorporated. Where a corporation
has more than one stated purpose, the articles of
incorporation shall state which is the primary purpose
and which is/are the secondary purpose or purposes:
Provided, That a non-stock corporation may not
include a purpose which would change or contradict its
nature as such;
c. The place where the principal office of the
corporation is to be located, which must be within the
Philippines;
d. The term for which the corporation is to exist;
e. The names, nationalities and residences of the
incorporators;
f. The number of directors or trustees, which shall not
be less than five (5) nor more than fifteen (15);
g. The names, nationalities and residences of persons
who shall act as directors or trustees until the first
regular directors or trustees are duly elected and
qualified in accordance with the Corporation Code;
h. If it be a stock corporation, the amount of its
authorized capital stock in lawful money of the
Philippines, the number of shares into which it is
divided, and in case the share are par value shares,
the par value of each, the names, nationalities and
residences of the original subscribers, and the
amount subscribed and paid by each on his
subscription, and if some or all of the shares are
without par value, such fact must be stated;
i. If it be a non-stock corporation, the amount of its
capital, the names, nationalities and residences of the
contributors and the amount contributed by each;
and
Such other matters as are not inconsistent with law
and which the incorporators may deem necessary and
convenient.
Page 113 of 250
COMMERCIAL LAW
Note: Articles of Incorporation must be accompanied by a
sworn statement of the Treasurer elected by the
subscribers showing that at least twenty-five (25%) percent
of the authorized capital stock of the corporation has been
subscribed, and at least twenty-five (25%) of the total
subscription has been fully paid to him in actual cash
and/or in property the fair valuation of which is equal to at
least twenty-five (25%) percent of the said subscription,
such paid-up capital being not less than five thousand
(P5,000.00) pesos.
c. Amendments
Requirement for Amending Articles of Incorporation
(Sec. 16)
a. A legitimate purpose for the amendment;
b. Majority vote of directors or trustees and the vote or
written assent of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock,
without prejudice to the appraisal right of dissenting
stockholders if available, or two-thirds (2/3) of the
members if it be a non-stock corporation.
c. Indication in the articles, by underscoring, the change
or changes made.
d. A copy of amended articles duly certified under oath
by the corporate secretary and a majority of the
directors or trustees stating the fact that said
amendment or amendments have been duly approved
by the required vote of stockholders or members, as
the case may be.
Grounds for Rejecting Incorporation or Amendment to
Articles of Incorporation (Sec. 17)
a. Not in prescribed form;
b. Illegal purpose;
C. False Treasurer's affidavit; and
d. Non-compliance with required Filipino stock
ownership.
The Commission shall give the corporation a reasonable
time to correct or modify objectionable portions.
Note: A favorable recommendation of the appropriate
government agency to the effect that such article or
amendment is in accordance with law is required in the
following types of corporation:
• Banks, banking and quasi-banking institutions
• Building and loan associations
• Insurance companies
• Public utilities
• Educational institutions
• Other corporations governed by special laws
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
d. Non-Amendable Items: b. Requisites of Valid By-Laws:
• Names of incorporators a. It must be consistent with the Corporation Code, other
• Names of incorporating directors/trustees pertinent laws and regulations.
• Names of original subscribers to capital stock and b. It must be consistent with the Articles of Incorporation.
subscribed and paid-up capital c. It must be reasonable and not arbitrary or oppressive.
• Treasurer-in-trust elected by original subscribers d. It must not disturb vested rights, impair contract or
property rights of stockholders or members or create
• Members who contributed to the initial capital of non-
obligations unknown to law.
stock corporation
• Witnesses and acknowledgments
c. Binding Effects
The by-laws of the corporation are its own private laws that
6. Registration And Issuance Of Certificate Of
have the same effect as the laws of the corporation. They
Incorporation
are deemed written into the charter. Thus, they become
The articles of incorporation does not become binding as
part of the fundamental laws of the corporation which are
the charter of the corporation unless it has been filed with
binding upon the corporation and its officers, and the
and registered by the SEC.
litigating parties who are not part of the corporation in
accordance with their terms (Pelia v. CA, G.R. No. 91478,
Commencement of Corporate Existence and Juridical
1991; Forest Hills Golf Club v. Gardpro Inc., G.R. No.
Personality
164686, 2014).
A private corporation formed or organized under the
Corporation Code commences to have corporate
existence and juridical personality and is deemed Procedure (Sec. 46)
incorporated from the date the securities and exchange a. Adopt by-laws one (1) month after receipt of official
commission issues a certificate of incorporation under notice of issuance of its certificate of incorporation
its official seal; and thereupon the incorporators, b. Approval by the majority of outstanding
stockholders/members and their successors shall shares/members
constitute a body politic and corporate under the name i. By-laws must be signed by
stated in the Articles of Incorporation for the period of time stockholders/members voting for them
mentioned therein, unless said period is extended or the ii. Kept in the principal office of the corporation
corporation is sooner dissolved in accordance with law. iii. Subject to inspection by stockholders or
(Sec. 19) members
iv. Certified copy signed by majority of directors,
7. Adoption of By-Laws countersigned by the corporate secretary, filed
w/ SEC and attached to original Articles of
a. By-laws Incorporation
Relatively permanent and continuing rules .of action
adopted by the corporation for its own government and of Note:
the individuals composing it and those having direction, By-laws may be adopted prior to or after the incorporation.
management and control of its affairs, in whole or in part,
in the management and control of its affairs and activities. Failure to comply with the one month period for filing by-
laws will not result to an automatic -demise" of the
Regulations, ordinances, rules or laws adopted by an corporation but it will be considered as a ground by which
association or corporation or the like for its internal the SEC may seek the corporation's dissolution (Loyola
governance, including rules for routine matters such as Grand Villas Homeowners (South) Association, Inc. v. CA,
calling meetings and the like (San Miguel Corp. v. G.R. No.117188, 1997).
Mandaue Packing Products Plants Union-FFVV, G.R. No.
152356, 2005). WHEN BY-LAWS VOTING
ADOPTED REQUIREMENT
By-laws are intended merely for the protection of the
Prior to incorporation All of the incorporators
corporation, and prescribe regulation, not restrictions, they
Within one month after Majority of stockholders
are always subject to the charter of the corporation (Rural
receipt of notice of the (representing OCS) or
Bank of Salinas v. CA, GR No. 96674, 1992).
issuance of the certificate of members (if non-stock)
incorporation by SEC and majority of the board
Page 114 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
Common Law Limitations on By-Laws
• By-laws cannot be contrary to law and articles of
incorporation
A by-law provision granting to a stockholder a permanent
representation in the Board of Directors is contrary to the
Corporation Code requiring all members of the Board to be
elected by the stockholders or members. Even when the
members of the association may have formally adopted the
provision, their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to
law (Grace Christian High School v. CA, G.R. No. 108905
, 1997).
Although the right to amend by-laws lies solely in the
discretion of the employer, this being in the exercise of
management prerogative or business judgment, such right
cannot impair the obligation of existing contracts or rights
or undermine the right to security of tenure of a regular
employee. Otherwise, it would enable an employer to
remove any employee from employment by the simple
expediency of amending its by-laws and providing the
position shall cease to exist upon occurrence of a specified
event (Salafranca v. Philamlife (Pamplona) Village
Homeowners Association, Inc., G.R. No. 121791, 1998)
-By-laws that prohibit directors who have interests in
competitor corporations are reasonable in order to protect
the interests of the company (Gokongwei v. SEC, G.R. No.
L-45911, 1979)
• By-laws cannot be unreasonable or be contrary to
nature of by-laws (GPI v. El Hogar Filipino, G.R. No.
L-26649, 1927).
Authority granted to a corporation to regulate the transfer
of its stock does not empower corporation to restrict the
right of a stockholder to transfer his shares, but merely
authorizes the adoption of regulations as to the formalities
and procedure to be followed in effecting transfer
(Thomson v. CA, G.R. No. 116631, 1998).
By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restrictions; they
are always subject to the charter of the corporation (Rural
Bank of Salinas, Inc. v. CA, 1992; quoting from Thompson
on Corporation Sec. 4137, cited in Fleischer v. Nolasco,
G.R. No. L-23241, 1925).
Page 115 of 250
COMMERCIAL LAW
• By-law provisions cannot discriminate among its
stockholders or members
Binding effect of by-laws:
• As- to the corporation and its components — Binding
not only upon the corporation but also on its
stockholder, members and those having direction,
management and control of its affairs. They have the
force of contract between the members/stockholders.
• As to third persons — Not binding unless there is
actual knowledge. Third persons are not even bound
to investigate the content because they are not bound
to know the by-laws which are merely provisions for
the government of a corporation and notice to them will
not be presumed (China Banking Corp. v. CA, G.R.
No. 118332 1997).
d. Amendment or Revision
• With stockholders or members approval
Majority vote of the members of the Board;
Majority of the outstanding capital stock or
majority of the members in case of non- stock
corporation, in a meeting duly called for the
purpose
• Delegation to the Board of Directors/ Trustees
- 2/3 of the outstanding capital stock; or
2/3 of the members in a non- stock corporation
may delegate to the board the power to amend
or repeal any by- laws or adopt new by- laws
o Such power of the Board may be revoked by
majority vote of the outstanding capital stock or
majority of the members in a non- stock
corporation
o The power to adopt the first original by- laws
cannot be delegated to the board of directors or
trustees; only the power to adopt new by- laws that
will supplant the old by- laws can be validly
delegated
The amended or new Li -laws shall only be
effective upon the issuance by the SEC of a
certification that the same are not inconsistent with
the Corporation Code.
E. CORPORATE POWERS
1. General Powers; Theory of General Capacity
a. Express powers — Those expressly authorized by the
Corporation Code and other laws, and its Articles of
Incorporation or Charter
b. Implied/necessary powers — Those that can be
inferred from or necessary for the exercise of the
ATENEO CENTRAL
BAR OPERATIONS 2019
express powers or for the pursuit of its purposes as
provided in the Charter. Examples are powers related
to the same line of business (e.g. stevedoring services
to unload coal to its pier for corporations supplying
electric power)
c. Incidental/inherent powers — Those that are deemed
to be within the capacity of corporate entities. These
"necessarily flow" from the business and attach at the
moment of creation without regard to express powers
or primary purpose.
General Express Powers under the Corporation Code
(Sec. 36)
a. Sue and be sued in its corporate name;
b. Succession;
c. Adopt and use a corporate seal;
d. Amend Articles of Incorporation
e. Adopt, amend or repeal By-laws;
f. For stock corporations — Issue stocks to subscribers
and to sell treasury stocks; for non-stock corporations
— admit members;
9. Purchase, receive, take, or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with real
and personal property, pursuant to its lawful business;
h. Enter into Merger or consolidation;
i. Reasonable Donations for public welfare, hospital,
charitable, cultural, scientific, civil or similar purposes
(Prohibited: for partisan political activity);
j. Establish pension, retirement and other plans for the
benefit of directors, trustees, officers and employees;
and
k. Other powers essential or necessary to carry out its
purposes.
2. Specific Powers: Theory of Specific Capacity
a. Power to Extend or Shorten corporate term
There should be a written notice of stockholders/members
meeting stating:
• Proposed action and time and place of meeting
• Addressed to each stockholder/ member
• Deposited to the addressee in post office, with
postage prepaid or served personally
Vote needed:
• Board majority (in board meeting)
• Ratified by 2/3 of OCS or members in a meeting —
mere written assent is not enough (Sec. 37)
Appraisal rights available to dissenting stockholders
• In case of extension of term — right of appraisal
exists
Page 116 of 250
COMMERCIAL LAW
• In shortening of term — right of appraisal
recognized in Sec 81(1) — amendment of Articles
to shorten or extend corporate term
b. Power to Increase or Decrease Capital Stock or
Incur, Create, Increase Bonded Indebtedness (Sec.
38)
Power to increase or decrease capital stock - provided
the 25-25 rule is complied with, as approved by the SEC
There shall be no increase or decrease of capital stock
unless
• Approved by majority of the board
• Approved by at least 2/3 of OCS in a meeting
• With notice of the proposal and meeting given to
stockholders
• With prior approval of the SEC
• Accompanied by a Sworn statement of the
treasurer showing that the 25-25 rule has been
complied with
No decrease of capital stock shall be approved by the SEC
if it will prejudice the rights-of corporate creditors
From and after the approval by the SEC and the issuance
of its certificate of filing, capital stock shall stand increased
or decreased as the certifi-Cate may declare
Incur, create, or increase-bonded indebtedness - There
should be no incurring, creating or increasing any bonded
indebtedness unless:
• Approved by majority of the board
• Approved by at least 2/3 of OCS/members in a
meeting
• With notice of the proposal and meeting given to
stockholders
• With prior approval of the SEC
c. Power to Deny Pre-Emptive Rights
As a general rule, stockholders have the pre-emptive right
to subscribe to all issues or disposition of shares of any
class in proportion to their shareholdings unless:
• Denied by the Articles of Incorporation or
amendment thereto;
• Shares are issued in compliance with laws
requiring minimum stock ownership by the public
• Shares issued in good faith in exchange for
property for corporate purposes approved by 2/3
of the OCS
• Shares in payment of previously contracted debts
approved by 2/3 of OCS (Sec. 39)
ATENEO CENTRAL
BAR OPERATIONS 2019
d. Power to Sell, Dispose, Lease, Encumber All or
Substantially All of Corporate Assets (Sec. 40)
Needs vote of:
• Board majority in meeting
• 2/3 of OCS or members
Written notice of stockholder/member meeting proposing
said action needed for "sale of all or substantially all of the
corporate property and asset" — one where the corporation
is rendered incapable of accomplishing its corporate
purpose.
Dissenting stockholders have appraisal right.
After authorization or approval by the
stockholders/members, the Board may however, abandon
proposed action without prior authorization/approval of
stockholders/members, subject to rights of parties
r stockholders until the unpaid subscription is fuIly
However, stockholders'/members' authorization not
needed if
• Disposition of property and assets is necessary in
the usual and regular course of business
• Or if the proceeds of sale or disposition is
appropriated for the conduct of the remaining
business (See. 40)
e. Power to Acquire Own Shares
Allowed for a legitimate corporate purpose including but
not limited to the following:
• To eliminate fractional shares arising out of stock
dividends;
• To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent
shares sold during said sale;
• To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of the Corporation Code.
Provided the corporation has unrestricted retained
earnings to cover stocks purchased or acquired (Sec. 41)
f. Power to Invest Corporate Funds in another
Corporation or For Non-PrImary Purpose (Sec. 42)
Needs vote of:
• Board majority in meeting
• 2/3 of OCS or members - Stockholders/members'
approval not needed if investment in stock of other
Page 117 of 250
COMMERCIAL LAW
corporations is reasonably necessary to
accomplish primary purpose
• Written notice of proposed investment and time
and place of meeting sent to stockholders
• Dissenting stockholders have appraisal rights
Investment by a sugar central in the equity of a jute-bag
manufacturing company used in packing sugar, falls within
the implied powers of the sugar central as part of its
primary purpose (De La Rama v. Ma-ao Sugar Central,
G.R. No. L-17504, 1969)
g. Power to Declare Dividends
Only Board action is needed (except stock dividends
where stockholder action is needed)
• Cash dividends due on delinquent stock should
first be applied to unpaid balance plus cost and
expenses
• Stock dividends shall be withheld from delinquent
paid
• Stock dividends need 2/3 vote of the OCS
• Dividends are payable out of unrestricted retained
earnings
• Stock corporations cannot retain surplus profits
more than 100% of paid-in capital stock unless:
- Needed for corporate expansion projects
approved by the board
Or prohibited by loan agreement which
prohibits declaration of dividends without
financial institution's consent
Or needed under special circumstances (Sec.
43)
• Unless otherwise provided in the articles of
incorporation, distribution of dividends is done on
a pro rata basis.
h. Power to Enter Into Management Contract
Where one corporation undertakes to manage all or
substantially all of the ousiness of another corporation,
whether the contract is called "service contracts" or
"operating agreement" (Sec. 44)
General Rule: Contract may not exceed 5yr5 per term
Exception: Contracts relating to exploration,
development, exploitation or utilization of natural
resources, where pertinent laws or regulations will govern
A management contract is not an agency contract, and
therefore is not revocable at will (Nielson v. Lepanto, G.R.
No. L-21601, 1968)
ATENEO CENTRAL
BAR OPERATIONS 2019
This needs approval of:
1. Board of Directors of both managing and managed
corporation
2. Majority of outstanding shares or members of
both managed and managing corporation
3. But 2/3 vote of outstanding stock/members of
managed corporation necessary in the if:
• Where stockholders of both
managing and managed
corporation (the common
stockholders) own or control more
than 1/3 or the outstanding stock
of managing corporation
• Where majority of directors in
both corporations are the same
i. Ultra Vires Acts
i. Applicability of Ultra Vires Doctrine
An act not within the express or implied, and incidental
powers of the corporation.
Types of Ultra Vires Cases
a. First type: Acts done beyond the powers of the
corporation as provided for in the law or its articles of
incorporation (Sec. 45)
b. Second type: Acts or contracts entered into in behalf
of the corporation by persons without corporate
authority, even though the contract is within the powers
of the corporation (Manila Metal Container Corp. v.
PNB, G.R. No. 166862, 2006) and
c. Third type: Acts or contracts, which are per se illegal
as being contrary to law.
ii. Consequences of Ultra Vires Acts
• Executed contract — Courts will not set aside or
interfere with such contracts;
• Executory contracts — No enforcement even at the
suit of either party (void and unenforceable);
• Partly executed and partly executory — Principle
against unjust enrichment shall apply.
Ultra vires test: It is a question, therefore, in each case,
of the logical relation of the act to the corporate purpose
expressed in the charter. If that act is one which is lawful
in itself, and not otherwise prohibited, is done for the
purpose of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a substantial,
and not in a remote and fanciful, sense, it may fairly be
considered within charter powers. The test to be applied is
whether the act in question is in direct and immediate
furtherance of the corporation's business, fairly incident to
Page 118 of 250
COMMERCIAL LAW
the express powers and reasonably necessary to their
exercise. If so, the corporation has the power to do it;
otherwise, not. (University of Mindanao, Inc. v. Bangko
Sentral ng Pilipinas, G.R. 194964-65, 2016)
Doctrine of Ratification
The corporation may ratify the unauthorized acts of its
corporate officer. The substance of the doctrine is
confirmation after conduct, amounting to a substitute for a
prior authority. Ratification can be made either expressly
or impliedly like silence or acquiescence and acceptance
of benefits (Yasuma v. Heirs of Cecilio De Villa, G.R. No.
150350, 2006). But illegal acts cannot be ratified.
Doctrine of Individuality of Subscription
On the creation of a corporation, the individuality of the
corporators or members is merged in the corporate body
and the corporation becomes in law a legal entity or
artificial person entirely distinct from its members and its
officers, and the property or rights acquired, or the liabilities
incurred by it are regarded as its property, rights, and
liabilities as such distinct legal entity (Jose C. Campos, Jr.,
et al., Survey of Mercantile Law, 30 Phil. L. J. 255, 264
[1954]).
Equality of Shares
Under the doctrine of equality of shares — all stocks issued
by the corporation are presumed equal with the same
privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences (CIR vs. CA
(G.R. No. 108576, 1999) citing Sec. 5 par 1, last sentence
of Act 1459 (Old Corporation Law) now Sec. 6 of the
Corporation Code requires that the distinguishing features
be stated also in the Certificate of Stock)
Those Who May Exercise the Powers of the
Corporation
General Rule: The Board of Directors ALONE exercises
the powers of the corporation.
Exceptions: Other persons or groups within the
corporation may do so similarly:
a. If (1) there is a management contract and (2) powers
are delegated by majority of the board to an executive
committee;
b. Corporate officers (e.g. the President) via authority
from (1) law, (2) corporate by-laws; and (3)
authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the
general course of business;
c. A corporate agent in transactions with third persons
to the extent of the authority to do so has been
conferred upon him;
ATENEO CENTRAL
BAR OPERATIONS 2019
d. Those with apparent authority (doctrine of
apparent authority).
Theories on Source of Board Power
a. Directly-Vested / Original Power
Pursuant to Section 23, the source of power of the Board
of Directors is primarily and directly-vested by law; it is not
a delegated power from the stockholders or members of
the corporation
b. Delegated Powers from Stockholders
The Board of Directors is a creation of the stockholders
and controls and directs the affairs of the corporation by
delegation of the stockholders. By drawing to themselves
the powers of the corporation, they occupy positions of
trusteeship in relation to the stockholders.
Doctrine of Apparent Authority
If a corporation knowingly permits one of its officers, or any
other agent, to act within the scope of an apparent
authority, it holds him out to the public possessing the
power to so 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 denying the agent's
authority. (Francisco v. GSIS, G.R. No. L-18287, 1963)
Apparent authority may be ascertained-through:
a. The general manner in which the corporation holds out
an officer or agent as having the power to act or, in
other words, the apparent authority to act in general,
with which it clothes him; or
b. The acquiescence in his acts of a particular nature,
with actual or constructive knowledge thereof, whether
within or beyond the scope of his ordinary powers.
If a private corporation intentionally or negligently clothes
its officers or agents with apparent power to perform acts
for it, the corporation will be estopped to deny that the
apparent authority is real as to innocent third persons
dealing in good faith with such officers or agents.
Note:
It requires presentation of evidence of similar acts
executed either in its favor or in favor of other parties. It is
not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporate officer with the
power to bind the corporation (People's Aircargo and
Warehousing Co., Inc. v. CA., G.R. No. 117847, 1998).
When the officers or agents of a corporation exceed their
powers in entering into contracts or doing other acts, the
corporation, when it has knowledge thereof, must promptly
disaffirm the contract or act and allow the other party or
third persons to act in the belief that it was authorized or
Page 119 of 250
COMMERCIAL LAW
has been ratified. If it acquiesces, with knowledge of the
facts, or fails to disaffirm, ratification will be implied or else
it will be estopped to deny ratification (Premiere
Development Bank vs. CA, G.R. No. 159352, 2004).
Efren was Bonanza's General Property Manager while
Miguel was the President. Bonanza leased the lot to Efren
but eventually notified the latter about the rescission of
lease. Using the Doctrine of Apparent Authority, Bonanza
was estopped from denying the existence and
enforceability of Lease Contract after it effectively ratified
the lease by accepting proceeds throughout several years.
Also, while it is true that the doctrine cannot be invoked by
one who is not a third party, an officer of a corporation
can actually be a third person in contract with the
corporation. (Quesada, et al. v. Bonanza Restaurants, Inc.,
G.R. No. 207500, 2016)
Who Is an Officer of a Corporation?
Corporations act only through their officers and duly
authorized agents. All acts within the powers of a
corporation may be performed by agents of its selection;
except so far as limitations or restrictions imposed by
special charter, by-laws, or statutory provisions (BA
Savings Bank v. Sia, G.R. No. 131214, 2000).
An "office" is created by the charter of the corporation and
the officer is elected by the directors or stockholders. Note
that a corporate officer's removal from his office is a
corporate act. Such removal occasions an intra-corporate
controversy and its nature is not altered by the reason or
wisdom, or lack thereof, with which the BOD might have in
taking such action.
When petitioner, as Executive VP, allegedly diverted
company funds for his personal use resulting in heavy
financial losses in the company, this matter would amount
to fraud. Such fraud would be detrimental to the interest
not only of the corporation but also of its members. This
type of frau-, encompasses controversies in a relationship
within the corporation covered by the SEC [now with the
regular courts]. Perforce, the matter would come within the
area of corporate affairs and management, and such a
corporate controversy would call for the adjudicative
expertise of the SEC, not the Labor Arbiter or the NLRC
(De Rossi v. NLRC, G.R. No. 108710, 1999)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
Corporate Officer vs. Other Positions Comptroller/Administrator, Chiefs of Services and such
CORPORATE OFFICERS OTHER POSITIONS other officers as it may deem necessary and prescribe their
Agents of the corporation Agents of the corporation powers and duties," then such specifically designated
More important employees positions should be considered "corporate officers"
exercising greater authority May also exercise position. The determination of the rights and the
or power in the authority but scope of concomitant liability arising from any ouster from such
management of the authority and duties are positions, would be intra-corporate controversy subject to
business limited by virtue of the the jurisdiction of the SEC (now RTC) rTabang v. NLRC,
Specific duties are imposed delegation G.R. No. 121143, 1997).
by express provision of law
Created by virtue of A corporate officer's dismissal is always a corporate act, or
Created by the Corporation an intra-corporate controversy, and the nature is not
"enabling powers" given
Code or the By-Laws altered by the reason or wisdom with which the Board of
to officers in the By-Laws
Directors may have in taking such action.
The electing/removing
Elected and removed by the
body need not follow the
directors or the The President, Treasurer and Secretary are considered
requirements in the
stockholders corporate officers because all corporations are required by
Corporation Code
law to have such positions.
RTC-Special Commercial
NLRC has jurisdiction
Court has jurisdiction over
over termination disputes The creation of a position under the corporation's charter
termination disputes
or by-laws, and that the election is by the directors or
stockholders must concur in order for an individual to .be
An "office" is created by the charter of the corporation and
considered a corporate officer, as against an ordinary
the officer is elected by the directors or stockholders (2
employee or officer. It is only when officer claiming to have
Fletcher Cyc. Corp. Ch. II, Sec. 266).
been illegally dismissed is classified as corporate officer
that the issue is deemed an intra-corporate dispute which
On the other hand, an "employee" usually occupies no
falls within the jurisdiction of the trial courts. (Wesleyan
office and generally is employed not by action of the
University v. Maglaya, Sr., G.R. No. 212774, 2016)
directors or stockholders bit by the managing officer of the
corporation who also determines the compensation to be
Liability of the Officer
paid to such employee (Tabang v. NLRC, G.R. No.
General rule: Corporate officers are not personally liable
121143, 1997).
for their official -acts unless it is shown that they have
exceeded their authority. ARB Constructions Co., Inc. v.
The president, vice-president, secretary and treasurer are
Court of Appeals, G.R, No. 126554, 2000)
commonly regarded as the principal or executive officers
of a corporation, and modern corporation statutes usually
Exception: Personal liability of a corporate director,
designate them as the officers of the corporation. However,
trustee or officer along (although not necessarily) with the
other offices are sometimes created by the charter or by-
corporation may validly attach, as a rule, only when:
laws of a corporation, or the board of directors may be
a. He assents to a patently unlawful act of the corporation
empowered under the by-laws of a corporation to create
b. Guilty of bad faith or gross negligence in directing its
additional offices as may be necessary (Tabang v. NLRC,
affairs
G.R. No. 121143, 1997).
c. for conflict of interest resulting in damages to the
corporation, its stockholders or other persons
When the by-laws of the condominium corporation
d. He consents to the issuance of watered stocks or who,
specifically includes the position of
having knowledge thereof, does not forthwith file with
"Superintendent/Administrator" in is roster of corporate
the corporate secretary his written objection thereto
officers, then such position is clearly a corporate officer
e. He agrees to hold himself personally and solidarily
position and issues of reinstatement would be within the
liable with the corporation; or
jurisdiction of the SEC [now with the RTC] and not the
f. He is made, by a specific provision of law, to personally
NLRC (Ongkingco v. NLRC, G.R. No. 119877, 1997).
answer for his corporate action (Atrium Management
Corporation vs. Court of Appeals, G.R. No. 109491,
When the by-laws provide that one of the powers of the
2001).
Board of Trustees is "[t]o appoint a Medical Director,
Page 120 of 250
 ATENEO CENTRAL
BAR OPERATIONS 2019
In Labor Cases: In the absence of malice, bad faith, or
specific provisions of law, a stockholder or an officer of a
corporation cannot be made personally liable for corporate
liabilities (McLeod v. NLRC, G.R. No. 146667, 2007)
3. Exercise of Corporate Powers
a. By the Shareholders
2/3 vote of stockholders or members are needed in the
following instances:
a. Removal of directors or trustees
b. In cases of vacancies, stockholders/members are
entitled to fill up such vacancies
c. Extension or shortening of corporate term
d. Increase or decrease of capital stock or the creation of
bonded indebtedness
e. Sale or other dispositions of all or substantially all
corporate assets
f. Investing corporate funds in another corporation or
business or for any other purpose other than its
primary purpose
g. Power to enter into management contracts in the
following instances: (a) where stockholders
representing the same interest of both the managing
and the managed corporations own more than one-
third (1/3) of the total outstanding capital stock entitled
to vote of the managing corporation; or (b) where a
majority of the members of the Board of Directors of
the managing corporation also constitute a majority of
the members of the Board of Directors of the managed
corporation
h. Declaration of stock dividend
.7) i. Amendment of the articles of incorporation
j. Approval of the plan of merger or consolidation
k. Dissolution of the corporation
However, only majority vote is needed in:
c. Approval of the by-laws of the corporation
d. Amendment of the by-laws
e. Power to enter into management contracts, except in
instances mentioned in letter (g) of the preceding
section
b. By the Board of Directors
The Board of Directors is the main agency by which all
corporate powers and authority are exercised
General rule: Majority vote of the Board is needed in the
following instances:
a. Filling of vacancies in the board, except when vacancy
was due to removal by the stockholders or members
Page 121 of 250
COMMERCIAL LAW
or by expiration of term, if the remaining BOD
constitutes a quorum; otherwise, said vacancies must
be filled by the stockholders in a regular or special
meeting called for that purpose.
b. Extension or shortening of the corporate term
c. Increase or decrease of capital stock or the creation of
bonded indebtedness
d. Sale or other disposition of all or substantially all
assets
e. Acquisition of its own shares
f. Investment of corporate funds in any corporation or
business or for any purpose other than its primary
purpose
g. Declaration of cash, property, and stock dividends
h. Entering into management contracts
i. Amendment of the articles of incorporation
j. Amendment o the by-laws
k. Approval of the plan of merger or consolidation
I. Dissolution of the corporation
c. By Executive Committee
The By-laws may create an executive committee,
composed of not less than 3 members of the board, to be
appointed by the Board.
General rule: The Executive Committee may act, by
majority vote, on specific matters within the competence of
-the board as deiegated to it
Exception:
1. Acts where stockholders' approval is also needed
2. Filling vacancies within the Board of Directors
3. Amending, repealing or adopting by-laws
4. Amending or repealing resolutions of the Board
where the resolution by express terms is not so
amendable or repealable by the Executive
Committee
5. Distribution of cash dividends
A. Trust Fund Doctrine
General Rule: The subscribed capital stock of the
corporation is a trust fund for the payment of debts of the
corporation which the creditors have the right to look up to
satisfy their credits. Corporations may not dissipate this,
and the creditors may sue the stockholders directly for their
unpaid subscriptions.
Special Rule in Insolvency: The trust fund doctrine is not
limited to reaching the stockholders' unpaid subscriptions.
The scope of the doctrine when the corporation is
insolvent encompasses not only the capital stock, but
also other property and assets generally regarded in
equity as a trust fund for the payment of corporate
ATENEO CENTRAL
BAR OPERATIONS 2019
debts. Thus, the Trust Fund Doctrine extends to all assets
(not just subscribed capital stock) when a corporation
becomes insolvent. (Halley v. Printwell, G.R. No. 157549,
2011)
A. BOARD OF DIRECTORS AND TRUSTEES
1. Doctrine of Centralized Management
Powers of the Board of Directors
Unless otherwise provided in the Corporation Code, the
corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all
property of such corporations controlled and 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 members of the corporation (Sec. 23).
2. Business Judgment Rule
Questions of policy or management are left solely to the
honest decision of officers and directors of a corporation
and the courts are without authority to substitute their
judgment for the -judgment of the board of directors; the
board is the business manager of the corporation and so
long as it acts in good faith its orders are not reviewable by
the courts or the SEC. The directors are also not liable to
the stockholders in performing such acts (Philippine Stock
Exchange, Inc. v. CA, GR No. 130644, 1997).,,
Coverage of the Rule: Two Branches
a. Resolutions and transactions -entered into by the
Board of Directors within the powers of the corporation
cannot be reversed by the courts not even on the
behest of the stockholders of the corporation; and
b. Directors and officers acting within such business
judgment cannot be held personally liable for the
consequences of such acts.
Instances When a Director is Liable:
a. Willfully and knowingly voting for and assenting to
patently unlawful acts of the corporation;
b. Gross negligence or bad faith in directing the affairs of
the corporation;
c. Acquiring any personal or pecuniary interest in conflict
of duty.
3. Tenure, Qualifications and Disqualifications of
Directors
Term of Office (Sec. 23)
Each duly elected director/trustee shall hold office for one
(1) year until their successors are elected and qualified.
Page 122 of 250
COMMERCIAL LAW
Qualifications of Directors (Sec. 23 & 27)
a. Must own at least one (1) share of the capital stock of
the corporation in his own name or must be a member
in the case of non-stock corporations
i. Any director who ceases to be the owner of at
least one (1) share of the capital stock of the
corporation of which he is a director shall
thereby cease to be a director.
b. A majority of the directors/trustees must be residents
of the Philippines
c. He must not have been convicted by final judgment of
an offense punishable by imprisonment for a period
exceeding six (6) years or a violation of the
Corporation Code, committed within five (5) years
before the date of his election
d. He must be of legal age
e. He must possess other qualifications as may be
prescribed in the by-laws of the corporation.
Disqualifications of Directors, Trustees, -or Officers
(Sec. 27)
a. Convicting by final judgment of an offense punishable
by imprisonment for a period exceeding 6 years; or
b. Violation of the Corporation Code, committed within 5
years prior to the date of his election or appointment
Note: It is the commission (not conviction) that must take
place within 5 years prior to election or appointment.
Grounds not exclusive
The enumeration of grounds is not exclusive.
By-law provisions that prohibit directors who have interests
in competitor corporations are reasonable in order to
protect the interests of the company (Gokongwei v. SEC,
G.R. No. L-45911, 1979)
Hold-Over Principle
Directors/Trustees may continue to hold office despite the
lapse of one year until their successors are elected and
qualified.
Remaining members of the board of directors cannot elect
another director to fill in a vacancy caused by the
resignation of a hold-over director. The hold-over period is
not part of the term of office of a member of the board of
directors. (Valle Verde Country Club v. Africa, G.R. No.
151969, 2009)
Thus, when during the holdover period, a director resigns
from the board, the vacancy can only be filled-up by the
stockholders, since there is no term left to fill-up pursuant
ATENEO CENTRAL
BAR OPERATIONS 2019
to the provisions of Section 29 which mandates that a
vacancy occurring in the board of directors caused by the
expiration of a member's term shall be filled by the
corporation's stockholders. (Valle Verde Country Club v.
Africa, G.R. No. 151969, 2009)
A director continuing to serve after one year from his
election (on a holdover capacity), cannot be considered as
extending his term. This hold-over period is not part of his
term, which, as declared, had already expired. (Valle
Verde Country Club v. Africa, G.R. No. 151969, 2009)
4. Elections
Election of Directors or Trustees (Sec. 24)
Manner of Election
• In any form; or
• By ballot when requested by any voting
stockholder or member
In stock corporations, voting may be in person or
by proxy
Time to Determine Voting Right
• At the time fixed in by- laws
• If by- laws are silent, at time of election
a. Methods of Voting in the Election of Directors
(Cumulative Voting/Straight Voting)
Outstanding capital stock - means the total shares of
stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially
paid, except treasury shares (Sec. 137)
a. Straight voting — Every stockholder may vote the
number of outstanding capital stock in his own name
for as many persons as there are directors to be
elected; or in non-stock corporations, members may
cast as many votes as there are trustees to be c,:ected
but may not cast more than one vote for one candidate.
(In straight voting, the votes are spread out evenly
among all the elective positions)
b. Cumulative voting for one candidate — a
stockholder may cumulate his shares and give one
candidate as many votes as the number of directors to
be elected multiplied by the number of his shares shall
equal;
c. Cumulative voting by distribution — a stockholder
may also cumulate his shares by multiplying the
number of his shares by the number of directors to be
elected and distribute the same among as many
candidates as he shall see fit
Page 123 of 250
COMMERCIAL LAW
Note: Stock corporations follow the cumulative voting
method. In non-stock corporations, unless otherwise
provided in the articles of incorporation or in the by-laws,
the default rule in the election of trustees is straight
voting. (Sec. 24)
b. Required Attendance at Meeting for Election
(Quorum)
• Stock Corporation - majority of outstanding
capital stock
•Non-stock Corporation — majority of members
entitled to vote
Any meeting of the stockholders or members called for an
election may adjourn from day to day or from time to time
but not sine die or indefinitely if, for any reason, no election
is held, or if there are not present or represented by proxy,
at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of
the member entitled to vote. Voting may be made
personally or by proxy.
Who Elects Directors or Trustees
• By the stockholders/members as provided in the
by-laws (traditionally during annual SH/M
meetings
• By the board, if still constituting quorum for
vacancies in the interim (i.e. between annual
meetings) due to causes other than removal or
expiry of term (Sec. 29)
• If the vacancies are due to removal or expiry of
term, the directors/trustees must be elected by the
stockholders/members at a meeting for this
purpose (special meeting)
How Elected
• By owners of majority of outstanding capital stock
or by members in annual stockholders'/members'
meeting
• Stockholders/members may be present in person
or by written proxy
• For stock corporations: Number of votes = (no. of
shares) x (no. of directors to be elected)
• By cumulative voting all votes may be cast for a
candidate or distributed among the candidates —
But no cumulative voting in non-stock
corporations
• Unless otherwise provided in the articles of
incorporation or in the by-laws, members of non-
stock corporations may cast as many votes as
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
there are trustees to be elected but may not cast Non-Filipino citizens may become members of the board
more than one vote for one candidate. of directors of a bank to the extent of the foreign
• Viva voce (live voice) or must be by ballot if participation in the equity of said bank. (General Banking
requested Law, Sec. 15)
• Delinquent shares and treasury shares cannot
vote Filling Vacancies in Board - Permissive
• Candidates with highest number of votes will be The filling of vacancies in the board by the remaining
declared elected directors or trustees constituting a quorum as provided for
by Section 29 is merely permissive, not mandatory, and the
When Elected (Sec. 29) vacancies may still be filled-up by the stockholders of
• Any vacancy occurring in the board of directors or members in a regular or special meeting called for the
trustees other than by removal by the stockholders purpose. However, when the by-laws of the corporation
or members or by expiration of term, may be filled contain a specific mode of filling- up existing vacancies in
by the vote of at least a majority of the remaining the board, the same is mandatory (Tan v. Sycip, G.R. No.
directors or trustees, if still constituting a quorum; 153468, 2006).
otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called Report On Election of Directors, Trustees and Officers
for that purpose Within 30 days after election of the directors, trustees and
• Any directorship or trusteeship to be filled by officers of the corporation, the secretary or any other officer
reason of an increase in the number of directors or of the corporation shall submit to the SEC, the names
trustees shall be filled only by an election at a nationalities and residences of the directors, trustees and
regular or at a special meeting of stockholders or officers elected. Should a director, trustee or officer die,
members duly called for the purpose, or in the resign or in any manner cease to hold office, his heirs in
same meeting authorizing the increase of directors case of his death, secretary or any other officer of the
or trustees if so stated in the notice of the meeting. corporation, or the director, trustee or officer himself, shall
immediately report such fact to the SEC.
Election Rules on Stock.and Non-Stock Corporations
STOCK CORPORATION NON-STOCK
Only the directors and officers of the corporation whose
CORPORATION
names appears in the report submitted to the SEC are
Owners of a majority of A majority of the
deemed legally constituted to bind the corporation in
outstanding capital stock,members, either in person
bringing a suit in behalf of the corporation (Premium
either in person or by or by representative
Marble Resources v. CA, G.R. No. 96551, 1996).
representative authorized authorized to act by
to act by written proxy, written proxy, must be
5. Removal (Sec. 28)
must be present at the present at the election of
election of the directors the trustees
Requisites of Removal from the Board
Cumulative voting is
Cumulative voting is not
a. It must take place either at a regular meeting or special
mandatory; a matter of available, unless allowed meeting of the stockholders or members called for the
right granted by law to by the articles or by-laws.
purpose;
each stockholder with
b. There must be previous notice to the stockholders or
voting rights. The Board may be elected
members of the intention to remove;
by region.
c. The removal must be by a vote of the stockholders
Directors are elected at representing 2/3 of the outstanding capital stock or 2/3
large. of the members, as the case may be;
d. The director may be removed with or without cause
Alien Membership in Board of Directors unless he was elected by the minority, in which case,
P.D. No. 715: "election of aliens as members of the board it is required that there is cause for removal.
of directors of governing body of corporations or
associations engaging in partially nationalized activity shall
6. Filling of Vacancies (Sec. 29)
be allowed in proportion to their allowable participation or
share in the capital of such entities."
By stockholders or members — if vacancy results
because of:
Page 124 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
a. Removal
b. Expiration of term
c. The ground is other than removal or expiration of term
where the remaining directors do not constitute a
quorum
d. Increase in the number of directors.
Note: Vacancies must be filled by the stockholders in a
regular or special meeting called for that purpose.
By board if remaining directors constitute a quorum —
Except for vacancies occuring due to removal, expiration
of term, or increase in the number of directors
7. Compensation (Sec. 30)
General Rule: The directors shall not receive any
compensation, as such
Exception: They may receive reasonable per diems [i.e.
at meetings] ,
Qualifiers to General Rule and Exception
Any such compensation other than per diems may be
granted to directors by the vote of the stockholders
representing at least a majority of the outstand,ing capital
stock at a regular or special stockholders' meeting.
The By-Laws may specifically provide for fixing of
compensation.
However: In no case shall the total yearly compensation
of directors, as such directors, exceed 10% percent of the
net income before income tax of the corporation during the
preceding year.
Note: The implication of the phrase "as such directors" is
that members of the Board may receive compensation, in
addition to reasonable per diems, when they render
services to the corporation in a capac'ty other than as
directors or trustees [in this case, if serving as corporate
officers] (Western Technology v. Sales, G.R. No. 113032,
1997)
Rules on Fiduciaries' Duties and Liabilities
Three-Fold Duties of Directors (Strategic Alliance
Development Corporation v. Radstock, G.R. No. 178158,
2009)
a. Duty of Obedience (Basis: Sec. 25)
To direct the affairs of the corporation only in accordance
with the purposes for which it was organized
Page 125 of 250
COMMERCIAL LAW
b. Duty of Loyalty (Basis: Secs. 31 & 34)
Directors or trustees shall not acquire any personal or
pecuniary interest in conflict with their duty as such
directors or trustees.
Disloyalty: Sec. 31(2) vs. Sec. 34
SEC. 31(2) SEC. 34
Applicable to directors, Applicable to directors
trustees, and officers only
Allows ratification of a
No ratification allowed transaction by the
director
Covers stock and non-stock Covers stock
corporations corporations only
c. Duty of Diligence (Basis: Sec. 31)
Directors and/or trustees shall not willfully and knowingly
vote for or assent to patently unlawful acts of the
corporation or act in bad faith or with gross negligence in
directing the affairs of the corporation
Doctrine of Corporate Opportunity
If there is presented to a corporate officer or director a
business opportunity, which the corporation has an interest
or a reasonable expectancy, the self-interest of the officer
or director will be brought into conflict with that of his
corporation. The law does not permit him to seize the
opportunity even if he will use his own funds in the venture.
If he seizes the opportunity thereby obtaining profits to the
expense of the corporation, he must account all the profits
by refunding the same to the corporation.
Requisites of Doctrine of Corporate Opportunity
a. The Corporation is financially able to undertake the
business opportunity.
b. From the nature of the business opportunity, it is in line
with the corporation's business and is of practical
advantage to the corporation.
c. The corporation has an interest or a reasonable
expectancy, by embracing the opportunity.
Consequence of violation
a. Directors must account for all the profits by refunding
the same to the corporation
b. Directors may be removed from the board.
Exception: The act of the director/trustee has been ratified
by a vote of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital stock.
Violations of Secs. 31 and 34 are not penal offenses in
relation Sec. 144: Had the Legislature intended to attach
ATENEO CENTRAL
BAR OPERATIONS 2019
penal sanctions to said sections, it could have expressly
stated such intent in the same manner it did for Section 74
of the same Code that the violation thereof is likewise
considered an offense under Section 144. (lent v. Tullet,
Inc., G.R. No. 189158, 2016)
Solidary liabilities for damages
(See below discussion on Personal Liabilities)
Liability for Watered Stocks
Watered Stock (Sec. 65)
Stock issued for a consideration less than its par or issued
value or for a consideration in any form other than cash,
valued in excess of its fair value.
Includes stock:
a. Issued without consideration (bonus share)
b. Issued as fully paid when the corporation received less
than its par or issued value (discount share)
c. Issued for a consideration other than actual cash (e.g.
property or services) the fair valuation of which is less
than its par or stated value
d. Issued as stock dividends when the corporation has
insufficient retained earnings or surplus
Effect of Issuance of Watered Stock
Directors or officers consenting to such issuance are
solidarily liable with the stockholder concerned, to the
corporation or its creditors for the difference between the
fair value received (by the corporation at the time of the
issuance) and the par or issued value of the stock issued.
Personal Liabilities
Personal liability of a corporate director, trustee or officer
along with the corporation may so validly attach, as a rule,
only when:
1. He assents:
a. To a patently unlawfi d act of the corporation,
or
b. For bad faith, or gross negligence in directing
its affairs, or
c. For conflict of interest, resulting in damages to
the corporation, its stockholders or other
persons;
2. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily
liable with the corporation; or
Page 126 of 250
COMMERCIAL LAW
4. He is made, by a specific provision of law, to personally
answer for his corporate action (Tramat Mercantile,
Inc. v. CA, G.R. No. 111008, 1994).
9. Responsibility For Crimes
(See Subsection on Personal Liabilities of Board of
Directors and Trustees)
Special Fact Doctrine
Under the Special Facts Doctrine, although a director does
not stand in fiduciary relation to the stockholder, he is
under legal obligation to make fair and full disclosure of
pertinent official information where special circumstances
exist, giving rise to the obligation to disclose. (Soledad M.
Cagampang, The Fiduciary Duties of Corporate Directors
Under Philippine Law, 46 Phil. L. J., 513, 562 [1971])
10. Inside Information
Unlawful Acts of Insider (RA 8799, Sec. 27)
It shall he unlawful for an insider to sell or to buy a security
of an issuer, while in the possession of material information
with respect to the issuer or the security that is not
generally available to the public unless:
1. The insider proves that the info was not gained from
such relationship
2. That the other party selling to or buying from the insider
is identified the insider proves
a. That he disclosed the information
b. That he had reason to believe that the other
party otherwise is also in possession of the
information
Presumption of a Purchase or Sale of a Security of an
Issuer of Insider
Applies when an insider or an insider's spouse, or relatives
by affinity or consanguinity within the second degree,
legitimate or common-law, while in possession of material
nonpublic information if transacted after such information
came into existence but prior to dissemination of such
information to the public and the lapse of a reasonable time
for market to absorb such information.
This presumption is rebutted upon a showing by the
purchaser or seller that he was aware of the material
nonpublic information at the time of the purchase or sale.
Material Non-Public Information
a. It has not been generally disclosed to the public and
would likely affect the market price of the security after
being disseminated to the public and the lapse of a
reasonable time for the market to absorb the
information; or
ATENEO CENTRAL
BAR OPERATIONS 2019
b. Would be considered by a reasonable person
important under the circumstances in determining his
course of action whether to buy, sell or hold a security.
11. Contracts
a. By Self-Dealing Directors with the Corporation - A
contract of the corporation with its director/s or trustee/s or
officer/s is voidable at the option of such corporation unless
the following are present:
a. The presence of such director/trustee in the Board
meeting in which the contract was approved was not
necessary to constitute a quorum.
b. The vote of such director or trustee was not necessary
for the contract's approval.
c. The contract is fair and reasonable
d. In case of:
• An officer, the contract with him has been
previously authorized by the Board.
• A director or trustee, where any of the first two
conditions are absent, there must be a ratification
by 2/3 of the outstanding capital stock provided
there is full disclosure of the adverse interest of the
director or trustee. (Sec. 32)
b. Contracts Between Corporations with Interlocking
Directors - These are valid so long as there is no fraud
and the contract is fair and reasonable. However, if the
director's interest,- is nominal in one of the contracting
corporations (not exceeding 20% of the outstanding capital
stock), then the contract must comply with the requisites
provided supra, Sec. 32, otherwise voidable.
12. Executive Committee / Delegated Authority
a. The Board may delegate such powers to either an
executive committee or officials or contracted
managers.
b. The delegation, except for the executive committee,
must be for specific purposes.
• Accordingly, the ge.,eral rules of agency as to the
binding effects of their acts would apply.
• For such officers to be deemed fully clothed by the
corporation to exercise a power of the Board, the
latter must specially authorize them to do so (ABS-
CBN Broadcasting Corporation v. CA, GR No.
128690, 1999).
Page 127 of 250
COMMERCIAL LAW
Powers That Cannot Be Delegated to the Executive
Committee
a. Approval of action requiring concurrence of
stockholders;
b. Filling of vacancies in the board;
c. Adoption, amendment or repeal of by-laws;
d. Amendment or repeal of board resolution which
by its terms cannot be amended or repealed;
e. Distribution of cash dividends.
13. Meetings
The corporation's by-laws can provide otherwise to all the
rules hereunder, so long as minimum requirements are
satisfied.
a. Regular or Special
1. Regular-held monthly, unless the by- laws provide
otherwise
2. Special- held anytime upon the call of the
President or as provided in the by- laws
i. Notice of the meeting - At least 1 day prior to the
scheduled meeting. A director may waive the requirement,
expressly or impliedly.
ii. Place of meetings - Anywhere in or outside the
b. Who Presides - The president shall preside at all
meetings of the directors or trustees, unless the by-laws
provide otherwise.
c. Quorum of Board - A majority of the number of directors
or trustees as fixed in the articles of incorporation.
Directors cannot be represented or vote by proxy.
d. Rule on Abstention
In case of abstention during a board meeting on a vote
taken on any issue, the general rule is that an abstention
is counted in favor of the issue that won the majority vote;
since by their act of abstention, the abstaining directors are
deem to abide by the rule of the majority. (Lopez v. Ericta,
G.R. No. L-32991, 1972)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
Comparison Between Stockholder's And Director's Meeting
STOCKHOLDER'S MEETING DIRECTOR'S/ TRUSTEES' MEETING
Types of Regular and Special Regular and Special
Meetings
Place of Held in the city or municipality where the Anywhere in or outside of the Philippines, unless the
Meetings principal office is located by- laws provide otherwise
When held REGULAR — held annually on a date fixed by the REGULAR — held monthly
by- laws, or if not so fixed, on any date in April of
every year as determined by the Board of
Directors or Trustees
SPECIAL — held at any time deemed necessary SPECIAL — held at any time upon the call of the
or as provided in the by- laws President
Notice of REGULAR — notice must be sent at least 2 Notice must be sent at least 1 day prior to the
Meeting weeks scheduled meeting. Notice may be waived expressly
SPECIAL — notice must be sent at least 1 week. or impliedly, by any Director or Trustee
Notice may be waived, expressly or impliedly, by
any stockholder or member
Who Person designated in the by- laws. When there is The President shall preside
presides no person authorized to call a meeting, SEC may
issue an order to petitioner, who is also a
stockholder or member, to call a meeting to
choose a presiding officer
Quorum Majority of the outstanding capital stock, or ofthe Majority of the number of directors and trustees as
members. fixed in the articles of incorporation
EXCEPT: in cases where greater vote for an act
or business is required by law. ..;,
Note: For stock corporations, quorum iS'based
on outstanding voting stocks. For non-stock
corporations, only those who are actual, living
members with voting rights shall be counted.(Tan
v. Sycip, G.R. No. 153468, 2006
F. STOCKHOLDERS AND MEMBERS Articles of Incorporation is silent on such differences. (CIR
v. CA, G.R. No. 108576, 1999)
1. Rights of Stockholders and Members
The following are important rights of stockholders, which 2. Participation In Management
continue to exist e)..3n when the shares have been a. Proxy — Section 58 of the Corporation Code provides
sequestered: that stockholders and members may vote in person or
a. Right to attend meetings and to vote by proxy in all meetings of stockholders or members.
b. Right to receive dividends
c. Right to receive distributions upon liquidation of the b. Voting Trust Agreements — A stockholder confers
corporation upon a trustee the right to vote and other rights
d. Right to inspect the books of the corporation pertaining to the shares for a period not exceeding 5
e. Pre-emptive rights (Cojuangco, Jr. vs. Roxas, G.R. No. years at any one time.
91925, 1991)
However, if the voting trust was a requirement for a loan
agreement, period may exceed 5 years but shall
a. Doctrine of Equality of Shares automatically expire upon full payment of the loan.
All stocks issued by the corporation are presumed equal
with the same privileges and liabilities, provided that the
Page 128 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
Pooling or voting agreements — two or more right to revoke the trust and recover damages from such
stockholders agree that their shares shall be voted as a trustee.
unit. Usually concerned with the election of directors to
gain control of the management. Voting Trust v. Proxy
VOTING TRUST PROXY
Requisites for Valid Proxy Trustee votes as owner Proxy holder votes as
1. The proxy shall be in writing; agent
2. Signed by the stockholder or member; and Agreement must be Proxy need not be
3. Filed before the scheduled meeting with the corporate notarized notarized
secretary (Sec. 58) Trustee acquires legal Proxy has no legal title to
title to the shares of the the shares of the principal
Duration of Proxy transferring stockholder;
General Rule: It shall be valid only for the meeting for only beneficial title
which it is intended. remains with the
stockholder
Exception: Unless otherwise provided in the proxy Trustee may vote in Proxy must vote in person
person or by proxy unless
Note: No proxy shall be valid and effective for a period the agreement provides
longer than five (5) years at any one time. otherwise
Trustee is not limited to Proxy can only act at a
The by-laws of the corporation may prescribe a particular act at any particular specified stockholder's
form for proxy and fix the deadline for its submission. meeting meeting (if not continuing)
Trustee can vote and Proxy can only vote in the
Generally, proxies, even those with irrevocable terms, exercise all the rights of absence of the owners of
have always been considered as revocable, unless the stockholder even the stock
coupled with an interest, and their revocation may be by when the latter is present
formal notice, orally, or by conduct as by the appearance Agreement must not Proxy cannot exceed 5
of the stockholder or member giving the proxy, or the exceed 5 years at any years at any one time
issuance of a subsequent proxy, or the sale of shares. one time, except when '
the same is made a
Proxy Disputes—Jurisdiction condition of a loan
The regular courts now have the power to hear and decide Right to vote is inherent or
Voting right is divorced
cases involving all matters and conduct of the elections of inseparable from the right
from the ownership of
directors, including validation of proxies. The power of SEC to ownership of the stock
stocks
to regulate proxies remains only in instances when
Agreement is irrevocable Revocable anytime, except
stockholders vote on matters other than the election of
if coupled with interest
directors (SEC v. CA, G.R. No. 187702/189014, 2014).
Limitations on Right to Vote
Requisites for Valid Voting Trust
a. Where the Articles of Incorporation provides for
a. In writing and notarized
classification of shares pursuant to Sec. 6, non-voting
b. Specifying the terms and conditions
shares are not entitled to vote except as other provided
c. A certified copy must be filed with the corporation and
in the said section.
with the SEC. (Sec. 59)
b. Preferred or redeemable shares may be deprived of
the right to vote unless otherwise provided.
Duration
c. Fractional shares of stock cannot be voted unless they
General Rule: Not exceeding 5 years
constitute at least one full share.
d. Treasury shares have no voting rights as long as they
Exception: If the voting trust was a requirement for a loan
remain in treasury.
agreement, period may exceed 5 years but shall
e. Holders of stock declared delinquent by the board for
automatically expire upon full payment of the loan.
unpaid subscription.
No voting trust must be used for the purposes of fraud.
Stockholders who are defrauded by their trustees have a
Page 129 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
f. A transferee of stock if his stock transfer is not
registered in the stock and transfer book of the
corporation.
g. A stockholder who mortgages or pledges his shares
retains the right to vote unless he gives authority for
creditor to vote.
c. Cases When Stockholder's Action is Required
i. Concurrence of majority of the outstanding
capital stock (by majority vote)
a. To enter into management contract if any
of the two instances stated above are
absent;
b. To adopt, amend or repeal the by-laws.
ii. Concurrence of 2/3 of outstanding capital stock
(by 2/3 vote) (see similar enumeration in the
specific express powers of the corporation)
a. Extend or shorten corporate term;
b. Increase/Decrease Corporate Stock;
c. Incur, Create Bonded Indebtedness;
d. Deny pre-emptive right;
e. Sell, dispose, lease, encumber all or substantially
all of corporate assets;
f. Investing another corporation, business other than
the primary purpose;
9. Declare stock dividends
h. Enter into management contract if (1) a
stockholder or- stockholders representing the
same interest of both the managing and the
managed corporations own or control more than
1/3 of the total outstanding capital entitled to vote
of the managing corporation; or (2) a majority of
the members of the board of directors of the
managing corporation also constitute a majority of
the members of the board of the managed
corporation;
i. Amend the Articles of Incorporation
iii. By Cumulative Voting
a. See earlier discussion on election of
directors
iv. Without board resolution
a. 2/3 of outstanding capital stock — delegate
to the board the power to amend the by-
laws;
b. Majority of the outstanding capital stock —
revoke the power of the board to amend
the by-laws which was previously
delegated.
c. Removal of directors by a vote of the
stockholders representing at least 2/3 of
the outstanding capital stock
Page 130 of 250
COMMERCIAL LAW
3. Proprietary Rights
a. Right To Dividends
The right to dividends vests at the time of its declaration
by the Board of Directors.
Although stock certificates grant the stockholder the right
to receive quarterly dividends of 1%, cumulative and
participating, the stockholders do not become entitled to
the payment thereof without necessity of a prior declaration
of dividends. (Republic Planters Bank v. Hon. Agana, Sr.,
G.R. No. 51765, 1997)
Stock Corporations are prohibited from retaining surplus
profits in excess of 100% of their paid-in capital stock,
except:
1. When justified by definite corporate expansion projects
or programs approved by the board of directors
2. Corporation is prohibited under a loan agreement from
declaring dividends without the creditor's consent.
3. Under special circumstances such as when there is a
need for special reserve for probable contingencies
Form of Dividends
1. Cash Dividends (revocable before announcement).
2. Property Dividends (revocable before announcement).
3. Stock Dividends, which requires, aside from the
declaration by the Board, the approval of 2/3 of the
outstanding capital stock (revocable-before issuance). P".
Note: No dividends can be declared out of capital, except
liquidating dividends distributed at dissolution.
b. Right Of Appraisal
The right to withdraw from the corporation and demand
payment of the fair value of his shares after dissenting from
certain corporate acts involving fundamental changes in
corporate structure.
Instances Wherein Appraisal Right May Be Exercised
a. Extension or shortening of corporate term;
b. In case any amendment to the articles of incorporation
has the effect of changing or restricting the rights of
any stockholders or class of shares, or of authorizing
preferences in any respect superior to those of
outstanding shares of any class;
c. Investing of corporate funds in another business or
purpose;
d. Sell or dispose all or substantially all assets of
corporation;
e. Merger or consolidation.
Exercise of Appraisal Right (Sec. 82)
)
ATENEO CENTRAL
BAR OPERATIONS 2019
• A written demand on the corporation within 30 days
after the vote was taken (failure to do so means
waiver);
• Ten (10) days from demand, the dissenting
stockholder must submit his certificates of stocks for
notation that such certificates represent dissenting
shares.
• The price to be paid is the fair value of the shares on
the date the vote was taken;
• The fair value shall be agreed upon by the corporation
and the dissenting stockholders within 60 days from
the date the vote was taken. In case there is no
agreement, the fair value shall be determined by a
majority of the 3 distinguished persons one of whom
shall be named by the stockholder another by the
corporation and the third by the two who were chosen;
• The right of appraisal is extinguished when:
a. He withdraws the demand with the
corporations consent;
b. The proposed action is abandoned;
c. The SEC disapproves the action.
• If the dissenting stockholder is not paid within 30 days
from the award, he shall automatically be restored to
all his rights as stockholder.
c. Right To Inspect
What Records Can Be Inspected?
1. Bodk of minutes of stockholders meetings;
2. Book of minutes of board meetings;
3. Record or Book of all business transactions;
4. Stock and transfer book.
5. Financial statements (Sec. 75)
Stock and transfer book
Record of:
1. All stocks in the names of the stockholders
alphabetically arranged;
2. The installment paid and unpaid on all stock for which
subscription has been made, and the date of payment
uf any installment;
3. A statement of every alienation, sale or transfer of
stock made; and
4. Such other entries as the by-laws may prescribe.
Notes: Stock and Transfer Book
Section 74, while specific in the kinds of records that must
be maintained, is not limiting, thus, the inspection right is
applicable to the stock and transfer book (Yujuico v.
Quiambao, G.R. No. 180416, 2014)
The corporate secretary is the officer who is duly
authorized to make entries on the stock and transfer book
(Gokongwei v. SEC, GR No. 45911, 1979).
Page 131 of 250
COMMERCIAL LAW
All transfers of shares not entered in the stock and transfer
book of the corporation are invalid as to attaching or
execution creditors of the assignors, as well as to the
corporation and to subsequent purchasers in good faith
and to all persons interested, except the parties to such
transfers: "All transfers not so entered on the books of the
corporation are absolutely void; not because they are
without notice or fraudulent in law or fact, but because they
are made so void by statute (Uson vs. Diosomito, G.R. No.
42135, 1935).
The entries are considered prima facie evidence only and
may be subject to proof to the contrary (Bitong v. CA, G.R.
No. 123553, 1998).
The stock and transfer book of the corporation cannot be
used as the sole basis for determining the quorum as it
does not reflect the totality of shares which have been
subscribed, and more so when the articles of incorporation
show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and
transfer book (Lanuza v. Court of Appeals, G.R. No.
131394, 2005).
Grounds for Not Allowing Inspection by a Stockholder
a. If the person demanding to examine the records has
improperly used any information secured fdi- prior
examination,
b. He is not acting in good faith,
c. It is not being exercised for a legitimate purpose
(Gokongwei v. SEC, G.R. No. 45911, 1979).
Doctrinal Rulings on Right to Inspect
1. The demand for inspection should cover only
reasonable hours on business days;
The stockholder, member, director or trustees demanding
the right is one who has not improperly used any
information secured through any previous examination of
the records;
The demand must be accompanied with statement of the
purpose of the inspection, which must show good faith or
legitimate purpose. Illegitimate purposes include to obtain
corporate secrets (formula), nuisance suit, or to embarrass
the company. (Africa v. PCGG, G.R. No. 83831, 1992)
If the corporation or its officers contest such purpose or
contend that there is evil motive behind the inspection, the
burden of proof is with the corporation or such officer to
show the same.
The RTC, and not the Sandiganbayan, has jurisdiction
over a stockholder's suit to enforce its right to inspect
ATENEO CENTRAL
BAR OPERATIONS 2019
under the Corporation Code where the case does not
involve a sequestration-related incident, but an intra-
corporate controversy (Abaci v. PHILCOMSAT, G.R. No.
200620, 2015)
A stockholder's right to inspect corporate records subsists
during the period of liquidation (three year period for
dissolution per Sec. 145). (Chua v. SEC, G.R. No. 216146,
2016)
Remedies If Right to Inspect is Denied
Mandamus
Refusal to allow stockholders (or members of a non-stock
corporation) to examine books of the -company is not a
ground for appointing a receiver (or creating a mgt.
committee) since there are other adequate remedies, such
as mandamus. (Ao-as v. CA, G.R. No. 128464, 2006)
Damages
Criminal Sanction (Sec. 144)
Requisites for Section 144 to Apply (Ang-Abaya v. Ang,
G.R. no. 178511, 2008)
• A director, trustee, stockholder or member has made
a prior demand in writing for ,a copy of excerpts from
the corporations records or minutes;
• Any officer or agent of the concerned corporation shall
refuse to allow the said director, trustee, stockholder
or member of the corporation to examine and copy
said excerpts;
• If refusal is made per a resolution or order of the board
of directors or trustees, the liability under this section
for such action shall be imposed upon the directors or
trustees who voted for refusal; and,
• Where the officer or agent of the corporation sets up
the defense that the person demanding to examine
and copy excerpts from the corporation's records and
minutes has improperly used any information secured
through any prior examination of the records or
minutes of such corporation or of any other
corporation, or was not acting in good faith or -for a
legitimate purpose in making his demand, the contrary
must be shown or proved.
• The person demanding to examine has improperly
used any information secured through any prior
examination of the records or minutes of such
corporation or for any other corporation; and
• The one requesting to inspect was not taking in good
faith or for a legitimate purpose in making his demand
d. Pre-Emptive Right
Page 132 of 250
COMMERCIAL LAW
The shareholders' right to subscribe to all issues or
dispositions of shares of any class in proportion to his
present stockholdings, the purpose being to enable the
shareholder to retain his proportionate control in the
corporation and to retain his equity in the surplus.
Instances When Pre-Emptive Right Is Not Available
a. Shares to be issued to comply with laws requiring
stock offering or minimum stock ownership by the
public;
b. Shares issued in good faith with approval of the
stockholders representing 2/3 of the outstanding
capital stock in exchange for property needed for
corporate purposes;
c. Shares issued in good faith with approval of the
stockholders representing 2/3 of the outstanding
capital stock issued in payment of previously
contracted debts;
d. In case the right is denied in the Articles of
Incorporation;
e. Waiver of the right by the stockholder;
f. If the shares of a corporation are offered and not
subscribed and purchased by the stockholders, and
the shares are being offered again, there is no pre-
emptive right with respect to the latter offer of shares
(Benito V. SEC, G.R. No. L-56655, 1983)
e. Right to Vote
(See Subsection F.2. on Participation in Management)
f. Right of First Refusal
The right of first refusal provides that a stockholder who
may wish to sell or assign his shares must first offer the
shares to the corporation or to the existing stockholders of
the corporation, under terms and conditions which are
reasonable; and that only when the corporation or the other
stockholders do not or fail to exercise their option, is the
offering stockholder at liberty to dispose of his shares to
third parties.
Pre-Emptive Right v. Right of First Refusal
RIGHT OF FIRST
PRE-EMPTIVE RIGHT
REFUSAL
Generally may be Arises only by virtue of
exercised, subject to contractual stipulations or
limitations in Corporation statutory stipulations (Sec.
Code 98)
Covers unissued shares Covers shares already
offered for subscriptions issued
May be exercised by mere Can only be exercised by
trustee or conservator the owner and not mere
(Republic v. trustee or conservator,
ATENEO CENTRAL
BAR OPERATIONS 2019
Sandiganbayan, G.R. No. since it is an act of
107789, 2003) ownership (Republic v.
Sandiganbayan, G.R. No.
107789, 2003) .
Right claimed against the
Right exercisable against
Corporation, where the
the seller-stockholder
stockholder must pay
Note:
A corporation has no power to prevent or restrain transfers
of its shares, unless such power is expressly conferred in
the Articles of Incorporation or the law. (Fleischer v. Botica
Nolasco Co., G.R.No. L-23241, 1925)
A provision in the by-laws granting the right of first refusal
(and therefore, restrains trade) is void and does not bind
third parties (Fleischer v. Botica Nolasco Co., G.R. No. L-
23241, 1925)
A corporation cannot by either its board, its by-laws, or the
acts of its officers create restrictions in stock transfers,
because 'restrictions in the transfer of stock must have
their source in legislative enactment.'
By-laws are intended merely for the protection of the
corporation and prescribe relation, not restriction; they are
always subject to the charter of the corporation. (Rural
Bank of Salinas v. CA, G.R_No. 96674, 1992)
g. Other Rights
• Right to issuance of stock certificate for fully paid
shares - Under Section 64 of the Corporation Code,
no certificate of stock shall be issued to a subscriber
until the full amount of his subscription together with
interest and expenses (in case of delinquent shares),
if any is due, has been paid. A subscriber must first
totally pay his subscription before a certificate of stock
covering shares subscribed and paid for could be
issued to him. But an unpaid subscription (not declared
delinquent) can be voted upon in corporate meetings.
Such delinquent shares are also entitled to dividends,
subject to the rules set forth in Section 43 of the
Corporation Code on delinquent shares.
Nevertheless, Section 64 does not prohibit the corporation
from "dividing" the subscription of a subscriber by
considering portion thereof as fully paid and issuing a
corresponding certificate over the paid- up shares. Thus,
in the absence of provisions in the by- laws to the contrary,
a corporation may apply payments made by subscribers
on account of their subscriptions either as:
Page 133 of 250
COMMERCIAL LAW
1. Full payment for the corresponding number of
shares, the par value of which is covered by such
payment; or
2. Payment pro rata to each and all the entire
number of shares subscribed for
Once an alternative is chosen, it must be applied uniformly
to all stockholders similarly situated, and therefore, it
cannot be changed without the consent of all stockholders
who might be affected.
• Proportionate participation in the distribution of
assets in liquidation
Stockholders and stock corporation — Except
by decrease of capital stock, and as otherwise
allowed by the Corporation Code, no corporation
shall distribute any of its assets or property to its
stockholders except upon lawful dissolution and
after payment of all its liabilities (Sec. 122)
- Members and foundations — Upon dissolution of
a non-stock corporation, all liabilities and
obligations must first be paid, and assets received
and held subject to limitations permitting their use
for specified eleemosynary purposes shall be
properly transferred or returned, then the net
assets remaining, if any, shall be distributed to the
members, or any class or classes of members, to
the extent that the articles of incorporation or by-
laws provide for a plan of distribution. Otherwise,
a plan of distribution may be adopted in the
process of dissolution by:
a. Majority vote of the Board of Trustees
b. Adopted by at least 2/3 of the members
having voting rights (Secs. 94-95)
• Right to transfer of stocks in corporate books;
Requirements for valid transfer of stocks
1 There must be delivery of the stock certificate;
2. The certificate must be endorsed by the owner, or his
attorney-in-fact, or other persons legally authorized to
make the transfer; and
3. To be valid against third parties, the transfer must be
recorded in the books of the corporation
A transfer of shares not recorded in the stock and transfer
book is non- existent as far as the corporation is
concerned, and consequently, a petition for mandamus
filed by a transferee, compelling it to issue the
corresponding certificates in th9 name of the transferee
would be without basis. It is only when the transfer has
been recorded in the stock and transfer book that a
ATENEO CENTRAL
BAR OPERATIONS 2019
corporation may rightfully regard the transferee as one of
its stockholders. From this time, the consequent
obligations on the part of the corporation to recognize such
right as it is mandated by law to recognize arises (Ponce
v. Alsons Cement, G.R. No. 139802, 2002).
Note: In Andaya v. Rural Bank of Cabadbaran, Inc., G.R.
No. 188769, 2016, the Court ruled that the registration of a
transfer of shares of stock is a ministerial duty on the part
of the corporation. Aggrieved parties may then resort to the
remedy of mandamus to compel corporations that
wrongfully or unjustifiably refuse to record the transfer or
to issue new certificates of stock. This remedy is
available even upon the instance of a bona fide
transferee who is able to establish a clear legal right to
the registration of the transfer.
4. Remedial Rights
Suits by Stockholders/Members
a. Individual Suit — those brought by the shareholder in
his own name against the corporation when a wrong is
directly inflicted against him.
b. Representative Suit — those brought by the
stockholder in behalf of himself and all other
stockholders similarly situated when a wrong is
committed against a group of stockholders.
c. Derivative Suit — those brought by one or more
stockholders/members in the name and on behalf of
the corporation to redress wrongs committed against
it, or protect/vindicate corporate rights whenever the
officials of the corporation refuse to sue, or the ones to
be sued, or has control of the corporation. (Ching v.
Subic Bay, G.R. No. 174353, 2014)
A lawyer engaged as counsel for a corporation
cannot represent members of the Board in a
derivative suit against them. To do so would be
tantamount to conflicting interest between the
Board and the corporation (Homilla V. Salunat,
A.C. 5804, 2003).
Requisites of Derivative Suit
a. He (Plaintiff) was a stockholder or member at the time
the acts or transactions subject of the action was filed;
b. He exerted all reasonable efforts, and alleges the
same with particularity in the complaint, to exhaust all
remedies available under the articles of incorporation,
by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
The exhaustion of intra-corporate remedies cannot be
dispensed even if the company is a family corporation
Page 134 of 250
COMMERCIAL LAW
(Yu v. Yukayguan, G.R. No. 177549, 2009; Ang v. Sps.
Ang, G.R. No. 201675, 2013)
c. No appraisal rights are available for the act or acts
complained of; and
d. The suit is not a nuisance or harassment suit (Interim
Rules of Procedure for Intra-Corporate Controversies,
A.M. No. 01-2-04-SC, 2001).
5. Obligations of a Stockholder
a. Liability to the corporation for unpaid subscription;
b. Liability to the creditors of the corporation for unpaid
subscription;
c. Liability to the corporation for interest on unpaid
subscription if so required by the by-laws;
d. Liability for watered stock;
e. Liability for dividends unlawfully paid;
6. Meetings
a. Regular or Special:
1. Regular - held annually on a date fixed in the by- laws,
or if not so fixed, on any date in April of every year as •
determined by the Board of Directors or Trustees.
Provided, written notice of regular meeting must be
sent at least 2 weeks, unless a different period is
required by the by- laws
Special - held at any time deemed necessary or as
provided in the by- laws. Provided that at least 1 week
written notice shall be sent to all stockholders or
members, unless otherwise provided in the by- laws.
Note that notice of any meeting may be waived,
expressly or impliedly by any stockholder or member.
i. When and Where - The meetings of stockholders or
members must be held in the city or municipality where the
principal office of the corporation is located, preferably in
the principal office itself. Any provision in the by- laws
changing such place shall be illegal
ii. Notice
Section 50 of the Corporation Code expressly allows a
shorter period of notice of stockholders'
meetings that those provided under its default two (2) week
period, provided the same is provided for in the By-Laws,
(Ricafort v. Dicdican, 787 SCRA 163, 2016); such period
set in the by-laws is valid even when the period is reckoned
from the mailing of the notice rather than when it is actually
received by the stockholder of record, (Guy v. Guy, 790
SCRA 288, 2016)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
b. Who Calls The Meetings on a similar demand, the yeas and nays must
1. Whenever for any cause, there is no person be taken on any motion or proposition, and a
designated by the by-laws to call a meeting, the SEC record thereof carefully made.
upon petition of a stockholder/ member, and on the - the protest of any director, trustee, stockholder
showing of good cause therefore, may issue an order or member on any action or proposed action
to petitioner to call a meeting by giving proper notice, must be recorded in full on his demand. (Sec.
with the petitioner presiding thereat until at least a 74)
majority of stockholders/ members present have
chosen a presiding officer. The signing of the minutes by all the members of the board
2. Same remedy may be used if the authorized person is not required—there is no provision in the Corporation
fails or refuses to call a meeting Code that requires that the minutes of the meeting should
be signed by all the members of the board. The signature
c. Quorum in meetings of the corporate secretary gives the minutes of the meeting
probative value and credibility (People v. Dumlao, G.R. No.
General rule: Majority of the outstanding capital stock, or 168918, 2009).
of the members, shall constitute a quorum
The entries contained in the minutes are prima fade
Outstanding Capital Stock — the total shares of stock evidence of what actually took place during the meeting,
issued under binding subscription agreements to pursuant to Section 44, Rule 130 of the Revised Rule on
subscribers or stockholders, whether or not fully or partially Evidence (People v. Dumlao, G.R. No. 168918, 2009).
paid, except treasury shares
Resolution vs. Minutes Of The Meeting (People v.
Exception: In cases where greater vote for an act or Dumlao, G.R. No. 168918, 2009)
business is required by law as when the required vote is RESOLUTION MINUTES OF THE
2/3 of the outstanding capital stock, or membership as the MEETING
case may be A formal action by a A brief statement not only
corporate board of what transpired at a
of
Note: For stock corporations, the "quorum" referred to in directors or meeting,
other usually of
Section 52 of the Corporation Code is based on the corporate bodystockholders/members or
number of outstanding voting stocks. For non- stock authorizing a particular directors/trustees, but also
corporations, only those who are actual, living members act, transaction, or
at a meeting of an
with voting rights shall be counted in determining the appointment executive committee
existence of a quorum during member's meetings. Dead
members shall not be counted (Tan v. Sycip, G.R. No.
153468, 2006). F. CAPITAL STRUCTURE
d. Minutes of meetings 1. Subscription Agreements
• Records of all business transactions and minutes Any contract for the acquisition of unissued stock shall be
of all meetings shall be kept and carefully deemed a subscription, notwithstanding the fact that the
preserved at a corporation's principal office parties refer to it as a purchase or some other contract.
• It shall set forth in detail: (Sec. 60)
time and place of holding the meeting, Kinds of Subscription Contracts
how authorized, a. Pre-incorporation subscription — entered into before
the notice given, the incorporation and irrevocable for a period of six (6)
whether the meeting was regular or special; if months from the date of subscription unless:
special its object must be stated, i. All other subscribers consent to the revocation, or
- those present and absent, and every act done ii. The corporation failed to materialize after 6
or ordered done at the meeting. months or within the stipulated period.
- upon the demand of any director, trustee,
stockholder or member, the time when any It cannot be revoked after filing the Articles of Incorporation
director, trustee, stockholder or member with the SEC. (Sec. 61)
entered or left the meeting must be noted in
the minutes;
Page 135 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
b. Post-incorporation subscription — entered into after 3. Shares of Stock
incorporation, such as for the unsubscribed portion of
the authorized capital stock and for the purchase of a. Nature of Stock
increased capital stocks after an amendment of the This is the interest or right, which an owner has in the
article of incorporation. management of the ,corporation, and its surplus profits,
and, on dissolution, in all of its assets remaining after the
2. Consideration for Stocks (Sec. 62) payment of its debt. The stockholder may own the share
Stocks shall not be issued for a consideration less than the even if he is not holding a certificate of stock.
par or issued price thereof.
Shares of Stock v. Certificate of Stock
Consideration for issuance of stock may be by any or a SHARES OF CERTIFICATE OF STOCK
combination of any two or more of the following: STOCK
a. Cash actually paid Unit of interest in a Evidence of the holder's
b. Property (tangible or intangible) actually received and corporation ownership of the stock and of his
necessary or convenient for the corporation's use right as a shareholder and up to
c. If other than cash, valuation must first be determined the extend specified therein
by incorporators (if not yet incorporated) or Board
subject to SEC approval
Incorporeal or It is concrete and tangible
d. Labor performed or -service actually rendered to the
intangible property
corporation
e. Debts incurred previously by the corporation (for May be issued by May be issued only if the
subscriptions after incorporation) the corporation even subscription is fully paid
f. Amounts from unrestricted dividends (for declaration if the subscription is .
of stock dividends) not fully paid
g. Outstanding shares exchanged in reclassification or
conversion Note: A stockholder who does not pay his subscription is
h. No issuance of shares on promissory notes or future not entitled to the issue of a stock certificate. The
services subscription price of the stocks subscribed by him should
i. Same rules on consideration for stocks whenever first be paid.
applicable are to be used for bonds issued by the
corporation b. Consideration for Shares of Stock
The issued price of no par value shares is the amount (See earlier discussion)
fixed:
i. In the Articles c. Watered Stock (Diluted Stock)
ii. By the Board if authorized in the Articles or By-
Laws, or i. Definition
iii. By majority vote of the outstanding stock Stock issued for a consideration less than its par or issued
value or for a consideration in any form other than cash,
Where the consideration is other than actual cash, or valued in excess of its fair value. (Sec. 65)
consists of intangible property such as patents of
copyrights, the valuation thereof shall initially be ii. Liability Of Directors For Watered Stock
determined by the incorporators or the board of directors, Directors or officers consenting to issuance of watered
subject to approval by the SEC. (Sec. 62) stock are solidarily liable with the stockholder concerned,
to the corporation or its creditors for the difference between
Note: A special stipulation contained in a subscription to the fair market value received (by the corporation at the
corporate stock which, if valid, would lessen the capital of time of issuance) and the par or issued value of the stock.
the company and relieve the subscriber from liability to be
sued upon the subscription, is illegal (National Exchange If knowing the same, the Directors or Officers did not object
v. Dexter, G.R. No. L-27872, 1928). and express their written objection, filed with the corporate
secretary, they shall be liable for the issuance of watered
stocks. (Sec. 65)
Page 136 of 250
0
(I
ATENEO CENTRAL
BAR OPERATIONS 2019
iii. Trust Fund Doctrine On Watered Stocks
The Trust Fund Doctrine is the basis for the prohibition on
issuing watered stock.
A Corporation has no power to release an original
subscriber of its capital stock from the obligation of paying
for his shares, without a valuable consideration for such
release; and as against creditors, a reduction of the capital
stock can take place only in the manner and under the
conditions prescribed by the statute or the charter or the
articles of incorporation (Philippine Trust Corp. v. Rivera,
G.R. No. L-19761, 1923).
See subsection F.4. for discussion on Trust Fund Doctrine.
d. Situs of the Shares of Stocks
The situs of shares of stock is the domicile of the
corporation (Tayag v. Benguet Consolidated Inc., G.R. No.
L-23145, 1968).
e. Classes of Shares of Stock (Sec. 6)
a. Common and Preferred shares
Common shares are also called ordinary shares
and they share in profits pro- rata
- Preferred shares may be preferred (a) as to
dividends, or (b) as to distribution of assets during
liquidation, or (c) as to any other manner stated in
the Arti,cies, not violative of the Corp Code. If
authorized by Articles, Board may fix terms. It is
ALWAYS with a stated par value.
b. Par Value and No-Par Value
• Par value shares - with a pre-stated amount or
denomination
• Non- par value - no pre-stated value
Non-par value shares are deemed fully paid and non-
assessable so holders of such are not liable to the
corporation or its creditors.
The consideration received is treated as capital and cannot
be declared as dividends.
Because they are vested with public interest, the
following types of corporations may only issue par
value shares:
a. Banks
b. Trust Companies
C. Insurance Companies
d. Public Utilities
e. Building and Loan Associations.
c. Voting and Non- Voting Shares
Page 137 of 250
COMMERCIAL LAW
• Voting share with complete voting rights
• Non - voting shares are usually preferred or
redeemable shares and have limited voting rights.
Non- Voting Shares Have Voting Rights In The
Following Matters:
a. Amendment of Articles
b. Adoption/ Amendment of By- Laws
c. Sale, lease, exchange, mortgage, pledge or dispose of
all or substantially all of corporate property
d. Incur, create, increase bonded indebtedness
e. Increase, decrease capital stock
f. Merger/ consolidation with another corporation
g. Investment of funds in another corporation
h. Dissolution of corporation
Other Classes of Shares: (Secs. 7, 8, 9)
a. Founder's shares — Given rights and privileges
not enjoyed by owners of other stocks; exclusive
right to vote/be voted in the election of directors
shall not exceed 5 years
b. Redeemable shares — Expressly provided in
articles; may be purchased/taken up upon
expiration of period of said shares purchased
whether or not there are unrestricted retained
earnings; may be deprived of voting rights.
c. Treasury stocks — stocks previously issued and
fully paid for and reacquired by the corporation
through lawful means (purchase, donation, etc.);
not entitled to vote and no dividends could be
declared thereon as corporations cannot declare
dividends to itself.
Escrow shares — those held by a third person to be
released only upon the performance of a condition or the
happening of a certain event contained in the agreement.
Preferred cumulative participating share of stock -
Share entitling its holder to preference in the payment of
dividends ahead of common stockholders and to be paid
the dividends due for prior years and to participate further
with common stockholders in dividend declarations.
Promotion stocks for services rendered prior to
incorporation escrow stock — Stock deposited with a 31d
person to be delivered to stockholder/assignor after
complying with certain conditions.
Over-Issued Stock — Stock issued in excess of authorized
capital stock; null and void.
ATENEO CENTRAL
BAR OPERATIONS 2019
4. Payment of Balance of Subscription
May be through any of the following means:
a. As specified in the subscription contract.
b. The Board, through a resolution, may call for all or part
of the unpaid subscriptions.
c. Failure to pay on a specified date, the entire balance
which is due and payable.
d. Failure to pay within thirty (30) days from the date the
subscription becomes delinquent and is subject to
sale.
The prescriptive period in case of subscription of shares
begins to run only from the time the board of directors
declares that the balance is due and payable (Garcia v.
Suarez, G.R. No. 45493, 1939)
Unpaid Subscriptions (Sec. 66)
a. There will be interest imposed on unpaid subscriptions
b. Payable to the corporation from date of subscription
c. If required by and interest fixed in the By-laws
d. If interest is required but not fixed — legal rate
e. Therefore, no interest on unpaid subscription is
required:
a. If not required by by-laws
b. If not required by subscription contract
Methods of Collection of Unpaid Subscription
a. Call for payment
b. Declaration of delinquency and sale at public auction
of delinquent shares;
c. Ordinary civil action;
d. Collection from cash dividends and other amounts due
to stockholders if allowed by by-laws/agreed to by him.
a. Call by-Board of Directors
The Board of Directors may, by a formal resolution, issue,
at any time, subject to the subscription contract, a call for
all or part of the unpaid subscription with or without
interest.
Requisites for a valid call
a) Must be made in the manner prescribed by law;
b) Must be made by the Board of Directors; and
c) Must operate uniformly upon all shareholders
Note: No need of a call if the subscription contract
specifies dates when the subscription balance is payable.
b. Notice Requirement
The unpaid subscriptions are not due and payable until a
call is made by the corporation for payment. It does not
even appear that a notice of such has been sent to
Page 138 of 250
COMMERCIAL LAW
petitioner by the respondent corporation (Apocada v.
NLRC, G.R. No. 80039, 1989).
c. Sale of Delinquent Shares
Delinquency on subscriptions
Stocks not paid within 30 days from the date fixed in the
contract of subscription or from the date stated in the call
made by the Board of Directors.
i. Effect of Delinquency
• They shall be subject to delinquency sale.
• The stock shall not be voted or be entitled to vote
or to representation at any stockholder's meeting.
• The holder shall not be entitled to any of the rights
of a stockholder except the right to dividends
• The corporation has the right to apply cash
dividends due to the unpaid balance plus cost and
expenses and to withhold stock dividends until the
unpaid subscription is fully paid.
Procedure of Delinquency Sale
a. The Board, by a resolution, declares a call, which is to
pay the unpaid subscription or part thereof on a
specified date.
Note: Notice of said resolution is sent to all shareholders
with unpaid subscriptions.
There is no need for a call if the subscription contract
specifies dates when subscription balance is due.
b. If no payment is made within thirty (30) days from the
date specified, the board shall order the sale of
delinquent shares.
c. Notice of sale and copy of resolution ordering the sale
of delinquent shares is given to every delinquent
stockholder personally or by registered mail.
d. Publication once a week for two (2) consecutive weeks
in a newspaper of general circulation in the province or
city of the corporation's principal office.
e. Sale at Public Auction is done wherein the winning
bidder is the one who offers full payment of balance
plus accrued interest, advertising costs, sale expenses
for smallest number of shares or fraction of a share. If
there are no bidders, the Corporation may bid and the
shares become treasury shares, provided the same
has unrestricted retained earnings.
Note: There shall be no sale at public auction if:
a. The delinquent stockholder pays on or before the
• sale: (a) balance due, (b) accrued interest, or (c)
advertising costs and expenses of sale.
0
ATENEO CENTRAL
BAR OPERATIONS 2019
b. The Board orders otherwise, on any of the
following grounds: (a) Defect in the Notice of Sale;
or (b) Defect in sale itself.
After the sale, the Stocks purchased are transferred to the
winning bidder in the corporate books.
When Sale May Be Questioned
a. The action is filed on the ground of irregularity or defect
in the notice of sale, or in the sale of the delinquent
stock;
b. The party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for which
the same was sold with interest from the date of the
sale at the legal rate; and
c. The complaint was filed within 6 months from the date
of the sale (Sec. 69)
Cases When Corporation Can Reacquire Stock
Note: Corporation must have unrestricted retained
earnings
a. Eliminate fractional shares;
b. Collection of compromise indebtedness to the
corporation arising from unpaid subscriptions;
c. Purchase delinquent shares;
d. Exercise appraisal right.
5. Certificate of Stock
a. Nature of the Certificate
It is the paper representation or tangible evidence of the
stock itself and of the various representations therein. It
expresses the contract between the corporation and the
stockholder. It is not essential to the ownership and/or
existence of the share of stock. It is prima facie evidence
that the holder is a shareholder in a corporation (Makati
Sports Club v. Cheng, G.R. No. 178523, 2010)
It is a written acknowledgment by the corporation of the
stockholder's interest in the corporation. It is the personal
property and may be mortgaged or pledged. Transfer
binds the corporation when it is recorded in the corporate
books.
Note: It is the shares that can be mortgaged or pledged,
not the certificate of stock
b. Uncertificated Shares/Securities
Defined as security evidenced by electronic or similar
records. (Securities and Regulation Code, Sec. 3.14)
Page 139 of 250
COMMERCIAL LAW
Note: Under Sec. 43.1 of the Securities and Regulation
Code, a corporation whose shares of stock are registered
pursuant to the Corporation Code or listed in a stock
exchange may:
a. If so resolved by its Board of Directors and agreed by
a shareholder, issue shares to, or record the transfer
of some or all of its shares into the name of said
shareholders, investors or, securities intermediary in
the form of uncertificated securities;
b. The use of uncertificated securities shall be without
prejudice to the rights of the securities intermediary
subsequently to require the corporation to issue a
certificate in respect of any shares recorded in its
name; and
c. If so provided in its articles of incorporation and by-
laws, issue all of the shares of a particular class in the
form of uncertificated securities and subject to a
condition that investors may not require the
corporation to issue a certificate in respect of any
shares recorded in their name.
c. Negotiability
Shares of stocks are transferable by endorsement plus
delivery.
Endorsement plus delivery is good as between parties but
it needs to be recorded in the corporate books to be
effective against ihird parties.
A certificate of stock is a quasi-negotiable instrument. It
may be transferred by endorsement, coupled with delivery
but the holder thereof takes it without prejudice to such
rights or defenses as the registered owner or creditor may
have under the law, except insofar as such rights or
defenses are subject to the limitations imposed by the
principles governing estoppel. (De los Santos v. McGrath,
G.R. No. L-4818, 1955)
i. Requirements for Valid Transfer of Stock:
1. If represented by a certificate, the following must be
strictly complied with:
a. Delivery of the certificate;
b. Indorsement by the owner or his agent;
c. To be effective against third parties, the transfer
must be recorded in the books of the corporation.
2. If NOT represented by the certificate (such as when
the certificate has not yet been issued or where for
some reason is not in the possession of the
stockholder):
a. By means of deed of assignment or public
document; and
b. Such is duly recorded in the books of the
corporation
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
d. Issuance b. Certificates and Serial Numbers of lost
Certificates; and
i. Full Payment c. Other Information and Evidence.
There shall be no issuance of stock certificates unless b. Publication of notice of loss by the Corporation for at
there is full payment of: least three (3) consecutive weeks in a newspaper of
1. Subscription; general circulation in the principal place of business of
2. Interest; and the corporation.
3. Expenses (in case of delinquent shares). c. If a contest is presented to the corporation or if an
action is pending in court, issuance of new certificates
ii. Payment pro rata is suspended until final court decision.
In the absence of special agreement to the contrary, the d. No action is allowed against the corporation for issuing
subscriber's right consists only in an equity entitling him to new shares except for fraud, bad faith, or negligence.
a certificate for the total number of shares subscribed for
by him upon payment of the remaining portion of the 6. Stock And Transfer Book
subscription price (Fua Cur; vs. Summers, G.R. No. 19441,
1923). a. Contents
Record of:
Requisites for Issuance of Certificate of Stock 1. All stocks in the names of the stockholders
1. The certificate must be signed by the president or vice- alphabetically arranged;
president, countersigned by the secretary or assistant 2. The installment paid and unpaid on all stock for which
secretary; subscription has been made, and the date of payment
2. The certificate must -be sealed with the seal of the of any installment;
corporation; 3. A statement of every alienation, sale or transfer of
3. The certificate must be delivered; stock made; and
4. The par value, as to par value shares or full 4. Such other entries as the by-laws may prescribe.
subscription as to no par value shares must first be
fully paid; and Only absolute transfers of shares of stock are required to
5. The original certificate must be surrendered where the be recorded in the corporation's stock and transfer book in
person requesting the issuance of a certificate is a order to have force and effect as against third persons.
transferee from the stockholder (Bitong v. CA. G.R. Attachments of shares are not "transfer" and need not be
No. 123553, 1998) recorded in the corporation's stock and transfer book.
(Ferro Chemicals v. Garcia, etal., G.R. 168134, 2016)
Shares Of Stock v. Certificate Of Stock
SHARES OF STOCK CERTIFICATE OF STOCK b. Who May Make Valid Entries
Evidence of the holder's Entries made on the stock and transfer book by any person
Unit of interest in a ownership of the stock and other than the Corporate Secretary, such as those made
corporation of his right as a by the President and Chairman cannot be given any valid
shareholder effect (Torres Jr. v. CA, G.R. No. 120138, 1997).
Incorporeal or intangible Concrete and tangible
property property Registration of a transfer of shares of stock is a ministerial
May be issued by the duty on the part of the corporation. Aggrieved parties may
corporation even if the May be issued only if the then resort to the remedy of mandamus to compel
subscription is not fully subscription is fully paid corporations that wrongfully or unjustifiably refuse to
paid record the transfer or to issue new certificates of stock.
This remedy is available even upon the instance of a bona
e. Lost or Destroyed Certificate fide transferee who is able to establish a clear legal right to
Procedure for the issuance of new certificates to replace the registration of the transfer. (Andaya v. Rural Bank of
those lost, stolen, or destroyed: Cabadbaran, Inc., G.R. No. 188769, 2016)
a. Affidavit of loss in triplicate copies to be made by the
registered owner or legal representative filed with the
corporation, and stating the following:
a. Circumstances of the Loss;
Page 140 of 250 s
ATENEO CENTRAL
BAR OPERATIONS 2019
7. Disposition And Encumbrances Of Shares
a. Sale of Shares
Sale of Partially Paid Shares
Section 63 provides that no share of stock against which
the corporation holds any unpaid claims shall be
transferable in the books of the corporation.
Sale of a Portion of Shares Not Fully Paid
A stockholder who has not paid the full amount of his
subscription cannot transfer part of his subscription in view
of the indivisible nature of a subscription contract. (SEC
Opinion)
Sale of All Shares Not Fully Paid
The entire subscription, although not yet fully paid, may be
transferred to a single transferee, who as a result of the
transfer must assume the unpaid balance. (SEC Opinion)
Consent of the corporation must first be secured since the
transfer of subscription rights and obligations
contemplates a novation of contract. (Civil Code, Art. 1923)
The SEC correctly categorized the assignment of the
subscription agreements as a form of novation by
substitution of a new debtor and which required the
consent of or notice to the creditor. In this case, the change
of debtor took place when R.C. Lee assigned the Oceanic--
shares under the subscription agreements to SSI so that
the latter became obliged to settle the 75% unpaid balance
on the subscription. The SEC was correct in saying that
Interport was duly notified of the assignment when SSI
tendered its payment for the 75% unpaid balance, and that
it could not anymore refuse to recognize the transfer of the
transfer of the subscription agreements to SSI was to
extinguish the obligation of R.C. Lee to Oceanic, now
Interport. Interport was no longer obliged to accept any
payment from R.C. Lee because the latter had ceased to
be privy to the subscription agreements, but was now
legally bound to accept SSi's tender of payment as the new
debtor. (Interport Resources Corporation v. Security
Specialist, Inc., G.R. No. 154069, 2016)
Sale of Fully Paid Shares
Section 63 provides that shares of stock issued with a
corresponding certificate of stock are personal property
and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the transfer.
b. Allowable Restrictions on Sale of Shares
The authority granted to a corporation to regulate the
transfer of its stock does not empower the corporation to
Page 141 of 250
COMMERCIAL LAW
restrict the right of a stockholder to transfer his shares, but
merely authorizes the adoption of regulations as to the
formalities and procedure to be followed in effecting
transfer (Thomson v. CA, G.R. No. 116631, 1998).
c. Requisites of a Valid Transfer
If represented by a certificate, the following must be strictly
complied with:
a. Delivery of the certificate;
b. Indorsement by the owner or his agent;
c. To be valid against third parties, the transfer must be
recorded in the books of the corporation (Rural Bank
of Lipa v. CA, G.R. No. 124535, 2001).
If NOT represented by a certificate, the following must be
complied with:
a. By means of a deed of a Deed of Assignment;
b. The same must be recorded in the books of the
corporation.
The failure by a seller to deliver, within a reasonable time,
the stock certificates representing shares of stock subject
of a sale transaction may be a basis to rescind such sale
(Fil-Estate Gold and Development v. Vertex, G.R. No.
202079, 2013).
In case of chattel mortgage, a double registration is
necessary with the Register of Deeds where:
a. The debtor resides
b. The corporation has its principal place of business.
Registration on the stock and transfer book would be of no
effect
In case of attachments and levies, shares may be attached
by leaving with the corporate officer a copy of the writ and
notice. No recording in the stock and transfer book is
needed. The moment the notice has been duly delivered,
it becomes binding.
d. Involuntary Dealings With Shares
As an incident of ownership, a stockholder may pledge,
mortgage or encumber his shares of stocks. Restrictions
by the corporation are only valid when:
a. They appear in the Articles of Incorporation, by-laws,
and the certificates.
b. They are not more onerous than granting existing
stockholders an option to purchase within a
reasonable period and within reasonable terms.
B. DISSOLUTION AND LIQUIDATION
Dissolution
ATENEO CENTRAL
BAR OPERATIONS 2019
Extinguishment of the franchise of a corporation and the
termination of its corporate existence.
However, the corporation shall nevertheless be continued
as a body corporate for three (3) years after the time when
it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets, but not for
the purpose of continuing the business for which it was
established. (Sec. 122)
1. Modes of Dissolution:
a. Voluntary
i. Where No Creditors Are Affected
• A meeting must be held on the call of directors or
trustees;
• Notice of the meeting should be given to the
stockholders by personal delivery or registered mail at
least 30 days prior to the meeting;
• The notice of meeting should also be published for
three (3) consecutive weeks in a newspaper published
in the place;
• The resolution to dissolve must be approved by the
majority of the directors/trustees and approved by the
stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of members;
• A copy of the resolution shall be certified by the
majority of the directors or trustees and countersigned
by the secretary;
• The signed and countersigned copy will be filed with
the SEC and the latter will issue the certificate of
dissolution.
ii. Where Creditors Are Affected
• Approval of the stockholders representing at least 2/3
of the outstanding capital stock or 2/3 of members in a
meeting called for that purpose;
• Filing a Petition with the SEC signed by majority of
directors or trustees or other officers having the
management of its affairs verified by President or
Secretary or Director. Claims and demands must be
stated in the petition;
• If Petition is sufficient in form and substance, the SEC
shall issue an Order fixing a hearing date for
objections;
• A copy of the Order shall be published at least once a
week for 3 consecutive weeks in a newspaper of
general circulation or if there is no newspaper in the
municipality or city of the principal office, posting for
Page 142 of 250
COMMERCIAL LAW
three (3) consecutive weeks in three (3) public places
is sufficient;
• Objections must be filed no less than 30 days nor more
than 60 days after the entry of the Order;
• After the expiration of the time to file objections, a
hearing shall be conducted upon prior five (5) day
notice to hear the objections;
• Judgment shall be rendered dissolving the corporation
and directing the disposition of assets; the judgment
may include appointment of a receiver.
iii. By Shortening Corporate Term- This is done by
amending the Articles of Incorporation.
b. Involuntary
A corporation may be dissolved by the SEC upon filing of
a verified complaint and after proper notice and hearing on
grounds provided by existing laws, rules, or regulations.
(Sec. 121)
i. Expiration of Corporate term: A corporation has a term
of not more than 50 years from date of incorporation
subject to extension for a period not exceeding 50 years
per extension unless:
- Sooner dissolved
- Extended. (Sec. 11)
ii. Failure to Organize And Commence Business Within
2 Years From Incorporation
If the corporation does not formally organize and
commence the transaction of its business or the
construction of its works within 2 years from the date of its
incorporation, its corporate power ceases and the
corporation shall be deemed dissolved. (Sec. -22)
iii. Legislative Dissolution
iv. Dissolution by the SEC on Grounds under Existing
Laws
A corporation may be dissolved by the SEC 1- ased on the
following grounds:
• Failure to organize and commence business within 2
years from incorporation (Corporation Code, Sec. 22)
• Continuously inoperative for 5 years (Corporation
Code, Sec. 22; (PD 902-A, Sec. 6(i(4)))
• Fraud in procuring Certificate of Registration (PD 902-
A, Sec. 6(i)(1))
• Serious misrepresentation as to what the government
can do or is doing to the prejudice of or damage to the
general public. Fraud in procuring Certificate of
Registration (PD 902-A, Sec. 6(i(2))
(
ATENEO CENTRAL
BAR OPERATIONS 2019
• Refusal to comply with any lawful order of the SEC
restraining commission of acts which would amount to
a grave violation of its franchise (PD 902-A, Sec.
6(i)(3))
• Failure to file by-laws within 30 days from issue of
certificate of incorporation (PD 902-A, Sec. 6(i)(5))
• Failure to file required reports (PD 902-A, Sec. 6(i(6)
• Breach of provision of law for its creation or renewal
(Sec. 2(a), Rule 66, Rules of Court)
• Continuance of business not feasible as found by
Management Committee or Rehabilitation Receiver
(PD 902-A, Sec. 6(d))
• Act or omission which amounts to a surrender of
corporate rights, privileges, or franchises (Sec. 2(c),
Rule 66, Rules of Court)
• Misuse of a right, privilege, or franchise in
contravention of law, such as the commission of ultra
vires or illegal acts (Sec. 2(c), Rule 66, Rules of Court)
Non- Use of Charter (Sec. 22)
"Organization" under SEC Rules
• Adoption of the by-laws and the filing and approval of
the same with and by the SEC if the same were not
adopted and filed simultaneously with the articles of
incorporation;
• Election of the Board of
• Directors or Trustees and of
the officers;
• Establishment of the principal office; and
• Providing for the subscription and payment of the
capital stock and the taking of such steps as are
necessary to endow the legal entity with capacity to
transact the legitimate business for which it was
created
"Commenced Business" under SEC Rules
When the corporation has performed preparatory acts
geared towards the fulfillment of the purposes for which it
was established such as but not limited to the following:
• Entering into contracts or negotiations for lease or sale
of properties to be used as business or factory site;
• Making plans for and the construction of the factory;
and
• Taking steps to expedite the construction of the
company's working equipment
The failure to file the by-laws does not automatically
operate to dissolve a corporation but is only a ground for
such dissolution (Chung Ka Bio v. IAC, G.R. No. 74653,
1988).
Demands of Minority for Dissolution
Page 143 of 250
COMMERCIAL LAW
Corporate dissolution due to mismanagement of majority
stockholder is too drastic a remedy, especially when the
situation can be remedied such as giving minority
stockholders a veto power to any decision (Chase v.
Buencamino, G.R. No. 20395, 1985).
Effects of Dissolution
(a) Vesting of legal title to the corporate property in the
stockholders, who become co-owners thereof
(b) The corporation ceases to be a body corporate to
continue the business for which it was established.
The termination of the life of a juridical entity does not by
itself cause the extinction or diminution of the rights and
liability of such entity, since it is allowed to continue as a
juridical entity for three (3) years for the purpose of
prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and
convey its property, and to distribute its assets (Republic
v. Tancinco, G.R. No. 139256, 2002).
A board resolution to dissolve the corporation does not
operate to so dissolve the juridical entity. For dissolution to
be effective the requirements mandated by the
Corporation Code should have been strictly complied with"
(Vesagas v. Court of Appeals, G.R. No. 142924, 2001)
A corporation cannot extend its life by amendment of its
articles of incorporation effected during the three-year
statutory period for liquidation when its original term of
existence had already expired, as the same would
constitute new business (Alhambra Cigar & Cigarette
Manufacturing Company, Inc. v. SEC, G.R. No. 23606,
1968).
When the period of corporate life expires, the corporation
ceases to be a body corporate for the purpose of
continuing the business for which it was organized (PNB v.
Court of First Instance of Rizal, Pasig, Br. XXI, G.R. No.
63201, 1992).
A party's stockholding in a corporation, whether existing or
dissolved, is a property right which he may vindicate
against another party who has deprived him thereof.
Stockholders may convey their respective shareholdings
toward the creation of a new corporation to continue the
business of the old or they may reincorporate by filing new
articles of incorporation and by-laws.
ATENEO CENTRAL
BAR OPERATIONS 2019
2. Methods ofLiquidation
Liquidation
Process by which all the assets of the corporation are
converted into liquid assets in order to facilitate the
payment of obligations to creditors, and the remaining
balance if any is to be distributed to the stockholders.
There is no time limit within which the trustees must
complete a liquidation placed in their hands (Vigilla
et.a/. v. Philippine College of Criminology, G.R. No.
200094, 2013).
Modes of Liquidation
a. Through Board of Directors or Trustees — normal
method of procedure
Even if no trustee is appointed or designated during the
three-year period of the liquidation of the corporation, the
Court has held that the Board of Directors may be
permitted to complete the corporate liquidation by
continuing as trustees by legal implication (Vigilla et al. v
Philippine College of Criminology, G.R. No. 200094, 2013)
b. Through Trustee — at any time during the three years
of liquidation, a corporation is authorized and
empowered to convey all of its property to trustees for
the benefit of stockholders, members, creditors, and
other persons in interest. The twee (3)-year limitation
will not apply provided the designation of the trustee is
made within said period.
c. Through Receiver —created by means of judicial or
quasi-judicial appointment of the receiver. The
receiver is actually an officer of the court and must
therefore be accountable to the court.
Note: If there is no Board of Directors or Trustees, those
having pecuniary interest in the assets, including not only
the shareholders but likewise the creditors of the
corporation, acting for and in its behalf, may liquidate
(Alabang Dev't v. Alabang Hills Village Ass'n, G.R. No.
196950, 2014)
d. Liquidation after Three Years
If full liquidation can only be effected after the 3-year period
and there is no trustee, the directors may be permitted to
complete the liquidation by continuing as trustees by legal
implication (Reburiano v. CA, G.R. No. 102965, 1999).
The trustee may continue to prosecute a case commenced
by the corporation within three years from its dissolution
Page 144 of 250
COMMERCIAL LAW
until rendition of 'the final judgment, even if such judgment
is rendered beyond the three-year period allowed by
Section 122. However, an already defunct corporation
cannot initiate a suit after the lapse of the three-year
period. (Alabang Dev't v. Alabang Hills Village Ass'n, G.R.
No. 196950, 2014)
Note: When a corporation threatened by bankruptcy is
taken over by a receiver, all the creditors shall stand on
equal footing. Not one of them should be given preference
by paying one or some of them ahead of the others.
The Civil Code provisions on concurrence and preference
of credits are applicable to the liquidation proceedings.
A corporation in the process of liquidation has no legal
authority to engage in any new business, even if the same
is in accordance with the primary purpose stated in its
articles of incorporation.
When a Corporation Must Wind Up (Sec. 122)
If it is dissolved by:
a. By expiry of term or
b. Is annulled by forfeiture, or otherwise, or
c. Is terminated In any other manner
Effects of Winding Up of Affairs: (SEC. 122)
a. Continues as a corporate body for 3 years to
prosecute and defend suits against it, close its
affairs, dispose and convey its property and
distribute assets
b. Cannot continue business for which it was
established
c. Can convey property to trustees for the benefit of
the stockholders/members, creditors and other
persons in interest
i. Legal interest vests in business
ii. Beneficial interest remains with
stockholders/ members, creditors
d. Assets distributable to unknown creditors,
stockholders/ members, persons in interest or
those who cannot be found shall be escheated to
the city or municipality where the assets are
located.
e. Distribution of assets only upon lawful dissolution
and payment of all debts and liabilities.
Exceptions:
a. Decrease of capital stock
b. As otherwise allowed in the Corporation Code
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
C. OTHER CORPORATIONS
Validity Of Restrictions On Transfers Of Shares
Close Corporations Restrictions on the right to transfer shares must appear in:
A close corporation, within the meaning of the Corporation 1. The articles of incorporation;
Code, is one whose articles of incorporation provide that: 2. The by-laws; and
1. All the corporation's issued stock of all classes, 3. In the certificate of stock
exclusive of treasury shares, shall be held of record by
not more than a specified number of persons, not Otherwise, the same shall not be binding on any purchaser
exceeding twenty (20) thereof in good faith.
2. All the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted Said restrictions shall not be more onerous than granting
by this Title the existing stockholders or the corporation the option to
3. The corporation shall not list in any stock exchange or purchase the shares of the transferring stockholder with
make any public offering of any of its stock of any such reasonable terms, conditions or period stated therein.
class.
If upon the expiration of• said period, the existing
Notwithstanding the foregoing, a corporation shall not be stockholders or the corporation fails to exercise the option
deemed a close corporation when at least two-thirds (2/3) to purchase, the transferring stockholder may sell his
of its voting stock or voting rights is owned or controlled by shares to any third person.
another corporation which is not a close corporation within
the meaning of the Corporation Code. (Sec. 96) Need for factual determination of close corporation to
apply Sec. 98
Suppietory Effect Before courts can allow the operation of Section 98 to a
The provisions of other Titles of the Corporation Code shall case, there must first be a factual determination that the
apply suppletorily except insofar as Title of Close corporation is indeed a close corporation. There needs to
Corporation otherwise provides. be a presentation of evidence on the relevant restrictions
in the articles of incorporation and by-laws of the
Characteristics corporation. (Rural Bank ofAndayay. Cabadbaran, G.R.
1. The articles of incorporation of a close corporation may No. 188769, 2016)
provide that the business of the corporation shall be
managed by the stockholders of the corporation rather Pre-Emptive Rights Of Stockholders In Close
than by a board of directors. Corporations
a. When they manage, stockholders are liable as General Rule: It shall extend to all stock to be issued,
directors; including reissuance of treasury shares, whether for
b. There is no need to call a meeting to elect money, property or personal services, or in payment of
directors; corporate debts
c. To the extent that the stockholders are actively
engaged in the management, said stockholders Exception: Unless the articles of incorporation provide
shall be liable for corporate torts unless the otherwise.
corporation has obtained reasonably adequate
liability insurance. Power To Buy-Back Shares Of Close Corporations v.
Appraisal Right In Stock Corporations
Companies That Cannot Be Close Corporations CLOSE CORP CLOSE CORP STOCK CORP
(MIPES-B00) Sec. 104 Sec. 105
a. Mining companies; Exercised by Exercised by the Exercised by the
b. Insurance companies; the corporation stockholder stockholder
c. Public utilities; There are
d. Educational institutions; Exercisable certain
e. Stock exchanges; only in a Exercisable for instances where
f. Banks; deadlock any reason appraisal rights
g. Oil companies; situation can be
h. Other corporations declared to be vested with public exercised
interest.
Page 145 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
Can be directed g. Fraternal,
either against Available only Available only h. Literary,
the corporation against the against the i. Scientific,
or any other corporation corporation j. Social,
stockholder k. Civic Service,
Limited only in a I. Similar purposes, like trade, industry, agriculture and
situation when like chambers, or
Available even Unrestricted m. Any combination of thereof (Sec. 88)
the corporation
without retained
has sufficient
unrestricted earnings are In the Articles of Incorporation, a non-stock corporatior
assets in its
retained required for may not include a purpose which would change Of
books to cover its
earnings and buyback to contradict its nature as such. (Sec. 14121)
debts and
not subject to happen,
liabilities,
any formula generally c. Treatment Of Profits
exclusive of
capital stock Non-stock non-profit corporations may actually earn profit:
incidentally from its operations, provided that the
Compelling Dissolution In Close Corporations v. Stock profits are devoted to their purpose.
Corporations
CLOSE CORP CLOSE CORP STOCK CORP The mere fact that a non-stock corporation may earn profit
Sec. 104 Sec. 105 does not make it a profit-making corporation, where such
profit is used to carry out the purposes set forth in the
SEC is given
Articles of Incorporation and is not distributed to its
express power A stockholder
Majority of the incorporators, members, trustees, or officers. (SEC
to dissolve a must make a
Board plus 2/3 Opinion, 13 November 1990, XXIV SEC Quarterly Bulletin
close written petition to
stockholder vote 63)
corporation the SEC to
is required for
when there is a compel
dissolution Note:
deadlock dissolution
Despite its nomenclature, the essence of a non-stock non-
situation
profit corporation is not the non-existence of shares of
stock to cover its capital (it is legally possible for a
1. Non-Stock Corporations
corporation having capital stock to still be considered a
non-stock corporation), but that:
a. Definition
a. Its primary purpose should be any of those under Sec.
A non-stock corporation is one where no part of its income
88 of the Corporation Code, and
is distributable as dividends to its members, trustees, or
b. There is a prohibition in the articles of incorporation
officers, subject to the provisions of the Corporation Code
and by-laws that no part of the income or any form of
on dissolution
dividend is distributable-to the members, trustees, and
officers of the corporation (CIR v. Club Filipino Inc. de
Any profit which a non-stock corporation may obtain as an
Cebu, G.R. No. L-12719, 1962)
incident to its operations shall, whenever necessary or
• Even though the corporation may
proper, be used for the furtherance of the purpose or
incidentally earn profits from its
purposes for which the corporation was organized, subject
operations. (CIR v. University of Visayas,
to the provisions of this Title. (Sec. 87)
G.R. No. L-13554, 1961)
b. Purposes
A non-stock corporation may be formed or organized for
d. Distribution of Assets upon Dissolution
the following purposes:
In case dissolution of a non-stock corporation in
a. Charitable,
accordance with the provisions of this Code, its assets
b. Religious,
shall be applied and distributed as follows:
c. Educational,
d. Professional, • All liabilities and obligations of the corporation shall be
e. Cultural, paid, satisfied and discharged, or adequate provision
f. Recreation, shall be made therefore;
Page 146 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
• Assets held by the corporation upon a condition
requiring return, transfer or conveyance, and which
condition occurs by reason of the dissolution, shall be
returned, transferred or conveyed in accordance with
such requirements;
• Assets received and held by the corporation subject to
limitations permitting their use only for charitable,
religious, benevolent, educational or similar purposes,
but not held upon a condition requiring return, transfer
or conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more corporations,
societies or organizations engaged in activities in the
Philippines substantially similar to those of the
dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;
• Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance
with the provisions of the articles of incorporation or
the by-laws, to the extent that the articles of
incorporation or the by-laws, determine the distributive
rights of members, or any class or classes of
members, or provide for distribution; and
• In any other case, assets may be distributed to such
persons, societies, organizations or corporations,
whether or not organized for profit, as may be specified
in a plan of distribution adopted pursuant to this
Chapter.(Sec. 94)
A non-stock corporation in the process of dissolution may
adopt a plan providing for the distribution of assets, not
inconsistent with the Code, in the following manner:
• The board of trustees shall, by majority vote, adopt a
resolution recommending a plan of distribution and
directing the submission thereof to a vote at a regular
or special meeting of members having voting rights.
• Written notice setting forth the proposed plan of
distribution or a summary thereof and the date, time
and place of such meeting shall be given to each
member entitled to vote, within the time and in the
manner provided in this Code for the giving of notice of
meetings to members.
• The plan of distribution shall be adopted upon approval
of at least 2/3 of the members having voting rights
present or represented by proxy at such meeting. (Sec.
95)
Note:
Although a non-stock corporation cannot distribute
incidental profits or dividends to its members, trustees and
officers during its corporate term, in the event of
dissolution, after the payment of all liabilities and return of
assets received subject to limitations permitting their use,
Page 147 of 250
COMMERCIAL LAW
the remaining assets may be distributed to the members,
as provided for in the articles of incorporation of by-laws.
In the absence of distribution rules, the remaining assets
may be distributed tc such persons, societies,
organizations, or corporations, whether or not organized
for profit, as may be specified in a plan of distribution as
adopted by the Board of Trustees and ratified by the
members.
In a regular non-stock corporation it is possible for its net
assets and accumulated "earnings" from its operations, to
inure to the benefit of private individuals (e.g., its own
members) or entities, but only as a consequence of
dissolution.
Suppletory Effect
The provisions governing stock corporation, when
pertinent, shall be applicable to non-stock corporations,
except as may be covered by specific provisions of this
Title.
Conversion between Stock and Non-Stock
Corporation
A non-stock corporation cannot be converted into a stock
corporation through mere amendment of its Articles of
Incorporation as this would be in violation of Section 87
which prohibits distribution of income as dividends to
members. (SEC Opinion, 20 March 1995) However, a non-
stock corporation can be converted into a stock corporation
only if the members dissolve it first and then organize a
stock corporation. The result is a new corporation. (SEC
Opinion, 13 May 1992)
On the other hand, a stock corporation may be converted
into a non-stock corporation by mere amendment provided
all the requirements are complied with. Its rights and
liabilities will remain.
Theory on Non-Stock Corporations
A non-stock corporation may only be formed or organized
for charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic or other similar
purposes. It may not engage in undertakings such as the
investment business where profit is the main or underlying
purpose. Although the non-stock corporation may obtain
profits as an incident to its operation such profits are not to
be distributed among its members but must be used for the
furtherance of its purposes (People v. Menil, G.R. No.
115054-66, 1999).
The incurring of profit or losses does not determine
whether an activity is for profit or non-profit, and the courts
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
will consider whether dividends have been declared or its Term of Board Members
members or that is property, effects or profit was ever used 3 years, but A01 or by-
for personal or individual gain, and not for the purpose of laws may provide
carrying out the objectives of the enterprise (Manila otherwise
1 year
Sanitarium and Hospital v. Gabuco, G.R. No. 13873,
1963). 5 years - educational
Constant terms
institutions
In a mutual life insurance corporation, organized as a non-
stock nonprofit corporation, the so-called "dividend" that is Staggered terms
received by members-policyholders is not a portion of How Board Members Are Elected
profits set aside for distribution to the stockholders in Elected by the Directly elected by the
proportion to their subscription to the capital stock of a stockholders (per Corp. members, unless A01
corporation. One, a mutual company has no capital stock Code) provides otherwise
to which subscription is necessary; there are no Manner of Voting
stockholders to speak of, but only members. And, two, the Straight voting, unless
amount they receive does not partake of the nature of a Straight or cumulative
A01 or by-laws provide
profit or income. The quasi-appearance of profit will not voting
otherwise
change its character; it remains an overpayment, a benefit Can membership be transferred?
to which the member-policyholder is equitably entitled Generally no, EXC: if A01
(Republic v. Sunlife Assurance Company of Canada, GR Generally yes or by-laws provide
No. 158085, 2005). otherwise
Can a stochokder/ member disengage from the
Delinquency in Membership Dues of Non-Stock corporation?
Corporations other Articles or by-laws
Can sell to
A non-stock corporation may seize and dispose of the stockholders OR exercise specifically provide for the
membership share of a fully-paid member on account of method of termination
of appraisal rights
his unpaid monthly dues, when such corporation is
authorized to do so under the by-laws, even when no
Corporation Sole
provision on the matter appears in the articles of
Special form of corporation, usually associated with the
incorporation, and in spite of the fact that Sec. 67 of
clergy and consists of one person only and his successors,
Corporation Code on delinquency sale pertains to payment
who are incorporated by law to give some legal capacities
of shares subscription. (Valley Golf v. De Caram, G.R. No.
and advantages.
155805, 2000)
A corporation sole does not have any nationality but for
Comparative Table: Stock v. Non-Stock Corporations
purposes of applying our nationalization laws, nationality is
STOCK CORP I NON-STOCK CORP determined by the nationality of the members (Roman
Can they earn profit? Catholic Apostolic Church v. LRC, G.R. No. 8451, 1957).
Yes Yes
Distribution of Dividends The doctrine in Republic v. Villanueva (G.R. No. 55418-19,
Yes Fro 1982) anu Republic v. lglesia ni Cristo (G.R. No. 180067,
Name of "Constituents" 1984), that a corporation sole is disqualified to
Stockholders Members acquire/hold alienable lands of the public domain,
Limitation to Purpose because of the constitutional prohibition qualifying only
May not include a purpose individuals to acquire land and the provision under the
No, there can be
which would change or Public Land Act which applied only to Filipino citizens or
secondary purposes
contradict its nature in A01 natural persons, has been expressly overturned in
Kind of Board Director of Lands v. IAC (G.R. No. 66575 1986).
Board of Directors Board of Trustees
Number of Board Members A registered corporation sole can acquire land if its
Min. 5; but may be more members constitute at least 60% Filipinos. (SEC Opinion,
5 < x < 1:-, than 15 8 August 1994)
EXC: special corporations
Page 148 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
G. Foreign Corporations
A corporation formed, organized or existing under any law
other than those of the Philippines, and whose laws allow
Filipino citizens and corporations to do business in its own
country or state. (Sec. 123)
A foreign corporation is one which owes its existence to the
laws of another state, and generally, has no legal existence
within the state in which it is foreign (Avon Insurance PLC
v. Court of Appeals, G.R. No. 97642, 1997).
A fundamental rule of international jurisdiction is that no
state can by its laws, and no court which is only a creature
of the state, can by its judgments and decrees, directly bind
or affect property or persons beyond the limits of that state
(Time, Inc. v. Reyes, GR No. 28882, 1971).
a. Bases of Authority over Foreign Corporations
i. Consent - It is the voluntary surrender of jurisdiction over
its person in a pending suit before the host state (Salonga,
Private International Law, 1979 ed., p.344).
ii. "Doing Business" with regard to Foreign
Corporations - Continuity of commercial dealings incident
to prosecution of purpose and object of the organization.
Isolated, occasional or casual transactions do not amount
to engaging in business. But where the isolated act is not
incidenial/casual but indicates the foreign corporation's
intention to do other business, said single act constitutes
engaging in business in the Philippines.
Test to Determine "Doing Business"
a. Isolated Transactions Test: where a foreign
corporation needs to obtain a license and fails to do
so, whether it should be denied legal standing to obtain
remedies from local courts and administrative
agencies or not, depends therefore on the issue
whether it will engage in business in the Philippines.
Not every activity undertaken in the Philippines
amounts to doing business as to require a foreign
corporation to obtain such license.
Single or isolated acts, contracts, or transactions of foreign
corporations are not regarded as a doing or carrying on of
business. Typical examples of these are the making of a
single contract, sale, sale with the taking of a note and
mortgage in the state to secure payment thereof,
purchase, or note, or the mere commission of a tort. In
these instances, there is no purpose to do any other
business within the country (MR. Holdings, Ltd. V. Bajar,
G.R. No. 138104, 2002).
Page 149 of 250
COMMERCIAL LAW
BUT: Where a single act or transaction is not merely
incidental or casual but indicates the foreign corporation's
intention to do other business in the Philippines, said single
act or transaction constitutes doing business (Far East Intl.
v. Nankai Kogyo, G.R. No. 13525, 1962).
Need to Allege: The fact that a foreign corporation is not
doing business in the Philippines must be alleged, if a
foreign corporation desires to sue in Philippines courts
under the "isolated transactions rule" (Atlantic Mutual Inc.
Co. v. Cebu Stevedoring Co., G.R. No. 18961, 1966); if not
alleged, it can be dismissed for lack of capacity to sue by
the plaintiff (Commissioner of Customs v. K.M.K. Gani,
G.R. No. 73722, 1990).
b. Twin Characterization Test (Mentholatum Co. Inc v.
Mangaliman G.R. No. 47701, 1941)
Substance Test: Consider the body or substance of the
business or the enterprise for which it was ORGANIZED or
whether it has substantially retired from it and turned it over
to another.
Continuity Test: That doing business implies a continuity
of commercial dealings and arrangements and
contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally
incidental to, and in ,,progressive prosecution of, the
purpose and object of its organization.
Taken together, DOING BUSINESS in the Philippines
must cover transactions and series of transactions in
pursuit of the main business goals of the corporation and
done with the intent to continue the same in the
Philippines.
c. Contract Test: if the salient points of a contract do not
find themselves in the Philippines, Philippine
"authorities have no business subjecting the parties to
local registration and licensing requirements (Pacific
Vegetable Oil Corp. v Singzon, G.R. No. 7917, 1955)
"Doing Business" Under The Foreign Investment Act
and IRR
"Doing Business" in the Philippines - Includes:
a. Soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches;
b. Appointing representatives or distributors domiciled in
the Philippines;
ATENEO CENTRAL
BAR OPERATIONS 2019
Note: Includes "appointing representatives or distributors
in the Philippines" but not when the representative or
distributor "transacts business in its name and for its own
account." (Alfred Hahn v. CA, G.R. No.113074, 1997)
c. Participating in the management, supervision, or
control of any domestic business, firm, entity, or
corporation in the Philippines; and
d. Any other act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to that extent the performance of acts or
works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the
business organization
Note: "Doing business" was upheld against Pioneer
International for soliciting orders and service contracts in
the performance of acts that imply continuity of commercial
dealings. Pioneer International's alleged acts in actively
negotiating to employ Todaro to run its pre-mixed concrete
operations in the Philippines, which acts are hypothetically
admitted in Pioneer International's motion to dismiss, are
not mere acts of a passive investor in a domestic
corporation. Such are managerial .and operational acts in
directing and establishing commercial operations in the
Philippines. (Pioneer International, LTD v. Guadiz, G.R.
No. 156848, 2007)
Does Not Include:
a. Mere investment as a shareholder by a foreign entity
in domestic corporations duly registered to do
business, and/or the exercise of rights as such
investor;
Having a nominee director or officer to represent its
interests in such corporation;
Appointing a representative or distributor domiciled in
the Philippines which transacts business in its own
name and for its own account;
The publication of a general advertisement through
any print or broadcast media;
Maintaining a stock of goods in the Philippines solely
for the purpose of having the same processed by
another entity in the Philippines;
Consignment by a foreign entity of equipment with a
local company to be used in the processing of products
for export;
Collecting information in the Philippines; and
Performing services auxiliary to an existing isolated
contract of sale which are not on a continuing basis,
such as Installing in the Philippine machinery it has
manufactured or exported to the Philippines, servicing
Page 150 of 250
COMMERCIAL LAW
the same, training domestic workers to operate it, and
similar incidental services.
No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns,
shall be permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative agency of
the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or
administrative tribunals on any valid cause of action
recognized under Philippine laws (Lorenzo Shipping Corp.
v. Chubb & Sons, Inc., et al., G.R. No. 147724, 2004).
b. Necessity of a License to Do Business:
• To place them under the jurisdiction of the courts
• To place them in the same footing as domestic
corporations
• Protection for the public in dealing with said
corporations.
i. Requisites for Issuance of License (Sec. 125;
Omnibus Investments Code, Art. 48)
1. Articles of Incorporation and By-Laws
2. An application form under oath setting forth
i. Date and term of incorporation
ii. Address of the corporation
iii. Name, address, _residence of resident agent
iv: Place of operation
v. Specific purposes
vi. Names and addresses of directors
vii. Statement of Authorized capital stock
viii. Statement of Outstanding capital stock
ix. Statement of Paid-in amount
x. Additional information determined by SEC
3. Statement that the corporation is solvent
4. Duly executed certificate under oath attesting that its
country permit -Filipinos to do business in that country
5. 60% Filipino control requirement
6. Business operation not inconsistent with Investment
Priorities Plan
7. Business not in conflict with 1987 Constitution
8. Business not adequately exploited by Phil nationals
9. Entry of applicant not promote monopolies
ii. Resident Agent
Who may be a Resident Agent
a. Individual residing in the Philippines of good moral
character and of sound financial standing
b. Domestic corporation lawfully transacting
business in the Philippines (Sec. 127)
ATENEO CENTRAL
COMMERCIAL LAW
BAR OPERATIONS 2019
Service of Process upon a Foreign Corporation d. A license subsequently granted enables the
Through A Resident Agent foreign corporation to sue on contracts executed
Before a foreign corporation can be issued a license to before the grant of the license (Eriks Ltd. v. Court
transact business in the Philippines, such corporation must of Appeals, G.R. No. 118843, 1997);
first file with the SEC e. Recovery of misdelivered property;
1. A written power of attorney designating some person f. Where the defendant is estopped.
who must be a resident of the Philippines, on whom
any summons and other legal processes may be Section 160 in relation to Section 3 of R.A. No. 8293
served in all actions or other legal proceedings against provides that any foreign corporation not engaged in
such corporation; & business in the Philippines and a national of a country
2. Consent that service upon such resident agent shall be which is a party to any convention, treaty or agreement
admitted and held as valid as if served upon the duly relating to intellectual property rights or the repression of
authorized officers of the foreign corporation at its unfair competition, to which the Philippines is also a party
home office. or extends reciprocal rights, may sue in trademark or
a. Whenever such service of summons or other service mark enforcement action (Sehwani Inc v. In-n-Out
process is made upon SEC, it must, within 10 Burger, G.R. No. 171053, 2007).
days thereafter, transmit by mail a copy of
such summons or other legal process to the Rules Regarding A Foreign Corporation's Right to
corporation at its home or principal office. Bring Suit in the Philippines
When SEC sends such copy, it shall constitute (Agilent Technologies v. Integrated Silicon, G.R. No.
a necessary part of and shall complete such 154618, 2004)
service FOREIGN CORP CAN FC SUE IN PH?
b. In case of a change of address of the resident STATUS
agent, it shall be his or its duty to immediately Doing business in before
Cannot sue
notify SEC in writing. (Sec. 128) Philippines without a Philippine courts
license
c. Personality to Sue Can sue before Philippine
Section 36 enumerates the express powers of a courts on an- isolated
corporation, which includes the corporation's ability to sue Not doing business in the transaction or on a cause
and be sued. Philippines of action entirely
independent of any
The power of the corporation to sue and be sued in any business transaction
court is lodged with the board of directors that exercises its Doing business in the
corporate powers. (Bitong v. CA, G.R. No. 123553, 1998) Philippines without a
license, but Philippine
d. Suability of Foreign Corporations citizen or entity has Can sue before Philippine
Every foreign corporation contracted with said courts due to estoppel
• Doing business in the Philippines with a license may corporation or derived
sue and can be sued in the Philippines benefits from the Foreign
• Doing business in the Philippines without a license Corporation
cannot sue, but may be sued in the Philippines Doing business in the Can sue before Philippine
• Not doing business in the Philippines, on Isolated Philippines and has the courts on any transaction
transactions may sue and can be sued (if jurisdiction required license
can be acquired)
e. Instances When Unlicensed Foreign Corporations
May Be Allowed To Sue:
a. Isolated transactions;
b. Action to protect good name, goodwill, and
reputation of a foreign corporation;
c. The subject contracts provide that Philippine
Courts will be venue to controversies;
Page 151 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
Table: Capability to Sue and Suability of Foreign
Corporations W/N Doing Business The power to merge or consolidate is not within the
NOT DOING inherent powers of the corporation. Therefore, it must be
DOING BUSINESS IN IN expressly granted by law.
BUSINESS
PHILIPPINES - Merger or consolidation does not become effective
PHILIPPINES
Licensed Unlicensed Isolated Transactions by mere agreement of the constituent
Yes, can sue; corporations. The approval of the SEC is -required
(PNB v. Andrada Electric & Engr. Co., Inc., G.R.
NO, cannot No. 142936, 2002).
EXC: if transactions
YES, can sue;
exhibits intent to do
sue Mere Acquisition/Transfer (3 Levels)
business, Foreign
EXC: estoppel a. Assets-Only Level. Purchase of raw assets of the
Corporation needs
license to sue enterprise. Transferee is NOT liable for the debts and
liabilities of the transferor corporation as there is no
YES, can be sued
privity of contract between transferee and creditors,
YES, can
except when there is fraud, assumption of liability, or
be sued Qualifier: as long as summons were
takeover of the assets of a dissolved corporation.
properly served (to acquire jurisdiction)
(Edward J. Nell Co. v Pacific Farms Inc., G.R. No. L-
20850, 1965)
f. Grounds for Revocation of License
b. -Business Enterprise Level. Purchase of substantially
Section 134 provides that the SEC may cancel the
all the assets of the corporation extending to its "going
certificate or license of a foreign corporation on any of the
concern" (ability to do business and make money,
following grounds:
goodwill, clientele, stock-in-trade, etc). There is case
a. Failure to file its annual report or pay any fees as
law, based on equity, that holds transferee liable for
required by Code;
the debts and liabilities of the transferor. A "free and
b. Failure to appoint and maintain a resident agent;
harmless clause" holding the transferee free from the
c. Failure to inform SEC of the change of resident
liabilities of the transferor is binding only between them
agent or the latter's change of address;
and cannot prejudice creditors who are not parties
d. Failure to submit a copy of amended articles of
thereto. (Y-/ Lesisure Philippines, Inc. et al. v James
incorporation or-by- laws; or articles of merger or
Yu, G.R. No. 207161, 2015)
consolidation;
c. Equity Level. Purchaser takes control of the business
e. A -misrepresentation of any material matters in
by purchasing the shareholdings. Purchasing
reports;
corporation is still protected by the limited liability
f. Failure to pay any and all taxes, imposts,
feature but the same can be pierced.
assessments or penalties;
g. Engaged in a business not authorized by SEC;
2. Plan of Merger or Consolidation (Sec. 76)
h. Acting as a dummy of a foreign corporation not
a. Names of corporations
licensed to do business in the Philippines; or
b. Terms of the merger or consolidation and the mode of
i. Any other ground as would render it unfit to
carrying the same into effect
transact business in the Philippines.
c. Statement of Changes of Articles of Incorporation
d. Other provisions
e. Approval by affirmative vote of stockholders or
H. MERGER AND CONSOLIDATION
members representing 2/3 of outstanding capital stock
1. Definition and Concept
3. Articles of Merger or Consolidation (Sec. 78)
Merger a. pigned by the president or vice president and certified
A union whereby one or more existing corporations are by the secretary setting forth:
absorbed by another corporation that survives and i. Plan of merger or consolidation
continues the combined business. ii. Number of outstanding shares or members
Consolidation iii. Number of shares or members voting for or
The union of two or more existing corporations. A new against merger or consolidation
corporation is created, and consolidating corporations are
extinguished.
Page 152 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
4. Procedure of Consolidation or Merger
1. The board of directors or trustees of each corporation,
party to the merger or consolidation, shall approve a
plan of merger or consolidation setting forth the
following:
a. Names of the corporations involved;
b. Terms and mode of the merger or consolidation;
c. Statement of the changes, if any, in the articles of
incorporation of the surviving corporation in case
of merger; and, with respect to the consolidated
corporation in case of consolidation; and
d. Other necessary or desirable provisions with
respect to the proposed merger or consolidation.
2. The plan of merger or consolidation shall be approved
by majority vote of each of the boards of the
corporations involved at separate meetings;
3. The same shall be submitted for approval by the
stockholders or members of each such corporation at
separate corporate meetings duly called for the
purpose. Notice of such meeting should be given to all
stockholders or members at least 2 weeks before the
meeting, either personally or by registered mail
4. At least 2/3 of the outstanding capital stock, if a stock
corporation, or 2/3 of the members of the non- stock
corporation should concur to such plan.
5. Dissenting stockholders may exercise their right of
appraisal. However, if the board abandons such plan,
such right is extinguished
6. Any amendment to,the plan must be approved by the
same votes of the board members or trustees and
stockholders or members required for the original plan.
7. Once the required number of stockholders or members
approved of the plan, Articles of Merger or Articles of
Consolidation shall be executed by each of the
constituent corporations, signed by the president or
vice-president and certified by the secretary or
assistant secretary of each corporation, setting forth:
a. The plan of the merger or the plan of
consolidation;
b. As to stock corporations, the number of shares
outstanding, or in the case of non-stock
corporations, the number of members; and
c. As to each corporation, the number of shares
or members voting for and against such plan,
respectively.
8. Four copies of the Articles of Merger or Articles of
Consolidation shall be submitted to the SEC for
approval. However, in the case of special corporations,
like banks, insurance companies, building and loan
associations, etc., the favorable recommendation of
the appropriate government agency shall first be
obtained.
Page 153 of 250
COMMERCIAL LAW
9. If the SEC is satisfied that the merger or consolidation
of the corporations concerned is legal, it shall issue a
certificate of merger or of consolidation, at which time
the merger or consolidation shall be effective.
10. If the SEC is not satisfied, it shall set a hearing to give
the corporations concerned the opportunity to be
heard. Written notice of the date, time and place of
hearing shall be given to each constituent corporation
at least two (2) weeks before said hearing.
A merger does not become effective upon the mere
agreement of the constituent corporations, but open
approval of the articles of merger by the SEC issuing the
certificate of merger as required by Section 79 of the
Corporation Code (Bank of Commerce v. Heirs of Rodolfo
dela Cruz).
5. Effectivity and Limits of Merger or Consolidation
• Submission to SEC for approval
• Merger or consolidation of banks or banking
institutions, building and loan associations, trust
companies, insurance companies, public ,utilities,
educational institutions and other special
corporations governed by special laws need
favorable recommendation by appropriate
governmental agency
• If upon investigation by SEC that merger or
consolidation is contrary to or inconsistent with the
Corporation Code, it will set a hearing
6. Effects of Merger or Consolidation
• The constituent corporations shall become a
single corporation.
• The separate existence of the constituents shall
cease except that of the surviving corporation (in
merger) or the consolidated corporation (in
consolidation).
• The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities,
properties and powers and shall be subject to all
duties and liabilities of a corporation.
• The surviving or the consolidated corporation shall
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
taken and deemed to be transferred to and vested
in such surviving or consolidated corporation
without further act or deed; and
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
• 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 claim, action or
proceeding pending by or against any of such
constituent corporations may be prosecuted by or
against the surviving or consolidated corporation,
as the case may be. Neither the rights of creditors
nor any lien upon the property of any of such
constituent corporations shall be impaired by such
merger or consolidation.
end of topic
Page 154 of 250
0
ATENEO CENTRAL
BAR OPERATIONS 2019
VI. SECURITIES REGULATION CODE (R.A. No.
8799)
TOPIC OUTLINE UNDER THE SYLLABUS
A. Registration requirement; exemptions
B. Prohibitions on fraud, manipulation, and insider
trading
C. Protection of investors
1. Tender offer rule
2. Rules on proxy solicitation
3. Disclosure rule
STATE POLICY, PURPOSE
The State policies underlying the Securities Regulation
Code (SRC) are the following:
a Establish a socially conscious free market that
regulates itself;
b. Encourage the widest participation of ownership in
enterprises;
c. Enhance the democratization of wealth
d. Promote the development of the capital market;
e. Protect investors;
f. Ensure full and fair disclosure about securities; and
g. Minimize, if not totally eliminate, insider trading and
other fraudulent or manipulative devices (SRC,
Sec. 2)
The principal purpose of SRC and its regulations (also
known as the Blue Sky Laws) is to protect the public from
worthless ventures, that have no basis at all, and the sale
of securities therein to investors, who are then left holding
certificates representing nothing more than a claim to a
square of a blue sky.
DEFINITION OF SECURITIES
Securities
Shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture evidenced
by a certificate, contract, instrument, whether written or
electronic in character. The definition includes investment
contracts. (SRC, Sec. 3.1)
Types of Securities
a. Equity Instruments (represent ownership rights in a
corporation, i.e., management, surplus profits, assets
upon dissolution)) — shares of stock; certificates of
interest or participation in a profit sharing agreement;
certificates of deposit for a future subscription;
Page 155 of 250
COMMERCIAL LAW
proprietary or nonproprietary membership certificates
in corporations;
b. Debt Instruments (issuer required to repay principal
amount loaned by fixed maturity date, at stated rate of
interest) — bonds, debentures, notes, evidences of
indebtedness, asset-backed securities;
C. Investment Instruments — investment contracts,
fractional undivided interests in oil, gas or other
mineral rights;
Note: An investment contract refers to a contract,
itransaction, or scheme whereby a person invests his
money in a common enterprise and is led to expect
profits primarily from the efforts of others. It is
presumed to exist whenever a person seeks to use the
money or property of others on the promise of profits.
(Virata v. Wee, G.R. No. 220926, 2017)
Hovey Test
Used to determine whether the security being offered takes
the form of an investment contract. The following must
concur for an investment contract to exist:
a. A contract, transaction or scheme;
lb. An investment of money;
c. Investment is made in a common enterprise;
d. Expectation of profits;
e. Profits arising primarily from the efforts of others.
(Virata v. Wee, G.R. No. 220926, 2017)
Turner Test
Used to determine whether a contract is an investment
contract within the definition of securities.
Under this test, an investment contract may be a
transaction, contract, or scheme whereby a person:
a. Makes an investment of money,
b. In a common enterprise,
c. With the expectation of profits,
d. To be derived primarily from the efforts of
others
The Turner Test was adopted in the Philippines,
specifically in the case of Power Homes wherein it was
determined that transactions under a pyramiding scheme
partakes the nature of investment contracts and thus falls
under the definition of "securities" under the SRC (Power
Homes v. SEC, G.R. No. 164182, 2008).
d. Derivative — option and warrants;
ATENEO CENTRAL
BAR OPERATIONS 2019
e. Trust Instruments — Certificates of assignments,
certificates of participation, trust certificates, voting
trust certificates or similar instruments; and
f. Catch-all — Other instruments as SEC may determine
in the future.
Note: "Public offering" for purposes of registration, means
a random or indiscriminate offering of securities in general
to anyone who will buy, whether solicited or unsolicited.
Issuer
An originator, maker, obligor, or creator of the security.
(SRC, Sec. 3.2)
Broker
A person engaged in the business of buying and selling
securities for the account of others. (SRC, Sec. 3.3)
Dealer
A person, who buys and sells securities for his own
account in the ordinary course of business. (SRC, Sec.
3.4)
Prospectus
The document, made by or on behalf of an issuer,
underwriter or dealer, to sell or offer securities for sale to
the public through a registration statement filed with the
SEC. (SRC. Sec. 3.11)
Registration
General rule: Securities are prohibited to be sold or
offered for sale or distribution within the Philippines (SRC.
Sec. 8.1):
a. Without registration statement duly filed with and
approved by SEC; and
b. Prior to such sale, information on the securities, in
such form and with such substance as SEC may
prescribe, must be made available to each
prospective purcnaser.
Exception: The following may be sold without need of
registration:
a. Exempt securities (SRC, Sec. 9)
b. Exempt transactions (SRC, Sec. 10)
Note: In approving the registration of the securities, the
SEC is not only concerned with the requirement that full
disclosure of information is given to the public but the SEC
is also concerned with the merit of the securities
themselves and the issuer (PSE v. CA, G.R. No. 125469,
1997).
Page 156 of 250
COMMERCIAL LAW
SEC Powers on Securities Transactions
The SEC has the following powers with respect to the sale
or offer for sale of securities:
a. Grant "conditional approval" of registration statements
(SRC. Sec. 8.2);
b. Specify terms and conditions under which any written
communication, including any summary prospectus,
shall not be deemed to constitute an offer for sale
(SRC. Sec. 8.3);
c. Keep and open to public inspection at reasonable
hours on business days, the Register of Securities
(which shall contain the records of the registration of
securities and SEC orders with respect to such
securities) and all documents or information with
respect to registered securities (SRC. Sec. 8.4);
d. Audit financial statements, assets and other
information of applicants for registration of securities,
when necessary to insure full disclosure or to protect
interests of investors and the public (SRC. Sec. 8.5);
Dispense with any requirement or require additional
information or documents, including written
information from an expert, depending on the
necessity thereof or their applicability to the class of
securities sought to be registered (SRC. Sec. 12.2).
KINDS OF SECURITIES
1. Exempt Securities (Sec. 9)
a. Government Issued
Issued or guaranteed by the government of the
Philippines or by any political subdivision, agency, or
by any person controlled or supervised by, and acting
as an instrumentality of the Government; (SRC. Sec.
9.a)
Note: The reason why the Government should not be
required to furnish a bond is that the State is
undoubtedly always solvent (Araneta v. Gatmaitan,
G.R. Nos. L-8895, L-9191, 1957).
b. Issuanced by Foreign Governments
Issued or guaranteed by the government of any
country with which the Philippines maintains
diplomatic relations, or by any state, province or
political subdivision thereof on the basis of reciprocity,
although the SEC may require compliance with the
form and content of disclosures; (SRC. Sec. 9.b)
ATENEO CENTRAL
BAR OPERATIONS 2019
c. Certificates issued by receiver or trustee in
bankruptcy duly approved by the proper adjudicatory
body; (SRC. Sec. 9.c)
d. Those involving the sale or transfer of which, by law, is
under the supervision and regulation of the: (SRC.
Sec. 9.d)
i. Office of the Insurance Commission;
ii. Housing and Land Use Regulatory Board; and
iii. Bureau of Internal Revenue
Reason: They are already supervised by another
government body.
e. Issued by a bank except its own shares of stock
Where a bank is a publicly-listed corporation in the
Philippine Stock Exchange (PSE), the mere fact that it
is under the supervision of the Bangko Sentral ng
Pilipinas (BSP) does not exempt it from complying with
the continuing disclosure requirements embodied in
the assailed Rules (IRR of the Revised Securities Act
— predecessor of the SRC). While a bank is primarily
subject to the control of the BSP, as a corporation
trading its securities in the stock market, it is also under
the supervision of the SEC. These regulations are
meant to assure full, fair and accurate disclosure of
information for the protection of investors in the stock
market. Imposing such regulations is a function within
the jurisdiction of the SEC (Union Bank v. SEC, G.R.
No. 138949, 2001).
2. Exempt Transactions (SRC, Sec. 10)
a. Judicial sale of securities
Any judicial sale, or sale by an executor, administrator,
guardian or receiver or trustee in insolvency or
bankruptcy (SRC. Sec. 10.a)
Note: As distinguished from exempt securities
specially issued by the receiver or trustee in a
bankruptcy proceeding mentioned above, the shares
covered under exempt transactions are ordinary
shares; however the owner of the shares is bankrupt
and so the shares are sold.
b. Sale of foreclosed securities
By or on account of a pledge holder or mortgagee or
any other similar lien holder, selling or offering for sale
or delivery in the ordinary course of business, not for
the purpose of avoiding the provisions of SRC, to
Page 157 of 250
COMMERCIAL LAW
liquidate a bona fide debt, a security pledged in good
faith as security for such debt; (SRC. Sec. 10.b)
c. Isolated transaction
An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner
thereof, or for his account, not being made in the
Course of repeated and successive transactions of a
like character, and such owner or representative not
being the underwriter of such security (SRC. Sec. 10.c)
Note: This transaction refers to secondary sale of the
Owner of the securities to another investor; and the
owner contemplated herein is not the issuer but an
investor; therefore the transaction does not fall under
the definition of public offerings.
d. Stock dividends
Distribution by a corporaticn of securities to its
stockholders or other security holders as stock
dividend or other distribution out of surplus (SRC. Sec.
10.d)
e. Sale of shares to stockholders not underwritten
Sale of capital stock of a corporation to its own
Stockholders exclusively — stock which has already
been issued (SRC. Sec. 10.e)
! sI suance of bonds to a single purchaser: Issuance
of bonds or notes secured by mortgage upon real
estate or tangible personal property (SRC. Sec. 10.f)
g. Transaction pursuant to the right of conversion
ssuance and delivery of any security in exchange for
any other security of the same issuer pursuant to a
right of conversion, provided that the: (SRC. Sec. 10.g)
Surrendered has been registered under the
SRC or was, exempt, when sold
ii. Security issued and delivered in exchange
would, at the time of conversion, fall into the
class entitled to registration
h. Broker's transactions
Broker's transactions, executed upon customer's
orders, on any registered Exchange or trading market
(SRC. Sec. 10.h)
Pre-incorporation subscription or subscription to
a capital increase: Subscriptions to shares of capital
stock (1) prior to incorporation or (2) pursuant to an
ihcrease in authorized capital stock — both to comply
 ATENE0 CENTRAL
BAR OPERATIONS 2019
with the requirements of the law for minimum
subscription (SRC. Sec. 10.1)
Exchange of securities with existing security
holders
Exchange of securities by the issuer exclusively with
its existing security holders exclusively, where no
commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange (SRC.
Sec. 10.j)
Note: The difference between (h) and (j) is that the
exchange in (h) is for any other security of the issuer
while in (j), the exchange is between the issuer and its
existing security holders wherein the securities
exchanged are not from the same issuer.
k. Private placements
Sale of securities by an issuer to fewer than 20
persons during any twelve-month period (SRC. Sec.
10.k)
I. Sale to qualified buyers
Sale of securities to any of the following qualified
buyers: (SRC. Sec. 10.1)
i. Bank
ii. Registered investment house
iii. Insurance company
iv. Pension fund or retirement plan maintained by
the government or managed by a bank or
other persons authorized by the BSP to
engage in trust functions
V. Investment company
vi. Such other person at the Commission may
determine as qualified
Notes:
• Reasons for exemption: small amount involved; limited
character of public offering; but the security itself may
or may not be exempt.
• For the exemptions under (k) and (I), you have to file a
notice for exemption as mandated under the Rules.
After which, you have to pay to the SEC a fee
equivalent to one-tenth (1/10) of one percent (1%) of
the maximum aggregate price or issued value of the
securities. (1RR to the SRC, Rule 10.1)
• The other exemptions do not require filing a notice for
exemption. (!RR to the SRC, Rule 10.1)
The SEC may exempt other transactions, if it finds that the
requirements of registration under the SRC is not
necessary in the public interest or for the protection of the
Page 158 of 250
COMMERCIAL LAW
investors such as by the reason of the small amount
involved or the limited character of the public offering.
(SRC, Sec. 10.2)
Issuance from authorized but previously unissued capital
stock may be granted exemption (Nestle Philippines v. CA,
G.R. No. 86738, 1991)
A. Registration Requirement; Exemptions
1. Procedure for Registration of Securities (SRC,
Sec. /2)
a. Filing
The issuer must file in the main office of the SEC:
a. Sworn registration statement with respect to such
securities, and
b. Registration statement must include any
prospectus required (SRC. Sec. 12.1)
Note: A registration statement may be withdrawn by the
issuer only with SEC's consent.
-b. Signature
The registration statement shall be signed by the issuer's
executive officer, its principal operating officer, its principal
financial officer, its comptroller, its principal accounting
officer, its corporate secretary or persons performing
similar functions accompanied by a duly verified resolution
of the board of directors of the issuer corporation and
accompanied by:
a. A duly verified resolution of the board of directors;
and
b. The written consent of the expert, who certified
any part of the registration statement (SRC. Sec.
12.4)
c. Filing Fee
Not more than one-tenth (1/10) of one per centum (1%) of
the maximum aggregate price of the securities (SRC. Sec.
12.514)
d. Publication
Notice of the filing of the registration statement shall be
immediately published by the issuer, at its own expense, in
two (2) newspapers of general circulation in the
Philippines, once a week for two (2) consecutive weeks,
reciting that:
a. A registration statement for the sale of such security
has been filed,
b. The registration statement, and its attachments, are
open to inspection; and
ATENEO CENTRAL
BAR OPERATIONS 2019
c. Copies shall be furnished to interested parties at such
reasonable charge as the SEC may prescribe. (SRC.
Sec. 12.5114)
e. Order
Within forty-five (45) days after the date of filing, the SEC
shall declare the registration statement effective or
rejected (SRC. Sec. 12.6)
f. Entry of Order
The SEC will enter an order declaring the registration
statement to be effective. (SRC. Sec. 12.6)
g. Oath by an Issuer
Upon effectivity of the registration statement, the issuer
shall state under oath in every prospectus that all
registration requirements have been met and that all
information are true and correct as represented by the
issuer or the one making the statement. (SRC. Sec. 12.7)
2. Grounds for Rejection and Revocation of
Registration Statement (SRC, Sec. 13)
a. When the issuer:
i. Has been judicially declared insolvent;
ii. Has violated any of the provision of the
SRC, the rules promulgate pursuant
thereto, or any order of the Commission of
which the issuer has notice in connection
with the offering for which a registration
statement has been filed
iii. Has been or is engaged or is about to
engage in fraudulent transactions;
iv. Has made any false or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities;
v. Has failed to comply with any
requirements that the Commission may
impose as a condition for registration of
the security for which the registration
statement has been filed;
b. The registration statement is on its face
incomplete or inaccurate in any material respect or
includes any untrue statements of a material fact
required to be stated therein or necessary to make
the statement therein not misleading; or
c. The issuer, any officer, director or controlling
person performing similar functions, or any
underwriter has been convicted, by a competent
judicial or administrative body, upon plea of guilty,
or otherwise, of an offense involving moral
turpitude and /or fraud or is enjoined or restrained
Page 159 of 250
COMMERCIAL LAW
by the Commission or other competent or
administrative body for violations of securities,
commodities, and other related laws.
Note: The term "competent judicial or
administrative body" shall include a foreign court of
competent jurisdiction as provided for under the Rules
of Court.
d. Where the issuer refused to comply with the order
of SEC for the production of all books and papers,
administration of oath, or examination of its
officers, or any other person connected to its
business affairs.
3. Consequences of an Incomplete or False
Inaccurate Statement in a Material Respect in the
Registration Statement (SRC, Sec. 14)
If the registration statement is on its face incomplete or
inaccurate in any material respect
• The Commission shall issue an order directing the
amendment of a registration statement; upon
compliance with such order, the amended registration
statement shall become effective;
• But if such registration statement has already become
effective, the issuer needs to publish a notice of the
proposed amendments in 2 newspapers of general
circulation in the Philippines stating that the offering in
its current form has been cancelled.
If the changes shall result to a derogation of rights of
existing security holders or purchasers of subject securities
who have paid a portion of the selling price
• The issuer shall include in the above-mentioned
publication an offer to rescind all transactions that have
been completed for sale to date, without making any
deduction and wait for thirty (30) days for purchasers
to respond to the rescission offer before initiation of the
amended offering.
• Purchasers may, within thirty (30) days from the date
of such notification, renounce their purchase of
securities.
o The issuer, or any person acting on behalf of
the issuer in connection with the distribution of
said securities, shall, within ten (10) days from
receipt of notification of such election, return
the contributions paid by such purchasers
without making any deduction.
ATENEO CENTRAL
BAR OPERATIONS 2019
• Purchasers who decide not to renounce their purchase
of securities shall be subject to the terms of the
amended offering.
Grounds for Suspension of the Registration of a Security
(SRC, Sec. 15)
If at any time, the information contained in the registration
statement filed is or has become misleading, incorrect,
inadequate or incomplete in any material respect
The sale or offering for sale of the security
registered thereunder may work or tend to work a
fraud
Pending further investigation of the security
registered to ascertain whether the registration of
such security should be revoked on any ground
specified in the SRC; or
Refusal to furnish information required by the
Commission
4. Procedure for Suspension of the Sale of Securities
(SRC, Sec. 15)
SEC may order the suspension of the offer and sale of
securities pending any investigation, stating the grounds
for taking such action.
Such order, although binding upon persons notified
thereof, shall be deemed confidential, and shall not be
published.
Notice of such order shall be given to the issuer and every
dealer and broker known as participating in such offering.
Upon issuance of suspension order, no further offer or sale
of such security shall be made until lifted or set aside by
the SEC; otherwise, such sale is void.
Upon issuance of an order of suspension, the SEC shall
conduct a hearing.
If it determines that the sale of any security should be
revoked, it shall issue an order prohibiting the sale of such
security.
If during a public offering, the Commission, after due notice
and hearing, revokes the effectivity of a registration
statement under Section 13, or suspends registration
under Section 15.
Such order shall be published in:
a. A newspaper of general circulation in the Philippines
and/or
Page 160 of 250
COMMERCIAL LAW
b. Post on the Commission's website along with a
statement that the—
i. Offering in its current form has been cancelled;
and
;i. Issuer subject to such order, or any person,
acting on behalf of such issuer in the distribution
of the subject securities and has in his
possession any payment for the purchase of
securities, has the duty to return any and all
payments made by purchasers of the subject
securities within 10 days of such publication,
and simultaneously furnish the issuer a copy of
this notice.
Upon receipt of a notice, the issuer and all persons acting
on its behalf in the distribution of the subject securities shall
immediately terminate the offering and return any and all
payments received from purchasers within 10 days after
the notice is first published.
If the public offering is already terminated and the
Commission, after due notice and hearing, revokes the
effectivity of the registration statement under Section 13,
or suspends registration under Section 15, the
Commission shall publish a notice of the order of
revocation or suspension in a newspaper of general
circulation in the Philippines and/or post in the
Commission's website.
Note: If the public offering has already terminated, there is
no more return of payments.
5. Material Information
Generally, it is any fact or omission, which is material to the
investor in making his decision whether he should invest in
the security or not.
However, the Rules provide for an enumeration of matters
considered as material information. With regard to those
specifically included in the enumeration, the issuer cannot
argue otherwise to say that those are immaterial:
a. Any event or transaction which creates or
increases a risk on the investments or on the
securities covered by the registration;
b. Increase/decrease in the volume of the securities
being offered at an issue price higher/lower than
the range set and disclosed in the registration
statement and which results to a derogation of the
rights of existing security holders, as may be
determined by the Commission;
c. Major change in the primary business of the
registrant;
ATENEO CENTRAL
BAR OPERATIONS 2019
d. Reorganization of the company;
e. Change in the work program or use of proceeds;
f. Loss, deterioration or substitution of the property
underlying the securities;
g. Significant or ten percent (10%) or more change in
the financial condition or results of operation of the
registrant unless a report to that effect is filed with
the Commission and furnished the prospective
purchaser;
h. Classification, de-classification or re-classification
of securities, which results to derogation of rights
of existing security holders, as may be determined
by the Commission.
6. Pre-Need Plan
A contract which provides for the performance of future
services or the payment of future monetary considerations
at the time of actual need, for which plan holders pay in
cash or installment at stated prices, with or without interest
or insurance coverage and includes life, pension,
education, interment, and other plans which the SEC may
from time to time approve (SRC, Sec. 3.9)
Note: The regulation of sales and offers for sale to the
public of pre-need plans are now transferred from the SEC
to the Insurance Commission (Pre-Need Code, Sec.7,
repealing SRC, Sec. 16)
7. Exemptions (SRC, Sec. 10)
The requirement of registration shall not apply to the sale
of any security in any of the following transactions:
(a) At any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in insolvency
or bankruptcy.
(b) By or for the account of a pledge holder, or mortgagee
or any of a pledge lien holder selling of offering for sale or
delivery in the ordinary course of business and not for the
purpose of avoiding the provision of this Code, to liquidate
a bonafide debt, a security pledged in good faith as
security for such debt.
(c) An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner
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 of repeated and
successive transaction of a like character by such owner,
or on his account by such representative and such owner
or representative not being the underwriter of such
security.
Page 161 of 250
COMMERCIAL LAW
(d) The distribution by a corporation actively engaged in
the business authorized by its articles of incorporation, of
securities to its stockholders or other security holders as a
stock dividend or other distribution out of surplus.
(e) The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
(f) The issuance of bonds or notes secured by mortgage
upon real estate or tangible personal property, when the
entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a single
sale.
(g) The issue and delivery of any security in exchange for
any other security of the same issuer pursuant to a right of
conversion entitling the holder of the security surrendered
in exchange to make such conversion: Provided, That the
security so surrendered has been
registered under this Code or was, when sold, exempt from
the provision of this Code, and that the security issued and
delivered in exchange, if sold at the conversion price,
would at the time of such conversion fall within the class of
securities entitled to registration under this Code. Upon
such conversion the par value of the security surrendered
in such exchange shall be deemed the price at which the
securities issued and delivered in such exchange are sold.
(h) Broker's transaction, executed upon customer's orders,
on any registered Exchange or other trading market.
(i) Subscriptions for shares of the capitals stocks of a
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stocks
under the Corporation Code, when no expense is incurred,
or no commission, compensation or 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 subscription is to comply with the
requirements of such law as to the percentage of the
capital stock of a corporation which should be subscribed
before it can be registered and duly incorporated, or its
authorized, capital increase.
0) The exchange of securities by the issuer with the
existing security holders exclusively, where no commission
or other remuneration is paid or given directly or indirectly
for soliciting such exchange.
ATENEO CENTRAL
BAR OPERATIONS 2019
(k) The sale of securities by an issuer to fewer than twenty
(20) persons in the Philippines during any twelve-month
period.
(I) The sale of securities to any number of the following
qualified buyers:
(i) Bank;
(ii) Registered investment house; (iii) Insurance
company;
(iv) Pension fund or retirement plan maintained by
the Government of the Philippines or any political
subdivision thereof or manage by a bank or other
persons authorized by the Bangko Sentral to
engage in trust functions;
(v) Investment company or;
(vi) Such other person as the Commission may
rule by determine as qualified buyers, on the basis
of such factors as financial sophistication, net
worth, knowledge, and experience in financial and
business matters, or amount of assets under
management.
(m) Other transactions, if the Commission finds that the
requirements of registration under this Code is not
necessary in the public interest or for the protection of the
investors
B. Prohibitions On Fraud, Manipulation And Insider
Trading
1. Manipulation Of Security Prices
It shall be unlawful for any person, for himself or
through a dealer or broker, directly and indirectly to —
a. Create a false or misleading appearance of
active trading in any listed security traded in
an Exchange
b. Effect along, or with others, a series of
transactions in securities that:
i. Raises their price to induce purchase;
ii. Depresses their price to induce their
sale; and
iii. Creates active trading to induce
purchase or sale through
manipulative devices
c. Circulation or dissemination of information to
the effect that the price of any such security
will or is likely to rise or fall because of market
operations;
d. Make, regarding any security registered on an
exchange, any statement which is false or
misleading with respect to any material fact,
Page 162 of 250
COMMERCIAL LAW
and which he knew or had reasonable ground
to believe is false or misleading
e. Effect series of transactions for the purpose of
pegging, fixing or stabilizing the price of
security trade in an Exchange, unless
otherwise allowed by the SRC or the SEC
rules.
Examples of Manipulative Practices:
a. Painting the Tape —• engaging in a series of
transactions in securities that are reported publicly to
give the impression of activity or price movement in a
security
b. Marking the Close — buying and selling securities at
the close of the market in an effort to alter the closing
price of the security
c. Improper Matched Orders — engaging in transaction
where both the buy and sell orders are entered at the
same time with the same price and quantity by different
but colluding parties, who have knowledge that such
orders would create an appearance of active trading of
the shares
d. Hype and Dump — engaging in buying activity at
increasingly higher prices and then selling securities in
the market at the higher prices after announcing a
glossy picture of a particular security as good
investment and thus lure investors to trade.
e. Wash Sales — engaging in stock trading where there
is no genuine change in actual beneficial ownership of
a security but makes it appear that the stocks are
actively traded.
f. Squeezing the Float —taking advantage of a shortage
of securities in the market by controlling .the demand
side and exploiting market congestion during such
shortages in a way as to create artificial prices
g. Disseminating false or misleading market
information through media, including the internet
Manipulative and Deceptive Devices (SRC, Sec. 24)
a. Short Sales - any sale of a security which the seller
does not own or any sale which is consummated by
the delivery of a security borrowed by, or for the
account of the seller
When short sale permissible:
1. At a price higher than the last sale or
2. At the price of the sale if and only if that price is
above the next preceding different sale price on
such day
b. Mandatory Close-Out - a contract involving a short
sale, which has not resulted in a delivery by the Broker
ATENEO CENTRAL
BAR OPERATIONS 2019
Dealer within the settlement period (period for making
full payment for the securities), must be closed by the
Broker Dealer, by purchasing (for cash or guaranteed
delivery) securities of like kind and quantity on the next
business day after settlement date, unless such
purchase cannot be effected within said period for
justifiable reasons.
c. Option Trading - no member of an Exchange shall,
directly or indirectly, endorse or guarantee the
performance of any put, call, straddle, option or
privilege in relation to any security registered on a
securities exchange.
i. Options
Contracts that give the buyer the right, but not
the obligation, to buy or sell an underlying
security at a predetermined price, called the
exercise or strike price, on or before a
predetermined date, called the expiry date,
which can only be extended in accordance
with the Exchange rules.
ii. Call Options
Rights to buy an underlying security
iii. Put Options
Rights to sell an underlying security
iv. Straddle
A combination of put and call
2. Fraudulent Transactions (SRC, Sec. 26)
It is unlawful, with respect to the purchase or sale of
securities: (EOE)
a. To employ any device, scheme, or artifice to defraud
b. Obtain money or property by means of any untrue
statement of a material fact or any omission to state a
material fact, that is necessary in order to make the
statements made, in the light of the circumstances
under which they were made, not misleading
c. Engage in any act, transaction, practice, or course of
business which would operate as a fraud or deceit
upon a person — actual intent to deceive not necessary
(SRC, Sec. 26)
Fraud or deceit is required, not mere negligence, on the
part of offender (SEC v. CA, G.R. No. 10465 and 106431-
32, 1995.)
3. Insider Trading
It is unlawful for an insider to sell or buy a security of the
issuer, while in possession of material information with
respect to the issuer that is not generally available to the
public — does not require taking advantage of information,
mere possession is enough (SRC, Sec. 27)
Page 163 of 250
COMMERCIAL LAW
a) Who is an Insider (TRIGOD)
a. Issuer;
b. Director or Officer of issuer;
c. Person whose Relationship or former relationship
with issuer gives him access to material
information not generally available to the public;
d. Government employee or director or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material
information; or
e. A person who learns such information by
communication from any of the foregoing insiders.
NOTE: In securities parlance, this is called
"tippee." This tippee must know that the tipper is
an insider" (SRC. Sec. 3.8)
b) Defenses Against Insider Trading
a. Proof that information was not gained from such
relationship or
b. If the other party buying or selling is identified,
insider proves that:
i. The disclosed the information to the other
party; or
ii. Had reason to beiieve that the other party
already knew of the information
c) Presumption of Insider Trading
Purchase or sale by:
a. Insider
b. Insider's spouse or relatives by affinity or
consanguinity within the second (2"d) degree,
legitimate or common-law, under the following
conditions:
i. Transacted after the information came into
existence but
ii. Prior to dissemination of the information to
the public and a lapse of a reasonable
time for the market to absorb such
information
d) Rebuttal of Presumption
Proof that seller or buyer was not aware of the material
non-public information at the time of the purchase or sale.
e) Material Nonpublic Information
Information is "material nonpublic" if:
a. It has not been generally disclosed to the public
and would likely affect the market price of the
security after being disseminated to the public and
the lapse of a rriasonable time for the market to
absorb the information; or
ATENEO CENTRAL
BAR OPERATIONS 2019
b. Would be considered by a reasonable person
important under the circumstances in determining
his course of action whether to buy, sell or hold a
security (SRC. Sec. 27.2.)
C. Protection Of Investors
1. Tender Offer Rule (SRC, Sec. 19)
A publicly announced intention by a person, acting alone
or in concert with other persons, to acquire equity
securities of a public company.
Purpose
Protection of the interests particularly of the minority
stockholders of a target company
Cases
A "tender offer" is a publicly announced intention by a
person acting alone or in concert with other persons to
acquire equity securities of a public company, i.e., one
listed on an exchange, among others.
• The term is also defined as "an offer by the acquiring
person to stockholders of a public company for the
latter to tender their shares therein on the terms
specified in the offer." (Morales, The Philippine
Securities Regulation Code, 2005 ed., p. 153, as cited
in Osmerla v. SSS, G.R. No. 165272, 2007.).
• Tender offer is in place to protect the interests of
minority stockholders of a target company against any
scheme that dilutes the share value of their
investments. It affords such minority shareholders the
opportunity to withdraw or exit from the company under
reasonable terms, a chance to sell their shares at the
same price as those of the majority stockholders
(Cemco Holdings, Inc. v. National Life Insurance Co.,
G.R. No. 171815, 2007, as cited in Osmetia v. SSS,
G.R. No. 165272, 2007).
• It is done by filing with the SEC a declaration to that
effect, furnishing the issuer with a statement with the
facts required by the SEC, and the publication of all
requests or invitations for tender.
Creeping Acquisition
When a person seeks to acquire 35% or more of equity
shares in a public company, in one or more transactions,
within a period of 12 months.
Note: Under the SRC itself, the creeping acquisition
threshold is 30%.
Page 164 of 250
COMMERCIAL LAW
When Tender Offer Rule is Mandatory:
1. Any person or group of person intends to acquire
35% or more of equity shares in a public company,
in one or more transactions within a period of 12
months
2. Acquisition of even less than 35% but would result
in ownership of more than 51% of the total
outstanding equity securities of a public company
3. The coverage of the mandatory tender offer rule
covers not only direct acquisition but also indirect
acquisition or any type of acquisition. The
legislative intent behind the tender offer rule
makes clear that the type of activity intended to be
regulated is the acquisition of control of the listed
company through the purchase of shares. Control
may [be] effected through a direct and indirect
acquisition of stock, and when this takes place,
irrespective of the means, a tender offer must
occur (Cemco Holdings, Inc. v. National Life
Insurance Co., G.R. No. 171815, 2007, as cited in
Osmefia v. SSS, G.R. No. 165272, 2007.).
Exemptions from Requirement (Purchases):
a. From unissued capital stock, provided that the
acquisition will not result in a 50% or more
ownership
b. Increase in authorized capital stock
c. Foreclosure proceedings
d. Privatization by the government
e. Rehabilitation under court supervision
f. Through an open market at the prevailing market
price
g. Merger or consolidation
2. Rules on Proxy Solicitation (SRC, Sec. 20)
This only refers to solicited proxies.
Basic Requirements:
a. In writing; signed by the stockholder or duly
authorized representative; and
b. Filed before the scheduled meeting with the
corporate secretary
c. Valid only for the meeting for which it is intended
Cannot be valid for a period longer than five years at one
time (Maximum effectivity period: 5 years)
Broker or dealer who holds or acquires the proxy for at
least 10% of the outstanding shares of the issuer shall
submit a re ort identifyin the beneficial owner within 10
days after such acquisition to the
ATENEO CENTRAL
BAR OPERATIONS 2019
• Issuer of the security;
• The Exchange where the security is traded; and
• SEC
3. Disclosure Rule (SRC, Sec. 17)
This rule only applies to issuer corporations that satisfy the
any of the following conditions:
a. Has sold a class of its securities pursuant to a
registration;
b. Has a class of securities listed for trading on an
Exchange; or
c. With assets of at least P50 Million (or such other
amount as SEC shall prescribe), and having 200
or more holders each holding at least 100 shares
of a class of its equity securities ("Public
company")
Reportorial Requirements:
a. Annual Report — for fiscal year in which registration
statement became effective and every fiscal year
thereafter, within 135 days after the end of the fiscal
year
b. Quarterly Report — within 45 days after the end of
each of the first three quarters of the fiscal year
c. Current Report — whenever necessary to make a full,
fair and accurate disclosure to the public of every
material fact or event that occurs, which would
reasonable be expected to affect investors' decisions
in relation to those securities
d. Monthly Report (for issuers of registered commercial
papers) — regarding commercial paper total issuances
outstanding at the end of each month, within 10
business days following the end of the month
Note: Reports filed by 5% beneficial owners - any
person who directly or indirectly acquires the beneficial
ownership of more than five percent (5%) or such lesser
per centum as the Commission may prescribe, of any class
of equity securities of an Issuer, covered by the Disclosure
Rule, shall file a report within five (5) business days after
such acquisition submit to the Issuer, the Exchange where
the security is traded, and to the Commission a sworn
statement prescribed by the SEC (SRC, Sec. 18)
CIVIL LIABILITY
1. In Connection With False Registration Statement
How Committed (SRC, Sec. 56) - any person acquiring a
security
a. The registration statement of which or any part thereof
Page 165 of 250
COMMERCIAL LAW
i. Contains an untrue statement of a material
fact; or
ii. Omits to state a material fact required to be
stated therein or necessary to make such
statements not misleading,
a. At the time of such acquisition he did
not know of such untrue statement or
omission; and
b. Who suffers damage;
c. May sue and recover damages from the following
persons:
i. The issuer and every person who signed the
registration statement;
ii. Every person who was a director of, or any
other person performing similar functions, or a
partner in, the issuer at the time of the filing of
the registration statement or any part,
supplement or amendment thereof with
respect to which his liability is asserted;
iii. Director of, or a person performing similar
functions, or a partner in, the issuer and whose
written consent thereto is filed with the
registration statement;
iv. Auditor or auditing firm named as having
certified any financial statements used in
connection with the registration statement or
prospectus.
v. Every person who, with his written consent,
has been named as having prepared or
certified any part of the registration statement,
or as having prepared or certified any report or
valuation which is used in connection with the
registration statement, with respect to the
statement, report, or valuation, which purports
to have been prepared or certified by him.
vi. Every selling shareholder who contributed to
and certified as to the accuracy of a portion of
the registration statement, with respect to that
portion of the registration statement which
purports to have been contributed by him.
vii. Every underwriter with respect to such
security.
Defenses
No person, other than the issuer, shall be liable if he
proves:
a. Director Or Officer — that before the effectivity part of
registration statement with respect to which his liability
is asserted:
ATENEO CENTRAL
BAR OPERATIONS 2019
i. He had resigned from or had taken such
steps to resign from, or ceased or refused
to act in which he was described in the
registration statement; and
ii. Has given written notice to the SEC and
the Issuer;
b. Non-Expert — he had reasonable ground to
believe and did believe that the statement therein
was true, and that there was no omission to state
a material fact required to be stated therein, or
necessary to make the statements therein not
misleading;
c. Expert Himself — on that part of registration
statement purporting to be made upon his
authority as an expert:
i. He had reasonable ground to believe and
did believe that the statements therein
were true, and that there was no omission
to state a material fact required to be
stated therein, or necessary to make the
statements therein not misleading; or
ii. Such part of the registration statement did
not fairly represent his statement as an
expert;
d. Public Official or Document — on that part of
registration statement purporting to be a statement
made by a public official, or purporting to be from
a public official document;
i. He had no reasonable ground to believe
and did not believe that the statement
therein were untrue;
ii. There was an omission to state a material
fact required to be stated therein or
necessary to make the statements therein
not misleading, or that such part of the
registration statement did not fairly
represent the statement made by the
public official; or
iii. Was not a fair copy of, or extract from
public official document
2. In Connection with Prospectus, Communications
and Reports (SRC, Sec. 57)
c. Any person who:
i. Offers to sell or sells a security without
complying with the registration requirements;
or
ii. Offers to sell or sells a security by the use of
any means or instruments of transportation or
communication, by means of a prospectus or
other written or oral communication, which
Page 166 of 250
COMMERCIAL LAW
includes an untrue statement of material fact
or omits to state a material fact necessary in
order to make the statements not misleading;
Or
d. Any person who makes or causes to be made false or
misleading statements with respect to any material fact
in any report or document filed — liability is to person
who relied on such statements in purchasing or selling
a security at a price which was affected by that
statement
Defenses: good faith, no knowledge that statement was
false or misleading
Note:
• No action shall be maintained to enforce any liability
created under the SRC unless brought within two (2)
years after the discovery of the facts constituting the
cause of action and within five (5) years after such
cause of action accrued. (SRC, Sec. 62)
• All suits to recover damages shall be brought before
the Regional Trial Court, which shall have exclusive
jurisdiction to hear and decide such suits. (SRC, Sec.
63)
• The Court is hereby authorized to award damages in
an amount not exceeding triple the amount of the
transaction plus actual damages. Exemplary damages
may also be awarded in cases of bad faith, fraud,
malevolence or wantonness in the violation of the SRC
or its rules and regulations (Id.)
• The Court is also authorized to award attorney's fees
not exceeding thirty per centum (30%) of the award.
(Id.)
end of topic
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

A. The New Central Bank Act (R.A. No. 7653)

VII. BANKING LAWS
1. Handling of Banks in Distress
TOPIC OUTLINE UNDER THE SYLLABUS
When Banks are in Distress
A. The New Central Bank Act (RA 7653, as amended Liquidity
by RA 11211)
Having cash or the ability of an asset to be readily
1. Handling of banks in distress
a. Conservatorship converted into cash. An entity is liquid when it is able to
b. Closure timely pay its liabilities when they fall due.
c. Receivership
d. Liquidation Illiquidity
B. Secrecy of bank deposits (RA 1405, as amended, The bank is not liquid, and it cannot readily meet its current
and RA 6426, as amended) liabilities.
1. Prohibited acts
2. Exceptions from coverage Note: Illiquidity is addressed by conservatorship.
3. Garnishment of deposits, including foreign
deposits
Insolvency
C. General Banking Law of 2000 (RA 8791)
When the actual market value of assets are insufficient to
1. Nature of bank funds and bank deposits
2. Diligence required of banks pay its liabilities, not considering capital stock and surplus
3. Prohibited transactions by bank directors and which are not liabilities for such purpose. An entity is
officers insolvent when it is unable to meet current and long-term
D. Philippine Deposit Insurance Corporation Act (RA obligations.
3591, as amended)
1. Maximum deposit insurance coverage Insolvency is handled by receivership and closure.
2. Meaning of insured deposit
3. Splitting of deposits Methods
Conservatorship, Receivership, and Liquidation

a. Conservatorship (NCBA, Sec. 29)

Involves the appointment of a conservator to preserve the
assets of the bank when the latter is illiquid, and take
measures.

Instances When Conservatorship Is Available:

Whenever, on the basis of a report submitted by the
appropriate supervising or examining department, the
Monetary Board finds that a bank or quasi-bank is:
a. In a state of continuing inability; or
b. Unwillingness to maintain a condition of liquidity
deemed adequate to protect the interest of depositors
and creditors (NCBA, Sec. 29):

The Monetary Board May:

a. Appoint a conservator to take charge, for a period not
exceeding 1 year, of the assets, liabilities, and the
management thereof;
b. Reorganize the management;
c. Collect all monies and debts due said bank; and
d. Exercise all powers necessary to restore its viability,
‘vith power to overrule or revoke the actions of the

Page 167 of 250

ATENEO CENTRAL
BAR OPERATIONS 2019
previous management and board of directors of the
bank or quasi-bank
A bank conservator appointed by the BSP has no power to
unilaterally rescind contracts entered into by the previous
management, such as a CBA, on the mere assertion that
such contracts are highly disadvantageous to the bank.
(Producers Bank v. NLRC, G.R. No. 118069, 1998). The
power to revoke or rescind contracts pertains to the courts.
Qualifications of a Conservator
The conservator should be competent and knowledgeable
in bank operations and management. (NCBA, Sec. 29)
The Monetary Board has exclusive power to designate the
conservator (Koruga v. Arcenas, G.R. Nos. 168332, 2009)
Responsibilities of Conservator:
a. Reorganize the management
b. Collect all monies and debts due said institution
c. Exercise all powers necessary to restore its viability
d. Where necessary, overrule or revoke the actions of the
previous management and board of directors of the
bank or quasi-bank
e. Report and be responsible tolhe Monetary Board
Powers of a Conservator
a. To take charge of the assets, liabilities, and the
management thereof;
b. To reorganize the management;
c. To exercise all powers necessary to restore its viability,
with the power to overrule or revoke the actions of the
previous management and board of directors of the
bank or quasi-bank; and
d. Collect all monies and debts due to the said bank
The power to revoke cannot extend to post-facto
repudiation of perfected transactions otherwise they would
infringe against the non-impairment clause of the
constitution. Thus, the law merely gives the conservator
power to revoke contracts that are deemed to be defective
— void, voidable, unenforceable, or rescissible. (Producers
Bank v. NLRC, G.R. No. 118069, 1998)
The conservator's power is not unilateral and he cannot
simply repudiate a contract or obligation validly entered
into by the bank. His autority would be only to bring court
actions to assail such contracts. (First Philippine
International Bank v. CA, G.R. No. 115849, 1996)
Remuneration of a Conservator
Page 168 of 250
COMMERCIAL LAW
General Rule:
The conservator shall receive remuneration in an amount
not to exceed 2/3 of the salary of the president of the
institution (i.e. the bank under conservatorship) in 1 year,
payable in 12 equal monthly payments
Exception:
A conservator connected with the BSP, in which case said
conservator shall not be entitled to receive any
remuneration or emolument (NCBA, Sec. 29)
Note: If at any time within one-year period, the
conservatorship is terminated on the ground that the
institution can operate on its own, the conservator shall
receive the balance of the remuneration which he would
have received up to the end of the year; but if the
conservatorship is terminated on other grounds, the
conservator shall not be entitled to such remaining
balance.
Duration of Conservatorship
Shall not exceed 1 year (NCBA, Sec. 29)
Expenses
The expenses attendant to the conservatorship shall be
borne by the bank or quasi-bank concerned. (NCBA, Sec.
29)
Termination of Conservatorship
a. When the Monetary Board is satisfied that the
institution can continue to operate on its own and the
conservatorship is no longer necessary;
b. Should the Monetary Board determine that the
continuance in business of the institution would involve
probable loss to its depositors or creditors, in which
case, proceedings for receivership and liquidation
shall be pursued.
The remedy of an aggrieved controlling shareholder from
the Monetary Bank order placing the rural bank under
conservatorship is a petition for certiorari pursuant to
NCBA, Sec. 30. The petition for certiorari must be filed with
the CA, not the SC, in accordance with Rule 65, since the
Monetary Board is a quasi-judicial agency (Vivas, et al. V.
Monetary Board, G.R. No. 191424, 2013)
b. Closure
Whenever a bank is ordered closed by the Monetary
Board, the PDIC shall be designated as receiver and it
shall proceed with the takeover and liquidation of the
closed bank in accordance with R.A. No. 3591. (R.A. No.
ATENEO CENTRAL
BAR OPERATIONS 2019
3591, Sec. 12[a], as amended by R.A. No. 10846
[hereinafter New PDIC Charter])
Receivership
The stage within which the PDIC manages the affairs of
the closed bank and preserves its assets for the benefit of
creditors (R.A. No. 9302, Sec. 10[a][b])
Receivership is equivalent to an injunction to restrain the
bank in any way. Thus, the appointment of a receiver
operates to suspend the authority of the bank and of its
directors and officers over its property and effects.
(Villanueva v. CA, G.R. No. 114870, 1995.)
Grounds for Resolution under the New PDIC Charter
(New PDIC Charter, Sec. 11): The PDIC, in coordination
with the BSP, may commence the resolution of a bank
upon —
a. Failure of prompt corrective action as declared by the
Monetary Board; or (new PDIC Charter, Sec. 11[a][1])
b. Request by a bank to be placed under resolution. (New
PD1C Charter, Sec. 11[a][2])
The PDIC shall inform the bank of its eligibility for entry into
resolution. Within a period of 180 days from a bank's entry
into resolution, the PDIC, through the affirmative vote of at
least 5 members of the board, shall determine whether the
bank may be resolved through the purchase of all its
assets and ssumption of all its liabilities, or merger or
consolidation with, or its acquisition, by a qualified investor.
(New PDIC Charter, Sec. 11[e])
Grounds for Receivership
Upon a determination by the PDIC that the bank may not
be resolved, the Monetary Board may act in accordance
with Section 30 of the NCBA.
Grounds under the New Central Bank Act (NCBA)
Whenever the Monetary Board finds that a bank or quasi-
bank -
a. Is unable to pay its liabilities as they become due in the
ordinary course of business (cash flow test) (NCBA,
Sec. 30[a]);
Exception: Inability to pay caused by extraordinary
demands induced by financial panic in the banking
community (bank run) (NCBA, Sec. 30[a]);
b. Has insufficient realizable assets to meet its liabilities
(balance sheet test) (NCBA, Sec. 30[b]);
Page 169 of 250
COMMERCIAL LAW
c. Continue in business without involving probable losses
to its depositors and creditors (NCBA, Sec. 30[c]); or
d. Has willfully violated a cease-and-desist order under
NCBA, Sec. 37 (Administrative Sanctions) that has
become final and involves acts or transactions which
amount to fraud or a dissipation of assets (NCBA, Sec.
30[d])
Grounds under the General Banking Law (hereinafter
GBL):
a. If the bank or quasi-bank notifies the BSP or publicly
announces a bank holiday (GBL, Sec. 53); or
b. If the bank or quasi-bank in any manner suspends the
payment of its deposit liabilities continuously for more
than 30 days (GBL, Sec. 53); or
c. If a bank persists in conducting its business in an
unsafe or unsound manner GBL, Sec. 56) and the
receiver determines that the bank cannot be
rehabilitated or permitted to resume business.
Mandatory Requirements for Bank Closure
1. Examination by the appropriate BSP department as to
the condition of the bank;
2. Examination showing that the condition of the bank is
one of insolvency, or that its continuance in business
would involve probable loss to its depositors or
creditors;
3. Director shall inform the Monetary Bank in writing of
such fact;
4. If the Monetary Board shall find the statement of the
department to be true, it shall appoint a receiver of the
assets and liabilities of the bank (Banco Filipino v.
Monetary Bank, G.R. No. 70054, 1991); and
5. Within 60 days, the Monetary Board shall determine
and confirm if the bank is insolvent, and if the public
interest requires, shall order the liquidation of the bank
Close Now-Hear Later Doctrine
The law does not require prior notice and hearing before
the bank may be directed to stop operations and placed
under receivership. The purpose is to prevent unwarranted
dissipation of the bank's power to protect the depositors,
creditors, stockholders and the general public. (Central
Bank of the Philippines v. CA, G.R. No. 72200, 1993)
Notice of Closure and Takeover Activities (New PDIC
Charter, Sec. 14)
a. Upon the designation of the PDIC as receiver of a
closed bank, it shall serve a notice of closure to the
highest-ranking officer of the bank present in the bank
premise, or in the absence of such officer, post the
ATENEO CENTRAL
BAR OPERATIONS 2019
notice of closure -in the bank premises or on its main
entrance. The closure of the bank shall be deemed
effective upon the service of the notice of closure.
Thereafter, the receiver shall takeover the bank and
exercise the powers of the receiver as provided in this
Act.
b. The receiver shall have authority to use reasonable
force, including the authority to force open the
premises of the bank, and exercise such acts
necessary to take actual physical possession and
custody of the bank and all its assets, records,
documents, and take charge of its affairs upon the
service of the notice of closure.
c. Directors, officers, employees, or agents of a bank
hold money and other assets of the bank in trust or
under administration or management by them for the
bank in their fiduciary capacity. Upon service of the
notice of closure to the bank, all directors, officers,
employees or agents of the closed bank shall have the
duty to immediately account for, surrender and turn
over tho the receiver, and provide information relative
to, the assets, records, and affairs of the closed bank
in their possession, custody, administration or
management
d. When the circumstances so warrant, the local
government unit and law enforcement agencies
concerned shall, upon request, immediately provide
assistance to the receiver during the service of notice
of closure and actual takeover operations to ensue the
orderly conduct thereof.
c. Receivership
Under the new PDIC Charter, banks closed by the
Monetary Board shall no longer be rehabilitated. The
PDIC, as receiver, shall immediately proceed with the
takeover and liquidation. (New PDIC Charter, Sec. 12[a])
d. Liquidation
The recovery and conversation of assets into cash for
distribution to all creditors in accordance with the rules on
concurrence and preference of credits.
Types of Liquidation
a. Voluntary liquidation (GBL, Sec. 68);
b. Involuntary Liquidation (GBL, Sec. 30-33)
Modes of Liquidation
a. Conventional Liquidation (New PD1C Charter, Sec.
16)
The assets gathered by the receiver shall be evaluated
and verified as to their existence, ownersh,p, condition,
and other factors to determine their realizable value.
Page 170 of 250
COMMERCIAL LAW
b. Purchase of Assets and/or Assumption of
Liabilities (New PDIC Charter, Sec. 15)
The receiver shall have the authority to facilitate and
implement the purchase of the assets of the closed
bank and the assumption of its liabilities by another
insured bank, without need for approval of the
liquidation court. The exercise of this authoirty shall be
in accordance with the Rules on Concurrence and
Preference of Credits under the Civil Code or other
laws, subject to such terms and conditions as the PDIC
may prescribe. The disposition of the branch licenses
and other bank licenses of the closed bank shall be
subject to the approval of the BSP.
Note: Such action of the receiver to determine whether a
bank may be subject of a purchase of assets and
assumption of liabilities transactions shall be final and
executory, and may not be set aside by any court.
Authorities of a Receiver and Effects of Placement of
a Bank under Liquidation (New PDIC Charter, Sec. 13)
Authorities of a Receiver
a. authorized to adopt and implement, without need of
consent of the stockholders, BOD, creditors and
depositors of the closed bank, any or a combination of
the following modes of liquidation:
i. Conventional liquidation; and
ii. Purchase of assets and./or assumption of
liabilities
b. In addition to the powers of a receiver provided under
existing laws, the PDIC, as receiver of a closed bank
is empowered to:
i. Represent and act for and on behalf of the
closed bank;
ii. Gather and take charge of all the assets,
records and affairs of the closed bank, and
administer the same for the benefit of its
creditors;
iii. Convert the assets of the closed bank to cash
or other forms of liquid assets, as far as
practicable;
iv. Bring suits to enforce liabilities of the directors,
officers, employees, agents of the closed bank
and other entitites related or connected to the
closed bank or to collect, recover, and
preserve all assets, including assets over
which the bank has equitable intestest;
v. Appoint or hire persons or entities of
recognized competence in banking, finance,
asset management or remedial management,
ATENEO CENTRAL
BAR OPERATIONS 2019
as its deputies, assistants or agents, to
perform such powers, and functions of the
PDIC as receiver of the closed bank, or assist
in the performance thereof;
vi. Appoint or hire persons or entities of
recognized competence in forensic and fraud
investigations;
vii. Pay accrued utilities, rentals and salaries of
personnel of the closed bank;
viii. Collect loans and other claims of the closed
bank and for this purpose, modify,
compromise or restructure the terms and
conditions of such loans or claims as may be
deemed advantageous to the interests of the
creditors of the closed bank;
ix. Hire or retain private counsel as may be
necessary;
x. Borrow or obtain a loan, or mortgage, pledge
or encumber any asset of the closed bank,
when necessary to preserve or prevent
dissipitation of the assets, or to redeem
foreclosed assets of the closed bank, or to
minimize losses to its depositors and
creditors;
xi. If the stipulated interest rate on deposits is
unusually high compared with prevailing
applicable interest rates, the receiver may
exercise such powers which may include a
reduction of the interest rate to a reasonable
rate;
Note: Any modifications or reductions shall
apply only to earned or unpaid interest
xii. Utilize available funds of the bank, including
funds generated by the receiver from the
conversion of assets to pay for reasonable
costs and expenses incurred for the
preservation of the assets, and liquidation of,
the closed bank, without need for approval of
the liquidation court;
Note: For banks with insufficient funds, the
PDIC is authorized to advance the foregoing
costs and expenses, and collect payments, as
and when funds become available.
xiii. Charge reasonable fees for the liquidation of
the bank from the assets of the bank
Provided, that payment of these fees,
including any unpaid advances under the
Page 171 of 250
COMMERCIAL LAW
immediately preceeding paragraph, shall be
subject to approval by the liquidation court;
xiv. Distribute the available assets of the closed
bank, in cash or in kind, to its creditors in
accordance with the Rules on Concurrence
and Preference of Credits under the Civil Code
or other laws;
xv. Dispose records of the closed bank that are no
longer needed in the liquidation in accordance
with the guidelines set by the PDIC BOD,
notwithstanding the laws on archival period
and disposal of records; and
xvi. Exercise such other powers as are inherent
and necessary for the effective discharge of
the duties of the Corporation as receiver.
c. After the payment of all liabilities and claims against
the closed bank, the receiver shall pay surplus, if any,
dividends at the legal rate of interest from date of
takeover to date of distribution to creditors and
claimants of the closed bank in accordance with the
Rules on Concurrence and Preference of Credits
under the Civil Code or other laws before distribution
to the shareholders of the closed bank
Effect of Placement of a Bank under Liquidation
The officers, employees, deputies, assistants and agents
of the receiver shall have no liability and shall not be
subject to any action, claim or demand in connection with
any act done or omitted to be done by them in good faith
in connection with the exercise of their powers and
functions under the PDIC charter and other applicable
laws, or other actions duly approved by the court. (New
PDIC Charter, Sec. 131d1)
The placement of a bank under liquidation shall have the
following effects:
a. On the CORPORATE FRANCHISE or existence (New
PDIC Charter, Sec. 15fe1[11)
Upon placement by the Monetary Board of a bank under
liquidation, it shall continue as a body corporate until the
termination of the winding up period
Note: Winding up period is 6 months from the date of
publication of notice of the approval by the court of the final
asset distribution plan of the closed bank. (New PDIC
Charter, Sec. 1610
Such continuation as a body corporate shall only be for the
purpose of liquidating, settling and closing its assets
ATENEO CENTRAL
BAR OPERATIONS 2019
Receiver shall represent the closed bank in all cases by or
against the closed bank and prosecute and defend suits by
or against it
Note: In no case shall the bank be reopened and permitted
to resume baking business after being placed under
liquidation.
b. On the POWERS AND FUNCTIONS of its directors,
officers and stockholders (DOS) (New PDIC Charter,
Sec. /5/e][2])
The powers, voting rights, functions and duties, as well as
the allowances, renumeration and perquisites of the DOS
of such bank are TERMINATED upon its closure
DOS shall be BARRED from interfering in any way with the
assets, records, and affairs of the bank
Note: The receiver shall exercise all authorities as may be
required to facilitate the liquidation of the closed bank for
the benefit of all its creditors.
c. On the ASSETS (New PDIC Charter, Sec. 151e1131)
Upon service of closure, all the assets of the closed bank
shall be deemed in custodia legis in the hands of the
receiver, and as such, these assets may not be subject to
attachment, garnishment, execution, levy or any other
court processes
A judge, officer of the court or any person who shall issue,
order, process or cause the issuance or implementation of
the garnishment order, levy, attachment or execution, shall
be liable
Provided: collaterals securing the loans and advances
granted by the BSP shall not be included in the assets of
the closed bank for distribution to other creditors
Provided, further: the proceeds in excess of the amount
secured shall be returned by the BSP to the receiver
Note: Any preliminary attachment or garnishment on any
of the assets of the closed bank existing at the time of
closure shall not give any preference to the attaching or
garnishing party. Upon motion of the receiver, the
preliminary attachment or garnishment shall be lifted
and/or discharged.
d. On LABOR RELATIONS (New PDIC Charter, Sec.
15jel(4])
Page 172 of 250
COMMERCIAL LAW
The employer-employee relationship between the closed
bank and its employees shall be deemed terminated upon
service of the notice of closure of the bank
Payment of separation pay or benefits provided for by law
shall be made from available assets of the bank in
accordance with the Rules on Concurrence and
Preference of Credits under the Civil Code or other laws
e. On CONTRACTUAL OBLIGATIONS (New PDIC
Charter, Sec. 15rej[5])
Receiver may cancel, terminate, rescind or repudiate any
contract of the closed bank that is not necessary for the
orderly liquidation of the bank, or is grossly
disadvantageous to the closed bank, or for any ground
provided by law
f. On INTEREST PAYMENTS (New PDIC Charter, Sec.
/5fe][6])
The liability of a bank to pay interest on deposits and all
other obligations as of closure shall cease upon its closure
without prejudice to NCBA, Sec. 85
Provided: The receiver shall have the authority, without
need for approval of the liquidation court, to assign, as
payment to secured creditors, the bank assets serving as
collaterals to their respective loans up to the extent of the
outstanding obligations including interests as of date of
closure (valuation based on the prevailing market value of
the collaterals)
Note: The BSP shall collect interest and other appropriate
charges on all loans and advances it extends, the closure,
receivership or liquidation of the debtor-institution
notwithstanding. (NCBA, Sec. 85)
g. On Liability for penalties and surcharges for later
payment and nonpayment of TAXES (New PDIC
Charter, Sec. 151e][7])
From the time of closure, the closed bank shall not be liable
for the payment of penalties and surcharges arising from
the late payment or non-payment of real property tax,
capital gains tax, transfer tax and similar charges
h. On BANK CHARGES AND FEES on services (New
PDIC Charter, Sec. 15(e1181)
Receiver may impose charges and fees for services
rendered after bank closure such as the execution of
pertinent deeds and certifications
I. On ACTIONS PENDING for or against the closed
bank (New PDIC Charter, Sec. 151b1[91)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

General Rule: Actions pending for or against the closed Board of Directors of the order directing receivership,
bank in any court or quasi-judicial body shall, upon motion conservatorship, or liquidation.
of the receiver, be suspended for a period not exceeding
180 days and referred to mandatory mediation nvoluntary Dissolution and Liquidation
CORPORATION CODE NCBA (MONETARY
Exception: Actions pending before the Supreme Court (SEC) BOARD, PDIC)
Filing of Complaint: Filing of Complaint:
j. On FINAL DECISIONS against the closed bank (New Requires filing of a verified Monetary Board may
PDIC Charter, Sec. 151e1110]) complaint and proper summarily and without
Execution and enforcement of a final decision of a court notice and hearing; need for prior hearing
other than the liquidation court against the assets of a forbid the bank from doing
closed bank shall be STAYED business
Prior to dissolution: Prior to dissolution:
Prevailing party shall file the final decision as a claim with Requires a BIR Tax PDIC shall immediately
the liquidation court and settled in accordance with the Clearance; gather and take charge of
Rules on Concurrence and Preference of Credits under the SEC shall issue final order all its assets and liabilities
Civil Code or other laws of dissolution after
submission of the tax
k. Docket and other COURT FEES (New PDIC Charter, clearance
Sec. 151-4111) Authority of the Authority of the
Payment of docket and other court fees relating to all cases Corporation in the Corporation in the
or actions filed by the receiver with any judicial or quasi- Dissolution: Dissolution:
judicial bodies shall be deferred until the action is Corporation is allowed to Bank is not given the
terminated with finality undertake its own option to undertake its
liquidation or at any time own liquidation
Any such fees shall constitute as a first lien on any during 3 years after its
judgment in favor of the closed bank or in case of dissolution
unfavorable judgment, such fees shall be paid in liquidation (In re: Petition for Assistance in the Liquidation of the Rural
costs and expenses during the distribution of the assets. Bank of Bokod Benguet, Inc., PDIC v. BIR, G.R. No.
158261, 2006)
All assets, records, and documents in the possession of
the closed bank at the time of its closure are presumed General Rule: If there is judicial liquidation of an insolvent
held by the bank in the concept of an owner. (New PDIC bank, all claims against the bank should be filed in the
Charter, Sec. /5/e1/12.1) liquidation proceeding (In re: Petition for Assistance in the
Liquidation of the Rural Bank ofBokod Benguet, Inc., PDIC
The exercise of authority, functions, and duties by the v. BIR, G.R. No. 158261, 2006)
receiver shall be presumed to have been performed in the
regular course of business. (New PDIC Charter, Sec. Exceptions:
151e1113.1) a When re-filing and re-litigating the case before the
liquidation court would be an exercise in futility in view
Assets and documents of the closed bank shall retain their of the number of years the case has been on trial and
private nature even if administered by the receiver. (New additional expenses to the party who is living in poverty
PDIC Charter, Sec. 151e][141) (Valenzuela v. CA, G.R. No. L-56168, 1988)
b. When more inconveniences would be caused to the
Note: Matters relating to the exercise by the receiver of the parties, entailing waste of more money and precious
functions shall be subject to visitorial audit only by the time (Carandang v. CA, G.R. No. L-44932, 1988); and
COA. c. When the issue is the validity of contracts upon which
a claim is based
Challenging the Decision of the Receiver
Only stockholders representing a majority of the capital Note: Even if the case falls within the aforementioned
stock of the bank have the personality to file a petition for exceptions, the claimant should still file the adjudicated
certiorari to be filed within 10 days from receipt by the claim with the liquidator or liquidation court for processing
Page 173 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
of claims to determine the proper concurrence and
preference of credit among the different creditors of the
bank (Cudiamat v. Batangas Savings Bank, G.R. No.
182403, 2010)
B. Law On Secrecy Of Bank Deposits (R.A. No. 1405,
As Amended)
Purpose
a. To give encouragement to the people to deposit
their money in banking institutions; and
b. To discourage private hoarding so that the same
may be properly utilized by banks in authorized
loans to assist in the economic development of the
country. (RA 1405 as amended, Sec. 1)
1. Prohibited Acts
All deposits of whatever nature with the banks in the
Philippines, including investments in government bonds
are considered absolutely confidential and may not be
examined, inquired or looked into by any person except as
allowed by law. (RA 1405 as amended, Sec. 2)
b. Deposits Covered
a All deposits of whatever nature with banks or
banking institutions in the Philippines
b. Investments in bonds issued by the Government
of the Philippines, its political subdivisions and its
instrumentalities. (RA 1405 as amended, Sec. 2)
All Bank accounts of whatever nature are absolutely
confidential under the Bank Secrecy Law, including trust
accounts. (Ejercito v. Sandiganbayan, G.R. No. 157294-
95, 2006)
Construction of Confidentiality
By force of statute, all bank deposits are absolutely
confidential, and that nature is unaltered even by the
legislated exceptions. There is disfavor towards construing
these exceptions in such a manner that would authorize
unlimited discretion on the part of the government or of any
party seeking to enforce those exceptions and inquire into
bank deposits. If there are doubts in upholding the
absolutely confidential nature of bank deposits against
affirming the authority to inquire into such accounts, then
such doubts must be resolved in Tavor of confidentiality.
(Republic v. Eugenio, G.R. No. 174629, 2008)
Page 174 of 250
COMMERCIAL LAW
Rules on Foreign Currency Deposits
General Rule: Deposits in foreign currency deposits (RA
No. 6426. 1972) and deposits in offshore banking units (PD
No. 1246, Sec. 8) are also confidential in nature.
Exception: Disclosure is allowed under said law upon the
written permission of the depositor.
Foreign currency deposits are exempt from attachment,
garnishment, or any other order or process of any court,
legislative body, government agency or any administrative
body whatsoever. (RA 6426, Sec. 8)
Rules Applicable for Investment in Trust or Deposit
Substitute
For investments in trust accounts or in deposit substitutes,
if these are in the form of investments in government bonds
or deposits, the protection under RA 1405 and RA 6426
extends thereto accordingly.
If these are in other forms of investments, the disclosure of
information related thereto is prohibited as provided by
GBI., Sec. 55.
Note: No director, officer, employee, or agent of any bank
shall, without order of a court of competent jurisdiction,
disclose to any unauthorized person any information
relative to the funds or properties in the custody of the bank
belonging to private individuals, corporations, or any other
entity. (GBL, Sec. 55[1]141) -
Deposits may not be examined, inquired or looked into by
any person, government official, bureau or office
Rule on Disclosure of Information Concerning
Deposites
It is also unlawful for any official or employee of a bank to
disclose to any person any information concerning
deposits
Requisites for Disclosure of Peso Deposits in Court
Cases
a. There must be a court order;
b. The order must be issued by a competent court
specifically directing the bank concerned to disclose
the required information
c. The bank should check and satisfy itself that the
deposits or investment in government bonds being
inquired into are either the subject of a case of bribery
or dereliction of duty of public officials, or of a case
where the deposit or investment itself is the subject
matter of the litigation.
ATENE0 CENTRAL
BAR OPERATIONS 2019
2. Effect of Non-Existence of Requisites
If these requirements are not met, there would be basis for
the bank to request the court to excuse compliance with
the court order.
Exceptions (Disclosure Allowed) - Grounds To Allow
Examination Of A Bank Account (Sec. 2):
a. Where the depositor consents IN WRITING;
b. IMPEACHMENT CASES;
Note: it is necessary that there be an order issued
by the impeachment court or by its authorized
officer to allow examination.
c. BY COURT ORDER in cases of:
i. Bribery
ii. Dereliction of duty of public officials
d. Money invested or deposited is subject of litigation
Additional Exceptions to the Secrecy of the Bank
Deposit Act (Aside From Those Stated In The Law)
a. The Commissioner of Internal Revenue can inquire
into the bank accounts of the following taxpayers:
• A decedent to determine his gross estate; or
• . Any taxpayer who has filed an application for
compromise of his tax liability, which application
on the ground of financial incapacity (N1RC, Sec.
6[0
A taxpayer, information on whose account is
requested by a foreign tax authority
Note: A waiver of rights under the Law on Secrecy of
Bank Deposits (RA 1405) must not only be voluntary,
but must have been made knowingly, intelligently, and
with sufficient awareness of the relevant
circumstances and likely consequences. There must
be persuasive evidence to show an actual intention to
relinquish the right. Mere silence on the part of the
holder of the right should not be construed as a
surrender thereof. (Dotia Adela Export International,
Inc. vs. T1DCORP and BPI, G.R. No. 201931, 2015)
b. In cases of unclaimed balances: Disclosure to the
Treasurer of the Philippines for dormant deposits for at
least 10 years (Act 3936, Sec. 2)
c. Inquiry into or examination of any deposit or
investment with any banking institution when the
examination is made by the BSP in the course of a
periodic or special examination in accordance with
the rules of examination of the BSP (RA 9160, Sec.
11)
Page 175 of 250
COMMERCIAL LAW
d. The Courts were authorized to examine bank deposits
of spouse and unmarried children of government
officials found to have unexplained wealth under the
Anti-Graft and Corrupt Practices Act
e. Human Security Act (RA 9372), Sec. 27: The
provisions of Republic Act No. 1405 as amended, to
the contrary notwithstanding, the justices of the Court
of Appeals designated as a special court to handle
anti-terrorism cases after satisfying themselves of the
existence of probable cause in a hearing called for that
purpose may authorize in writing any police or law
enforcement officer and the members of his/her team
duly authorized in writing by the anti-terrorism council
to:
• Examine, or cause the examination of, the
deposits, placements, trust accounts, assets and
records in a bank or financial institution; and
• Gather or cause the gathering of any relevant
information about such deposits, placements, trust
accounts, assets, and records from a bank or
financial institution. The bank or financial
institution concerned, shall not refuse to allow
such examination or to provide the desired
information, when so, ordered by and served with
the written order of the Court of Appeals.
f. Under AMLA, Sec. 11:
Upon order of a competent court in cases of violation of the
AMLA where there is probable cause of money laundering,
except that no court order is required in cases of:
• Kidnapping for ransom
• Drug trafficking
• Hijacking, destructive arson and murder, including
those perpetrated by terrorists against non-
combatants and similar targets
BSP inquiry into or e-.amination of deposits or investments
with any bank, when the inquiry or examination is made in
the course of the BSP's periodic or special examination
g. Under Sections 1(d) and 4 of the Plunder Law
h. Under Section 8 of the new PDIC Charter
Whenever upon examination by the Corporation into the
condition of any insured bank, it shall be disclosed that an
insured bank or its directors or agents have committed, are
committing or about to commit unsafe or unsound
practices in conducting the business of the bank, or have
violated, are violating or about to violate any provisions of
any law or regulation to which the insured bank is subject,
ATENEO CENTRAL
BAR OPERATIONS 2019
the BOD shall submit the report of the examination to the
Monetary Board to secure corrective action.
i. In-Camera Inspection
Requisites:
a. Pending case before a court of competent
jurisdiction
b. Account must be clearly identified
c. The inspection is limited to the subject matter of
the pending case
d. The bank personnel and the account holder must
be notified to be present during the inspection, and
such inspe.ction may cover only the account
identified in the pending case.
Note: An investigation by the Office of the Ombudsman is
not a pending litigation to allow examination of a bank
account. (Marquez v. Desierto, G.R. No. 135882, 2001)
Grounds for Disclosure of Foreign Currency Deposits
a. Upon written permission of the depositor.
b. When there is probable cause of Money Laundering as
provided under the AMLA Sec. 11.
c. When there is probable cause of Terrorism under the
Human Security Act. (Aquino, Banking Laws [2010])
Disclosures Applicable -to Both Peso and Foreign
Currency Deposits
• Under the Rules of Court
a. Garnishment (Rule 39, Sec. WO
b. Preliminary attachment (Rule 57, Sec. 10)
• Waiver in case of DOSRI loans - Any director, officer
or stockholder who, together with his related interest,
contracts a loan or any form of financial
accommodation from:
a. His bank; or
b. From a bank
i. Which is a subsidiary of a bank holding
company of which both his bank and the
lending bank are subsidiaries; or
ii. In which a controlling proportion of the shares
is owned by the same interest that owns a
controlling proportion of the shares of his
bank, in excess of five percent (5%) of the
capital and surplus of the bank, or in the
maximum amount permitted by law, whichever
is lower, shall be required by the lending bank
to waive the secrecy of his deposits of
whatever nature in all banks in the Philippines.
Page 176 of 250
COMMERCIAL LAW
Any information obtained from an examination of his
deposits shall be held strictly confidential and may be used
by the examiners only in connection with their supervisory
and examination responsibility or by the BSP in an
appropriate legal action it has initiated involving the deposit
account. (NCBA, Sec. 26)
Note: Even in cases not involving prosecution under the
Anti-Graft and Corrupt Practices Act, an inquiry into the
whereabouts of the amount converted necessarily extends
to whatever is concealed (being in the name of persons
other than the one responsible for the illegal acquisition)
inasmuch as the case is aimed at recovering the amount
converted. (Mellon Bank v. Magsino, G.R. No. 71479,
1990)
Account Names
a. Peso Accounts
When banks allow the opening of deposit accounts under
pseudonyms, it is assumed that: (1) They have exercised
due diligence to ascertain the identity of their clients; and
(2) They are aware of the legal provisions and
requirements on the use of pseudonyms.
Question: With the issuance of Circular 251, does that
mean there is no longer confidentiality/secrecy of
deposit accounts?
Answer: NO. Circular 251 merely disallowed the
opening of fictitious and anonymous accounts and has
not in any way modified nor lessened the safeguards
and protection to depositors under RA 1405. This
means that, notwithstanding Circular 251, deposit
accounts cannot be examined or looked into except
under the limited circumstances provided for in RA
1405.
b. Accounts Using Alias or Account Numbers
On July 7, 2000 and in seeking the adoption of anti-money
laundering measures, BSP issued a regulation, Circular
No. 251, providing that, unless othesrwise prescribed
under existing laws, anonymous accounts or accounts
under fictitious names are prohibited.
The exception referred to under Circular No. 251 was RA
6426 (The Foreign Currency Deposit Act), which explicitly
allows the keeping of numbered accounts for the recording
and servicing of deposits.
Note: Prior to said date, there was no prohibition.
However, in the Manual of Regulations issued by BSP and
even before Circular 251, banks were required to: (a) adopt
ATENEO CENTRAL
BAR OPERATIONS 2019
systems to establish the identity of their depositors; and (b)
set a minimum of three (3) specimen signatures from each
of their depositors subject to regular updating.
Even for numbered accounts as authorized under RA
6426, BSP has required banks, under Circular 251, to take
necessary measures to establish and record the true
identity of their clients, which identification may be based
on official or other reliable documents and records.
3. Garnishment of Deposits, Including Foreign Deposits
The prohibition against examination of or inquiry into a
bank deposit under Republic Act 1405 does not preclude
its being garnished to insure satisfaction of a judgment.
Indeed there is no real inquiry in such a case, and if the
existence of the deposit is disclosed the disclosure is
purely incidental to the execution process. (China Bank v.
Ortega, G.R. L-34964, 1973)
Deposits maintained by banks with the Bangko Sentral as
part of their reserve requirements shall be exempt from
attachment, garnishments, or any other order or process
of any court, government agency or any other
administrative body issued to satisfy the claim of a party
other than the Government, or its political subdivisions or
instrumentalities. (Sec. 103)
Penalties for Violation:
Any violation of this law will subject offender upon
conviction, to an imprisonment of not more than five years
or a fine of not more than twenty thousand pesos or both,
in the discretion of the court. (RA 1405, Sec 5.)
C. General Banking Law Of 2000 (R.A. 8791)
Plereinafter Gbll
Definition And Classification Of Banks
Banks
Entities engaged in the lending of funds obtained in the
form of deposits. (GBL, Sec. 3.1)
Elements
1. Engaged in lending of funds
2. Obtained in the form of deposits
3. From the public, which shall mean 20 or more persons
How Banks are Structured
General Rule: Banks are stock corporations. However,
cooperative banks may also be formed under the
Cooperative Code.
Page 177 of 250
COMMERCIAL LAW
Note: Under R.A. No. 10641, foreign banks may now be
fully foreign owned, through any of the following modes of
entry:
(1) Acquiring, purchasing, or owning up to 100% of
the voting stock of an existing bank;
(2) Investing in up to 100% of the voting stock of a new
banking subsidiary incorporated under the laws of
the Philippines; or
(3) Establishing branches with full banking authority;
a. However, the foreign bank must be
established, reputable, and financially
sound
b. Further, it must be widely-owned and
publicly listed in the country of origin
Universal Banks
A universal bank shall have the authority to exercise, in
addition to the powers authorized for a commercial bank in
Section 29, the powers of an investment house as provided
in existing laws and the power to invest in non-allied
enterprises as provided in this Act. (GBL, Sec. 23)
Commercial Banks
A commercial bank shall have, in addition to the general
powers incident to corporations:
a. All such powers as may be necessary to carry on the
business of commercial banking such as accepting
drafts and issuing letters of credit;
b. Discounting and negotiating promissory notes, drafts,
bills of exchange, and other evidences of debt;
c. Accepting or creating demand deposits; receiving
other types of deposits and deposit substitutes;
d. Buying and selling foreign exchange and gold or silver
bullion;
e. Acquiring marketable bonds and other debt securities;
and
f. Extending credit, subject to such rules as the Monetary
Board may promulgate.
These rules may include the determination of bonds
and other debt securities eligible for investment, the
maturities and aggregate amount of such investment.
Thrift Banks
They include savings and mortgage banks, private
development banks, and stock savings and loans
associations organized under existing laws. (R.A. No.7906
— Thrift Banks Act)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Rural Banks To determine whether the financial assets are deposit

Banks which are designed to make needed credit available
and readily accessible in the rural areas on reasonable
terms. (R.A. No. 7353)
Cooperative Banks
One organized, the majority shares of which is owned and
controlled by cooperatives, primarily to provide financial
and credit services to cooperatives. (R.A. No. 6938)
substitutes, the "20 or more individual or corporate lenders"
rule must apply. (Id.)
Trust Entities
Any bank, investment house or a stock corporation duly
authorized by the Monetary Board to engage in trust,
investment management and fiduciary business
methodology. (Definitions of MORB, Sec. X410.1)

Islamic Banks TRUST

BANK QUASI-BANK
Created by Congress to promote and accelerate socio- ENTITY
economic development of the Autonomous Region by Entities Entities engaged in Entities engaged
performing banking, financing and investment operations engaged in the borrowing of in trust,
and to establish and participate in agricultural, commercial the lending funds through the investment
of funds issuance or management
and industrial ventures based on the Islamic concept of
obtained in acceptance of and fiduciary
banking. (RA 6848, Sec. 3)
the form of deposit substitutes business
deposits. for the purpose of methodology.
Distinction Of Banks From Quasi-Banks And Trust purchasing
Entities receivables or other
obligations.
Quasi-Banks
Refer to entities engaged in the borrowing of funds through Bank Powers and Liabilities
the issuance, endorsement or assignment with recourse or
acceptance of -deposit substitutes as defined in [NCBA, 1. Corporate Powers
Sec. 95] for purposes of relending or purchasing of As banks are required to organize as stock corporations,
receivables and other obligations. (GBL, Sec. 4, Par. 3) they shall have the powers enumerated under Sec. 36 of
the Corporation Code:
Deposit Substitutes • To sue and be sued in its corporate name;
An alternative form of obtaining funds from the public, other • Of succession by its corporate name for the period
than deposits, through the issuance, endorsement, or of time stated in the articles of incorporation and
acceptance of debt instruments for the borrower's own the certificate of incorporation;
account, for the purpose of relending or purchasing of • To adopt and use a corporate seal;
receivables and other obligations. • To amend its articles of incorporation in
accordance with the provisions of this Code;
Note: The definition of deposit substitutes in the banking
• To adopt by-laws, not contrary to law, morals, or
laws was brought about by an observation that banks and
public policy, and to amend or repeal the same in
non-bank financial intermediaries have increasingly
accordance with this Code;
resorted to issuing a variety of debt instruments, other than
• In case of stock corporations, to issue or sell
bank deposits, to obtain funds from the public. (BD° v.
stocks to subscribers and to sell stocks to
RCBC, G.R. No. 1.98756, 2016)
subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and
Under the NIRC, deposit substitutes include not only the
to admit members to the corporation if it be a non-
issuances and sales of banks and quasi-banks for
stock corporation;
relending or purchasing receivables and other similar
• To purchase, receive, take or grant, hold, convey,
obligations, but also debt instruments issued by
sell, lease, pledge, mortgage and otherwise deal
commercial, industrial, and other non-financial companies
with such real and personal property, including
to finance their own needs or the needs of their agents or
securities and bonds of other corporations, as the
dealers. (Id.)
transaction of the lawful business of the
corporation may reasonably and necessarily

Page 178 of 250

ATENE0 CENTRAL
BAR OPERATIONS 2019
require, subject to the limitations prescribed by law
and the Constitution;
To enter into merger or consolidation with other
corporations as provided in this Code;
• To make reasonable donations, including those for
the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or
foreign, shall give donations in aid of any political
party or candidate or for purposes of partisan
political activity;
To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and
employees; and
To exercise such other powers as may be
essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.
(Corporation Code, Sec. 36)
2. Banking and Incidental Powers of BSP
Operations and activities of banks shall be subject to
the supervision of the BSP, which shall include:
• Issuance of rules of conduct or the establishment
of standards of operation for uniform application
to all institutions or functions covered;
• Conduct of examination to determine compliance
with laws and regulations;
• Overseeing to ascertain that laws and regulations
are complied with;
• Regular investigation (not oftener than once a
year to determine whether an institution is
conducting its business on save or sound basis;
• Inquiring into solvency and liquidity of the
institution; or
• Enforcing prompt corrective action.
Examination by BSP
The BSP shall, when examining a bank, have the authority
to examine an enterprise which is wholly or majority-owned
or controlled by the bank. (GBL, Sec. 7)
BSP Authority Over Quasi-Banks and Trust Entities
The BSP shall also have supervision over the operations
of and exercise regulatory powers over quasi- banks, trust
entities and other financial institutions which under special
laws are subject to BSP supervision. (GBL, Sec. 4)
BSP Powers Policy Direction; Ratios, Ceilings and
Limitations
Page 179 of 250
COMMERCIAL LAW
• The BSP shall provide policy direction in the areas
of money, banking and credit. Thus, Monetary
Board may prescribe ratios, ceilings, limitations, or
other forms of regulation on the different types of
accounts and practices of banks and quasi-banks
which shall, to the extent feasible, conform to
internationally accepted standards, including
those of the Bank for International Settlements
(BIS).
• The Monetary Board may exempt particular
categories of transactions from such ratios,
ceilings and limitations, but not limited to
exceptional cases or to enable a bank or quasi-
bank under rehabilitation or during a merger or
consolidation to continue in business with safety to
its creditors, depositors and the general public.
(GBL, Sec. 5)
a. Nature of Bank Funds and Bank Deposits
Nature of Bank Funds
The bank can make use as its own the money deposited.
(Tan Tiong Tick v. American Apothecaries, G.R. No. L-
43682, 1938)
Said amount is not being held in trust for the depositor nor
is it being kept for safekeeping.
Nature of Bank Deposits
(NCC, Art. 1980) Fixed, savings and current deposits of
money in banks and similar institutions shall be governed
by the provisions concerning simple loan.
By reason of the fiduciary nature of the bank's relationship
with its depositors, this fiduciary relationship does not
"convert the contract between the bank and its depositors
from a simple loan to a trust agreement, whether express
or implied." It simply means that the bank is obliged to
observe "high standards of integrity and performance" in
complying with its obligations under the contract of simple
loan. (Goyanko, Jr. v. UCPB, G.R. No. 179096, 2013)
Effects of Deposits as Being Simple Loans - Bank as
Debtor
Deposit is voluntary agreement; "Know Your Customer"
standards
Bank acquires ownership of money deposited; obligation
to pay amount, but no obligation to return the same money
ATENEO CENTRAL
BAR OPERATIONS 2019
(Guingona, Jr. v. City Fiscal of Manila, G.R. No. L-60033,
1984)
Payment to proper party-depositor (Fultron Iron Works Co.
v. China Banking Corp., G.R. No. 32576, 1930)
Deposits are not preferred credits. (Central Bank v. Morfe,
G.R. No. L-38427, 1975)
Bank has right to set-off or compensation (Guiles v.
Philippine National Bank, G.R. No. 4391, 1935)
No breach of trust (Mandamus not a remedy) (Lucman v.
Malawi, G.R. No. 159794, 2006)
Kinds of Deposits
a. Savings Deposits
b. Negotiable Order of Withdrawal (NOW) — are
interest bearing deposit accounts that combine the
payable on demand feature and investment feature
of savings accounts.
c. Time Deposits — are one payment of which
generally cannot legally be required within a
specified number of days. (BPI Family Savings v.
First Metro Investment, G.R. 132390, 2004)
d. Demand Deposits — are those liabilities of the
Bangko Sentral and of other banks, which are
denominated in Philippine currency and are subject
to payment in legal tender upon demand by the
presentation of checks.
Only banks duly authorized to do so may accept funds or
create liabilities payable in pesos upon demand by the
presentation of checks, and such operations shall be
subject to the control of the Monetary Board in accordance
with the powers granted it with respect thereto under this
Act. (GBL, Sec. 59)
Checks representing demand deposits do not have legal
tender power and their acceptance in the payment of
debts, both public and private, is at the option of the
creditor: Provided, however, That a check which has been
cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash in an amount
equal to the amount credited to his account.
b. Diligence Required Of Banks
The State recognizes the vital role of banks providing an
environment conducive to the sustained development of
the national economy and the fiduciary nature of banking
that requires high standards of integrity and performance.
Page 180 of 250
COMMERCIAL LAW
In furtherance thereof, the State shall promote and
maintain a stable and efficient banking and financial
system that is globally competitive, dynamic and
responsive to the demands of a developing economy.
(GBL, Sec 2)
Banks are required to exercise the highest degree of
diligence.
As a business affected with public interest and because of
the nature of its functions, the bank is under obligation to
treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their
relationship. (Simex International (Manila) Inc. v CA, G.R.
No. 88013, 1990)
Banks are expected to exercise the highest degree of
diligence in the selection and supervision of their
employees. By the very nature of their work, the degree of
responsibility, care and trustworthiness expected of their
employees and officials is far greater than those of ordinary
clerks and employees. (Philippine Commercial and
International Bank v. CA, G.R. No. 121413, 2001)
Sec. 2 of GBL expressly imposes a fiduciary duty on the
banks when it declares that the State recognizes the
"fiduciary nature of banking that requires high standards of
integrity and performance." The fiduciary relationship
means that the bank's obligation to observe high standards
of integrity and pertormance is deemed written into every
deposit agreement between a bank and its depositor.
(Philippine Banking Corp. v. CA, G.R. No. 127469, 2004)
Since the banking business is impressed with public
interest, of paramount importance thereto is the trust and
confidence of the public in general, the highest degree of
diligence is expected and .high standards of integrity and
performance are even required of it. (Bank of the Philippine
Islands v. Casa Montessori Internationale, G.R. No.
149454. 2004)
c. Prohibited Transactions By Bank Directors and Officers
No director, officer, employee, or agent of any bank shall
1. Make false entries in any bank report or statement
or participate in any fraudulent transaction, thereby
affecting the financial interest of, or causing damage
to, the bank or any person;
2. Without order of a court of competent jurisdiction,
disclose to any unauthorized person any information
relative to the funds or properties in the custody of
the bank belonging to private individuals,
corporations, or any other entity: Provided, That with
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

respect to bank deposits, the provisions of existing
laws shall prevail;
3. Accept gifts, fees or commissions or any other form
of remuneration in connection with the approval of a
loan or other credit accommodation from said bank;
4. Overvalue or aid in overvaluing any security for the
purpose of influencing in any way the actions of the
bank or any bank; or
5. Outsource inherent banking functions.
(Sec 55.1, RA 8791)
D. Philippine Deposit Insurance Corporation Act (RA
3591, as amended)
1. Maximum deposit insurance coverage
The maximum deposit insurance coverage is P500,000.00
per depositor, per bank. (New PDIC Charter, Sec. 3)
2. Meaning of insured deposit
The term insured deposit means the amount due to any
bonafide depositor for legitimate deposits in an insured
bank as of the date of closure but not to exceed Five
hundred thcusand pesos (P500,000.00). Such amount
shall be determined according to such regulations as the
Board of Directors may prescribe.
In determining such amount due to any depositor,-there
shall be added together all deposits in the bank maintained
in the same right and capacity for his or her benefit either
in his or her own name or in the name of others.
this Act unless the passbook, certificate of deposit, or other
evidence of deposit is determined by the Corporation to be
an authentic document or record of the issuing bank:
Provided, finally, That in case of a condition that threatens
the monetary and financial stability of the banking system
that may have systemic consequences, as defined in
Section 22 hereof, as determined by the Monetary Board,
the maximum deposit insurance cover may be adjusted in
such amount, for such a period, and/or for such deposit
products, as may be determined by a unanimous vote of
the Board of Directors in a meeting called for the purpose
and chaired by the Secretary of Finance, subject to the
approval of the President of the Philippines. (New PDIC
Charter, Sec. 5)
3. Splitting of deposits
Splitting of deposits occurs whenever a deposit account
with an outstanding balance of more than the statutory
maximum amount of insured deposit maintained under the
name of natural or juridical persons is broken down and
transferred into two (2) or more accounts in the name/s of
natural or juridical persons or entities who have no
beneficial ownership on transferred deposits in their names
within one hundred twenty (120) days immediately
preceding or during a bank-declared bank holiday, or
immediately preceding a closure order issued by the
Monetary Board of the B3ngko Sentral ng Pilipinas for the
purpose of availing of the maximum deposit insurance
coverage (New PDIC Charter, Sec. 11)

A joint account regardless of whether the conjunction 'and', end of topic

'or', 'and/or' is used, shall be insured separately from any
individually-owned deposit account: Provided, That
(1) if the account is held jointly by two or more natural
persons, or by two or more juridical persons or entities, the
maximum insured deposit shall be divided into as many
equal shares as there are individuals, juridical persons or
entities, unless a different sharing is stipulated in the
document of deposit, and
(2) if the account is held by a juridical person or entity jointly
with one or more natural persons, the maximum insured
deposit shall be presumed to belong entirely to such
juridical person or entity: Provided, further, That the
aggregate of the interest of each co-owner over several
joint accounts, whether owned by the same or different
combinations of individuals, juridical persons or entities,
shall likewise be subject to the maximum insured deposit
of Five hundred thousand pesos (P500,000.00): Provided,
furthermore, That the provisions of any law to the contrary
notwithstanding, no owner/holder of any passbook,
certificate of deposit, or other evidence of deposit shall be
recognized as a depositor entitled to the rights provided in
Page 181 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

VIII. INTELLECTUAL PROPERTY LAW (exclude INTELLECTUAL PROPERTY RIGHTS,

Implementing Rules and Regulations) IN GENERAL

TOPIC OUTLINE UNDER THE SYLLABUS Definition of Intellectual Property Rights

"Those property rights which result from the physical
A. Patents manifestation of original thought." (Kho vs. CA, G.R. No.
1. Patentable vs. non-patentable inventions 115758, 2002)
2. Ownership of a patent
3. Grounds for cancellation of a patent Differences among the IP Rights
4. Remedy of the true and actual inventor
5. Rights conferred by a patent As to subject Matter
6. Limitations on patent rights
7. Patent infringement A product, process or any
B. Trademarks PATENT improvement of the foregoing which
1. Marks vs. collective marks vs. trade names is a technical solution of a problem.
2. Acquisition of ownership COPYRIGHT A literary or artistic work
a. Concept of actual use
b. Effect of registration Any sign to distinguish the goods or
3. Non-registrable marks TRADEMARK
services of an enterprise.
4. Well-known marks
5. Priority right Elements
6. Rights conferred by registration
7. Cancellation of registration 1. Any technical. solution of a
8. Trademark infringement problem in a field of human
9. Unfair competition activity
C. Copyrights 2. Has a patentable subject;
PATENT 3. the invention must be new
1. Copyrightable works
2. Non-copyrightable works (novelty);
3. Rights conferred by copyright 4. involves an inventive step; (non-
4. Ownership of a copyright obvious) and
5. Limitations on copyright 5. Which is industrially applicable
6. Doctrine of fair use 1. Literary or artistic work
7. Copyright infringement COPYRIGHT 2. Independently created
3. Has a minimum of creativity

1. Any visible sign

2. Capable of distinguishing the
goods or services of an
TRADEMARK
enterprise
3. Must not be excluded by the
laws

How Registered

PATENT Intellectual Property Office

COPYRIGHT the National Library

TRADEMARK Intellectual Property Office

When Protection Starts

upon issuance of letters of patent by
PATENT
the Intellectual Property Office

COPYRIGHT upon creation

Page 182 of 250 F

ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Who may File for Patent Protection

upon issuance of the trademark
TRADEMARK
certificate AS TO LEGAL
AS TO NATIONALITY
PERSONALITY
Term of Protection

20 years 1. Filipino nationals 1. Inventor or his

PATENT
2. Foreign nationals or attorney-in-fact
generally up to 50 years after the those domiciled or have 2. Assignee of the
COPYRIGHT a real and effective inventor
death of the author
commercial
TRADEMARK 10 years establishment in a
country which is bound
by a treaty to grant
Filipinos same right as
A. Patents
its own nationals (IP
Code, Sec. 3)
Definition of a Patent
A patent is a grant issued by the government through the
Intellectual Property Office of the Philippines (IP0). It is an
1 Patentable Inventions (Sec. 21, IP Code)
exclusive right granted for a product, process or an
a) Any technical solution of a problem in a field of
improvement of a product or process which is new,
human activity
inventive and useful given to its inventor the right to
b) Which is new (element of novelty)
exclude others from making, using, or selling the product
c) Which involves an inventive step; and
of his invention during the life of the patent.
d) Which in industrially applicable
Three-fold Purpose of Patent Law
Overview of the Elements of a Patent
(a) Seeks to foster and reward invention
(b) Promotes disclosure of inventions to stimulate further An invention is novel if it does not
Element of
innovation, and to permit the public to practice the form part of the prior art. (Sec. 23,
Novelty
invention once the patent expires, IP Code)
(c) The stringent requirements of patent protection seek to An invention involves an inventive
ensure that ideas in the public domain remain there for step if, having regard to prior art, it is
the free use of the public. (Pearl & Dean, Inc. v. not obvious to a person skilled in the
Element of
Shoemart, G.R. No. 148222, 2003) Inventive Step art at the time of filing date or priority
date of application claiming the
Term of Protection invention (Sec.26, IP Code)
A patent has a term of protection of 20 years providing an
inventor significant commercial gain. An invention that can be produced
Element of
and used in any industry shall be
Industrial
Effect of Lapse of Term of Protection industrially applicable. (Sec.27, IP
Applicability
The patent owner must share the full description of the Code)
invention. This information is made :Atonable to the public
in the form of the Intellectual Property Official Gazette and When an Invention is Not New
can be utilized as basis for future research and will in turn Novelty is an essential requisite of patentability of an
promote innovation and development. invention or discovery. An invention is not new if it has
been disclosed or used in public, or sold in the market
before the patent application for the invention is filed.
(Manzano v. Court of Appeals, G.R. No. 113388, 1997)

Non-prejudicial Disclosures
The disclosure of information contained in the application
during the twelve (12) months preceding the filing date or
the priority date of the application shall not prejudice the

Page 183 of 250

ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

applicant on the ground of lack of novelty if such disclosure a. Scope and content of prior art;
was made by: b. Objective evidence of non-obviousness.
a. The inventor; c. Level of ordinary skill in the art;
b. A patent office and the information was contained d. Differences between the claimed invention and
(a) in another application filed by the inventor and the prior art; and
should not have been disclosed by the office, or e. Prior public use is a bar whether the use was
(b) in an application filed without the knowledge or with or without the consent of the patentee.
consent of the inventor by a third party which
obtained the information directly or indirectly from A mere experimental use is not the public use defined by
the inventor; or the Act, but a single use for profit, not purposely hidden, is
c. A third party which obtained the information directly or such.
indirectly from the inventor. (Sec. 25, IP Code)
The ordinary use of a machine or the practice of a process
Prior Art in a factory in the usual course of producing articles for
Prior Art shall consist of: commercial purposes is a public use. (Electric Storage
i. Everything made available to the public anywhere in Battery Co. vs. Shimadzu, 507 U.S. 613, 1939)
the world, before the filing date or priority date of the
application claiming the invention; and Special Rules with regard to Drugs and Medicines
i. Whole contents of an application for a patent, utility In the case of drugs and
model, or industrial designs registration, published in medicines, there is no inventive
accordance with IP Code, filed or effective in the step if:
Philippines, with a filing or priority date earlier than filing a. The invention results from
or priority date of application. Provided— the mere discovery of a new
a. Application which has validly claimed filing date form or new property of a
of an earlier application under Section 31 of IPC, known substance, which
does not result in the
shall be prior art with effect as of the filing date Element of enhancement of the known
of such earlier application; Inventive efficacy of that substance, or
b. Applicant or inventor identified in both Step b. The mere discovery of any
applications are not one and the same (Sec. 24, new property or new use for
IP Code) a known substance, or
c. The mere use of a known
Person Skilled in the Art process, unless such known
A person skilled in the art is an ordinary practitioner aware process results in a new
of what was common general knowledge in the art at the product that employs at least
relevant date. He is presumed to have: one new reactant.
ii. knowledge of all references that are sufficiently related
to one another and to the pertinent art; Non-Patentable Inventions
iii. knowledge of all arts reasonably pertinent to the a. Discoveries, scientific theories and mathematical
particular problems with which the inventor was methods, and in the case of drugs and medicines, the
involved; and mere discovery of a new form or new property of a
iv. at his disposal the normal means and capacity for known substance which does not result in the
routine work and experimentation. enhancement of the known efficacy of that substance,
or the mere discovery of any new property or new use
Rule on Non-Obviousness (Inventive Step) for a known substance, or the mere use of a known
A claimed invention is not patentable if the differences process unless such known process results in a new
between it and the prior art are such that the subject matter product that employs at least one new reactant.
as a whole would have been obvious at the time the
invention was made to a person having ordinary skill in the For the purpose of this clause, salts, esters, ethers,
art. polymorphs, metabolites, pure form, particle size,
The ultimate determination as to whether or not an isomers, mixtures of isomers, complexes,
invention is obvious is a legal conclusion based on combinations, and other derivatives of a known
underlying: substance shall be considered to be the same
Page 184 of 250

0
ATENEO CENTRAL
BAR OPERATIONS 2019
substance, unless they differ significantly in properties
with regard to efficacy
• When a discovery is not nature's handiwork, but
his own; accordingly, it is a patentable subject
matter. The inventions which most benefit
mankind are those that "push back the frontiers
of chemistry, physics and the like." (Diamond vs.
Chakrabarty, 447 U.S. 303, 1980)
• It is now commonplace that an application of a
law of nature or mathematical formula to a
known structure or process may well be
deserving of patent protection. (Funk Brother
Seed Co. v. KaloInnoculant Co., 333 US 127,
1948)
• Involvement of a mathematical process does
not automatically render it non-patentable.
b. Schemes, rules and methods of performing mental
acts, playing games or doing business, and programs
for computers;
• General rule: Computer programs are in general,
the subjects of copyright, not of patents.
• Exception: Patentable if they are part of a process
like a business process.
• It is for the discovery or invention of some practical
method or means of producing a beneficial result
or effect that the patent is granted, and not for the
result or effect itself. (Diamond vs. Chakrabarty
447 U.S. 303, 1980)
c. Methods for treatment of human and animal body by
surgery or therapy, and diagnostic methods practiced
on the human or animal body;
• However, this Shall not apply to products and
composition for use in any of these methods;
d. Plant varieties or animal breeds or essentially
biological process for the production of plants or
animals;
• Provisions under this subsection shall not preclude
Congress to consider the enactment of a law
providing sui generis protection of plant varieties
and animal breeds and a system of community
intellectual rights protection
Page 185 of 250
COMMERCIAL LAW
• However, this shall not apply to micro- organisms
and non- biological and microbiological processes;
e. Aesthetic creations; and
f. Anything which is contrary to public order or morality
• The mere combination of a number of old parts or
elements, which, in combination, perform or
produce no new or different function or operation
than that theretofore performed or produced by
them, is not a patentable invention. (Great Atlantic
& Pacific Tea Co. vs. Supermarket Equipment
Corp, 340 U.S. 147, 1950)
• The conjunction or concert of known elements
must contribute something; only when the whole in
some way exceeds the sum of its parts is the
accumulation of old devices patentable. (Great
Atlantic & Pacific Tea Co. vs. Supermarket
Equipment Corp, 340 U.S. 147, 1950)
1. Ownership of Patent
a. Right to a Patent
The right to patent belongs to the inventor, his heirs,
or assigns. When two or more persons have jointly
made an invention, the right shall belong to them
jointly.
b. First-to-File Rule
If two or more persons have made invention
separately and independently of each other, right shall
belong to applicant who has earliest filing date or
earliest priority date.
If two or more applications for the same invention have
the same filing date or priority date, the patent will be
issued jointly to all the applicants.(Sec. 29, IP Code)
c. Inventions created pursuant to a Commission
Persons who commissions work shall own patent,
unless otherwise provided in the contract. However, in
case employee made invention in course of his
employment contract, patent shall belong to:
Employee, if inventive activity is not part of his regular
duties even if employee uses time, facilities and
materials of employer, or
ATENEO CENTRAL
BAR OPERATIONS 2019
Employer, if invention results from performance of his
regularly-assigned duties, unless there is an
agreement, express or implied, to the contrary. (Sec.
30, IP Code)
d. Right of Priority
Application filed by any person who has previously
applied for the same invention in another country
which by treaty, convention, or law affords similar
privileges to Filipino citizens, shall be considered as
filed as of date of filing the foreign application,
provided that:
The local application expressly claims priority;
It is filed within 12 months from date earliest foreign
application was filed; and
A certified copy of foreign application together with
English translation is filed within 6 months from date
of Philippine filing. (Sec. 31, IP Code)
Overview of the Patent Application Process
Filing Date
The filing date of a patent application is the date when the
applicant filed all of the following:
(a) An express or implicit indication that a Philippine patent
is sought;
(b) Information identifying the applicant; and
(c) Description of the invention and one (1) or more claims
in Filipino or English
Note: If any of these elements is not submitted within the
period set; the application shall be considered withdrawn.
The Patent Application
Patent application shall be in Filipino or English and shall
contain the following:
a. A request for the grant of a patent;
b. A description of the invention;
c. Drawings necessary for the understanding of the
invention;
d. One or more claims; and
e. An abstract
Note: No patent may be granted unless the application
identifies the inventor. If applicant is not the inventor, IPO
may require him to submit said authority.
Page 186 of 250
COMMERCIAL LAW
Request before the IPO
Must contain:
(a) A petition for the grant of the patent;
(b) Name and other data of the applicant, inventor and the
agent; and
(c) Title of the invention
Disclosure and Description of Invention
(d) In a manner sufficiently clear and complete for it to be
carried out by a person skilled in the art;
(e) Where the application concerns a microbiological
process or the product thereof and involves the use of
a micro-organism which cannot be sufficiently
disclosed in the application in such a way as to enable
the invention to be carried out by a person skilled in the
art and such material is not available to the public, the
application shall be supplemented with a deposit of
such material with an international depositary
institution; and in accordance with the rules and
regulations by the Patent Office with respect to the
contents of the description and the order of
presentation.
Unity of Invention
An application shall relate to one invention only or to a
group of inventions forming a single general inventive
concept. .
Note: if several independent inventions are claimed in one
application, the Director may require that application -be
restricted to a single invention. A later application filed 'for
an invention divided out shall be considered as having
been filed on the same day as the first application.
provided that the later application is filed within 4 months
after the requirement to divide becomes final, or within
such additional time not exceeding 4 months, as may be
granted. (Sec. 38, IP Code)
Concept of Divisional Application
This comes into play when two or more inventions are
claimed in a single application, but are of such a nature
that a single patent may not be issued for them. The
applicant thus is required to divide," that is, to limit the
claims to whichever not elected may be made the subject
of separate applications which are called "divisional
applications." (Smith Kline Beckman Corp vs. CA, G.R. No.
126627, 2003)
Publication and Search
The application shall be published in IPO Gazette, togethe-
with a search document established by or on behalf of the
ATENEO CENTRAL
BAR OPERATIONS 2019
IPO citing any documents that reflect prior art after
expiration of 18 months from filing date of priority date.
(Sec. 44, IP Code)
Confidentiality before Publication
An application which has not yet been published, and all
related documents, shall not be made available for
inspection without the applicant's consent (Sec.45, IP
Code)
Grant of Patent
Patent shall take effect on date of publication of grant of
patent in IPO Gazette.
Effect of Issuance of Letters of Patent
Issuance of letters of patent creates presumption which
yields only to clear and cogent evidence that patentee was
the original and first inventor. Burden of providing want of
novelty is on him who avers it and burden is a heavy one
which is met only by clear and satisfactory proof which
overcomes every reasonable doubt. (Manzano vs. CA,
G.R. No. 11338, 1997)
Annual Fees
To maintain patent application or patent, annual fee shall
be paid upon expiration of 4 years from date application
was published and on each subsequent anniversary date.
If the annual fee is not paid, patent application is deemed
withdrawn or patent considered lapsed.
2. Grounds for Cancellation of Patents
Interested party may, upon petition and payment of
required fee, petition to cancel patent or any claim thereof,
or parts of claim, on any of the following grounds:
a. The claimed invention does not qualify for registration
as a utility model and is among the inventions which
are not patentable;
b. The description and the claims do not comply with the
prescribed requirements;
c. No drawing which is necessary for the understanding
of the invention was furnished; and
d. The owner of the registration of the utility model is not
the inventor or his successor in title.
Note: Where the grounds for cancellation relate to some
of claims or parts of claim, cancellation may be effected to
such extent only.
Effect of Cancellation
The rights conferred by patent or any specified claim or
claims shall terminate, with notice of cancellation published
in IPO Gazette. But unless restrained by Director General,
Page 187 of 250
COMMERCIAL LAW
decision/order to cancel by immediately executory even
pending appeal.
3. Remedies of The True and Actual Inventor
When true and actual inventor is deprived of patent without
his consent or through fraud, and so declared by final
order, court shall order for his substitution as patentee, or
at the option of true inventor, cancel the patent, and award
actual and other damages in his favor as warranted.
Actions should be filed within 1 year from application.
Application by persons not having right to patent
If a person other than the applicant is declared by final
court order or decision as having the patent right, such
person may, within 3 months after decision has become
final:
a. Prosecute his application as his own in place of
applicant;
b. File new patent application in respect of same
invention;
C. Request that application be refused;
d. Seek cancellation of patent, if already been issued
4. Rights Conferred by a Patent Application After
Publication
Patent shall confer on its owner the following exclusive
rights:
(a) Where patent covers a PRODUCT — to restrain,
prohibit, and prevent any unauthorized person or entity
from making, using, offering for sale, selling, or
importing that product; as well as to assign, or transfer
by succession the patent, and to conclude licensing
contracts for the same.
(b) Where patent covers a PROCESS — to restrain,
prevent or prohibit any unauthorized person or entity
from using process, and from manufacturing, dealing
in, using, selling or offering for sale, or importing any
product obtained directly or indirectly from such
process; as well as to assign, or transfer by succession
the patent, and to conclude licensing contracts for the
same. (Sec. 46, IP Code)
What can be Assigned
Assignment may be of entire patent and invention covered
thereby, or of an undivided share of entire patent and
invention, in which event, parties become joint- owners.
Assignment may be limited to specified territory.
Form of assignment
Assignment must be in writing, and notarized.
ATENEO CENTRAL
BAR OPERATIONS 2019
Recording of Assignments
Instruments shall be void as against any subsequent
purchaser or mortgagee without notice, unless recorded in
IPO within 3 months from date of instrument, or prior to
subsequent purchase or mortgage.
Rights of joint owners
If two or more persons own patent and invention covered
thereby, each of the joint owners shall be entitled to
personally make, use, sell or import the invention for his
own profit. Provided, neither of joint owners shall be
entitled to grant licenses or to assign his right, title or
interest or part thereof without consent of other owner or
owners, or without proportionally dividing proceeds
therewith.
5. Limitations of Patent Rights
Patent owner has no right to prevent third parties from
performing, in the following circumstances:
• Using patent products which has been put on
Philippine market by owner of product, or with his
express consent, insofar as such use is performed
after that product has been so put on the said market;
• Where the act is done privately and on a non-
commercial scale for a non- commercial purpose,
provided that it does not significantly prejudice
owner's economic interests;
• Where act consists of making or using exclusively for
purpose of experiments that relate to subject matter of
patent invention;
• Where act consists of preparation for individual cases,
in a pharmacy or by a medical professional, of a
medicine in accordance with a medical prescription or
acts concerning medicine so prepared;
• Under R.A. 9502, otherwise known as the
"Cheaper Medicines Act of 2008", private third
parties have the unqualified right to import or
possess "unregistered imported drugs".
Moreover, an "unregistered drug" is not the same
as "counterfeit drug" which is prohibited by a
previous statute. (Roma Drug vs. RTC and
GlaxoSmithKline, G.R. No. 149907, 2009)
• Where the invention is used in any ship, vessel,
aircraft, or land vehicle of any other country entering
Philippine territory temporarily or accidentally.
• Term of Patent shall be 20 years from the filing
date of the application.
Page 188 of 250
COMMERCIAL LAW
a. Prior User
Any prior user, who, in good faith, was using the invention
or has undertaken serious preparations to use the
invention in his enterprise or business, before filing date or
priority date of application on which a patent is granted,
shall have the right to continue use thereof as envisaged.
The right of prior user may only be transferred or assigned
together with enterprise or business, or with the part of his
enterprise or business in which use or preparations for use
have been made.
b. Use of Invention by the Government
A government agency or third person authorized by the
Government may exploit the invention without agreement
of the patent owner where:
• Public interest, national security, nutrition, health or the
development of other sectors, as determined by
appropriate government agency, so requires; or
• Judicial or administrative body has ruled anti-
competitive exploitation of patent by owner or licensee
6. Patent Infringement
Patent infringement constitutes:
• Making,- using, offering for sale, selling or importing
patented product or obtained from patented
processes; or
• Use of patented processes without authorization of
patentee.
Note:
• Infringement is not limited to the unauthorized
manufacture of a patented invention. It includes the
importation, marketing and use of the patented
invention without authorization of the patent owner.
(Parke, Davis & Company v. Lukas Pharmaceuticals,
Inc., G.R. No. 53162-R, 1981)
• In order to infringe a patent, a machine or device must
perform the same function, or accomplish the same
result by identical or substantially identical means and
the principle or mode of operation must be
substantially the same. (Del Rosario vs. CA, G.R. No.
115106, 1996)
• If the subject matter of a patent is a process for
obtaining a product, any identical product shall be
presumed to have been obtained through the use of
the patented process if the product is new or there is
substantial likelihood that the identical product was
made by the process and the owner of the patent has
ATENEO CENTRAL
BAR OPERATIONS 2019
been unable despite reasonable efforts, to determine
the process actually used. In ordering the defendant to
prove that the process to obtain the identical product
is different from the patented process, the court shall
adopt measures to protect, as far as practicable, his
manufacturing and business secrets.
• Defendant must prove that the process to obtain the
identical product is different from the patented
process.
• The court shall adopt measures to protect, as far as
practicable, defendant's manufacturing and business
secrets.
• An action for infringement of patents falls within the
jurisdiction of the regular courts rather than the
intellectual Property Office. (Amancor, Inc. v. Salas,
AC.-G.R. SP No. 06049, 1985)
• There can be no infringement of a patent if the
application is still pending and the patent has not yet
been granted, since whatever right one has to the
invention covered by the patent arises alone from the
grant of thereof. (Cresser Precisions Systems, Inc. v.
Court of Appeals, G.R. No. 118708, 1998)
• A civil action for infringement of a patent may be filed
despite the pendency of a petition in the Intellectual
Property Office for cancellation of the patent. (Abbot
Laboratories Phils. v. Salvador, 7 CARA 799, 1989)
• A patentee only has exclusive rights over the patent
during the pendency of such patent. After such period,
he loses such rights. (Phil Pharmawealth vs. Pfizer,
G.R. No. 167715, 2010)
• To be able to effectively and legally preclude others
from copying and profiting from the invention, a patent
is a primordial requirement. No patent, no protection.
(Pearl & Dean v. Shoemart, G.R. No. 148222, 2003)
• Even if a device serves the same function as another
device, there is no infringement if it lacks the features,
methods, or arrangements of the other device.
(Castillo v. Mungcal, 90 0.G. 4194, 1990)
7. Patent Infringement
a. Tests in Patent Infringement
i. Literal Infringement
In using literal infringement as a test, resort must be made
to the words of the claim. If the challenged matter clearly
falls within the claim, literal infringement exists. To
determine whether the challenged matter falls within the
literal meaning of the patent claim, the claims of the patent
and the challenged matter should be compared within the
overall context of the claims and specifications, to
Page 189 of 250
COMMERCIAL LAW
determine whether there is exact identity of all material
elements. (Godines vs. CA, G.R. No. 97343, 1993)
ii. Doctrine of Equivalents
For the purpose of determining the extent of protection
conferred by the patent, due account shall be taken of
elements which are equivalent to the elements expressed
in the claims, so that a claim shall be considered to cover
not only all the elements as expressed therein, but also
equivalents.
The doctrine of equivalents infringement takes place
when a device appropriates a prior invention by
incorporating its innovative concept and, although with
some modification and change, performs substantially the
same function in substantially the same way to achieve
substantially the same result (Smith Kline Beckman Corp
v. CA, 409 SCRA 33, 2003).
Contributory Infringer
A contributory infringer is any person who:
• Actively induces the infringement of patent or
• Provides the infringer with a component of a patented
product or of a product produced because of a
patented process knowing it to be especially adopted
for infringing the patented invention and not suitable
for substantial non-infringement
Liability of a Contributory Infringer is jointly and severally
liable with the infringer.
Aside from the infringer, anyone who actively induces the
infringement of a patent or provides the infringer with a
component of a patented product or of a product produced
because of a patented process knowing it to be especially
adopted for infringing the patented invention and not
suitable for substantial non-infringing use is liable jointly
and severally with the infringer as a contributory infringer.
Infringement Action by Foreign National
Any foreign national or juridical entity who meets the
requirements of Section 3 and not engaged in business in
Philippines, to which a patent had been granted or
assigned under, may bring an action for infringement.
Rights of Patentee When there is Infringement
• Bring civil action before courts to recover from infringer
such damages sustained thereby, plus attorney's fees
and other expenses of litigation; am
• To secure an injunction for the protection of his rights
ATENEO CENTRAL
BAR OPERATIONS 2019
Note: The burden of proof to substantiate a charge of
patent infringement rests on the plaintiff. (Smith Kline
Beckman Corp vs. CA, G.R. 126627, 2003)
Extent of Protection and Interpretation of Claims
The extent of protection conferred by the patent shall be
determined by the claims, which are to be interpreted in the
light of the description and drawings.
For the purpose of determining the extent of protection
conferred by the patent, due account shall be taken of
elements which are equivalent to the elements expressed
in the claims, so that a claim shall be considered to cover
not only all the elements as expressed therein, but also
equivalents.
Actions for Infringement (Literal and Equivalent)
Civil Action for Infringement
1. Any patentee, or anyone possessing any right, title or
interest in and to the patented invention, whose rights
have been infringed, may bring a civil action before a
court of competent jurisdiction, to recover from the
infringer such damages sustained thereby, plus
attorney's fees and other expenses of litigation, and to
secure an injunction for the protection of his rights.
2. If damages are inadequate or cannot be reasonably
ascertained, court may award by way of damages a
sum equivalent to reasonable royalty.
3. Court may, according to the circumstances of the case,
award damages in a sum above the amount found as
actual damages sustained. But not to exceed 3 times
amount of actual damages.
4. Court may, in its discretion, order that the infringing
goods, materials and implements predominantly used
in the infringement be disposed of outside the
channels of commerce or destroyed, without
compensation.
Criminal Action for Repetition of Infringement
If the infringement is repeated by infringer or by anyone in
connivance with him after finality of judgment against
infringer, offenders shall, without prejudice to institution of
civil action for damages, be criminally liable. Such criminal
action shall prescribe in 3 years from date of commission
of crime.
The definition of "unfair competition" under Sec. 168 of the
IP Code does not mention any crime of unfair competition
involving design patents. Since it is unclear whether the
crime exists, for the enactment of RA 8293 did not result in
Page 190 of 250
COMMERCIAL LAW
the reenactment of RPC Art. 189, the matter must strictly
be construed against the State and liberally in favor of the
accused in unfair competition. (Kenneth Roy Savage v.
Taypin, G.R. No. 134217, 2000)
Administrative
Bureau of Legal Affairs shall exercise original jurisdiction
in administrative complaints for violations of laws involving
intellectual property rights: Provided,
1. That its jurisdiction is limited to complaints where the
total damages claimed are not less than P200,000:
2. That availrnent of the provisional remedies may be
granted in accordance with the Rules of Court. The
Director of Legal Affairs shall have the power to hold
and punish for contempt all those who disregard orders
or writs issued in the course of the proceedings.
3. The condemnation or seizure of products which are
subject of the offense. The goods seized hereunder
shall be disposed of in such manner as may be
deemed appropriate by the Director of Legal Affairs,
such as by sale, donation to distressed local
governments or to charitable or relief institutions,
exportation, recycling into other goods, or any
combination thereof, under such guidelines as he may
provide;
4. The forfeiture of paraphernalia and all real and
personal properties which have been used in the
commission of the offense;
5. The imposition of administrative fines in such amount
as deemed reasonable by the Director of Legal Affairs,
which shall in no case be less than P5,000 nor more
than P150,000. In addition, an additional fine of not
more than P1,000 shall be imposed for each day of
continuing violation;
6. The cancellation of any permit, license, authority, or
registration which may have been granted by the
Office, or the suspension of the validity thereof for such
period of time as the Director of Legal Affairs may
deem reasonable which shall not exceed 1 year;
7. The withholding of any permit, license, authority, or
registration which is being secured by the respondent
from the Office;
8. The assessment of damages;
9. Censure; and
10. Other analogous penalties or sanctions.
Note: The proper remedy against an interlocutory order
issued by the BLA-IPO is to file a petition for certiorari to
the CA. (Phil Pharmawealth v. Pfizer, G.R. No. 167715,
2010)
ATENEO CENTRAL
BAR OPERATIONS 2019
Rule on Damages
Damages CANNOT be recovered for infringement
committed before the infringer had known, or had
reasonable grounds to know of a patent.
However, it is presumed that infringer had knowledge if on
patented product, on container, or package, or on
advertising, are placed words "Philippine Patent" with
number of patent.
Limitations of Actions for Damages
No damages can be recovered for acts of infringement
committed more than 4 years before institution of
infringement action.
b. Defenses in Action for Infringement
• In an infringement action, defendant may show
invalidly of the patent, or any claim thereof, on any of
the grounds on which a petition of cancellation can be
brought
• In an action for infringement, if court shall find patent
or any claim to be invalid, it shall cancel the same, and
Director of Legal Affairs upon receipt of the final
judgment of cancellation, shall record that fact in IPO
Registry and publish notice to that effect in IPO
Gazette
• What is claimed as the invention is not new or
patentable;
• The patent does not disclose the invention in a manner
sufficiently clear and complete for it to be carried out
by any person skilled in the art; or
• The patent is contrary to public order or morality. (Phil
Pharmawealth vs. Pfizer, G.R. No. 167715, 2010)
Licensing
a. Voluntary Licensing
To encourage transfer and dissemination of technology,
prevent or control practices and conditions that may in
particular cases constitutes an abuse of intellectual
property rights having an adverse effect on competition
and trade, all technology transfer arrangements shall
comply with the provisions of IPO.
Prohibited Clauses
1. Those which impose upon the licensee the obligation
to acquire from a specific source capital goods, Mandatory Provisions
intermediate products, raw materials, and other The following provisions shall be included in voluntary
technologies, or of permanently employing personnel license contracts:
indicated by the licensor; 1. That the laws of the Dhilippines shall govern the
2. Those pursuant to which the licensee reserves the
Page 191 of 250
COMMERCIAL LAW
right to fix the sale or resale prices of the products
manufactured on the basis of the license;
3. Those that contain restrictions regarding the volume
and structure of production;
4. Those that prohibit the use of competitive technologies
in a non-exclusive technology transfer arrangement;
5. Those that establish full or partial purchase option in
favor of the licensor;
6. Those that obligate the licensee to transfer for free to
the licensor the inventions or improvements that may
be obtained through the use of the licensed
technology;
7. Those that require payment of royalties to the owners
of patents for patents which are not used;
8. Those that prohibit the licensee to export the licensed
product unless justified for the protection of the
legitimate interest of the licensor such as exports to
countries where exclusive licenses to manufacture
and/or distribute the licensed product(s) have a!ready
been granted;
9. Those which restrict the use of the technology supplied
after the expiration of the technology transfer
arrangement, except in cases of early termination of
the technology transfer arrangement due to reason(s)
attributable to the licensee;
10. Those which require payments for patents and other
industrial property rights after, their expiration or
termination of the technology transfer arrangement;
11. Those which require that the technology recipient shall
not contest the validity of any of the patents of the
technology supplier;
12. Those which restrict the research and development
activities of the licensee designed to absorb and adapt
the transferred technology to local conditions or to
initiate research and development programs in
connection with new products, processes or
equipment;
13. Those which prevent the licensee from adapting the
imported technology to local conditions, or introducing
innovation to it, as long as it does not impair the
standards prescribed by the licensor; and
14. Those which exempt the licensor from liability for non-
fulfillment of his responsibilities under the technology
transfer arrangement and/or liability arising from third
party suits brought about by the use of the licensed
product or the licensed technology.
interpretation of the agreement and in the event of
ATENEO CENTRAL
BAR OPERATIONS 2019
litigation, the venue shall be the proper court in the
place where the licensee has its principal office;
2. Continued access to improvements in techniques and
processes related to the technology shall be made
available during the period of the technology transfer
arrangement;
3. In the event the technology transfer arrangement shall
provide for arbitration, the Procedure of Arbitration of
the Arbitration Law of the Philippines or the Arbitration
Law of the United Nations Commission on
International Trade Law (UNCITRAL) or the Rules of
Conciliation and Arbitration of the International
Chamber of Commerce shall apply and the venue of
arbitration shall be the Philippines or any neutral
country; and
4. The Philippine taxes on all payments relating to the
technology transfer arrangement shall be borne by the
licensor.
Rights of Licensor
Absent a contrary provision in technology transfer
arrangement, the grant of a license shall not prevent the
licensor from granting further license to third person nor
from exploiting the subject matter of the technology
transfer arrangement himself
Rights of Licensee
Licensee entitled to exploit the subject matter of the
technology transfer arrangement during-the whole term of
agreement.
Exceptional Cases
When Exemption From Any Of The Requirements In A
Voluntary Licensing Contract May Be Allowed — where,
after evaluation by the DITT Bureau, substantial benefits
will accrue to the economy such as:
a. High technology content
b. Increase in foreign exchange earnings
C. Employment generation
d. Regional dispersal of industries and/or
e. Substitution with or use of local raw materials or
f. Registered companies with pioneer status
Non-Registration
Technology transfer arrangements that conform with the
forgoing provisions need not be registered. But the non-
conformance with any of provisions shall automatically
render arrangement unenforceable, unless approved and
registered with Documentation, Information and
Technology Transfer Bureau (DITTB)
Page 192 of 250
COMMERCIAL LAW
b. Compulsory Licensing
General rule: One cannot exploit a patent without the
consent of the patentee.
Exception: Through compulsory license
Grounds for Compulsory Licensing
The Director of Legal Affairs may grant license to exploit
patented invention, even without agreement of patent
owner, in favor of person who has show his capability to
exploit invention, under any of the following circumstances:
1. National emergency or other circumstances of
extreme urgency
2. Where public interest, in particular, national security,
nutrition, health or development of other vital sectors
of national economy as determined by the appropriate
agency of the Government, so requires; or
3. Where a judicial or administrative body has
determined that manner of exploitation by patent
owner or his licensee is anti- competitive; or
4. In case of public non-commercial use of patent by
patentee, without satisfactory reason;
5. If patented invention is not being worked in Philippines
on commercial scale, although not capable of being
worked, without satisfactory reason. Provided that
importation-of patented article shall constitute working
or using the patent
Requirement to Obtain License on Reasonable
Commercial Terms
General rule: License will only be granted after petition
has made unsuccessful efforts to obtain authorization from
patent owner on reasonable commercial terms and
conditions within a reasonable time.
Exceptions:
a. Where petition for compulsory license seeks to remedy
a practice determined after judicial or administrative
process to be anti- competitive;
b. In situations of national emergency or other
circumstances of extreme urgency (in which case the
right holder shall be notified as soon as reasonably
practicable);
c. In cases of public non-commercial use
Sec. 34 of the Patent Law which authorizes the BPTT to
grant a compulsory license to a local is not contrary to the
Paris Convention. The legislative intent in the grant of
compulsory license was not only to afford others an
opportunity to provide the public with quantity of the
ATENEO CENTRAL
BAR OPERATIONS 2019
patented product, but also to prevent the growth of
monopolies. (Smith Kline v. CA, G.R. No. 121267, 2001)
The grant of compulsory license will not result in
deprivation of property to the registrant owner without just
compensation, since the owner of exclusive rights to
manufacture, use and sell the patent would still receive
royalties for use of such product. (Smith Kline v. CA, G.R.
No. 121267, 2001)
Compulsory License Based on Interdependence of
Patents
If the invention is protected by a patent, hereafter, referred
to as "second patent," within the country cannot be worked
without infringing another patent, hereafter referred to as
"first patent," granted on a prior application or benefiting
from an earlier priority, a compulsory license may be
granted to owner of second patent to the extent necessary
for the working of his invention, subject to the following
conditions:
1. Invention claimed in second patent involves an
important technical advance of considerable economic
significance in relation to first patent;
2. First patent owner entitled to cross- license on
reasonable terms to use invention claimed in second
patent;
3. Use authorized in respect of first patent shall be non-
assignable except with assignment of second patent;
and
4. Required terms and conditions:
i. Scope and duration of license limited to
purpose for which it was authorized;
ii. License shall be non-exclusive
iii. License shall be non-registrable, except with
part of enterprise or business with which
invention is exploited;
iv. Use of subject matter of license shall be
devoted predominantly for supply of Philippine
market. Provided, limitation shall not apply
where grant of license is based on ground that
patentee's manner of exploiting patent is
determined anti- competitive judicially or
administratively;
v. License may be terminated upon proper
showing that circumstances which led to its
grant have ceased to exist and are unlikely to
recur; and
vi. Patentee shall be paid adequate remuneration
taking into account the economic value of the
grant or authorization
Page 193 of 250
COMMERCIAL LAW
Amendment, Cancellation, Surrender of Compulsory
License
Upon request of patentee, or licensee, Director of Legal
Affairs may amend decision granting compulsory license,
upon proper showing of new facts or circumstances
justifying such amendment; or may cancel compulsory
license if:
a. Ground for grant of compulsory license no longer
exists and is unlikely to recur;
b. Licensee has neither begun to supply domestic market
nor made serious preparation therefore;
c. Licensee not complied with prescribed terms of license
Licensee's Exemption from Liability
Any person who works a patented product, substance
and/or process under a compulsory license, shall be free
from any liability for infringement. In case of voluntary
licensing, no collusion with licensor is proven. This is
without prejudice to rightful patent owner to recover from
licensor whatever he may receive as royalties under the
license.
7. Assignment and Transmission of Rights
Patents or application for patents and invention to which
they relate, shall be protected in the same way as the rights
of other property under the Civil Code. (IP Code, Sec
1oq. )
Inventions and any right, title or interest in and to patents
and inventions covered by them, may be assigned or
transmitted by inheritance or bequest or may be the
subject of a licensing agreement. (IP Code, Sec 103.2)
Requirements for Recording of Assignment
a. It must be in writing and accompanied by an English
translation, if it is in a language other than English or
Filipino;
b. It must be notarized;
c. It must be accompanied by an appointment of a
resident agent, if the assignee is not residing in the
Philippines;
d. It must identify the letters patent involved by number
and date and give the name of the owner of the patent
and the title of the invention. In the case of an
application for a patent, it should state the application
number and the filing date of the application and give
the name of the applicant and the title of the invention.
If the assignment was executed concurrently with or
subsequent to the execution of the application but
before the application is filed or before its application
number is ascertained, it should adequately identify
the application by its date of execution, the name of
ATENEO CENTRAL
BAR OPERATIONS 2019
the applicant, and the title of the invention.
e. It must be accompanied by the required fees.
Note:
• The assignment of a patent is void as against any
subsequent purchaser or mortgagee for valuable
consideration and without notice unless it is recorded
in the Intellectual Property Office within three months
from the date of the assignment or prior to the
subsequent purchase or mortgage. (/P Code, Sec.
106.2)
• Notice of the recording will be published in the
Intellectual Property Gazette. (Rules and Regulations
on Inventions, Rule 1205)
Utility Models
• A utility model is a new model of implement or tools
or of any industrial product or of part of it which does
not possess the quality of invention but which is of
practical utility by reason of its form, configuration,
construction or composition. To qualify for
registration, a utility model must be new and
industrially applicable.
• A utility model varies from an invention, for which a
patent for invention is, likewise available, on at least
3 aspects:
• The requisite of "inventive step" in a patent for
invention is not required
• The maximum term of protection is only 7 years,
compared to a patent which is 20 years, both
reckoned from the date of the application,
• The provisions on utility model dispense with its
substantive examination and prefer for a less
complicated system. (Ching v. Salinas, G.R. No.
161295, 2005)
• A utility model shall not be considered "new" if before
the application for a patent it has been publicly known
or publicly used in this country or has been described
in a printed publication within the country, or it is
substantially similar to any other utility model so
known, used or described within the country.
(Manzano •v. Court of Appeals, G.R. No. 113388,
1997)
Requirements for Application for Registration
• Request for registration;
• Description of the utility model;
• Claim or claims;
• Drawings or pictorial representation disclosing
completely the utility model; and
• Payment of the filing fee.
Page 194 of 250
COMMERCIAL LAW
(Rules and Regulations on Utility Models and
Industrial Design, Rule 203)
Note:
• A utility model registration shall expire at the end of the
seventh year after the date of the filing of the
application without any renewal. (IP Code, Sec. 109)
• Provisions governing patents shall apply, mutatis
mutandis to the registration of utility models (IP Code,
Sec. 108).
o However, where the right to a patent conflicts with
the right to a utility model registration in the case
referred to in Section 29, the said provision shall
apply as if the word "patent" were replaced by the
words "patent or utility model registration" (IP
Code, Sec 108.2)
• An invention qualifies for registration as a utility model
if it is new and industrially applicable. (IP Code, Sec.
109.1)
• "Patentable Inventions", shall apply except the
reference to inventive step as a condition of protection.
(IP Code, Sec. 109.1)
• A utility model registration shall expire, without any
possibility of renewal, at the end of the seventh year
after the date of the filing of the application. (IP Code,
Sec. 109.3)
Conversion of Patent Application for Utility Model
Registration
At any time before the grant or refusal of a patent, an
applicant for a patent may, upon payment of the prescribed
fee, convert his application into an application for
registration of a utility model, which shall be accorded the
filing date of the initial application. An application may be
converted only once. (IP Code, Sec. 110:1)
At any time before the grant or refusal of a utility model
registration, an applicant for a utility model registration
may, upon payment of the prescribed fee, convert his
application into a patent application, which shall be
accorded the filing date of the initial application. (IP Code,
Sec. 110.2)
Prohibition against Filing of Parallel Applications
An applicant may not file two (2) applications for the same
subject, one for utility model registration and the other for
the grant of a patent whether simultaneously or
consecutively. (IP Code, Sec. 111).
Industrial Designs
Any composition of lines or colors or any three —
dimensional form, whether associated with lines or colors,
ATENEO CENTRAL
BAR OPERATIONS 2019
provided that such composition or form gives a special
appearance to and can serve as pattern for an industrial
product or handicraft (IP Code, Sec 111.2)
-Integrated Circuit
A product, in its final form, or an intermediate form, in which
the elements, at least one of which is an active element
and some or all of the interconnections are integrally
formed in and/or on a piece of material, and which is
intended to perform an electronic function (IP Code, Sec
112.2)
Layout-Design
This term is synonymous with 'Topography' and means the
three-dimensional disposition, however expressed, of the
elements, at least one of which is an active element, and
of some or all of the interconnections of an integrated
circuit, or such a three-dimensional disposition prepared
for an integrated circuit intended for manufacture (IP Code,
Sec 112.3)
A layout- design is considered original if it is the result of
its creator's own intellectual effort and is not commonplace
among creators of layout- designs and manufacturers of
integrated circuits at the time of its creation. (IP Code, Sec
113.3)
Industrial designs dictated essentially by technical or
functional considerations to obtain a technical result or
those that are contrary to public order, health or morals
shall not be protected. (IP Code, Sec 113.2)
Substantive Conditions for Protection
• Only industrial designs that are new or ornamental
shall benefit from protection (IP Code, Sec 112.3)
• Only layout designs that are original shall benefit from
protection.
• A layout design consisting of a combination of
elements and interconnections that are commonplace
shall be protected only if the combination taken as a
whole is original.
Term of Industrial Design Registration
• The registration shall be for 5 years from application's
filing date.
o Registration may be renewed for not more than 2
consecutive periods of 5 years each, each time
paying renewal fee.
• Registration of layout design shall be valid for 10
years, without renewal, and such validity shall be
counted from date of commencement of protection:
Page 195 of 250
COMMERCIAL LAW
o On date of first commercial exploitation, anywhere
in the world, provided that application filed with
IPO within 2 years from such date;
o On filing date accorded to application if layout-
design has not been previously exploited
commercially anywhere in the world.
Rights Conferred to Owner of Layout Design
Registration
a. To reproduce, whether by incorporation, in an
integrated circuit or otherwise, layout- design in its
entirety or any party thereof, except an act of
reproducing any party that does not comply with
requirement of originality; and
b. To sell or otherwise distribute for commercial
purposes the registered layout design, an article or
an integrated circuit in which the registered layout-
design is incorporated.
(IP Code, Sec 119.4)
Limitations of Layout Rights
• The owner of a layout design has no right to prevent
third parties from reproducing, selling or otherwise
distributing for commercial purposes the registered
layout-design in the following circumstances:
• Reproduction of the registered layout-design for
private purposes or for the sole purpose of evaluation,
analysis, research or teaching;
• Where the act is performed in respect of a layout-
design created on the basis of such analysis or
evaluation and which is itself original in the meaning
as provided herein;
• Where the act is performed in respect of a registered
lay-out-design, or in respect of an integrated circuit in
which such a layout-design is incorporated, that has
been put on the market by or with the consent of the
right holder;
• In respect of an integrated circuit where the person
performing or ordering such an act did not know and
had no reasonable ground to know when acquiring the
integrated circuit or the article incorporating such an
integrated circuit, that it incorporated an unlawfully
reproduced layout-design; or
• Where the act is performed in respect of an identical
layout-design which is original and has been created
independently by a third party (IP Code, Sec 119.5)
ATENEO CENTRAL
BAR OPERATIONS 2019
B. Trademarks
Definitions of Marks, Collective Marks, Trade Names,
and Trademarks
Mark
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. (IP CODE, Sec.121.1)
Collective Mark
• Any visible sign designated as such in,the application
for registration and capable of distinguishing the origin
or any other common characteristic, including the
quality of goods or services of different enterprises
which use the sign under the control of the registered
owner of the collective mark; (IP Code, Sec.121.2, see
also Sec. 167)
• The objects of a trademark are "to point out distinctly
the origin or ownership of the articles to which it is
affixed, to secure to him who has been instrumental in
bringing into market a superior article or merchandise
the fruit of his industry and skill, and to prevent fraud
and imposition." (Etepha v. Director of Patents, G.R.
No. L-20635, 1966)
• Today, the trademark is not merely a symbol of origin
and goodwill; it is often the most effective agent for the
actual creation and protection of goodwill. It imprints
upon the public mind an anonymous and impersonal
guaranty of satisfaction, creating a desire for further
satisfaction. In other words, the mark actually sells the
goods. (Mirpuri v. CA, GR 114508, 1999)
Note: In determining whether a trademark should be
registered, the similarity of the features of the competing
trademarks as well as the entirety of the marks as applied
to the products should be examined. (Nestle v. Puregold,
G.R. No. 217194, 2017)
Tradename
The name or designation identifying or distinguishing an
enterprise (IP Code, Sec.121.3) is defined by the same law
as including "individual names and surnames, firm names,
tradenames, devices or words used by manufacturers,
industrialists, merchants, agriculturalists, and others to
identify their business, vocations, or occupations; the
names or titles lawfully adopted and used by natural or
juridical persons, unions, and any manufacturing,
industrial, commercial, agricultural or other organizations
Page 196 of 250
COMMERCIAL LAW
engaged in trade or commerce." (Etepha v. Director of
Patents, G.R. No. L-20635, 1966)
The following may not be used as tradenames:
a. If by its nature or the use to which the name or
designation may be put, it is contrary to public order or
morals.
b. If it is liable to deceive the public as to the nature of the
enterprise identified by the name.
c. If the trade name is similar to a mark or a trade name
owned by another person and its use would likely
mislead the public.
Functions of Trademark
• Indicate origin or ownership or the articles to which
they are attached
• Guarantee that those articles come up to a certain
standard of quality
• Advertise the articles they symbolize (Mipuri v. CA,
G.R. No. 114508, 1999)
Distinguishing "Trademark" from "Tradename"
Under RA8293, Sec. 1, a mark means 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, while a
tradename means the name or designation identifying or
distinguishing an enterprise.
Simply put, a tradename refers to the business and its
goodwill; a trademark refers to the goods. (Canon
Kabushiki Kaisha v. CA, G.R. No. 120900, 2000)
Exercise of Intellectual Property Rights = Monopoly
Monopoly
The control obtained by one supplier over the commercial
market within a given region.
In a way, Intellectual Property Rights is a form of
monopoly. Copyrights allow others to enjoy an author's
economic rights when there is permission. Trademarks
protect goodwill and it does not prevent production of
similar goods. It is only allowed by the Constitution
because it provides incentive for innovation and
technological advancement.
Salient Features of the Paris Convention on
Trademarks
• National Treatment Principle — foreign nationals are
to be given the same treatment in each of the member
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

countries as that country makes available in its own • Agency for the creation
citizens. and perpetuation of
• Right of Priority — any person who has duly filed goodwill.
registration for trademark shall enjoy a right of priority
of six (6) months.
Spectrum of Distinctiveness of Tradename
• Protection Against Unfair Competition
(Zantarain's Inc. v. Old Grove Smokehouse, 698 F. 2d
• Protection of Trade Names — protected in all
786, 1983) (from weakest to strongest)
countries without obligation of filing or registration
• Generic — refers to a particular genus or class of which
• Protection of Well-Known Marks — each country-
an individual article or service is but a member (i.e.
member of the Union may refuse, cancel the
escalator, cellophane).
registration and prohibit the use Of a trademark which
o It can never attain trademark protection.
is a reproduction, imitation or translation (or any
o Further, if at any time a registered trademark
essential part of which constitutes such), liable to
becomes generic as to a particular product or
create confusion; of a mark considered by competent
service, the mark's registration is subject to
authority where protection is sought to be well-known
cancellation.
in the country as being the mark of a person entitled
• Descriptive —identifies a characteristic or quality of an
to the benefits of the convention; and used for similar
article or service such as its color, odor, function,
or identical goods.
dimensions or ingredients.
o General Rule: it is not ordinarily protectable
The question of whether respondent's trademarks are
as a trademark because like a generic term, it
considered "well-known" is factual in nature, involving as
belongs to the public domain. (Ong Al Gui V.
it does the appreciation of evidence adduced before the
Director Of Patents, G.R. No. L-6235, 1955)
BLA-IPO. (Sehwani v. CA, G.R. No. 171053, 2007)
o Exception: when the doctrine of secondary
meaning applies in such a way that it has
1. MARKS VS COLLECTIVE MARKS V TRADENAMES
acquired a secondary meaning in the minds of
the consumers.
Trademark v. Collective Mark
— • Suggestive — requires the consumer to exercise the
TRADEMARK COLLECTIVE MARK OR imagination in order to draw a conclusion as to the
COLLECTIVE nature of the goods or services.
TRADENAME • Arbitrary or Fanciful — bear no relationship to the
Any visible sign designated products or services to which they are applied. They
Any visible sign capable of
are protectable without proof of secondary meaning
distinguishing the goods or as such in the application
(e.g. Kodak, Ivory — soap).
services. (IP CODE, Sec for registration and capable
121.1) of distinguishing the origin
or any other common 1. Acquisition of Ownership of Mark
Prior to RA 8293, the rights to a trademark were acquired
Three (3) Distinct characteristic, including the
through the "first-to-use" system (RA 166)
Functions of quality of goods or services
Trademarks: of different enterprises
The rights in a mark shall be acquired through
• To indicate origin or which use the sign under
REGISTRATION. (IP Code, Sec. 122)
ownership. (Hanover v. the control of the registered
Metcalf, 240 U.S. 403, owner of the collective
mark. (IP CODE, 121.2) Note: Any person who shall procure registration in the
1916.)
Office of a mark by a false or fraudulent declaration or
• To identify the goods representation, whether oral or in writing, or by any false
as satisfactory
means, shall be liable in a civil action by any person injured
(guarantee the quality
thereby for any damages sustained in consequence
of goods) and thereby
thereof. (IP Code, Sec. 162)
stimulate further
purchases by the
Nothing shall adversely affect the rights on the
consuming public.
enforcement of rights in patents, utility models, industrial

Page 197 of 250

ATENEO CENTRAL
BAR OPERATIONS 2019
desions, marks and works, acquired in good faith prior to
the effective date of this Act (1998). (IP Code, Sec. 236)
• The registration of trademark under Sec. 21 of the
law is required to give notice that this mark is
registered by displaying the same with the words:
"Registered Phil. Patent Office."
• Failure to mark will prevent the registrant from
recovering damages for infringement, unless the
offender has actual notice of the same. The victim,
however, still has a cause of action under other
laws. (Cagayan v. CA, G.R. No. 78413, 1959)
However, the owner of the registered mark shall not be
entitled to recover profits or damages in any suit for
infringement, unless the acts have been committed with
knowledge that such limitation is likely to cause confusion,
to cause mistake, or to deceive. Such knowledge is
presumed if the registrant gives notice that his mark is
registered by displaying with the mark the words
"Registered Mark" or the letter R within a circle or if the
defendant had otherwise actual notice of the registration.
(IP Code, Sec. 158)
2. Acquisition of Ownership of Trade Name
Prior to the IP Code, ownership of a mark or trade name
may be acquired not necessarily by registration but by
adoption and use in trade or commerce. As between
actual use of a mark without registration, and
registration of the mark without actual use thereof, the
former prevails over the latter. For a rule widely accepted
and firmly entrenched, because it has come dcwn through
the years, is that actual use in commerce or business is a
pre-requisite to the acquisition of the right of ownership.
The IP Code has dispensed with the requirement of prior
use at the time of registration. Although prior use is basis
for ownership of trade and -business names. (Shangri- La
International Hotel Management v. Developers Group of
Companies, G.R. No. 159938, 2006)
Notwithstanding any laws or regulations providing for any
obligation to register trade names, such names shall be
protected, even prior to or without registration, against
any unlawful act committed by third parties. (IP Code, Sec.
165.2.a)
In particular, any subsequent use of the trade name by a
third party, whether as a trade name or a mark or collective
mark, or any such use of a similar trade name or mark,
likely to mislead the public, shall be deemed unlawful (IP
Code, Sec. 165.2.b)
Page 198 of 250
COMMERCIAL LAW
3. Non-Registrable Marks
• Consists of an immoral, deceptive or scandalous
matter or a matter which may disparage or falsely
suggest a connection with persons living or dead,
institutions, beliefs, or national symbols, or bring
them into contempt or disrepute;
• Consists of the flag or coat of arms or other
insignia of the Philippines or any of its political
subdivisions, or of any foreign nation, or any
simulation of them;
• Consists of a name, portrait or signature
identifying a particular living individual except by
his written consent, or the name, signature, or
portrait of a deceased President of the Philippines
during the lifetime of his widow, except by written
consent of-the widow;
• Is identical with a registered trademark belonging
to a different proprietor or a trademark with an
earlier filing or priority date under any of the
following circumstances:
o Refers to same goods or services;
o Refers to closely related goods or services; or
o Nearly resembles such a trademark as to be
likely to deceive or cause confusion;
• Is identical with or confusingly similar to or is a
translation of a trademark, which is considered -by
the competent authority of the Philippines to be
well-known internationally and in the Philippines,
whether it is registered in the Philippines, as being
already the trademark of someone other than the
applicant for registration, and used for identical or
similar goods or services. In determining whether
a mark is well-known, account should be taken of
the knowledge of the relevant sector of the public,
rather than of the public at large, including
knowledge in the Philippines which has been
obtained as a result of the promotion of the
trademark;
• Is identical with or confusingly similar to or is a
translation of a trademark considered well-known
which is registered in the Philippines as regards to
goods or services which are not similar to those
with respect to which registration is applied for.
The use of the trademark in relation to those goods
or services indicates a connection between those
goods and services and the owner of the
registered trademark, and the interests of the
owner of the registered trademarks are likely to be
damaged by such use;
• Is likely to mislead the public, particularly as to the
nature, quality, characteristics or geographical
origin of the goods or services.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

• Consists exclusively of signs that are generic for Tests To Determine Confusing Similarity Between
the goods or services they seek to identify; Marks
• Consists exclusively of signs or of indications that DOMINANCY TEST HOLISTIC TEST
have became customary or usual to designate the
goods or services, in everyday language or in Focuses on the similarity of Requires the court to
bona fide and established trade practice; the prevalent features of the consider the entirety of the
• Consists exclusively of signs or of indications that competing trademarks that marks as applied to the
may serve in trade to designate the kind, quality, might cause confusion. products, including the
quantity, intended purpose, value, geographical - the "colorable imitation of labels and packaging, in
origin, time or production of the goods or rendering a registered mark xxx or determining confusing
of the services or other characteristics of the a dominant feature thereof." similarity. (Great White
goods or service; (IP CODE, Sec 155.1) Shark, Inc. v. Caralder,
• Consists of shapes that may be necessitated by Jr., G.R. No. 192294,
technical factors or by the nature of the goods 2012)
themselves or factors that affect their intrinsic
value;
• Consists of color alone, unless defined by a given The HOLISTIC TEST has been abandoned by the
form; Supreme Court.
• Is contrary to public order or morality; Abandoned by the Supreme Court in the cases of
• Is the emblem, official seal, or name of the United McDonald's Corporation v. L.C. Big Mak Burger, Inc.
Nations, whether in its full or abbreviated form. (2004) and Societe des Produits Nestle, S.A. v. CA (2001)
(IP Code, Sec. 123) but came back and used it in Diaz v People (2013) and in
at least 2 more cases after McDonalds and Nestle.
Prior Use of Mark as a Requirement
It used to be that ownership in a mark could be acquired The Court holds that the DOMINANCY TEST IS
upon proof of actual commercial use. APPLICABLE. In recent cases with similar factual milieu,
the Court has consistently applied the dominancy test. In
The Trademark Law. is very clear. It requires actual Prosource International, Inc., the Court applied the
commercial use of the mark prior to its registration. There dominancy test in holding that "PCO-GENOLS" is
is no dispute that respondent corporation was the first confusingly similar to "PYCNOGENOL." (Societe Des
registrant, yet it failed to fully substantiate its claim that it Produits Nestle. S.A. v. Martin Dy, G.R. No. 172276, 2010)
used in trade or business in the Philippines the subject
mark; it did not present proof to invest it with exclusive, The totality or holistic test is contrary to the elementary
continuous adoption of the trademark which should consist postulate of the law on trademarks and unfair competition
among others, of considerable sales since its first use. that confusing similarity is to be determined on the basis of
(Pagasa Industrial v. CA, G.R. No. L-54158, 1982) visual, aural, connotative comparisons and overall
impressions engendered by the marks in controversy as
The rights in a mark shall be acquired through registration they are encountered in the realities of the
made validly in accordance with the provisions of this law marketplace. The totality or holistic test only relies on
(IP Code, Sec 122) visual comparison between two trademarks whereas the
dominancy test relies not only on the visual but also on the
aural and connotative comparisons and overall
impressions between the two trademarks.
(Societe Des Produits Nestle, S.A v. CA, G.R. No. 112012,
2001)

However, in Berris Agricultural vs. Norvy Abyadang G.R.

No. 183404, 2010, the Court applied the holistic test since
under the dominancy test, the alleged act would not have
been an infringement but it would have been an
infringement if the holistic test was applied.

Page 199 of 250

ATENEO CENTRAL
BAR OPERATIONS 2019
4. Well-Known Marks
Criteria for determining whether a mark is well-known:
a. Duration, extent and geographical area of any use of
the mark, in particular, the duration, extent and
geographical area of any promotion of the mark,
including advertising or publicity and the presentation,
at fairs or exhibitions, of the goods and/or services to
which the mark applies;
b. Market share, in the Philippines and in other countries,
of the goods and/or services to which the mark
applies;
c. Degree of the inherent or acquired distinction of the
mark;
d. Quality-image or reputation acquired by the mark;
e. Extent to which the mark has been registered in the
world;
f. Exclusivity of registration attained by the mark in the
world;
g. Extent to which the mark has been used in the world;
h. Exclusivity of use attained by the mark in the world;
I. Commercial value attributed to the mark in the world;
j. Record of successful protection of the rights in the
mark;
k. Outcome of litigations dealing with the issue of whether
the mark is a well-known mark; and,
I. Presence or absence of identical or similar marks
validly registered for or used on identical or similar
goods or services and owned by persons other than
the person claiming that his mark is a well-known
mark.
(Rules and Regulations On Trademarks,
Servicemarks, Tradenarnes and Marked or Stamped
Containers, Rule 102)
5. Priority Right (IP Code, Sec.131)
An application for registration of a mark filed in the
Philippines by a person referred to in Section 3, and who
previously duly filed an application for registration of the
same mark in one of those countries, shall be considered
as filed as of the day the application was first filed in the
foreign country.
No registration of a mark in the Philippines by a person
described in this section shall be granted until such mark
has been registered in the country of origin of the
applicant.
6. Rights Conferred By Registration
Trade names are protected even prior to or without
registration. Thus, non-registration of the trade name with
the Securities and Exchange Commission or the
Page 200 of 250
COMMERCIAL LAW
Department of Trade and Industry will not deprive the
owner thereof the right granted to him by the IP Code.
Right of Owner of Tradename
The IP Code deems unlawful any subsequent use of the
trade name by a third party, whether as a trade name or a
mark or collective mark, or any such use of a similar
tradename or mark, likely to mislead the public. The
remedy against the unlawful use of a trade name would be
a civil action for damages and injunction.
Grounds for Refusal of Trademark Registration
• The word Selecta is an ordinary or common word but
once adopted or coined in connection with one's
business as an emblem or as a badge of authenticity,
it may acquire a secondary meaning as to be
exclusively associated with its products and business.
(Arce & Sons v. Selecta Biscuit Co., G.R. Nos. L-
14761 and L-17981, 1961)
• Actual use of goods in the local market establishes
trademark use which serves as the basis for action
aimed at trademark pre-emption. Sales invoices are
best proof of actual sales of the products in the
Philippines. (Converse Rubber Corp. v. Universal
Rubber Products, G.R. No. L-27906, 1987)
• The right to use a corporate name is a property right,
a right in rem which it may assert. Corporation Code
gives two (2) requirements:
a. That complaint acquired a priorright over such
name and
b. That the proposed name is identical,
deceptively or confusingly similar, or patently
deceptive.
The test is whether it would be confusing to an ordinary
person. (Philips Export B. V. v. Court of Appeals, GR No.
96161, 1992)
Ownership of trademark is a property right which is entitled
to protection. However, when a TM is used for a product in
which the other party does not deal, the use of the same
trademark on the latter's product cannot be validly objected
to. Trademark owner is entitled to protection when junior
user (2nd user) forestalls the normal expansion of the
business, but Canon Japan has failed to attach evidence
that would convince that it has also embarked in the
production of footwear products. (Canon Kabushiki v.
Court of Appeals, G.R. No. 120900, 2000)
Trademark, copyright and patents are different intellectual
property rights that cannot be interchanged with one
another. (Kho v. Court of Appeals, G.R. No. 115758, 2002)
ATENEO CENTRAL
BAR OPERATIONS 2019
The certificate of registration can confer the exclusive right
to use its own symbol only to those goods specified in the
certificate and that one who has adopted and used a
trademark on his goods does not prevent the adoption and -
use of the same trademark by others for products, which
are of a different description. (Pearl & Dean v. Shoemart,
G.R. No. 148222, 2003)
The prima facie presumption brought about by the
registration of a mark may be challenged and overcome, in
an appropriate action, by proof of the nullity of the
registration or of non-use of the mark, except when
excused. Moreover, the presumption may likewise be
defeated by evidence of prior use by another person, i.e.,
it will controvert a claim of legal appropriation or of
ownership based on registration by a subsequent
user. This is because a trademark is a creation of use and
belongs to one who first used it in trade or commerce.
(Berris Agricultural v. Norvy Abyadang, G.R. No. 183404,
2010)
"Hoarding" of bottles does not fall within the coverage of
the IP Code and of Section 168 in particular. It does not
relate to any patent, trademark, trade name or service
mark that the respondents have invaded, intruded into or
used without proper authority from the petitioner. Nor are
the respondents alleged to be fraudulently "passing off'
their products or services as those of the petitioner. The
respondents are not also alleged to be undertaking any
representation or misrepresentation that would confuse or
tend to confuse the goods of the petitioner with those of the
respondents, or vice versa. What in fact the petitioner
alleges is an act foreign to the Code, to the concepts it
embodies and to the acts it regulates; as alleged, hoarding
inflicts unfairness by seeking to limit the opposition's sales
by depriving it of the bottles it can use for these sales.
(Coca-Cola Bottlers v. Quintin J. Gomez, G.R. No. 154491,
2008)
Doctrine of Secondary Meaning
• A word or phrase originally incapable of exclusive
appropriation with reference to an article in the market
(because it is geographically or otherwise descriptive)
might nevertheless have been used for so long and so
exclusively by one producer with reference to his
article that, in the trade and to that branch of the
purchasing public, the word or phrase has come to
mean that the article was his property. (Ang v.
Teodoro, G.R. No. L-48226, 1942)
• Unfair competition is the employment of deception or
any other means contrary to good faith by which a
Page 201 of 250
COMMERCIAL LAW
person shall pass off the goods manufactured by him
or in which he deals, or his business, or services, for
those of another who has already established goodwill
for his similar goods, business, or services, or any acts
calculated to produce the same result.
• Nobody can acquire any exclusive right to market
articles supplying a simple human need in containers
or wrappers of the general form, size, and character
commonly and immediately used in marketing such
articles. (Asia Brewery Inc. v. Court of Appeals GR No.
103543, 1993)
Dissent of Justice Cruz in Asia Brewery Case — The test
is not whether the two (2) articles are distinguishable by
their labels when put side by side, but whether the general
confusion made by the article upon the eye of the casual
customer, who is unsuspicious and off his guard, is such
as is likely to result in confounding it with the original, not
side by side comparison.
Use by Third Parties Of Names, Etc. Similar to
Registered Mark
Registration of the mark shall not confer on the registered
owner the right to preclude third parties from using bona
fide their names, addresses, pseudonyms, a geographical
name, or exact indications concerning the kind, quality,
quantity, destination, value, place of origin, or time of
production or of supply, of their goods or services:
Provided, That such use is confined to the purposes of
mere identification or information and cannot mislead the
public as to the source of the goods or services.
7. Infringement and Remedies
Territorial Limits of a Trademark
The territorial limits of a trademark extend beyond the
country where said trademark may have been registered.
Under RA 8293, Sec. 3, any person who is a national or
who is domiciled or has a real and effective industrial
establishment in a country whici is a party to any
convention, treaty, or agreement relating to intellectual
property rights or the repression of unfair competition, to
which the Philippines is also a party, or extends reciprocal
rights to nationals of the Philippines by law, shall be
entitled to benefits to the extent necessary to give effect to
any provision of such convention, treaty or reciprocal law,
in addition to the rights to which any owner of an intellectual
property right is otherwise entitled by the Act.
(See the Paris Convention on the Protection of Industrial
Property to which the Philippines is a signatory)
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

a. Trademark Infringement
To establish trademark infringement, the following On application of the complainant, the court may impound
elements: during the pendency of the action, sales invoices and other
• Validity of plaintiff's mark, documents evidencing sales.
• The plaintiffs ownership of the mark, and
• Use of the mark or its colorable imitation by the alleged In cases where actual intent to mislead the public or to
infringer results in the likelihood of confusion. defraud the complainant is shown, in the discretion of the
(McDonald's Corporation v. LC Big Mak Burgers Inc., court, the damages may be doubled.
GR No. 143993, 2004)
The complainant, upon proper showing, may also be
Factors to consider in deciding TM infringement when the granted injunction.
products are different:
• Strength of the mark c. Requirement of Notice
Upon the filing of an opposition, the Office shall -serve
• Degree of similarity between the two marks
notice of the filing on the applicant, and of the date of the
• Proximity of the products
hearing thereof upon the applicant and the oppositor and
• Likelihood that the prior owner will bridge the gap
all other persons having any Tight, title or interest in the
• Actual confusion
mark covered by the application, as appear of record in the
• Defendant's good faith in adopting its own mark Office.
• Quality of the defendant's product
• Sophistication of the buyers
(Polaroid Corp v. Polaroid Elect. Corp., 287 F. 2d 492, Kinds of Confusion, Which Can be Brought by
1961) Infringement
CONFUSION OF GOODS CONFUSION OF
The question is whether the general confusion made by the BUSINESS
article upon the eye of the casual purchaser, who is
unsuspicious and off his guard, is such as to likely result in When the ordinarily When although the goods
his confounding it with the original. prudent purchaser would of the parties are different,
be induced to purchase the defendant's products is
The general impression of the ordinary purchaser buying one product in the belief such as might be
under the normally prevalent conditions in trade and giving that he was purchasing the reasonably be assumed to
the attention such purchasers usually give in buying that other. (Great White Shark, originate with the plaintiff,
class of goods, is the touchstone. (Del Monte Corp v. Court Inc. v. Caralder, Jr., G.R. and the public would then
of Appeals, GR No. 78325, 1990) No. 192294, 2012) be deceived either into that
belief or into the belief that
b. Damages there is some connection
The owner of a registered mark may recover damages between the plaintiff and
from any person who infringes his rights. The measure of defendant which, in fact,
the damages suffered shall be either: does not exist. (Great
• The reasonable profit which the complaining party White Shark, Inc. v.
would have made, had the defendant not infringed his Caralder, Jr., G.R. No.
rights, or 192294, 2012)
• The profit which the defendant actually made out of the
infringement, or
• In the event such measure of damages cannot be
readily ascertained with reasonable certainty, then the Trademark Infringement v. Unfair Competitiqn
court may award as damages a reasonable The "true test" of unfair competition is whether the acts of
percentage based upon the amount of gross sales of the defendant have the intent of deceiving or are calculated
the defendant or the value of the services in to deceive the ordinary buyer making his purchases under
connection with which the mark or trade name was the ordinary conditions of the particular trade to which the
used in the infringement of the rights of the controversy relates. One of the essential requisites in an
complaining party. action to restrain unfair competition is proof of fraud; the
Page 202 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

intent to deceive, actual or probable must be shown before
the right to recover can exist. (Superior Commercial
Enterprises v. Kunnan Enterprises Ltd., et. al., G.R. No.
169974, 2010)
Essentially, what the law punishes is the act of giving one's
goods the general appearance of the goods of another,
which would likely mislead the buyer into believing that
such goods belong to the latter.
The law on unfair competition is broader and more
inclusive than the law on trademark infringement.
Trademark infringement is a more exclusive right derived
from the trademark adoption and registration by the person
whose goods or business is first associated with it. The law
on trademarks is a specialized subject distinct from the law
on unfair competition, although the two subjects are
entwined with each other and are dealt with together in the
IP code.
Table: Trademark Infringement v. Unfair Competition
TRADEMARK UNFAIR
INFRINGEMENT COMPETITION
ordinary purchaser mulls upon the product and is likely to
buy the same under the belief that he is buying another.
The test of fraudulent simulation is to be found in the
likelihood or the possibility of deception of some persons
in some measure acquainted with an established design
and desirous of purchasing the commodity with which that
design has been associated. (Levi Strauss v. Tony Lim,
G.R. No. 162311, 2008)
Master tapes are not essential for the determination of
probable cause for the issuance of a warrant in trademark
infringement cases. To restrict the exercise of discretion by
a judge by adding a particular requirement (the
presentation of master tapes, as intimated by 20th Century
Fox) not provided nor implied in the law for a finding of
probable cause is beyond the realm of judicial competence
or statesmanship. It serves no purpose but to stultify and
constrict the judicious exercise of a court's prerogatives
and to denigrate the judicial duty of determining the
existence of probable cause to mere ministerial or
mechanical functions. There is no law or rule which
requires that the existence of probable cause is or should
be determined solely by a specific kind of evidence.
(People v. Choi, G.R. No. 152950, 2006)

Essence -Unauthorized use of Passing off one's A Preliminary Injunction in trademark infringement cases
a mark, goods as that of may only issue if applicant has clear and unmistakable
another. exclusive right over the mark. If the registrability of the
mark or its ownership is in question, the injunction may not
Intent Not necessary that Intent to deceive or issue since this would, if allowed, dispose of the case on
there be bad faith. bad faith is the merits as it effectively will enjoin the use of the word
present. "Ginebra" without the benefit of a full-blown trial. (Tanduay
Distillery v. Ginebra San Miguel Inc., G.R. No. 164324,
Registra- Prior registration of Registration is not
2009)
tion mark alleged to be necessary.
infringed is required.
Right of Foreign Corporation to Sue in Trademark or
Service Mark Enforcement Action
Related Goods Doctrine Any foreign national or juridical person who meets the
When goods are so related that the public may be, or is requirements of Section 3 of this Act and does not engage
actually, deceived and misled that they come from the in business in the Philippines may bring a civil or
same maker or manufacturer, trademark infringement administrative action hereunder for opposition,
occurs. cancellation, infringement, unfair competition, or false
designation of origin and false description, whether or not
Remedies Available to Registrant In Order to Stop the it is licensed to do business in the Philippines under
Infringement of Mark existing laws. (IP Code, Sec. 160)
• Judicial
o Civil
o Criminal Prosecution
• Administrative

The SC held that he probability of deception must be

tested at the point of sale since it is at tnis point that the
Page 203 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Limits of Trademark Protection person as that for another constitutes actionable unfair
competition. (Alhambra Cigar vs. Mojica, G.R. No. L-8937,
TERM TERRITORIAL LIMIT
1914)

A certificate of registration of a
mark shall remain in force for
ten (10) years.
It is required, however, that
the owner of a mark show that
he is using the mark or that his
non-use of the same is due to
causes beyond his control by
filing an Affidavit of Use or
Excusable Non-Use, with the
BT within one (1) year from
the 5th anniversary of the
registration of the marks.
The registration may also be
renewed for a period of ten
(10) years after its expiration.
There is no limit as to the
number of times the registrant
may request for the renewal of
his registration.
The registration of a
mark will have force and
effect within the territory
of the Philippines.
• If one fails to establish his exclusive property right to a
trademark, he may still obtain relief on the ground of -his
competitor's unfairness or fraud.
Conduct constitutes unfair competition if the effect is to
pass off on the public the goods of one man as the goods
of another. (Mighty Corp v. E & J Gallo Winery, G.R. No.
154342, 2004)
Essentially, what the law punishes is the act of giving one's
goods the general appearance of the goods of another,
which would likely mislead the buyer into believing that
such goods belong to the latter. (Manuel C. Espiritu et. al.
v. Petron Corp. et. G.R. No. 170891, 2009)
Director of BLA of the IPO may cancel Certificate of
registration issued to one party even if the hearing
regarding the cancellation of registration was for the
registration of the other party and even if there was no
petition for cancellation to that effect. (E. Y. Industrial Sales
Inc., v. Shen Dar Electricity and Machinery Co. Ltd.. G.R.
No. 184850, 2010)

The registered trademark owner enjoys protection in
product and market areas that are the normal potential
expansion of his business. (McDonalds Corporation v. Big
Mak Burger, G.R. 143993, 2004)
8. Cancellation of Registration of Trademark
When —Within five (5) years from the registration of mark
Who - Any person who believes that he will be damaged
by the registration of a mark.
Trade Names or Business Names
Trade name of business name is an essential part of
business since it is usually used when dealing with clients
or customers. If it is a Single Proprietorship Business, it
must be registered with the Department of Trade and
Industry. if it is a corporation or partnership, it must first be
registered with the SEC. After the SEC certificate of
registration, the corporation or partnership may register its
name with DTI to ensure exclusivity of the usage of that
name. (RA 3883)

Grounds: Collective Marks

Any of the grounds to reject the registration of a mark which
• An application for registration of a collective mark shall
are enumerated as absolute or relative grounds for refusal.
designate the mark as a collective mark and shall be
accompanied by a copy of the agreement, if any,
Non-use for an uninterrupted period of three (3) years is
governing the use of the collective mark.
also a ground for cancellation.
• The registered owner of a collective mark shall notify
the Director of any changes made in respect of the
9. Unfair Competition
agreement.
Unfair competition is passing off or attempting to pass off
• The Court shall cancel the registration of a collective
upon the public the goods/business of one person as for
mark if the person requesting the cancellation proves
the goods/business of another.
that only the registered owner uses the mark, or that
he uses or permits its use in contravention of the
Any conduct the end and probable effect of which is to
agreements or that he uses or permits its use in a
deceive the public or pass off the goods or business of a
manner liable to deceive trade circles or the public as
Page 204 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
to the origin or any other common characteristics of the
goods or services concerned.
• The registration of a collective mark, or an application
therefor shall not be the subject of a license contract.
C. Copyright
Basic Principles
What is Copyright?
a. A bundle of rights that an author enjoys on the form of
expression of the ideas.
b. Copyright refers to finished works, not concepts.
(Joaquin v. Drilon, G.R. No. 108946, 1999)
c. It is only the treatment of the subject and the
expression of the idea that are protected by copyright.
(Abiva v. Weinbrenner, 6 CAR (2s) 1023, 1964)
Note: Author must be a natural person (IP Code, Sec
171.1)
Rights Granted
a. Economic Rights
b. Moral Rights
c. Neighboring Rights
Criteria for Copyright Protection
a. Originality — Act of authorship, answers the question
"did you make it?"
b. Copyrightability — does the law allow the work to be
the subject of copyright?
(Fixation is NOT REQUIRED under our IP Code. See: Sec.
172.2)
Definitions
a. Author — is the natural person who has created the
work;
b. Collective Work — work which has been created by
two (2) or more natural persons at the initiative and
under the direction of another with the understanding
that it will be disclosed by the latter under his own
name and that contributing natural persons will not be
identified;
c. Communication to the Public — the making of a
work available to the public by wire or wireless means
in such a way that members of the public may access
these works from a place and time individually chosen
by them;
d. Computer — an electronic or similar device having
information-processing capabilities, and a "computer
program" is a set of instructions expressed in words,
Page 205 of 250
COMMERCIAL LAW
codes, schemes or in any other form, which is capable
when incorporated in a medium that the computer can
read, of causing the computer to perform or achieve a
particular task or result;
e. Public Lending — the transfer of possession of the
original or a copy of a work or sound recording for a
limited period, for non-profit purposes, by an institution
the services of which are available to the public, such
as public library or archive;
Public Performance — in the case of a work other
than an audiovisual work, is the recitation, playing,
dancing, acting or otherwise performing the work,
either directly or by means of any device or process; in
the case of an audiovisual work, the showing of its
images in sequence and the making of the sounds
accompanying it audible; and, in the case of a sound
recording, making the recorded sounds audible at a
place or at places where persons outside the normal
circle of a family and that family's closest social
acquaintances are or can be present, irrespective of
whether they are or can be present at the same place
and at the same time, or at different places and/or at
different times, and where the performance can be
perceived without the need for communication within
the meaning of Subsection 171.3;
g- Published Works — works, which, with the consent
of the authors, are,made available to the public by wire
or wireless means in such a way that members of the
public may access these works from a place and time
individually chosen by them: Provided, That availability
of such copies has been such, as to satisfy the
reasonable requirements of the public, having regard
to the nature of the work;
h. Work of applied art — an artistic creation with
utilitarian functions or incorporated in a useful article,
whether made by hand or produced on an industrial
scale;
1. Copyrightable Works
Original Literary or Artistic Works
These are original intellectual creations in the literary and
artistic domain protected from the moment of their creation
and shall include in particular:
• Books, pamphlets, articles and other writings;
• Periodicals and newspapers;
• Lectures, sermons, addresses, dissertations prepared
for oral delivery, whether or not reduced in writing or
other material form;
• Letters;
• Dramatic or dramatico-musical compositions;
choreographic works or entertainment in dumb shows;
ATENEO CENTRAL
BAR OPERATIONS 2019
• Musical compositions, with or without words;
• Works of drawing, painting, architecture, sculpture,
engraving, lithography or other works of art; models or
designs for works of art;
• Original ornamental designs or models for articles of
manufacture, whether or not registrable as an
industrial design, and other works of applied art;
• Illustrations, maps, plans, sketches, charts and three-
dimensional works relative to geography, topography,
architecture or science;
• Drawings or plastic works of a scientific or technical
character;
• Photographic works including works produced by a
process analogous to photography; lantern slides;
• Audiovisual works and cinematographic works and
works produced by a process analogous to
cinematography or any process for making audio-
visual recordings;
• Pictorial illustrations and advertisements;
• Computer programs; and
• Other literary, scholarly, scientific and artistic works.
Note: Works are protected by the sole fact of their creation,
irrespective of their mode or form of expression, as well as
of their content, quality and purpose
Derivative Works
• Dramatizations, translations, adaptations,
abridgments, arrangements, and 'other alterations of
literary or artistic works (PD No. 49, Sec. 2, [Pk and
• Collections of literary, scholarly cr artistic works, and
compilations of data and other materials which are
original by reason of the selection -or coordination or
arrangement of theircontents. (PD No. 49, Sec. 2[Q])
S . Derivative works shall be protected as new works,
provided however, That such new work:
o Shall not affect the force of any subsisting
copyright upon the original works employed or any
part thereof, or
o Be construed to imply any right to such use of the
original works, or to secure or extend copyright in
such original works. (PD No. 49, Sec. 8; TRIPS,
Art. 10)
Architectural Designs
shall include the right to control the erection of any building
which reproduces the whole or substantial part of the work
either in its original form or in any form recognizably
derived from the original, provided that the copyright
therein shall not include the right to control the
reconstruction or rehabilitation in the same style as the
Page 206 of 250
COMMERCIAL LAW
original of the building to which that copyright relates.
Published Edition of Work
In addition to the right to publish granted by the author, his
heirs, or assigns, the publisher shall have a copyright
consisting merely of the right of reproduction of the
typographical arrangement of the published edition of the
work
Note:
• Works shall be protected:
o By the sole fact of their creation, not registration
o Irrespective of their mode or form of expression,
content, quality and .purpose
• The copyright for a work is acquired by an intellectual
creator from the moment of creation even in the
absence of registration and deposit (Columbia Pictures
v. CA, G.R. No. 110318, 1996)
• To be entitled to copyright, the -thing being copyrighted
must be an original, created by the author through his
own skill, labor and judgment, without directly copying
or evasively imitating the work of another (Sambar v.
Levi Strauss & Co, G.R. No. 132604, 2002)
2. Non-Copyrightable Works
• Any idea, procedure, system, method of operation,
concept, principle, discovery or mere data as such, „-
even if they are expressed, explained, illustrated or
embodied in a work;
• News of the day and other miscellaneous facts having
the character of mere items of press information; or
• Any official text of a legislative, administrative or legal
nature, as well as any official translation thereof
• Works of the Government.
• However, prior approval of the government agency or
office wherein the work is created shall be necessary
for exploitation of such work for profit. Such agency or
office may, among other things, impose as a condition
the payment of royalties.
• But, no prior approval or conditions shall be required
for the use of any purpose of statutes, rules and
regulations, and speeches, lectures, sermons,
addresses, and dissertations, pronounced, read or
rendered in courts of justice, before administrative
agencies, in deliberative assemblies and in meetings
of public character.
• Nevertheless, the author of speeches, lectures,
sermons, addresses, and dissertations mentioned in
the preceding paragraphs shall have the exclusive
right of making a collection of his works
• Notwithstanding the foregoing provisions,
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

i. Government is not precluded from receiving and shall belong to author;

holding copyrights transferred to it by In joint authorship, co-authors shall be original
•
assignment, bequest or otherwise; owners of copyright and in the absence of
ii. Such publication or republication by the agreement; their rights shall be governed by rules
Government in a public document of any work in on co-ownership. However, in work of joint
which copyright is subsisting ownership consists of parts that can be used
• Shall not be taken to cause any abridgment or separately and author of each part can be
annulment of the copyright, or identified, author of each part shall be the original
• Shall not authorize any use or appropriation of such owner of the copyright in the part that he has
work without the consent of the copyright owner created.
• Useful articles, whose sole purpose is utilitarian, and • In work created by an author during and in the
have no separate artistic value, are not copyrightable. course of his employment:
It has no separate artistic value; to be distinguished o The employee, if the creation of the object
from a work of applied art in that while the latter has of copyright is not a part of his regular
utilitarian functions, there is an identifiable artistic work duties even if the employee uses the time,
or creation incorporated thereto facilities and materials of the employer.
• Works of Public Domain — these are works whose term o The employer, if the work is the result of
of copyright protection has expired. the performance of his regularly-assigned
duties, unless there is an agreement,
3. Rights of a Copyright Owner express or implied, to the contrary.
• In the case of a work commissioned by a person
(a) Copyright or Economic Rights other than an employer of the author and who pays
Shall consist of the exclusive right to carry out, authorize for it and the work is made in pursuance of the
or prevent the following acts: (RETRANS - FIRE - DPPR - commission, the person who so commissioned the
OTHER) work shall have ownership of the work, but the
• Reproduction of the work or substantial portion of the copyright thereto shall remain with the creator,
work; unless there is a written stipulation to the contrary;
• Transformation of the work; • In the case of audio-visual work, the copyright
• First public distribution of the original and each copy of shall belong to the producer, the author of the
the work by sale or other forms of transfer of scenario, the composer of the music, the film
ownership; director, and the author of the work so adapted.
However, subject to contrary or other stipulations
• Dramatization, translation, adaptation, abridgment,
arrangement or other transformation of the work; among the creators, the producer shall exercise
the copyright to an extent required for the
• Public display of the original or a copy of the work;
exhibition of the work in any manner, except for the
• Public performance of the work;
right to collect performing license fees for the
• Rental of the original or a copy of an audiovisual or
performance of musical compositions, with or
cinematographic work, a work embodied in a sound
without words, which are incorporated into the
recording, a computer program, a compilation of data
work; and
and other materials or a musical work in graphic form,
• In respect of letters, the copyright shall belong to
irrespective of the ownership of the original or the copy
the writer subject to the provisions of Article 723 of
which is the subject of the rental; and
the Civil Code.
• Other communication to the public of the work.
• Anonymous and Pseudonymous Works. The
publishers shall be deemed to represent the
Note: Substantial reproduction doesn't necessarily mean
authors of articles and other writings published
that the entire work, or even a large portion, be copied. If
without the names of the authors or under
so much is taken that the value of the original work is
pseudonyms; except
substantially diminished, there is infringement (Habana v.
a. When the contrary appears;
Robles, 310 SCRA 511, 1999)
b. The pseudonyms or adopted name
leaves no doubt as to the author's identity;
(")) Copyright Ownership
or
• In original literary and artistic works, copyright
c. if the author of the anonymous works
Page 207 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
discloses his identity.
(c) Transfer or Assignment of Copyright
• Copyright may be assigned in whole or in part. Within
the scope of the assignment, the assignee is entitled
to all the rights and remedies which the assignor had
with respect to the copyright.
• Copyright is not deemed assigned inter vivos in whole
or in part unless there is a written indication of such
intention.
• The submission of a literary, photographic or artistic
work to a newspaper, magazine or periodical for
publication shall constitute only a license to make a
single publication unless a greater right is expressly
granted. If 2 or more persons jointly own a copyright or
any part thereof, neither of the owners shall be entitled
to grant licenses without the prior written consent of
the other owner or owners.
• Since copyright is distinct from the property in the
material object subject to it:
o Transfer or assignment of copyright shall not itself
constitute a transfer of the material object;
o Transfer or assignment of the sole copy or one or
several copies Of the work shall not imply transfer
or assignment of the copyright
• Copyright owners or their heirs may designate a
society of artists, writers, or composers to enforce their
economic rights and moral rights, on their behalf
(a) Moral Rights
Scope of Moral Rights
The author of a work shall, independently of the economic
rights in Section 177 or the grant of an assignment or
license with respect to such right, have the right (mob -
re2st)
• To Make any alterations of his work prior to, or to
withhold it from publication;
• To 2I2ject to any distortion, mutilation or other
modification of, or other derogatory action in relation
to, his work which would be prejudicial to his honor or
reputation;
• To Require that the authorship of the works be
attributed to him, in particular, the right that his name,
as far as practicable, be indicated in a prominent way
on the copies, and in connection with the public use of
his work; and
• To Restrain the use of his name with respect to any
work not of his own creation or in a distorted version of
his work.
Exceptions of Moral Rights
Page 208 0 250
COMMERCIAL LAW
Absent special contract at the time creator licenses/permits
another to use his work, the following are deemed NOT to
contravene creator's moral rights, provided they are done
in accordance w/ reasonable customary standards or
requisites of the medium: (DA2ME)
o Dramatization
• Arranging
o Adaptation
o Mechanical and electrical reproduction
• Editing
Complete destruction of work unconditionally transferred
by creator
Breach of Contract
An author cannot be compelled to perform his contract to
create a work or for the publication of his work already in
existence. However, he may be held liable for damages for
breach of such contract.
Waiver of Moral Rights
General rule: Moral rights can be waived in writing by
expressly stating such waiver.
Exceptions: Even if writing, waiver is still not valid if:
• To use the name of the author, or the title of his work,
or otherwise to make use of his reputation with respect
to any version or adaptation of his work which,
because of alterations therein, would substantially
tend to injure the literary or artistic reputation of
another author; or
• To use the name of the author with respect to a work
he did not create.
Contribution to Collective Work
When an author contributes to a collective work, his right
to have his contribution attributed to him is deemed waived
unless he expressly reserves it.
Term of Moral Rights
• Shall last during author's lifetime;
• And for 50 years after his death
• Shall not be assignable or subject to license
o Person(s) charged with posthumous enforcement
of these rights shall be named in writing filed with
National Library
o In default of such person(s), such enforcement
shall devolve upon either the author's heirs;
o In default of the heirs, Director of National Library
• Damages may be availed of under Civil Code
• Any damage recovered after creator's death shall be
held in trust remitted to his heirs, and in default of heirs,
f
ATENEO CENTRAL
BAR OPERATIONS 2019
to the Government
• No damages may be recovered under IP Code after 4
years from time cause of action arose.
(b) Rights to Proceeds in Subsequent Transfers or
Droit De Suite
Sale or Lease of Work. - In every sale or lease of an
original work of painting or sculpture or of the original
manuscript of a writer or composer, subsequent to the first
disposition thereof by the author, the author or his heirs
shall have an inalienable right to participate in the gross
proceeds of the sale or lease to the extent of five percent
(5%). This right shall exist during the lifetime of the author
and for fifty (50) years after his death.
This rule shall not apply to prints, etchings, engravings,
works of applied art, or works of similar kind wherein the
author primarily derives gain from the proceeds of
reproductions.
(c) Neighboring Rights
• These are the rights of a performer, producers and
broadcasting organization in relation to an original
work. (chapters XII, XIII, XIV)
• Exclusive Rights
• Moral rights - specifically the right of the performer
to claim to be identified as such performer.
• Include the right to proceeds in subsequent
transfers - equivalent to 5% of the compensation
received for the original performance. (IP Code,
Secs. 184 and 185 shall apply mutatis mutandis —
see: Secs. 205 and 210)
Neighboring Rights Does Not Apply To The Following
• Exclusive use of a natural person for own personal
purposes
• Short excerpts for reporting current events
• Sole use for the purpose of teaching or for scientific
research
• Fair use of the broadcast
(d) Rights of Performers. Producers of Sound
Recordings and Broadcasting Organizations
Scope of Performer's Rights
As regards their performances, the right of authorizing:
• The broadcasting and other communication to the
public of their performance; and
• The fixation of their unfixed performance.
• Of authorizing:
a. Direct or indirect reproduction of their
Page 209 of 250
COMMERCIAL LAW
performances fixed in sound recordings, in any
manner or form;
b. First public distribution of original and copies of
their performance fixed in sound recording through
sale or rental or other forms of transfer of
ownership;
c. Commercial rental to public of original and copies
of their performances fixed in sound recordings,
even after distribution of them by, or pursuant to
authorization by performer;
d. Making available to public of their performances
fixed in sound recordings, by wire or wireless
means, in such a way that members of public may
access them from a place and time individually
chosen by them.
Moral Rights of Performers
Independent of a performer's economic rights, the
performer, shall, as regards his live aural performances or
performances fixed in sound recordings, have the right to
claim to be identified as the performer of his performances,
except where the omission is dictated by the manner of the
use of the performance, and to object to any distortion,
mutilation or other modification of his performances that
would be prejudicial to his reputation
DURATION: maintained and exercised fifty (50) years
after his death, by his heirs, and in default of heirs, the
government, where protection is claimed.
Limitation on Performer's Rights
• Once the performer has authorized the broadcasting
or fixation of his performance, the provisions of Section
203 shall have no further application.
• Fair use and limitations to copyrights shall apply
mutatis mutandis to performers.
Additional Remuneration for Subsequent
Communications or Broadcasts
Unless otherwise provided in the contract, in every
communication to the public or broadcast of a performance
subsequent to the first communication or broadcast thereof
by the broadcasting organization, the performer shall be
entitled to an additional remuneration equivalent to at least
five percent (5%) of the original compensation he or she
received for the first communication or broadcast.
Nothing shall deprive performers of the right to agree by
contracts on terms and conditions more favorable for them
in respect of any use of their performance.
(e) Terms of Protection, In General
ATENEO CENTRAL
BAR OPERATIONS 2019
• Life of the author, plus 50 years after his death, in
case of sole authorship.
• Life of the last surviving author, plus 50 years after
his death, in case of joint authorship.
• 50 years from publication of anonymous or
pseudonymous works, or 50 years from making if
unpublished:
Provided that if the author's identity is revealed
prior to the expiration of such period, protection
shall be as provided in the case of sole authorship
• 25 years from the date of making, in case of works
of applied art.
• 50 years from publication or from date of making if
unpublished, in case of photographic works and
audio-visual works.
Note: Term of protection subsequent to author's death
shall run from death of his death or of publication, but such
terms shall always be deemed to begin on the first day of
January of year following event which gave rise to them
4. Rules on Ownership of Copyright
a. Original literary and artistic works
• Copyright belongs to the author of the work,
subject to the provisions of this section
b. Joint authorship
• Co-authors shall be the original owners of the
copyright
• Absence of agreement, rights shall be governed
by the rules on co-ownership
Joint authorship consists of parts
• Author shall be the original owner of the copyright
in the part he has created if:
o Parts can be used separately and
o Author of each part can be identified
c. Employee's Work
• Copyright shall belong to:
a) Employee: creation of the object of copyright
is not a part of his regular duties even if the
employee uses the time, facilities and
materials of the employer
b) Employer: work is the result of the
performance of his regularly-assigned duties,
unless there is an agreement, express or
implied, to the contrary
Page 210 of 250
COMMERCIAL LAW
d. Independent Contractor's Work
• Ownership belongs to the person other than the
employer who commissioned the work and who
pays for it
• Copyright remains with the creator, unless there is
a written stipulation to the contrary
e. Audiovisual work
• Copyright belongs to the producer, the author of
the scenario, the composer of the music, the film
director, and the author of the work so adapted
• Subject to contrary or other stipulations among the
creators, the producer shall exercise the copyright
to an extent required for the exhibition of the work
in any manner
Exception: the right to collect performing
license fees for the performance of musical
compositions, with or without words, which are
incorporated into the work
f. Letters
• Copyright belongs to the writer subject to the
provisions of Article 723 of the Civil Code. (/P
Code, Sec. 178)
5. Limitations On Copyright
Acts That Do Not Constitute Infringement
a. Recitation or performance of a work
• Lawfully made accessible to public
• Done privately & free of charge or
• Made strictly for charitable or religious institution
or society
b. Making quotations from a published work provided:
• Compatible with fair use and
• Extent: justified for the purpose
• Source & name of author, if appearing on the work,
are mentioned
c. Reproduction or communication to the public by mass
media of articles of current PRESS provided:
• Delivered in public
• Use: info purposes
• Not expressly reserved
• Source: clearly indicated
d. Reproduction or communication to public of literary,
artistic, scientific works
• Part of reports of current events
• By means of photo, cinema, broadcasting
• Extent necessary for that purpose
e. Inclusion of a work in any communication to the public:
• Made by illustration for teaching purposes
• Compatible with fair use: source/name of author,
mentioned
ATENEO CENTRAL .
BAR OPERATIONS 2019
f. Recording in schools, university and educational
institutions
• Intended for broadcast for such schools
• Recording: deleted w/in reasonable period after
they were 1st broadcast
• Recordings: may NOT be made from AV works are
part of the general feature films except for brief
excerpts of the works.
g. Making of ephemeral recordings by broad-orgs by its
own facilities and for use of its own broadcasts
h. Use of work made by or under the direction/control of
Government
• By National Library or any education, scientific or
professional (SEP) institution
• Use: public interest
• Compatible with fair use
i. Public performance/communication of a work:
• In a place: no admission fee
• By a club/institution for education and charitable
purpose: aim is NOT profit-making
• Subject to such other limitations as may be
provided in the regulations
j. Public display of original/copy of work NOT made
• By any media means
• Either work has been published, sold, given away,
transferred to another person by author or his
successor in title (SGT)
k. Use: work for purpose of:
• Any judicial proceedings
• For giving of professional advice by legal
practitioner
6. Doctrine of Fair Use
The fair use of copyrighted work for criticism, news
reporting, teaching (including multiple copies for classroom
use), research, and similar purposes is not an infringement
of copyright.
Factors to Determine Fair Use (PuCLa — NaCo - ASuE)
• Purpose & Character of the use
• Nature of the Copyrighted work
• Amount & Substantiality of the portion used in relation
to the whole thing as a whole
• Effect of the use: on the potential market or the value
of the copyrighted work
• The fact that a work is unpublished shall not by itself
bar a finding of fair use if such finding is made upon
consideration of all the above factors
Decompilation is understood here to be the
reproduction/translation of code to achieve interoperability
Page 211 of 250
COMMERCIAL LAW
of an independently created computer program
Effect of Fair Use as a Defense in Infringement
• The defendant relieves the prosecution of the burden
of presenting evidence showing the use of the
copyright, as the defendant admits having used it. But
evidence should still be presented for the purpose of
proving damages.
• Infringement consists in the doing of any person,
without the consent of the copyright owner, of
anything, the sole right to do which is conferred by
statute to the owner of the copyright (Habana v.
Robles, 310 SCRA 511, 1999)
7. Copyright Infringement
Elements of Infringement
a. Existence of a Valid Copyright
b. Unauthorized Copying
• Direct evidence of actual copying
• Indirect evidence of access to the original
work
Copyright infringement and unfair competition are not
limited to the act of selling counterfeit goods. They cover a
whole range of acts from copying, assembling, packaging
to marketing, including the mere offering for sale of
counterfeit goods. (Microsoft Corp v. Maxicorp Inc., GR
No. 140946, 2004)
Technology Transfer Arrangements
Contracts or agreements involving the transfer of
systematic knowledge for the manufacture of a product,
the application of a process, rendering of a service
including management contracts; and the transfer,
assignment or licensing of all forms of intellectual property
rights, including licensing of computer software except
computer software developed for mass market.
The signing of the Intellectual Property (IP) Code (RA
8293) liberalizes regulations on technology transfer
registration particularly the rate of fees or royalties and
strengthens intellectual property rights protection in the
Philippines. Voluntary Licensing has been provided by the
Code. The law makes it necessary for the recording of
these agreements with the intellectual property office.
However, registration is no longer required where the
agreement is in conformity of the requirements of the law
under Sections 87 and 88.
end of topic
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

IX. ANTI MONEY LAUNDERING ACT ANTI-MONEY LAUNDERING LAW (R.A 9160, AS
AMENDED BY R.A. 9194)
TOPIC OUTLINE UNDER THE SYLLABUS

AS Policy of the Law

ANTI-MONEY LAUNDERING LAW (R.A 9160,
• To protect and preserve the integrity and
AMENDED BY R.A. 9194)
confidentiality of bank accounts;
• To ensure that the Philippines would not be used as a
A. Covered institutions and their obligations
B. Covered and suspicious transactions money laundering site for the proceeds of any unlawful
C. Safe harbor provision activity; and
D. When is money laundering committed • To promote cooperation in transnational investigations
(including predicate crimes) and prosecution of persons involved in money
E. Authority to inquire into bank deposits laundering activities whenever committed. (R.A. No.
F. Freezing and forfeiture 9610, Sec. 2)

A. Covered Institutions

'Covered persons', natural or juridical, refer to (BIS-J2SS):

(1) 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 Bangko Sentra! ng
Pilipinas (BSP);

(2) Insurance companies, pre-need companies and all

other persons supervised or regulated by the Insurance
Commission (IC);

(3) The following entities administering Securities:

(i) Securities dealers, brokers, salesmen, investment
houses and other similar persons managing securities
or rendering services as investment agent, advisor, or
consultant;

(ii) Mutual funds, close-end investment companies,

common trust funds, and other similar persons; and

(iii) Other entities administering or otherwise dealing

in currency, commodities -or financial derivatives
based thereon, valuable objects, cash substitutes and
other similar monetary instruments or property
supervised or regulated by the Securities and
Exchange Commission (SEC);

(4) Jewelry dealers in precious metals, who, as a business,

trade in precious metals, for transactions in excess of One
million pesos (P1,000,000.00);

(5) Jewelry dealers in precious stones, who, as a business,

trade in precious stones, for transactions in excess of One

Page 212 of 250

ATENEO CENTRAL
BAR OPERATIONS 2019
million pesos (P1,000,000.00);
(6) Company Service providers which, as a business,
provide any of the following services to third parties:
(i) Acting as a formation agent of juridical persons;
(ii) 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;
(iii) 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
(iv) Acting as (or arranging for another person to act
as) a nominee shareholder for another person; and
(7) Persons who provide any of the following Services:
(i) Managing of client money, securities or other
assets;
(ii) Management of bank, savings or securities
accounts;
(iii) Organization of contributions for the creation,
operation or management of companies; and
(iv) Creation, operation or management of juridical
persons or arrangements, and buying and selling
business entities.
The term 'covered persons' shall exclude lawyers and
accountants acting as independent legal professionals in
relation to information concerning their clients or where
disclosure of information would compromise client
confidences or the attorney-client relationship: Provided,
That these lawyers and accountants are authorized to
practice in the Philippines and shall continue to be subject
to the provisions of their respective codes of conduct
and/or professional responsibility or any of its
amendments. (R.A. No. 10365, Sec. 3)
Note: Republic Act No. 10927, enacted July 14, 2017,
effectively amends AMLA, or Republic Act No. 9160, to
include casinos as "covered persons", to wit: "(8) casinos,
including internet and ship-based casinos, with respect to
their casino cash transactions related to their gaming
operations."
• Casinos, as defined by the law, are businesses
"authorized by the appropriate government
Page 213 of 250
COMMERCIAL LAW
agency to engage in gaming operations." (Sec. 3)
• The AMLA also states that single cash
transactions of casinos in excess of P5 million or
its equivalent in any other currency, must be
reported to the Anti-Money Laundering Council
(AMLC). (Sec. 3b)
1. Obligations of Covered Institutions
Section 9. Prevention of Money Laundering; Customer
Identification Requirements and Record Keeping. — (CRR)
a. Customer Identification, -
Covered institutions shall establish and record the true
identity of its clients based on official documents.
They shall maintain a system of verifying the true
identity of their clients and, in case of corporate clients,
require a system of verifying their legal existence and
organizational structure, as well as the authority and
identification of all persons purporting to act on their
behalf.
The provisions of existing laws to the contrary
notwithstanding, anonymous accounts, accounts
under fictitious names, and all other similar accounts
shall be absolutely prohibited.
Peso and foreign currency non-checking numbered
accounts shall be allowed.
The BSP may conduct annual testing solely limited to
the determination of the existence and true identity of
the owners of such accounts.
b. Record Keeping —
All records of all transactions of covered institutions
shall be maintained and safely stored for five (5) years
from the date of transactions.
With respect to closed accounts, the records on
customer identification, account files and business
correspondence, shall be preserved and safety stored
for at least five (5) years from the dates when they
were closed.
c. Reporting of Covered and Suspicious Transactions. —
Covered persons shall report to the AMLC all covered
ATENEO CENTRAL
BAR OPERATIONS 2019
transactions and suspicious transactions within five (5)
working days from occurrence thereof, unless the
AMLC prescribes a different period not exceeding
fifteen (15) working days. (R.A. No. 9160, as amended
by R.A. No. 10365, Sec. 9[13])
Lawyers and accountants acting as independent legal
professionals are not required to report covered and
suspicious transactions if the relevant information was
obtained in circumstances where they are subject to
professional secrecy or legal professional privilege
Should a transaction be determined to be both a
covered transaction and a suspicious transaction, the
covered institution shall be required to report the same
as a suspicious transaction.
When reporting covered or suspicious transactions to
the AMLC, covered persons and their officers and
employees are prohibited from communicating,
directly or indirectly, in any manner or by any means,
to any person or entity, the media, the fact that a
covered or suspicious transaction has been reported
or is about to be reported, the contents of the report,
or any other information in relation thereto. Neither
may such reporting be published or aired in any
manner or form by the mass media, electronic mail, or
other similar devices. In case of violation thereof, the
concerned officer and employee of the covered person
and media shall be held criminally liable. (R.A. No.
9160, as amended by R.A. No. 9194, Sec. 9)
B. Covered Transactions (CPR)
Any transaction in cash or other equivalent monetary
instrument involving a total amount in excess of Five
hundred thousand pesos (PhP 500,000.00) within one (1)
banking day. (R.A. No. 9160, Sec. 31-b], as amended)
Other Transactions
(1) Jewelry dealers in precious metals, who, as a business,
trade in precious metals, for transactions in excess of One
million pesos (P1,000,000.00);
(2) Jewelry dealers in precious stones, who, as a business,
trade in precious stones, for transactions in excess of One
million pesos (P1,000,000.00);
(3) The Land Registration Authority, and all its Registries
of Deeds to submit to the AMLC, reports on all Real Estate
Transactions involving an amount in excess of Five
hundred thousand pesos (P500,000.00) within 15 days
from the date of registration of the transaction, in a form to
Page 214 of 250
COMMERCIAL LAW
be prescribed by the AMLC (R.A. No. 10365, Sec. 6)
2. Suspicious Transactions
Transactions with covered institutions, regardless of the
amounts involved, where any of the following
circumstances exist (PCA-SDUS):
a. There is no underlying legal or trade obligation,
Purpose or economic justification;
b. The Client is not properly identified;
c. The Amount involved is not commensurate with
the business or financial capacity of the client;
d. Taking into account all known circumstances, it
may be perceived that the client's transaction is
Structured in order to avoid being the subject of
reporting requirements under the Act;
e. Any circumstances relating to the transaction
which is observed to Deviate from the profile of the
client and/or the client's past transactions with the
covered institution;
f. The transactions is in a way related to an Unlawful
activity or offense under this Act that is about to
be, is being or has been committed; or
g. Any transactions that is Similar or analogous to
any of the foregoing.
3. When is Money Laundering Committed
A crime whereby the proceeds of an unlawful activity are
transacted, thereby making them appear to have
originated from legitimate sources (R.A. No. 9160, Sec. 4)
Money laundering is committed by any person who,
knowing that any monetary instrument or property
represents, involves, or relates to the proceeds of any
unlawful activity
a. Transacts said monetary instrument or property;
b. Converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or
property;
c. Conceals or disguises the true nature, source,
location, disposition, movement or ownership of or
rights with respect to said monetary instrument or
property;
d. Attempts or conspires to commit money laundering
offenses referred to in paragraphs (a), (b) or (c);
e. Aids, abets, assists in or counsels the commission of
the money laundering offenses referred to in
paragraphs (a), (b) or (c) above; and
f. Performs or fails to perform any act as a result of which
he facilitates the offense of money laundering referred
to in paragraphs (a), (b) or (c) above.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

4. Unlawful Activities or Predicate Crimes

Money laundering is also committed by any covered 'Unlawful activity' refers to any act or omission or series or
person who, knowing that a covered or suspicious combination thereof involving or having direct relation to
transaction is required under this Act to be reported to the following:
Anti-Money Laundering Council (AMLC), fails to do so.
a. Kidnapping for ransom;
Three Steps in Money Laundering b. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of
(1) Placement Republic Act No. 9165, otherwise known as the
At this stage, the launderer inserts the dirty money into a Comprehensive Dangerous Act of 2002;
legitimate financial institution, usually in the form of cash c. Section 3 paragraphs B, C, E, G, H and I of Republic
deposits Act No. 3019, as amended, otherwise known as the
Anti-Graft and Corrupt Practices Act;
(2) Layering d. Plunder;
Involves sending money through various financial e. Robbery and extortion under Articles 294, 295, 296,
transactions to change its form and make it more difficult 299, 300, 301 and 302 of the Revised Penal Code, as
to follow. It may consist of bank-to-bank transfers, amended;
changing currency, or purchasing high value items. f. Jueteng and Masiao punished as illegal gambling;
g. Piracy on the high seas;
(3) Integration h. Qualified theft;
The money re-enters mainstream economy in legitimate- i. Swindling;
looking form, appearing to have come from some j. Smuggling under the Revised Administrative Code
legitimate transaction. It may involve a final bank transfer and the Tariff and Customs Laws;
into the account of a local business in which the launderer k. Violations under the Electronic Commerce Act of 2000;
is "investing" in exchange for a cut of the profits or the sale I. Hijacking and other violations under the Anti-Hijacking
of high value items bought during the layering stage. (IRR, Law; destructive arson and murder;
R.A. No. 9160, Rule 4, Sec. 1) m. Terrorism and conspiracy to commit terrorism;
n. The following violations under the Terrorism Financing
Monetary Instruments Prevention and Suppression Act of 2012:
(1) Coins or currency of legal tender of the Philippines, or • Financing of terrorism;
of any other country; • Attempt or conspiracy;
• Accomplice;
(2) Drafts, checks and notes; • Accessory;
• Dealing with property or funds of designated
(3) Securities or negotiable instruments, bonds,
persons
commercial papers, deposit certificates, trust certificates,
o. Bribery and Corruption of Public Officers;
custodial receipts or deposit substitute instruments, trading
p. Frauds and Illegal Exactions and Transactions;
orders, transaction tickets and confirmations of sale or
q. Malversation of Public Funds and Property;
investments and money market instruments;
r. Forgeries and Counterfeiting;
s. The following violations under the Anti-Trafficking in
(4) Contracts or policies of insurance, life or non-life, and
Persons Act of 2003:
contracts of suretyship; and
• Acts of trafficking in persons;
(5) Other similar instruments where title thereto passes to • Acts to promote trafficking in persons;
another by endorsement, assignment or delivery. • Qualified trafficking in persons;
t. The following violations of the Revised Forestry Code
of the Philippines:
• Payment, collection, and remittance of forest
charges;
• Sale of wood products;
u. Violations under the Philippine Fisheries Code of
1998;
v. Violations under the Philippine Mining Act of 1995;
Page 215 of 250
ATENEO CENTRAL
BAR OPERATIONS 2019
w. The following violations under the Wildlife Resources
Conservation and Protection Act:
• Effecting acts in critical habitats;
• Trading of wildlife;
• Collecting, hunting or possessing wildlife, their by-
products and derivatives;
• Gathering or destroying of active nests and the
like;
• Transporting of wildlife;
x. Consuming, selling, bartering, etc., without authority,
any cave resource under the National Caves and Cave
Resources Management Protection Act;
y• Violation of the Anti-Carnapping Act of 2002;
The following violations of the decree Codifying the
Laws on Illegal/Unlawful Possession, Manufacture,
Dealing In, Acquisition or Disposition of Firearms,
Ammunition or Explosives:
• Unlawful manufacture, sales, acquisition,
disposition or possession of firearms, ammunition
or instruments;
• Unlawful manufacture, sales, acquisition,
disposition or possession of explosives;
• Tampering of firearm's serial number;
aa. Violation of the Anti-Fencing Law;
bb. Violations relating to Illegal Recruitment under the
Migrant Workers and Overseas Filipinos Act of 1995;
cc. Violation of the Intellectual Property Code of the
Philippines;
dd. Violation of the Anti-Photo and Video Voyeurism Act of
2009;
ee. Violation of the Anti-Child Pornography Act of 2009;
if. Violation of the Special Protection of Children Against
Abuse, Exploitation and Discrimination Act;
gg. Fraudulent practices and other violations under the
Securities Regulation Code of 2000;
hh. Felonies or offenses of a similar nature that are
punishable under the penal laws of other countries.
Safe Harbor Provision
No administrative, criminal or civil or civil proceedings shall
lie against any person for having made a covered
transaction report in the regular performance of his duties
and in good faith, whether or not such reporting results in
any criminal prosecution under AMLA or any other
Philippine law (BSP Circular 706 dated January 5, 2011)
5. Anti-Money Laundering Council (AMLC)
Composition of the AMLC
(1) BSP Governor - Chairman
(2) Commissioner of the Insurance Commission
Page 216 of 250
COMMERCIAL LAW
(3) Chairman of the Securities and Exchange Commission
(R.A. No. 9160, Sec. 8)
6. Functions of AMLC
The AMLC shall act unanimously in the discharge of its
functions as defined hereunder:
• To require and receive covered or suspicious
transaction reports from covered institutions;
• To issue orders addressed to the appropriate
Supervising Authority or the covered institutions to
determine the true identity of the owner of any
monetary instrument or property subject of a covered
transaction or suspicious transaction report or request
for assistance from a foreign State, or believed by the
Council, on the basis of substantial evidence, to be, in
whole or in part, wherever located, representing,
involving, or related to directly or indirectly, in any
manner or by any means, the proceeds of an unlawful
activity.
• To institute civil forfeiture proceedings and all other
remedial proceedings through the Office of the
Solicitor General;
• To cause the filing of complaints with the Department
of Justice or the Ombudsman for the prosecution of
money laundering offenses;
• To investigate suspicious transactions and covered
transactions deemed suspicious after an investigation
by AMLC, money laundering activities and other
violations of this Act;
• To apply before the Court of Appeals, ex parte, for the
freezing of any monetary instrument or property
alleged to be the proceeds of any unlawful activity as
defined in Section 3(i) (R.A. No. 10365, Sec. 6);
• To implement such measures as may be necessary
and justified under this Act to counteract money
laundering;
• To receive and take action in respect of, any request
from forfign states for assistance in their own anti-
money 12undering operations provided in this Act;
• To develop educational programs on the pernicious
effects of money laundering, the methods and
techniques used in the money laundering, the viable
means of preventing money laundering and the
effective ways of prosecuting and punishing offenders;
• To enlist the assistance of any branch, department,
bureau, office, agency, or instrumentality of the
government, including government-owned and -
controlled corporations, in undertaking any and all anti-
money laundering operations, which may include the
use of its personnel, facilities and resources for the
 ATENEO CENTRAL
BAR OPERATIONS 2019
more resolute prevention, detection, and investigation
of money laundering offenses and prosecution of
offenders;
• To impose administrative sanctions for the violation of
laws, rules, regulations, and orders and resolutions
issued pursuant thereto (R.A. No. 9194, Sec. 5); and
• To require the Land Registration Authority and all its
Registries of Deeds to submit to the AMLC, reports on
all real estate transactions involving an amount in
excess of Five hundred thousand pesos
(P500,000.00) within fifteen (15) days from the date of
registration of the transaction, in a form to be
prescribed by the AMLC. The AMLC may also require
the Land Registration Authority and all its Registries of
Deeds to submit copies of relevant documents of all
real estate transactions. (R.A. No. 9160, Sec. 7, as
amended)
7. Freezing of Monetaty Instrument or Property
The AMLC's power to freeze accounts has been deleted
under R.A. No. 9194, Sec. 7.
However, the CA may issue a freeze order which shall be
effective immediateiy, and which shall not exceed 6
months depending upon the circumstances of the case,
upon:
(1) A verified ex parte petition by the AMLC; and
(2) After determination that probable cause exists that any
▪ monetary instrument or property is in any way related to an
unlawful activity defined in Sec. 3(i) of R.A. No. 10365
The court should act on the petition to freeze within 24
hours from filing of the petition. If the application is filed a
day before a nonworking day, the computation of the 24-
hour period shall exclude the nonworking days.
If there is no case filed against a person whose account
has been frozen within the period determined by the court,
the freeze order shall be deemed ipso facto lifted.
This rule shall not apply to pending cases in the courts.
Remedy Against Freeze Order
A person whose account has been frozen may file a motion
to lift the freeze order and the court must resolve this
motion before the expiration of the freeze order.
Page 217 of 250
COMMERCIAL LAW
No court shall issue a temporary restraining order or a writ
of injunction against any freeze order, except the Supreme
Court.
8. Authority to Inquire into Bank Deposits
General Rule: Court Order Required
Notwithstanding the provisions of Republic Act No. 1405,
as amended; Republic Act No. 6426, as amended;
Republic Act No. 8791; and other laws:
The AMLC may inquire into or examine any particular
deposit or investment, including related accounts, with any
banking institution or non-bank financial institution upon
order of any competent court based on:
(1) An ex parte application in cases of violations of this
Act;
(2) When it has been established that there is
probable cause that the deposits or investments,
including related accounts involved, are related to
an unlawful activity as defined in Section 3(i)
hereof or a money laundering offense under
Section 4 hereof;
Exceptions: No court order shall be required in the
following cases:
(1) Kidnapping for ransom under Art. 267, RPC;
(2) Violations of the Comprehensive Dangerous
Drugs Act of 2002 (R.A. No. 9165, Secs. 4, 5, 6, 8,
9, 10, 12, 13, 14, 15, and 16);
(3) Highjacking and other violations under R.A. No.
6235;
(4) Destructive arson and murder under the RPC,
including those perpetrated by terrorists against
non-combatant persons and similar targets;
(5) Felonies or offenses of a nature similar to those
mentioned above, which are punishable under the
penal laws or other countries; and
(6) Terrorism and conspiracy to commit terrorism as
defined and penalized under R.A. No. 9372 (R.A.
No. 10167, Sec. 2)
Time for CA to act on application
The Court of Appeals shall act on the application to inquire
into or examine any deposit or investment with any banking
institution or non-bank financial institution within twenty-
four (24) hours from filing of the application.
To ensure compliance with this Act, the Bangko Sentra! ng
Pilipinas may, in the course of a periodic or special
examination, check the compliance of a Covered institution
with the requirements of the AMLA and its implementing
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

rules and regulations.

Related Accounts
Accounts, the funds and sources of which originated from
and/or are materially linked to the monetary instrument(s)
or property(ies) subject of the freeze order(s). (R.A. No.
10167, Sec. 2)

A court order ex parte must first be obtained before the

AMLC can inquire into these related Accounts: Provided,
That the procedure for the ex parte application of the ex
parte court order for the principal account shall be the
same with that of the related accounts.

The authority to inquire into or examine the main account

and the related accounts shall comply with the
requirements of Article Ill, Sections 2 and 3 of the 1987
Constitution, which are hereby incorporated by reference.

end of topic

Page 218 of 250

ATENEO CENTRAL
BAR OPERATIONS 2019
X.ELECTRONIC COMMERCE ACT OF 2000 (R.A.
No. 8792) and A.M. No. 01-7-01-SC or the Rules
on Electronic Evidence
Topics under the Syllabus
A. Legal recognition of electronic data messages,
documents, and signatures
B. Presumption relating to electronic signatures
C. Admissibility and evidential weight of electronic
data message or electronic document
D. Obligation of confidentiality
Page 219 of 250
COMMERCIAL LAW
ELECTRONIC COMMERCE ACT OF 2000
A. Legal Recognition of Electronic Writing or
Document and Data Messages
Electronic Data Message
Refers to information generated, sent, received or stored
by electronic, optical or similar means. (R.A. No. 8792,
Sec. 5[0
Legal Recognition of Electronic Data Messages
Information shall not be denied legal effect, validity or
enforceability solely on the grounds that it is in the data
message purporting to give rise to such legal effect, or that
it is merely referred to in that electronic data message.
(R.A. No. 8792, Sec. 6)
Electronic Document
Refers to information or the representation of information,
data, figures, symbols or other modes of written
expression, described or however represented, by which a
right is established or an obligation extinguished, or by
which a fact may be prove and affirmed, which is receive,
recorded, transmitted, stored, processed, retrieved or
produced electronically. (R.A. No. 8792. Sec. 51-ti)
Legal Recognition of Electronic Documents
(a) Where the law requires a document to be in writing, that
requirement is met by an electronic document if the said
electronic document maintains its integrity and reliability
and can be authenticated so as to be usable for
subsequent reference, in that —
(i) The electronic document has remained complete
and unaltered, apart from the addition of any
endorsement and any authorized change, or any
change which arises in the normal course of
communication, storage and display; and
(ii) The electronic document is reliable in the light of
the purpose for which it was generated and in the light
of all relevant circumstances.
(b) Paragraph (a) applies whether the requirement therein
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 —
ATENEO CENTRAL
BAR OPERATIONS 2019
(i) 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
(ii) That document is capable of being displayed to the
person to whom it is to be presented. No provision of
this Act shall apply to vary any and all requirements of
existing laws on formalities required in the execution of
documents for their validity.
For evidentiary purposes, an electronic document shall be
the functional equivalent of a written document under
existing laws. (R.A. No. 8792, Sec. 7)
B. Electronic Signature
Refers to any distinctive mark, characteristic and/or sound
in electronic form, representing the identity of a person and
attached to or logically associated with the electronic data
message or electronic document or any methodology or
procedures employed or adopted by a person and
executed or adopted by such person with the intention of
authenticating or approving an electronic data message or
electronic document. (R.A. No. 8792, Sec. 5[e])
Legal Recognition of Electronic Signatures
An electronic signature on the electronic document shall
be equivalent to the signature of a person on a written
document if that signature is proved by showing that a
prescribed procedure, not alterable by the parties
interested in the electronic document, existed under which
(a) A method is used to identify the .party sought to be
bound and to indicate said party's access to the electronic
document necessary for his consent or approval through
the electronic signature;
(b) Said method is reliable and appropriate for the purpose
for which the electronic document was generated or
communicated, in the light of all circumstances, including
any relevant agreement;
(c) It is necessary for the party sought to be bound, in or
order to proceed further with the transaction, to have
executed or provided the electronic signature; and
(d) The other party is authorized and enabled to verify the
electronic signature and to make the decision to proceed
with the transaction authenticated .by the same. (R.A. No.
8792, Sec. 8)
Page 220 of 250
COMMERCIAL LAW
In any proceedings involving an electronic signature, it
shall be presumed that —
(a) The electronic signature is the signature of the person
to whom it correlates; and
(b) The electronic signature was affixed by that person with
the intention of signing or approving the electronic
document unless the person relying on the electronically
signed electronic document knows or has noticed of
defects in or unreliability of the signature or reliance on the
electronic signature is not reasonable under the
circumstances. (R.A. No. 8792, Sec. 9)
Rule on Ordinary Documents
(1) Where the law requires information to be presented o'r
retained in its original form, that requirement is met by an
electronic data message or electronic document if;
(a) the integrity of the information from the time when
it was first generated in its final form, as an electronic
data message or electronic document is shown by
evidence aliunde or otherwise; and
(b) where it is required that information be resented,
that the information is capable of being displayed to
the person to whom it is to be presented.
(2) Paragraph (1) applies whether the requirement therein
is in the form of an obligation or whether the law simply
provides consequences for the information not being
presented or retained in its original form.
(3) For the purpose of subparagraph (a) of paragraph (1):
(a) the criteria for assessing integrity shall be whether
the information has remained complete and unaltered,
apart from the addition of any endorsement and any
change which arises in the normal course of
communication, storage and display ; and
(b) the standard of reliability required shall be
assessed in the light of purposed for which the
information was generated and in the light of all the
relevant circumstances. (R.A. No. 8792, Sec. 10)
C. Admissibility and Evidential Weight of Electronic
Data Message or Electronic Document
Nothing in the application of the rules on evidence shall
deny the admissibility of an electronic data message or
electronic document in evidence —
ATENEO CENTRAL
BAR OPERATIONS 2019
(a) On the sole ground that it is in electronic form; or
(b) On the ground that it is not in the standard written
form, and the electronic data message or electronic
document meeting, and complying with the
requirements under Sections 6 or 7 hereof shall be
the best evidence of the agreement and transaction
contained therein.
In assessing the evidential weight of an electronic data
message or electronic document, 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 shall be
given due regard. (R.A. No. 8792, Sec. 12)
Formation of Contracts In Electronic Form
Except as otherwise agreed by the parties, an offer, the
acceptance of an offer and such other elements required
under existing laws for the formation of contracts may be
expressed in, demonstrated and proved by means of
electronic data messages or electronic documents and no
contract shall be denied validity or enforceability on the
sole ground that it is in the form of an electronic data
message or electronic document, or that any or all of the
elements required under existing laws for the formation of
contracts is expressed, demonstrated and proved by
means of electronic data messages or electronic
documents.
Electronic transactions made through networking among
banks, or linkages thereof with other entities or networks,
and vice versa, shall be deemed consummated upon the
actual dispensing of cash or the debit of one account and
the corresponding credit to another, whether such
transaction is initiated by the depositor or by an authorized
collecting party: Provided, that the obligation of one bank,
entity, or person similarly situated to another arising
therefrom shall be considered absolute and shall not be
subjected to the process of preference of credits. (R.A. No.
8792, Sec. 16)
As between the originator and the addressee of an
electronic data message or electronic document, a
declaration of will or other statement shall not be denied
legal effect, validity or enforceability solely on the ground
that it is in the form of an electronic data message. (R.A.
No. 8792, Sec. 17)
Page 221 of 250
COMMERCIAL LAW
D.Oblioation of Confidentiality
Except for the purposes authorized under this Act, 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 this Act, shall
NOT convey to or share the same with any other person.
(Sec. 32, R.A. 8792)
Choice of Security Methods
Subject to applicable laws and /or rules and guidelines
promulgated by the Department of Trade and Industry with
other appropriate government agencies, parties to any
electronic transaction shall be free to determine the type of
level of electronic data message and electronic document
security needed, and to select and use or implement
appropriate technological methods that suit their need.
(R.A. No. 8792, Sec. 24)
Electronic Commerce in Carriage Of Goods
Actions Related to Contracts of Carriage of Goods
(a) (i) furnishing the marks, number, quantity or weight of
goods; (ii) stating or declaring the nature or value of
goods; (iii) issuing a receipt for goods; (iv) confirming
that goods have been loaded;
(b) (i) notifying a person of terms and conditions of the
contract; (ii) giving instructions to a carrier;
(c) (i) claiming delivery of goods; (ii) authorizing release of
goods; (iii) giving notice of loss of, or damage to goods;
(d) giving any other notice or statement in connection with
the performance of the contract;
(e) undertaking to deliver goods to a named person or a
person authorized to claim delivery;
(f) granting, acquiring, renouncing, surrendering,
transferring or negotiating rights in goods;
(g) acquiring or transferring rights and obligations under
the contract. (R.A. No. 8792, Sec. 25)
Transport Documents
(1) Where the law requires that any action referred to
contract of carriage of goods be carried out in writing
or by using a paper document, that requirement is met
if the action is carried out by using one or more data
messages or electronic documents.
ATENEO CENTRAL
BAR OPERATIONS 2019
(2) Paragraph (1) applies whether the requirement there in
is in the form of an obligation or whether the law simply
provides consequences for failing either to carry out
the action in writing or to use a paper document.
(3) If a right is to be granted to, or an obligation is to be
acquired by, one person and no person, and if the law
requires that, in order to effect this, the right or
obligation must be conveyed to that person by the
transfer, or use of, a paper document, that requirement
is met if the right or obligation is conveyed by using
one or more electronic data messages or electronic
documents unique;
(4) For the purposes of paragraph (3), the standard of
reliability required shall be assessed in the light of the
purpose for which the right or obligation was conveyed
and in the light of all the circumstances, including any
relevant agreement.
(5) Where one or more data messages are used to effect
any action in subparagraphs (f) and (g) of Section 25,
no paper document used to effect any such action is
valid unless the use of electronic data message or
electronic document has been terminated and
replaced by the used of paper documents. A paper
document issued in these circumstances shall contain
a statement of such termination. The replacement of
the electronic data messages or electronic documents
by paper documents shall not affect the rights or
obligation of the parties involved.
(6) If a rule of laws is compulsorily applicable to a contract
of carriage of goods which is in, or is evidenced by, a
paper document, that rule shall not be inapplicable to
such a contract of carriage of goods which is
evidenced by one or more electronic data messages
or electronic documents by reason of the fact that the
contract is evidenced by such electronic data
messages or electronic documents instead of by a
paper document. (R.A. No. 8792, Sec. 26)
When a Service Provider Can Be Liable Under the Act
"Service provider" refers to a provider of —
(i) On-line services or network access or the operator of
facilities therefor, including entities offering the
transmission, routing, or providing of connections for online
communications, digital or otherwise, between or among
points specified by a user, of electronic documents of the
user's choosing; or
Page 222 of 250
COMMERCIAL LAW
(ii) The necessary technical means by which electronic
documents of an originator may be stored and made
accessible to designated or undesignated third party.
Such service providers shall have no authority to modify or
alter the content of the electronic data message or
electronic document received or to make any entry therein
on behalf of the originator, addressee or any third party
unless specifically authorized to do so, and who shall retain
the electronic document in accordance with the specific
request or as necessary for the purpose of performing the
services it was engaged to perform. (R.A. No. 8792, Sec.
Liability of Service Provider
No person or party shall be subject to any civil or criminal
liability in respect of the electronic data message or
electronic document for which the person or party acting
as a service provider merely provides access if such
liability is founded on —
(a) The obligations and liabilities of the parties under the
electronic data message or electronic document;
(b) The making, publication, dissemination or distribution
of such material or any statement made in such material,
including possible infringement of any right subsisting in or
in relation to such material. Provided, That:
(i) The service provider does not have actual
knowledge, or is not aware of the facts or
circumstances from which it is apparent, that the
making, -publication, dissemination or distribution of
such material is unlawful or infringes any rights
subsisting in or in relation to such material
(ii) The service provider does not knowingly receive a
financial benefit directly attributable to the unlawful or
infringing activity; and
(iii) The service provider does not directly commit any
infringement or other unlawful act and does not induce
or cause another person or party to commit any
infringement or other unlawful act and/or does not
benefit financially from the infringing activity or
unlawful act or another person or party;
Provided, further, That nothing in this Section shall
affect —
(a) Any obligation founded on contract;
ATENEO CENTRAL
BAR OPERATIONS 2019
(b) The obligation of a service provider as such under
a licensing or other regulatory regime established
under written law; or
(c) Any obligation imposed under any written law;
(d) The civil liability of any party to the extent that such
liability forms the basis for injunctive relief issued by a
court under any law requiring that the service provider
take or refrain from actions necessary to remove, block
or deny access to any material, or to preserve
evidence of a violation of law. (R.A. No. 8792, Sec. 30)
C. Rules ON ELECTRONIC EVIDENCE
a. Scope; Coverage; Meaning Of Electronic
Evidence; Electronic Data Message
Scope and Coverage
The Rules on Electronic Evidence (REE) shall apply
whenever an electronic document or electronic data
message as defined in these rules is offered or used in
evidence. (REE, Rule 1 Sec. 1)
These Rules shall apply to all civil actions and
proceedings, as well as quasi-judicial and administrative
cases. (REE, Rule 1 Sec. 2)
Applicability to Criminal Actions
As to the admissibility of the text messages, the RTC
admitted them in conformity with the Court's earlier
Resolution applying the Rules on Electronic Evidence to
criminal actions. (People v. Enojas, G.R. No. 204894,
2014)
Electronic Document - information or the representation
of information, data, figures, symbols or other modes of
written expression, described or however represented, by
which a right is established or an obligation extinguished,
or by which a fact may be proved and affirmed, which is
received, recorded, transmitted, stored, processed,
retrieved or produced electronically.
It includes digitally signed documents and any print-out or
output, readable by sight or other means, which accurately
reflects the electronic data message or electronic
document. (REE, Rule 2, Sec. 1(h))
Electronic Data Message - information generated, sent,
received or stored by electronic, optical or similar means.
(REE, Rule 2, Sec. 1(g))
Page 223 of 250
COMMERCIAL LAW
A facsimile transmission cannot be considered as
electronic evidence. It is not the functional equivalent of
an original under the Best Evidence Rule and is not
admissible as electronic evidence. (MCC v. Ssangyong,
G.R. No. 170633, 2007)
Note: For purposes of these Rules, the term "electronic
document" may be used interchangeably with electronic
data message". (REE, Rule 2, Sec 1(h)
Electronic evidence as functional equivalent of paper
based documents - Whenever a rule of evidence refers
to the term writing, document, record, instrument,
memorandum or any other form of writing, such term shall
be deemed to include an electronic document as defined
in these Rules. (REE, Rule 3, Sec. 1)
b. Probative Value Of Electronic Documents Or
Evidentiary Weight; Method Of Proof
Admissibility
An electronic document is admissible in evidence if:
1. It complies with the rules on admissibility prescribed by
the Rules of Court and related laws; and
2. It is authenticated in the manner prescribed by these
Rules. (REE, Rule 3, Sec. 2)
Best Evidence Rule Under the REE
An electronic document shall be regarded as the
equivalent of an original document under the Best
Evidence Rule if it is a printout or output readable by sight
or other means, shown to reflect the data accurately. (REE,
Rule 4, Sec. 1)
When copies or duplicates of a document shall be
regarded as original:
1. It is in two or more copies executed at or about the
same time with identical contents; or
2. It is a counterpart produced by the same
impression as the original, or from the same
matrix, or by mechanical or electronic re-
recording, or by chemical reproduction, or by other
equivalent techniques which accurately
reproduces the original
Such copies or duplicates shall be regarded as the
equivalent of the original. (REE, Rule 4, Sec. 2)
Note: Notwithstanding the foregoing, copies or duplicates
shall not be admissible to the same extent as the original
if: (REE, Rule 4, Sec. 2)
1. A genuine question is raised as to the authenticity of
the original; or
ATENEO CENTRAL
BAR OPERATIONS 2019
2. In the circumstances it would be unjust or inequitable
to admit the copy in lieu of the original.
Factors in Determining Evidentiary Weight of
Electronic Evidence (REE, Rule 7, Sec. 1 and 2)
In assessing the evidentiary weight of an electronic
document, the following factors may be considered: (REE,
Rule 7, Sec. 1)
t The reliability of the manner or method in which it was
generated, stored or communicated, including but not
limited to input and output procedures, controls, tests
and checks for accuracy and reliability of the electronic
data message or document, in the light of all the
circumstances as well as any relevant agreement;
2. The reliability of the manner in which its originator was
identified;
3. The integrity of the information and communication
system in which it is recorded or stored, including but
not limited to the hardware and computer programs or
software used as well as programming errors;
4. The familiarity of the witness or the person who made
the entry with the communication and information
system;
5. The nature and quality of the information which went
into the communication and information system upon
which the electronic data message or electronic
document was based; or
6. Other factors which the court may consider as affecting
the accuracy or integrity of the electronic document or
electronic data message.
In any dispute involving the integrity of the information and
communication system in which an electronic document or
electronic data message is recorded or stored, the court
may consider, among others, the following factors: (REE,
Rule 7, Sec. 2)
1. Whether the information and communication system or
other similar device was operated in a manner that did
not affect the integrity of the electronic document, and
there are no other reasonable grounds to doubt the
integrity of the information and communication system;
2. Whether the electronic document was recorded or
stored by a party to the proceedings with interest
adverse to that of the party using it; or
3. Whether the electronic document was recorded or
stored in the usual and ordinary course of business by
a person who is not a party to the proceedings and who
did not act under the control of the party using it.
Method of Proof
Page 224 of 250
COMMERCIAL LAW
Affidavit Evidence - All matters relating to the
admissibility and evidentiary weight of an electronic
document may be established by an affidavit stating facts
of:
(i) direct personal knowledge of the affiant; or
(ii) based on authentic records
The affidavit must affirmatively show the competence of
the affiant to testify on the matters contained therein. (REE,
Rule 9, Sec. 1)
Cross-Examination of Deponent — The affiant shall be
made to affirm the contents of the affidavit in open court
and may be cross-examined as a matter of right by the
adverse party. (REE, Rule 9, Sec. 2)
Examination of Witness
Electronic Testimony - After summarily hearing the
parties pursuant to Rule 9 of these Rules, the court may
authorize the presentation of testimonial evidence by
electronic means. Before so authorizing, the court shall
determine the necessity for such presentation and
prescribe terms and conditions as may be necessary under
the circumstances, including the protection of the rights of
the parties and witnesses concerned. (REE, Rule 10, Sec.
1)
Transcript of electronic testimony - When examination
of a witness is done electronically, the entire proceedings,
including the questions and answers, shall be transcribed
by a stenographer, stenotypist or other recorder authorized
for the purpose, who shall certify as correct the transcript
done by him. The transcript should reflect the fact that the
proceedings, either in whole or in part, had been
electronically recorded. (REE, Rule 10, Sec. 2)
c. Authentication Of Electronic Documents And
Electronic Signatures
Authentication of Electronic Documents (REE, Rule 5,
Section 1 to 3)
Burden of proving authenticity
The person seeking to introduce an electronic document in
any legal proceeding has the burden of proving its
authenticity in the manner provided in this Rule. (REE,
Rule 5, Sec. 1)
Manner of authentication
Beforc any private electronic document offered as
authentic is received in evidence, its authenticity must be
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

proved by any of the following means: (REE, Rule 5, Sec. This exception (to the hearsay rule) may be overcome by
2) evidence of the untrustworthiness of the source of
1. By evidence that it had been digitally signed by the information or the method or circumstances of the
person purported to have signed the same; preparation, transmission or storage thereof. (REE, Rule
2. By evidence that other appropriate - security 8, Sec. 2)
procedures or devices as may be authorized by the
Supreme Court or by law for authentication of
electronic documents were applied to the document;
or
3. By other evidence showing its integrity and reliability to
the satisfaction of the Judge.

Proof of electronically notarized document

A document electronically notarized in accordance with the
rules promulgated by the Supreme Court shall be
considered as a public document and proved as a notarial
document under the Rules of Court. (REE, Rule 5, Sec. 3)

Authentication of Electronic Signature

An electronic signature or a digital signature authenticated
in the manner prescribed hereunder is admissible in
evidence as the functional equivalent of the signature of a
person on a written document. (REE, Rule 6, Sec. 1)

An electronic signature may be authenticated in any of the

following manner: (REE, Rule 6, Sec. 2)
1. By evidence that a method or process was utilized to
establish a digital signature and verify the same;
2. By any other means provided by law; or;
3. By any other means satisfactory to the judge as
establishing the genuineness of the electronic
signature.

d. Business Records As Exception To The Hearsay

Rule (REE, Rule 8, Section 1 And 2)

A memorandum, report, record or data compilation of acts,

events, conditions, opinions, or diagnoses, made by
electronic, optical or other similar means is an exception to
the hearsay rule provided that the following are shown by
the testimony of the custodian or other qualified witness:
1. That it was made at or near the time of or from
transmission or supply of information;
2. That it was made by a person with knowledge thereof;
3. That it was kept in the regular course or conduct of a
business activity; and
4. That such was the regular practice to make the
memorandum, report, record, or data compilation by
electronic, optical or similar means (REE, Rule 8, Sec.
1)

Page 225 of 250

ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

e. Audio, Photographic, Video And Ephemeral

Evidence

Ephemeral Electronic Communication - refers to

telephone conversations, text messages, chatroom
sessions, streaming audio, streaming video, and other
electronic forms of communication the evidence of which
is not recorded or retained. (PEE, Rule 2, Sec. 1(k))

Text messages have been classified as "ephemeral

electronic communication" under Section 1(k), Rule 2 of
the -Rules on Electronic Evidence, and "shall be proven by
the testimony of a person who was a party to the same or
has personal knowledge thereof." (Vidallon-Magtolis v.
Salud, A.M. No. CA-05- 20-P, 2005)

Admissibility (REE, Rule 11, Section 1 and 2)

Audio, photographic and video evidence

Audio, photographic and video evidence of events, acts or
transactions shall be admissible provided: (REE, Rule 11,
Sec. 1)
1. It shall be shown, presented or displayed to the court;
and
2. It shall be identified, explained or authenticated by the
person who made the recording or by scme other
person competent to testify on the accuracy thereof

Ephemeral electronic communications

Ephemeral evidence shall be proven by the testimony of a
person who was a party to the same or has personal
knowledge thereof.
• In the absence or unavailability of such witnesses,
other competent evidence may be admitted.

A recording of the telephone conversation or ephemeral

electronic communication shall be covered by the
immediately preceding section.

Note: If the foregoing communications are recorded or

embodied in an electronic document, then the provisions
of Rule 5 on authentication of electronic documents shall
apply. (REE, Rule 11, Sec. 2)

end of topic

Page 226 of 250

 ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

I IX. DATA PRIVACY ACT (R.A. No. 10173) I A. Personal V. Sensitive Personal Information

Personal Information
TOPIC OUTLINE UNDER THE SYLLABUS Refers to any information whether recorded in a material
form or not, from which the identity of an individual is
A. Personal vs. Sensitive personal information apparent or can be reasonably and directly ascertained by
B. Scope the entity holding the information, or when put together with
C. Processing of Personal information other information would directly and certainly identify an
D. Rights of Data Subject individual

• Information about an identified or identifiable person

Example: A company ID number is personal

information because it is about an identifiable person.
It can be put together with records of a company's
Human Resource Department to directly identify an
individual

In Breyer v. Germany, the Court of Justice of the

European Union ruled that a dynamic internet protocol
address (IP address) may be considered personal
data. (because additional information may be made
available by the internet service provider to identify a
person)

Sensitive Personal Information

Refers to personal information:
1) About an individual's race, ethnic origin, marital status,
age, color, and religious, philosophical or political
affiliations;
2) About an individual's health, education, genetic or
sexual life of a person, or to any proceeding 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;
3) Issued by government agencies peculiar to an
individual which includes, but not limited to:
a. Social Security numbers
b. Previous or current health records
c. Licenses or its denials
d. Suspension or revocation
e. Tax returns
4) Specifically established by an executive order or an act
of Congress to be kept classified

• Sensitive personal information is personal

information, that is specifically considered by law
to be sensitive in nature.
• Note that the law also covers privileged
information.

Importance of Distinction

Sensitive personal information requires stronger data

protection or security measures.

Page 227 of 250

ATENEO CENTRAL
BAR OPERATIONS 2019
Criteria to allow processing of sensitive personal
information is stricter.
When what is involved in a personal data breach is
sensitive personal information, mandatory breach
notification is generally required.
Penalties for violation of the Data Privacy Act will be
higher if sensitive personal information is involved.
B. Scope
Scope
In general, applies to the processing of all types of
personal information and to any natural and juridical
person involved in personal information processing,
including:
• Personal information controllers and processors
who:
o Use equipment that are located in the
Philippines, regardless if found or
established in Philippines
o Maintain an office, branch or agency in the
Philippines
Provided, publishers, editors or duly accredited reporters
of any newspaper, magazine or periodical of general
circulation are given protection from being compelled to
reveal the source of any news report or information
appearing in said publication which was related in
confidence to such publisher, editor, or reporter (Sec. 5 RA
10173 in relation to RA 53)
Processing refers to any operation performed upon the
personal data including, but not limited to: collection,
recording, organization, storage, updating or modification,
retrieval, consultation, use, consolidation, blocking,
erasure or destruction.
All Types of Personal Information:
• Personal Information, Sensitive Personal
Information, Privileged Information
Natural and juridical person involved in personal
information processing:
• Personal Information Controllers
Refers to a natural or juridical person, or any other body
who controls the processing of personal data, or instructs
another to process personal data on its behalf.
Does not refer to the employee in charge of computer
systems, encoders, or the head of IT department.
Page 228 of 250
COMMERCIAL LAW
• Personal Information Processors
Refers to any natural or juridical person or any other body
to whom a personal information controller may outsource
or instruct the processing of personal data pertaining to a
data subject.
If a personal information processor uses the personal
information any other purpose not provided by the
controller, then the personal information processor
becomes the personal information controller.
• Covers only information about individuals (natural
persons) and not juridical persons (Information
about a comoany is outside the scope)
• The Personal Information Controllers (P/C) or
Personal Information Processor (PIP) may be
juridical persons.
• Example: A customer ordering from a fast food
chain will call a hotline number being operated by
a call center, to be able to order from the fast Tood
chain. -; The customer is the data subject, the
fast food chain the PIC, and the call center the PIP.
The fast food chain (P/C) outsourced to the call
center (PIP) processing of personal information of
customer.
Extraterritorial application: The law generally has
extraterritorial application to the extent that a
particular company has links to the Philippines, with
due consideration to international law and comity.
(Ex, Processing done in Philippines, Company doing
business in Philippines)
Does Not Apply to:
A) Information about any individual who is or was an
officer or employee of a government institution
that relates to the position or functions of the
individual including:
1) Fact that the individual or is or was an officer
or employee of the government institution;
2) The title, business address and office
telephone number of the individual;
3) The classification, salary range and
responsibilities of the position held by the
individual;
4) Name of the individual on a document
prepared by the individual in the course of
employment with the government
B) Information about an individual who is or was
performing service under contract for a
government institution that relates to the services
performed, including:
1) Terms of the contract
2) Name of the individual given in the course of
the performance of services
ATENEO CENTRAL
BAR OPERATIONS 2019
C) Information relating to any discretionary benefit of
a financial nature, such as:
1) Granting of a license or permit given by the
government to an individual, including the
name of individual and exact nature of the
benefit
D) Personal information processed for journalistic,
artistic, literary or research purposes
E) Information necessary in order to carry out the
functions of public authority
1) Processing of personal data for the
performance by the independent
2) Central monetary authority
3) Law enforcement and regulatory agencies, of
their constitutionally and statutorily mandated
functions
F) Information necessary for banks and other financial
institutions under the jurisdiction of the central
monetary authority or Banko Sentral ng Pilipinas,
to comply the Anti-Money Laundering Act and
other applicable laws
G) 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 the Philippines
• Those outside the scope refer to information only.
The National Privacy Commission has opined that
entities or agencies processing personai
information remain to be covered by the DPA, and
are subject to requirements of implementing
security measures even if the particular
information being processed is outside the scope.
• Example: Banks remain covered by the DPA and
must secure the personal information they hold,
even if part of the information they have are
outside the scope of the DPA (Ex. Reporting
suspicious transcations under AIVILA)
C. Processing OF PERSONAL INFORMATION
General Data Privacy Principles
General Rule: Processing of personal information shall be
allowed,
Subject to the following:
1.) Compliance with requirements of this act and other
laws allowing disclosure of information to the
public
2.) Adherence to the principles of transparency,
legitimate purpose and proportionality.
Transparency —Data subject must be aware of the nature,
purpose and extent of the processing of his or her personal
data. Any information relating to the processing of personal
data should be easy to access and understand.
Page 229 of 250
COMMERCIAL LAW
Legitimate Purpose — Processing of information shall be
compatible with a declared and specified purpose which
must not be contrary to law, morals, or public policy.
Proportionality — Processing shall be adequate, relevant,
suitable, necessary, and not excessive in relation to a
declared and specified purpose. Personal information shall
be processed only if the purpose of the processing could
not be reasonably be fulfilled by other means.
Personal Information must, be:
a.) Collected for specified and legitimate purposes
determined and declared before, or as soon as
reasonably practicable after collection, and later
processed in a way compatible with such declared
purposes only;
b.) Processed fairly and lawfully;
c.) Accurate, relevant and, where necessary for
purposes for which it is to be used, be kept up to
date;
o Inaccurate or incomplete data must be
rectified, supplemented, destroyed or their
further processing restricted
d.) Adequate and not excessive in relation to the
purposes for which they are collected and
processed;
e.) Retained only for as long as necessary for the
fulfillment of the purposes for which the data was
obtained or for the establishment, exercise or -
defense of legal claims, or for legitimate business
purposes, or as provided by law;
f.) Kept in a form which permits identification of data
subjects for no longer than is necessary for the
purposes for which data were collected and
processed
a. Provided, personal information collected
for other purposes may lie processed for
historical, statistical or scientific purposes,
and in cases laid down in law may be
stored for longer periods
b. Adequate safeguards are guaranteed by
said laws authorizing their processing
Personal information controller must ensure
implementation of personal information processing
principles set out herein
Criteria for Lawful Processing
Processing of personal information (not sensitive or
privileged) shall be permitted only if:
a. Not otherwise prohibited by law; and
b. When at least one of the following conditions exist:
i. Data subject has given consent;
ii. Processing is necessary and is related to the
fulfillment of a contract with data subject;
ATENEO CENTRAL
BAR OPERATIONS 2019
iii. Necessary for compliance with a legal
obligation to which personal information
controller is subject;
iv. Necessary to protect vitally important interests
of data subject;
v. Necessary in order to respond to national
emergency, comply with public order and
safety, or to fulfill functions of public authority
vi. Necessary for purposes of legitimate interests
pursued by the personal information controller
or by a third party to whom data is disclosed
i. EXCEPT where such interests are
overridden by fundamental rights and
freedoms of the data subject
Criteria for Processing of Sensitive Personal Information
and Privileged Information
Sensitive Personal Information and Privileged
Information
Generally, processing of sensitive personal information
and privileged information shall be prohibited
EXCEPT in the following cases:
a. Data subject has given consent, specific to the
purpose prior to the processing, or in the case of
privileged information, all parties to the exchange have
given consent prior to processing;
b. Processing is provided for by existing laws and
regulations;
i. Such regulations guarantee the protection of
sensitive personal and privileged information
ii. Consent of the data subjects are not required by
law or regulation
c. Processing is necessary to protect the life and health
of the data subject or another person, and the data
subject is not legally or physically able to express his
or her consent prior to the processing;
d. Processing is necessary to achieve lawful and
noncommercial objectives of public organizations and
associations;
i. Only confined to the bona fide members of these
organizations
ii. Sensitive information are not transferred to third
parties
iii. Consent of data subject was obtained prior to
processing
e. Processing is necessary for Medical treatment, carried
out by a medical practitioner or institution, and an
adequate level of protection of personal information is
ensured;
f. Personal information necessary for the protection of
lawful rights and interests of natural or legal persons in
court proceedings, or the establishment, exercise or
defense of legal claims, or when provided to
government or public authority •
Page 230 of 250
COMMERCIAL LAW
Subcontract of Personal Information
A personal information controller may subcontract the
processing of personal information.
The personal information controller must ensure that
proper safeguards are in place to ensure the confidentiality
of the personal information processed, prevent its
unauthorized use, and comply with processing
requirements.
Extension of Privileged Communication
Personal information controllers may invoke the principle
of privileged communication over privileged information
that they lawfully control or process. Subject to existing
laws and regulations, any evidence gathered on
privileged information is inadmissible.
D. Rights Of The Data Subject
Rights of data subjects, in general, include:
1. Right to be informed on matters pertaining to the
processing of personal data, including intended
changes to the processing;
2. Right to object to the processing of personal.data;
3. Right to access upon demand;
4. Right to correct errors and inaccuracies in the personal
data being processed;
5. Right to erasure or blocking of personal data when no
longer necessary for the purpose of collection, and
when rights of data subjects are already being violated;
6. Right to data portability, or the right to request for
copies of his or personal data which are being
processed by electronic means in commonly used
formats;
7. Right to damages when the data subject is injured by
an unlawful or unauthorized processing, or by other
acts violating his or her rights; and
8. Right to file a complaint with the National Privacy
Commission
• DPA also has provisions on transmissibility of
rights of data subject to lawful heirs and assigns of
the data subject at any time after the death of the
data subject, or when the data subject is
incapacitated or incapable of exercising rights
• Limitation of rights of data subject: depending on
circumstances, rights of data subjects may not
apply or may be limited for:
(1) Scientific and statistical research
(2) Investigations in relation to any criminal,
administrative or tax liabilities
----end of topic----
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

XII.FINANCIAL REHABILITATION AND Governing Statute and Rules

INSOLVENCY ACT OF 2010 (R.A. No. 10142) 1. Financial Rehabilitation and Insolvency Act of 2010
(R.A. No. 10142) [hereinafter FRIA]
Topics under the Syllabus 2. Financial Rehabilitation Rules of Procedure, A.M. No.
12-12-11-SC [hereinafter FR Rules]
A. Basic concepts 3. Financial Liquidation and Suspension of Payments
1. Rehabilitation Rules of Procedure for Insolvent Debtors, A.M. No. 15-
2. Insolvent 04-06-SC [hereinafter FLSP Rules]
3. Liquidation
4. Suspension of payments A. Basic Concepts
B. Modes of rehabilitation
1. Court-supervised rehabilitation Rehabilitation and Insolvency
a. Voluntary vs. involuntary
b. Commencement order (including stay Rehabilitation
order)
The restoration of the debtor to a condition of successful
c. Rehabilitation receiver and management
committee operation and solvency, if it is shown that its continuance
d. Determination of claims of operation is economically feasible and its creditors can
e. Rehabilitation plan recover by way of the present value of payments projected
i. Concept of feasibility in the plan, more if the debtor continues as a going concern
ii. Material financial commitments than if it is immediately liquidated. (FR/A, Sec. 4[0])
iii. Liquidation analysis
f. Creditor approval and confirmation Rehabilitation contemplates a continuance of corporate life
g. Failure of rehabilitation and activities in an effort to restore and reinstate the
2. Pre-negotiated rehabilitation corporation to its former position of successful operation
a. How initiated
and solvency (Wonder Book Corporation v. Phil. Bank of
b. Period and effect of approval
3. Out-of-Court or Informal Restructuring Communications, G.R. No. 187316, 2012)
Agreement or Rehabilitation Plan
a. Minimum requirements (BERNABE)The basic issues in rehabilitation proceedings
b. Standstill period concern the viability and desirability of continuing the
c. Cram down effect business operations of distressed corporations, all with a
C. Liquidation view of effectively restoring to a state of solvency or to its
1. Voluntary liquidation vs. involuntary former healthy financial condition through the adoption of
liquidation vs. conversion a rehabilitation plan (BPI Family Savings Bank v. St.
2. Procedure Michael Medical Center, G.R. No. 205469, 2015)
a. Liquidation order; effects
3. Determination of claims
D. Suspension of Payments; Suspension of Payment Inso!vency
Order The financial condition of a debtor that is generally unable
E. Remedies to pay its or his liabilities as they fall due in the ordinary
1. Motion for reconsideration course of business or has liahilities that are greater than its
2. Petition for certiorari or his assets (FR/A, Sec. 4[p])

Debtors
The term "debtor" shall refer to (PICS):
a. Partnership duly registered with the SEC;
b. Individual debtor who has become insolvent;
c. Corporation duly organized and existing under
Philippine laws; or
d. Sole Proprietorship registered with the DTI (FR/A,
Sec. 4[k])

Page 231 of 250

ATENEO CENTRAL
BAR OPERATIONS 2019
Note: An individual debtor shall refer to a natural person
who is a resident and citizen of the Philippines that has
become insolvent (FRIA, Sec. 4[b])
Debtors NOT covered by FRIA
a. Banks;
b. Insurance Companies;
C. Pre-Need Companies; and
d. National and Local Government Agencies or Units
(FRIA, Sec. 5)
Government financial institutions other than banks and
GOCCs shall be covered by this Act, unless their specific
charter provides otherwise (FRIA, Sec. 5)
Creditors and Claims Covered By Fria
Creditor
A natural or juridical person which has a claim against the
debtor that arose on or before the commencement date
(FRIA, Sec. 4[h])
Claim
All claims or demands of whatever nature or character
against the debtor or its property, whether for money or
otherwise, liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed, including,
but not limited to:
(1) All claims of the government, whether national or 10C21,
including taxes, tariffs and customs duties; and
(2) Claims against directors and officers of the debtor
arising from acts done in the discharge of their
functions falling within the scope of their authority. This
inclusion does not prohibit the creditors or third parties
from filing cases against the directors and officers
acting in their personal capacities
Proceedings Covered By FRIA
DEBTOR PROCEEDING
Sole Voluntary Rehabilitation (FRIA, Sec.
Proprietorship 12);
Partnership Involuntary Rehabilitation (FRIA, Sec.
Corporation 13);
Pre-Negotiated Rehabilitation (FRIA,
Sec. 76);
Voluntary Liquidation (FRIA, Sec. 90);
Involuntary Liquidation (FRIA, Sec.
91)
Page 232 of 250
COMMERCIAL LAW
Individual Suspension of Payment (FRIA, Sec.
Debtor 94)
Voluntary Liquidation (FRIA, Sec.
103)
Involuntary Liquidation (FRIA, Sec.
105)
Nature of Proceedings under FRIA
a. In Rem — Jurisdiction over all persons affected by the
proceedings shall be considered as acquired upon
publication of the notice of the commencement of the
proceedings in any newspaper of general circulation in
the Philippines as prescribed under the Supreme
Court rules of procedure; and
b. Summary and Non-Adversarial (FR Rules, Sec. 4)
B. Types of Rehabilitation Proceedings
Three Main Types of ,Rehabilitation Proceedings:
(a) Court Supervised, which may be:
i. Voluntary, if initiated by Debtor
Involuntary, 'if initiated by Creditor
(b) Pre-Negotiated, and
(c) Out of Court or Informal Proceedings.
a. Court Supervised Rehabilitation
Court Supervised Rehabilitation Proceedings may either
be voluntary or involuntary.
i. Voluntary Proceedings
Initiation of Voluntary Proceedings
Who may Petition for Voluntary Rehabilitation
1. The owner in case of a sole proprietorship, or
2. A majority of the partners in case of a partnership, or
3. A majority vote of the board of directors or trustees and
authorized by the vote of the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock,
in stock corporations, or of the members, in case of non-
stock corporation
An insolvent debtor may initiate voluntary proceedings
under this Act by filing a petition for rehabilitation with the
court and on the grounds hereinafter specifically provided.
A group of debtors shall refer to:
(1) corporations that are financially related to one another
as parent corporations, subsidiaries or affiliates;
(2) partnerships that are owned more than fifty percent
(50%) by the same person; and
ATENEO CENTRAL
BAR OPERATIONS 2019
(3) single proprietorships that are owned by the same
person. When the petition covers a group of debtors,
all reference under these rules to debtor shall include
and apply to the group of debtors (FR/A, Sec. 4[n])
Grounds for Voluntary Rehabilitation
A group of debtors may jointly file for rehabilitation when:
a. One or more of its members foresee the impossibility of
meeting debts when they respectively fall due, and
b. The financial distress would likely adversely affect the
financial condition and/or operations of the other
members of the group and/or the participation of the
other members of the group is essential under the
terms and conditions of the proposed Rehabilitation
Plan. (FR Rules, Rule 2, Sec. 1)
Petition for Voluntary Proceedings
The petition shall be verified to establish the insolvency of
the debtor and the viability of its rehabilitation, and include,
whether as an attachment or as part of the body of the
petition, as a minimum the following:
a. Identification of the debtor, its principal activities and
its addresses;
b. Statement of the fact of and the cause of the debtor's
insolvency or inability to pay its obligations as they
become due;
c. The specific relief sought pursuant to this Act;
d. The grounds upon which the petition is based;
e. Other information that may be required under this Act
depending on the form of relief requested;
f. Schedule of the debtor's debts and liabilities including
a list of creditors with their addresses, amounts of
claims and collaterals, or securities, if any;
g. An inventory of all its assets including receivables and
claims against third parties;
h. A Rehabilitation Plan;
i. The names of at least 3 nominees to the position of
rehabilitation receiver; and
Other documents required to be filed with the petition
pursuant to this Act and the rules of procedure as may
be promulgated by the Supreme Court.
ii. Involuntary Proceedings
Initiation of Involuntary Proceedings
Who may petition for involuntary proceedings
1. Any creditor or group of creditors with a claim of, or the
aggregate of whose claims is, whichever of is higher of:
a. At least Php1,000,000.00; or
b. At least 25% of the subscribed capital stock or partners'
contributions (FR Rules, Rule 2, Sec. 4)
Page 233 of 250
COMMERCIAL LAW
Circumstances Necessary to Start Involuntary
Proceedings
These proceedings may be initiated against the debtor by
filing a petition for rehabilitation with the court if:
a. There is no genuine issue of fact on law on the claim/s
of the petitioner/s, and that the due and demandable
payments thereon have not been made for at least 60
days or that the debtor has failed generally to meet its
liabilities as they fall due; or
b. A creditor, other than the petitioner/s, has initiated
foreclosure proceedings against the debtor that will
prevent the debtor from paying its debts as they
become due or will render it insolvent. (FR Rules, Rule
2, Sec. 5)
Petition for Involuntary Proceedings
The creditor/s' petition for rehabilitation shall be verified to
establish the substantial likelihood that the debtor may be
rehabilitated, and include:
a. Identification of the debtor its principal activities and its
address;
b. The circumstances sufficient to support a petition to
initiate involuntary rehabilitation proceedings under
Section 13 of this Act;
c. The specific relief sought under this Act;
d. A Rehabilitation Plan;
e. The names of at least 3 nominees to the, position of
rehabilitation receiver;
f. Other information that may be required under this Act
depending on the form of relief requested; and
g. Other documents required to be filed with the petition
pursuant to this Act and the rules of procedure as may
be promulgated by the Supreme Court.
Common Provisions to Voluntary and Involuntary
Proceedings
Venue
RTC having jurisdiction over the principal office of the
debtor as specified in its articles of incorporation or
partnership or in its registration papers with the DTI in
cases of sole proprietorship (FR Rules, Rule 1, Sec. 6)
Note: The petition for court assistance to execute or
implement either a standstill agreement or out of court
restructuring agreement may be filed with the RTC having
jurisdiction over the place in which the insolvent debtor
resides or has its principal place of business (FR Rules,
Rule 4, Sec. 8)
ATENEO CENTRAL
BAR OPERATIONS 2019
Action on the Petition
1. If the court finds the petition to be substantial in form and
substance, the commencement order shall be issued
within 5 working days from its filing
2. If found deficient within the same period, the court may
give 5 working days from receipt of the notice of order
to satisfy the deficiency.
3. The court shall dismiss the petition if the deficiency is
not complied within the extended 5-day period (FR
Rules, Rule 2, Sec. 7)
1. Commencement Order
Rehabilitation proceedings commence upon the issuance
of the Commencement Order. The Commencement Order
contains the following:
a. Identify the debtor, its principal business or activity/ies
and its principal place of business;
b. Summarize the ground/s for initiating the proceedings;
c. State the relief sought under this Act and any
requirement or procedure particular to the relief
sought;
d. State the legal effects of the Commencement Order;
e. Declare that the debtor is under rehabilitation;
f. Direct the publication of the Commencement Order in
a newspaper of general circulation in the Philippines
once a week for at least 2 consecutive weeks, with the
first publication to be made within 7 days from the time
of its issuance;
g. If the petitioner is the debtor direct the service by
personal delivery of a copy of the petition on each
creditor holding at least 10% of the total liabilities of the
debtor as determined from the schedule attached to
the petition within 5 days; if the petitioner/s is/are
creditor/s, direct the service by personal delivery of a
copy of the petition on the debtor within 5 days;
h. Appoint a rehabilitation receiver who may or not be
from among the nominees of the petitioner/s and who
shall exercise such powers and duties defined in this
Act as well as the procedural rules that the Supreme
Court will promulgate;
i. Summarize the requirements and deadlines for
creditors to establish their claims against the debtor
and direct all creditors to their claims with the court at
least 5 days before the initial hearing;
Direct Bureau of internal Revenue (BIR) to file and
serve on the debtor its comment on or opposition to
the petition or its claim/s against the debtor under such
procedures as the Supreme Court provide;
Page 234 of 250
COMMERCIAL LAW
k. Prohibit the debtor's suppliers of goods or services
from withholding the supply of goods and services in
the ordinary course of business for as long as the
debtor makes payments for the services or goods
supplied after the issuance of the Commencement
Order;
I. Authorize the payment of administrative expenses as
they become due;
m. Set the case for initial hearing, which shall not be more
than 40 days from the date of filing of the petition for
the purpose of determining whether there is
substantial likelihood for the debtor to be rehabilitated;
n. Make available copies of the petition and rehabilitation
plan for examination and copying by any interested
party;
o. Indicate the location or locations at which documents
regarding the debtor and the proceedings under Act
may be reviewed and copied;
p. State that any creditor or debtor who is not the
petitioner, may submit the name or nominate any other
qualified person to the position of rehabilitation
receiver at least 5 days before the initial hearing;
q. Include a Stay or Suspension Order. (FR/A, Sec. 16)
Effects of the Commencement Order
a. Vest the rehabilitation with all the powers and functions
provided for this Act, such as the right to review and
obtain records to which the debtor's management and
directors have access, including bank accounts or
whatever nature of the debtor subject to the approval
by the court of the performance bond filed by the
rehabilitation receiver;
b. Prohibit or otherwise serve as the legal basis rendering
null and void the results of any extrajudicial .activity or
process to seize property, sell encumbered property,
or otherwise attempt to collection or enforce a claim
against the debtor after commencement date unless
otherwise allowed in this Act, subject to the provisions
of Section 50 hereof;
c. Exempt the debtor from liability for taxes and fees,
including penalties, interests, and charges due to the
government;
d. Serve as the legal basis for rendering null and void any
setoff after the commencement date of any debt owed
to the debtor by any of the debtor's creditors;
e. Serve as the legal basis for rendering null and void the
perfection of any lien against the debtor's property
after the commencement date; and
f. Consolidate the resolution of all legal proceedings by
and against the debtor to the court; provided, however,
that the court may allow the continuation of cases on
ATENE0 CENTRAL
BAR OPERATIONS 2019
other courts where the debtor had initiated the suit. (FR
Rules, Rule 2, Sec. 9)
Effectivity and Duration of the Commencement Order
The Commencement Order shall be effective for the
duration of the rehabilitation proceedings, unless:
1. Earlier lifted by the court;
2. The Rehabilitation P12...n is seasonably confirmed or
approved; or
3. The Rehabilitation proceedings are ordered terminated
by the court FR Rules, Rule 2, Sec. 11)
2. Rehabilitation Receiver
Rehabilitation Receiver
The person or persons, natural or juridical, appointed as
such by the court pursuant to this Act and which shall be
entrusted with such powers and duties as set forth herein.
(FR Rules, Rule 1, Sec. 5[p])
Minimum Qualifications of a Rehabilitation Receiver
If the rehabilitation receiver is a natural person:
a. Citizen of the Philippines or a resident of the
Philippines in the 6 months prior to nomination;
b. Not been earlier dismissed as a rehabilitation receiver;
c. As far as practicable, has expertise and acumen to
manage and operate a business similar in size and
complexity of that of the debtor;
d. Has a general familiarity with the rights of creditors
subject to suspension of payment or rehabilitation and
a general understanding of the duties and obligations
of a rehabilitation receiver;
e. Of good moral character and with acknowledged
integrity, impartiality and independence;
f. No conflict of interest;
9- Has an operating knowledge in management, finance,
and rehabilitation of distressed companies; and
h. Willing and able to file a bond in such amount as
determined by the court FR Rules, Rule 2, Sec. 21[A])
The conflict of interest requirement may be waived,
expressly or impliedly, by a party who may be prejudiced
thereby. (FR/A, Sec. 29[d])
If the rehabilitation receiver is a juridical person:
a. Duly authorized to do business in the Philippines for at
least six (6) years prior to its appointment;
b. Good standing as certified by the appropriate
regulatory agency/ies;
c. No conflict of interest;
d. Not been earlier dismissed as a rehabilitation receiver;
Page 235 of 250
COMMERCIAL LAW
e. Must submit the name of the person designated to
discharge the responsibilities and powers of a
rehabilitation receiver and the names of the employees
and other persons authorized to assist the designated
representative, together with a sworn certification that
these persons possess the qualifications and none of
the disqualifications required from natural persons;
f. Must submit a sworn undertaking, duly approved in
accordance with law, binding itself to be solidarily liable
with the persons designated by it to discharge the
functions and responsibilities of a rehabilitation
receiver;
g. Willing and able to file a bond in such amount as may
be determined by the court;
h. Not disqualified to discharge the duties of a
rehabilitation receiver under the Constitution and other
relevant laws (FR Rules, Rule 2, Sec. 21)
Additional Requirements for Representatives of
Juridical Persons
a. Duly designated and authorized to act for and on
behalf of the juridical entity;
b. Must be a director, officer, stockholder or partner of the
juridical entity; and
c. Must submit a sworn undertaking that he shall be
solidarily liable with his firm for all the obligations and
responsibilities of a rehabilitation receiver. (FR Rules,
Rule 2, Sec. 21)
Other qualifications and disqualifications of the
rehabilitation receiver shall be set forth in procedural rules,
taking into consideration the nature of the business of the
debtor and the need to protect the interest of all
stakeholders concerned.
Principal Duties of the Rehabilitation Receiver
a. Preserving and maximizing the value of the assets of
the debtor during the proceedings;
b. Determining the viability of the rehabilitation;
C. 7reparing and recommending a Rehabilitation Plan to
the court; and Implementing the approved
Rehabilitation Plan (FR Rules, Rule 2, Sec. 26)
Removal of a Rehabilitation Receiver
The rehabilitation receiver may be removed at any time by
the court, either motu proprio or upon motion by any
creditor/s holding more than 50% of the total obligations of
the debtor (FR Rules, Rule 2, Sec. 27)
ATENEO CENTRAL
BAR OPERATIONS 2019
Grounds for Removal
a. Incompetence, gross negligence, failure to perform or
failure to exercise the proper degree of tare in the
performance of his duties and powers;
b. Lack of a particular or specialized competency
required by the specific case;
c. Illegal acts or conduct in the performance of his duties
and powers;
d. Lack of qualification or presence of any
disqualification;
e. Conflict Of interest that arises after his appointment;
f. Manifest lack of independence that is detrimental to
the general body of the stakeholders;
g. Failure, without just cause, to perform any of his
powers and functions under these Rules; or
h. Any of the grounds for removing a trustee .under the
general principles of trusts.
Cases of Conflict of Interest
An individual shall be deemed to have a conflict of interest
if he is so situated as to be materially influenced in the
exercise of his judgment for or against any party to the
proceedings. Without limiting the generality of the
foregoing, an individual shall be deemed to have a conflict
of interest if:
a. He is a creditor, owner, partner or stockholder of the
debtor;
b. He is engaged in a line of business which competes
with-that of the debtor;
c. He is, or was, within 5 years from the filing Of the
petition, a director, officer, owner, partner or employee
of the debtor or any of the creditors, or the auditor or
accountant of the debtor;
d. He is, or was, within 2 years from the filing of the
petition, an underwriter of the outstanding securities of
the debtor;
e. is related by consanguinity or affinity -within the fourth
civil degree to any individual creditor, owner/s of a sale
proprietorship-debtor, partners of a partnership-debtor
or to any stockholder, director, officer, employee or
underwriter of a corporation-debtor; or
f. He has any other direct or indirect material interest in
the debtor or any of the creditors. (FR Rules, Rule 2,
Sec. 22)
Any rehabilitation receiver, member of the management
committee or persons employed or contracted by them
possessing any conflict of interest shall make the
appropriate disclosure either to the court or to the creditors
in case of out-of-court rehabilitation proceedings. Any party
to the proceeding adversely affected by the appointment of
any person with a conflict of interest to any of the positions
Page 236 of 250
COMMERCIAL LAW
enumerated above may however waive his right to object
to such appointment and, if the waiver is unreasonably
withheld, the court may disregard the conflict of interest,
taking into account the general interest of the stakeholders.
Management of Debtor's Business
General Rule: The management of the juridical debtor
shall remain with existing management.
Exception: Displacement of Existing Management by the
Rehabilitation Committee
Upon motion of any interested party and within the soonest
possible time, the court may appoint and direct the
rehabilitation receiver to assume the powers of
management of the debtor, or appoint a management
committee that will undertake the management of the
debtor, upon clear and convincing evidence of any of the
following circumstances:
(A) Actual or imminent danger of dissipation, loss,-wastage
or destruction of the debtors as-sets or other properties; or
(B) Paralyzation of the business operations of the debtor;
or
(C) Gross mismanagement of the debtor, fraud or other
wrongful conduct on the part of, or gross or willful violation
of the Act by the existing management of the debtor or the
owner, partner, director, officer or representative/s in
management of the debtor.
In case the court appoints the rehabilitation receiver to
assume the management of the debtor, the court may:
(1) Require the rehabilitation receiver to post an additional
bond;
(2) Authorize him to engage the services or to employ
persons or entities to assist him in the discharge of his
managerial functions; and
(3) Authorize a commensurate increase in his
compensation.
Rules and Liability on Conflicting Decisions
In case the rehabilitation receiver is a juridical person, the
acts of its designated representative shall be presumed to
be carried out in accordance with the authority vested in
him by the juridical entity which he represents.
In case of conflict, the decision of the governing body of
the juridical entity shall prevail.
However, the rehabilitation receiver and its
representative/s shall remain solidarily liable for all
0
ATENEO CENTRAL
BAR OPERATIONS 2019
obligations and responsibilities, subject to the right of
withdrawal prior to the implementation of the disputed
decision.
Note: Upon assumption of management, the receiver shall
exercise the same powers granted under Sec. 26 in
addition to the powers granted to the management
committee (FR Rules, Rule 2, Sec. 32)
3. Management Committee
Role of the Management Committee
1. Take custody of and control all assets owned or
possessed by the debtor;
2. Take the place of the management and governing body
of the debtor; and
3. Assume the powers, rights and responsibilities of the
debtor (FR Rules, Rule 2, Sec. 33)
Note: A majority of all members shall be necessary for the
management committee to act or make a decision (FR
Rules, Rule 2, Sec. 35)
Composition of the Management Committee
The management committee shall be composed of three
qualified members appointed by the court, as follows:
a. Nominated by the debtor;
b. Nominated by the creditor/s holding more than 50% of
the total obligations of the debtor;
c. A chairman nominated by the first and second
members within 10 days from the appointment (FR
Rules, Rule 2, Sec. 34)
The management committee may overrule or revoke the
actions of the previous management or governing body of
the debtor (FR Rules, Rule Z Sec. 33)
Powers and Duties of the Committee
The specific powers and duties of the management
committee, whose members shall also be considered as
officers of the court, are the following:
a. Investigate the acts, conduct, properties, liabilities, and
financial condition of the corporation, association or
partnership under management;
b. Examine under oath the directors and officers of the
entity and any other witnesses that the committee may
deem appropriate;
c. Report to the court any ascertained fact pertaining to
the causes of the problems, fraud, misconduct,
mismanagement and irregularities committed by any
other person;
Page 237 of 250
COMMERCIAL LAW
d. Use the services of or employ such person or persons,
such as lawyers, accountants, auditors, appraisers
and staff as are necessary to perform its functions and
duties as management committee;
e. Report to the court any material adverse change in the
business of the entity under management;
f. Evaluate the existing equity, capital, assets and
liabilities, earnings, and operations of the entity under
management;
g. Determine and recommend to the court the best way
to salvage and protect the interest of the creditors,
stockholders and the general public, including the
rehabilitation of the entity under management;
h. Prohibit and report to the court any encumbrance,
transfer, or disposition of the debtor's property outside
of the ordinary course of business or beyond what is
allowed by the court
i. Prohibit and report to the court payments made outside
the ordinary course of business;
j. Have unlimited access to the employees, premises,
books, records and financial documents of the entity
under management during business hours;
k. Inspect, copy, photocopy or photograph any
document, paper, book, account or letter, whether in
the possession of the entity or other persons, that
pertain to the business of the debtor;
I. Gain entry into any property owned by he entity under
management for the purposes of inspecting,
measuring, surveying, or taking photos or videos of
any designated relevant object or operation thereon;
m. Bring to the attention of the court any material change
affecting the entity's ability to meet its obligations;
n. Take the appropriate steps to modify, nullify, or revoke
transactions coming to its knowledge which it deems
detrimental or prejudicial to the interest of the entity
under management;
o. Recommend the termination of the proceedings and
the dissolution of the entity if it determines that the
continuance in business of such entity will no longer
work to the best interest of the stakeholders and
creditors;
p. Apply to the court for any order or directive that it may
deem necessary or desirable to aid it in the exercise of
its powers and performance of its duties and functions,
including the power to examine parties and witnesses
under oath; and
q. Exercise such other powers as the court may, from
time to time confer upon it.
(FR Rules, Rule 2, Sec. 33)
ATENEO CENTRAL
BAR OPERATIONS 2019
Qualifications of Members of the Management
Committee
Same as with rehabilitation receivers (FR Rules, Rule 2,
Sec. 36)
Immunity from Suit
The rehabilitation receiver, the members of the
management committee, and all persons they engage
shall not be subject to any action, claim or demand for any
act or omission in good faith in the exercise of their powers
and functions (FR Rules, Rule 2, Sec. 38)
4. Rehabilitation Plan
Rehabilitation Plan
A plan by which the financial well-being and viability of an
insolvent debtor can be restored using various means
including, but not limited to, debt forgiveness, debt
rescheduling, reorganization or quasi- reorganization,
dacion en pago, debt-equity conversion and sale of the
business (or parts of it) as a going concern, or setting-up
of new business entity, or other similar arrangements as
may be approved by the court or creditors. (FR/A, Sec.
4[4)
Approval of the Rehabilitation Plan
Within 20 days from notice to, creditors and stakeholders,
the creditors shall be convened for purposes of voting on
the approval of the Rehabilitation Plan. The Plan shall be
deemed rejected unless approved by aIl classes of
creditors. (FR/A, Sec. 64)
The Plan is deemed to have been approved by a class of
creditors if members of the said class holding more than
50% of the total class vote in favor of the plan (FR Rules,
Rule 2, Sec. 62)
Confirmation of Plan Notwithstanding Rejection
Notwithstanding the rejection of the Rehabilitation Plan,
the court may, motu proprio or upon motion of any
interested party within ten (10) days from notice of the
rejection of the Rehabilitation Plan, confirm the Plan if all
of the following circumstances are present:
a. The Rehabilitation Plan complies with the
requirements specified in the FRIA and the FR Rules;
b. The rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
C. The shareholders, owners or partners of the juridical
debtor lose at least their controlling interest as a result
of the Rehabilitation Plan; and
Page 238 of 250
COMMERCIAL LAW
d. The Rehabilitation Plan would likely provide the
objecting class of creditors with compensation, which
has a net present value greater than that which they
would have received if the debtor were under
liquidation. (FR Rules, Rule 2, Sec. 62)
The rehabilitation receiver shall submit the approved Plan
to the court for confirmation. Within five (5) days from
receipt of the Rehabilitation Plan, the court shall notify the
creditors that the Rehabilitation Plan has been submitted
for confirmation. (FR Rules, Rule 2, Sec. 63)
Objections by creditors may be filed 20 days from notice
(FR Rules, Rule 2, Sec. 64).
Grounds for Objection on the Rehabilitation Plan
a. The creditors' support was induced by fraud;
b. The documents or data relied upon in the
Rehabilitation Plan are materially false or
misleading; or
c. The Rehabilitation Plan is in fact not supported by
the voting creditors. (FR Rules, Rule 2. Sec. 64)
Confirmation of the Rehabilitation Plan
The court shall issue an order confirming the Rehabilitation
Plan in any of the following instances:
a. No objections are filed within the twenty (20)-day
period from receipt of notice from the court that a
Rehabilitation Ran has been submitted to court;
b. The court finds the objections lacking in merit;
c. The basis for the objection has been cured; or
d. The debtor has-complied with the order to cure the
objection.
The court may confirm the Rehabilitation Plan
notwithstanding unresolved disputes over claims if the
Rehabilitation Plan has made adequate provisions for
paying such claims.
If the court finds that there is no substantial likelihood that
the debtor can be rehabilitated, it shall not confirm the
Rehabilitation Plan and, instead, declare a failure of
rehabilitation.
The court shall have the power to approve or implement
the Rehabilitation Plan despite the lack of approval, or
objection from the owners, partners or stockholders of the
insolvent debtor: provided, that the terms thereof are
necessary to restore the financial well-being and viability
of the insolvent debtor.
ATENEO CENTRAL
BAR OPERATIONS 2019
The order confirming the Rehabilitation Plan shall specify
the portions approved by the court and the portions
rejected during consideration or cured by the rehabilitation
receiver. (FR Rules, Rule 2, Sec. 66)
The approval of the Rehabilitation Plan shall not affect the
rights of creditors to pursue separate actions against
general partners of a partnership to the extent they are
liable under relevant legislation for the debts thereof. (FR
Rules, Rule 2, Sec. 68)
Amounts of any indebtedness or obligations reduced or
forgiven in connection with a Plan's approval shall not be
subject to any tax. (FR Rules, Rule 2, Sec. 69)
Minimum Contents of a Rehabilitation Plan
a. Specify the underlying assumptions, the financial
goals and the procedures proposed to accomplish
such goals;
b. Compare the amounts expected to be received by the
creditors under the Rehabilitation Plan with those that
they will receive if liquidation ensues within the next
120 days;
c. Contain information sufficient to give the various
classes of creditors a reasonable basis for determining
whether supporting the Plan is in their financial interest
when compared to the immediate liquidation of the
debtor, including any reduction of principal interest and
penalties' payable to the creditors;
d. Establish classes of voting creditors;
e. Establish subclasses of voting creditors if prior
approval has been granted by the court;
f. Indicate how the insolvent debtor will be rehabilitated
including, but not limited to, debt forgiveness, debt
rescheduling, reorganization or quasi- reorganization,
dacion en pago, debt-equity conversion and sale of the
business (or parts of it) as a going concern, or setting-
up of a new business entity or other similar
arrangements as may be necessary to restore the
financial well-being and viability of the insolvent
debtor;
g. Specify the treatment of each class or subclass
described in subsections (d) and (e);
h. Provide for equal treatment of all claims within the
same class or subclass, unless a particular creditor
voluntarily agrees to less favorable treatment;
i. Ensure that the payments made under the plan follow
the priority established under the provisions of the Civil
Code on concurrence and preference of credits and
other applicable laws;
Page 239 of 250
COMMERCIAL LAW
Maintain the security interest of secured creditors and
preserve the liquidation value of the security unless
such has been waived or modified voluntarily;
k. Disclose all payments to creditors for pre-
commencement debts made during the proceedings
and the justifications thereof;
I. Describe the disputed claims and the provisioning of
funds to account for appropriate payments should the
claim be ruled valid or its amount adjusted;
m. Identify the debtor's role in the implementation of the
Plan;
n. State any rehabilitation covenants of the debtor, the
breach of which shall
be considered a material breach of the Plan;
o. Identify those responsible for the future management
of the debtor and the supervision and implementation
of the Plan, their affiliation with the debtor and their
remuneration;
p. Address the treatment of claims arising after the
confirmation of the Rehabilitation Plan;
q. Require the debtor and its counter-parties to adhere to
the terms of all contracts that the debtor has chosen to
confirm;
r. Arrange for the payment of all outstanding
administrative expenses as a condition to the Plan's
approval unless such condition has been waived in
writing by the creditors concerned;
s. Arrange for the payment of all outstanding taxes and
assessments, or an adjusted amount pursuant to a
compromise settlement with the BIR Or other
applicable tax authorities;
t. Include a certified copy of a certificate of tax clearance
or evidence of a compromise settlement with the BIR;
u. Include a valid and binding resolution of a meeting of
the debtor's stockholders to increase the shares by the
required amount in cases where the Plan
contemplates an additional issuance of shares by the
debtor;
v. State the compensation and status, if any, of the
rehabilitation receiver after the approval of the Plan;
and
w. Contain provisions for conciliation and/or mediation as
a prerequisite to court assistance or intervention in the
event of any disagreement in the interpretation or
implementation of the Rehabilitation Plan.
G. Failure of Rehabilitation
1. Termination of Proceedings (Sec. 74)
The rehabilitation proceedings, upon motion by any
stakeholder or the rehabilitation receiver, shall be
termination by order of the court either declaring a
ATENEO CENTRAL
BAR OPERATIONS 2019
successful implementation of the rehabilitation plan or a
failure of rehabilitation.
There is Failure of Rehabilitation in the following
cases:
a. Dismissal of the petition by the court;
b. Debtor fails to submit a Rehabilitation Plan;
c. Under the Rehabilitation Plan, there is no substantial
likelihood that the debtor can be rehabilitated within a
reasonable period;
d. The Rehabilitation Plan or its amendment is approved
by the court but in the implementation, the debtor fails
to perform its obligations thereunder OR there is a
failure to realize the objectives, targets or goals set
forth therein, including the timelines and conditions for
the settlement of the obligations due to the creditors
and other claimants;
e. The commission of fraud in securing the approval of
the Rehabilitation Plan or its amendment; and
f. Other analogous circumstances as may be defined by
the rules of procedure
2. Action of Court Upon Termination (Sec. 74)
Upon -a breach of, or upon a failure of the Rehabilitation
Plan the court upon motion by an affected party may:
a. Issue an order directing that the breach be cured within
a specified period of time, falling which the
proceedings may be converted to a liquidation;
b. Issue an order converting the proceedings to a
liquidation;
c. Allow the debtor or rehabilitation receiver to submit
amendments to the Rehabilitation Plan, the approval
of which shall be governed by the same requirements
for the approval of a Rehabilitation Plan;
d. Issue any other order to remedy the breach consistent
with the present regulation, other applicable law and
the best interests of the creditors; or
e. Enforce the-applicable provisions of the Rehabilitation
Plan through a writ of execution.
3. Effects of Termination (Sec. 75)
Discharge of the rehabilitation receiver subject to this
submission of a final accounting and Lifting of the Stay
Oorder and any other court order holding in abeyance any
action for the enforcement of a claim against the debtor
Provided, however, that if the termination of proceedings
is due to failure of rehabilitation or dismissal of the petition
for reasons other than technical grounds, the proceedings
shall be immediately converted to liquidation as provided
in Sec. 92.
Page 240 of 250
COMMERCIAL LAW
2. Pre-Negotiated Rehabilitation
Pre-Negotiated Rehabilitation Plans, when approved by
the court, have the same legal effect as confirmation of a
judicially supervised plan.
Pre-Negotiated Rehabilitation Petition
An insolvent debtor, by itself or jointly with any of its
creditors, may file a verified petition with the court for the
approval of a pre-negotiated Rehabilitation Plan which has
been endorsed or approved by creditors holding at least
two-thirds (2/3) of the total liabilities of the debtor, including
secured creditors holding more than 50% of the total
secured claims of the debtor and unsecured creditors
holding more than 50% of the total unsecured claims of the
debtor.
The petition shall include as a minimum:
a. Schedule of the debtor's debts and liabilities;
b. Inventory of the debtor's assets;
c. The pre-negotiated Rehabilitation Plan, including the
names of at least 3 qualified nominees for
rehabilitation receiver; and
d. Summary of disputed claims against the debtor and a
report on the provisioning of funds to account for
appropriate payments should any such. claim-s be ruled
valid or their amounts adjusted.
If Petition Deemed Sufficient
Within five (5) working days, and after determination that
the petition is sufficient in form and substance, -the court
shall issue an Order which shall;
a. 'Identify the debtor, its principal business of activity/ies
and its principal place of business;
b. Declare that the debtor is under rehabilitation;
c. Summarize the grounds for the filling of the petition;
d. Direct the publication of the Order in a newspaper of
general circulation in the Philippines once a week for
at least 2 consecutive weeks. with the first publication
to be made within 7 days from the time of its issuance;
e. Direct the service by personal delivery of a copy of the
petition on each creditor who is not a petitioner holding
at least 10')/0 of the total liabilities -of the debtor, as
determined in the schedule attached to the petition,
within 3 days;
f. State that copies of the petition and the Rehabilitation
Plan are available for examination and copying by any
interested party;
g. State that creditors and other interested parties
opposing the petition or Rehabilitation Plan may file
their objections or comments thereto within a period of
ATENEO CENTRAL
BAR OPERATIONS 2019
not later than 20 days from the second publication of
the Order;
h. Appoint a rehabilitation receiver, if provided for in the
Plan; and
Include a Suspension or Stay Order as described in
this Act.
Approval of the Pre-Negotiated Plan
Within 10 days from the date of the second publication of
the Order, the court shall approve the Rehabilitation Plan
unless a creditor or other interested party submits an
objection to it in accordance with the next succeeding
section.
Objections to the Pre-Negotiated Plan
Any creditor or other interested party may submit to the
court a verified objection to the petition or the
Rehabilitation Plan not later than 8 days from the date of
the second publication of the Order.
The grounds for objection are limited to the following:
a. Allegations in the petition or the Rehabilitation Plan or
the attachments thereto are materially false or
misleading;
b. Majority of any class of creditors do not in fact support
the Rehabilitation Plan;
c. The Rehabilitation Plan fails to accurately account for
a claim against the debtor and the claim in not
categorically declared as a contested claim; or
d. Support of the creditors, or any of them was induced
by fraud.
Copies of any objection to the petition of the Rehabilitation
Plan shall be served on the debtor, the rehabilitation
receiver (if applicable), the secured creditor with the largest
claim and who supports the Rehabilitation Plan, and the
unsecured creditor with the largest claim and who supports
the Rehabilitation Plan.
3. Out of Court or Informal Rehabilitation
a.Minimum Requirements
For an out-of-court or informal restructuring/workout
agreement or Rehabilitation Plan to qualify, it must meet
the following minimum requirements:
4. Debtor must agree to the out-of-court or informal
restructuring/workout agreement or Rehabilitation
Plan;
5. Approved by creditors representing at least 67% of the
secured obligations of the debtor;
6. Approved by creditors represent at least 75% of the
unsecured obligations of the debtor; and
Page 241 of 250
COMMERCIAL LAW
7. Approved by creditors holding at least 85% of the total
liabilities, secured and unsecured, of the debtor.
(Secs. 83 and 84)
b.Standstill Period
A standstill period that may be agreed upon by the parties
pending negotiation and finalization of the out-of-court or
informal restructuring/workout agreement or Rehabilitation
Plan contemplated herein shall be effective and
enforceable not only against the contracting parties but
also against the other creditors: Provided, that:
a. Such agreement is approved by creditors
representing more than 50% of the total
liabilities of the debtor;
b. Notice thereof is published in a newspaper of
general circulation in the Philippines once a
week for 2 consecutive weeks; and
c. The Standstill period DOES NOT exceed 120
days from the date of effectivity
Note: Notice must invite creditors to participate in the
negotiation for out-of-court rehabilitation or restructuring
agreement and notify them that said agreement will be
binding on all creditors if the required majority votes
prescribed in Sec. 84 are met.
c.Cram Down Effect
Two Aspects of the Cram Down Power of The
Rehabilitation Court
a. Approval despite opposition; and
b. Binding effect of the approved plan
Cram-Down
The power of the rehabilitation court to approve and
implement a rehabilitation plan notwithstanding the
objection of the majority of creditors. The "cram-down"
clause is necessary to curb the majority creditors' natural
tendency to dictate their own terms and conditions to the
rehabilitation, absent due regard to the greater long-term
benefit of all stakeholders. Otherwise stated, it forces the
creditors to accept the terms and conditions of the
rehabilitation plan, preferring long-term viability over
immediate but incomplete recovery. (Bank of the Philippine
Islands vs. Sarabia Manor Hotel Corporation, GR No.
175844, 2013)
The Court may approve a rehabilitation plan over the
objection of the creditors, if, in its judgment, the
rehabilitation of the debtors is feasible and the opposition
of the creditors is manifestly unreasonable. The criteria for
manifest unreasonableness are:
ATENEO CENTRAL
BAR OPERATIONS 2019
a. The rehabilitation plan complies with the requirements
specified in Section 18 of Rule 3, A.M. No. 00-8-10-
SC;
b. The rehabilitation plan would provide the objecting
class of creditors with payments whose present value
projected in the plan would be greater than that which
they would have received if the assets of the debtor
were sold by a liquidator within a six (6)month period
from the date of filing of the petition; and
c. The rehabilitation receiver has recommended approval
of the plan. (Victorio-Aquino v. Pacific Plans, G.R. No.
193108, 2014)
Effects of Confirmation of Rehabilitation Plan
a. The Plan and its provisions shall bind the debtor and
all persons who may be affected thereby, including the
creditors, whether or not such persons have
participated in the proceedings or opposed the Plan or
whether or not their claims have been scheduled;
b. The debtor shall comply with the provisions of the Plan
and shall take all actions necessary to carry them out;
c. Payments shall be made to the creditors in accordance
with the provisions of the Plan;
d. Contracts and other arrangements between the debtor
and its creditors shall remain valid and continue to
apply to the extent that they do not conflict with the
provisions of the Plan;
e. Any compromises on amounts or rescheduling of
timing of payments by the debtor shall be binding on
the creditors regardless of whether or not the Plan is
successfully implemented; and
f. Claims arising after the approval of the Plan that are
otherwise not treated by the Plan are not subject to any
Suspension Order. (FR Rules, Rule 2, Sec. 67)
D. Stay or Suspension Order
A Stay or Suspension Order has the following effects:
a. Suspend all actions or proceedings, in court or
otherwise, for the enforcement of claims against the
debtor;
b. Suspend all actions to enforce any judgment,
attachment or other provisional remedies against the
debtor;
c. Prohibit the debtor from selling, encumbering,
transferring or disposing in any manner any of its
properties except in the ordinary course of business;
and
d. Prohibit the debtor from making any payment of its
liabilities outstanding as of the commencement date
except as may be provided herein. (FR Rules, Rule 1,
Sec. 51r- 1)
Page 242 of 250
COMMERCIAL LAW
The issuance of the Commencement Order and the
Suspension or Stay Order, and any other provision of the
Act, shall not in any way diminish or impair the security or
lien of a secured creditor, or the value of his lien or security,
except that his right to enforce the security or lien may be
suspended during the term of the Stay Order. The court
may allow the enforcement of the security or lien if the
property is not necessary fo,r the rehabilitation of the
debtor. (FR Rules, Rule 2, Sec. 59)
The Stay or Suspension Order does not apply in the
following cases:
a. Cases already pending appeal in the Supreme Court
as of commencement date Provided, That any final
and executory judgment arising from such appeal shall
be referred to the court for appropriate action;
b. Subject to the discretion of the court, to cases pending
or filed at a specialized court or quasi-judicial agency
which, upon determination by the court is capable of
resolving the claim more quickly, fairly and efficiently
than the court; Provided, That any final and executory
judgment of such court or agency shall be referred to
the court and shall be treated as a non-disputed claim;
c. Enforcement of claims against sureties and other
persons solidarily liable with the debtor, and third party
or accommodation mortgagors as well as issuers of
letters of credit, unless the property subject of the third
party or accommodation mortgage is necessary for the
rehabilitation of the debtor as determined by the court
upon recommendation by the rehabilitation receiver;
d. Any form of action of customers or clients of a
securities market participant to recover or otherwise
claim moneys and securities entrusted to the latter in
the ordinary course of the latter's business as well as
any action of such securities market participant or the
appropriate regulatory agency or self-regulatory
organization to pay or settle such claims or liabilities;
e. Actions of a licensed broker or dealer to sell pledged
securities of a debtor pursuant to a securities pledge
or margin agreement for the settlement of securities
transactions in accordance with the provisions of the
Securities Regulation Code and its implementing rules
and regulations;
f. Clearing and settlement of financial transactions
through the facilities of a clearing agency or similar
entities duly authorized, registered and/or recognized
by the appropriate regulatory agency like the Bangko
Sentral ng Pilipinas (BSP) and the SEC as well as any
form of actions of such agencies or entities to
reimburse themselves for any transactions settled for
the debtor; and
ATENE0 CENTRAL
BAR OPERATIONS 2019
g. Any criminal action against individual debtor or owner,
partner, director or officer of a debtor shall not be
affected by any proceeding commend under this Act.
(FR Rules, Rule 2, Sec. 10)
C. Liquidation
a. Kinds of Debtors
i. Juridical Debtors
1. Voluntary Liquidation
Party Applicant
An insolvent debtor may apply for liquidation by filing a
petition for liquidation
Where to file the application
RTC which has jurisdiction over its principal office as
specified in its articles of incorporation or partnership.
Where the principal office of the corporation or partnership
as registered with the Securities and Exchange
Commission (SEC) is in Metro Manila, the petition must be
filed in the RTC Court of the city or municipality where the
head office is located.
Petition for Voluntary Liquidation
The petition shall be verified, shall establish the insolvency
of the debtor and shall indicate the names of at least 3
nominees to the position of liquidator.
It shall include, as minimum attachments, the following:
a. Certificate attesting to the holding of a meeting of the
Board of Directors of a stock corporation or the Board
of Trustees of a non-stock corporation, as the case
may be, called for the purpose and the approval during
the meeting of a resolution to file the petition, signed
by the secretary of the meeting and at least a majority
of the member of the Board present during the
meeting;
b. Certificate attesting to the holding of a meeting of the
stockholders, members or partners comprising the
debtor, as the case may be, called for the purpose and
the approval during the meeting of a resolution to file
the petition by the stockholders holding at least two-
thirds (2/3) of the outstanding capital stock of the stock
corporation, or two-thirds (2/3) of the members or
partners in case of a non-stock corporation,
association or partnership, as the case may be, signed
by the chairman and the secretary of the meeting
Page 243 of 250
COMMERCIAL LAW
c. Schedule of the debtor's debts and liabilities including
a list of creditors with their addresses, amounts of
claims and collaterals, or securities, if any;
d. Inventory of all its assets including receivables and
claims against third parties; and
e. Schedule of current income and expenditures within
three (3) months prior to the filing of the petition;
f. List of all properties acquired by the debtor in the
immediately preceding two (2) years;
g. List of all properties sold, disposed of, or donated by
the debtor in the immediately preceding two (2) years;
h. Schedule of the debtor's executory contracts and
unexpired leases;
i. Audited financial statements of the debtor for the
immediately preceding three (3) years; and
Income tax return of the debtor for the immediately
preceding year
2. Involuntary Liquidation
Party Applicant to Petition for Liquidation
The applicants must be made up of 3 or more creditors
whose claim(s) is/are:
a. At least P1,000,000; or
b. At least 25% of the subscribed capital stock or
partners' contributions (FLSP Rules, Rule 2, Sec.
4)
Where to file the Petition
RTC which has jurisdiction over its principal office as
specified in its articles of incorporation or partnership.
Where the principal office of the corporation or partnership
as registered with the Securities and Exchange
Commission (SEC) is in Metro Manila, the petition must be
filed in the RTC Court of the city or municipality where the
head office is located.
Petition for Involuntary Liquidation
The motion shall be verified, shall indicate the names of at
least 3 nominees to the position of liquidator, and must
show that:
a. There is no genuine issue of fact or law on the claims/s
of the petitioner/s, and that the due and demandable
payments thereon have not been made for at least one
hundred eighty (180) days or that the debtor has failed
generally to meet its liabilities as they fall due; and
b. There is no substantial likelihood that the debtor may
be rehabilitated
The petition shall also include information to the best
knowledge of the petitioners on:
ATENEO CENTRAL
BAR OPERATIONS 2019
a. The schedule of debts and liabilities, including a list of
its known creditors with their addresses, amounts of
claims and collaterals, or securities, if any;
b. The debtor's assets, including receivables and claims
against third parties; and
C. Audited financial statements of the debtor for the
immediately preceding three (3) years. (FLSP Rules,
Rule 2, Sec. 4)
The petitioners shall post a bond in an amount at least
equal in value to the aggregate of their claims, conditioned
upon payment to the debtor of all expenses and damages
it may incur by reason of the filing of the petition if the same
is later denied or dismissed by the court, or withdrawn by
the petitioners without the consent of the debtor. (FLSP
Rules, Rule 2, Sec. 5)
ii. Individual Debtors
1. Suspension of Payments
Party Applicant
An individual debtor who, possessing sufficient property to
cover all his debts but foreseeing the impossibility of
meeting them when they respectively fall due, may file a
verified petition that he be declared in the state of
suspension of payments by the court of the province or city
in which he has resides for six (6) months prior to the filing
of his petition. (FLSP Rules, Rule 3, Sec. 1)
Petition for Suspension of Payments
The petition shall indicate the names of at least 3 nominees
to the position of commissioner and shall include, as
minimum attachments, the following:
a. Schedule of debts and liabilities, including a list of
creditors with their addresses, amount of claims and
collaterals, if any;
b. Inventory of all the debtor's assets, including
receivables and claims against third parties;
c. Schedule of current income and expenditures within
three (3) months prior to the filing of the petition;
d. Income tax return of the debtor for the immediately
preceding year;
e. List of all properties acquired by the debtor in the
immediately preceding two (2) years;
f. List of all properties sold, disposed of, or donated by
the debtor in the immediately preceding two (2) years;
g. Schedule of the debtor's executory contracts and
unexpired leases; and
h. Proposed agreement with the creditors. (FLSP Rules,
Rule 3, Sec. 1)
Page 244 of 250
COMMERCIAL LAW
Court Action in Suspension of Payments
If the court finds the petition sufficient in form and
substance, it shall, within 5 working days from the filing of
the petition, issue a Suspension of Payments Order:
a. Prohibiting creditors from suing or instituting
proceedings for collection against the debtor, except:
(i) creditors having claims for personal labor,
maintenance, expense of last illness and funeral of the
wife or children of the debtor incurred within 60 days
immediately prior to the filing of the petition; and (ii)
secured creditors;
b. Calling a meeting of all the creditors named in the
schedule of debts and 'liabilities at such time not less
than 15 days nor more than 40 days from the date of
such Order and designating the date, time and place
of the meeting;
c. Directing such creditors to prepare and present written
evidence of their claims before the scheduled
creditors' meeting;
d. Directing the publication of the said order in a
newspaper of general circulation published in the
province or city in which the petition is filed once a
week for 2 consecutive weeks, with the first publication
to be made within seven 7 days from the time of the
issuance .of the Order;
e. Directing the -clerk of court to cause the sending of a
copy of the Order by -registered mail, postage prepaid,
to all creditors named in the schedule of debts and
liabilities;
f. Forbidding the individual debtor from selling,
transferring, encumbering or disposing in any manner
of his property, except those used in the ordinary
operations of commerce or of industry in which the
petitioning individual debtor is engaged so long as the
proceedings relative to the suspension of payments
are pending;
g. Prohibiting the individual debtor from making any
payment outside of the necessary or legitimate
expenses of his business or industry, so long as the
proceedings relative to the suspension of payments
are pending; and
h. Appointing a commissioner to preside over the
creditors' meeting. (FLSP Rules, Rule 3, Sec. 2)
Actions Suspended by a Suspension Order
Upon motion filed by the individual debtor, the court may
issue an order suspending any pending execution against
the individual debtor. Properties held as security by
secured creditors shall not be the subject of such
suspension order.
ATENEO CENTRAL
BAR OPERATIONS 2019
The suspension order shall lapse when three (3) months
shall have passed without the proposed agreement being
accepted by the creditors or as soon as such agreement is
denied. (FLSP Rules, Rule 3, Sec. 3)
2. Voluntary Liquidation
Party Applicant
An individual debtor whose properties are not sufficient to
cover his liabilities, and owing debts exceeding
Php500,000.00, may apply to be discharged from his debts
and liabilities by filing a verified petition with the court of the
province or city in which he has resided for 6 months prior
to the filing of such petition. (FLSP Rules, Rule 3, Sec. 11)
Petition for Voluntary Liquidation
The petition shall indicate the names of at least 3 nominees
to the position of commissioner and shall include, as
minimum attachments, the following:
a. Schedule of debts and liabilities, including a list of
creditors with their addresses, amount of claims and
collaterals, if any;
b. Inventory of all the debtor's assets, including
receivables and claims against third parties;
c. Schedule of current income and expenditures within
three (3) months prior to the filing of the petition;
d. Income tax return of the debtor for the immediately
preceding year;
e. List of all properties acquired by the debtor in the
immediately preceding two (2) years;
f. List of all properties sold, disposed of, or donated by
the debtor in the immediately preceding two (2) years;
and
g. Schedule of the debtor's executory contracts and
unexpired leases (FLSP Rules, Rule 3, Sec. 11)
If the court finds the petition sufficient in form and
substance it shall, within five (5) working days issue the
Liquidation Order (FLSP Rules, Rule 3, Sec. 12)
Note: The official copy of the FLSP Rules states Rule 3,
Sec. 12 as Rule 3, Sec. 3.
3. Involuntary Liquidation
Party Applicant
Any creditor or group of creditors with a claim of, or with
claims aggregating at least Php500,000.00 may file a
verified petition for liquidation with the court of the province
or city in which the individual debtor resides. (FLSP Rules,
Rule 3, Sec. 13)
Page 245 of 250
COMMERCIAL LAW
Acts of Insolvency
The following shall be considered acts of insolvency, and
the petition for liquidation shall set forth or allege at least
one of such acts:
a. Such person is about to depart or has departed from
the Republic of the Philippines, with intent to defraud
his creditors;
b. Being absent from the Republic of the Philippines, with
intent to defraud his creditors, he remains absent;
c. He conceals himself to avoid the service of legal
process for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;
d. He conceals, or is removing, any of his property to
avoid its being attached or taken on legal process;
e. He has suffered his property to remain under
attachment or legal process for 3 days for the purpose
of hindering or delaying the liquidation or of defrauding
his creditors;
f. He has confessed or offered to allow judgment in favor
of any creditor or claimant for the purpose of hindering
or delaying the liquidation or of defrauding any
creditors or claimant;
g. He has willfully suffered judgment to be taken against
him by default for the purpose of hindering or delaying
the liquidation or of defrauding his creditors;
h. He has suffered or procured his property to be taken
on legal process with intent to give a preference to one
or more of his creditors and thereby hinder or delay the
liquidation or defraud any one of his creditors;
i. He has made any assignment, gift, sale, conveyance
or transfer of his estate, property, rights or credits with
intent to hinder or delay the liquidation or defraud his
creditors;
He has, in contemplation of insolvency, made any
payment, gift, grant, sale, conveyance or transfer of his
estate, property, rights or credits;
k. Being a merchant or tradesman, he has generally
defaulted in the payment of his current obligations for
a period of 30 days;
I. For a period of 30 days, he has failed, after demand,
to pay any moneys deposited with him or received by
him in a fiduciary; and
m. An execution having been issued against him on final
judgment for money, he shall have been found to be
without sufficient property subject to execution to
satisfy the judgment. (FLSP Rules, Rule 3, Sec. 13)
Court Action in Involuntary Liquidation
The court shall issue an Order requiring the individual
debtor to show cause, at a time and place to be fixed by
the said court, why he should not be adjudged an insolvent.
(FLSP Rules, Rule 3, Sec. /5)
ATENEO CENTRAL
BAR OPERATIONS 2019
Upon good cause shown, the court may issue an Order
forbidding the individual debtor from making payments of
any of his debts, and transferring any property belonging
to him. However, nothing contained herein shall affect or
impair the rights of a secured creditor to enforce his lien in
accordance with its terms.
2. Procedure
i. Conversion of Rehabilitation Proceedings to
Liquidation Proceedings
During the pendency of court-supervised or pre-negotiated
rehabilitation proceedings, the court may order the
conversion of rehabilitation proceedings to liquidation
proceedings pursuant to:
a. Section 25(c) of the FRIA which states that
conversions can be done when the debtor is insolvent
and there is no substantial likelihood for the debtor to
be successfully rehabilitated; or
b. Section 72 of the FRIA or if no Rehabilitation Plan is
confirmed within 1 year from the date of the filing of a
petition to confirm the rehabilitation plan, the
proceedings may, upon motion or motu proprio, be
converted into one for the liquidation of the debtor; or
c. Section 75 of the FRIA or if termination of proceedings
is due to failure of rehabilitation or dismissal of the
petition for reasons other than technical grounds, the
proceedings shall be immediately converted to
liquidation; or
d. Section 90 of the FRIA or if during the pendency of
court-supervised or pre-negotiated rehabilitation
proceedings, the debtor may also initiate liquidation
proceedings by filing a motion in the same court where
the rehabilitation proceedings are pending to 'convert
the rehabilitation proceedings into liquidation
proceedings.
e. At any other time upon the recommendation of the
rehabilitation receiver that the rehabilitation of the
debtor is not feasible.
Motion to Convert Rehabilitation Proceedings Into
Liquidated Proceedings
At any time during the pendency of or after a rehabilitation
court-supervised or pre-negotiated rehabilitation
proceedings, creditors may compel a debtor who is
undergoing rehabilitation to liquidate instead. The following
are the requisites:
The applicants must be made up of 3 or more creditors
whose claim(s) is/are:
a. At least P1,000,000; or
Page 246 of 250
COMMERCIAL LAW
b. At least 25% of the subscribed capital stock or
partners' contributions
The motion shall be verified & shall contain/set forth the
same matters mentioned in the FLSP Rules, Sec. 4. (FLSP
Rules, Rule 2, Sec. 6)
Action on the Petition or Motion
If the petition or motion is sufficient in form and substance,
the court shall issue an Order:
• Directing the publication of the petition or motion in a
newspaper of general circulation once a week for 2
consecutive weeks;
• Directing the debtor and all creditors who are not the
petitioners to file their comment on the petition or
motion within 15 days from the date of last publication;
and
• Directing that a copy of the petition or motion be served
on the debtor and on all known creditors, unless they
exceed 20 in number, in which case, service shall be
made on at least the first 20 largest known creditors of
the debtor in terms of credits held. However, if there
are more than 20 known creditors (who are not
petitioners) and one or more of them acquired their
credit/s within the 6-month period immediately
preceding the filing of the petition, the number of
creditors to be served copies of the petition shall be
increased by the same number.
If, after considering the comments filed, the court
determines that the petition or motion is meritorious, it shall
issue the Liquidation Order. (FLSP Rules, Rule 2, Sec. 8)
After notice and hearing, the court where rehabilitation
proceedings are pending may also order the conversion of
rehabilitation proceedings into liquidation proceedings in
those cases authorized by law, or at any other time upon
the recommendation of the rehabilitation receiver or
management committee that the rehabilitation of the
debtor is no longer feasible. (FLSP Rules, Rule 2, Sec. 9)
Thereupon, the court shall issue the Liquidation Order.
ii. Liquidation Order
The Liquidation Order shall:
a. Declare the debtor insolvent;
b. Order the liquidation of the debtor and, in the case of
a juridical debtor, declare it as dissolved;
c. Order the sheriff to take possession and control of all
the property of the debtor, except those that may be
exempt from execution;
ATENEO CENTRAL
BAR OPERATIONS 2019
d. Order the publication of the petition or motion in a
newspaper of general circulation once a week for 2
consecutive weeks;
e. Direct payments of any claims and conveyance of any
property due the debtor to the liquidator;
f. Prohibit payments by the debtor and the transfer of any
property by the debtor;
g. Direct all creditors to file their claims with the liquidator
within the period set by the rules of procedure
h. Authorize the payment of administrative expenses as
they become due;
i. State that the debtor and creditors who are not
petitioneris may submit the names of other nominees
to the position of liquidator; and
Set the case for hearing for the election and
appointment of the liquidator, which date shall not be
less than 30 days nor more than 45 days from the date
of the last publication. (FLSP Rules, Rule 4, Sec. 2)
iii. Effects of the Liquidation Order
Upon issuance of the Liquidation Order:
a. Juridical debtor shall be deemed dissolved and its
corporate or juridical existence terminated;
b. Legal title to and control of all the assets of the debtor,
except those that may be exempt from execution, shall
be deemed vested in the liquidator or, pending his
election or appointment, with the court;
c. All contracts of the debtor shall be deemed terminated
and/or breached, unless the liquidator, within 90 days
from the date of his assumption of office, declares
otherwise and the contracting party agrees;
d. No separate action for the collection of an unsecured
claim shall be allowed. Such actions already pending
will be transferred to the Liquidator for him to accept
and settle or contest. If the liquidator contests or
disputes the claim, the court shall allow, hear and
resolve such contest except when the case is already
on appeal. In such a case, the suit may proceed to
judgment, and any final and executor judgment therein
for a claim against the debtor shall be filed and allowed
in court; and
e. No foreclosure proceeding shall be allowed for a
period of 180 days. (FLSP Rules, Rule 4, Sec. 3)
iv. Rights of Secured Creditors
The Liquidation Order shall not affect the right of a secured
creditor to enforce his lien in accordance with the
applicable contract or law, unless he waives his right.
(FLSP Rules, Rule 4, Sec. 4)
Options available to a secured creditor
A secured creditor may:
Page 247 of 250
COMMERCIAL LAW
a. Waive his right under the security or lien, prove his
claim in the liquidation proceedings and share in the
distribution of the assets of the debtor; or
b. Maintain his rights under the security or lien.
Failure to file a manifestation means that the secured
creditor is deemed to have opted to maintain his right
under the security or lien (FLSP Rules, Rule 4, Sec. 5)
Nature of Waiver
A secured creditor shall not be deemed to have waived his
right under the security or lien unless the waiver is made in
a public document, in unequivocal language, and with full
knowledge of the consequences of his action. If a secured
creditor waives his right, he shall be entitled to participate
in the liquidation proceedings as an unsecured creditor.
(FLSP Rules, Rule 4, Sec. 6)
If the secured creditor maintains his rights under the
security or lien:
a. The value of the property may be fixed in a manner
agreed upon by the creditor and the liquidator. When
the value of the property is less than the claim it
secures, the liquidator may convey the property to the
secured creditor and the latter will be admitted in the
liquidation proceedings as a creditor for the balance. If
its value exceeds the claim secured, the liquidator may
convey the property to the creditor and waive the
debtor's right of redemption upon receiving the excess
from the creditor;
b. Liquidator may sell the property and satisfy the
secured creditor's entire claim from the proceeds of the
sale; or
c. Secure creditor may enforce the lien or foreclose on
the property pursuant to applicable laws. (FLSP Rules,
Rule 4, Sec. 7)
Powers, Duties, and Responsibilities of the Liquidator
The Liquidator
The Liquidator is a natural person or juridical entity
appointed as such by the court and entrusted with such
powers and duties.
If the liquidator is a juridical entity, it must designated a
natural person who possesses all the qualifications and
none of the disqualifications as its representative, it being
understood that the juridical entity and the representative
are solidarity liable for all obligations and responsibilities of
the liquidator. (FLSP Rules, Rule 4, Sec. 8)
ATENEO CENTRAL
BAR OPERATIONS 2019
Election of a Liquidator
The creditors entitled to vote will elect the liquidator in open
court. The nominee receiving the highest number of votes
cast in terms of amount of claims and who is qualified shall
be appointed as the liquidator.
Only creditors who have filed their claims within the period
set by the court, and whose claims are not barred by the
statute of limitations, will be allowed to vote in the election
of the liquidator.
A secured creditor will not be allowed to vote unless:
a. He waives his security or lien; or
b. Has the value of the property subject of his
security or lien fixed by agreement with the
liquidator, and is admitted for the balance of his
claim. (FLSP Rules, Rule 4, Sec. 9)
Appointment of a Liquidator
The court may appoint the liquidator if:
a. On the date set for the election of the liquidator,
the creditors do not attend;
b. Creditors who attend, fail or refuse to elect a
liquidator;
c. After being elected, the liquidator fails to qualify;
or
d. Vacancy occurs for any reason whatsoever, In any
of the cases provided herein, the court may
instead set another hearing of the election of the
liquidator.
Qualifications of a Liquidator
The liquidator shall have the same qualifications as the
rehabilitation receiver:
• Citizen of the Philippines or a resident of the
Philippines in the 6months immediately preceding
his nomination;
• Good moral character and with acknowledged
integrity, impartiality and independence;
• Has the requisite knowledge of insolvency and
other relevant commercial laws, rules and
procedures, as well as the relevant training and/or
experience that may be necessary to enable him
to properly discharge the duties and obligations of
a rehabilitation receiver; and
• Has no conflict of interest: Provided, That such
conflict of interest may be waived, expressly or
impliedly, by a party who may be prejudiced
thereby. (FLSP Rules, Rule 4, Sec. 8)
Powers, Duties and Responsibilities of a Liquidator
The liquidator shall be deemed an officer of the court with
the principal duly of preserving and maximizing the value
Page 248 of 250
COMMERCIAL LAW
and recovering the assets of the debtor, with the end of
liquidating them and discharging to the extent possible all
the claims against the debtor. The powers, duties and
responsibilities of the liquidator shall include, but not
limited to:
a. Sue and recover all the assets, debts and claims,
belonging or due to the debtor;
b. Take possession of all the property of the debtor
except property exempt by law from execution;
c. Sell, with the approval of the court, any property of the
debtor which has come into his possession or control;
d. Redeem all mortgages and pledges, and so satisfy any
judgement which may be an encumbrance on any
property sold by him;
e. Settle all accounts between the debtor and his
creditors, subject to the approval of the court;
f. Recover any property or its value, fraudulently
conveyed by the debtor;
g. Recommend to the court the creation of a creditors'
committee which will assist him in the discharge of the
functions and which shall have powers as the court
deems just, reasonable and necessary; and
h. Upon approval of the court, to engage such
professional as may be necessary and reasonable to
assist him in the discharge of his duties.
In addition to the rights and duties of a rehabilitation
receiver, the liquidator, shall have the right and duty to take
all reasonable steps to manage and dispose of the debtor's
assets with a view towards maximizing the proceedings
therefrom, to pay creditors and stockholders, arid to
terminate the debtor's legal existence. Other duties of the
liquidator in accordance with this section may be
established by procedural rules. (FLSP Rules, Rule 4, Sec.
12)
Removal of Liquidator
The liquidator may be removed at any time by the court
either motu proprio or upon motion by the debtor or any
creditor or creditors on any of the following grounds:
a. He did not actually receive the highest number of votes
during the election for liquidator;
b. Incompetence, gross negligence, failure to -perform or
exercise the proper degree of care in the performance
of his duties and powers;
c. Lack of a particular or specialized competency
required by the specific case;
d. Illegal acts or conduct in the performance of his duties
and powers;
e. Lack of any of the qualifications stated under Section
8 of the FLSP Rules or presence of any
disqualification;
ATENEO CENTRAL
BAR OPERATIONS 2019
f. Conflict of interest, unless, waived, expressly or
impliedly, by a party who may be prejudiced thereby;
9- Partiality or lack of independence; or
h. Any other ground analogous to the foregoing. (FLSP
Rules, Rule 4, Sec. 13)
3. Determination of Claims
Registry of Claims
Within 20 days from his assumption into office the
liquidator shall prepare a preliminary registry of claims of
secured and unsecured creditors. Secured creditors who
have waived their security or lien, or have fixed the value
of the property subject of their security or lien by
agreement with the liquidator and is admitted as a creditor
for the balance, shall be considered as unsecured
creditors.
The liquidator shall make the registry available for public
inspection and provide publication notice to creditors,
individual debtors owner/s of the sole proprietorship-
debtor, the partners of the partnership-debtor and
shareholders or members of the corporation-debtor, on
where and when they may inspect it. All claims must be
duly proven before being paid. (FLSP Rules, Rule 4, Sec.
17)
Challenging/Opposing Claims
Within thirty 30 days from the expiration of the period for
filing of applications for recognition of claims:
1. creditors,
2. individual debtors,
3. owner/s of the sole proprietorship-debtor,
4. partners of the partnership-debtor and
5. shareholders or members of the corporation-debtor
and
6. other interested parties
may submit a challenge to claim or claims to the cOurt,
serving a certified copy on the liquidator and the creditor
holding the challenged claim.
Upon the expiration of the 30 day period, the rehabilitation
receiver shall submit to the court the registry of claims
containing the undisputed claims that have not been
subject to challenge. Such claims shall become final upon
the filling of the register and may be subsequently set aside
only on grounds or fraud, accident, mistake or inexcusable
neglect. (FLSP Rules, Rule 4, Sec. 19)
Right of Set-Off
Page 249 of 250
COMMERCIAL LAW
If the debtor and creditor are mutually debtor and creditor
of each other, one debt shall be set off against the other
and only the balance, if any, shall be allowed in the
liquidation proceedings. (FLSP Rules, Rule 4, Sec. 18)
vii. Liquidation Plan
Within 3 months from his assumption into office, the
Liquidator shall submit a Liquidation Plan to the court. The
Liquidation Plan shall, as a minimum enumerate all the
assets of the debtor and a schedule of liquidation of the
assets and payment of the claims. (FLSP Rules, Rule 4,
Sec. 23)
Properties Exempt from Liquidation
It shall be the duty of the court, upon petition and after
hearing, to exempt and set apart, for the use and benefit of
the said insolvent, such real and personal property as is by
law exempt from execution, and also a homestead.
However, no such petition shall be heard as aforesaid until
it is first proved that notice of the hearing of the application
therefor has been duly given by the clerk, by causing such
notice to be posted it at least 3 public places in the province
or city at least 10 days prior to the time of such hearing,
which notice shall set forth the name of the said insolvent
debtor, and the time and place appointed for the hearing of
such application, and shall briefly indicate the homestead
sought to be exempted or the property sought to be set
aside; and the decree must show that such proof was
made to the satisfaction of the court, and shall be
conclusive evidence of that fact.
Preference of Credit
The Liquidation Plan and its Implementation shall ensure
that the concurrence and preference of credits as
enumerated in the Civil Code and other relevant laws shall
be observed, unless a preferred creditor voluntarily waives
his preferred right. For purposes of this chapter, credits for
services rendered by employees or laborers to the debtor
shall enjoy first preference under Article 2244 of the Civil
Code, unless the claims constitute legal liens under Article
2241 and 2242 thereof. (FLSP Rules, Rule 4, Sec. 25)
Court Action upon Completion of Liquidation —
Removal from Registry of Legal Entries and
Termination of Liquidation Proceeding
Upon determining that the liquidation has been completed,
the court shall issue an Order approving the report and
ordering the SEC to remove the debtor from the registry of
legal entities.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

Upon receipt of evidence showing that the debtor has been

removed from the registry of legal entities at the SEC, the
court shall issue an Order terminating the proceedings.
(FLSP Rules, Rule 4, Sec. 29)

E. Remedies

1. Motion for Reconsideration

a. For Suspension of Payments
A party may file a motion for reconsideration of a
Suspension of Payments Order, or any order issued by the
court prior to its order confirming or disapproving the
proposed agreement. No relief can be extended to the
party aggrieved by the court's order on the motion through
a special civil action for certiorari under Rule 65 of the
Rules of Court. (Rule 5, Sec. I of FLSP Rules)

b. In Liquidation Proceedings
A party may file a motion for reconsideration of any order
issued by the court prior to the issuance of the Liquidation
Order. No relief can be extended to the party aggrieved by
the Court's order on the motion through a special civil
action for certiorari under Rule 65 of the Rules of Court.
(Rule 5, Sec. 3 of FLSP Rules)

2. Petition for Certiorari

a. For Suspension of Payments
The Court's dismissal of the petition for suspension of
payments on the ground of insufficiency in form and
substance resulting in the non-issuance of a Suspension
of Payments Order, and its order confirming or
disapproving the proposed agreement can only be
reviewed through a petition for certiorari to the Court of
Appeals under Rule 65 of the Rules of Court within 15 days
from notice of order. (Rule 5, Sec. 2 of FLSP Rules)

b. In Liquidation Proceedings
The Liquidation Order and the order approving or
disapproving the Liquidation Plan can only be reviewed
through a petition for certiorari to the Court of Appeals
under Rule 65 of the Rules of Court within 15 days from
notice of order. (Rule 5, Sec. 4 of FLSP Rules)

end of topic

Page 250 of 250