AUSL 2019 Pre Week Notes Mercantile Law FINAL

I.
LETTERS OF CREDIT AND TRUST RECEIPTS
1. What is a letter of credit?
A letter of credit is a written instrument whereby the writer requests or authorizes the addressee
to pay money or deliver goods to a third person and assumes responsibility for payment of debt
therefor to the addressee. (Transfield Philippines, Inc. vs. Luzon Hydro Corp, G.R. No. 146717,
November 22, 2004)
2. What is the “independence principle” in Letter of Credit?
The "independence principle" 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. Under this principle, banks assume no
liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal
effect of any documents, or for the general and/or particular conditions stipulated in the
documents or superimposed thereon, nor do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of the goods, or any other
person whomsoever. (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, G.R. No. 146717,
November 22, 2004)
3. Luzon Hydro Corp. (LHC) entered into a Turnkey Contract with Transfield Philippines,
Inc. (TPI), whereby LHC undertook to construct, on a turnkey basis, a seventy (70)-
Megawatt hydro-electric power station at the Bakun River in the provinces of
Benguet and Ilocos Sur. To secure the performance of LHC’s obligation on the target
completion date, LHC opened in favor of TPI two standby letters of credit with
Security Bank. LHC failed to complete the project within the agreed period. This gave
rise to an arbitration proceeding between LHC and TPI to determine whether the
failure of LHC to complete the project is justified. Pending this arbitration proceeding,
TPI called on the standby letter of credit. Can TPI validly call on the standby letters of
credit despite the pendency of the arbitral proceedings?
Yes. The principle of independence liberates the issuing bank from the duty of ascertaining the
compliance by the parties in the main contract. As the principle’s nomenclature clearly suggests,
the obligation under the letter of credit is independent of the related originating contract. In
brief, the letter of credit is separate and distinct from the originating contract. To say that any
dispute must first be resolved by the parties through negotiations or arbitration before the
beneficiary is entitled to call on the letter of credit would convert the letter of credit into a mere
guarantee. (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, G.R. No. 146717, November
22, 2004)
4. What is a trust receipt?

Trust Receipt is a commercial document which expresses a security transaction where the bank,
having no prior title on the goods on which lien is constituted, lends its money to entrustee-
borrower on security of the goods which borrower is privileged to sell, clear of the lien, with an
agreement to pay all or part of sale proceeds to creditor-bank. (Metropolitan Bank and Trust
Company vs. Go, G.R. No. 155647, November 23, 2007)
2019 MERCANTILE LAW |1
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A trust receipt is considered a security transaction intended to aid in financing importers and
retail dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except through utilization,
as collateral, of the merchandise imported or purchased. (Ng vs. People, G.R. No. 173905, April
23, 2010)
5. Who owns the goods, documents or instruments under a trust receipt?
The entruster owns the goods, documents or instruments under a trust receipt. In a trust receipt
transaction, the goods are released by the entruster (who owns or holds absolute title or security
interests over the said goods) to the entrustee on the latter’s execution and delivery to the
entruster of a trust receipt. The trust receipt evidences the absolute title or security interest of
the entruster over the goods. (DBP vs. Prudential Bank, G.R. No. 143772, November 22, 2005;
(Ng vs. People, G.R. No. 173905, April 23, 2010)
6. Mikay entered into a trust receipt agreement with Bank of Sampaloc (Bank) for
purchase of assorted ukay-ukay products. Upon expiration of the agreement and
after demand by the Bank, Mikay failed to comply with her undertakings under the
trust receipt. Thereafter, the bank filed a complaint for estafa against Mikay but the
same was dismissed. Subsequently, the Bank filed a civil suit for collection of sum of
money against Mikay. Mikay claimed that the Bank’s right to institute separately the
civil action for the recovery of civil liability is already barred on the ground that the
same was not expressly reserved in the criminal action earlier filed against her. Is the
contention of Mikay correct?
No. The Bank’s complaint against Mikay was based on the failure of the latter to comply with her
obligation as spelled out in the Trust Receipt executed by them. This breach of obligation is
separate and distinct from any criminal liability for "misuse and/or misappropriation of goods or
proceeds realized from the sale of goods, documents or instruments released under trust
receipts", punishable under Section 13 of the Trust Receipts Law (P.D. 115) in relation to Article
315(1), (b) of the Revised Penal Code as estafa. Being based on an obligation ex contractu and
not ex delicto, the civil action may proceed independently of the criminal proceedings instituted
against Mikay regardless of the result of the latter. (Sarmiento vs. Court of Appeals, G.R. No.
122502 December 27, 2002)
7. When can intent to defraud be presumed in a trust receipt agreement?
Under the Trust Receipts Law, intent to defraud as element of estafa is presumed when:
(1) the entrustee fails to turn over the proceeds of the sale of goods covered by the trust receipt
to the entruster; or
(2) when the entrustee fails to return the goods under trust, if they are not disposed of in
accordance with the terms of the trust receipts. (Landbank of the Philippines vs. Perez, G.R. No.
166884. June 13, 2012)
8. When can an agreement for trust receipt be considered a mere loan?
When both parties enter into an agreement knowing 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
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receipt transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed
upon by the parties would be the return of the proceeds of the sale transaction. This transaction
becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the
purchase of the goods. (Landbank of the Philippines vs. Perez, G.R. No. 166884. June 13, 2012)
9. What are the Liens of a Warehouseman? When is the lien deemed lost?
A warehouseman shall have a lien on the goods deposited or to 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
d) The sale of the goods where default had been made in satisfying the warehouseman’s lien.
(Sections 27, Warehouse Receipts Act)
The lien of the warehouseman is deemed lost by:
a. Surrender of goods; and

b. Refusal to surrender goods when demand is made is made with which he is bound to comply
under the provisions of the Warehouse Receipts Law. (Sec. 29, Warehouse Receipts Act)
10. What are the remedies of a warehouseman to enforce his lien/s?
Under the Warehouse Receipts Act, warehouseman’s remedies to enforce his lien are:
a) To refuse to deliver the goods until his lien is satisfied;

b) To sell the goods and apply the proceeds thereof to the value of the lien;
Note: Where the sale was made without the publication required and before the time
provided by law, such sale is void and the purchaser of the goods acquires no title to
them.
c) By other legal means allowed to the creditor against his debtor, for the collection from
depositor of all charges and advances which the depositor expressly or impliedly contracted
for; or
d) Such other remedies allowed by law for enforcement of a lien against personal property. (PNB
vs. Sayo, Jr, G.R. No. 129918 July 9, 1998)
II. NEGOTIABLE INTRUMENTS LAW
11. What are effects of Forgery?
A forged signature is wholly inoperative and no one can gain title to the instrument through it. A
person whose signature to an instrument was forged was never a party and never consented to
the contract which allegedly gave rise to such instrument. (Associated Bank vs. Court of Appeals,
G.R. No. 107382, January 31, 1996)
The exception to this rule is when the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority. (Sec. 23, NIL)

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12. What is the “cut off rule”?
The parties prior to the forged signature are cut-off from the parties after the forgery in the
sense that prior parties cannot be held liable and can raise the defense of forgery. The holder
can enforce the instrument against parties who became as such after the forgery. The only
instance when the prior parties are liable is if they are precluded from setting up such defense of
forgery either because of their warranties, representations or their negligence. (Aquino, Notes
and Cases in Negotiable Instruments Law and Banking Law, p. 286, 2018 Edition)
Parties who are precluded from setting up forgery or want of authority:

(1) those parties who warrant or admit the genuineness of the signature in question like
indorsers and persons negotiating the instrument by delivery;
(2) those parties who by their act, silence or negligence is estopped from setting up the defense
of forgery; and
(3) where the forged signature is unnecessary to the title of the holder as when the forged
indorsement is on an instrument payable to bearer. (Villanueva, Commercial Law Review, p. 356,
2018 Edition)
13. When is an alteration in a negotiable instrument considered material?
An alteration is said to be material if it alters the effect of the instrument. It means an

unauthorized change in an instrument that purports to modify in any respect the obligation of a
party or an unauthorized addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party. In other words, a material alteration is one which
changes the items which are required to be stated under Section 1 of the Negotiable Instruments
Law. (Philippine National Bank vs. Court of Appeals, G.R. No. 107508, April 25, 1996)
14. What is the effect of payment made under a materially altered instrument?
Payment made under materially altered instrument is not payment done in accordance with the
instruction of the drawer. When the drawee bank pays a materially altered check, it violates the
terms of the check, as well as its duty to charge its client's account only for bona fide
disbursements he had made. Since the drawee bank, in the instant case, 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. (Metropolitan Bank
and Trust Company vs. Cabilzo, G.R. No. 154469, December 6, 2006)
15. What are the rights of a holder in due course in the following instances:
a. Incomplete and delivered;

b. Incomplete and undelivered;
c. Complete and undelivered instrument.
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Kind of Holder INCOMPLETE, INCOMPLETE, COMPLETE,
DELIVERED UNDELIVERED UNDELIVERED
(Sec. 14) (Sec. 15) (Sec. 16)
Holder in Due He can enforce the Valid delivery conclusively
Course instrument as completed presumed.
against parties prior or Not a valid instrument in
subsequent to the the hands of any holder.
completion.
However, the invalidity of
the instrument is only with
Not a Holder in He can enforce the reference to parties whose It be shown that delivery is
Due Course instrument as completed signatures were placed on conditional or for a special
(NHDC) only against parties the instrument prior to purpose only, and not for
subsequent to the delivery. the purpose of transferring
completion but not title.
against those prior
thereto.
Type of Defense Personal Defense Real Defense Personal Defense
16. Jun was about to leave for a business trip. As his usual practice, he signed several
blank checks. He instructed Ruth, his secretary, to fill them as payment for his
obligations. Ruth filled one check with her name as payee, placed P30,000.00
thereon, endorsed and delivered it to Marie. She accepted the check in good faith as
payment for goods she delivered to Ruth. Eventually, Ruth regretted what she did
and apologized to Jun. Immediately he directed the drawee bank to dishonor the
check. When Marie encashed the check, it was dishonored. Supposing the check was
stolen while in Ruth's possession and a thief filled the blank check, endorsed and
delivered it to Marie in payment for the goods he purchased from her, is Jun liable to
Marie if the check is dishonored?
No. The check is an incomplete instrument not delivered in contemplation of law. An incomplete
instrument not delivered is not a valid contract in the hands of any holder as against any person
whose signature was placed thereon before delivery. As such, Jun is not liable to Marie since he
does not assume any responsibility whatsoever upon the said check. (Sec. 15, Negotiable
Instruments Law)
17. Puzon was a dealer of San Miguel beer products, buying it on credit. To ensure
payment, and as a business practice, San Miguel required Puzon to issue postdated
checks equivalent to the value of the products purchased on credit. The checks are
then returned after full payment of the value of the transaction. Puzon purchased
products to which he issued two checks to cover the transaction. A month later,
Puzon visited San Miguel’s Sales Office to reconcile his account. Puzon allegedly
requested to see one of the checks. When he got hold of both checks, he immediately
left the office, bringing the check with him. San Miguel then sent a demand letter
asking for the checks back. After being ignored, San Miguel filed a criminal complaint
for theft and argued that the checks’ ownership were transferred to it because they
were issued in payment of the purchases and not merely for security. Is the delivery
of the checks to SMC vested it ownership over the checks?
No. The check was not given as payment, there being no intent to give effect to the instrument.
“Delivery” as a term used in Sec. 12 means that the party delivering did so for the purpose of

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giving effect thereto. Otherwise, it cannot be said that there has been delivery of the negotiable
instrument. Once there is delivery, the person to whom the instrument is delivered gets the title
to the instrument completely and irrevocably. The purpose of the delivery will determine if
ownership is transferred: (1) if the purpose is the give effect to the instrument, title or ownership
transfers upon delivery; (2) if the intent to give effect is missing, ownership is retained by the
person who delivered. (San Miguel Corporation vs. Puzon, Jr., G.R. No. 167567, September 22,
2010)
18. When is an indorsement considered Restrictive Indorsement?
An indorsement is restrictive which either;

(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an indorsement
restrictive. (Sec. 36, NIL)
19. What is the Shelter Rule?
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. This is known as the “shelter rule”. (Section 58, Negotiable
Instruments Law)
20. Distinguish Personal Defenses from Real Defenses.
PERSONAL (EQUITABLE DEFENSES) REAL DEFENSES

Those which are available only against a person not a Those that attach to the instrument itself and are
holder in due course or a subsequent holder who available against all holders, whether in due course
stands in privity with him. or not.
Examples: Examples:
a. Failure or absence of consideration; a. Material alteration; (partial real defense)

b. Illegal consideration; b. Non-delivery of incomplete instrument;
c. Non-delivery of complete instrument; c. Forgery;
d. Conditional delivery of complete instrument; d. Fraud in factum or fraud in esse contractus;
e. Fraud in inducement; e. Minority (available only to the minor);
f. Filling up blank not within authority; f. Ultra vires acts of a corporation;
g. Duress or intimidation; g. Want of authority;
h. Filling up blank beyond reasonable time; h. Illegality – if declared void for any purpose;
i. Transfer in breach of faith; i. Vicious force or violence;
j. Mistake; j. Extinctive Prescription.
k. Insertion of wrong date;
l. Ante-dating or post-dating for illegal or fraudulent
purpose.
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21. Distinguish check from a bill of exchange.
CHECK BILL OF EXCHANGE

A check is always payable on demand. Bill of exchange may be payable on demand or at a
fixed or determinable future time.
A check need not be presented for acceptance. Bill of exchange must be presented for acceptance
However, if the holder requests and the bank only if it is one of those enumerated in Sec. 143
desires, bank may accept. If the check is certified, which is an exclusive list.
it is deemed accepted.
A check is drawn on a deposit, otherwise, there Bill of exchange need not be drawn on a deposit,
would be fraud. hence it is not necessary that the drawer of a bill of
exchange should have funds in the hands of the
drawee.
A check must be presented for payment within a Bill of exchange may be presented for payment
reasonable time after its issuance (within 6 within reasonable time after its last negotiation.
months from issuance).
If a check is certified, the drawers/indorsers are If a bill of exchange is accepted, drawer/indorser
discharged remains liable.
22. What is a crossed check? What are the effects of crossing a check?
A crossed check is a check with two (2) parallel lines, written diagonally on the upper right corner
thereof. It is a warning to the drawee bank that payment must be made to the right party;
otherwise the bank has no authority to use the drawer's funds deposited with the bank. The
purpose is to insure payment to the payee. It can only be deposited but may not be converted
into cash by the drawer. Crossing a check does not destroy its negotiability but the check may be
negotiated only once – to one who has an account with the bank (De Ocampo vs. Gatchalian,
G.R. No. L15126, November 30, 1961).
The effects of crossing a check are:

a. That the check may not be encashed but only deposited in the bank;
b. That the check may be negotiated only once- to one who has an account with a bank;
and
c. That the act of crossing the check serves as a warning to the holder that the check has
been issued for definite purpose so that he must inquire if he has received the check
pursuant to the purpose. Otherwise, he is not an holder in due course (SIHI vs. IAC, G.R.
No. 72764, July 13, 1989).
23. SSP sold welding electrodes to Interco. As payment, Interco issued three (3) checks
payable to the order of SSP. Each check was crossed with the notation “account
payee only” and was drawn against Equitable Bank. Joseph Uy, an Interco employee,
presented each crossed check to Equitable, claiming that he had good title over them.
Uy demanded the deposit of the checks to his personal accounts with Equitable and
this was allowed by Interco on the assumption that Uy, as the son-in-law of Interco’s
majority stockholder, was acting pursuant to Interco’s orders. Uy promptly withdrew
the proceeds of the checks. Did Equitable properly allow Uy to deposit the checks to
his personal accounts?
No. The checks that Interco issued in favor of SSP were all crossed, made payable to SSP’s order,
and contained the notation “account payee only.” This creates a reasonable expectation that the
payee alone would receive the proceeds of the checks and that diversion of the checks would be

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averted. This expectation arises from the accepted banking practice that crossed checks are
intended for deposit in the named payee’s account only and no other. At the very least, the
nature of crossed checks should place a bank on notice that it should exercise more caution or
expend more than a cursory inquiry, to ascertain whether the payee on the check has authorized
the holder to deposit the same in a different account. (Equitable Banking Corporation, Inc. vs.
Special Steel Products, G.R. No. 175350, June 13, 2012)
24. What is a manager’s check? What are its effects?
A managers check is a bill of exchange drawn by the bank upon itself and is accepted at its
issuance and signed by a manager on behalf of a bank.
A manager’s check is as good as cash. It is a check drawn by the bank against itself. It is
deemed pre-accepted by the bank from the moment of issuance. The check becomes the primary
obligation of the bank which issues it and constitutes its written promise to pay. By issuing it, the
bank in effect commits its total resources, integrity and honor behind the check (Metrobank and
Trust Company vs Chiok, GR No. 172652, November 26, 2014).
25. Birdie drew a crossed check against his BDO bank account payable to Irish for the
delivery of sanitary wares. Irish then negotiated the check to Guiller who has an
account with Union Bank. Guiller deposited the check to his account with Union Bank,
who accommodated the check. Upon seeing Union Bank’s accommodation, BDO
encashed the check and credited it to Guiller’s account in Union Bank. Irish failed to
deliver the sanitary wares, prompting Birdie to go to BDO for stop payment order,
only to find out that the check was already encashed. Who should be held liable for
the encashed check?
In cases of unauthorized payment of checks to a person other than the payee named therein, the
drawee bank may be held liable to the drawer. The drawee bank, in turn, may seek
reimbursement from the collecting bank for the amount of the check.
The liability of the drawee bank is based on its contract with the drawer and its duty to charge to
the latter's accounts only those payables authorized by him. A drawee bank is under strict liability
to pay the check only to the payee or to the payee's order. When the drawee bank pays a person
other than the payee named in the check, it does not comply with the terms of the check and
violates its duty to charge the drawer's account only for properly payable items.
On the other hand, the liability of the collecting bank is anchored on its guarantees as the last
endorser of the check. Under Section 66 of the Negotiable Instruments Law, an endorser
warrants "that the instrument is genuine and in all respects what it purports to be; that he has
good title to it; that all prior parties had capacity to contract; and that the instrument is at the
time of his endorsement valid and subsisting." It has been repeatedly held that in check
transactions, the collecting bank generally suffers the loss because it has the duty to ascertain
the genuineness of all prior endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment has done its duty
to ascertain the genuineness of the endorsements. If any of the warranties made by the
collecting bank turns out to be false, then the drawee bank may recover from it up to the amount
of the check. (BDO Unibank, Inc. vs. Lao, G.R. No. 227005, June 19, 2017)
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26. What is the fictitious payee rule and who is liable under it? Is/are there any
exception/s?
As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds,
the check is considered as a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears
the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer
instrument that can be negotiated by delivery. The underlying theory is that one cannot expect a
fictitious payee to negotiate the check by placing his indorsement thereon. And since the maker
knew this limitation, he must have intended for the instrument to be negotiated by mere delivery.
Thus, in case of controversy, the drawer of the check will bear the loss.
However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of
commercial bad faith on the part of the drawee bank, or any transferee of the check for that
matter, will work to strip it of this defense. The exception will cause it to bear the loss.
Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to
the fraudulent scheme. (PNB vs. Spouses Rodriguez, G.R. No. 170325, September 26, 2008)
III. INSURANCE LAW
27. What are the characteristics of an Insurance Contract?
a. Risk Distributing Device – the device of insurance serves to distribute the risk of
economic loss among as many as possible to those who are subject to the same kind of risk.
The risk is distributed to the group of persons having the same risk.
b. Contract of Adhesion – insurance is a contract of adhesion considering that most of the
terms of the contract do not result from mutual negotiations between the parties as they are
prescribed by the insurer in printed form to which the insured may adhere if he chooses but
which he cannot change.
c. Aleatory – the obligation of the insurer to pay the proceeds of the insurance arises only
upon the happening of an event which is uncertain, or which is to occur at an indeterminate
time.
d. Contract of indemnity – the insured who has insurable interest over a property is only
entitled to recover the amount of actual loss sustained and the burden is upon him to
establish the amount of such loss.
e. Uberrimae Fides Contract / Utmost good faith – the contract of insurance is one of
perfect good faith not for the insured alone but equally so for the insurer. Since there was an
assumption of risk on the part of the insurer, it is their duty to make an intelligent estimates
that is the reason why it requires the parties to the contract of insurance to disclose
conditions affecting the risk of which he is aware, or material fact, which the applicant
knows, and those, which he ought to know. (Sundiang and Aquino, Reviewer On Commercial
Law, p. 78-80, 2014 Edition)
28. How shall the court construe an insurance contract?
Contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms which the parties themselves have used. If such terms are clear and

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unambiguous, they must be taken and understood in their plain, ordinary and popular sense.
Accordingly, in interpreting the exclusions in an insurance contract, the terms used specifying the
excluded classes therein are to be given their meaning as understood in common speech. A
contract of insurance is a contract of adhesion. So, when the terms of the insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation. (Alpha Insurance vs. Castor, G.R. No. 198174,
September 2, 2013)
29. What is an Insurable Interest?
An insurable interest is that interest which a person is deemed to have in the subject matter
insured, where he has a relation or connection with or concern in it, such that the person will
derive pecuniary benefit or advantage from the preservation of the subject matter insured and
will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening
of the event insured against. (Lalican vs. The Insular Life Assurance Company Limited, G.R. No.
183526, August 25, 2009)
30. Discuss the insurable interest of a mortgagor and the mortgagee with respect to the
mortgaged property.
The insurable interests of the mortgagor and mortgagee are separate and distinct. The
mortgagor, as owner of the property, has insurable interest over the property to the extent of its
value. The mortgagee has insurable interest to the extent of the debt secured and such interest
continues until the mortgage debt is extinguished. (Rizal Commercial Banking Corp. vs. CA, G.R.
No. 128833, April 20, 1998)
31. Distinguish insurable interest in life insurance from insurable interest in property
insurance.
LIFE INSURANCE PROPERTY INSURANCE

Extent as to amount Unlimited, except in life insurance Limited to the actual value of the
effected by the creditor on the life of interest on the property.
the debtor to the extent of the debt.
Time when the insurable At the time the policy takes effect At the time the policy takes effect
interest must exist only. and at the time of the loss but need
not exist in the meantime.
Expectation of the Need not have any legal basis. There must be a legal basis.
benefit to be derived
Beneficiary’s interest Need not have insurable interest in Must have insurable interest over the
the life of the insured. property insured.
32. Distinguish Double Insurance from over-insurance.
DOUBLE INSURANCE OVER-INSURANCE

There may be no over-insurance as when the sum When the amount of the insurance is beyond the
total of the amounts of the policies issued does not value of the insured’s insurable interest.
exceed the insurable interest of the insured.
There are always several insurers. There may only be one insurer involved.
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33. Distinguish reinsurance from double insurance.
REINSURANCE DOUBLE INSURANCE

Insurance of different interests. Involves same interest.
Insurer becomes an insured in relation to reinsurer. Insurer remains in such capacity.
Original insured has no interest in reinsurance Insured in the 1st contract is a party in interest in
contract. the 2nd contract.
Subject of insurance is the original insurer’s risk. Subject of insurance is property
Consent of original insured is not necessary. Insured has to give his consent.
34. What is the “No Fault Clause”?
The injured third party or passenger is given the option to file a claim for death or injury without
the necessity of proving fault or negligence of any kind under the following conditions:
a. The total indemnity in respect of any person shall not exceed P15,000.00;
b. The following proofs of loss, when submitted under oath, shall be sufficient evidence to
substantiate the claim: (1) police report of accident; AND (b) Death certificate or medical
report and evidence of medical, or hospital disbursement in respect of which refund is
claimed; Claim may be made against one motor vehicle only. (Sec. 391, ICP; Insurance
Memo. Circular 4-2006)
35. What is incontestability clause?
The "incontestability clause" is a provision in law that after a policy of life insurance made
payable on the death of the insured shall have been in force during the lifetime of the insured for
a period of two (2) years from the date of its issue or of its last reinstatement, the insurer cannot
prove that the policy is void ab initio or is rescindible by reason of fraudulent concealment or
misrepresentation of the insured or his agent. The purpose of the law is to give protection to the
insured or his beneficiary by limiting the rescinding of the contract of insurance on the ground of
fraudulent concealment or misrepresentation to a period of only two (2) years from the issuance
of the policy or its last reinstatement. The insurer is deemed to have the necessary facilities to
discover such fraudulent concealment or misrepresentation within a period of two (2) years. It is
not fair for the insurer to collect the premiums as long as the insured is still alive, only to raise
the issue of fraudulent concealment or misrepresentation when the insured dies in order to
defeat the right of the beneficiary to recover under the policy. (Manila Bankers Life Insurance
Corporation vs. Aban, G.R. No. 175666, July 29, 2013)
36. Tom applied for life insurance with Star Life. On August 15, 2016, Star Life issued
Tom’s insurance policy. On January 2, 2017, Tom died in a vehicular accident. Tom’s
wife, Marie, filed with Star Life a claim for death benefits indicated in the insurance
policy. Star Life denied the claim on the ground that Tom’s medical history was not
disclosed in his application form. Star Life then filed a complaint for rescission of the
insurance policy. Assuming there was concealment on the part of Tom, will you grant
to rescind the insurance contract? Why or why not?
No. If the insured dies within the two-year contestability period, the insurer loses its right to
rescind the policy. The death of the insured within the two-year period will render the right of the
insurer to rescind the policy nugatory. As such, the incontestability period will now set in. The
insurer is bound to make good its obligation under the policy, regardless of the presence or lack

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of concealment or misrepresentation. (Sun Life of Canada (Philippines), Inc. vs. Sibya, G.R. No.
211212, June 8, 2016).
37. Jason is the proud owner of a newly-built house worth P5 Million. As a protection
against any possible loss or damage to his house, Jason applied for a fire insurance
policy thereon with Shure Insurance Corporation (Shure) on October 11, 2016 and
paid the premium in cash. It took the company a week to approve Jason’s application.
On October 18, 2016, Shure mailed the approved policy to Jason which the latter
received five (5) days later. However, Jason’s house had been razed by fire which
transpired a day before his receipt of the approved policy. Jason filed a written claim
with Shure under the insurance policy. Decide Jason’s claim with reasons.
Jason’s claim should be denied. What governs insurance contract is the cognition theory
whereby the insurance contract is perfected only from the time the applicant came to know of
the acceptance of the offer by the insurer. In this case, the loss occurred a day prior to Jason’s
knowledge of the acceptance by Shure of Jason’s application. There being no perfected insurance
contract, Jason is not entitled to recover from Shure. (Great Pacific Life Assurance Corporation
vs. CA, G.R. No. L-31845, April 30, 1979)
38. Joan Lim owns a 2019 Toyota Fortuner (Fortuner). Chens Insurance Corporation
(Chens) issued a comprehensive insurance policy for the said Fortuner. The policy is
effective starting August 1, 2019. Being her practice to pay though checks, Joan Lim
issued a check for the agreed premiums for the policy and informed that the check
was ready for pick up on the same day. Since it was the birthday of the president of
Chens, nobody picked up the check. The check was only picked up by an agent of
Chens on August 5, 2019. Unknown to her, and while her husband used the Fortuner
for a trip to Baguio, the Fortuner was carnapped in the parking area of a restaurant in
Baguio on August 4, 2019. She reported the same to Chens and asked for indemnity.
Is Joan Lim entitled to indemnity for her stolen car?
No. Insurance is a contract whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event. Just like any other
contract, it requires a cause or consideration. The consideration is the premium, which must be
paid at the time and in the way and manner specified in the policy. If not so paid, the policy will
lapse and be forfeited by its own terms. The law, however, limits the parties’ autonomy as to
when payment of premium may be made for the contract to take effect. The general rule in
insurance laws is that unless the premium is paid, the insurance policy is not valid and binding.
Here, there is no dispute that the check was delivered to and was accepted by Chen’s agent, only
on August 5, 2019. No payment of premium had thus been made at the time of the loss of the
vehicle on August 4, 2019. While Joan Lim claims that Chen was informed that the check was
ready for pickup on August 1, 2019, the notice of the availability of the check, by itself, does not
produce the effect of payment of the premium. Thus, at the time of loss, there was no payment
of premium yet to make the insurance policy effective. (Gaisano vs. Development Insurance and
Surety Corporation, G.R. No. 190702, February 27, 2017)
39. What are the exceptions to the rule that payment of premium is essential for an
insurance policy to be valid and binding?
a. In life and industrial life insurance, whenever the grace period provision applies, or
whenever under the broker and agency agreements with duly licensed intermerdiaries, a 90-
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day credit extension is given (Section 77, Insurance Code);
b. An acknowledgement un a policy or contract of insurance or the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding
any stipulation therein that it shall not be binding until the premium is already paid (Section
79, Insurance Code);;
c. When the parties have agreed to the payment of the premium in installments and partial
payment has been made at the time of the loss (Makati Tuscany Condominium Corp. vs. CA,
G.R. No. 95546, November 6, 1992));
d. When a credit term has been agreed upon (UCPB Insurance Co., Inc. vs. Masagana
Telemart, Inc., G.R. No. 137172, April 4, 2001);
e. When the parties are barred by estoppel.
40. What is the test of materiality in concealment?
Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the communication is due, in
forming his estimate of the disadvantages of the proposed contract, or in making his inquiries.
(Section 31, Insurance Code)
41. Noli insured his life for P20 million. He was asked of the following questions: Within
the past 5 years, have you: (a) consulted any doctor or other health practitioner? (b)
submitted to ECG, X Rays, blood tests and other tests?; (c) attended or have been
admitted to any hospital or other medical facility?. Noli disclosed the fact that he
consulted a doctor but only for cough and flu complications. While playing golf one
day, Noli collapsed at the fairway and was declared dead on arrival at the hospital
due to hypertension. His death certificate stated that Noli suffered a massive heart
attack.
a. Will the beneficiary of Noli be entitled to the proceeds of the life insurance under
the circumstances, despite the non-disclosure that he is hypertensive at the time
of application?
No. Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due, in forming
his estimate of the disadvantages of the proposed contract or in making his inquiries. The
information which the insured failed to disclose were material and relevant to the approval
and issuance of the insurance policy. The matters concealed would have definitely affected
petitioner's action on his application, either by approving it with the corresponding
adjustment for a higher premium or rejecting the same. Moreover, a disclosure may have
warranted a medical examination of the insured by petitioner in order for it to reasonably
assess the risk involved in accepting the application. The hypertension of Noli is a material
fact that should have been disclosed to the insurer. The concealment of such material fact
entitles the insurer to rescind the insurance policy.(Sunlife Assurance Company of Canada
vs. CA and Spouses Bacani, G.R. No. 105135 June 22, 1995)
b. Can Noli’s beneficiary claim the defense of good faith?
No. Materiality of the information withheld does not depend on the state of mind of the
insured. Neither does it depend on the actual or physical events which ensue. Thus, "good

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faith" is no defense in concealment. (Sunlife Assurance Company of Canada vs. CA and
Spouses Bacani, G.R. No. 105135 June 22, 1995)
c. If Noli died in an accident instead of a heart attack, would the fact of Noli’s
failure to disclose that he is hypertensive be considered as material information?
Yes. The facts concealed had no bearing to the cause of death of the insured. It is well
settled that the insured need not die of the disease he had failed to disclose to the insurer.
It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks
of the proposed insurance policy or in making inquiries. (Sunlife Assurance Company of
Canada vs. CA and Spouses Bacani, G.R. No. 105135 June 22, 1995)
42. What is the effect of a breach of warranty?
The violation of a material warranty, or other material provision of a policy, on the part of either
party thereto, entitles the other to rescind. (Section 74, Insurance Code) However, in case of
immaterial provisions, a policy should declare that a violation of specified provisions thereof shall
avoid it; otherwise the breach of an immaterial provision does not avoid the policy. (Section 75,
Insurance Code) A breach of warranty without fraud merely exonerates an insurer from the time
that it occurs, or where it is broken in its inception, prevents the policy from attaching to the risk.
(Section 76, Insurance Code)
43. Discuss the rules on loss in insurance.
Loss for which insurer is liable Loss for which insurer is not liable
1. Loss the proximate cause of which is the peril 1. Loss by insured’s willful act;
insured against (Sec. 84); 2. Loss due to connivance of the insured
2. Loss the immediate cause of which is the peril (Sec. 87); and
insured against except where proximate cause is an 3. Loss where the excepted peril is the
excepted peril; proximate cause.
3. Loss through negligence of insured except where
there was gross negligence amounting to willful acts;
and
4. Loss caused by efforts to rescue the thing from
peril insured against;
5. 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 (Sec. 85, Insurance Code).
44. Noy as lessee, entered into a lease agreement with Javin for a commercial space for
one year. One of the stipulations of the agreement is that the lessee shall not insure
against fire the chattels, merchandise, textiles, goods and effects placed at any stall
or store or space in the leased premises without first obtaining the written consent
and approval of the lessor. If the lessee obtains the insurance thereof without the
consent of the lessor then the policy is deemed assigned and transferred to the lessor
for its own benefit. Notwithstanding the said stipulation, Noy insured against loss by
fire their merchandise inside the leased premises without the written assent of Javin.
On the day that the lease contract was to expire, fire broke out inside the leased
premises. When Javin learned of the insurance earlier procured without his assent, he
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wrote to the insurer a demand letter asking for the proceeds of the insurance
contract. Is Javin entitled to the proceeds?
No. A non-life insurance policy such as the fire insurance policy taken by Noy over the
merchandise is primarily a contract of indemnity. Insurable interest in the property insured must
exist at the time the insurance takes effect and at the time the loss occurs. The basis of such
requirement of insurable interest in property insured is based on sound public policy: to prevent
a person from taking out an insurance policy on property upon which he has no insurable interest
and collecting the proceeds of said policy in case of loss of the property. In such a case, the
contract of insurance is a mere wager which is void under Section 25 of the Insurance Code.
Javin therefore, under the Insurance Code—a special law—cannot validly be a beneficiary of the
fire insurance policy taken by the Noy over the merchandise. This insurable interest over said
merchandise remains with Noy. The automatic assignment of the policy to Javin under the
provision of the lease contract previously quoted is void for being contrary to law and/or public
policy. The proceeds of the fire insurance policy thus rightfully belong to Noy. The insurer cannot
be compelled to pay the proceeds of the fire insurance policy to a person who has no insurable
interest in the property insured. (Spouses Cha vs. United Insurance Co., Inc., G.R. No. 124520.
August 18, 1997)
45. Is the insurer liable in case of loss due to the (a) willful act of the insured; and (2) the
negligent act of the insured?
a. An insurer is not liable for a 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. (Sec. 89, Insurance Code)
b. Insurer is liable. One of the purposes for taking out insurance is to protect the insured
against the consequences of his own negligence and that of his agents. Thus, it is a basic
rule in insurance that the carelessness and negligence of the insured or his agents constitute
no defense on the part of the insurer. This rule however presupposes that the loss has
occurred due to causes which could not have been prevented by the insured, despite the
exercise of due diligence. (FGU Insurance Corporation vs. CA, G.R. No. 137775, March 31,
2005)
46. Distinguish Perils of Sea and Perils of the Ship.

PERILS OF THE SEA PERILS OF THE SHIP
Includes only those casualties due to the unusual A loss which in the ordinary course of events, results
violence or extraordinary causes connected with the from the:
navigation. It has been said to include only such 1. natural and inevitable action of the sea;
losses as are extraordinary in nature or arise from 2. ordinary wear and tear of the ship; or
some overwhelming power which cannot be 3. Negligent failure of the ship’s owner to provide the
guarded against by the ordinary exertion of human vessel with proper equipment to convey the cargo
skill or prudence. (Sundiang and Aquino, Reviewer under ordinary conditions.
on Commercial Law, p. 146, 2014 Edition)
Generally compensable. Not compensable unless the insurance policy is an All

Risk Marine Insurance Policy.

Pre-week Notes
47. An insurance company issued a marine insurance policy covering a shipment by sea
from Mindoro to Batangas of 1,000 pieces of Mindoro garden stones against “total
loss only.” The stones were loaded in two lighters, the first with 600 pieces and the
second with 400 pieces. Because of rough seas, damage was caused the second
lighter resulting in the loss of 325 out of the 400 pieces. The owner of the shipment
filed claims against the insurance company on the ground of constructive total
loss inasmuch as more than ¾ of the value of the stones had been lost in one of the
lighters. Is the insurance company liable under its policy? Why?
No, the insurance company is not liable under its policy covering against “total loss only” the
shipment of 1,000 pieces of Mindoro garden stones. While the same was carried in two barges, it
was insured under a single policy. There is no constructive total loss that can be claimed since
the ¾ rule is to be computed on the total 1,000 pieces of Mindoro garden. The loss of 325 pieces
of garden stones is definitely less than 3/4 of 1,000 pieces of garden stones. (Section 139,
Insurance Code, cited in Oriental Assurance vs. Court of Appeals and Panama Saw Mill, G.R. No.
94052, August 9, 1991)
48. In marine insurance, when the cargo was lost due to the ship being unseaworthy,
may the shipper, who has no knowledge of the unseaworthiness of the ship, be
entitled to the proceeds of the insurance policy?
No. 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/shipowner 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. The fact that the unseaworthiness of the ship was unknown to the insured is
immaterial in ordinary marine insurance and may not be used by him as a defense in order to
recover on the marine insurance policy. (Roque vs. IAC, G.R. No. L-66935 November 11, 1985)
49. What is deviation? When is devation proper?
Deviation is a departure from the course of the voyage insured, or an unreasonable delay in
pursuing the voyage or the commencement of an entirely different voyage. (Section 125,
Insurance Code)
A deviation is proper:
(a) When caused by circumstances over which neither the master nor the owner of the ship has
any control;
(b) When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is
insured against;
(c) When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a
peril; or
(d) When made in good faith, for the purpose of saving human life or relieving another vessel in
distress. (Section 126, Insurance Code)
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IV. TRANSPORTATION LAW
50. What are common carriers?
Common carriers are persons, corporations, firms or associations engaged in the business of
carrying or transporting passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public. (Art. 1732, New Civil Code)
51. Gianna engaged the services of Jian to facilitate the withdrawal of his goods in the
customs office and to deliver the same to her factory in Rizal. Jian subcontracted the
services of Jevy who is engaged in trucking services for the delivery of the goods, to
which Gianna had no objections. On the day of the arrival of the goods, Jevy picked it
up and while on its way to Gianna’s factory, some of the goods sustained damages.
Gianna claimed for damages against Jian and Jevy. Jian denied its liablity since he is
just a broker and he does not own the truck used for delivery. Is the contention of
Jian tenable?
No. A customs broker — whose principal business is the preparation of the correct customs
declaration and the proper shipping documents — is still considered a common carrier if it also
undertakes to deliver the goods for its customers. The law does not distinguish between one
whose principal business activity is the carrying of goods and one who undertakes this task only
as an ancillary activity. That Jian does not own the truck and has to subcontract the delivery of
its clients’ goods, is immaterial. As long as an entity holds itself to the public for the transport of
goods as a business, it is considered a common carrier regardless of whether it owns the vehicle
used or has to actually hire one. (Torres-Madrid Brokerage, Inc. vs. Feb Mitsui, G.R. No. 194121,
July 11, 2016)
52. What are the exceptions to the rule that common carriers are responsible for the loss,
destruction, or deterioration of the goods?
Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless
the same is due to any of the following causes only:
a. Flood, storm, earthquake, lightning, or other natural disaster or calamity;

b. Act of the public enemy in war, whether international or civil;
c. Act or omission of the shipper or owner of the goods;
d. The character of the goods or defects in the packing or in the containers;
e. Order or act of competent public authority;
f. Exercise of extraordinary diligence. (Art. 1734 and 1735, New Civil Code)
53. What is the Registered Owner Rule?
Regardless of who the actual owner is of a motor vehicle, the registered owner is the operator of
the same with respect to the public and third persons, and as such, directly and primarily
responsible for the consequences of its operation. In contemplation of law, the owner/operator of
record is the employer of the driver, the actual operator and employer being considered merely
as his agent. (Villanueva vs. Domingo, G.R. No. 144274. September 20, 2004).

Pre-week Notes
54. Explain the concept of 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 them under his license,
sometimes for a fee or percentage of the earnings. Kabit system is invariably recognized as being
contrary to public policy and therefore void and inexistent under Art. 1409 of the New Civil Code.
If the registered owner and the buyer entered into this transaction they are in pari delicto thus,
in case something happens the court will not aid them. The court will leave them as they were.
This arrangement is a circumvention of the requirement for license. (Abelardo Lim vs. CA, G.R.
No. 125817, January 26, 2002)
55. Distinguish a common carrier from a private carrier.
Point of Comparison Common Carrier Private Carrier

As to availability Holds himself out in common, that Agrees in some special case with
is, to all persons who choose to some private individual to carry for
employ him, as ready to carry for hire.
hire
As to binding effect Bound to carry all who offer and Not bound to carry for any reason,
tender reasonable compensation such goods as it is accustomed to
for carrying them carry, unless it enters into a
special agreement to do so.
As to diligence required Required to exercise extraordinary Only required to exercise ordinary

diligence in transporting goods, or diligence.
passengers, or both
As to governing law Common carriers are bound by the Private carriers are bound by the
provisions of the Civil Code law on obligations and contracts
-
56. What are the requirements for stipulations limiting the liability of common carriers to
be valid?
A stipulation between the common carrier and the shipper or owner limiting the liability of the
former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary
diligence shall be valid, provided it be:
a. In writing, signed by the shipper or owner;

b. Supported by a valuable consideration other than the service rendered by the common
carrier; and
c. Reasonable, just and not contrary to public policy. (Art. 1744, New Civil Code)
57. Distinguish between the liability of a common carrier for death or injuries for acts of
its employees and of its passengers or strangers.
Point of Distinction For Acts of Employees For Acts of Passengers or

Strangers
As to Required Diligence Extraordinary diligence Ordinary diligence
As to Liability Liable for tortious acts; however, the General Rule: Not liable
employee must be on duty at the
time of the act/s (Art. 1759, NCC) Exception: If the common carrier’s
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employees, through the exercise of
Note: If employee is not on duty, the diligence of a good father of a
the rule on strangers apply to him. family could have prevented or
stopped the act or omission (Art.
In case of personal violence of 1763, NCC)
employees, the liability extends only
to those acts which it could foresee
or avoid through the exercise of the
degree of diligence required.
58. Briefly explain the doctrine of limited liability (hypothecary rule).
The real and hypothecary nature of maritime law simply means that the liability of the carrier in
connection with the losses related to maritime contracts is confined to the vessel, which is
hypothecated for such obligations or which stands as the guaranty for their settlement. (Aboitiz
Shipping Corporation vs. General Accident Fire and Life Assurance Corp. Ltd., G.R. No. 100446,
January 21, 1993)
59. State the exceptions to the doctrine of limited liability.

The exceptions to the doctrine of limited liability are:
(1) where the injury or death to a passenger is due either to the fault of the ship owner, or to the
concurring negligence of the ship owner and the captain;
(2) where the vessel is insured; and
(3) in workmen's compensation claims. (Chua Yek Hong vs. IAC, G.R. No. 74811 September 30,
1988)
60. What are averages? What are its kinds?

The following shall be considered averages:
a. All extraordinary or accidental expenses incurred during the navigation for the
preservation of the vessel or cargo, or both;
b. All damages or deterioration the vessel may suffer from the time she puts to sea from
the port of departure until she casts anchor in the port of destination, and those
suffered by the merchandise from the time it is loaded in the port of shipment until it is
loaded in the port of consignment. (Article 806, Code of Commerce)
The two kinds of averages are:
a. Particular and simple average – includes all kinds of damages and expenses caused to
the vessel or cargo that did not inure to the common benefit and profit of all persons
interested in the vessel and her cargo. (Art. 809, Code of Commerce)
b. General or gross averages – includes all damages and expenses which are deliberately
caused in order to save the vessel, her cargo or both at the same time, from a real and
known risk. (Art. 811, Code of Commerce)

Pre-week Notes
61. What is the Jason Clause in a Charter Party?
Jason Clause is a provision in the contract of carriage that requires the cargo owners to
contribute in general average though the event which gave rise to the sacrifice or expenditure
may have been due to the fault of one of the parties to the adventure. (Rule D, York Antwerp
Rules)
62. Compare the Procedure and Prescriptive Period for Claims under Coastwise Shipping
and under Carriage of Goods by Sea Act (COGSA).
Coastwise Shipping COGSA

When to file a claim to Under Art. 366 of the Code of a. Upon the discharge of the goods,
the carrier? Commerce, if the goods arrived in if the damage is apparent, claim
damaged condition, claim must be should be filed immediately.
filed by the shipper within the
following periods, otherwise recovery b. If the damage is not apparent,
is barred: claim should be filed within 3 days
from delivery.
a. Immediately if the damage us
apparent; The filing of claim is not a condition
precedent.
b. Within 24 hours form delivery if
damage is not apparent.
Note that the filing of claim is a

condition precedent in coastwise
shipping
When to file a case in a. Within 6 years, if no bill of lading Within 1 year from discharge
court has been issued; or
b. Within 10 years, if a bill of lading

has been issued.
63. Distinguish a bareboat or demise charter from voyage or trip charter.
Bareboat or Demise Charter Voyage or Trip Charter

Nature The ship owner leases to the The vessel is leased for a single or
charterer the whole vessel, particular voyage or specific period
transferring to the latter the entire of time. The master and crew remain
command, possession and in the employ of the owner of the
consequent control over the vessel’s vessel
navigation, including the master and
the crew, who thereby become the
charterer’s “servants”.
Classification Private Carrier Common Carrier
64. What are the purposes of a bill of lading?
A bill of lading serves two (2) functions: first, it is a receipt for the goods shipped; second, it is a
contract by which three parties, namely, the shipper, the carrier and the consignee who
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undertake specific responsibilities and assume stipulated obligations. (MOF Company, Inc., vs.
Shin Yang Brokerage Corporation, G.R. No. 172822, December 18, 2009)
65. When may a consignee although not a signatory to the contract of carriage between
the shipper become a party to the contract?
A consignee, although not a signatory to the contract of carriage between the shipper and the
carrier, becomes a party to the contract by reason of either:
a. The relationship of agency between the consignee and the shipper/ consignor;
b. The unequivocal acceptance of the bill of lading delivered to the consignee, with full
knowledge of its contents or
Availment of the stipulation pour autrui, i.e., when the consignee, a third person, demands
before the carrier the fulfillment of the stipulation made by the consignor/shipper in the
consignee’s favor, specifically the delivery of the goods/cargoes shipped. (MOF Company, Inc.,
vs. Shin Yang Brokerage Corporation, G.R. No. 172822, December 18, 2009)
66. What is the doctrine of inscrutable fault?
In a collision, where fault is established but it cannot be determined which of the two vessels
were at faulty, both shall be deemed to have been at fault. (Sundiang, Reviewer on Commercial
Law, p. 470, 2014 Edition)
67. What is the limit of liability under the COGSA?
Under Sec. 4(5) of the COGSA, when the shipper fails to declare the value of the goods in the bill
of lading, neither the carrier nor the ship shall in any event be or become liable for any loss or
damage to or in connection with the transportation of goods in an amount exceeding US$500 per
package. Thus, where there is a loss/damage to goods covered by contracts of carriage from a
foreign port to a Philippine port and there is an absence of a shipper’s declaration of the value of
the goods in the bill of lading, the rule on package limitation liability of US$500 per package
shall apply. (Philam Insurance Company, Inc. vs. Heung-A Shipping Corporation and Wallem
Philippines Shipping, Inc., G.R. No. 187701, July 23, 2014)
68. What is the prescriptive period for filing an action for lost/damaged goods under the
COGSA? Is failure to file notice of claim fatal to such action?
The prescriptive period is within one year after the delivery of the goods or the date when the
goods should have been delivered. Failure to comply with the notice requirement shall not affect
or prejudice the right of the shipper to bring suit. (Philam Insurance Company, Inc. vs. Heung-A
Shipping Corporation and Wallem Philippines Shipping, Inc., G.R. No. 187701, July 23, 2014)
69. When does the Warsaw Convention apply?
Warsaw Convention applies to all international carriage of persons, luggage or goods performed
by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air
transport undertaking. (Article 1.1, Warsaw Convention)

Pre-week Notes
70. Where can a plaintiff file an action for damages in Warsaw Convention?
Under Article 28(1) of the Warsaw Convention, the plaintiff may bring the action for damages
before —the court where the carrier is domiciled; 2. the court where the carrier has its principal
place of business; 3. the court where the carrier has an establishment by which the contract has
been made; or 4. the court of the place of destination. Article 28(1) of the Warsaw Convention is
jurisdictional in character. (Lhuiller vs. British Airways, G.R. No. 171092, March 15, 2010)
71. When is a contract of transportation considered international?
“International carriage" means any carriage in which, according to the contract made by the
parties, the place of departure and the place of destination, whether or not there be a break in
the carriage or a transhipment, are situated either within the territories of two High Contracting
Parties, or within the territory of a single High Contracting Party, if there is an agreed stopping
place within a territory subject to the sovereignty, suzerainty, mandate or authority of another
Power, even though that Power is not a party to this Convention. A carriage without such an
agreed stopping place between territories subject to the sovereignty, suzerainty, mandate or
authority of the same High Contracting Party is not deemed to be international for the purposes
of this Convention. (Article 1.2, Warsaw Convention)
72. What are the Five Freedoms of the Air Transport?
a) First Freedom of the Air - the right or privilege, in respect of scheduled international air
services, granted by one State to another State or States to fly across its territory without
landing (also known as a First Freedom Right).
b) Second Freedom of the Air - the right or privilege, in respect of scheduled international air
services, granted by one State to another State or States to land in its territory for non-
traffic purposes (also known as a Second Freedom Right).
c) Third Freedom of The Air - the right or privilege, in respect of scheduled international air
services, granted by one State to another State to put down, in the territory of the first
State, traffic coming from the home State of the carrier (also known as a Third Freedom
Right).
d) Fourth Freedom of The Air - the right or privilege, in respect of scheduled international air
services, granted by one State to another State to take on, in the territory of the first
State, traffic destined for the home State of the carrier (also known as a Fourth Freedom
Right).
e) Fifth Freedom of The Air - the right or privilege, in respect of scheduled international air
services, granted by one State to another State to put down and to take on, in the
territory of the first State, traffic coming from or destined to a third State (also known as
a Fifth Freedom Right). (Manual on the Regulation of International Air Transport)
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73. Distinguish Loan on Bottomry from Loan on Respondentia.
LOAN ON BOTTOMRY LOAN ON RESPONDENTIA

As to Definition Loan made by the shipowner or ship Loan taken on security of the cargo
agent guaranteed by vessel itself and laden on a vessel, and repayable upon
repayable upon arrival of vessel at safe arrival of cargo at destination
destination (Article 719, Code of (Article 719, Code of Commerce)
Commerce)
Note: No loan on bottomry may however

be made, in case on the salaries of the
crew, nor of the profits which may be
expected (Article 725, Code of
Commerce)
As to Who may Shipowner or ship agent. Outside of the Only the owner of the cargo
Contract residence of the owners –the
captain(Article 167, Code of Commerce)
Common Elements a. Exposure of security to marine peril; and
b. Obligation of the Debtor conditioned only upon safe arrival of the security at the
point of destination
Forms
a. May be executed by means of a:
b. Public instrument;
c. Policy signed by the contracting parties and the broker taking part therein; and
d. Private instrument (Article 720, Code of Commerce)
74. Until when is the duty to observe extra-ordinary diligence be exercised by a common
carrier in contract of carriage of goods?
The extraordinary responsibility of the common carrier lasts from the time the goods are
unconditionally placed in the possession of, and received by 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, without prejudice to the provisions of Article 1738. (Art.
1736, Civil Code of the Philippines)
The common carrier's duty to observe extraordinary diligence over the goods remains in full force
and effect even when they are temporarily unloaded or stored in transit, unless the shipper or
owner has made use of the right of stoppage in transitu. (Art. 1737, Civil Code of the Philippines)
The extraordinary liability of the common carrier continues to be operative even during the time
the goods are stored in a warehouse of the carrier at the place of destination, until the consignee
has been advised of the arrival of the goods and has had reasonable opportunity thereafter to
remove them or otherwise dispose of them. (Art. 1738, Civil Code of the Philippines)
75. Does Land Transportation and Franchising Regulatory Board (LTFRB) have the power
to suspend a fleet of a public utility that violates the law, to the damage of the
public?

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Yes. LTFRB has the power to suspend the Certificates of Public Convenience (CPCs) issued to
public utility vehicles depending on the assessment of the gravity of the violation, the potential
and actual harm to the public, and the policy impact of its own actions. The law clearly states that
LTFRB has the power “[t]o suspend or revoke any certificate issued under the provisions of [the
Public Service Act] whenever the holder thereof has violated or willfully and contumaciously
refused to comply with any order, rule or regulation of the Commission or any provision of this
Act. (LTFRB vs. GV Florida, G.R. No. 213088. June 28, 2017)
V. CORPORATION LAW
76. Richard owns 90% of the share of the capital stock in GOM Corporation. On one
occasion, GOM Corp., represented by Richard as President and General Manager,
executed a contract to sell a subdivision lot in favor of Tomas. However, GOM failed
to develop the subdivision. Thus, Tomas filed an action for rescission and damages
against GOM and Richard. Will the action prosper? Explain.
The action will prosper against GOM Corporation but not against Richard. Richard has a separate
and distinct personality from the corporation. His mere ownership of 90% of the shares of the
capital stock of GOM does not make him one with the corporation. Mere ownership by a single
stockholder, or by another corporation, of all or nearly all of the capital stock of a corporation is
not itself a suffering ground for disregarding the separate corporate personality. (Secosa vs.
Heirs of Erwin Suarez Francisco, G.R. No. 160039, June 29, 2004)
77. Can the court award moral damages to a corporation?
Yes. A juridical person is generally not entitled to moral damages because, unlike natural
persons, it cannot experience physical suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock. Nevertheless, item 7 of Article 2219 of the Civil Code
expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of
defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly complain for libel or any other form
of defamation and claim for moral damages. (Filipinas Broadcasting Network, Inc. vs. AMEC-
BCCM, G.R. No. 141994, January 17, 2005)
78. Explain the Corporate Entity Theory.
As a legal entity, a corporation has a personality distinct and separate from its individual
stockholders or members, and is not affected by the personal rights, obligations and transactions
of the latter. The property of the corporation is its property and not that of the stockholders, as
owners. On the other hand, the corporation is not liable for the debts, obligations or liabilities of
its stockholders.(Cruz vs. Dalisay, A.M. No. R-181-P, July 31, 1987)
79. What is the doctrine of “piercing the veil of corporate entity?”
Under the doctrine of “piercing the veil of corporate entity,” the legal fiction that a corporation is
an entity with a juridical personality separate and distinct from its members or stockholders may
be disregarded and the corporation will be considered as a mere association of persons, such
that liability will attach directly to the officers and the stockholders.
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Where it appears that business enterprises are owned, conducted and controlled by the same
parties, law and equity will disregard the legal fiction that these corporations are distinct entities
and shall treat them as one. This is in order to protect the rights of third persons. (Vicmar
Development Corporation vs. Elarcosa, G.R. No. 202215, December 19, 2015)
80. What are the grounds for application of the Doctrine of Piercing the Corporate Veil?
The Doctrine of Piercing the Corporate Veil applies upon the following circumstances:
a. If the fiction is used to perpetuate fraud (Fraud Test);

b. The complete control of one corporate entity to another which perpetuated the wrong is the
proximate cause of the injury (Control Test);
c. If a certain corporation is only an adjunct or an extension of the personality of the corporation
(Alter Ego or Instrumentality Test); and
d. If the fiction is pierced to make the stockholders liable for the obligation of the corporation
(Objective Test). (Philippine National Bank vs Ritratto Group, Inc., G.R. No. 142616, July 31, 2001)
81. When is the “Grandfather Rule” applied in determining the nationality of a

corporation?
The "control test" is still the prevailing mode of determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the natural resources of the Philippines.
When in the mind of the Court, there is doubt, based on the attendant facts and circumstances of
the case, in the 60-40 Filipino equity ownership in the corporation, then it may apply the
"grandfather rule." The Grandfather Rule was originally conceived to look into the citizenship of
the individuals who ultimately own and control the shares of stock of a corporation for purposes
of determining compliance with the constitutional requirement of Filipino ownership. (Narra
Nickel Mining and Development Corp. vs. Redmont Consolidated Mines Corporation, G.R. No.
195580, January 28, 2015)
82. The following is the composition of Sana Oil Company, a public utility company:
Outstanding Stock Kind of Stock Number of shares owned by
Filipinos
100 Common Shares 60
100 Class A Preferred Shares (with 60
right to elect directors)
100 Class B Preferred Shares (without 50
right to elect directors)
Is the company compliant with the 60-40 requirement under the Constitution?
No. To determine if a corporation is a “Philippine National,” the Voting Control Test and the
Beneficial Ownership Test must be applied.
Under the Voting Control Test, there should be at least 60% voting shares owned by Filipinos.
For Sana All Company, there should at least be a total of 120 of common shares and Class A
preferred shares (in any combination) owned and controlled by Filipinos for it to be compliant
with the 60% of the voting rights in favor of Filipinos requirement. Here, it has 60 common

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shares and 60 Class A preferred shares (with right to elect directors). Thus, Sana All Company
passed the Voting Control Test.
However, under the Beneficial Ownership Test, at least 60% of all the outstanding capital stock
should be owned by Filipinos. For Sana All Company, there should be at least a total of 180
shares of all the outstanding capital stock owned and controlled by Filipinos (provided that
among those 180 shares a total of 120 of the common shares and Class A preferred shares (in
any combination) are owned and controlled by Filipinos). Here, there are only 170 shares owned
by Filipinos out of all the outstanding capital stock. Thus, Sana All Company is not compliant
under the Beneficial Ownership Test. (Roy III vs. Herbosa, G.R. No. 207246, November 22,
2016)
83. What is a De Facto Corporation. What are the requisites of a De Facto Corporation?
A De Facto Corporation is a corporation which exists by virtue of an irregularity or a defect in the

organization or constitution or from some omission to comply with the conditions precedent by
which corporations de jure are created; organized with a colorable compliance with the
requirements of a valid law. Its existence cannot be inquired collaterally, such inquiry may be
made by the Solicitor General in a quo warranto proceeding. (Sec. 20, Corporation Code)
The requisites of a de facto Corporation are:
1. A valid law under which the corporation is organized;

2. A bona fide attempt on good faith to incorporate; and,
3. An assumption of corporate powers. (Seventh Day Adventist Conference Church of
Southern Philippines vs. Northeastern Mindanao Mission of Seventh Day Advantist, G.R.
No. 150416, July 21, 2006)
84. What is a corporation by estoppel?

A corporation by estoppel exists when a group of persons assumes to act as a corporation
knowing it to be without authority to do so and enters into a transaction with a third person on
the strength of such appearance. It cannot be permitted to deny its existence in an action under
said transaction. It is neither a de jure nor a de facto corporation. (International Express vs. CA,
G.R. No. 119002, October 19, 2000)
85. Who are estopped in denying the existence of a corporation by estoppel?
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party.
In the first instance, an unincorporated association, which represented itself to be a corporation,
will be estopped from denying its corporate capacity in a suit against it by a third person who
relied in good faith on such representation. It cannot allege lack of personality to be sued to
evade its responsibility for a contract it entered into and by virtue of which it received advantages
and benefits.
A third party who, knowing an association to be unincorporated, nonetheless treated it as a

corporation and received benefits from it, may be barred from denying its corporate existence in a
suit brought against the alleged corporation. In such case, all those who benefited from the
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transaction made by the ostensible corporation, despite knowledge of its legal defects, may be
held liable for contracts they impliedly assented to or took advantage of.
Those having reaped the benefits of the contract entered into by persons with whom he
previously had an existing relationship is deemed to be part of said association and is covered by
the scope of the doctrine of corporation by estoppel. (Lim Tong Lim vs. Philippine Fishing Gear
Industries, Inc., G.R. No. 136448. November 3, 1999)
86. Discuss the Trust Fund Doctrine.

The trust fund doctrine considers the subscribed capital stock as a trust fund for the payment of
the debts of the corporation, and to which creditors have a right to look up to for the satisfaction
of their credits. Hence, the corporation cannot dissipate it to the prejudice of its creditors.
(Miravite, Bar Review Materials in Commercial Law, 16th Edition, 2017)
It is an established doctrine that subscriptions to the capital stock of a corporation constitute a

fund to which creditors have a right to look up to for satisfaction of their claims, and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts. (Ong vs. CA, G.R. No. 119858, April 29, 2003)
87. Discuss the Concept of Business Judgment Rule.
Questions of policy or of management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to substitute its 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. (Montelibano vs. Bacolod-Murcia Milling
Co., Inc., G.R. No. L-15092, May 18, 1962)
88. What is the Doctrine of Centralized Management?
The corporate powers of all corporations formed under this Code shall be exercise by all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees. (Section 23, Corporation Code)
The corporate powers of all corporations shall be exercised by the board of directors. Just as a
natural person may authorize another to do certain acts in his behalf, so may the board of
directors of a corporation validly delegate some of its functions to individual officers or agents
appointed by it. Thus, contracts or acts of a corporation must be made either by the board of
directors or by a corporate agent duly authorized by the board. Absent such valid
delegation/authorization, the rule is that the declarations of an individual director relating to the
affairs of the corporation, but not in the course of, or connected with the performance of
authorized duties of such director, are held not binding on the corporation. (Manila Metal
Container Corporation vs. PNB, G.R. No. 166862, December 20, 2006)
89. Harold bought from Michaela 2,200 shares of stocks of Lexi Corp evidenced by a
notarized deed of sale of shares of stocks. Michaela endorsed and delivered the
certificate of stocks to Harold and requested Lexi Corp to record the sale in its stock
and transfer books and to issue new certificate of stocks in favor of Harold. The
corporate secretary denied the recording of the sale stating that under an existing
stockholder’s resolution that existing stockholders have the right of first refusal in

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the event shares of other stockholders are offered for sale. Andaya opposed the
refusal and claimed that the restriction does not appear in the articles of
incorporation, the by-laws and the certificate of stock. He filed an action for
mandamus to compel Lexi Corp to record the sale. Can Harold compel the recording
of the transfer of stocks in the stock and transfer book of the corporation?
Yes. 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. A person who has
purchased stock, and who desires to be recognized as a stockholder, for the purpose of voting,
must secure a standing by having the transfer recorded upon the books. If the transfer is not
duly made upon request, he has, as his remedy, to compel it to be made. Clearly, the right of a
transferee/assignee to have stocks transferred to his name is an inherent right flowing from his
ownership of the stocks. (Andaya vs. Rural Bank of Cabadbaran, G.R. No. 188769, August 3,
2016)
90. What are the rules on calling of a meeting for corporations when the officer
authorized to call such meeting refuses, neglects, or fails to do so?
Where there is an officer authorized to call a meeting and that officer refuses, fails, or neglects to
call a meeting, the SEC can assume jurisdiction and issue an order to the petitioning stockholder
to call a meeting pursuant to its regulatory and administrative powers to implement the
Corporation Code. This is clearly provided for by Section 50 of the Corporation Code:
Sec. 50. Regular and special meetings of stockholders or members. Whenever, for any cause,
there is no person authorized to call a meeting, the Securities and Exchange Commission, upon
petition of a stockholder or member, and on a showing of good cause therefore, may issue an
order to the petitioning stockholder or member directing him to call a meeting of the corporation
by giving proper notice required by this Code or by the bylaws. The petitioning stockholder or
member shall preside thereat until at least majority of the stockholders or members present have
chosen one of their member[s] as presiding officer. (Bernas vs. Cinco, G.R. Nos. 163356-57, July
1, 2015)
91. When can a stock corporation acquire its own shares?

A stock corporation can acquire its own shares under the following conditions:
a. That it be for a legitimate and proper corporate purpose such as:

i. to eliminate fractional shares arising out of stock dividends;
ii. to collect or compromise an indebtedness to the corporation out of unpaid
subscription in a delinquency sale;
iii. to purchase delinquent shares sold during the sale; or
iv. to pay dissenting or withdrawing stockholders entitled to such payment; and
b. There shall be unrestricted retained earnings to purchase the same and its capital is
not thereby impaired. (Sec. 41, Corporation Code)
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92. What is an ultra vires act? What is its legal implication?
An ultra vires act is an act done by a corporation outside of the express and implied powers
vested in it by its charter and by law.
A distinction should be made between corporate acts or contracts which are illegal and those
which are merely ultra vires. The former contemplates the doing of an act which is contrary to
law, morals, or public policy or public duty, and are, like similar transactions between public
order, or contravene some rules of individuals, void. They cannot serve as basis of a court action,
nor acquire validity by performance, ratification, or estoppel.
Mere ultra vires acts, on the other hand, or those which are not illegal and void ab initio, but are
not merely within the scope of the articles of incorporation are merely voidable and may become
binding and enforceable when ratified by the stockholders. (Bernas vs. Cinco, G.R. Nos. 163356-
57, July 01, 2015)
93. When can an unlicensed foreign corporation be considered as doing business in the
Philippines?
Under the Continuity Test, doing business implies a continuity of commercial dealings and
arrangements, and contemplates to some extent the performance of acts or works or the exercise
of some functions normally incident to and in progressive prosecution of, the purpose and object
of its organization.
Under the Substance Test, a foreign corporation is doing business in the country if it is continuing
the body or substance of the enterprise of the business for which it was organized. (Aquino and
Sundiang, Reviewer on Commercial Law, p. 275, 2014 Edition)
94. State the rules regarding the right of a foreign corporation to bring suit in Philippine
courts.
The principles regarding the right of a foreign corporation to bring suit in Philippine courts may
thus be condensed in four statements:
(1) if a foreign corporation does business in the Philippines without a license, it cannot sue before
the Philippine courts;
(2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue
before Philippine courts on an isolated transaction or on a cause of action entirely independent of
any business transaction;
(3) if a foreign corporation does business in the Philippines without a license, a Philippine citizen
or entity which has contracted with said corporation may be estopped from challenging the
foreign corporation’s corporate personality in a suit brought before Philippine courts; and
(4) if a foreign corporation does business in the Philippines with the required license, it can sue
before Philippine courts on any transaction. (Agilent Technologies Singapore (PTE), Ltd. vs.
Integrated Silicon Technology Phil. Corp., G.R. No. 154618, April 14, 2004)

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95. When does merger or consolidation takes effect?
The merger shall only be effective upon the issuance of a certificate of merger by the SEC,
subject to its prior determination that the merger is not inconsistent with the Corporation Code or
existing laws. The same rule applies to consolidation which becomes effective not upon the mere
agreement of the members but only upon issuance of the certificate of consolidation by the SEC.
(Mindanao Savings and Loan Assoc vs. Wilkom, G.R. No. 178618, October 11, 2010)
96. Under the Nell Doctrine, so called because it was first pronounced by the Supreme
Court in the 1965 ruling in Nell v. Pacific Farms, Inc., the general rule is that where
one corporation sells or otherwise transfers all of its assets to another corporation,
the latter is not liable for the debts and liabilities of the transferor. State the
exceptions to the Nell Doctrine.
a. When the buyer expressly or impliedly assumes the liabilities of the seller;
b. If the same amounts to a merger or consolidation;
c. If the sale is entered into fraudulently or made in bad faith;
d. If the buyer is merely a continuation of the personality of the selling corporation or the
so-called business-enterprise transfer rule. (Nell Company vs. Pacific Farms Inc., G.R. No.
L-20850, November 29, 1965)
97. What is appraisal right? When can it be exercised?
It refers to the right of the stockholder to dissent and demand payment of the fair value of his
shares, after dissenting from a proposed corporate action involving a fundamental change in the
charter or articles of incorporation in the instance provided for under the Code. (Sec. 81,
Corporation Code)
It can be exercised in any of the following cases:
a. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code;
c. In case of merger or consolidation (Sec. 81, Corporation Code);
d. In case the corporation decides to invest its funds in another corporation or business for any
purpose other than its primary purpose as provided in Section 42 of the Code;
e. Any stockholder of a close corporation may, for any reason, compel said corporation to
purchase his shares at their fair value, which shall not be less than their par or issued value,
when the corporation has sufficient assets in its books to cover its debts and liabilities
exclusive of capital stock. (Sec. 105, Corporation Code)
Note: In items a to d, the corporation must have unrestricted retained earnings.
98. What is pre-emptive right? When is a stockholder not entitled to exercise his pre-
emptive right?
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It is the right to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied by the articles of incorporation or an
amendment thereto. (Sec. 39, Corporation Code)
The right is not available in the following cases:
a. When shares to be issued is in compliance with laws requiring stock offerings or minimum
stock ownership by the public; or
b. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of
the outstanding capital stock either:
i. In exchange for property needed for corporate purpose, or
ii. In payment of a previously contracted debt. (Sec. 39, Corporation Code)
Note: In close corporations, pre-emptive right applies to all issued shares without exception.
99. Discuss the concept of (a) Self-Dealing Director/s and (b) Interlocking Directors, and
the status of the contracts entered by the corporation with them.
Point of Distinction Self-Dealing Interlocking Officers/Directors

Officers/Directors (Section 33)
(Section 32)
Status of the contract A contract of the corporation with A contract between two or more
one or more of its directors or corporations having interlocking
trustees or officers is voidable, directors shall not be invalidated
at the option of the corporation, on that ground alone. Provided
unless all the following conditions that:
are present:
1. Contract is not fraudulent;
1. That the presence of such
director or trustee in the board 2. Contract is fair and reasonable
meeting in which the contract under the circumstances; and
was approved was not necessary
to constitute a quorum for such 3. If the interest of the interlocking
meeting; director in one corporation or
corporations is merely nominal (not
2. That the vote of such director exceeding 20% of the outstanding
or trustee was not necessary for capital stock), he shall be subject
the approval of the contract; to the provisions of Sec. 32 insofar
as the latter corporation or
3. That the contract is fair and corporations are concerned.
reasonable under the
circumstances;
4. In case of corporations vested

with public interest, material
contracts are approved by at
least 2/3 of the entire
membership of the board, with at
least a majority of the
independent directors voting to
approve the material contract;
and

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5. That in the case of an officer,
the contract with the officer has
been previously authorized by
the board of directors.
Ratification by stockholders Where any of the first two No such provision for ratification.
conditions set forth in the
preceding paragraph is absent, in
the case of a contract with a
director or trustee, such contract
may be ratified by the vote of the
stockholders representing at least
two-thirds (2/3) of the
outstanding capital stock or of at
least two-thirds (2/3) of the
members in a meeting called for
the purpose: Provided, That full
disclosure of the adverse interest
of the directors or trustees
involved is made at such
meeting: Provided, however,
That the contract is fair and
reasonable under the
circumstances.
100. What is the Instrumentality Rule?

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in
fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the
instrumentality may be disregarded. (Lipat vs. Pacific Banking Corporation, G.R. No. 142435, April
30, 2003.
101. What are the tests in determining the applicability of the doctrine of piercing the veil
of corporate fiction?
a. Control, not mere majority or complete stock control, but complete dominion, not only of
finances but of policy and business in respect to the transaction attacked so 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 fraud or wrong in
contravention of plaintiff’s legal rights;
c. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of. (Concept Builders vs. NLRC, G.R. No. 108734, May 29, 1996)
102. Are the employees of constituent corporation, which ceased to exist by virtue of
merger with another, absorbed by the surviving corporation?
Yes. The merger of a corporation with another does not operate to dismiss the employees of the
corporation absorbed by the surviving corporation. This is in keeping with the nature and effects
of a merger as provided under law and the constitutional policy protecting the rights of labor.
The employment of the absorbed employees subsists.
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This acquisition of all assets, interests, and liabilities of the absorbed corporation necessarily
includes the rights and obligations of the absorbed corporation under its employment contracts.
Consequently, the surviving corporation becomes bound by the employment contracts entered
into by the absorbed corporation. These employment contracts are not terminated. They subsist
unless their termination is allowed by law. (Philippine Geothermal, Inc. Employees Union vs.
Unocal Philippines Inc. (Chevron), G.R. No. 190187, September 28, 2016)
103. What is a Voting Trust?
A voting trust is a trust created by an agreement between a group of the stockholders of a

corporation and the trustee or by a group of identical agreements between individual
stockholders and a common trustee, whereby it is provided that for a term of years, or for a
period contingent upon a certain event, or until the agreement is terminated, control over the
stock owned by such stockholders, either for certain purposes or for all purposes, is to be lodged
in the trustee, either with or without a reservation to the owners, or persons designated by them,
of the power to direct how such control shall be used. (Lee vs. CA, G.R. No. 93695, February 4,
1992)
104. Summary of the voting requirements in various corporate acts.
Corporate act Votes Required

Board of Directors/Trustees Stockholders/Members
Amendments, repeal, or adoption Majority vote of BOD General Rule: Majority vote of
of new by-law the outstanding capital stock
Exception: If delegated by the

stockholders to the BOD
Amendment to articles of Majority vote of BOD Vote representing 2/3 of the
incorporation outstanding capital stock
Entering into management Majority of the quorum of the General Rule: Vote of the
contract BOD majority of the outstanding
shares of stock or members of
both the managing and the
managed corporation.
Exception: The vote required for

the managed corporation is not
merely majority but 2/3 of the
outstanding capital stock in
cases where:
1) A stockholder or stockholders
representing the same interest of
both the managing and the
managed corporations own or
control more than one-third
(1/3) of the total outstanding
capital stock entitled to vote of
the managing corporation; or
2) Majority of the members of

the board of directors of the

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managing corporation also
constitute a majority of the
members of the board of
directors of the managed
corporation.
Issuance
Extending or shortening the Majority vote of the BOD Vote representing 2/3 of the
corporate term outstanding capital stock
Increase or decrease of capital Majority vote of the BOD Vote representing 2/3 of the
stock outstanding capital stock
Investment of corporate funds in Majority vote of the BOD Vote representing 2/3 of the
another corporation or business or outstanding capital stock
for any other purpose other than
the primary purpose
To incur, create, or increase Majority vote of the BOD Vote representing 2/3 of the
bonded indebtedness outstanding capital stock
The sale or other disposition of all Majority vote of the BOD Vote representing 2/3 of the
or substantially all of the outstanding capital stock
corporate assets
Merger or consolidation Majority vote of the BOD Vote representing 2/3 of the
outstanding capital stock
Voluntary dissolution Majority vote of the BOD Vote representing 2/3 of the
Grant of compensation to Approval of the Board Majority vote of the outstanding
directors capital stock
Deny Pre-emptive Right Majority vote of the BOD Vote representing 2/3 of the
VI. SECURITIES REGULATION CODE
105. What securities are exempt from the requirement of registration?
a. Any security issued or guaranteed by the Government of the Philippines, or by any political
subdivision or agency thereof, or by any person controlled or supervised by, and acting as
an instrumentality of said Government.
b. Any security 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: Provided, That the Commission may require compliance
with the form and content for disclosures the Commission may prescribe.
c. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper
adjudicatory body.
d. Any security or its derivatives the sale or transfer of which, by law, is under the supervision
and regulation of the Office of the Insurance Commission, Housing and Land Use Rule
Regulatory Board, or the Bureau of Internal Revenue.
e. Any security issued by a bank except its own shares of stock. (Sec. 9.1 of the Securities
Regulation Code)
106. Who is considered an “insider”?
“Insider” means: (a) the issuer; (b) a director or officer (or person performing similar functions)
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of, or a person controlling the issuer; (c) a person whose relationship or former relationship to
the issuer gives or gave him access to material information about the issuer or the security that is
not generally available to the public; (d) a government employee, or director, or officer of an
exchange, clearing agency and/or self-regulatory organization who has access to material
information about an issuer or a security that is not generally available to the public; or (e) a
person who learns such information by a communication from any of the foregoing insiders.
(Section 3.8, RA 8799 Securities and Regulations Code)
107. When is information considered as material non-public?
Information is "material non-public" 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 reasonable time for the
market to absorb the information; or
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. (Sec. 27.2, RA 8799
Securities Regulation Code)
108. What is Tender Offer? When is it required to be made?
Tender Offer means a publicly announced intention by a person acting alone or in concert with
other persons to acquire the outstanding equity securities of a public company (i.e. one listed on
an exchange) or outstanding equity securities of an associate or related company of such public
company which controls the said public company. (Rule 19.1.8, 2015 SRC Rules)
It is required when:
a. Any person or group of persons acting in concert, who intends to acquire thirty-five percent
(35%) or more of equity shares in a public company. They must, however, disclose the
intention to acquire the shares contemporaneously with the tender offer.
b. Any person or group of persons acting in concert, who intends to acquire thirty-five percent
(35%) or more of equity shares in a public company in one or more transactions within a
period of twelve (12) months, shall be required to make a tender offer to all holders of such
class for the number of shares so acquired within the said period.
c. If any acquisition of even less than thirty-five percent (35%) would result in ownership of
over fifty-one percent (51%) of the total outstanding equity securities of a public company,
the acquirer shall be required to make tender offer for all the outstanding equity securities to
all remaining stockholders of the said company at a price supported by a fairness opinion
provided by an independent financial advisor or equivalent third party. The acquirer in such a
tender offer shall be required to accept any and all securities thereof. (RA 8799, Rule 19 (2),
Amended IRR)
109. What are the defenses against insider trading?

a) The insider proves that the information was not gained from such relationship; or
b) If the other party selling to or buying from the insider (or his agent) is identified, the insider
proves:
i. that he disclosed the information to the other party; or

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ii. that he had reason to believe that the other party otherwise is also in possession of the
information. (Rule 27.1, 2015 SRC Rules)
110. Should civil cases for damages arising from violation of SRC be first filed with the SEC
before resorting to judicial action?
No. Civil suits falling under the SRC are under the exclusive original jurisdiction of the Regional
Trial Courts and hence, need not be first filed before the SEC, unlike criminal cases wherein the
latter body exercises primary jurisdiction. (Pua vs. Citibank, N.A., G.R. No. 180064, September
16, 2013, J. Perlas Bernabe)
111. What is an investment contract?
An investment contract has been defined as a contract, transaction or scheme (collectively

“contract”), whereby a person invests his money in a common enterprise and is led to expect
profits primarily from the efforts of others. An investment contract is presumed to exist whenever
a person seeks to use the money or property of others on the promise of profits and a common
enterprise is deemed created where 2 or more investors “pool” their resources creating a
common enterprise, even if the promoter receives nothing more than a broker’s commission.
(Rule 3, par. 1 subpar. G, SRC Amended Implementing Rules and Regulations; SEC vs. Santos,
G.R. No. 195542, March 19, 2014)
112. Yenkell Cement Corporation (YCC) is a public corporation whose shares are listed at
the PSE. It is 60% owned by Yenkell Holdings Corporation (YHC) and 20% by Yengco
Exploration Inc. (YEI). The remaining 20% is held by the public. YHC is a private non-
listed corporation which, in turn, is 60% owned by Yatlas Mines Inc. (YMI), and 40%
by Yacnotan Consolidated Inc. (YCI). On August 8, 2008, the Board of Directors of
YEI passed a resolution approving the acquisition of 50% and 25% of the shares held
by YMI and YCI, respectively, in the authorized capital stock of YHC. Yolly, one of the
staff members in the office of the Corporate Secretary of YEI, was immediately asked
to type the resolution and file the disclosure with the PSE and the Securities and
Exchange Commission (SEC). In acquiring 75% of the total capital stock of YHC,
should YEI be required to do a mandatory tender offer?
Yes. The coverage of the mandatory tender offer rule covers not only direct acquisition but
also indirect acquisition or “any type of acquisition.” By happenstance, as a result of the
transaction, YEI became an indirect owner of YCC. Ownership acquisition is to mean both direct
and indirect. 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. The bottomline
of the law is to give the shareholder of the listed company the opportunity to decide whether or
not to sell in connection with a transfer of control. (Cemco Holdings, Inc. vs. National Life
Insurance Company of the Philippines, Inc. G.R. No. 171815. August 7, 2007)
113. By public corporation, does the law contemplate only those whose shares are listed in
the stock exchange?
No. Rule 3(1)(m) of the Amended Implementing Rules and Regulations of the SRC, which defines
a “public company” as “any corporation with a class of equity securities listed on an Exchange or
with assets in excess of Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or
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more holders, at least two hundred (200) of which are holding at least one hundred (100) shares
of a class of its equity securities.” From these provisions, it is clear that a “public company,” as
contemplated by the SRC, is not limited to a company whose shares of stock are publicly listed;
even companies like the Bank, whose shares are offered only to a specific group of people, are
considered a public company, provided they meet the requirements enumerated above.
(Philippine Veterans Bank vs. Callangan, G.R. No. 191995. August 3, 2011)
114. What is proxy solicitation and proxy validation?

Proxy solicitation involves the securing and submission of proxies, while proxy validation concerns
the validation of such secured and submitted proxies. (SEC vs. Rosete, G.R. No. 183905, April 16,
2009)
115. When proxies are solicited in relation to election of corporate officers, and a
controversy arose therein, which court or tribunal has the jurisdiction to resolve the
controversy?
The regular courts. Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC,
the jurisdiction of the regular trial courts with respect to election-related controversies is
specifically confined to “controversies in the election or appointment of directors, trustees,
officers or managers of corporations, partnerships, or associations.” Evidently, the jurisdiction of
the regular courts over so-called election contests or controversies under Section 5(c) does not
extend to every potential subject that may be voted on by shareholders, but only to the election
of directors or trustees, in which stockholders are authorized to participate under Section 24 of
the Corporation Code. This qualification allows for a useful distinction that gives due effect to the
statutory right of the SEC to regulate proxy solicitation, and the statutory jurisdiction of regular
courts over election contests or controversies. The power of the SEC to investigate violations of
its rules on proxy solicitation is unquestioned when proxies are obtained to vote on matters
unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-A. However,
when proxies are solicited in relation to the election of corporate directors, the resulting
controversy, even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should
be properly seen as an election controversy within the original and exclusive jurisdiction of the
trial courts by virtue of Section 5.2 of the SRC in relation to Section 5(c) of Presidential Decree
No. 902-A. (SEC vs. Rosete, G.R. No. 183905. April 16, 2009)
VII. BANKING
116. May the Monetary Board summarily place a bank under receivership without prior
notice and hearing?
Yes. Under the “Close Now Hear Later Scheme,” the Monetary Board, in cases of existence of
grounds for receivership, may summarily and without need for prior hearing forbid the institution
from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation
(PDIC) as receiver of the banking institution.
This "close now, hear later" scheme is grounded on practical and legal considerations to prevent
unwarranted dissipation of the bank’s assets and as a valid exercise of police power to protect
the depositors, creditors, stockholders, and the general public. (BSP vs. Rural Bank of Parañaque,
G.R. No. 184778, October 2, 2009)

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There is no violation of due process since “Closure Now-Hear Later Scheme” is grounded on
practical and legal considerations to prevent unwarranted dissipation of the bank’s assets and as
a valid exercise of police power to protect the depositors, creditors, stockholders, and the general
public. (Central Bank vs. Court of Appeals, G.R. No. 76118, March 30, 1993)
117. Conservatorship and Receivership and Rehabilitation.
Point of Distinction Conservatorship Receivership and

(Section 29, New Central Rehabilitation
Bank Act) (Section 30, New Central
Bank Act)
Grounds Whenever, on the basis of a Whenever, upon report of the
report submitted by the head of the supervising or
appropriate supervising or examining department, the
examining department, the Monetary Board finds that a bank
Monetary Board finds that a bank or quasi-bank:
or a quasi-bank is in a state of
continuing inability or (a) is unable to pay its liabilities
unwillingness to maintain a as they become due in the
condition of liquidity deemed ordinary course of business:
adequate to protect the interest Provided, That this shall not
of depositors and creditors, the include inability to pay caused by
Monetary Board may appoint a extraordinary demands induced
conservator with such powers as by financial panic in the banking
the Monetary Board shall deem community;
necessary
(b) has insufficient realizable
assets, as determined by the
Bangko Sentral, to meet its
liabilities; or
(c) cannot continue in business

without involving probable losses
to its depositors or creditors; or
(d) has willfully violated a cease

and desist order under Section 37
that has become final, involving
acts or transactions which
amount to fraud or a dissipation
of the assets of the institution.
Powers and duties a. Take charge of the assets, a. Immediately gather and take
liabilities, and the charge of all assets and liabilities
management thereof; of the institution, and administer
b. reorganize the management; the same for the benefit of the
c. collect all monies and debts creditors;
due said institution; and b. Exercise the general powers of
d. exercise all powers a receiver under the Revised
necessary to restore its Rules of Court;
viability c. May deposit or place the funds
of the institution in non-
speculative investments;
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d. The receiver shall not, with
the exception of administrative
expenses, pay or commit any act
that will involve the transfer or
disposition of any asset of the
institution.
Who may be appointed The conservator should be Philippine Deposit Insurance
competent and knowledgeable in Corporation in case of banking
bank operations and institution.
management.
For a quasi-bank, any person of
recognized competence in
banking or finance may be
designed as receiver.
118. Sps. Pulido contracted a monetary loan with River Bank in the amount of P135,000,
evidenced by a promissory note, due and demandable on February 27, 1981, and
secured by a Real Estate Mortgage executed on their lot together with the
improvements thereon. On March 23, 1985, River Bank went bankrupt and was
placed under receivership/liquidation by the Central Bank from April 25, 1985 until
August 1992. In 1995, River Bank filed a Petition for the foreclosure of mortgage of
the spouses’ property. Sps. Pulido opposed this on the ground that the right of action
of River Bank to foreclose the mortgage had already prescribed. On the other hand,
River Bank argues that its right of action has not prescribed because the period
within which the Bank was placed under receivership was a fortuitous event which
suspended the running of the ten-year prescriptive period in bringing actions. Is
River Bank correct?
No. When a bank is prohibited from continuing to do business by the Central Bank and a receiver
is appointed for such bank, that bank would not be able to do new business, i.e., to grant new
loans or to accept new deposits. However, the receiver of the bank is in fact obliged to collect
debts owing to the bank, which debts form part of the assets of the bank. The receiver must
assemble the assets and pay the obligation of the bank under receivership, and take steps to
prevent dissipation of such assets. Accordingly, the receiver of the bank is obliged to collect pre-
existing debts due to the bank, and in connection therewith, to foreclose mortgages securing
such debts.
Accordingly, the period within which the Bank was placed under receivership did not suspend the
running of the prescriptive period. Thus, its right to foreclose the mortgage by the time it sought
to foreclose it in 1995 had already prescribed. (Larrobis vs. Philippine Veterans Bank, G.R. No.
135706, October 1, 2004)
119. Should the Monetary Board first make its own independent finding that a bank could
no longer be rehabilitated, instead of merely relying on the findings of the PDIC,
before ordering the liquidation of the said bank?
No. Nothing in Section 30 of RA 7653 requires the BSP, through the Monetary Board, to make an
independent determination of whether a bank may still be rehabilitated or not. As expressly
stated in Sec. 30, once the receiver determines that rehabilitation is no longer feasible, the
Monetary Board is simply obligated to: (a) notify in writing the bank's board of directors of the
same; and (b) direct the PDIC to proceed with liquidation. If the law had indeed intended that
the Monetary Board make a separate and distinct factual determination before it can order the

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liquidation of a bank or quasi-bank, then there should have been a provision to that effect. There
being none, it can safely be concluded that the Monetary Board is not so required when the PDIC
has already made such determination. (Apex Bancrights Holdings vs. Bangko Sentral ng Pilipinas,
G.R. No. 214866, October 2, 2017, J. Perlas-Bernabe)
120. What are the exceptions to Secrecy of Bank Deposits?

a. When there is written permission of the depositor or investor;
b. Impeachment cases;
c. Upon the order of a competent court in cases of bribery or dereliction of duty of public
officials;
d. Upon the order of a competent court in cases where the money deposited or invested is the
subject of litigation;
e. Upon order of the competent court or tribunal in cases involving unexplained wealth under
Sec. 8 of the Anti-Graft and Corrupt Practices Act (R.A. 3019);
f. Upon inquiry by the Commissioner of Internal Revenue for the purpose of determining the
net estate of a deceased depositor;
g. In case the taxpayer compromised his tax liability by reason of financial incapacity.
h. Upon the order of a competent court or in proper cases by the Anti-Money Laundering
Council where there is probable cause of money laundering.
i. Disclosure of the Treasurer of the Philippines for dormant deposits for at least 10 years
under the Unclaimed Balances Act (R.A. 3936)
On Foreign Currency deposits: only when there is a written consent of depositor.

See also Sec. 27 of R.A. 9372 where the deposits, placements, trust accounts, assets and records
in a bank or financial institution of a person charged with or suspected of the crime of terrorism
or, conspiracy to commit terrorism may be examined by virtue of a court order.
121. Is the case of plunder exempted from the protection of R.A. No. 1405?
Yes. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no
reason is seen why these two classes of cases cannot be exempted from the rule making bank
deposits confidential. The policy as to one cannot be different from the policy as to the other.
Plunder being thus analogous to bribery, the exception to R.A. 1405 applicable in cases of bribery
must also apply to cases of plunder. (Ejercito vs. Sandiganbayan, G.R. Nos. 157294-95,
November 30, 2006)
122. Are the deposits under a Trust Agreement covered by the Bank Secrecy Law?
Yes. The term deposits used in the law is to be understood broadly and not limited only to
accounts which give rise to a creditor-debtor relationship between the depositor and the bank.
(Ejercito vs. Sandiganbayan, G.R. Nos. 157294-95, November 30, 2006)
123. Raymond, an American tourist, was arrested for four counts of rape committed
against Crushie. Recovered from him are several dollar checks and a dollar account in
the China Banking Corp. In a civil case filed against him, the trial court awarded
Crushie moral, exemplary and attorney’s fees amounting to almost P1,000,000.00.
Crushie tried to execute the judgment on the dollar deposit of Raymond with the
China Banking Corp. but the latter refused arguing that Section 113 of Central Bank
Circular No. 960 exempts foreign currency deposits from attachment, garnishment, or
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any other order or process of any court, legislative body, government agency or any
administrative body whatsoever. Is Raymond’s contention correct?
No. Although foreign currency deposits shall be exempt from attachment, garnishment, or any
other order or process of any court, legislative body, government agency or any administrative
body whatsoever. However, this is subject to an exception that the application of Section 8 of
R.A. 6426 depends on the extent of its justice. The garnishment of a foreign currency deposit
should be allowed to prevent injustice and for equitable grounds, otherwise, it would negate
Article 10 of the New Civil Code which provides that “in case of doubt in the interpretation or
application of laws, it is presumed that the lawmaking body intended right and justice to prevail.
(Salvacion vs. Central Bank of the Philippines, G.R. No. August 21, 1997)
124. May the Office of the Ombudsman order to have an in camera inspection (orders that
the bank records would be examined without bringing the documents outside the
bank premises) of a person’s account as an exception to the law on secrecy of bank
deposits even in the absence of a pending case before a court of competent
jurisdiction?
No. Before an in camera inspection of bank accounts may be allowed, there must be a pending
case before a court of competent jurisdiction. Further, the account must be clearly identified, and
the inspection limited to the subject matter of the pending case before the court of competent
jurisdiction. The bank personnel and the account holder must be notified to be present during the
inspection, and such inspection may cover only the account identified in the pending case. Thus,
when there is no pending litigation yet before a court of competent authority, but only an
investigation by the Ombudsman on the so-called "scam", any order for the opening of the bank
account for inspection is clearly premature and legally unjustified. (Marquez vs. Desierto, G.R.
No. 135882, June 27, 2001)
125. Joseph and Jonas, Directors of ABC Bank, were accused of engaging in an unsafe and
unsound banking practices, more particularly acts that violate the prohibition on self-
dealing. In question was the manner with which they have handled the affairs of the
bank, in particular, the fraudulent loans and dacion en pago which they approved in
favor of several dummy corporations known to have close ties and are directly
controlled by them. Should a legal action be pursued against Joseph and Jonas, will
this be under the jurisdiction of the Bangko Sentral ng Pilipinas or the regular courts?
The Bangko Sentral ng Pilipinas has jurisdiction. The law vests in the BSP jurisdiction over
operations and activities of the banks. The allegation in the complaints calls for the examination
of the allegedly questionable loans. Whether these loans are covered by the prohibition on self-
dealing is a matter for the BSP to determine. These are not ordinary intra-corporate matters;
rather, they involve banking activities which are by law, regulated and supervised by the BSP.
(Arcenas, Jr. vs. Marella, G.R. Nos. 168332/169053, June 19, 2009)
126. Pio is the president of Western Bank. His wife applied for a loan with the said bank to
finance an internet cafe. The loan officer told her that her application will not be
approved because the grant of loans to related interests of bank directors, officers,
and stockholders is prohibited by the General Banking Law. Is the loan officer
correct?

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No. Section 36 of the General Banking Law of 2000 does not entirely prohibit directors or officers
of the bank, directly or indirectly, from borrowing from the bank. In this case, Pio is the president
of Western Bank, which makes him an officer, director and stockholder of the said bank. The
General Banking Law provides for additional restrictions to the bank before it can lend to its
directors or officers. A written approval of the majority vote of all the directors of the bank,
excluding the director concerned, is required. Furthermore, such dealings must be upon terms
not less favorable to the bank than those offered to others. A violation of this provision will cause
his or her position to be declared vacant and the erring director or officer subjected to the penal
provisions of the New Central Bank Act. (Section 1326, Central Bank's "Manual of Regulations for
Banks and Other Financial Intermediaries; Ranioso vs. CA, G.R. No. 117416, December 8, 2000)
127. What is a commercial bank?
A commercial bank is a bank that can: (1) accept drafts; (2) issue letters of credit:13] discount
and negotiate promissory notes, drafts, bills of exchange, and other evidence of debt:(4) accept
or create demand deposits; (5) receive other types of deposits, as well as deposit substitutes; (6)
buy and sell foreign exchange, as well as gold or silver bullion; (7) acquire marketable bonds and
other debts securities; and (8) extend credit, subject to such rules promulgated by the Monetary
Board. (Section 29, The General Banking Law of 2000)
128. What is a thrift bank?

A thrift bank is established as a savings and mortgage bank, a stock savings and loan association,
or a private development bank, for the purpose of: (1) accumulating the savings of depositors
and investing them in outlets determined by the Monetary Board as necessary in the furtherance
of national economic objectives; (2) providing short-term working capital, medium and long-term
financing, to businesses engaged in agriculture, services, industry and housing; and (3) providing
diversified financial and allied services for its chosen market and constituencies specially for small
and medium enterprises and individuals. (Section 3[a], RA 7906, Thrift Banks Act of 1995)
129. As part of the safeguards against imprudent banking, the General Banking Law
imposes limits or restrictions on loans and credit accommodations, which may be
extended by banks. Identify at least two (2) of these limits or restrictions and explain
the rationale of each of them.
Any two (2) of the following limits or restrictions on loan and credit transactions which may be
extended by banks, as part of the safeguards against imprudent banking, to wit:
a. Single Borrowers Limit Rules - are those which regulate the total amount of loans, credit
accommodations and guarantees that may be extended by a bank to any person,
partnership, association, corporation or other entity. The rules seek to protect a bank from
making excessive loans to a single borrower by prohibiting it from lending beyond a specified
ceiling.
b. DOSRI Rules – These rules regulate the amount of credit accommodations that a bank may
extend to its directors, officers, stockholders and their related interests (DOSRI). Generally, a
bank’s credit accommodations to its DOSRI must be in the regular course of business and on
terms not less favorable to the bank than those offered to non-DOSRI borrowers.
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130. On December 4, 2003, RED Corporation executed a real estate mortgage in favor of
BLUE Bank. RED Corporation defaulted in the payment of its loan. Consequently, on
June 4, 2004, BLUE Bank extra judicially foreclosed the property. Being the highest
bidder in the auction sale conducted, the Bank was issued a Certificate of Sale which
was registered on August 4, 2004. Does RED Corporation still have the right to
redeem the property as of September 14, 2004?
No. RED Corporation has lost its right to redeem the property. Juridical persons whose property is
sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property until
registration of the certificate of sale with the Register of Deeds, which shall in no case be more
than three months after foreclosure, whichever is earlier. (Section 47, The General Banking Law
of 2000)
131. When Occidental Bank folded up due to insolvency, Manuel had the following
separate deposits in his name: P200,000 in savings deposit; P250,000 in time
deposit; P50,000 in current account; P1 million in a trust account and P3 million in
money market placement. Under the Philippine Deposit Insurance Corporation Act,
how much could Manuel recover?
Manuel can recover P500, 000.00, because this is the total of his savings deposit, time deposit
and current account (Section 4(g) of Republic Act No. 3591, as amended). The trust account and
the money market placements are not included in the insured deposits. (Section 4(f), RA 3591,
Philippine Deposit Insurance Corporation Act).
132. What is an insured deposit?
The term insured deposit means the amount due to any bona fide depositor for legitimate
deposits in an insured bank as of the date of closure but not to exceed Five hundred thousand
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.
A joint account regardless of whether the conjunction ‘and’, ‘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 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

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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. (Section 5(j), RA 3591,
Philippine Deposit Insurance Corporation Act, as amended by RA 10846).
133. When does splitting of deposits occur?
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 Bangko Sentral ng Pilipinas for the purpose of availing of the maximum deposit insurance
coverage. (Sec. 26, RA 3591, Philippine Deposit Insurance Corporation Act, as amended by RA
10846).
134. How do you determine the insured deposit amount of a depositor?
Under Republic Act No. 3591 (PDIC Charter), as amended, all deposits in a bank maintained in
the same right and capacity for a depositor's benefit, either in his name or in the name of others,
shall be added together for the purpose of determining the insured deposit amount due to a bona
fide depositor, which amount should not exceed the maximum deposit insurance coverage
(MDIC) of P500,000.00. Thus, the entitlement to a deposit insurance is based not on the number
of bank accounts held, but on the number of beneficial owners. (Philippine Deposit Insurance
Corporation vs. Gidwani, G.R. No. 234616, June 20, 2018)
135. Can there be a charge for DOSRI violation in such a situation wherein the accused
bank officer did not secure a loan in his own name, but was alleged to have used the
name of another person in order to indirectly secure a loan from the bank?
Yes. The prohibition in Section 83 of RA 337 is broad enough to cover various modes of
borrowing. It covers loans by a bank director or officer (like herein petitioner) which are made
either: (1) directly, (2) indirectly, (3) for himself, (4) or as the representative or agent of others.
It applies even if the director or officer is a mere guarantor, indorser or surety for someone else's
loan or is in any manner an obligor for money borrowed from the bank or loaned by it. The
covered transactions are prohibited unless the approval, reportorial and ceiling requirements
under Section 83 are complied with. The prohibition is intended to protect the public, especially
the depositors, from the overborrowing of bank funds by bank officers, directors, stockholders
and related interests, as such overborrowing may lead to bank failures. It has been said that
"banking institutions are not created for the benefit of the directors [or officers]. While directors
have great powers as directors, they have no special privileges as individuals. They cannot use
the assets of the bank for their own benefit except as permitted by law. Stringent restrictions are
placed about them so that when acting both for the bank and for one of themselves at the same
time, they must keep within certain prescribed lines regarded by the legislature as essential to
safety in the banking business". A direct borrowing is obviously one that is made in the name of
the DOSRI himself or where the DOSRI is a named party, while an indirect borrowing includes
one that is made by a third party, but the DOSRI has a stake in the transaction.(Soriano vs.
People, G.R. No. 162336, February 1, 2010)
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136. What are the obligations of the bank before granting a loan in which a property was
offered as a collateral?
Before approving a loan application, it is standard operating procedure for banks and financial
institutions to conduct an ocular inspection of the property offered for mortgage and to
determine the real owner(s) thereof The apparent purpose of an ocular inspection is to protect
the "true owner" of the property as well as innocent third parties with a right, interest or claim
thereon from a usurper who may have acquired a fraudulent certificate of title thereto. (PNB vs.
Vila, G.R. No. 213241, August 1, 2016)
VIII. INTELLECTUAL PROPERTY CODE
137. What are the differences among Patents, Copyright, and Trademarks?
PATENTS COPYRIGHT TRADEMARK

Any technical solution of a Confined to literary and artistic Any visible sign capable of
problem in any field of human works which are original distinguishing the goods
activity, which is new, involves intellectual creations in the (trademark) or services (service
an inventive step and is literary and artistic domain mark) of an enterprise and shall
industrially applicable. protected from the moment of include a stamped or marked
their creation. container of goods.
Term of protection is 20 years Generally, term of protection is Term of protection is 10 years
from the filing of application, during the author’s lifetime and and may be renewed
non-renewable 50 years after his death
IP rights vest upon issuance of IP rights vest from the moment IP rights vest upon registration.
letter of patents. of creation.
138. What are the non-patentable inventions?

a. Discoveries, scientific theories and mathematical methods;
b. Schemes, rules and methods of performing mental acts, playing games or doing business, and
programs for computers;
c. Methods for treatment of the human or animal body by surgery or therapy and diagnostic
methods practiced on the human or animal body. This provision 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. This provision 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. (Section 22, Intellectual Property Code)
139. What are the grounds for cancellation of a patent?
Any interested person may, upon payment of the required fee, petition to cancel the patent or
any claim thereof, or parts of the claim, on any of the following grounds:
(a) That what is claimed as the invention is not new or Patentable;

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(b) That 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
(c) That the patent is contrary to public order or morality.
Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation
may be effected to such extent only. (Section 61, Intellectual Property Code)
140. State at least five marks that cannot be registered.
A mark cannot be registered if it:
a) Consists of immoral, deceptive or scandalous matter, or 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;
b) If it nearly resembles such a mark as to be likely to deceive or cause confusion;
c) Is likely to mislead the public, particularly as to the nature, quality, characteristics or
geographical origin of the goods or services;
d) Consists exclusively of signs that are generic for the goods or services that they seek to
identify;
e) Is contrary to public order or morality. (Section 123.1, Intellectual Property Code)
141. What does confusion of business mean?
Confusion of business (source or origin confusion) is where, although the goods of the parties are
different, the product, the mark of which registration is applied for by one party, is such as might
reasonably be assumed to originate with the registrant of an earlier product, and the public
would then be deceived either into that belief or onto the belief that there is some connection
between the two parties, though inexistent. (UFC Philippines, Inc. vs. Barrio Fiesta Manufacturing
Corporation, G.R. No. 198889, January 20, 2016)
142. What does confusion of goods mean?
Also known as product confusion, where the ordinarily prudent purchaser would be induced to
purchase one product in the belief that he was purchasing the other. (Skechers vs. Inter Pacific
Industrial Trading Corp., G.R. No. 164321, March 23, 2011)
143. Distinguish between Dominancy Test and Holistic Test.
The Dominancy Test focuses on the similarity of the dominant features of the competing
trademarks that might cause confusion, mistake, and deception in the mind of the ordinary
purchaser, and gives more consideration to the aural and visual impressions created by the
marks on the buyers of goods, giving little weight to factors like prices, quality, sales outlets, and
market segments. In contrast, the Holistic or Totality Test considers the entirety of the marks as
applied to the products, including the labels and packaging, and focuses not only on the
predominant words but also on the other features appearing on both labels to determine whether
one is confusingly similar to the other as to mislead the ordinary purchaser. (Great White Shark
Enterprises, Inc. vs. Caralde, G.R. No. 192294, November 21, 2012, J. Perlas-Bernabe)
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144. When can a confusion be considered within the ambit if Sec. 123 of the Intellectual
Property Code?
To fall under the ambit of Sec. 123.1(d)(iii) and be regarded as likely to deceive or cause
confusion upon the purchasing public, a prospective mark must be shown to meet two (2)
minimum conditions: 1. The prospective mark must nearly resemble or be similar to an earlier
mark; and 2. The prospective mark must pertain to goods or services that are either identical,
similar or related to the goods or services represented by the earlier mark. The first condition of
the proscription requires resemblance or similarity between a prospective mark and an earlier
mark. Similarity does not mean absolute identity of marks. To be regarded as similar to an earlier
mark, it is enough that a prospective mark be a colorable imitation of the former. Colorable
imitation denotes such likeness in form, content, words, sound, meaning, special arrangement or
general appearance of one mark with respect to another as would likely mislead an average
buyer in the ordinary course of purchase. The second condition of the proscription requires that
the prospective mark pertain to goods or services that are either identical, similar or related to
the goods or services represented by the earlier mark. (Mang Inasal Philippines, Inc. vs. IFP
Manufacturing Corporation, G.R. No. 221717, June 19, 2017)
145. What is Unfair Competition?
Unfair competition is defined as the passing off (or palming off) or attempting to pass off upon
the public of the goods or business of one person as the goods or business of another with the
end and probable effect of deceiving the public. This takes place where the defendant gives his
goods the general appearance of the goods of his competitor with the intention of deceiving the
public that the goods are those of his competitor. (Co vs. Yeung, G.R. No. 212705, September
10, 2014, J. Perlas-Bernabe)
146. Distinguish between suits for trademark infringement and unfair competition.
(a) the former is the unauthorized use of a trademark, whereas the latter is the passing off of
one’s goods as those of another;
(b) fraudulent intent is unnecessary in the former, while it is essential in the latter; and
(c) in the former, prior registration of the trademark is a pre-requisite to the action, while it is
not necessary in the latter. (Co vs. Yeung, G.R. No. 212705, September 10, 2014, J. Perlas-
Bernabe)
147. Dermaline Inc. filed before the IPO an application for registration of the Trademark
“DERMALINE DERMALINE, INC.” for health and beauty services. ABC Pharmaceuticals
opposed the registration on the ground that the mark resembles its mark
“DERMALIN” classified under medical goods against skin disorders. ABC claimed that
the dominant feature is the term DERMALINE which is practically identical with its
own DERMALIN more particularly that the first eight letters of the marks are
identical, and that its pronunciation are both identical which will likely cause
confusion, mistake, and deception to the purchasing public. Can ABC preclude
Dermaline, Inc. from using the contested mark?
Yes. As a registered trademark owner it has the right to prevent third parties from using a
trademark, or similar signs or containers for goods or services, without its consent, identical or

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similar to its registered trademark, where such use would result in a likehood of confusion. Here,
the public may mistakenly think that Dermaline is connected to or associated with ABC
Pharmaceuticals, such that considering the proliferation of health and beauty products in the
market, the purchasers would likely be misled that ABC Pharmaceuticals has already expanded its
business through Dermaline from merely carrying pharmaceutical topical applications for the skin
to health and beauty services. Verily when one applies for the registration of a trademark or label
which is almost the same or that very closely resembles one already used and registered by
another, the application should be rejected and dismissed outright, even without any opposition
on the part of the owner and user of a previously registered label or trademark. This is intended
not only to avoid confusion on the part of the public, but also to protect an already used and
registered trademark and established goodwill. (Demaline, Inc. vs. Myra Pharmaceuticals, Inc.,
G.R. No. 190065, August 16, 2010)
148. What is the obligation imposed upon the Philippines (and other signatory- countries)
upon signing the Paris Convention for the Protection of Industrial Property (Paris
Convention)?
Under the Paris Convention, the Philippines is obligated to assure nationals of the signatory-
countries that they are afforded an effective protection against violation of their intellectual
property rights in the Philippines in the same way that their own countries are obligated to
accord similar protection to Philippine nationals. Thus, under Philippine law, a trade name of a
national of a State that is a party to the Paris Convention, whether or not the trade name forms
part of a trademark, is protected without the obligation of filing or registration. (E Ecole de
Cuisine Manille vs. Cointreau, G.R. No. 185830, June 5, 2013, J. Perlas-Bernabe)
149. What is the so-called Doctrine of Equivalents?
The doctrine of equivalents, provides that an infringement also takes place when a device
appropriates a prior invention by incorporating its innovative concept and, although which some
modification and change, performs substantially the same function in substantially the same way
to achieve substantially the same result. (Smith Line Beckam Corp. vs. CA, G.R. No. 126627,
August 14, 2003)
150. What are the rights of a copyright owner?
a. Copyright or economic rights (Sec. 177)

b. Moral rights (Sec. 193)
c. Rights to proceeds in subsequent transfer (Sec. 200)
151. How is Copyright Infringement committed?
When a person:
a. Directly commits an infringement;

b. Benefits from the infringing activity of another person who commits an infringement if the
person benefiting has been given notice of the infringing activity and has the right and ability
to control the activities of the other person;
c. With knowledge of infringing activity, induces, causes or materially contributes to the
infringing conduct of another. (Sec. 216, IPL, as amended)
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152. What are the rules on ownership of copyright?
TYPE OF WORK OWNER
Single creation Author
Commissioned work Person who commissioned the work, unless there is a written stipulation.
Commissioned work belongs to person who commissioned.
Copyright belong to the creator.
Course of Employment Employee-if the work is not part of his regular duties
Employer-if the work is part of his regular duties, unless there is an
agreement, express or implied.
Letters Person/s to whom they are addressed and delivered.
153. Explain the doctrine of fair use. What are the factors in determining whether the use
made of a work is fair use?
The fair use of a copyrighted work for criticism, comment, news reporting, teaching including
limited number of copies for classroom use, scholarship, research, and similar purposes is not an
infringement of copyright. (Sec. 185 IPC)
The following are the factors in determining whether the use made of a work is fair use:
a. The purpose and character of the use, including whether such use is of a commercial nature
or is for non-profit educational purposes;
b. The nature of the copyrighted work;
c. The amount and substantiality of the portion used in relation to the copyrighted work as a
whole; and
d. The effect of the use upon the potential market for or value of the copyrighted work.
(Section 185.1, IPC)
154. Atty. Rabuyay was the author of Law for Dummies. While Rabuyay was researching
for books to assist him in updating his own book, Rabuyay chanced upon the book of
Lim entitled Surviving Law School. He discovered further that the book of Lim was
strikingly similar to the contents, scheme of presentation, illustrations and illustrative
examples of Law for Dummies. Rabuyay then sued Lim and the latter’s publisher for
infringement and/or unfair competition with damages. Lim, in his defense, alleged
that his book was not a copy of any existing valid copyrighted book and that the
similarities may be due to the authors' exercise of the "right to fair use of copyrighted
materials, as guides. Is Lim’s argument tenable?
No. Lim’s act of lifting from the book of Rabuyay’s substantial portions of discussions and
examples, and his failure to acknowledge the same in his book is an infringement of Rabuyay’s
copyrights. Substantial reproduction of a book does not necessarily require that the entire
copyrighted work, or even a large portion of it, be copied. If so much is taken that the value of
the original work is substantially diminished, there is an infringement of copyright and to an
injurious extent, the work is appropriated. In determining the question of infringement, the
amount of matter copied from the copyrighted work is an important consideration. To constitute
infringement, it is not necessary that the whole or even a large portion of the work shall have
been copied. If so much is taken that the value of the original is sensibly diminished, or the
labors of the original author are substantially and to an injurious extent appropriated by another,
that is sufficient in point of law to constitute piracy. (Habana vs. Robles, G.R. No. 131522, July

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19, 1999)
155. Cathy Garcia was charged with copyright infringement. In her defense she argues
that copyright infringement is malum in se, in that copying alone is not what is being
prohibited, but its injurious effect which consists in the lifting from the copyright
owners’ film or materials, that were the result of the latter’s creativity, work and
productions and without authority, reproduced, sold and circulated for commercial
use to the detriment of the latter. Is Cathy Garcia’s argument tenable?
No. In its current form, the Intellectual Property Code is malum prohibitum and prescribes a strict
liability for copyright infringement. Good faith, lack of knowledge of the copyright, or lack of
intent to infringe is not a defense against copyright infringement. (ABS CBN vs. Gozon G.R. No.
195956 March 11, 2015)
156. Enumerate four moral rights of a copyright owner. Explain each briefly.
a. Right to be attributed or credited - 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
b. Right to alter or withhold - to make any alterations of his work prior to, or to withhold it from
publication;
c. Right of integrity against derogatory treatment - to object 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; and
d. Right against false attribution - 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. (Section 193, Intellectual Property
Code)
157. May the copyright owner waive his moral rights?
Yes. An author may waive some but not all of his moral rights by a written instrument. Thus, no
such waiver shall be valid where its effects to permit another:
a) 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
alternations therein, would substantially tend to injure the literary or artistic reputation of
another author.(Section 195.1, Intellectual Property Code)
b) To use the name of the author with respect to a work he did not create.(Section 195.2,
Intellectual Property Code)
158. Enumerate the economic rights of copyright owner:
It is the exclusive right to carry out, authorize or prevent the following acts:
a. Reproduction of the work or substantial portion of the work;

b. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of
the work;
c. The first public distribution of the original and each copy of the work by sale or other forms
of transfer of ownership;
d. Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied
in a sound recording, a computer program, a compilation of data and other materials or a
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musical work in graphic form, irrespective of the ownership of the original or the copy which
is the subject of the rental;
e. Public display of the original or a copy of the work;
f. Public performance of the work; and
g. Other communication to the public of the work (Sec.177, Intellectual Property Code)
159. What are the four factors in determining whether the use made of a work in any
particular case is fair use?
(a) The purpose and character of the use, including whether such use is of a commercial nature
or is for non-profit educational purposes;
(b) The nature of the copyrighted work;
(c) The amount and substantiality of the portion used in relation to the copyrighted work as a
whole; and
(d) The effect of the use upon the potential market for or value of the copyrighted work. (Sec. 185,
IPL)
160. Is registration of tradename indispensable before filing an infringement case?
No. A trade name need not be registered with the IPO to institute infringement case. All that is
required is that the trade name is previously used in trade or commerce in the Philippines as
provided by law. 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. Section 165.2 of RA 8293 categorically states that trade
names shall be protected, even prior to or without registration with the IPO, against any unlawful
act including any subsequent use of the trade name by a third party, whether as a trade name or
a trademark likely to mislead the public. (Coffee Partners, Inc. vs. San Francisco Coffee &
Roastery, Inc., G.R. No. 169504, March 3, 2010)
161. Faberge manufactures and sells after-shave lotion, shaving cream, deodorant, and
toilet soap under its registered trademark ‘BRUT’. Co Beng Kay manufactures and
sells briefs under the trademark ‘BRUTE.’ Faberge tried to oppose the registration by
Co Beng Kay of the trademark ‘BRUTE’ for being confusingly similar with his
trademark. Can Co Beng Kay use and register “BRUTE” for his merchandise?
Yes. Sec. 4 of Intellectual Property Code provides that the owner of trademark, trade-name or
service-mark used to distinguish his goods, business or services from the goods, business or
services of others shall have right to register the same on the principal register, unless it 4(d)
Consists of or comprises a mark or trade-name which so resembles a mark or trade-name
registered in the Philippines or a mark or trade-name previously used in the Philippines by
another and not abandoned, as to be likely, when applied to or used in connection with the
goods, business or services of the applicant, to cause confusion or mistake or to deceive
purchasers. Here, Faberge is engaged in manufacturing and selling - shave lotion, shaving cream,
deodorant, toiled soap, while Co Beng Kay’s product line are briefs. With this, it is unlikely that
there will be confusion or deception to purchasers. (Faberge Inc vs. IAC, G.R. No. 71189,
November 4, 1992)

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162. What is the doctrine of secondary meaning?
A word or phrase originally incapable of exclusive appropriation with reference to an article on

the market, because it is geographical or otherwise descriptive, may nevertheless be used
exclusively by one producer with reference to his article so long as 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. (G. and C. Merriam Co. vs. Saalfield, 198 F. 369, 373, cited in Ang vs. Teodoro, G.R. No.
L-48226, December 14, 1942)
163. (a) What is an industrial design? (b) What are the substantive conditions for
protection of an industrial design?
a) An industrial design is any composition of lines or colors or any three-dimensional form,
whether or not associated with lines or colors; provided, that such composition or form gives a
special appearance to and can serve as pattern for an industrial product or handicraft (Sec.
112, IP Code).
b) Only industrial designs that are new or original shall benefit from protection under the
Intellectual Property Code (IP Code). 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 are not protected (Sec 113, IP Code).
164. What is a utility model?
A utility model is a protection awarded to inventions that fall short of the inventive requirement.
It is any technical solution of a problem in any field of human activity which is new and
industrially applicable. It may be, or may relate to, a product, or process, or an improvement of
any of the foregoing (Sec.109 in relation to Sec. 21, IP Code).
165. Define the term “passing off or palming off”. When does it happen?
The passing off (or palming off) or attempting to pass off upon the public of the goods or
business of one person as the goods or business of another with the end and probable effect of
deceiving the public.’
Passing off (or palming off) takes place where the defendant, by imitative devices on the general
appearance of the goods, misleads prospective purchasers into buying his merchandise under the
impression that they are buying that of his competitors. [In other words], the defendant gives his
goods the general appearance of the goods of his competitor with the intention of deceiving the
public that the goods are those of his competitor.”
The “true test” of unfair competition has thus been “whether the acts of the defendant have the
intent of deceiving or are calculated to deceive the ordinary buyer making his purchases under
the ordinary conditions of the particular trade to which the controversy relates.” Based on the
foregoing, it is therefore essential to prove the existence of fraud, or the intent to deceive, actual
or probable, determined through a judicious scrutiny of the factual circumstances attendant to a
particular case. (Shang Properties Realty Corporation (formerly The Shang Grand Tower
Corporation) vs. St. Francis Development Corporation, G.R. No. 190706. July 21, 2014, J.
Perlas-Bernabe)
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166. What is a ‘geographically descriptive term’? When is it considered descriptively used?
A ‘geographically descriptive term’ is any noun or adjective that designates geographical location
and would tend to be regarded by buyers as descriptive of the geographic location of origin of
the goods or services. A geographically descriptive term can indicate any geographic location on
earth, such as continents, nations, regions, states, cities, streets and addresses, areas of cities,
rivers, and any other location referred to by a recognized name. In order to determine whether
or not the geographic term in question is descriptively used, the following question is relevant:
(1) Is the mark the name of the place or region from which the goods actually come? If the
answer is yes, then the geographic term is probably used in a descriptive sense, and secondary
meaning is required for protection.” (Shang Properties Realty Corporation (formerly The Shang
Grand Tower Corporation) vs. St. Francis Development Corporation, G.R. No. 190706. July 21,
2014, J. Perlas-Bernabe)
167. When can a ‘geographically descriptive term’ said to have acquired secondary
meaning?
Under Section 123.2 of the IP Code, specific requirements have to be met in order to conclude
that a geographically-descriptive mark has acquired secondary meaning, to wit: (a) the
secondary meaning must have arisen as a result of substantial commercial use of a mark in the
Philippines; (b) such use must result in the distinctiveness of the mark insofar as the goods or
the products are concerned; and (c) proof of substantially exclusive and continuous commercial
use in the Philippines for five (5) years before the date on which the claim of distinctiveness is
made. Unless secondary meaning has been established, a geographically-descriptive mark, due
to its general public domain classification, is perceptibly disqualified from trademark registration.
Section 123.1(j) of the IP Code states this rule as follows: SEC. 123. Registrability.—123.1 A
mark cannot be registered if it: x x x x (j) Consists exclusively of signs or of indications that may
serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical
origin, time or production of the goods or rendering of the services, or other characteristics of the
goods or services. (formerly The Shang Grand Tower Corporation) vs. St. Francis Development
Corporation, G.R. No. 190706. July 21, 2014, J. Perlas-Bernabe)
IX. ANTI-MONEY LAUNDERING ACT
168. When is money laundering committed?
It 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 ML offenses referred to in paragraphs (a), (b) or (c) above
e. aids, abets, assists in or counsels the commission of the Money Laundering offenses referred
to in paragraphs (a), (b) or (c) above (Rule 4, IRR 2016, RA 9160)

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169. Who are covered persons or institutions in the Anti-Money Laundering Act?
Covered persons’, natural or juridical, refer to:
a. 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 Sentral ng Pilipinas
(BSP);
b. insurance companies, pre-need companies and all other persons supervised or regulated by
the Insurance Commission (IC);
c. (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);
d. 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);
e. 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);
f. 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
g. 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.
h. Notwithstanding the foregoing, 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. (Section 3(a),
RA 9160 as amended by RA 10365)
i. Casinos, including internet and ship-based casinos, with respect to their casino cash
transactions related to their gaming operations, and such other entities as may be hereafter
determined by AGA, are hereby designated as covered persons under the AMLA. (Sec. 5, R.A.
No. 10927)
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170. When should the report of covered and suspicious transactions be made?
The AMLA requires that “covered transactions” and “suspicious transactions” be reported by
covered persons to the AMLC within five working days from occurrence, unless a different period
not exceeding 15 working days is prescribed by the AMLC. (Rule 9, Section C of RA 9160)
171. What is Safe Harbor Provision in AMLA?
No administrative, criminal 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 the AMLA or any other Philippine
law. (Rule 3, Section 3, paragraph (e) of RA 9160)
172. Does AMLC’s function to inquire by court order into bank deposits or investments
violate any person’s constitutional right to procedural due process?
No. As the AMLC does not exercise quasi-judicial functions, its inquiry by court order into bank
deposits or investments cannot be said to violate any person’s constitutional right to procedural
due process. AMLC’s ex parte application for a bank inquiry, which is allowed under Section 11 of
R.A. 9160, does not violate substantive due process. There is no such violation, because the
physical seizure of the targeted corporeal property is not contemplated in any form by the law.
The AMLC may indeed be authorized to apply ex parte for an inquiry into bank accounts, but only
in pursuance of its investigative functions akin to those of the National Bureau of Investigation.
(People v Bolantes, G.R. No. 186717, April 17, 2017)
173. Can the account holder subject of Bank Inquiry/Freeze Order question the issuance
of such orders?
Yes. The holder of a bank account that is the subject of a bank inquiry order issued ex parte has
the opportunity to question the issuance of such an order after a freeze order has been issued
against the account. The account holder can then question not only the finding of probable cause
for the issuance of the freeze order, but also the finding of probable cause for the issuance of the
bank inquiry order. (People vs. Bolantes, G.R. No. 186717, April 17, 2017)
174. May a person be prosecuted of both offense of money laundering and unlawful
activity under AMLA?
Yes. Any person may be charged with and convicted of both the offense of money laundering
and unlawful activity. Any proceeding relating to the unlawful activity shall be given precedence
over the prosecution of any offense or violation without prejudice to the freezing and other
remedies (Sec. 6, RA 9160).
175. When can AMLC make bank inquiry even without court order?
The AMLC is authorized to inquire into or examine deposits and investments with any banking
institution or non-bank financial institution and their subsidiaries and affiliates without a court
order:
a. Any property or funds that are in any way related to financing terrorism or acts of terrorism;

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and
b. Property or funds of any person or persons in relation to whome there is probable cause to
believe that such person or persons are committing or attempting or conspiring to commit, or
participating in or facilitating the financing of terrorism or acts of terrorism. (Sundiang and
Aquino, Reviewer on Commercial Laws, p. 468, 2019 Edition)
176. What is a Freeze Order? What is the duration of a Freeze Order?
“Freeze Order” refers to a provisional remedy aimed at blocking or restraining monetary

instruments or properties in any way related to an unlawful activity, as herein defined, from
being transacted, withdrawn, deposited, transferred, removed, converted, concealed, or
otherwise moved or disposed without affecting the ownership thereof. (Rule 2 (mm) 2018
Implementing Rules of RA No. 9160)
The freeze order shall take effect immediately and shall remain effective for a total period not
exceeding six (6) months. This is without prejudice to an asset preservation order that the
regional trial court having jurisdiction over the appropriate AMLC case or civil forfeiture case may
issue on the same account depending upon the circumstances of the case, where the Court of
Appeals will remand the case and its records. (Rule 10 Section 2.8, 2018 Implementing Rules of
RA No. 9160)
177. What is Civil Forfeiture?
“Civil Forfeiture” refers to the non-conviction-based proceedings aimed at forfeiting, in favor of

the government, monetary instruments or properties related to an unlawful activity or money
laundering offense. (Rule 2 (r) 2018 Implementing Rules of RA No. 9160)
X. ELECTRONIC COMMERCE ACT
178. Did RA 8792 or Electronic Commerce Act of 2000 allow the internet to be valid
medium for publishing laws, rules and regulations?
No. R.A. 8792 considers an electronic data message or an electronic document as the functional
equivalent of a written document only for evidentiary purposes. In other words, the law merely
recognizes the admissibility in evidence (for their being the original) of electronic data messages
and/or electronic documents. It does not make the internet a medium for publishing laws, rules
and regulations. (Garcillano vs. House of Representatives, G.R. No. 170338, December 23, 2008)
179. What are the disputable presumptions in relation to electronic signature?
Upon the authentication of an electronic signature, it shall be presumed that:
(a) The electronic signature is that of the person to whom it correlates;

(b) The electronic signature was affixed by that person with the intention of authenticating or
approving the electronic document to which it is related or to indicate such person’s consent to
the transaction embodied therein; and
(c) The methods or processes utilized to affix or verity the electronic signature operated without
error or fault. (Rule 6, Section 3 of RA 8792)
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180. When is electronic data message or electronic document admissible in evidence?
An electronic document is admissible in evidence if it complies with the rules on admissibility

prescribed by the Rules of Court and related laws and is authenticated in the manner prescribed
by these Rules. (Rule 3, Section 2 of RA 8792)
181. What is the Obligation of Confidentiality under RA 8792?
Except for the purposes authorized under RA 8792, 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. (Part V, Section 32 of RA 8792)
182. Discuss the legal recognition of electronic data messages under RA No. 8792 or the
Electronic Commerce Act of 2000.
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. (Section 6, RA 8792)
183. Discuss the legal recognition of electronic documents under RA No. 8792 or the
Electronic Commerce Act of 2000.
Electronic documents shall have the legal effect, validity or enforceability as any other document
or legal writing, and -
(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 -
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

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ii. That document is capable of being displayed to the person to whom it is to be
presented: Provided, That 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.
XI. DATA PRIVACY ACT (RA 10173)
184. When does Data Privacy Act not apply?
(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) The fact that the individual 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; and
(4) The 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 the terms of the contract,
and the name of the individual given in the course of the performance of those services;
(c) Information relating to any discretionary benefit of a financial nature such as the granting of a
license or permit given by the government to an individual, including the name of the individual
and the 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 which includes
the processing of personal data for the performance by the independent, central monetary
authority and law enforcement and regulatory agencies of their constitutionally and statutorily
mandated functions. Nothing in this Act shall be construed as to have amended or repealed
Republic Act No. 1405, otherwise known as the Secrecy of Bank Deposits Act; Republic Act No.
6426, otherwise known as the Foreign Currency Deposit Act; and Republic Act No. 9510,
otherwise known as the Credit Information System Act (CISA);
(f) Information necessary for banks and other financial institutions under the jurisdiction of the
independent, central monetary authority or Bangko Sentral ng Pilipinas to comply with Republic
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Act No. 9510, and Republic Act No. 9160, as amended, otherwise known as the Anti-Money
Laundering Act and other applicable laws; and
(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. (Section 4, RA 10173)
185. What are the Principles of Transparency, Legitimate Purpose and Proportionality in
Data Privacy Act?
The processing of personal data shall be allowed subject to adherence to the principles of
transparency, legitimate purpose, and proportionality.
a. Transparency. The data subject must be aware of the nature, purpose, and extent of the
processing of his or her personal data, including the risks and safeguards involved, the identity of
personal information controller, his or her rights as a data subject, and how these can be
exercised. Any information and communication relating to the processing of personal data should
be easy to access and understand, using clear and plain language.
b. Legitimate purpose. The processing of information shall be compatible with a declared and
specified purpose which must not be contrary to law, morals, or public policy.
c. Proportionality. The processing of information shall be adequate, relevant, suitable, necessary,

and not excessive in relation to a declared and specified purpose. Personal data shall be
processed only if the purpose of the processing could not reasonably be fulfilled by other means.
(Section 18, Rule IV, Implementing Rules and Regulations of the Data Privacy Act of 2012)
186. What is an electronic document?
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.
(Section 4(e), R.A. No. 8792)
187. What is a “personal information”?
The term “personal information” refers to any information whether recorded in a material form or
not, from which the identity of an individual is apparent or can be reasonably and directly
ascertained by the entity holding the information, or when put together with other information
would directly and certainly identify an individual. (Section 1(g), Data Privacy Act)
188. Is the processing of personal information allowed?
The processing of personal information shall be allowed, subject to compliance with the
requirements of the Data Privacy Act and other laws allowing disclosure of information to the
public and adherence to the principles of transparency, legitimate purpose and proportionality.
(Section 11, Data Privacy Act)

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189. What is a “sensitive personal information”?
The term “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, social security
numbers, previous or current health records, licenses or its denials, suspension or revocation,
and tax returns; and (4) Specifically established by an executive order or an act of Congress to
be kept classified. (Section 1(l), Data Privacy Act)
190. Enumerate the criteria for lawful processing of personal information.

(a) The data subject has given his or her consent;
(b) The processing of personal information is necessary and is related to the fulfillment of a
contract with the data subject or in order to take steps at the request of the data subject prior to
entering into a contract;
(c) The processing is necessary for compliance with a legal obligation to which the personal
information controller is subject;
(d) The processing is necessary to protect vitally important interests of the data subject,
including life and health;
(e) The processing is necessary in order to respond to national emergency, to comply with the
requirements of public order and safety, or to fulfill functions of public authority which necessarily
includes the processing of personal data for the fulfillment of its mandate; or
(f) The processing is necessary for the purposes of the legitimate interests pursued by the
personal information controller or by a third party or parties to whom the data is disclosed,
except where such interests are overridden by fundamental rights and freedoms of the data
subject which require protection under the Philippine Constitution. (Sec. 11, Data Privacy Act)
XII. FINANCIAL REHABILITATION, INSOLVENCY, LIQUIDATION, AND SUSPENSION OF

PAYMENTS
191. What is rehabilitation?
Rehabilitation is defined under the Financial Rehabilitation and Insolvency Act of 2010 (FRIA) as
the restoration of the debtor to a condition of successful operation and solvency, if it is shown
that its continuance of operation is economically feasible and its creditors can recover by way of
the present value of payments projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated. In other words, rehabilitation assumes that the
corporation has been operational but for some reasons like economic crisis or mismanagement
had become distressed or insolvent, i.e., that it is generally unable to pay its debts as they fall
due in the ordinary course of business or has liability that are greater than its assets. Thus, the
basic issues in rehabilitation proceedings concern the viability and desirability of continuing the
business operations of the distressed corporation, all with a view of effectively restoring it to a
state of solvency or to its former healthy financial condition through the adoption of a
rehabilitation plan. (BPI Family Savings Bank, Inc. vs. St. Michael Medical Center, Inc., G.R. No.
205469, March 25, 2015, J. Perlas-Bernabe)
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192. What are the actions suspended covered by stay order during rehabilitation?
(1) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims
against the debtor;
(2) suspend all actions to enforce any judgment, attachment or other provisional remedies
against the debtor;
(3) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of
its properties except in the ordinary course of business; and
(4) prohibit the debtor from making any payment of its liabilities outstanding as of the
commencement date except as may be provided herein. (Section 16, RA No. 10142)
193. Differentiate Voluntary Liquidation from Involuntary Liquidation of Juridical Debtors.
Point of Distinction Voluntary Liquidation Involuntary Liquidation

(Section 90, FRIA) (Section 91, FRIA)
Who may file An insolvent debtor may apply for Three (3) or more creditors the
liquidation by filing a petition for aggregate of whose claims is at
liquidation with the court. least either One million pesos
(Php1,000,000.00) or at least
twenty-five percent (25%) of the
subscribed capital stock or
partner's contributions of the
debtor, whichever is higher, may
apply for and seek the liquidation
of an insolvent debtor by filing a
petition for liquidation of the
debtor with the court.
Contents of the petition The petition shall be verified, shall The petition shall show that:
establish the insolvency of the debtor and
shall contain, whether as an attachment a. there is no genuine issue of
or as part of the body of the petition: a. fact or law on the claim/s of the
a schedule of the debtor's debts and petitioner/s, and that the due and
liabilities including a list of creditors with demandable payments thereon
their addresses, amounts of claims and have not been made for at least
collaterals, or securities, if any; b. an one hundred eighty (180) days or
inventory of all its assets including that the debtor has failed
receivables and claims against third generally to meet its liabilities as
parties; and c. the names of at least they fall due; and
three (3) nominees to the position of
liquidator. b. there is no substantial
likelihood
Conversion of When: At any time during the pendency When: At any time during the
rehabilitation proceedings of court-supervised or pre-negotiated pendency of or after a
to liquidation proceedings rehabilitation proceedings rehabilitation court supervised or
pre-negotiated rehabilitation
Who may initiate: The debtor may also proceedings
initiate liquidation proceedings by filing a
motion in the same court where the Who may initiate: Three (3) or
rehabilitation proceedings are pending more creditors whose claims is at
least either One million pesos
How: By filing a motion to convert the (Php1,000,000.00) or at least
rehabilitation proceedings into liquidation twenty-five percent (25%) of the
proceedings. The motion shall be subscribed capital or partner's

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verified, shall contain or set forth the contributions of the debtor,
same matters required in the preceding whichever is higher, may also
paragraph, and state that the debtor is initiate liquidation proceedings by
seeking immediate dissolution and filing a motion in the same court
termination of its corporate existence. where the rehabilitation
proceedings are pending.
If a petition is sufficient in form and
substance, the court shall issue a How: By filing a motion to convert
liquidation order. the rehabilitation proceedings into
liquidation proceedings. The
motion shall be verified, shall
contain or set forth the same
matters required in the preceding
paragraph, and state that the
movants are seeking the
immediate liquidation of the
debtor.
If a petition or motion is sufficient

in form and substance, court shall
issue order directing:
a. Publication of petition or
motion in a newspaper of general
circulation once a week for 2
consecutive weeks; and
b. Debtor and all creditors who

are not the petitioners to file their
comments within 15 days from
the date of last publication.
After considering the comments

filed, of court determines that
petition/motion is meritorious, it
shall issue liquation order.
194. What is suspension of payments?
Upon motion filed by the individual debtor, the court may issue an order suspending any pending
execution against the individual debtor, provided that properties held as security by secured
creditors shall not be the subject of such suspension order. 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.
No creditor shall sue or institute proceedings to collect his claim from the debtor from the time of
the filing of the petition for suspension of payments and for as long as proceedings remain
pending except:
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(a) those creditors having claims for personal labor, maintenance, expense of last illness and
funeral of the wife or children of the debtor incurred in the sixty (60) days immediately prior to
the filing of the petition; and
(b) secured creditors. (Section 96, RA No. 10142)
195. What is a material financial commitment?
A material financial commitment becomes significant in gauging the resolve, determination,

earnestness and good faith of the distressed corporation in financing the proposed rehabilitation
plan. This commitment may include the voluntary undertakings of the stockholders or the would-
be investors of the debtor-corporation indicating their readiness, willingness and ability to
contribute funds or property to guarantee the continued successful operation of the debtor
corporation during the period of rehabilitation. (BPI Family Savings Bank, Inc. vs. St. Michael
Medical Center, Inc., G.R. No. 205469, March 25, 2015, J. Perlas-Bernabe)
196. Explain the principle of equality of equity.
Under the principle of equality of equity, during rehabilitation receivership, the assets are held in
trust for the equal benefit of all creditors to preclude one from obtaining an advantage or
preference over another by the expediency of an attachment, execution or otherwise. When a
corporation threatened by bankruptcy is taken over by a receiver, all the creditors stand on equal
footing. (New Frontier Sugar Corporation vs. RTC, G.R. No. 165001, January 31,2007)
197. What is the cram down power of the Court?
The "cram-down" power of the Rehabilitation Court has long been established and even codified
under Section 23, Rule 4 of the Interim Rules, to wit: Section 23. Approval of the Rehabilitation
Plan. – The court may approve a rehabilitation plan over the opposition of creditors, holding a
majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is
feasible and the opposition of the creditors is manifestly unreasonable. Such prerogative was
carried over in the Rehabilitation Rules, which maintains that 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. This provision,
which is currently incorporated in the FRIA, 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. (Aquino vs. Pacific Plans, G.R. No. 193108, December 10, 2014)
198. What are the two-pronged purpose of rehabilitation proceedings?
Rehabilitation proceedings have a two-pronged purpose, namely: (a) to efficiently and equitably
distribute the assets of the insolvent debtor to its creditors; and (b) to provide the debtor with a
fresh start, viz: Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative
purposes. On the one hand, they attempt to provide for the efficient and equitable distribution
ofan insolvent debtor's remaining assets to its creditors; and on the other, to provide debtors with
a "fresh start" by relieving them of the weight of their outstanding debts and permitting them to
reorganize their affairs. The purpose of rehabilitation proceedings is to enable the company to
gain a new lease on life and thereby allow creditors to be paidtheir claims from its earnings.

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(Philippine Bank of Communications vs. Basic Polyprinters and Packaging Corporation, G.R. No.
187581, October 20, 2014)
199. Explain the following briefly:

a. Technical Insolvency;
b. Supervening Insolvency.
Under technical insolvency is the inability of the petitioning corporation to pay although
temporarily, for a period longer than one year from the filing of the petition. (SEC Rules of
Procedure on Corporate Recovery Rule III, Section 3-12); Union Bank of the Philippines vs. ASB
Development Corporation, G.R. No 172895, July 20,2008; Philippine National Bank vs. Court of
Appeals, G.R. No. 165571 January 20, 2009)
Under Supervening Insolvency, if at any time during the pendency of the proceedings, the
petitioner has become or is shown to be insolvent, whether actual or technical, or it has violated
any of the conditions of the suspension order or has failed to make payments on its obligations in
accordance with the approved Repayment Schedule, the SEC (now Special Commercial Courts)
shall terminate the proceedings and dismiss the petition. Instead of terminating the proceedings,
however, the SEC (now Special Commercial Courts) may upon motion, treat the petition as one
for rehabilitation of the debtor. (SEC Rules of Procedure on Corporate Recovery Rule III, Section
3-12; Union Bank of the Philippines vs. ASB Development Corporation, G.R. 172895, July 20,2008)
200. What is the nature of rehabilitation proceedings?
Rehabilitation proceedings are summary and non-adversarial in nature, and do not contemplate
adjudication of claims that must be threshed out in ordinary court proceedings. Adversarial
proceedings similar to that in ordinary courts are inconsistent with the commercial nature of a
rehabilitation case. The latter must be resolved quickly and expeditiously for the sake of the
corporate debtor, its creditors and other interested parties. Thus, the Interim Rules "incorporate
the concept of prohibited pleadings, affidavit evidence in lieu of oral testimony, clarificatory
hearings instead of the traditional approach of receiving evidence, and the grant of authority to
the court to decide the case, or any incident, on the basis of affidavits and documentary evidence.
(Advent Capital vs. Alcantara, G.R. No. 183050, January 25, 2012)
201. When should rehabilitation should be denied?
The remedy of rehabilitation should be denied to corporation whose insolvency appears to be

irreversible and whose sole purpose is to delay enforcement of any rights of the creditors. Which
is rendered obvious by:
a. Absence of a sound workable business plan;
b. Baseless and unexplained assumptions, targets and goals; and
c. Speculative infusion or lack thereof for the executive business plan.(Philippine Asset Growth
Two, Inc. vs. Fastech Synergy Philippines, G.R. No. 206528, June 28,2016, J. Perlas
Bernabe)
HAIL TO THE CHIEFS!

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AUSL 2019 Pre Week Notes Mercantile Law FINAL

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AUSL 2019 Pre Week Notes Mercantile Law FINAL

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I.

LETTERS OF CREDIT AND TRUST RECEIPTS

1. What is a letter of credit?

2. What is the “independence principle” in Letter of Credit?

4. What is a trust receipt?

5. Who owns the goods, documents or instruments under a trust receipt?

7. When can intent to defraud be presumed in a trust receipt agreement?

8. When can an agreement for trust receipt be considered a mere loan?

a) All lawful charges for storage and preservation of the goods;

The lien of the warehouseman is deemed lost by:

a. Surrender of goods; and

10. What are the remedies of a warehouseman to enforce his lien/s?

a) To refuse to deliver the goods until his lien is satisfied;

II. NEGOTIABLE INTRUMENTS LAW

11. What are effects of Forgery?

2019 MERCANTILE LAW |3

Parties who are precluded from setting up forgery or want of authority:

13. When is an alteration in a negotiable instrument considered material?

An alteration is said to be material if it alters the effect of the instrument. It means an

a. Incomplete and delivered;

2019 MERCANTILE LAW |5

18. When is an indorsement considered Restrictive Indorsement?

An indorsement is restrictive which either;

19. What is the Shelter Rule?

20. Distinguish Personal Defenses from Real Defenses.

PERSONAL (EQUITABLE DEFENSES) REAL DEFENSES

a. Failure or absence of consideration; a. Material alteration; (partial real defense)

CHECK BILL OF EXCHANGE

The effects of crossing a check are:

2019 MERCANTILE LAW |7

24. What is a manager’s check? What are its effects?

III. INSURANCE LAW

27. What are the characteristics of an Insurance Contract?

28. How shall the court construe an insurance contract?

2019 MERCANTILE LAW |9

29. What is an Insurable Interest?

LIFE INSURANCE PROPERTY INSURANCE

32. Distinguish Double Insurance from over-insurance.

DOUBLE INSURANCE OVER-INSURANCE

REINSURANCE DOUBLE INSURANCE

34. What is the “No Fault Clause”?

35. What is incontestability clause?

2019 MERCANTILE LAW |11

40. What is the test of materiality in concealment?

b. Can Noli’s beneficiary claim the defense of good faith?

2019 MERCANTILE LAW |13

42. What is the effect of a breach of warranty?

43. Discuss the rules on loss in insurance.

46. Distinguish Perils of Sea and Perils of the Ship.

Generally compensable. Not compensable unless the insurance policy is an All

2019 MERCANTILE LAW |15

49. What is deviation? When is devation proper?

50. What are common carriers?

a. Flood, storm, earthquake, lightning, or other natural disaster or calamity;

53. What is the Registered Owner Rule?

2019 MERCANTILE LAW |17

55. Distinguish a common carrier from a private carrier.

Point of Comparison Common Carrier Private Carrier

As to diligence required Required to exercise extraordinary Only required to exercise ordinary

a. In writing, signed by the shipper or owner;

Point of Distinction For Acts of Employees For Acts of Passengers or

58. Briefly explain the doctrine of limited liability (hypothecary rule).

59. State the exceptions to the doctrine of limited liability.

60. What are averages? What are its kinds?