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Toaz - Info 5 2020 Up Boc Commercial Law Reviewerpdf PR
Toaz - Info 5 2020 Up Boc Commercial Law Reviewerpdf PR
CONTRIBUTORS CONTRIBUTOR
Kent A. Alonzo Simplicio Pio I. Mathay III
Anna Nikita R. Bayot INSURANCE LAW &
Freya Elessandra G. Patron BANKING LAW
Micah Amethyst M Taguibao HEAD
Samantha Isabelle Vitriol0 Mikaela V. Bernardino
TRANSPORTATION LAW SPECIAL LAWS
HEAD HEAD
Janna Jee-Anne G. Abella Mikaela V. Bernardino
CONTRIBUTORS CONTRIBUTORS
Kent A. Alonzo
Romina Luz B. Medina
Simplicio Pio I. Mathay III
Anne Renee T. Suarez
2020 UP LAW BAR OPERATIONS COMMISSION
PHILIPPINE COPYRIGHT
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U.P. LAW BOC COMMERCIAL LAW
TABLE OF CONTENTS
7. Corporate Powers ................................. 162 B. LAW ON SECRECY OF BANK DEPOSITS ............... 307
8. Stockholders and Members ................... 179 1. Purpose ................................................. 307
9. Board of Directors and Trustees ............ 205 2. Prohibited Acts ...................................... 307
10. Capital Affairs .................................... 219 3. Deposits and Investments Covered ....... 307
11. Dissolution And Liquidation ............... 231 4. Exceptions............................................. 308
12. Other Corporations............................ 242 5. Garnishment of Deposits, Including Foreign
13. Merger and Consolidation ................. 264 Deposits................................................... 309
14. Investigations, offenses, and penalties ... 6. Penalties for Violation ............................ 310
.......................................................... 268 C. GENERAL BANKING LAW OF 2000 (GBL) ........ 310
1. Definition and classification of banks ..... 310
SECURITIES ......................................................... 276
2. Distinction of banks from Quasi-banks and
A. STATE POLICY ............................................. 277 trust entities ............................................. 311
B. DEFINITION OF SECURITIES ..................................... 277 3. Bank Powers and Liabilities................... 311
C. KINDS OF SECURITIES .............................................. 278 4. Diligence required of banks in view of
1. Exempt Securities [Sec. 9] .................... 278 fiduciary nature of banking ....................... 313
2. Exempt Transactions [Sec. 10].............. 279 5. Nature of Bank Funds and Bank Deposits ..
3. Non-exempt transactions ...................... 281 .............................................................. 314
D. POWERS AND FUNCTIONS OF THE SECURITIES AND 6. Grant of Loans and Security Requirements
EXCHANGE COMMISSION .............................................. 282 .............................................................. 314
E. PROCEDURE FOR REGISTRATION OF SECURITIES ... 7. Penalties for violations .......................... 317
.................................................................. 282 D. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT.
F. PROHIBITIONS ON FRAUD, MANIPULATION, AND .................................................................. 319
INSIDER TRADING ............................................................. 284 1. Basic Policy ........................................... 319
1. Manipulation of security prices [Sec. 24] .... 2. Powers and functions of the PDIC;
.............................................................. 284 prohibitions .............................................. 319
2. Short sales [Rule 24.2-2, 2015 SRC IRR]... 3. Concept of insured deposits .................. 321
.............................................................. 286 4. Liability to depositors ............................. 321
3. Option trading [Sec. 25] ......................... 287 5. Concept of bank resolution .................... 325
4. Fraudulent transactions [Sec. 26] .......... 287 6. Role of the PDIC in relation to banks in
5. Insider trading [Sec. 61]......................... 288 distress .......................................................... 326
G. PROTECTION OF SHAREHOLDER INTERESTS....... 289
INTELLECTUAL PROPERTY LAW ...................... 331
1. Tender offer rule .................................... 289
2. Rules on proxy solicitation ..................... 291 A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL. 332
3. Disclosure rule....................................... 292 1. Intellectual Property Rights.................... 332
2. Differences between copyright, trademarks,
BANKING .............................................................. 295
and patents .............................................. 332
A. THE NEW CENTRALBANK ACT ............... 296 3. Technology Transfer Arrangements ...... 332
1. State Policies......................................... 296 B. PATENTS ...................................................................... 333
2. Creation of the Bangko Sentral ng Pilipinas 1. Patentable Invention.............................. 333
.............................................................. 296 2. Non-Patentable Inventions .................... 334
3. Responsibility and Primary Objective of BSP 3. Ownership of a Patent ........................... 335
.............................................................. 296 4. Grounds for Cancellation of a Patent..... 336
4. Corporate Powers ................................. 297 5. Remedy of the True and Actual inventor.....
5. Operations of the BSP ........................... 297 .............................................................. 336
6. Monetary Board (MB); Powers and 6. Rights Conferred by a Patent ................ 337
Functions ................................................. 300 7. Limitations of Patent Rights ................... 337
7. How The BSP Handles Banks In Distress .. 8. Patent Infringement ............................... 339
.............................................................. 300 9. Licensing ............................................... 340
8. Administrative sanctions on supervised 10. Assignment and Transmission of Rights
entities ..................................................... 304 344
9. Rules on bank deposits and investments by C. TRADEMARKS ............................................................. 344
directors, officers, stockholders and their 1. Definition of Marks, Collective Marks, and
related interests ....................................... 304 Trade Names ................................................. 344
10. Supervision and regulation of bank 2. Acquisition of Ownership of Mark .......... 346
operations ................................................ 305 3. Acquisition of Ownership of Trade Name....
11. Rate of exchange .............................. 306 .............................................................. 347
4. Non-Registrable Marks .......................... 347
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5. Prior use of mark as a Requirement ...... 348 2. Financial Rehabilitation and Insolvency Act
6. Tests to Determine Confusing Similarity of 2010..................................................... 423
between Marks ........................................ 350 F. DATA PRIVACY ACT OF 2012 ........................ 437
7. Well-Known Marks ................................ 351 1. Definitions and Scope ........................... 437
8. Rights Conferred by Registration........... 352 2. Extraterritorial Application...................... 438
9. Use by third parties of names, etc. similar to 3. Processing of personal information ....... 438
registered mark ........................................ 354 4. Rights of the data subject; exceptions/non-
10. Infringement and remedies................ 354 applicability .............................................. 440
11. Unfair Competition ............................ 356 5. Duties and responsibilities of personal
12. Registration of marks under the Madrid information controller ............................... 442
Protocol ................................................... 357 G. PHILIPPINE COMPETITION ACT .............................. 443
D. COPYRIGHT ................................................................. 360 1. Definitions and Scope of Application ..... 443
1. Basic Principles ..................................... 360 2. Powers and functions of the Philippine
2. Copyrightable Works ............................. 360 Competition Commission ......................... 444
3. Non-Copyrightable Works ..................... 361 3. Prohibited acts....................................... 445
4. Rights of Copyright Owner .................... 363 4. Covered Transactions ........................... 448
5. Rules on Ownership of Copyright .......... 367 5. Determining the Relevant Market .......... 449
6. Limitations on Copyright ........................ 369 6. Determining the control or dominance of.......
7. Copyright Infringement .......................... 370 market...................................................... 449
7. Determining Existence of Anti-Competitive
SPECIAL LAWS .................................................... 376
Conduct ................................................... 450
A. SECURED TRANSACTIONS .................... 377 8. Forbearance by the Philippine Competition
1. Personal Property Security Act.............. 377 Commission ............................................. 450
2. Real Estate Mortgage Law..................... 391
3. Guaranty ............................................... 392
4. Surety .................................................... 397
5. Letters of credit...................................... 399
B. TRUTH IN LENDING ACT ........................................... 402
1. Purpose ................................................. 402
2. Obligation of Creditors to Persons to whom
Credit is Extended ................................... 402
3. Covered and Excluded Transactions ..... 402
4. Consequences of Non-Compliance ....... 403
C. ANTI-MONEY LAUNDERING ACT ............ 403
1. Policy of the Law ................................... 403
2. Covered Institutions and Their Obligations .
.............................................................. 404
3. Covered and Suspicious Transactions . 405
4. Money Laundering; how committed; unlawful
and predicate crimes ............................... 406
5. Anti-Money Laundering Council; functions .
.............................................................. 407
6. Safe Harbor Provision ........................... 408
7. Application for Freeze Orders................ 408
8. Authority to Inquire into Bank Deposits. 409
D. FOREIGN INVESTMENTS ACT ................ 411
1. Policy of the law .................................... 412
2. Definition of terms ................................. 412
3. Registration of investments of non-Philippine
nationals .................................................. 414
4. Foreign investments in export enterprises ..
.............................................................. 414
5. Foreign investments in domestic market
enterprises ............................................... 415
6. Foreign Investment Negative List .......... 415
E. INSOLVENCY LAWS ................................ 418
1. Concurrence and preference of credits. 418
U.P. LAW BOC INSURANCE COMMERCIAL LAW
INSURANCE
COMMERCIAL LAW
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On August 15, 2013, RA 10607 was signed into The Insurance Code has no provision requiring
law. It is a restatement of the Insurance Code a particular form for the validity of an insurance
(PD 612), with amendments. contract. In our jurisdiction, the Supreme Court
has not made a categorical ruling against the
The section numbers hereinafter generally validity of an oral contract of insurance
pertain to RA 10607, unless otherwise [Carale].
indicated.
An insurance policy is different from the
1. Contract of Insurance contract of insurance. The policy is the formal
A contract of insurance is an agreement written instrument evidencing the contract of
whereby one undertakes for a consideration to insurance entered into between the insured
indemnify another against loss, damage or and the insurer. [Sec. 232]
liability arising from an unknown or contingent
event. [Sec. 2(a)] 2. Doing or Transacting Insurance
Business
Definition The term “doing an insurance
Thus, a contract of insurance is: business or transacting an insurance
1. A contract of indemnity; business” includes:
2. Wherein one undertakes for a 1. Making or proposing to make, as insurer,
consideration; any insurance contract;
3. To indemnify another against loss, 2. Making or proposing to make, as surety,
damage, or liability; any contract of suretyship as a vocation
4. Arising from an unknown or contingent and not as merely incidental to any other
event. legitimate business or activity of the surety;
3. Doing any kind of business, including a
Contingent Event Unknown Event reinsurance business, specifically
Event that is not Event which is certain to recognized as constituting the doing of
certain to take happen, but the time of an insurance business within the
place. its happening is not meaning of the Insurance Code;
known. 4. Doing or proposing to do any business in
substance equivalent to any of the
foregoing in a manner designed to evade
General Rule: A past event cannot be a
designated event in an insurance contract. the provisions of the Insurance Code. [Sec.
2(b)]
Exception: It may be a designated event only
in cases where it has happened already but the
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3. Governing Law
B. ELEMENTS OF AN
General Rule: The Insurance Code primarily INSURANCE
governs insurance contracts.
CONTRACT
Exception: When there is a special law which
specifically governs (e.g., insurance contract C2 R2 I M
under R.A. 1161 or the Social Security Act), in a) Cause – event or peril insured against;
which case, the Insurance Code governs b) Consideration – premium payments paid
subsidiarily. by the insured
c) Risk of loss or damage being assured by
Matters not expressly provided for in the the Insurer
Insurance Code and special laws are regulated d) Risk-Distributing Scheme – distribution
by the Civil Code. and transfer by the insurer of risk of loss,
damage or liability among persons having
Other special laws: similar risks;
a. National Health Insurance Act of 2013 (RA e) Insurable interest - the insured possesses
10606, amending RA 7875) an interest of some kind which the event
b. The Revised Government Service insured against may cause loss or damage
Insurance Act of 1997 (RA 8291) f) A Meeting of Minds of the parties upon all
c. The Social Security Act (RA 8282) the foregoing essentials.
d. The Property Insurance Law (RA 656, as
amended by PD 245)
e. The Philippine Deposit Insurance Act of
1963 (RA 3591)
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c. Voluntary
C. CHARACTERISTICS
AND NATURE OF AN General rule: Contracts of Insurance are not
compulsory and the parties are free to
INSURANCE incorporate such terms and conditions they
CONTRACT may deem convenient provided they are not
contrary to law, morals, good customs, public
1. In General order, or public policy [de Leon].
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3. Philippine rule: the insured may not information is of a doubtful character, the
abandon the thing insured unless the loss insured is entitled to a reasonable time to
or damage is more than ¾ of its value. [de make inquiry [Sec. 143];
Leon] 3. Abandonment is made by giving notice
thereof to the insurer, which may be done
A person insured by a contract of marine orally, or in writing: Provided, That if the
insurance may abandon the thing insured and notice be done orally, a written notice of
recover for a total loss thereof when the cause such abandonment shall be submitted
of the loss is a peril insured against – within seven days from such oral notice
1. If more than ¾ thereof in value is actually [Sec. 145];
lost, or would have to be expended to 4. Abandonment must be absolute and
recover it from the peril; total.
2. If it is injured to such an extent as to reduce
its value by more than ¾; No notice of abandonment is required for
3. If the thing insured is a ship, and the recovery of loss in cases of actual total loss.
contemplated voyage cannot be lawfully
performed without incurring either an Where the information upon which an
expense to the insured of more than ¾ the abandonment has been made proves
value of the thing abandoned or a risk incorrect, or the thing insured was so far
which a prudent man would not take under restored when the abandonment was made
the circumstances; or that there was in fact no total loss, the
4. If the thing insured is cargo or freightage, abandonment becomes ineffectual.
and the voyage cannot be performed, nor
another ship procured by the master, within Characteristics
a reasonable time and with reasonable A valid abandonment has the following
diligence, to forward the cargo without characteristics:
incurring either an expense to the insured 1. There must be an actual relinquishment
of more than ¾ the value of the thing by the person insured of his interest in the
abandoned or a risk which a prudent man thing insured;
would not take under the circumstances 2. There must be a constructive total loss;
[Sec. 141]. 3. It must be factual [Sec. 144];
4. The notice of abandonment must be
Note: Freightage cannot in any case be explicit and must specify the particular
abandoned unless the ship is also abandoned. cause of the abandonment. [Sec. 146]
f. Abandonment Effects
1. An abandonment is equivalent to a transfer
Definition by the insured of his interest to the insurer,
Abandonment, is the act of the insured by with all the chances of recovery and
which, after a constructive total loss, he indemnity [Sec. 148];
declares the relinquishment to the insurer of his 2. If a marine insurer pays for a loss as if it
interest in the thing insured. [Sec. 140] were an actual total loss, he is entitled to
whatever may remain of the thing insured,
Conditions or its proceeds or salvage, as if there had
Aside from the requirement under Sec. 141 been a formal abandonment [Sec. 149];
already mentioned above: 3. Upon an abandonment, acts done in good
1. An abandonment must be neither partial faith by those who were agents of the
nor conditional [Sec. 142]; insured in respect to the thing insured,
2. An abandonment must be made within a subsequent to the loss, are at the risk of the
reasonable time after receipt of reliable insurer, and for his benefit [Sec. 150].
information of the loss, but where the
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combustion is usually rapid oxidation. Fire is as it burns in the place where it ought to be.
always caused by combustion, but combustion [Carale]
does not always cause fire. [Western Woolen
Mills Co. v. Northern Assurance Co., 139 Fed c. Alterations in Use or Condition
637 (1905)]
An alteration in the use or condition of a thing
Fire cannot be considered a natural disaster or insured from that to which it is limited by the
calamity since it almost always arises from policy:
some acts of man or by human means. It 1. Entitles an insurer to rescind a contract
cannot be an act of God unless caused by of fire insurance if such alteration:
lightning or a natural disaster or casualty not a. Increases the risks, and
attributable to human agency. [Phil. Home b. Was made: (i) Without the consent
Assurance Corp. v. CA, G.R. No. 106999 of the insurer, and (ii) By means
(1996)] within the control of the insured;
2. Does not affect a contract of fire
Fire or other so-called “allied risks” insurance if the alteration does not
enumerated in Sec. 169 must be the proximate increase the risk. [Sec. 170-171]
cause of the damage or loss.
Note: A contract of fire insurance is not affected
The presence of heat, steam, or even smoke is by any act of the insured subsequent to the
evidence of fire, but taken by itself will not execution of the policy, which does not violate
prove the existence of fire. its provisions, even though it increases the risk
and is the cause of the loss. [Sec. 172]
b. Risks
Transferring machinery to another location,
Rule: The risk assumed by the insurer is the despite a provision in the policy stating that the
loss and damage caused by hostile fire and not machine cannot be transferred without the
friendly fire. consent of the insurer, is considered an
alteration in the condition and location of the
thing insured. [Malayan Insurance Co, Ltd v.
Hostile Fire Friendly Fire
PAP Co., Ltd., G.R. No. 200784 (2013)]
Fire that escapes Fire that burns in a
from the place where place where it is d. Measure of Indemnity
it was intended to intended to burn and
burn and ought to be, ought to be like fire 1. In an open policy, only the expense
or one which remains burning in a stove or necessary to replace the thing lost or
completely within its a lamp. [de Leon] injured in the condition it was at the time of
proper place but the injury will be paid;
because of the Friendly fire may 2. In a valued policy, the parties are bound
unsuitable materials become hostile fire by the valuation, in the absence of fraud or
used to light it, by escaping from the mistake [Sec. 173];
becomes inherently place where it ought 3. The parties may provide for an option-to-
dangerous and to be to some place in rebuild clause concerning the repairing,
uncontrollable. [de which it ought not to rebuilding, or replacing of buildings or
Leon] be [Carale]. structures wholly or partially damages.
[Sec. 174]
The principle underling this distinction is that
Valued policy
the policy shall not be construed to protect the
If there is a valuation, the effect shall be similar
insured from injury consequent upon his
to a marine insurance policy wherein the
negligent use or management of fire, so long
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a. Definition c. Divisions
Casualty Insurance is insurance covering loss Casualty insurance has two general divisions:
or liability arising from accident or mishap. 1. Liability Insurance - against specified
perils which may give rise to liability on
Including, but not limited to: the part of the insured;
i. Employer’s liability insurance, 2. Indemnity insurance – against
ii. Motor vehicle liability insurance, specified perils which may affect the
iii. Plate glass insurance, persons.
iv. Burglary and theft insurance,
v. Personal accident and health Except with respect to compulsory motor
insurance, as written by non-life vehicle liability insurance, the Insurance Code
insurance companies, and contains no other provisions applicable to
vi. Other substantially similar kinds of casualty insurance or to robbery insurance in
insurance. particular. These contracts are, therefore,
governed by the general provisions applicable
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Note: Any stipulation extending the 2-year design and are unexpected, unusual, and
period is void. unforeseen.
2. If committed in a state of insanity, Where the death or injury is not the natural or
regardless of the date of the commission, probable result of the insured’s voluntary act,
unless suicide is an excepted peril. [Sec. or if something unforeseen occurs in the doing
183] of the act which produces the injury, the
resulting death is within the protection of the
Since suicide is contrary to the laws of nature policies insuring against death or injury from
and the ordinary rules of conduct, it is never accident. [Carale]
presumed. The burden of proving lies with the
insurer, who seeks to avoid liability under a life An event is not an accident if it is due to a
policy, excepting it from coverage. [Campos] voluntary and intentional act on the part of
anyone, including third parties. In the absence
Death at the hands of the law of proof that the incident was intentional, the
Death at the hands of the law (e.g., legal insurer shall pay the beneficiary the value of
execution) is one of the risks assumed by the the supplemental policy covering death by
insurer under a life insurance policy in the accident. [Calanoc v. CA, G.R. No. L-8151
absence of a valid policy exception. [Campos] (1955)]
Killing by the beneficiary The fact that there were nine wounds in total is
General rule: The interest of a beneficiary in a proof that the victim was killed intentionally, as
life insurance policy shall be forfeited when the this cannot be considered accidental. Thus,
beneficiary is the principal, accomplice or the incident is not covered by the supplemental
accessory in willfully bringing about the death insurance on death by accident. [Biagtan v.
of the insured. In such event, the other Insular [G.R. No. L-25579 (1972)]
beneficiaries so named shall receive their
share and divide among them the forfeited 6. Microinsurance
share of the “guilty” beneficiary. In the absence
of other beneficiaries, proceeds shall be paid Microinsurance is a financial product or
according to the policy contract, and if silent, it service that meets the risk protection needs of
shall be paid to the estate of the insured. [Sec. the poor, where:
12] 1. The amount of contributions, premiums,
fees or charges, computed on a daily basis,
Exceptions does not exceed 7.5% of the current daily
1. Accidental killing minimum wage rate for nonagricultural
2. Self-defense workers in Metro Manila; and
3. Insanity of the beneficiary at the time he 2. The maximum sum of guaranteed benefits
killed the insured is not more than 1,000 times of the said
4. Negligence current daily minimum wage rate. [Sec.
187]
Note: Conviction of the beneficiary is
necessary before his interest in the insurance No insurance company or mutual benefit
policy is forfeited in favor of the others indicated association shall engage in the business of
in Sec. 12. Microinsurance UNLESS it possesses all the
requirements as may be prescribed by the
Accidental death Commissioner. [Sec. 188]
The terms accident and accidental means
have been taken to mean that they happen by
chance or fortuitously, without intention and
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a. Its financial and general condition; and combination of fixed amount and variable
b. Its methods of operations, including the amount of benefits, and for option lump-sum
issue and sale of variable contracts, payment of benefits. [Sec. 239]
are not and will not be hazardous to the
public or to its policy and contract owners.
[Sec. 238(a)] F. INSURABLE INTEREST
No foreign insurance company shall be
authorized to issue, deliver or sell any variable Insurable interest
contract in the Philippines, unless it is likewise That interest which a person is deemed to have
authorized to do so by the laws of its domicile. in the subject matter insured, where he has a
[Sec. 238(a)] relation or connection with or concern in it, such
that the person will:
In determining the qualifications of a company Derive pecuniary benefit or advantage from
requesting authority to issue, deliver, sell or the preservation of the subject matter
use variable contracts, the Commissioner shall insured; and
always consider the following:
Suffer pecuniary loss or damage from its
destruction, termination, or injury by the
1. The history, financial and general condition
happening of the event insured against.
of the company: Provided, That such
[Lalican v. Insular Life Ins., G.R. No.
company, if a foreign company, must have
183526 (2009)].
deposited with the Commissioner for the
benefit and security of its variable contract An insurable interest is one of the most basic
owners in the Philippines, securities and essential requirements in an insurance
satisfactory to the Commissioner contract.
consisting of bonds of the Government of
The existence of an insurable interest gives
the Philippines or its instrumentalities with
a person the legal right to insure the subject
an actual market value of Two million
matter of the policy of insurance [Lalican v.
pesos (P2,000,000.00);
Insular Life Ins., G.R. No. 183526 (2009)].
2. The character, responsibility and fitness of
It may NOT be waived by stipulation.
the officers and directors of the company;
Absence of insurable interest renders the
and
insurance contract void. [Sec. 25]
3. The law and regulation under which the
company is authorized in the state of
General Rule: Insurable interest must be
domicile to issue such contracts. [Sec.
capable of pecuniary estimation because the
238(c)] purpose of insurance is to indemnify. It would
be difficult to measure if the benefit derived or
If after notice and hearing, the Commissioner
the loss incurred is not capable of pecuniary
shall find that the company is qualified to issue,
estimation.
deliver, sell or use variable contracts in
Exception: The insurable interest need not
accordance with this Code and the regulations
always be pecuniary in nature (e.g., in insuring
and rules issued thereunder, the
the life of a person, the purpose is not to
corresponding order of authorization shall be
indemnify but to act as an investment or
issued. Any decision or order denying authority
savings instrument). [Lucena v. Crawford,
to issue, deliver, sell or use variable contracts
2Bos & PNR 269 (1806)]
shall clearly and distinctly state the reasons
and grounds on which it is based. [Sec.238(d)]
Rationale: As a deterrence to the insured
Any insurance company issuing variable
contracts pursuant to this Code may, in its
discretion, issue contracts providing a
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A policy issued to a person without insurable General rule: A change of interest in the thing
interest is a mere wager policy or contract and insured does not transfer the policy, but
is void for illegality. [de Leon] suspends the insurance to an equivalent extent
until the interest in the thing and the interest in
Evidence that life insurance is regarded as the insurance policy are vested in the same
a wager policy: person. Thus, the contract is not rendered void
a) The original proposal to take out but is merely suspended. [Sec. 20]
insurance was that of the beneficiary;
b) The premiums are paid by the Exceptions
beneficiary; 1. Life, health, and accident insurance.
c) The beneficiary has no interest, 2. A change of interest in the thing insured
economic or emotional, in the after the occurrence of an injury which
continued life of the insured. [de Leon] results in a loss does not affect the policy.
[Sec. 21]
As a measure of limit of recovery 3. A change in the interest in one or more of
The insurable interest is the measure of the several things, separately insured by one
upper limit of his provable loss under the policy, such as a conveyance of one or
contract. Insurance should not provide the more things, does not affect the policy with
insured means of making a net profit from respect to the others not so conveyed.
the happening of the event insured against. [Sec. 22]
[de Leon] 4. A change of interest by will or succession
on the death of the insured. His interest
When insurable interest should exist passes to his heir or legal representative
Insurable Interest Required who may continue the insurance policy on
Inceptio Interveni Occurren the property by continuing paying
n ng Period ce of Loss premiums. [Sec. 23]
Life/Heal ✓ 5. A transfer of interest by one of several
th partners, joint owners, or owners in
Property ✓ ✓ common, who are jointly insured, to the
others. This will avoid the policy only as to
the selling partners or co-owners, but not
For Life Insurance: Insurable interest over as to others. [Sec. 24]
life/health must exist at the time of the inception 6. Automatic transfers of interest in cases in
of the contract, but may be lost after. [Sec. 19] which the policy is so framed that it will
inure to the benefit of whosoever may
For Property Insurance: Insurable interest become the owner of the interest insured
must exist at the time of the inception of the during the circumstance of the risk. [Sec.
contract and at the occurrence of the loss. 57]
But it need not exist during the intervening
period or from the time between when the It is an exception to the general rule that upon
policy takes effect and the loss occurs. maturity, the proceeds of a policy shall be given
The alienation of insured property will not exclusively to the proper interest if the person
defeat a recovery if the insured has in whose name or for whose benefit it is made.
subsequently reacquired the property and
possesses an insurable interest at the time In case of an express prohibition against
of loss. [Sec. 19] alienation in the policy [Art. 1306, NCC],
alienation will not merely suspend the contract
CHANGE OF INTEREST but avoid it entirely.
Change of interest means the absolute transfer
of the property insured.
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(2) Trustees in the case of the seller may sell the remains without prejudice to
of property not yet delivered, his right to recover; [Sec. 21]
(3) Mortgagors over the property 2. A change of interest in one or more several
mortgaged, and lessor, lessee distinct things, separately insured by one
and sub-lessee over the property policy. This does not avoid the insurance
leased. [de Leon] as to the others; [Sec. 22]
b. An inchoate interest founded on an 3. A change in interest by will or succession
existing interest; [Sec. 14] or upon the death of the insured; [Sec. 23]
Inchoate interest in property exists but 4. A transfer of interest by one of several
is incomplete or unripe until the partners, joint owners, or owners in
happening of an event. [de Leon] common who are jointly insured. The
Examples of inchoate interests are: acquiring co-owner has the same interest;
(1) The interest of stockholders with his interest merely increases upon
respect to dividends in case of acquiring other co-owners interest. [Sec.
profits and shares in the assets, 24]
and
(2) The interest of a partner in the Note: This makes a distinction between a
properties belonging to the transfer in favor of a partner and in favor of a
partnership. [de Leon] stranger. The latter will avoid the policy while
c. An expectancy, coupled with an the former will not. [Carale]
existing interest in that out of which the
expectancy arises. [Sec. 14] Mere transfer of the property does not transfer
For example, a farmer who planted the policy but suspends it until the same person
crops has insurable interest over his becomes the owner of both the policy and the
harvest which can be expected. [de thing insured. [Sec. 20]
Leon]
Measure of Indemnity
A mere contingent or expectant interest in
anything, not founded on an actual right to the Being a contract of indemnity, the measure of
thing, nor upon any valid contract for it, is not insurable interest in property is the extent to
insurable. [Sec. 16] which the insured might be damnified by the
A son has no insurable interest over loss of injury thereof. [Sec. 17]
the property of his father because
such is just a mere expectancy and The insured cannot recover a greater value
has no legal basis before he inherits than that of his actual loss because it would be
such property. [Carale] a wagering policy contrary to public policy and
void.
Time of Existence
A carrier or depository of any kind has an
General rule: Interest in property insured must insurable interest in a thing held by him as
exist both at inception and at time of loss, but such, to the extent of his liability but not to
not in the intervening period [Sec. 19]. exceed the value thereof. [Sec. 15]
Exceptions
1. A change in interest over the thing insured
after the loss contemplated. The insured
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If there is over-insurance and loss occurs, then ratably to the loss or damage considering that
the insurers will pay pro-rata or in the order as the several insurances cover the same subject
stated in contract or excess clause. matter and interest against the same peril. If
the loss is greater than the sum total of all the
Double Insurance Over Insurance policies issued, each insurer is liable for the
Amount of insurance Amount of insurance amount of his policy.
may or may not exceeds the value of
exceed the value of the insured’s 4. Multiple or Several Interests
the insured’s insurable interest
insurable interest
on Same Property
There are always There may be one or
General Rule: The insurance proceeds shall
several insurers more insurers
be applied exclusively to the proper interest of
the person in whose name or for whose benefit
Rules for Payment it is made.
Where the insured in a policy other than life is Exception: Unless otherwise specified in the
over insured by double insurance: policy. [Sec. 53]
(a) The insured, unless the policy otherwise
provides, may claim payment from the Examples wherein multiple persons may each
insurers in such order as he may select, up have insurable interest over the same property:
to the amount for which the insurers are (1) Corporations – the corporation and its
severally liable under their respective stockholders have insurable interest over
contracts; the corporate assets.
(b) Each insurer is bound, as between himself (2) Partnerships – the partnership and the
and the other insurers, to contribute ratably partners composing it have insurable
to the loss in proportion to the amount for interest over its assets.
which he is liable under his contract. [Sec. (3) Assignments – the assignor and assignee
96] have insurable interest over the property
assigned.
Rules for claiming payment under Valued (4) Trusts – the trustor and trustee have
Policies vs. Unvalued Policies [Sec. 96] insurable interest over the property in trust.
Valued Policy Unvalued policy (5) Lease Agreements - the lessor, lessee and
Any sum received by Any sum received by sub-lessees have insurable interest over
him under any other him under any policy the property in lease.
policy shall be shall be deducted (6) Mortgages – the mortgagor and
deducted from the against the full mortgagee/s have insurable interest over
value of the policy insurable value for the property mortgaged.
without regard to the any sum received by
actual value of the him under any policy
Multiple Interests over Mortgaged
subject matter
insured
Property
The Insurance Code recognizes that:
Where the insured receives any sum in
Both the mortgagor and mortgagee have
excess of the valuation (for valued policies),
each separate and distinct insurable
or of the insurable value (for unvalued
interest in the mortgaged property.
policies), the insured must hold such sum in
trust for the insurers, according to their right They may take out separate policies with
of contribution among themselves. the same or different insurance companies.
Insurance taken by one on his own name
only, does not inure to the benefit of the
Sec. 96 enunciates the principle of contribution
other. [Sec. 53]
which requires each insurer to contribute
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Thus, a mortgagor has an insurable interest insurer, to the extent of the insurance money
equal to the value of the mortgaged property paid. [Palileo v. Cosio, G.R. No. L- 7667
and a mortgagee, only to the extent of the debt (1955)]
Secured by the mortgage. [Geagonia v. CA,
G.R. No. 114427(1995)] When mortgagor takes out insurance policy
When a mortgagor takes out an insurance for
Mortgagor Mortgagee his own benefit, only he can recover from the
As owner, the Only to the extent of insurer but the mortgagee has a lien on the
interest is to the the debt secured proceeds by virtue of the mortgage. A
extent of the value of mortgagor can make the proceeds payable to
the property, or assigned to the mortgagee [de Leon].
regardless of
whether it equals to Ways where mortgagee may be the
the mortgage debt or beneficial payee [Geagonia v. CA, G.R. No.
not 114427 (1995)]:
His interest lies in What is insured is (1) As assignee with the consent of the
that the loss or not the property, but insurer;
destruction of the his interest as (2) A pledge without such consent;
property will not mortgagee, which (3) The original policy may contain a mortgage
extinguish his subsists until the clause;
mortgage debt mortgage debt is (4) A rider making the policy payable to the
extinguished mortgagee “as his interest may appear”
[CARALE] may be attached;
(5) A “standard mortgage clause,” containing a
When mortgagee takes out insurance collateral independent contract between
policy the mortgagee and the insurer may be
When a mortgagee insures his own interest attached;
in the mortgaged property without (6) The policy, though by its terms payable
reference to the right of the mortgagor, absolutely to the mortgagor, may have
mortgagee is entitled to the proceeds of the been procured by a mortgagor under a
policy in case of loss to the extent of his contract duty to insure for the mortgagee's
credit. [de Leon] benefit.
If the proceeds are more than the total
amount of credit, then mortgagee has no Open Loss Payable Mortgage
right to the excess. Clause
If the proceeds are equal to the credit, then
insurer is subrogated to the mortgagee’s An open loss payable clause states that the
rights and mortgagee can no longer proceeds of the insurance contract is payable
recover the mortgagor’s indebtedness. to the mortgagee as beneficiary.
If the proceeds are less than the credit,
then the mortgagee may recover from the The contract, however, is procured by the
mortgagor the deficiency. Upon payment, mortgagor for his interest in the property. He is
the insurer is subrogated to the rights of the the party to the contract, not the mortgagee.
mortgagee against the mortgagor to the
extent of the amount paid. The acts of the mortgagor prior to the loss,
which would otherwise avoid the insurance,
When a mortgagee insured his own interest affects the mortgagee, even if the property is in
and a loss occurs, he is entitled to recover on the hands of said mortgagee.
the insurance. The mortgagee, however, is not
allowed to retain his claim against the
mortgagor, but it passes by subrogation to the
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This clause is similar to an open loss payable In Enriquez v. Sun Life Assurance Co. [G.R.
clause, except that it is stipulated that the acts No. L-15895 (1920)] the Court held that:
of the mortgagor cannot invalidate the a) The submission of an application,
insurance, provided that if the mortgagor fails even with premium payment is a mere
to pay the premiums due, the mortgagee shall, offer on the part of the applicant, and
on demand, pay said premiums. [de Leon] does not bind the insurer;
b) An insurance contract is also not
perfected where the applicant dies
G. PERFECTION OF THE before the approval of his application
CONTRACT OF or it does not appear that the
acceptance of the application ever
INSURANCE came to the knowledge of the
applicant.
1. Offer and
Acceptance/Consensuality Delay in Acceptance
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paid three full annual premiums is given the Upon production of evidence of insurability
right, upon default, to have the policy satisfactory to the company; and
continued from the date of default for the Upon payment of all overdue premiums
whole period of insurance without further and any indebtedness to the company
payment of premiums. upon said policy, with interest rate not
exceeding that which would have been
It is also called reduced paid-up because in applicable to said premiums and
effect the policy, terms and conditions are indebtedness in the policy years prior to
the same but the face value is reduced to reinstatement. [Sec. 233(j)]
the “paid-up” value.
Reinstatement of a lapsed life insurance policy
The terms and conditions of the original is NOT a non-default option.
policy remain the same, however, the It does not create a new contract, but
amount will be less than the original face merely revives the original policy so insurer
value. cannot require a higher premium than the
amount stipulated in the contract.
(3) Automatic premium loan (APL) - where, It does not apply to group/industrial life
upon default, the insurer lends/advances to insurance.
the insured without any need of application
on his part, the amount necessary to pay Requisites: [Sec. 233(j)]
overdue premium, but not to exceed the a. It must be exercised within three years from
CSV of the policy. date of default;
b. The insured must present evidence of
It only applies if requested in writing by the insurability satisfactory to the insurer;
insured either in the application or at any c. He must pay all back premiums and all
time before expiration of the grace period. indebtedness to the insurer (with interest);
d. The CSV must not have been duly paid to
In effect, the insurance policy continues in the insured nor the extension period
force for a period covered by the payment. expired;
e. The application must be filed during the
After the period, if insured still does not insured’s lifetime, [Andres v. Crown Life
resume paying his premiums, the policy Ins., G.R. No. L-10874 (1958)]
lapses, unless CSV still remains. If there is
still CSV, APL continues until CSV is 5. Refund of Premiums
exhausted.
Return of premiums can be made in the
4. Reinstatement of a Lapsed following cases:
Policy of Life Insurance a. If the thing insured was never exposed to
the risks insured against, the whole
In the case of individual life or endowment premium should be refunded. [Sec. 80(a)]
insurance, the policy shall contain a provision b. When the contract is voidable due to the
that the policyholder shall be entitled to have fraud or misrepresentation of insurer or his
the policy reinstated: agent, the whole premium should be
At any time within three (3) years from the refunded. [Sec. 82]
date of default of premium payment c. When by any default of the insured other
o Unless the cash surrender value than actual fraud, the insurer never
has been duly paid incurred any liability under the policy and
o Unless the extension period has the whole premium should be refunded.
expired, [Sec. 82]
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d. When the contract is voidable because of i. Which are material to the contract;
the existence of facts of which the insured ii. As to which he makes no warrant; and
was ignorant without his fault, the whole iii. Which the other has not the means of
premium should be refunded. [Sec. 82] ascertaining. [Sec. 28]
e. Where the insurance is for a definite period
and the insured surrenders his policy, the An intentional or fraudulent omission, on the
portion of the premium that corresponds to part of one insured, to communicate
the unexpired time at a pro rata rate, unless information of matters proving or tending to
a short period rate has been agreed upon prove the falsity of a warranty, entitles the
and appears on the face of the policy insurer to rescind. [Sec. 29]
should be return. [Sec. 80(b)]
f. When there is over-insurance by several Note: If the applicant is aware of the existence
insurers, the return premiums should be of some circumstance which he knows would
proportioned to the amount by which the influence the insurer in acting upon his
aggregate sum insured in all the policies application, good faith requires him to disclose
exceeds the insurable value of the thing at that circumstance, though unasked. [Vance]
risk. [Sec. 83]
g. When rescission is granted due to the Matters which Need Not be Disclosed
insurer’s breach of contract. 1. Matters already known to the insurer [Sec.
30(a)];
2. Matters which each party are bound to
H. RESCISSION OF know [Sec. 30(b) and Sec. 32];
INSURANCE CONTRACTS 3. Matters of which the insurer waives
communication [Sec. 30(c) and Sec. 33];
4. Matters which prove or tend to prove the
1. Concealment existence of a risk excluded by a warranty
and which are not otherwise material [Sec.
A concealment, whether intentional or 30(d)];
unintentional, entitles the injured party to 5. Matters which relate to a risk excepted in
rescind a contract of insurance. [Sec. 27] the policy, and which are not otherwise
material [Sec. 30(e)];
Rationale: The contract of insurance is one of 6. Information of the nature or amount of the
perfect good faith (uberrimae fides) not for the interest of one insured unless if inquired
insured alone, but equally for the insurer [Qua upon by the insurer, except if required by
Chee Gan v. Law Union & Rock Insurance, Sec. 51 [Sec. 34];
G.R. No. L-4611(1955)]. 7. Matters of opinion. [Sec. 35]
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d. The other party has not the means of (3) Accepting the application for
ascertaining the fact concealed; insurance. [Sec. 31]
e. The fact concealed is material.
The test is the effect which the knowledge of
Failure of the insured to disclose conditions the fact in question would have on the contract.
affecting the risk, of which he is aware, makes It is sufficient if the knowledge of it would
the contract voidable at the insurer’s option, the influence the party in making the contract. [de
ratio being that a contract of insurance is of Leon]
good faith.
In several cases, the cause of death may have
But, Sec. 27, uses the phrase “injured party”, no relation to the fact or facts concealed.
thus the insured may also rescind the contract. [CARALE]
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The cause, not the proximate cause, which investigation and take such action as may be
immediately precedes the loss. necessary to protect its interest.
This refers to the formal notice given the For compulsory motor vehicle insurance, the
insurer by the insured or claimant under a notice must be given within six months from the
policy of the occurrence of the loss insured date of the accident. [Sec. 397]
against.
For other non-life insurance, the Commissioner
Purpose may specify the period for the submission of
Its purpose is to apprise the insurance the notice of loss. [Sec. 90]
company so that it may make proper
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(b) The Commissioner’s complaint experience insurer, NOT from the time when the loss
with other insurance companies writing actually occurs.
similar lines of insurance. [Sec. 247]
The cause of action in an insurance contract
Penalty Per Violation does not accrue until the insured's claim is
If it is found, after notice and an opportunity to finally rejected by the insurer. This is because
be heard, that an insurance company has before such final rejection, there is no real
violated this section, each instance of necessity for bringing suit. [Eagle Star
noncompliance: Insurance vs Chia Yu, G.R. No. L-5915 (1955)]
(1) May be treated as a separate violation; and
(2) Shall be considered sufficient cause for the Subrogation
suspension or revocation of the company’s
certificate of authority. Subrogation is a process of legal substitution.
The insurer, after paying the amount covered
Sec. 247 lists the grounds which are sufficient by the insurance policy, steps into the shoes of
cause for the suspension or revocation of the the insured and avails himself of the latter's
insurer’s certificate of authority [Sec. 247(c)]. rights that exist against the wrongdoer at the
time of loss.
Prescription of Action
The insurer becomes entitled to recover from
Should the insurer reject the claim of the the wrongdoer the amount of the loss it may
insured, the remedy of the latter would be to file have paid to the insured.
an action against the insurer with the proper
tribunal [Carale]. Note: Subrogation applies only to property
insurance and non-life insurance.
An “action” or “suit” is an act by which one sues
another in a court of justice for the enforcement Right of Subrogation
or protection of a right, or the prevention or The insurance company shall be subrogated to
redress of a wrong. [Lopez v. Filipinas the rights of the insured against the wrongdoer
Compania de Seguros, G.R. No. L-19613 or the person who has violated the contact if:
(1966)] (1) The plaintiff’s property has been insured,
and
Prescriptive Period (2) The plaintiff has received indemnity from
General Rule: It being based on a written the insurance company for the injury or loss
contract, the action prescribes in ten years. arising out of the wrong or breach of
[Art. 1144, NCC] contract complained of. [Art. 2207, NCC]
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and held as valid as if served upon (1) Set aside an amount corresponding to the
the foreign company at its home legal reserves of the policies written in the
office. Philippines; and
B. Agreement or stipulation, executed (2) Invest and keep the same therein in
by the proper authorities of said accordance with the provisions of this
company, which states that: section. [Sec. 199]
(1) Service of any notice provided by
law, or insurance policy, proof of The legal reserve therein required to be set
loss, summons, or other legal aside shall be invested only in the classes of
process may be made upon the Philippine securities described in Section
Insurance Commissioner 206: Provided, however, That –
(2) Such service upon the Insurance (1) No investment in stocks or bonds of any
Commissioner shall have the same single entity shall, in the aggregate exceed
force and effect as if made upon 20% of the net worth of the investing
the company if at any time said company or 20% of the capital of the
company shall: issuing company, whichever is the lesser,
a. Leave the Philippines, or unless otherwise approved in writing by the
b. Cease to transact business Commissioner.
therein, or (2) The securities purchased and kept in the
c. Be without any agent in the Philippines under this section, shall not be
Philippines on whom any sent out of the territorial jurisdiction of the
notice, proof of loss, Philippines without the written consent of
summons, or legal process the Commissioner. [Sec. 199]
may be served, then in any
action or proceeding Rule as to Partnerships, Persons, or
arising out of any business Association of Persons
or transaction which General Rule: No person, partnership, or
occurred in the Philippines association of persons shall transact any
(3) Whenever such service of notice, insurance business in the Philippines except as
proof of loss, summons, or other agent of a person or corporation authorized to
legal process shall be made upon do the business of insurance in the
the Commissioner, he must, within Philippines.
ten (10) days thereafter, transmit
by mail, postage paid, a copy of Exceptions: Such person, partnership, or
such notice, proof of loss, association of persons may transact insurance
summons, or other legal process to business in the Philippines, provided that:
the company at its home or (1) It is possessed of the capital and assets
principal office. [Sec. 196] required of an insurance corporation doing
the same kind of business in the
7. For foreign companies: Surplus Fund, Philippines and invested in the same
Legal Reserves [Sec. 196, 199] manner;
The Commissioner may, as a pre-licensing (2) The Commissioner granted it a certificate
requirement of a new branch office of a foreign to the effect that it has complied with all the
insurance company, require the company to provisions of this Code. [Sec. 192]
have an additional surplus fund in an amount
to be determined by the Insurance
Commission. [Sec. 197]
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Primary and exclusive jurisdiction over claims The Commissioner is authorized to suspend or
for benefits involving pre-need plans where the revoke all certificates of authority granted to
amount of benefits does not exceed P100,000. such insurance company, its officers and
[Sec. 55, RA 9829] agents, and no new business shall thereafter
be done by such company or for such company
For the purpose of proceeding under its by its agents in the Philippines while such
adjudicatory powers under the Insurance suspension, revocation, or disability continues
Code, the Commissioner or any officer thereof or until its authority to do business is restored
designated by him, is empowered to administer by the Commissioner. [Sec. 254]
oaths and affirmation, subpoena witnesses,
compel their attendance, take evidence and Before restoring such authority, the
require the production of any books, papers, Commissioner shall require the company
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3. Liquidation of Insurance
Company
If the company is determined by the
Commissioner to be insolvent or cannot
resume business, he shall, if public interest
requires, order its liquidation. [Sec. 256]
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PRE-NEED
COMMERCIAL LAW
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1. Pre-Need Plans
A. DEFINITION
Pre-need plans are contracts which provide
The section numbers hereinafter generally pertain to for the rendering of services or payment of
RA 9829 (Pre-Need Code), unless otherwise indicated. money to plan holders or their beneficiaries
when the actual need for such payment or
Pre-need plans are contracts, agreements, rendition of services accrues. [Carale]
deeds or plans for the benefit of the
planholders which provide for the performance They are governed by the Pre-Need Code (RA
of future services, payment of monetary 9829). They are not considered as
considerations or delivery of other benefits at insurance contracts because:
>the time of actual need or agreed maturity a. Pre-need plans can have insurance
date, as specified therein, in exchange for cash coverage, implying that they are separate
or installment amounts with or without interest contracts; and
or insurance coverage and includes life, b. Pre-need plans do not involve unknown or
pension, education, interment and other plans, contingent events but events certain to
instruments, contracts or deeds. [Sec. 4(B)] happen at a certain time.
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It shall be unlawful for any pre-need company d. Such other information that the
to adverti>se itself or its pre-need plans unless Commission shall require by rule. [Sec. 19]
the Commission has approved such
advertising material. The making of any untrue statement of a
material fact in an information brochure is a
The Commission shall have a period of ten (10) ground for administrative sanctions and
working days to approve or deny the criminal penalties. [Sec. 56(a)(i), IRR of RA
advertising material and failure to act within the 9829]
said period shall cause the advertising material
to be approved. For purposes hereof, the
Commission shall have the power to define the
C. LICENSING OF SALES
scope of its advertising rules to appropriately COUNSELORS AND
cover advertising or other communications to
the public.
GENERAL AGENTS
Any person who sells or offers to sell any pre- 1. Qualifications for Issuance
need plan or contract by any means or No sales counselor shall be allowed to solicit,
instruments of communication in violation of sell or offer to sell pre-need plans under this
this section shall be liable to the person Code without being licensed as such by the
purchasing such pre-need contract who may Commission.
sue to recover the consideration paid for such
pre-need contract with interest thereon. In Such license shall automatically expire every
addition hereto, the Commission shall have the 30th day of June or such date of every year as
power to pursue the erring pre-need company may be fixed by the Commission and may be
in an administrative or criminal proceeding. accordingly renewed.
A fine of P100, 000,000.00 shall be imposed on Qualifications for the issuance of a license:
any pre-need company found to have violated a. The applicant must be of good moral
this section: Provided, That a second violation character and must not have been
of this section shall, in addition to the fine convicted of any crime involving moral
imposed, result in the suspension of the license turpitude;
of the pre-need company. [Sec. 18] b. The applicant has undergone a training
program approved by the Commission and
6. Disclosures to Prospective Planholders such fact has been certified under oath by
No registered pre-need plan shall be sold to a duly authorized representative of a pre-
prospective planholders unless an information need company; and
brochure, which has been filed with the c. The applicant has passed a written
Commission, has been provided to the examination administered by the
purchaser. Commission: Provided, that the
administration of the examination may be
The information brochure shall contain: delegated to an independent organization
a. An explanation of the principal features of under the supervision of the Commission.
the pre-need plan; [Sec. 20]
b. A statement that the planholder may avail
of a default or reinstatement period within 2. Denial, Suspension, or Revocation of
which to reinstate his lapsed plan; License
c. The conditions of the same and the rates of An application for the issuance or renewal of a
return for scheduled benefit plans and license to act as sales counselor may be
illustrative yields for contingent benefit denied, or such license, if already issued, shall
be suspended or revoked based on the
plans;
following grounds:
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Reinstatement
The planholder shall be allowed a period of not
less than two (2) years from the lapse of the
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5. Distribution of Profits
A pre-need company may declare
divided: Provided, That the following shall
remain unimpaired, as certified under oath by
the president and the treasurer with respect to
items (a) and (b); and in the case of item (c), by
the trust officer:
(a) One hundred percent (100%) of the capital
stock;
(b) An amount sufficient to pay all net losses
reported, or in the course of settlement,
and all liabilities for expenses and taxes;
and
(c) Trust fund.
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TRANSPORTATION
COMMERCIAL LAW
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One of the primary factors considered in the 1. application and approval/ denial of
granting of a certificate of public convenience franchise,
for the business of public transportation is the 2. setting of fares, routes, operating
financial capacity of the holder of the license, conditions, and
so that liabilities arising from accidents may be 3. imposition of fines, suspension and
duly compensated. The kabit system renders cancellation of franchise.
illusory such purpose and, worse, may still be
availed of by the grantee to escape civil liability The LTFRB shall grant the TNCs and their
caused by a negligent use of a vehicle owned accredited TNVS a Certificate of Public
by another and operated under his license Convenience (CPC) upon full compliance of
[Dizon v. Octavio (1955)]. jurisdictional requirements, as may be
determined by LTFRB. The LTFRB shall also
However, one who has availed of the kabit set the fare for the TNVS after public hearing
system is not precluded from filing for damages or in consultation with the TNCs and TNVS.
against another who caused the injury, as the [DOTr D.O. No. 2018-012]
policy against the kabit system will not be Previously, the TNC may or may not have been
defeated by giving such person standing to sue granted a Certificate of Public Convenience
[Lim v. CA, G.R. No. 125817 (2002)]. (CPC).
If it is a holder of a valid and current CPC,
3. Classification of transport it is known as a common carrier.
Otherwise, it is classified as a land
network vehicle services and transportation service contractor.
transport network companies
The Partners (owners of the vehicles used in
Transport Network Company or TNC is transporting passengers) forming part of the
defined as an organization whether a network of a TNC, may or may not be a
corporation, partnership, or sole proprietor, that common carrier, depending on whether the
provides pre-arranged transportation services Partner(s) itself/themselves are holders of a
for compensation using an internet-based CPC.
technology application or a digital platform A mere Accreditation given by Land
technology to connect passengers with drivers Transportation Franchising and Regulatory
using their personal vehicles [DOTC D.O. No. Board (LTFRB) is not an equivalent to a
2015-011]. CPC and will not make said holder a
common carrier.
Transport Network Vehicle Service or TNVS If the Partner is a holder of a CPC, said
refers to a TNC-accredited private vehicle Partner is a common carrier. However, if
owner, which is a common carrier, using the the Partner is not a holder of a CPC, said
internet-based technology application or digital Partner is merely a land transportation
platform technology transporting passengers service contractor [BIR RMC 70-2015]
from one point to another, for compensation.
The TNVS cannot operate as a common carrier
outside of or independent from the use of the B. VIGILANCE OVER
internet-based technology of the TNC or TNCs GOODS
to which they are accredited. [DOTr D.O. No.
2018-012]
The liability of the common carrier with respect
to vigilance over goods, in general, are as
TNVs and TNCs are expressly considered
follows:
common carriers and are classified as public a. Common carriers are responsible for the
utilities. They are subject to full regulation and loss, destruction, or deterioration of the
supervision by the LTFRB, including but not goods [Art. 1734, NCC]. In fact, they are
limited to:
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liable even in those cases where the cause 2. The common carrier must exercise due
of the loss or damage is unknown diligence to prevent or minimize the loss
[AGBAYANI]. before, during and after the occurrence of
b. If the goods are lost, destroyed, or the flood, storm, or natural disaster [Art.
deteriorated, common carriers are 1739, NCC]; and
presumed to have been at fault or to have 3. The common carrier must not have
acted negligently [Art. 1735, NCC]. negligently incurred delay [Art. 1740,
NCC].
Note: Two-pronged analysis in determining
liability: Fire may not be considered a natural disaster
a. Whether or not the cause of the loss, or calamity because it arises almost invariably
destruction, or deterioration is included from some act of man or by human means. It
under Art. 1734; does not fall within the category of an act of
b. If not, whether or not the common carrier God unless caused by lightning or by other
exercised extraordinary diligence. natural disaster or calamity [Eastern Shipping
Lines v. IAC, G.R. No. L-69044 (1987)].
Presumption of Negligence
General rule: Common carriers are Act of public enemy
responsible for the loss, destruction, or
deterioration of the goods. Requisites
a. The act of the public enemy was committed
Exception: Common carriers are not liable either in an international or civil war [Art.
when such loss, destruction, or deterioration is 1734 (2), NCC];
due to any of the following causes only: b. The act of the public enemy must have
1. Flood, storm, earthquake, lightning, or been the proximate and only cause; and
other natural disaster or calamity; c. The common carrier must exercise due
2. Act of the public enemy in war, whether diligence to prevent or minimize the loss
international or civil; before, during and after the act of the public
3. Act of omission of the shipper or owner of enemy causing the loss, destruction or
the goods; deterioration of the goods [Art. 1739, NCC].
4. The character of the goods or defects in the
packing or in the containers; Thieves, rioters, robbers, and insurrectionists,
though at war with social order, are not in a
5. Order or act of competent public authority
legal sense classed as public enemies, but are
[Art. 1734, NCC].
merely private depredators for whose acts a
carrier is answerable. Pirates on the high seas,
In all other cases of loss, destruction, or
however, stand as an exception to this rule.
deterioration, the common carrier is presumed
They are considered the enemies of all civilized
to have been at fault or to have acted
nations, and indeed of the human race, and
negligently, unless they prove that they
consequently their depredations on a common
observed extraordinary diligence [Art. 1735,
carrier will excuse him from liability [Aquino].
NCC].
Act or omission of shipper or owner
1. Exempting Causes
The act or omission of the shipper must have
Natural disaster or calamity been the proximate and only cause of the loss,
destruction, or deterioration of the goods.
Requisites
1. The natural disaster must have been the If the shipper or owner merely contributed to
proximate and only cause of the loss; the loss, destruction or deterioration of the
goods, the proximate cause being the
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negligence of the common carrier, the latter A fortuitous event has the following
shall be liable for the damages, which shall, characteristics:
however, be equitably reduced [Art. 1741, a. The cause of the unforeseen and
NCC]. unexpected occurrence, or the failure of
the debtor to comply with his obligations,
Character of the goods must be independent of human will;
b. It must be impossible to foresee the event
Requisites which constitutes the caso fortuito, or if it
a. The loss, destruction, or deterioration of can be foreseen, it must be impossible to
the goods is due to the character of the avoid;
goods or defects in the packing or in the c. The occurrence must be such as to render
containers [Art. 1734 (4), NCC]; and it impossible for the debtor to fulfill his
b. The common carrier must exercise due obligation in a normal manner; and
diligence to forestall or lessen the loss [Art. d. The obligor must be free from any
1742, NCC]. participation in the aggravation of the injury
resulting to the creditor.
If the fact of improper packing is known to the
carrier or its servants or apparent upon A common carrier may not be absolved from
ordinary observation, but it accepts the goods liability in case of force majeure or fortuitous
notwithstanding such condition, it is not event alone. The common carrier must still
relieved of liability for loss or injury resulting prove:
therefrom [Southern Lines v. CA, G.R. No. L- (i) That it was not negligent in causing the
16629 (1962)]. death or injury resulting from an
accident; [Yobido v. CA, G.R. No.
Order of competent authority 113003 (1997)]
(ii) That the loss or destruction of the
Requisites merchandise was due to accident and
a. There must be an order or act of competent force majeure and not fraud, fault, or
public authority through which the goods negligence on the part of the captain or
are seized or destroyed [Art. 1734 (5), owner of the ship [Tan Chiong Sian v.
NCC]; and Inchausti, G.R. No. L-6092 (1912)].
b. The said public authority must have had
the power to issue the order [Art. 1743, a. Requirement of Absence of
NCC]. Negligence
To be exempted from liability, the intervention If the common carrier is found to have acted
of the competent public authority must be of a negligently, it is precluded from invoking the
character that would render impossible the exempting causes under Art. 1734, and will be
fulfillment by the carrier of the obligation liable for damages suffered by the goods it
[Ganzon v. CA, G.R. No. L-48757 (1988)]. carried if such damages arise from its
negligence [Agbayani].
Force majeure
The exempting circumstance should be the
Force majeure – in general, has also been proximate and only cause of the loss,
invoked as an exempting cause based on Art. destruction, or deterioration of the goods for
1174, which states that no person shall be the common carrier to be exempted from
responsible for a fortuitous event which could liability on any of the ff. grounds:
not be foreseen, or which, though foreseen, 1. Natural Disaster/Calamity
was inevitable. 2. Act of Public Enemy
3. Character of the Goods [Art. 1739, 1742,
NCC]
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Thus, the liability of the carrier as common It is settled in maritime law jurisprudence that
carrier and its duty of extraordinary diligence cargoes while being unloaded generally remain
begins with the actual delivery of the goods, under the custody of the carrier [Asian
NOT: Terminals, Inc. v. Philam Insurance Co., G.R.
When the common carrier received the No. 181163 (2013)].
goods not for transportation but only for
safekeeping; or Temporary Unloading or Storage
When a receipt or bill of lading is executed,
since the issuance of a bill of lading is not General rule: Extraordinary diligence over the
necessary to complete delivery and goods remains even when the goods are
acceptance [Compania Maritima v temporarily unloaded or stored in transit.
Insurance Co., G.R. No. L-18965 (1964)].
Exception: The duty to observe such diligence
Actual or Constructive Delivery ceases when shipper or owner makes use of
the right of stoppage in transitu [Art 1737,
The extraordinary responsibility of the common NCC].
carrier ends when, subject to Art. 1738, the
goods are delivered actually or constructively Stoppage in transitu is the act by which the
by the carrier to: unpaid vendor of goods stops their progress
a. The consignee; or and resumes possession of them
b. The person who has a right to receive constructively, while they are in the course of
them, such as agents, brokers, and the transit from him to the purchaser and not yet
like. actually delivered to the latter [Agbayani].
Art. 1738 provides that the extraordinary Basis: Under Art. 1530, when the buyer of the
liability of the common carrier continues to be goods becomes insolvent, the unpaid seller
operative even during the time the goods are who has parted with the possession of the
stored in a warehouse of the carrier at the place goods, at any time while they are in transit, may
of destination, until the consignee has: resume the possession of the goods as he
1. Been advised of the arrival of the goods; would have had if he had never parted with the
and possession.
2. Had reasonable opportunity thereafter to When the right of stoppage in transitu is
remove them or otherwise dispose of them. exercised, the common carrier holds the goods
in the capacity of an ordinary bailee or
Delivery of the cargo to the customs authorities warehouseman upon the theory that the
is not delivery to the consignee or “to the exercise of the right of stoppage in transitu
person who has a right to receive them” as terminates the contract of carriage. Hence,
contemplated in Art. 1736 because in such only ordinary diligence is required
case the goods are still in the hands of the [Agbayani].
government and the owner cannot exercise
dominion over them. However, the parties may 4. Stipulation for Limitation of
agree to limit the liability of the carrier
considering that the goods still have to go Liability
through the inspection of the customs
authorities before they are actually turned over There are two possible stipulations limiting the
to the consignee. It is unfair that the carrier be liability of the common carrier:
made responsible for what may happen during a. Stipulation limiting the common carrier’s
the interregnum [Lu Do v. Binamira, G.R. No. liability as to the diligence required;
L-9840 (1957)]. b. Stipulation limiting the common carrier’s
liability as to the amount of liability.
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An agreement limiting the common carrier’s 8. That the common carrier is exempt from
liability for delay on account of strikes or riots is any and all liability for loss or damage
also valid [Art. 1748, NCC]. occasioned by its own negligence;
9. Stipulation providing for an unqualified
As to Diligence Required limitation of such liability to an agreed
A stipulation between the common carrier and stipulation [Heacock v. Macondray, G.R.
the shipper or owner limiting the liability of the No. L-16598 (1921)].
former for the loss, destruction, or deterioration
of the goods to a degree less than b. Limitation of Liability to Fixed
extraordinary diligence shall be valid, provided Amount
it be:
1. In writing, signed by the shipper or A contract fixing the sum that may be
owner; recovered by the owner or shipper for the loss,
2. Supported by a valuable consideration destruction or deterioration of the goods is
other than the service rendered by the valid if:
common carrier; and 1. It is reasonable and just under the
3. Reasonable, just and not contrary to circumstances; and
public policy [Art. 1744, NCC]. 2. It has been fairly and freely agreed upon
[Art. 1750, NCC].
a. Void Stipulations
While a passenger may not have signed the
Any of the following or similar stipulations shall plane ticket, he is nevertheless bound by the
be considered unreasonable, unjust and provision thereof, regardless of the latter’s lack
contrary to public policy: of knowledge or assent to the regulation. It is
what is known as a contract of adhesion
1. That the goods are transported at the risk wherein one party imposes a ready-made form
of the owner or shipper; of contract on the other. The one who adheres
2. That the common carrier will not be liable to the contract is in reality free to reject it
for any loss, destruction, or deterioration of entirely. A contract limiting liability upon an
the goods; agreed valuation does not offend against the
3. That the common carrier need not observe policy of the law forbidding one from
any diligence in the custody of the goods; contracting against his own negligence [Ong
4. That the common carrier shall exercise a Yiu v. CA, G.R. No. l-40597 (1979)].
degree of diligence less than that of a good
father of a family, or of a man of ordinary [However], the fact that the conditions are
prudence in the vigilance over the printed at the back of the ticket stub in letters
movables transported; so small that they are hard to read would not
5. That the common carrier shall not be warrant the presumption that the [shipper] was
responsible for the acts or omission of his aware of those conditions such that he had
or its employees; “fairly and freely agreed” to those conditions
6. That the common carrier’s liability for acts [Shewaram v. PAL, G.R. No. L-20099 (1966)].
committed by thieves, or of robbers who do
not act with grave or irresistible threat, Factors Affecting Agreement
violence or force, is dispensed with or The effect of these stipulations is subject to the
diminished; following provisions:
7. That the common carrier is not responsible 1. An agreement limiting the common
for the loss, destruction, or deterioration of carrier’s liability may be annulled by the
goods on account of the defective condition shipper or owner if the common carrier
of the car, vehicle, ship, airplane or other refused to carry the goods unless the
equipment used in the contract of carriage former agreed to such stipulation [Art.
[Art. 1745, NCC]; 1746, NCC];
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2. If the common carrier, without just cause, must have a direct relationship with the
delays the transportation of the goods or passenger who is traveling.
changes the stipulated or usual route, the
contract limiting the common carrier’s For instance, a balikbayan box or suitcase is
liability cannot be availed of in case of the passenger’s baggage. However, 10,000 cans
loss, destruction, or deterioration of the of corned beef is not considered as passenger
goods [Art. 1747, NCC]; baggage. They are considered as goods, and
3. The fact that the common carrier has no are not part of the contract of carriage [of
competitor along the line or route, or a part passenger]. A separate contract of carriage [or
thereof, to which the contract refers shall bill of lading] must be entered into in order to
be taken into consideration on the question transport them [Agbayani].
of whether or not a stipulation limiting the
common carrier’s liability is reasonable, There are two kinds of passenger’s baggage,
just and in consonance with public policy which are governed differently:
[Art. 1751, NCC]; a. Passenger baggage in the custody of the
4. Even when there is an agreement limiting passenger (or carry-on luggage); and
the liability of the common carrier in the b. Passenger baggage NOT in the custody
vigilance over the goods, the common of the passenger (or checked-in luggage).
carrier is disputably presumed to have
been negligent in case of their loss, The liability is greater for baggage that is in the
destruction or deterioration [Art. 1752, custody of the carrier, or checked-in baggage,
NCC]. as compared to those in the possession of the
passenger.
c. Limitation of Liability in
Absence of Declaration of a. Checked-In baggage
Greater Value
The provisions of Arts. 1733-1753 shall apply
A stipulation that the common carrier’s liability to passenger’s baggage which is not in his
is limited to the value of the goods appearing in personal custody or in that of his employee [Art.
the bill of lading, unless the shipper or owner 1754, NCC].
declares a greater value, is binding [Art. 1749,
NCC]. In other words, the rules governing the
responsibility of a common carrier in the
Where the liability has been limited due to a transportation of goods apply. Thus,
stipulation written at the back of a ticket, to the extraordinary diligence is required.
effect that the liability is limited to a certain
amount unless the passenger declares a b. Baggage in Possession of
higher valuation, a passenger who did not
Passengers
declare a higher valuation, or did not pay
additional charges, cannot increase the liability
As to baggage other than checked-in baggage,
of the carrier [Ong Yiu v. CA, G.R. No. l-40597
they are governed by Arts. 1998, and 2000-
(1979)].
2003, concerning the responsibility of hotel-
keepers [Art. 1754, NCC].
5. Liability for Baggage of
Passengers Art. 1998, as applied by analogy, the baggage
of passengers in their personal custody or in
Baggage are things that a passenger will bring that of their employees, while being
with him consistent with a temporary absence transported, are regarded as necessary
from where he lives. Passenger’s baggage deposits. The common carriers are responsible
as depositaries, provided that:
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The reduction of fare does not justify any (1) Caused by the (a) He may not be
limitation of the common carrier’s liability [Art. disability of the required to pay
1758, NCC]. vessel and any increased
(2) A passenger price of passage;
2. Duration of Liability should agree to but
await the repairs (b) His living
As in the contract of carriage of goods, the expenses during
perfection of the contract of carriage of the stay shall be
passengers does not necessarily coincide with for his own
the commencement of the duty of extraordinary account.
diligence. It may occur at the same time or
later. 2. In case of delay in the departure of the
vessel, the passengers have:
Based on jurisprudence, the duty that the a) The right to remain on board;
carrier of passengers owes to its patrons b) If the delay is not due to a fortuitous
extends to persons boarding the cars as well event or force majeure, the right to be
as those alighting therefrom [Del Prado v.
furnished with food for the account of
Manila Electric Company, G.R. No. L-29462
the vessel;
(1929)].
c) If the delay should exceed ten days:
i) Passengers requesting the same
This is also reflected in Art. 17, Warsaw shall be entitled to the return of the
Convention, which applies to international air fare; and
carriage. It provides that the liability of a
ii) If it is due exclusively to the fault
common carrier for injury to the passenger
of the captain or ship agent, they
lasts from embarkation to disembarkation,
may also demand indemnity for
including the period when the passenger is on
losses and damages.
board the aircraft.
A vessel exclusively devoted to the
In maritime commerce, Art. 698, Code of transportation of passengers must take them
Commerce relates to the period of the voyage: directly to the port or ports of destination, no
1. In case a voyage already begun should be matter what the number of passengers may be,
interrupted: making all the stops indicated in its itinerary.
a. The passengers shall be obliged to
pay the fare in proportion to the
distance covered; and
a. Waiting for Carrier or Boarding of
b. Have the following reliefs: Carrier
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2. However, a person boarding a moving car justify the presence of the victim on or near
must be taken to assume the risk of injury the petitioner’s vessel:
from boarding the car under the conditions 1. A person who, after alighting from a train,
open to his view. Nonetheless, he cannot walks along the station platform is
fairly be held to assume the risk that the considered still a passenger;
motorman, having the situation in view, will 2. A passenger, who has alighted at his
increase the peril by accelerating the destination and is proceeding by the usual
speed of the car before he is planted safely way to leave the company’s premises, but
on the platform [Del Prado v. Manila before actually doing so is halted by the
Electric Company, G.R. No. L-29462 report that his brother, a fellow passenger,
(1929)]. has been shot, and he in good faith, returns
to relieve his brother, is deemed
The extraordinary responsibility of common reasonably and necessarily delayed and
carriers commences: thus continues to be a passenger entitled
(i) With respect to carriage of passengers as such to the protection of the railroad and
by trains: The moment the person who company and its agents [La Mallorca v. CA,
purchases the ticket from the carrier G.R. No. L-20761 (1966)];
presents himself at the proper place 3. In the case of a shipper, the passengers of
and in a proper manner to be vessels are allotted a longer period of time
transported with a bona fide intent to to disembark from the ship than other
ride the coach [Aquino citing Vda. de common carriers such as a passenger bus,
Nueca, et al. vs. Manila Railroad since such vessels are capable of
Company]. accommodating a bigger volume of both
(ii) With respect to carriage of passengers passenger and baggage as compared to
by sea: As soon as the person with the capacity of a regular commuter bus.
bona fide intention of taking passage Consequently, a ship passenger will need
places himself in the care of the carrier at least an hour as is the usual practice, to
or its employees and is accepted as disembark from the vessel and claim his
passenger [Aquino]. baggage [Aboitiz Shipping v. CA, G.R. No.
84458 (1989)];
b. Arrival at Destination 4. The carrier necessarily would still have to
exercise extraordinary diligence in
The relation of carrier and passenger does not safeguarding the comfort, convenience
cease at the moment the passenger alights and safety of its stranded passengers until
from the carrier’s vehicle at a place selected by they have reached their final
the carrier at the point of destination, but destination [PAL v. CA, G.R. No. L-82619
continues until the passenger has had a (1993)].
reasonable time or a reasonable opportunity to
leave the carrier’s premises. Note: Despite the Court’s pronouncement in
PAL v. CA, note that common carriers are
What is a reasonable time or a reasonable bound to observe extraordinary diligence in the
delay within this rule is to be determined from ‘safety’ of its passengers. The law does not
all the circumstances such as the kind of mention the words ‘comfort’ and ‘convenience.’
common carrier, the nature of its business, the
customs of the place, and so forth, and 3. Liability for Acts of Others
therefore precludes a consideration of the time
element per se without taking into account Employees
such other factors.
General rule: Common carriers are liable for
The primary factor to be considered is the the death of or injuries to passengers through
existence of a reasonable cause as will
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the negligence or willful acts of the former’s as there are human factors involved in the
employees, although such employees may situation [Yobido v. CA, G.R. No. 113003
>have acted beyond the scope of their (1997)].
authority or in violation of the orders of the
common carriers. Other Passengers and Strangers
This liability does not cease: General Rule: A common carrier is not liable
(i) Even upon proof that they exercised for injuries inflicted by strangers or co-
all the diligence of a good father of a passengers.
family in the selection and
supervision of their employees [Art. Exception: A common carrier is responsible
1759, NCC]; for injuries suffered by a passenger on account
(ii) By stipulation, by the posting of of the willful acts or negligence of other
notices, nor by statements on the passengers or of strangers, if the common
tickets eliminating or limiting said carrier's employees, through the exercise of
liability [Art. 1760, NCC]. the diligence of a good father of a family,
could have prevented or stopped the act or
Ratio: The servant is clothed with delegated omission [Art. 1763, NCC].
authority and charged with the duty to execute
the carrier’s undertaking to carry the passenger Note: The law speaks of injuries suffered by the
safely [Agbayani]. Also, the defense of passenger but not death. However, there
diligence in the selection and supervision of appears to be no reason why the common
employees does not obtain because the liability carrier should not be held liable under such
is not based on quasi-delict, but on culpa circumstances. The word “injuries” should be
contractual. However, there must be a interpreted to include death [Agbayani].
reasonable connection between the act and
the contract of carriage. Under Art. 1763, a tort committed by a stranger
which causes injury to a passenger does not
Note: The employee must be on duty at the accord the latter a cause of action against the
time of the act. carrier. The negligence for which a common
It is enough that the assault happens within carrier is held responsible is the negligent
the course of the employee’s duty. It is no omission by the carrier’s employees to prevent
defense for the carrier that the act was done in the tort from being committed when the same
excess of authority or in disobedience of the could have been foreseen and prevented by
carrier’s orders. [Maranan v. Perez, G.R. No. them through the exercise of the diligence of
L-22272 (1967)]. a good father of a family [Pilapil v. CA, G.R.
No. 52159 (1989)].
Exception: A common carrier is not
responsible for acts falling under force Contributory Negligence
majeure. When a party is unable to fulfill his The passenger must observe the diligence of a
obligation because of force majeure, he cannot good father of a family to avoid injury to himself
be held liable for damages for non- [Art. 1761, NCC].
performance [Japan Airlines vs. CA, G.R. No.
118664 (1998)]. The contributory negligence of the passenger
does not bar recovery of damages for his death
Note: In order to be exempted from liability due or injuries, if the proximate cause thereof is the
to a fortuitous event, a common carrier must negligence of the common carrier, but the
still prove a complete exclusion of human amount of damages shall be equitably reduced
agency from the cause of injury or death. [Art. 1762, NCC].
Hence, it was held that the explosion of the new
tire may not be considered a fortuitous event
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3. Death of a passenger resulted even in the breach of contract of carriage and in every case
absence of bad faith or fraud [Art. 2206, where any property right has been invaded
NCC]. [Art. 2222, NCC].
Willful and deliberate overbooking on the part In the case of Philtranco v Paras [G.R. No.
of the airline carrier constitutes bad faith. Under 161909(2012)], the Supreme Court upheld the
Section 3, Economic Regulations No. 7 of the award of temperate damages by the CA. Paras
Civil Aeronautics Board, overbooking, which failed to show receipts of at least two surgeries
does not exceed ten percent, is not considered as well as rehabilitative therapy. Nonetheless,
as deliberate and therefore does not amount to the CA was convinced that Paras should not
bad faith [United Airlines v. CA, G.R. No. suffer from the lack of definite proof of his
124110 (2001)]. actual expenses for the surgeries and
rehabilitative therapy. Thus, the CA awarded to
c. Exemplary Damages him temperate damages of P50,000.00 in the
In a contract of carriage, exemplary damages absence of definite proof of his actual
may be awarded if the common carrier acted in expenses towards that end.
a wanton, fraudulent, reckless, oppressive, or
malevolent manner [Art. 2232, NCC]. Liquidated damages are those damages
agreed upon by the parties to a contract, to be
Exemplary damages serves as an instrument paid in case of breach thereof [Art. 2226, NCC].
to serve the ends of law and public policy by
reshaping socially deleterious behaviors, e. Attorney’s Fees
specifically, in the case, to compel the common Under Art. 2208, as applicable to a contract of
carrier to control their employees, to tame their carriage, attorney’s fees and expenses of
reckless instincts, and to force them to take litigation may be recovered in the following
adequate care of human beings and their cases:
property [Mecenas v. CA, G.R. No. 88052 1. When exemplary damages are awarded;
(1989)]. 2. When the common carrier’s act or omission
has compelled the plaintiff to litigate with
d. Nominal, Temperate, and Liquidated third persons or to incur expenses to
Damages protect his interest;
Nominal damages are adjudicated in order 3. Where the common carrier acted in gross
that a right of the plaintiff, which has been and evident bad faith in refusing to satisfy
violated by the defendant, may be vindicated or the plaintiff’s valid, just and demandable
recognized, not for the purpose of indemnifying claim;
the plaintiff for any loss suffered by him [Art.
2221, NCC]. It may be awarded in case of
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4. In any other case where the court deems it It is covered by the Parol Evidence Rule in
just and equitable that attorney’s fees and which the terms of the contract are rendered
expenses of litigation should be recovered. conclusive upon the parties.
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pay in case of loss or misplacement [Art. 372, requirement was held nevertheless to have
COC]. been complied with [Aboitiz v Insurance
Company of North America, GR No. 168402
3. Period for Filing Claims (2008)].
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occasioned by
4. Period for Filing Actions its own
negligence
Overland Transportation and Limited Unqualified INVALID
liability limitation of
Coastwise Shipping such liability to
an agreed
The general rules under the Civil Code on valuation
extinctive prescription apply. Thus, action for
Qualified Limits the VALID and
damages must be filed in court:
liability liability of the enforceable
1. Within 6 years, if a bill of lading was not
carrier to an
issued [Art. 1145, NCC];
agreed
2. Within 10 years, if a bill of lading was
valuation unless
issued [Art. 1146, NCC].
the shipper
declares a
International Carriage of Goods by higher value
Sea and pays a
higher rate of
Suit must be brought within one year: freight
1. After delivery of the goods; or [H.E. Heacock Company v. Macondray &
2. From the date when the goods should have Company, Inc., G.R. No. L-16598, Oct. 3,
been delivered. 1921].
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transport merchandise or persons for a fixed b. Existing vessel which should be placed at
price. the disposition of the shipper;
c. Freight; and
Liabilities arising from breach of a charter party d. Compliance with the formal requisites
is identical to overland transport. under Article 652 of the Code of Commerce
which include the requirement that the
Towage is not a charter party. It is a contract charter party must be in (a) writing, (b)
for the hire of services by which a vessel is drawn in duplicate, and (c) signed by the
engaged to tow another vessel from one port to parties [Aquino].
another for consideration.
In modern maritime law and usage, there are
Bill of lading distinguished from a charter party three distinguishable types of charter parties:
Bill of Lading Charter Party a. Bareboat or demise charter;
A private receipt A complete contract, b. Time charter; and
which the captain whereby the whole or c. Voyage or trip charter [Litonjua Shipping,
gives to accredit part of the ship is let Inc. v. National Seamen Board, G.R. No. L-
that such goods by the owner to a 51910 (1989)].
belong to such merchant or other
persons. person for a specified Note: Both time and voyage charters are said
time or use for the to be contracts of affreightment, where a
conveyance of goods, common or public carrier is not converted into
in consideration of the a private carrier.
payment of freight
[Caltex v. Sulpicio Contract of affreightment – one in which the
Lines, G.R. No. owner of the vessel leases part or all of its
131166 (1999)]. space to haul goods for others.
A real contract A consensual contract
which exists only which can be It is a contract for special service, wherein the
after delivery of the dissolved by means of general owner retains the possession,
goods to be indemnity for losses command and navigation of the ship
transported is and damages.
made. The charterer or freighter merely has use of the
space in the vessel in return for his payment of
Persons who make a charter: the charter hire.
a. Owner or owners of the vessel, either in
whole or in part, who have legal control and The rights, responsibilities of ownership rest on
possession of the vessel; the owner, and the charterer is usually free
b. Charterer may subcharter entire vessel to from liability to third persons in respect of the
3rd person only if not prohibited in original ship [Puromines Inc. v. CA, G.R. No. 91228
charter [Art 679, COC]; (1993)].
c. Ship agent if authorized by the owner/s or Bareboat or Demise Charter
given such power in the certificate of
appointment [Art 598, COC]; or In a bareboat or demise charter, the ship owner
d. Captain in the absence of the ship agent or leases to the charterer the whole vessel.
consignee and only if he acts in
accordance with the instructions of the The owner relinquishes, completely and
agent or owner and protects the latter’s exclusively, the possession, command and
interest [Art 609, COC]. navigation of the vessel
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of faults committed by the crew in the Induce capitalists into effectively wagering
service and defense of the same, if he does their resources against the consideration of
not prove that he made full use of his the large profits attainable in the trade
authority to prevent or avoid them; [Aboitiz Shipping Corp. v. General Accident
5. For those arising by reason of an undue Fire and Life Assurance Corp., G.R. No.
use of powers and non-fulfillment of the 100446 (1993)].
obligations which are his;
6. For those arising by reason of his going out Thus, under the doctrine of abandonment:
of his course or taking a course which he 1. The agent shall be civilly liable for the
should not have taken without sufficient indemnities in favor of third persons which
cause, in the opinion of the officers of the arise from the conduct of the captain in the
vessel at a meeting with the shippers or care of the goods which the vessel carried,
supercargoes who may be on board; but he may exempt himself therefrom by
7. For those arising by reason of his abandoning the vessel with all her
voluntarily entering a port other than that of equipment and the freight he may have
his destination; earned during the voyage [Art. 587, COC];
8. For those arising by reason of non- 2. The owners of a vessel shall be civilly
observance of the provisions contained in liable in the proportion of their contribution
the regulations on situation of lights and to the common fund, for the results of the
maneuvers for the purpose of preventing acts of the captain, referred to in Art. 587.
collisions. Each part owner may exempt himself from
this liability by the abandonment before a
Exceptions to Limited Liability notary of the part of the vessel belonging to
him [Art. 590, COC];
The Doctrine of Limited Liability 3. In case of collision, the liability of the ship
(Hypothecary Rule) owner shall be understood as limited to the
The real and hypothecary nature of maritime value of the vessel with all her
law simply means that the liability of the carrier appurtenances and all the freight earned
in connection with losses related to maritime during the voyage [Art. 837, COC];
contracts is confined to the vessel, which is 4. If the vessel and her freight should be
hypothecated for such obligations or which totally lost, by reason of capture or wreck,
stands as the guaranty for their settlement. all rights of the crew to demand any wages
whatsoever shall be extinguished, as well
The liability of the vessel owner and agent as the agent for the recovery of the
arising from the operation of such vessel is advances made [Art. 643, COC].
confined to the vessel itself, its equipment, If the ship owner or agent may in any way be
freight, and insurance, if any held civilly liable at all for injury to or death of
passengers arising from the negligence of the
Originated by reason of the conditions and captain in cases of collisions or shipwrecks, his
risks attending maritime trade in its earliest liability is merely co-extensive with his interest
years, when such trade was replete with in the vessel such that a total loss thereof
innumerable and unknown hazards since results in its extinction [Yangco v. Laserna,
vessels had to go through largely uncharted G.R. No. L-47447 (1941)].
waters to ply their trade.
Exceptions to the Limited Liability Rule
Ratio: Such limitation of liability was designed (1) Claims under the Workmen’s
to – Compensation Act [Abueg v. San Diego,
Offset adverse conditions; G.R. No. L-773 (1946)];
Encourage people and entities to venture (2) Expenses for repairing, provisioning and
into maritime commerce despite the risks equipping the vessel [Government v
and the prohibitive cost of shipbuilding; and
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Collisions and Allisions The doctrine of last clear chance and the rules
on contributory negligence cannot be applied in
Collision is an impact or sudden contact collision cases.
between two moving vessels [Aquino].
This is in accordance with Art. 827 of the Code
Allision is the striking of a moving vessel of Commerce.
against one that is stationary.
Thus, if both vessels were negligently
Collision between a Steam and a Sail Vessel operated, each must suffer its own damage
General Rule: When meeting a sailing vessel, even if the other has the last clear chance of
whether close hauled or with the wind free, the avoiding the injury [C.B. Williams v. Yangco,
sail vessel has a right to keep her course, and G.R. No. L-8325 (1914)].
it is the duty of the steamer to adopt
precautions as will avoid the sail vessel. Similarly, proof that the plaintiff was negligent
will bar recovery from the defendant in collision
In a collision between a steam vessel and a sail cases even if the plaintiff’s negligence can be
vessel, the presumption is against the steam classified as merely contributory [Gorgonio De
vessel. Sarasola v. Yu Biao Sontua, G.R. No. L-22630
(1925)].
The steam vessel must show that she took the
proper measures to avoid a collision.
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recovery if it is nonetheless filed within one but only if the amount so declared is the real
year. value of goods [Aquino].
This one-year prescriptive period also applies The Civil Code does not limit the liability of the
to the shipper, the consignee, the insurer of the common carrier to a fixed amount per package.
goods or any legal holder of the bill of lading. Thus, the COGSA, supplements the Civil Code
Inasmuch as the neither the Civil Code nor the by establishing a statutory provision limiting the
Code of Commerce states a specific carrier’s liability in the absence of a shipper’s
prescriptive period on the matter, the COGSA declaration of a higher value in the bill of lading
may be applied [Belgian Overseas Chartering [Belgian Overseas Chartering and Shipping v.
and Shipping v. Philippine First Ins. Co, G.R. Philippine First Ins. Co, G.R. No. 143133
No. 143133 (2002)]. (2002)].
Period of Prescription
1. Definition of Public Utility
A public utility is a business or service engaged
The carrier and the ship shall be discharged
in regularly supplying the public with some
from all liability in respect of loss or damage
commodity or service of public consequence
unless suit is brought within one year after
such as electricity, gas, water, transportation,
delivery of the goods or the date when the
telephone, or telegraph service [National
goods should have been delivered.
Power Corporation v. Court of Appeals, G.R.
No. 112702 (1997)].
The absence of a notice shall not affect or
prejudice the right of the shipper to bring suit
Elements of a public utility:
within one year after the delivery of the goods
1. There must be public interest or
or the date when the goods should have been
consequence;
delivered [Section 3 (6), COGSA].
2. Private property devoted to public use;
3. Offers to the public indiscriminately ;
COGSA, as a special law, prevails over the
4. For hire/ compensation.
general provisions of the Civil Code on
prescription of actions [Maritime Agencies &
Services, Inc. v. CA, G.R. No. 77638 (1990)]. 2. Necessity for certificate of
public convenience
Limitation of Liability
No public service as herein defined shall
Under Section 4(5), COGSA, the limit is set at operate in the Philippines without having first
a maximum of $500 per package or customary secured from the Commission a certificate,
freight unit. which shall be known as Certificate of Public
Convenience (CPC) or as Certificate of Public
This is deemed incorporated in the bill of lading Convenience and Necessity (CPCN) [Section
even if not mentioned therein [Eastern 15, Public Service Act].
Shipping Lines v. IAC, G.R. No. L-69044
(1987)]. Requisites
The declaration made by the shipper stating an The ff. are the requisites before a Certificate of
amount bigger than $500 per package will Public Convenience (CPC) may be granted:
make the carrier liable for such bigger amount,
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1. The applicant must be a citizen of the financial capacity of the holder of the license,
Philippines, or a corporation or co- so that liabilities arising from accidents may be
partnership, association or joint stock duly compensated [Dizon v Octavio, 51 O.G.
company constituted and organized under 4059 (1955)].
the laws of the Philippines, 60 per centum
at least of the stock or paid-up capital of Prior operator rule
which belong entirely to citizens of the
Philippines; Meaning
2. The applicant must prove that the
operation of the public service proposed The first licensee should have more or less of
and the authorization to do business will a vested and preferential right over a person
promote the public interest in a proper who seeks to acquire another and a later
and suitable manner; license over the same route, so long as the first
3. The applicant must be financially capable licensee:
of undertaking the proposed service and Keeps and performs the terms and
meeting the responsibilities incident to its conditions of its license; and
operations [Vda. De Lat v. Public Service Complies with the reasonable rules
Commission, G.R. No. L-34978 (1988)]. and regulations of the Commission and
meets the reasonable demands of the
Citizenship public.
No franchise, certificate, or any other form of Rationale: Without such preferential right, the
authorization for the operation of a public utility first licensee would not have protection on his
shall be granted except to: investment, and would be subject to ruinous
(1) Citizens of the Philippines; or competition and thus defeat the very purpose
(2) Corporations or associations organized and intent for which the Public Service
under the laws of the Philippines at least Commission was created [Batangas
sixty per centum of whose capital is owned Transportation Co., G.R. No. L-28865 (1928)].
by such citizens [Section 11, Article XII,
1987 Constitution]. Exceptions
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be a break in the transportation or a place during the transportation by air [Art. 18,
transshipment; or WC].
b. Within the territory of a single >high
contracting party, if there is an agreed The Warsaw Convention does not provide for
stopping place within a territory subject to an exclusive enumeration of instances when
the sovereignty, mandate or authority of the carrier is liable.
another power, even though the power is It does not provide an absolute limit of
not a party to the Convention [Art. 1(2), liability and it does not preclude the
WC]. application of the Civil Code and other
pertinent local laws in the determination of
A carriage to be performed by several the extent of liability of the common carrier
successive air carriers is deemed, for the [Philippine Airlines v. CA, G.R. No. (1996)].
purposes of the Convention, to be one Hence, a complaint for quasi-delict can still
undivided carriage, if it has been regarded by be filed even if the filing is beyond the
the parties as a single operation, whether it had prescriptive period provided for under the
been agreed upon under the form of a single Convention so long as it is within the
contract or of a series of contracts [Art. 1(3), prescriptive period of four years under the
WC]. Civil Code [Villanueva].
The carrier is liable for damages for: Notice of claim with the international carrier is
a. Death or injury of a passenger if the a mandatory or condition precedent under the
accident causing it took place: Warsaw Convention.
1. On board the aircraft; a. Baggage: within 3 days from receipt. In
2. In the course of the operations of case of delay, within 14 days from the time
embarking or disembarking; or the baggage was placed at the disposal of
3. When there was delay [Art. 17 and 19, the passenger;
WC]. b. Goods: within 7 days from delivery.
b. Destruction, loss, or damage to any
baggage or goods that are checked in, if In case of an action for damage to passenger
damage occurred: baggage, the case must be filed in court within
1. During the transportation by air; or two years.
2. When there was delay [Art. 18 and 19,
WC]. 2. Limitation of Liability
c. Delay in the transport by air of
passengers, baggage or goods [Art. 19, Any provision tending to relieve the carrier of
WC]. liability or to fix a lower limit than that which is
laid down shall be null and void, but the nullity
The carriage by air contemplated comprises of any such provision does not involve the
the period in which the baggage or goods are nullity of the whole contract [Art. 23, WC].
in charge of the carrier, whether in an airport or
on board an aircraft, or, in the case of a landing Availing of Provisions Excluding/Limiting
outside an airport, in any place whatsoever. Liability
The carrier shall not be entitled to avail himself
It does not cover any transportation by land, by of the provisions which exclude or limit his
sea, or by river performed outside an airport. liability, if:
(1) The damage is caused by his willful
If transportation takes place in the performance misconduct or by such default on his part,
of a contract by air, for the purpose of loading, as is considered to be equivalent to willful
delivery, or transshipment, any damage is misconduct; or
presumed, subject to proof to the contrary, to
have been the result of an event which took
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(2) The damage is caused as aforesaid by any General rule: “In the carriage of cargo, the
agent of the carrier acting within the scope liability of the carrier is limited to a sum of 17
of his employment [Art. 25, WC]. Special Drawing Rights per kilogramme”
[Art. 22(1), WC as amended by Additional
Sec. 22(2), WC does not operate as an Protocol No. 3 (1975)].
exclusive enumeration of the instances of an
airline’s liability, or as an absolute limit of the Exception: The limit does not apply when the
extent of that liability. The Convention’s consignor has made, at the time when the
provisions do not regulate or exclude the package was handed over to the carrier, a
following areas: special declaration of the value at delivery and
(1) Liability for other breaches of the contract has paid a supplementary sum if the case so
by the carrier; requires.
(2) Misconduct of its officers and employees;
and In that case, the carrier will be liable to pay a
(3) For some particular or exceptional type of sum not exceeding the declared sum, unless
damage (i.e. moral, nominal, temperate or he proves that that sum is greater than the
exemplary damages) [Alitalia v. IAC, G.R. actual value to the consignor at delivery [Art.
No. 71929 (1990)]. 22(2), WC].
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3. Willful Misconduct
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BUSINESS
ORGANIZATIONS
COMMERCIAL LAW
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2. Those made between persons found the partners may acquire subsequently
guilty of the same criminal offense, in by inheritance, legacy or donation
consideration thereof [Article 739, cannot be included in such stipulation,
NCC] except the fruits thereof. [Art. 1779,
3. Those made to a public officer or his NCC]
wife, descendants and ascendants, by 2. All the profits –
reason of his office [Article 739, NCC] a. It comprises all that the partners may
4. Every donation or grant of gratuitous acquire by their industry or work during
advantage, direct or indirect, between the existence of the partnership.
the spouses during the marriage shall b. Only the usufruct over the property of
be void, except moderate gifts, which the partners passes to the partnership.
the spouses may give to each other on [Art. 1780, NCC]
the occasion of any family rejoicing.
The prohibition shall also apply to When the articles of universal partnership do
persons living together as husband and not specify its nature (all present property or all
wife without a valid marriage. [Article the profits), the partnership will be considered
87, Family Code] as one only of all the profits. [Art. 1781, NCC]
b. A corporation cannot enter into a
partnership in the absence of express Rule on After-Acquired Properties
authorization by statute or charter. Aside from the contributed properties, only the
[Mendiola v. CA, G.R. No. 159333 (2006)] profits of the contributed common property (no
other profits) are included. Thus, should a
Under Sec. 35 of the Revised Corporation partner subsequently acquire a property as
Code (RCC), every corporation incorporated remuneration for his work, such property and
under the RCC has the power and capacity to its fruits are not to be enjoyed by the universal
enter into a partnership, joint venture, partnership of all present property. [Paras]
merger, consolidation, or any other commercial
agreement with natural and juridical persons. Properties subsequently acquired by
inheritance, legacy, or donation, cannot be
There is no prohibition against a partnership included in the stipulation but the fruits thereof
being a partner in another partnership. [de can be included in the stipulation.
Leon]
IN A PARTICULAR PARTNERSHIP
Object A particular partnership has for its object
determinate things, their use or fruits, or a
IN A UNIVERSAL PARTNERSHIP specific undertaking, or the exercise of a
A universal partnership may refer to: profession or vocation. [Art. 1783, NCC]
1. All present property –
a. The partners contribute all the property EFFECT WHEN THE OBJECT IS
which belongs to them to a common UNLAWFUL
fund, with the intention of dividing the If the partnership has an unlawful object or
same among themselves, as well as purpose:
the profits they may acquire therewith. 1. The contract is void ab initio [Art. 1409(1),
[Art. 1778, NCC] NCC];
b. The property contributed includes all 2. Once dissolved by judicial decree:
those belonging to the partners at the a. The profits shall be confiscated by
time of the constitution of the favor of the State;
partnership. b. The instruments or tools and proceeds
c. A stipulation for the common of the crime shall also be forfeited in
enjoyment of any other profits may also favor of the State [Art. 1770, NCC];
be made. However, the property which
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derived therefrom are used as a common a. The partnership is for a fixed term or
fund with intent to produce profits for the particular undertaking;
heirs in proportion to their respective b. It is continued after the termination of
shares in the inheritance as determined in the fixed term or particular undertaking
a project partition. [Ona v. CIR, G.R. L- without any express agreement. [Art.
19342 (1972)] 1785, NCC]
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the income of which is derived from engaging Exception: He cannot do so when he acts in
in any trade or business. [Sec. 22(B), NIRC] bad faith. [Art. 1800, NCC]
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non-managers because in appointing their alteration without interposing any objection. [de
other partners as managers, they have Leon]
stripped themselves of all participation in
the administration. [Paras] Mutual Agency
In addition to the Art. 1801, NCC there is
The other managers, however, should effectively a mutual agency in the following
make the opposition before the acts cases:
produce legal effects insofar as third 1. Partners can dispose of partnership
persons are concerned. property even when in partnership name.
[Art. 1819, NCC]
IRRECONCILABLE DEADLOCK 2. An admission or representation made by
Those who vote against the contract shall any partner concerning partnership affairs
prevail, the same having been entered into is evidence against the partnership. [Art.
without authority. [de Leon] 1820, NCC]
3. Notice to any partner of any matter relating
Stipulation of Unanimity to partnership affairs is notice to the
General Rule: In case there is a stipulation that partnership. [Art. 1821, NCC]
none of the managing partners shall act without 4. Wrongful act or omission of any partner
the consent of others — acting for partnership affairs makes the
a. The concurrence of all is necessary for the partnership liable. [Art. 1822, NCC]
validity of the acts, and 5. Partnership is bound to make good losses
b. The absence or disability of one cannot be for wrongful acts or misapplications of
alleged. partners. [Art. 1823, NCC]
Rationale: The partner has the obligation to Right to Associate Another in Share
secure the benefits for the partnership. As
such, the requirement for compensation that Every partner may associate another person
the partner be both a creditor and a debtor of with him in his share, but the associate shall not
the partnership at the same time, is not be admitted into the partnership without the
complied with [Art. 1278, NCC; de Leon]. consent of all the other partners, even if the
partner having an associate should be a
Exception: The court may equitably lessen the manager. [Art. 1804, NCC]
liability if, through his extraordinary efforts in
other activities of the partnership, unusual This arrangement refers to a contract of
profits were realized [Art. 1794, NCC]. Note, subpartnership, which is a partnership within a
however, that there is still no compensation in partnership, distinct and separate from the
this case. main partnership. It is considered a
modification of the original contract. [de Leon]
c. If the partner is excluded, he may ask for: partner without the consent of all other
1. Formal accounting [Art.1809, NCC]; or partners.
2. Dissolution by judicial decree
[Art.1831, NCC]. RISK OF LOSS OF THINGS CONTRIBUTED
d. A partner’s right in such property is not Who Bears the
Thing Contributed
assignable, except when all the partners Risk
assign their rights in the same property. Specific and
e. The right is not subject to attachment or determinate things Borne by the partner
execution, except on claim against the which are not because he remains
partnership. fungible; only the the owner of the
usufruct is things
In case of such attachment, the partners, or contributed
any of them, or the representatives of a Specific and
deceased partner, cannot claim any right determinate things
under the homestead or exemption laws. the ownership of Borne by the
f. The right is not subject to legal support which is partnership as owner
under Article 291. [Art. 1811, NCC] transferred to the
g. Contemplates tangible property. partnership
Partnership,
Interest In Partnership because use is
A partner’s interest in the partnership is his impossible without
share of the profits and surplus. [Art. 1812, Fungible things
the things being
NCC] consumed or
impaired
Assignment of Interest [Art. 1813, NCC] Partnership, for
Assignment by a partner of his whole interest there cannot be any
in the partnership, of itself: Things contributed doubt that the
a. Does not dissolve the partnership; or to be sold partnership was
b. Does not entitle the assignee to: intended to be the
1. Interfere in the management or owner
administration of the partnership Partnership,
business or affairs; because the
2. Require information or account of intention of the
partnership; or parties was to
3. Inspect the partnership books. Things brought contribute to the
and appraised in partnership the price
It merely entitles the assignee to: the inventory of the things
a. Receive the profits to which the assigning contributed with an
partner was entitled; appraisal in the
b. In case of fraud in management, avail inventory. There is
himself of the usual remedies provided by thus an implied sale.
law, such as dissolution [Art. 1831, NCC];
c. In case of dissolution: Note: The list presupposes delivery. Without
1. Receive his assignor’s interest; and delivery, the loss is borne by the partner.
2. Require an accounting from the date
only of the last account agreed to by all Right to be Reimbursed by the
the partners. [Art. 1813, NCC]. Partnership
Rationale: It would effectively allow a third party The partnership shall be responsible to every
to participate in the affairs of the partnership partner for:
and would basically have a stranger become a
Avail themselves of the benefit which he may the partnership, whether in his own name or for
have obtained with a right to damages. [de the account of another at the expense of the
Leon] partnership. [de Leon]
contrary. [Cia. Maritima v. Muñoz, G.R. No. L- Exception: The partnership is bound if the
24796 (1907)] other partners authorized him to do the act.
[par. 2, Art. 1818, NCC]
Stipulation against Individual Liability
Any stipulation against pro rata liability is: 3. Acts of Strict Dominion
Void against third persons; but
Valid among the partners. [Art.1817, NCC] General Rule: One or some of the partners
have no authority to do the following acts of
A stipulation which excludes one or more strict dominion:
partners from any share in the profits or loses a. Assign the partnership property in trust
is void. [Art. 1799, NCC] for creditors or on the assignee’s
promise to pay the debts of the
Reconciling Art. 1816 and Art. 1797 partnership;
The exemption of the industrial partner to pay b. Dispose of the goodwill of the business;
losses relates exclusively to the settlement of c. Do any other act which makes it
the partnership affairs among the partners impossible to carry on the ordinary
themselves, and has nothing to do with the business of the partnership;
liabilities of the parties to third persons. d. Confess a judgment;
e. Enter into a compromise concerning a
Art. 1816 refers to “liabilities” while Art. 1797 partnership claim or liability;
speaks of “losses”. There is therefore no f. Submit a partnership claim or liability to
conflict between the two articles. [Nachura] arbitration;
g. Renounce a claim of the partnership.
Liability of Partners for Partnership
Contracts Exceptions:
They may do so if:
1. Acts apparently for the carrying on of 1. Authorized by all the partners; or
usual business 2. The other partners have abandoned the
business. [par. 3, Art. 1818, NCC]
General rule: The partnership is liable for
any act of a partner which is apparently for 4. Acts In Contravention of a Restriction
the carrying on of the usual business of the
partnership binds the latter, including the Any act of a partner in contravention of a
execution of any instrument in the restriction on authority does not bind the
partnership name. partnership to persons having knowledge
of the restriction. [par. 4, Art. 1818, NCC].
Exception: The partnership is not bound
when the following concur: The partnership is not liable to third
(a) The partner has in fact no authority to persons having actual or presumptive
act; and knowledge of the restrictions, whether or
(b) The person with whom he deals has not the acts are for apparently carrying on
knowledge of such fact [par. 1, Art. in the usual business of the partnership. [de
1818, NCC]. Leon]
carry out the usual business of the Instances Where Knowledge of a Partner is
partnership, under par. 1, Art. 1818, Considered Knowledge of the Partnership
NCC; or a. Knowledge of the partner acting in the
2) If not so authorized, the property has particular matter –
been conveyed by the grantee, or a a. Acquired while a partner; or
person claiming under him, to a holder b. Then present to his mind;
for value and without knowledge that b. Knowledge of any other partner who
the partner exceeded his authority. reasonably could and should have
[par. 1, Art. 1819, NCC] communicated it to the acting partner. [Art.
A partner authorized to carry out the usual 1821, NCC]
business may convey, in his own name, the
equitable interest of the partnership. [par. Liability for Wrongful Acts of a
2, Art. 1819, NCC] Partner
(b) Title in the Name Of Other Persons The partnership is solidarily liable with the
Where the title is in the name of one or partner who causes loss or injury to any
more but not all the partners, and the person not a partner, or incurs any penalty
record does not disclose the right of the through any wrongful act or omission:
partnership: a. In the ordinary course of the business of
1) The partners having title may convey the partnership; or
title. b. Not in such ordinary course of business,
2) The partnership may recover it when but with the authority of his co-partners.
the partners conveying title have no [Art. 1822, NCC]
authority to carry on the usual business
of the partnership, unless the Liability for Misapplication of Money
purchaser or his assignee is: or Property
i. A holder for value; and
ii. Without knowledge that the act The partnership is liable for losses suffered by
exceeded authority. [par. 4, Art. a third person whose money or property was:
1819, NCC]. a. Received by a partner –
Acting within the scope of his apparent
Where the title is in the name of one or more or authority; and
all the partners, or in a third person in trust for Misapplied it;
the partnership, a partner authorized to carry b. Received by the partnership –
on the usual business may convey equitable In the course of its business; and
title in the partnership name or in his own Misapplied by any partner while it is in
name. [par. 4, Art. 1819, NCC] the custody of the partnership. [Art.
Where the title is in the names of all the 1823, NCC]
partners, a conveyance executed by all of them
passes all the rights to the property. [par. 5, Art. LIABILITY OF THE OTHER PARTNERS
1819, NCC] UNDER ARTS. 1822 AND 1823, NCC
Liability for Admission by a Partner All partners are solidarily liable with the
partnership for its liabilities under Arts. 1822
An admission or representation by any partner and 1823. [Art. 1824, NCC]
may be used as evidence against the
partnership when: This is without prejudice to the guilty partner
a. It concerns partnership affairs; and being liable to the other partners. However, as
b. Such affairs are within the scope of his far as third persons are concerned, the
authority. [Art. 1820, NCC] partnership is answerable. [de Leon]
b. Partner’s Individual Creditor – Ask for Note: The dissolution of a partnership must not
attachment and public sale of the share of be understood in the absolute and strict sense
the partner in the partnership assets. [de so that at the termination of the object for which
Leon]. it was created, the partnership is extinguished.
[Testate Estate of Mota v. Serra, G.R. No. L-
Liability with Regard to Personal 22825 (1925)]
Creditors of Partners
Partnership Still Exists
Interest by Personal Creditors The partnership, although dissolved, continues
General rule: Partnership creditors are to exist until its termination, at which time the
preferred over the personal creditors of the winding up of its affairs should have been
partners as regards partnership property. completed and the net partnership assets are
partitioned and distributed to the partners.
Exception: On due application by any [Emnace v. CA, G.R. No. 126334 (2001)]
judgment creditor of a partner, a competent
court may: Winding up – the actual process of settling the
a. Charge the interest of the partner for the partnership business or affairs after
satisfaction of the judgment debt; dissolution. It involves collection and
b. Appoint a receiver of the share of the distribution of partnership assets, payment of
profits and of any other money due or to fall debts, and determination of the value of the
due to the partner; and interest of the partners in the partnership.
c. Make all other orders, directions, accounts
and inquiries, which the debtor partner Termination – the point in time when all
might have made, or which the partnership affairs are completely wound up
circumstances may require. [par. 1, Art. and finally settled. It signifies the end of the
1814, NCC] partnership life. [de Leon]
the partnership without making a new 4. By the insolvency of any partner or of the
agreement, the firm becomes a partnership at partnership;
will. [Art. 1785, NCC]
5. Note: The insolvency of the partner or of
Any one of the partners may, at his sole the partnership must be adjudged by the
pleasure, dictate the dissolution of the court. [de Leon]
partnership at will. He must, however, act in
good faith, not that the attendance of bad faith 6. By the civil interdiction of any partner;
can prevent the dissolution of the partnership,
but that it can result in a liability for damages. Civil interdiction deprives the offender
[Ortega v. CA, G.R. No. 109248 (1995)] during the time of his sentence of the right
to manage his property and dispose such
In Contravention of the Agreement property by any act or any conveyance
Between the Partners inter vivos. [Art. 34, RPC]
Where circumstances do not permit dissolution Ratio: One who is without capacity to
under any other provision of Art. 1830, NCC it manage his own property should not be
may also be dissolved by the express will of allowed to manage partnership property.
any partner at any time. [de Leon]
Ratio: They defeat and materially affect In general, upon dissolution, the authority of the
and obstruct the purpose of the partners to represent the partnership is
partnership. [de Leon] confined only to acts necessary to:
1. Wind up partnership affairs; or
5. The business of the partnership can only 2. Complete transactions begun but not then
be carried on at a loss; finished. [par. 1, Art. 1832, NCC]
partnership business was regularly his want of authority, the fact of his
carried on. [par. 1, Art. 1834, NCC] want of authority has not been
advertised. [Art. 1834, NCC]
Note the character of the notice required:
1. As to persons who extended credit to the Art. 1834, NCC does not affect the liability
partnership prior to dissolution, notice must under Art. 1825, NCC of any person who, after
be actual. dissolution, represents himself or consents to
2. As to persons who merely knew of the another representing him as a partner in a
existence of the partnership, publication in partnership engaged in carrying on business.
a newspaper of general circulation in the [Art. 1834, NCC]
place of business of the partnership is
sufficient. On Liability for Contracts after
Dissolution by Specific Causes
On Liability for Transactions after
Dissolution General rule: A contract:
1. Entered into by a partner acting for the
The liability of a partner, in general, is the same partnership;
as in ordinary contracts (pro rata and 2. After dissolution by –
subsidiary). a. act,
b. death, or
In the following cases, however, the liability c. insolvency of a partner,
shall be satisfied out of the partnership assets Binds the other partners.
alone (i.e., there is no subsidiary liability):
1. When the partner had been, prior to the Exceptions:
dissolution, unknown as a partner to the 1. The dissolution being by act of any partner,
person with whom the contract is made; the partner acting for the partnership had
2. When the partner had been, prior to the knowledge of the dissolution; or
dissolution, so far unknown or inactive in 2. The dissolution being by death or
partnership affairs that the business insolvency of a partner, the partner acting
reputation of the partnership could not be for the partnership had knowledge or notice
said to have been in any degree due to his of the death or insolvency. [Art. 1833, NCC]
connection with it. [Art. 1834, NCC]
On Existing Liability of Partners
Any act of a partner after dissolution in no case
binds the partnership in the following cases: General rule: Dissolution does not of itself
1. Where the partnership is dissolved discharge the existing liability of any partner.
because it is unlawful to carry on the
business, unless the act is appropriate for Exception: A partner may be relieved when
winding up partnership affairs; there is an agreement to that effect between:
2. Where the partner has become insolvent; 1. Himself;
or 2. The partnership creditor; and
3. Where the partner has no authority to wind 3. The person or partnership continuing the
up partnership affairs, except by a business.
transaction with one who –
a. Had extended credit to the
partnership prior to dissolution and
had no knowledge or notice of his
want of authority; or
b. Had not extended credit to the
partnership prior to dissolution and,
having no knowledge or notice of
interest in the partnership, less any creditors of the partnership for any
damages recoverable, and indemnity payments made by him in respect of the
against all present or future partnership partnership liabilities; and
liabilities. [Art. 1837(2), NCC] c. To be indemnified by the person guilty of
the fraud or making the representation
PARTNER WHO CAUSED THE against all debts and liabilities of the
DISSOLUTION partnership [Art. 1838, NCC].
The partner who caused the dissolution
wrongfully has the following rights: Nature of Fraud or Deceit
1. If the business is not continued, all the The fraud or deceit must be material or
rights par. 1, Art. 1837, NCC, subject to substantial. Mere exaggerations of one partner
liability for damages; of the prospects of enterprises or of value of the
2. If the business is continued, the right, as property which he has put into the firm as
against his co-partners and all claiming capital is not ground for dissolution. [Pineda]
through them, to:
a. Ascertainment, without considering Settling of Accounts between
the value of the goodwill of the Partners
business, and payment to him in
cash the value of his partnership Subject to any agreement to the contrary, the
interest, less any damage, or have following rules shall be observed in settling
the payment secured by a bond accounts between partners after dissolution.
approved by the court; and
b. Be released from all existing Composition of Partnership Assets
liabilities of the partnership. [Art.
1837(3), NCC] 1. The partnership property; and
2. The contributions of the partners
The goodwill of a business may be defined to necessary for the payment of all the
be the advantage which it has from its liabilities. [Art. 1839(1), NCC]
establishment or from the patronage of its
customers, over and above the mere value of In accordance with the subsidiary liability of the
its property and capital. The goodwill (which partners, the partnership property shall be
includes the firm name) is part of the applied first to satisfy any liability of the
partnership assets and may be subject of sale. partnership. [Art. 1839(3), NCC]
[de Leon]
Amount of Contribution for
Rights of Partners in Case of Liabilities
Rescission
The rules for distribution of losses shall
A partner, who is induced by fraud or determine the contributions of the partners.
misrepresentation to become such partner, [Art. 1839(4), NCC] As such:
may rescind the contract. Without prejudice to 1. The contribution shall be in conformity with
any other right, he is entitled: the agreement.
a. To a lien on, or right of retention of, the 2. If only the share in profits has been
surplus of the partnership property after stipulated, the contribution shall be in the
satisfying the partnership liabilities to third same proportion.
persons for any sum of money paid by him 3. In the absence of any stipulation, the
for the purchase of an interest in the contribution shall be in proportion to the
partnership and for any capital or advances capital contribution. [Art. 1797, NCC]
contributed by him;
b. To stand, after all liabilities to third persons
have been satisfied, in the place of the
prescribed by law. [Arts. 1844 and 1957, Prohibited (subject Not prohibited
NCC] to qualifications)
Effect of retirement, death, insanity or
A limited partnership has the following insolvency
advantages: Dissolves Does not dissolve
1. For general partners, to secure capital partnership partnership; rights
from others while retaining control and transferred to executor
supervision for the business; or administrator for
2. For limited partners, to have a share in selling his estate
the profits without risk of personal liability. Assignability of interest
Not assignable Assignable
General and Limited Partners
Distinguished General and Limited Partnership
Distinguished
General partner Limited partner
Extent of liability General Limited
Personally, but Liable only to the partnership partnership
subsidiarily liable extent of his capital Creation
for obligations of contributions (subject
Partners must: [1]
the partnership to exceptions)
sign and swear to a
Right to participate in management May be constituted in certificate in
Unless otherwise No right to participate any form, subject to compliance with Art.
agreed upon, all in management exceptions 1844, NCC; and [2]
general partners file the certificate for
have an equal record in the SEC
right to manage
Composition
the partnership
One or more general,
Nature of contribution
Only general partners and one or more
Cash, property or Cash or property only,
limited partners
industry not industry Firm name
Proper party in proceedings by or Must include the word
against partnership “Limited” [SEC Memo.
Proper party Not proper party, Circ. No. 14-00]
unless (1) he is also a Must contain the word
general partner; or (2) “Company” [SEC
Must not include
where the object of the Memo Circ No. 14-
name of limited
00], except for
proceedings is to partners, unless: [1] it
professional
enforce his right is also the surname of
partnerships.
against or liability to a general partner, or
the partnership. [2] prior to the time
May or may not
when the limited
include the name of
The limited partner is partner became such,
one or more of the
a necessary but not an the business has
partners.
indispensable party. been carried on under
a name in which his
Firm name
surname appeared
Name may appear Name must not
Rules governing dissolution
in the firm name appear in the firm
Arts. 1828-1842, NCC Arts. 1860-1863, NCC
name (subject to
exceptions)
Prohibition to engage in other business
Formation Exceptions:
1. It is also the surname of a general partner;
General Requirements or
2. Prior to the time when the limited partner
Two or more persons desiring to form a limited became such, the business had been
partnership shall: carried on under a name in which his
1. Sign and swear to a certificate stating the surname appeared.
items in Art. 1844, NCC; and
2. File for record the certificate in the SEC. A limited partner whose surname appears in a
[Art. 1844, NCC] partnership name contrary to this prohibition
is liable as a general partner to partnership
A limited partnership is formed if there is creditors who extend credit without actual
substantial compliance in good faith with the knowledge that he is not a general partner. [Art.
requirements. [Art. 1844, NCC] When there is 1846, NCC]
failure to substantially comply with the
requirements: False Statement in the Certificate
1. In relation to third persons, the partnership
is general, unless they recognized that the If the certificate contains a false statement, one
firm is a limited partnership; and who suffers loss by reliance thereon may hold
2. As between the partners, the partnership liable any party to the certificate who knew the
remains limited, since they are bound by statement to be false:
their agreement. [de Leon] 1. At the time he signed the certificate; or
2. Subsequently, but within a sufficient time
Purpose of Filing before the statement was relied upon to
enable him to cancel or amend the
1. To give actual or constructive notice to certificate, or to file a petition for its
potential creditors or persons dealing with cancellation or amendment [Art. 1847,
the partnership; and NCC].
2. To acquaint them with its essential
features, including the limited liability of Requisites:
limited partners. [de Leon] 1. The partner knew the statement to be false:
a. At the time he signed the
Firm Name certificate; or
b. Subsequently, but having sufficient
General rule: The surname of a limited partner time to cancel or amend it, or file a
shall not appear in the partnership name. petition for its cancellation or
amendment, and he failed to do so;
2. The person seeking to enforce liability has
relied upon the false statement in
transacting business with the partnership;
and
3. The person suffered loss as a result of
reliance upon such false statement.
General and Limited Partner at the f. Admit a person as a limited partner, unless
Same Time the right to do so is given in the certificate;
1. Continue the business with partnership
A person may be: property on the:
1. A general; and 2. Death;
2. A limited partner, 3. Retirement;
in the same partnership at the same time. 4. Insanity;
5. Civil interdiction; or
This fact must be stated in the certificate. 6. Insolvency of a general partner,
These liabilities can be waived or compromised 1. His surname appears in the partnership
only by the consent of all members. Such name, with certain exceptions. [par. 2, Art.
waiver or compromise, however, shall not 1846, NCC]
affect the right to enforce said liabilities of a 2. He takes part in the control of the business.
creditor: [Art. 1848, CC]
1. Who extended credit; or 3. The certificate contains a false statement of
2. Whose claim arose, after the filing or before which he knows and which was relied
a cancellation or amendment of the upon, resulting in loss. [Art. 1847, CC]
certificate, to enforce such liabilities. [par.
3, Art. 1858, NCC] In cases (1) and (2), the limited partner is
entitled to reimbursement by the general
Even after a limited partner has rightfully partner/s.
received the return in whole or in part of his
capital contribution, he is still liable to the Ratio: The general partner/s may not have
partnership for any sum, not in excess of such been aware of such false statement.
return with interest, necessary to discharge its
liabilities to all creditors: Liability to Separate Creditors
1. Who extended credit; or
2. Whose claims arose before such return. On due application to a court of competent
[par. 4, Art. 1858, CC] jurisdiction by any separate creditor of a limited
partner, the court may:
A person: 1. Charge his interest with payment of the
1. Who has contributed capital to a unsatisfied amount of such claim;
partnership; 2. Appoint a receiver; and
2. Who erroneously believed that he has 3. Make all other orders, directions and
become a limited partner; and inquiries which the circumstances of the
3. Whose name appears in the certificate as case may require.
a general partner, or who is not designated
as a limited partner, The interest so charged may be redeemed with
is not personally liable as a general partner by the separate property of any general partner,
reason of his exercise of the rights of a limited but may not be redeemed with partnership
partner, provided: property. [Art. 1862, NCC]
a. On ascertaining the mistake, he
promptly renounces his interest in the Note: In a general partnership, the interest may
profits of the business or other be redeemed with partnership property with the
compensation by way of income [Art. consent of all the partners whose interests are
1852, NCC]; not charged. [Art. 1814, NCC]
b. He does not participate in the
management of the business [Art. Rights of a Limited Partner
1848, NCC]; and
c. His surname does not appear in the In General
partnership name. [Art. 1846, NCC]
A limited partner shall have the same rights as
Liability to Partnership Creditors a general partner to:
1. Require that the partnership books be kept
General rule: A limited partner is not liable as at the principal place of business of the
a general partner. His liability is limited to the partnership;
extent of his contributions. [Art. 1843, NCC] 2. To inspect and copy any of them at a
reasonable hour;
Exceptions: The limited partner is liable as a 3. To demand true and full information of all
general partner when: things affecting the partnership;
From the moment the amended Being only a juridical entity, the physical acts of
certificate/writing or a certified copy of a court the corporation, like the signing of documents,
order granting the petition for amendment has can be performed only by natural persons duly
been filed, such amended certificate shall authorized for such purpose by corporate by-
thereafter be the certificate of partnership. [Art. laws or by a special act of the Board of
1865, NCC] Directors (BOD). [Swedish Match Philippines,
Inc. v. Treasurer of the City of Manila, G.R. No.
Limited Partnerships Formed Prior 181277 (2013)]
to the NCC
A corporation, upon coming into existence, is
Limited partnerships formed under the law prior invested by law with a personality separate and
to the NCC may distinct from those persons composing it as
a. Continue to be governed by the provisions well as from any other legal entity to which it
of the old law may be related. [Yutivo Sons Hardware v. CTA,
b. Become a limited partnership under the G.R. No. L-13203 (1961)]
NCC by compliance with Art. 1844,
provided that the certificate states: b. Created by Operation of Law
1. The amount of the original contribution Mere consent of the parties to form a
of each limited partner and the time it corporation is not sufficient. The State must
was made; and give its consent either through a special law (in
2. That the partnership assets exceeds its case of government corporations) or a general
liabilities to third persons by an amount law (i.e., Revised Corporation Code in case of
greater than the sum of all limited private corporations).
partners’ contributions. [Art. 1867,
NCC] A corporation comes into existence upon the
issuance of the certificate of incorporation.
Then, and only then, will it acquire juridical
personality to sue and be sued, enter into
B. CORPORATIONS contracts, hold or convey property or perform
any legal act in its own name.
necessary to accomplish its purposes. In turn, Its governing body is usually the Board of
a corporation exercises said powers through its Trustees (BoT). However, non-stock
BOD and/or its duly authorized officers and corporations may, through their articles of
agents. [Monfort Hermanos Agricultural Dev. incorporation or their by-laws, designate their
Corp. v. Monfort III, G.R. No. 152542 (2004)] governing boards by any name other than as
board of trustees. [Sec. 174]
Being a creature of the law, its powers are
limited by: Stock Non-Stock
The law (see Sec. 35 for general
powers and Secs. 36 to 43 for specific No part of income is
powers); Have capital stock distributable as
By the express terms of its AOI as well divided into shares dividends to its
those essential or necessary to carry [Sec. 3,] members or trustees
out its purpose or purposes under such [Sec. 86]
Articles (see Sec. 35, last par.); and
By those necessary or incidental to its Are authorized to Any profit may obtain
powers so conferred (see Sec. 44) distribute to the as an incident to its
holders of such operations shall,
shares, dividends or when necessary or
2. Classes of Corporations allotments of surplus proper, be used for
profits on the basis of the furtherance of its
a. Stock Corporation the shares held [Sec. purpose or purposes
Stock corporations – corporations which 3] [Sec. 86,]
have capital stock divided into shares AND are
authorized to distribute to the holders of such Composed of Composed of
shares dividends or allotments of the surplus stockholders members
profits on the basis of shares held. [Sec. 3] It is
organized for profit. It is not for profit [Sec.
It is for profit
87]
The governing body of a stock corporation is
usually the BOD (except in certain instances, Other distinctions
e.g. one person corporations, close Stock Non-Stock
corporations).
Cumulative voting in Cumulative voting in
Note: A corporation is deemed to have the election of directors election of trustees is
power to declare dividends. So long as the is provided by law only available if
corporation has capital stock and there is no [Sec. 23] provided in AOI or
prohibition in its Articles of Incorporation or in BL [Sec. 23]
its by-laws for it to declare dividends, such
corporation is a stock corporation. [Sec. 42] Maximum of 15 May be more than 15
directors except in [Sec. 91]
b. Non-Stock Corporation merger or
All other corporations are non-stock consolidation of
corporations. [Sec. 3] banks [Sec. 13]
change the independent existence of a at least 2/3 of its voting stock or voting rights is
government entity as it deals with another owned or controlled by another corporation
government entity. [Polytechnic University of which is not a close corporation. [Sec. 95]
the Phils. v. CA, G.R. No. 143513 (2001)]
Any corporation may be incorporated as a
Not all corporations which are not GOCCs close incorporation, except:
are ipso facto to be considered private 1. Mining or oil companies;
corporations as there exists another distinct 2. Stock exchanges;
class of corporations or chartered institutions 3. Banks;
which are otherwise known as “public 4. Insurance companies;
corporations.” These corporations are 5. Public utilities;
treated by law as agencies or instrumentalities 6. Educational institutions; and
of the government which are not subject to 7. Corporations declared to be vested with
the tests of ownership or control and public interest. [Sec. 95]
economic viability but to different criteria
relating to their public purposes/interests or
Ordinary Stock
constitutional policies and objectives and Close Corporation
Corporation
their administrative relationship to the
government or any of its Departments or AOI must provide:
Offices. [Boy Scouts of the Philippines v. COA, a. Not to be held by
G.R. No. 177131 (2011)] more than a certain
number of
2. Private Corporation Stockholders, not
Private corporation – One formed for some to exceed 20
private purpose, benefit, aim or end [Sec. 3, Act b. Transfer
1456]; it may be either stock or non-stock, restrictions allowed
Has an AOI with a
government-owned or controlled or quasi- c. Shall not be listed,
general template
public. and shall not
[Sec. 14]
publicly offer
The test to determine whether GOCC or
private corporation: if a corporation is created Further, a corporation
by its own charter for the exercise of a public which is not a close
function, then GOCC; if by incorporation under corp. cannot own more
the general corporation law, then private than 75% of the
corporation. [Baluyot v. Holganza, G.R. No. outstanding capital
136374 (2000)] stock
14. Corporation By Estoppel Comparison with Sec. 15, Rule 3 of the ROC
Corporation by estoppel – Where a group of
Corporation by Estoppel Sec.15, Rule 3
persons misrepresent themselves as a
corporation, they are subsequently estopped Clothes a non-entity with
The unincorporated
from claiming lack of corporate life in order to personality to sue a third
entity may only be
avoid liability. Also, a third party who had dealt person who seeks to
sued but has no
with an unincorporated association as a evade liability in favor of
personality to sue
corporation is precluded from denying its the former
corporate existence on a suit brought by the Does not concede
alleged corporation on the contract. Merely creates a fiction to the association
whereby an association of of persons the
persons is treated as a cover of a
EFFECTS OF CORPORATION BY
corporation only for corporate entity
ESTOPPEL purposes of even for such
exacting/enforcing liability purposes of
As to liability litigation
All persons who assume to act as a corporation Procedural remedy
For purposes of both
knowing it to be without authority to do so shall for drawing out the
protecting, as well as
be liable as general partners for all debts, persons who will
imposing liability against,
liabilities and damages incurred or arising as a truly answer for the
third parties liability
result thereof. [Sec. 20]
The term “capital” is not limited to voting shares SEC Memorandum Circular No. 8 dated 20
since the constitutional requirement of at least May 2013
60% Filipino ownership applies not only to All corporations engaged in identified areas of
voting control of the corporation, but also to the activities or enterprises specifically reserved,
beneficial ownership of the corporation. It is wholly or partly, to Philippine Nationals by the
therefore imperative that such requirement Constitution, the FIA and other existing laws,
apply uniformly and across the board to all shall, at all times, observe the constitutional or
classes of shares, regardless of nomenclature statutory ownership requirement. For
and category, comprising the capital of a purposes of determining compliance
corporation. therewith, the required percentage of Filipino
ownership shall be applied to both:
Preferred shares, denied the right to vote in the 1. the total number of outstanding shares of
election of directors, are still entitled to vote on stock entitled to vote in the election of
the eight specific corporate matters under Sec. directors; AND
6. of the Corporation Code. [Note: Still Sec. 6 2. the total number of outstanding shares of
under the RCC] stock, whether or not entitled to vote in the
Thus, the 60-40 ownership requirement in favor election of directors. [Sec. 1-2, SEC MC
of Filipino citizens must apply separately to No. 8]
each class of shares, whether common, Note: This was the SEC Memorandum that was
preferred non-voting, preferred voting or any put in question in the Roy III v. Herbosa case,
other class of shares. [Gamboa v. Teves, G.R. and subsequently upheld by the Court as
No. 176579 (2012)] constitutional.
to 60% of the capital and the foreign 1. This legal fiction is used for ends
corporation subscribed to 40%, but the subversive to the policy and purpose
subscription of the former is only behind its creation or which could not have
nominally paid-up and such been intended by law to which it owes its
corporation entered into a financial being (i.e. to defeat public convenience,
assistance agreement with the foreign- justify wrong, protect fraud, defend crime,
owned corporation), the application of confuse legitimate legal or judicial issues,
the grandfather rule is necessary. used as a vehicle for the evasion of an
[Narra Nickel Mining and Dev. Corp v. existing obligation, perpetrate deception or
Redmont Consolidated Mines Corp., otherwise circumvent the law).
G.R. No. 195580 (2015)] 2. The corporate entity is a mere alter ego,
adjunct, or business conduit for the sole
4. Corporate Juridical benefit of the stockholders or of another
corporate entity. [Land Bank of the
Personality Philippines v. CA, G.R. No. 127181 (2001)]
The corporation is merely a farce, as it so
Corporate existence and juridical personality organized and controlled, and its affairs are
commences from the date the SEC issues a so conducted, as to make it merely an
certificate of incorporation under its official instrumentality, agency, conduit or adjunct
seal. [Sec. 18] of another corporation. [Lanuza et al v. BF
Corporation, et al, G.R. No. 174938 (2014)]
Persons desiring to incorporate must submit to
the SEC: Property
1. The intended corporate name for Corporate property is owned by the corporation
verification, and as a juridical person, and the stockholders
2. The articles of incorporation and bylaws. have no claim on corporate property as
[Sec. 18] owners. The latter only have a mere
Note: One person corporations are not expectancy or inchoate right to the same upon
required to submit and file bylaws. [Sec. 119] dissolution of the corporation and after all
corporate creditors have been paid. Such right
Doctrine of Separate Juridical is limited only to their equity interest (doctrine
Personality of limited liability).
are concerned. [Smith, Bell & Co. v. Natividad, Nevertheless, a corporation can recover moral
40 Phil. 144 (1920)] They are also entitled to damages under Art 2219(7), if it was the victim
protection against unreasonable searches and of defamation. [Filipinas Broadcasting Network
seizures. [Bache & Co. v. Ruiz, 37 SCRA 823 v. Ago Medical and Educational Center, G.R.
(1971)] They are not, however, entitled to the No. 141994 (2005)]
privilege against self-incrimination. [Bataan
Shipyard & Engineering v. PCGG, 150 SCRA Note: Filipinas Broadcasting pointed out that
181 (1987)] the doctrine in Mambulao Lumber v. PNB
(1968), to the effect that a corporation may
Liability for Tort and Crime recover moral damages for besmirched
reputation, is obiter dictum.
Being an entity with a separate juridical
personality, a corporation can be held liable for Doctrine of Piercing the Corporate
torts committed by its officers under express Veil
direction from the stockholders or directors,
acting as a body. [PNB v. CA G.R. No. L-27155 A corporation will be looked upon as a legal
(1978)] entity as a general rule, and until sufficient
reason to the contrary appears but when the
The corporation itself cannot be arrested and notion of legal entity is used to defeat
imprisoned; thus, it cannot be penalized for a public convenience, justify wrong, protect
crime punishable by imprisonment. However, a fraud or defend crime, the law will regard
corporation may be charged and prosecuted the corporation as an association of
for a crime if the imposable penalty is a fine. persons.
[Ching v. Secretary of Justice,¸G.R. No.
164317 (2006)] Piercing the veil of corporate entity is an
Note: Sec. 170 of the RCC provides that for equitable remedy developed to address
violations of the Code, if it is committed by a situations where the separate corporate
corporation, the same may, after notice and personality of a corporation is abused or used
hearing, be dissolved in appropriate for wrongful purposes. [PNB v. Ritratto Group,
proceedings before the Commission. G.R. No. 142616 (2001)]
Since a corporation as a person is a mere legal Effect of Piercing the Corporate Veil
fiction, it cannot be proceeded against The corporation will be considered as a mere
criminally because it cannot commit a crime in association of persons. Thus, the liability will
which personal violence or malicious intent is directly attach to the stockholders or to the
required. Criminal action is limited to the other corporation. [China Banking v. Dyne-
corporate agents guilty of an act amounting Sem, G.R. No. 149237 (2006)]
to a crime and never against the
corporation itself. [Time Inc. v. Reyes, G.R. For the juridical personality of a corporation to
No. L-28882 (1971)] be disregarded, the wrongdoing must be
clearly and convincingly established, and
Recovery of Damages cannot be presumed. [Del Rosario v. NLRC,
G.R. No. 85416 (1990)]
A corporation, being an artificial person, has no
feelings, emotions nor senses; therefore, it Procedural Considerations
cannot experience physical suffering and One cannot pierce the veil in order to acquire
mental anguish, which are bases for moral jurisdiction over a party. [Pacific Rehouse
damages under Art. 2217 of Civil Code. [Manila Corp. v. CA, G.R. No. 199687 (2014)]
Electric Co. v. Nordec Philippines, 861 SCRA
515 (2018)].
A sheriff may not pierce the corporate veil, Only in these and similar instances may the veil
because such power only belongs to the court. be pierced and disregarded. [PNB v. Andrada
[Cruz v. Dalisay, A.M. No. R-181-P (1987)] Electric and Engineering Co., G.R. No. 142936
(2002)]
Grounds for Application of the
Doctrine Test in Determining Applicability
The veil of separate corporate personality may The doctrine has been applied in the following
be lifted/pierced: contexts:
1. When such personality is used to defeat
public convenience, to justify wrong, to 1. When the liability belongs to the
protect fraud or defend crime, or as a shield corporations but the plaintiff seeks to
to confuse the legitimate issues; hold the individual liable. Mere
2. When the corporation is merely an adjunct, controlling interest is not enough. There
a business conduit or an alter ego of must be a clear showing that the corporate
another corporation; or fiction is used to defeat public convenience,
3. Where the corporation is so organized and justify wrong, protect fraud or defend crime.
controlled and its affairs are so conducted [Koppel Phil v. Yatco, G.R. No. L-47673
as to make it merely an instrumentality, (1946)]
agency, conduit or adjunct of another
corporation; or Note the following badges of fraud: (1)
4. When the corporation is used as a cloak or used as a shield to further an end
cover for fraud or illegality, or to work subversive of justice; or (2) for purposes
injustice, or that could not have been intended by the
5. Where necessary to achieve equity or for law that created it; or (3) to defeat public
the protection of the creditors. [China convenience; (4) justify wrong; (5) protect
fraud; or (6) defend crime; or (7) to e. the subsidiary has grossly inadequate
perpetuate fraud or confuse legitimate capital;
issues; or (8) to circumvent the law or f. the parent corporation pays the
perpetuate deception. salaries and other expenses or losses
of the subsidiary;
2. Where the liability is personal to the g. the subsidiary has substantially no
individual and he seeks to evade it by business except with the parent
hiding behind a corporate vehicle. corporation or no assets except those
conveyed to or by the parent
The veil of corporate fiction must be corporation;
pierced where the main purpose in forming h. in the papers of the parent corporation
the corporation was to evade the or in the statements of its officers, the
incorporator’s subsidiary civil liability subsidiary is described as a
resulting from the conviction of one of his department or division of the parent
employees. [Palacio v. Fely corporation or its business or financial
Transportation, G.R. No. L-15121 (1962)] responsibility is referred to as the
parent corporation’s own;
3. The instrumentality or alter ego rule. i. the parent corporation uses the
The elements of this modality are: property of the subsidiary as its own;
a. Control, not mere majority or j. the directors or executives of the
complete stock control, but subsidiary do not act independently in
complete domination, not only of the interest of the subsidiary but take
finances but of policy and business their orders from the parent corporation
practice in respect to the in the latter’s interest; and
transaction attacked so that the k. the formal ledger requirements of the
corporate entity as to this subsidiary are not observed. [PNB v.
transaction had at the time no Ritratto Group, G.R. No. 142616
separate mind, will or existence of (2001)]
its own;
b. Such control must have been used 4. Successor corporation rule - where a
by the defendant to commit fraud corporation feigns dissolution or cessation
or wrong, to perpetuate the but really continues in existence organized
violation of a statutory or other under another name.
positive legal duty, or dishonest
and unjust act in contravention of The application of the rule figures
plaintiffs’ legal rights; and prominently in labor cases where the prior
c. The aforesaid control and breach of entity seeks to evade its obligations to its
duty must proximately cause the laborers. Some telltale signs exhibited in
injury or unjust loss complained of. Claparols v. CIR [G.R. No. L-30822 (1975)]
include: (1) consecutive date of cessation
Circumstances rendering a subsidiary and commencement of subsequent entity;
an instrumentality (2) ownership and control by former
a. the parent corporation owns all or most controlling stockholder; and (3) turnover of
of the subsidiary’s capital stock; assets. On the other hand, in Livesey v.
b. the parent and subsidiary corporations Binswanger [G.R. No. 177493 (2014)], the
have common directors or officers; court pointed to the following: (1) same
c. the parent corporation finances the officers; (2) same office; and (3)
subsidiary; continuation of the business.
d. the parent corporation subscribes to all
the capital stock of the subsidiary or Note: SME v. De Guzman, G.R. No.
otherwise causes its incorporation; 184517 (2013) allows for the defense of
provided that there shall always be a class or The RCC made the redemption subject to the
series of shares which have complete voting rules and regulations that may be issued by
rights. [Sec. 6] SEC, in addition to what may be stipulated in
the AOI and Certificate of Stock. [Sec. 8]
Exception: These redeemable and preferred
shares, when such voting rights are denied, Limitations
shall nevertheless be entitled to vote on the 1. Redeemable shares may be issued only
following fundamental matters: when expressly provided for in the AOI
1. Amendment of the Articles of Incorporation [Sec. 8].
2. Adoption and amendment of by-laws 2. The terms and conditions affecting said
3. Sale, lease, exchange, other disposition of shares must be stated both in the AOI and
all or substantially all of the corporate in the certificate of stock [Sec. 8].
property 3. Redeemable shares may be deprived of
4. Incurring, creating or increasing bonded voting rights in the AOI. [Sec. 6]
indebtedness 4. The corporation is required to maintain a
5. Increase or decrease of capital stock sinking fund to answer for redemption price
6. Merger and consolidation if the corporation is required to redeem.
7. Investment of corporate funds in another [SEC-OGC Opinion No. 07-03]
corporation or business 5. The redeemable shares are deemed
8. Dissolution of the corporation retired upon redemption, unless otherwise
provided in the AOI (i.e., if the AOI allows
iii. Founders’ Shares for reissuance of such shares). [SEC Rules
Governing Redeemable and Treasury
Founders’ Shares are shares classified as Shares, 26 April 1982]
such in the AOI, which are given certain rights 6. Unrestricted retained earnings are NOT
and privileges not enjoyed by the owners of necessary before shares can be
other stocks. These may be given special redeemed, but there must be sufficient
preference in voting rights and dividend assets to pay the creditors and to answer
payments. for operations. [Republic Planters Banks v.
Agana, G.R. No. 51765 (1997)]
Where exclusive right to vote and be voted for 7. Redemption cannot be made if such
in the election of directors is granted, such right redemption will result in insolvency or
must be for a limited period not to exceed 5 inability of the corporation to meet its
years, subject to approval by SEC The 5-year obligations. [SEC Opinion, 24 Aug 1987]
period shall commence from date of approval
by SEC. Kinds of redeemable shares
Founder’s shares given the exclusive right to 1. Compulsory - the corporation is required to
vote and be voted for are not allowed to redeem the shares.
exercise that right in violation of the Anti- 2. Optional - the corporation is not mandated
Dummy Law and the Foreign Investment Act. to redeem the shares.
[Sec. 7]
v. Treasury Shares
iv. Redeemable Shares
Treasury Shares are shares which have been
Redeemable Shares are shares which may be issued and fully paid for, but subsequently re-
purchased by the corporation from the holders acquired by the issuing corporation by
of such shares upon the expiration of a fixed purchase, redemption, donation or through
period, regardless of the existence of some other lawful means. Such shares may
unrestricted retained earnings in the books of again be disposed of for a reasonable price
the corporation. fixed by the BOD. [Sec. 9]
Shares may be reacquired without impairing Treasury Shares are not Retired Shares
the corporate trust fund. Reacquisition of Treasury shares do not revert to the unissued
shares is allowed, provided the corporation will shares of the corporation, but are regarded as
use assets up to the extent of its unrestricted property acquired by the corporation, which
retained earnings. [SEC Rules Governing may be reissued or resold at a price to be fixed
Redeemable and Treasury Shares, Sec 3, par by the Board of Directors. [SEC Rules
(1)(a)] Governing Redeemable and Treasury Shares,
CCP No. 1-1982]
It should be recalled that corporate earnings
are not part of the corporate trust fund. Note: Under the SEC Rules, the redemption of
[Herbosa, 2019] They are excluded from the redeemable shares does not necessarily make
definition of outstanding capital stock. them as treasury shares. Instead, it leads to
their automatic retirement or cancellation,
Pre-emptive right of stockholders in close unless the contrary is specifically stipulated.
corporations shall extend to reissuance of The articles thus provide advance notice to
treasury shares, unless otherwise provided in ordinary shareholders that the board may, at its
the AOI. [Sec. 101] own discretion, reissue redeemable shares
with the same features.
Delinquent stocks, which are stocks that have
not been fully paid, may become treasury Treasury shares distributed by way of
stocks upon bid of the corporation in absence dividends
of other bidders. [Sec.67] Treasury shares may also be distributed as
property dividends. In order for treasury shares
Limitations on treasury shares to be distributed as property dividends, the
1. They may be re-issued or sold again as amount of the retained earnings previously
long as it is for a reasonable price fixed by used to support their acquisition must not have
the BOD. been impaired by losses. Further, such
2. Cannot participate in dividends. retained earnings must not be used to justify
3. It has no voting right as long as such the distribution of treasury shares as property
shares remain in the Treasury. [Sec. 56] dividends. They may only be distributed out of
4. It cannot be represented during the other earnings of the corporation. [SEC-
stockholder’s meetings. OGC Opinion No. 12-06, dated April 20, 2012]
5. The amount of URE equivalent to the cost
of treasury shares being held shall be Note: Treasury shares are treated as assets of
restricted from being declared and issued the corporation. [Herbosa, 2019] Since a
as dividends. treasury share is a fully paid share re-acquired
by the corporation, it is not outstanding and
Note: When treasury shares are sold below its may be re-issued and resold. It cannot receive
par or issued value, there can be no watering dividends before the resale, because the
of stock because such watering of stock corporation cannot grant dividends to itself.
contemplates an original issuance of shares. [CIR vs Manning]
For both stock corporations and close vi. Par Value Shares vs. No-Par Value
corporations, the pre-emptive right of Shares
stockholders extends to the re-issuance or sale
treasury shares, unless the articles of Par value shares
incorporation provide otherwise. [Sec. 38 and These are shares with a stated or fixed value
101; SEC Opinion, 14 January 1993] set out in the Articles of Incorporation, which
remains the same regardless of the profitability
of the corporation. This gives rise to financial
stability, and is the reason why banks, trust
(e) Amounts transferred from unrestricted (b) between the stockholders and the State;
retained earnings to stated capital; (c) between the corporation and its
(f) Outstanding shares exchanged for stocks stockholders. [Villanueva]
in the event of reclassification or (d) among the stockholders [Campos]
conversion;
(g) Shares of stock in another corporation; The AOI must be filed with the SEC for the
and/or issuance of the Certificate of Incorporation. The
(h) Other generally accepted form of AOI and its amendments can be filed
consideration. [Sec. 61] electronically. [Sec. 13]
The AOI is a basic contract document, defining See f. Corporate Name; Limitations on Use
the charter of the corporation, and serves as of Corporate Name
the basis by which to judge whether it exists for
legal purposes. (b) Purpose Clause
The charter of the corporation is a contract A corporation only has such powers as are
between 3 parties: expressly granted by law and the AOI. The
(a) between the State and the corporation;
purpose clause confers and limits the powers chattel mortgage of shares should be
that a corporation may exercise. registered. [Chua Guan vs. Samahang
Must indicate the specific PRIMARY and Magsasaka, G.R. No. L-42091 (1935)]
SECONDARY purposes if there are more
than one purpose; a non-stock corporation 1. Must be within the Philippines [Sec. 13 (c)];
may not include a purpose which would 2. Articles of Incorporation must specify both
contradict or change its nature as such. province or city or town where it is located;
[Sec. 13 (b)] 3. All corporations and partnerships applying
Must not be patently unconstitutional, for registration with the SEC should state in
illegal, immoral, and contrary to their Articles of Incorporation or Articles of
government rules and regulations. [Sec. 16 Partnership the following:
(b)] a. Specific address of their principal
Must not be for the purpose of practicing a office, which shall include, if
profession. [Sec. 10] feasible, the street number, street
name, barangay, city or
Prohibited Purposes and Activities municipality, and if applicable, the
A corporation may not be formed for the name of the building, number of the
purpose of practicing a profession like law, building, and name or number of
medicine or accountancy. [Sec. 10] the room or unit; and
b. Specific residence address of each
Under the present state of our law and incorporator, stockholder, director,
jurisprudence, a corporation cannot be trustee or partner. [SEC
organized for or engage in the practice of law Memorandum Circular No. 6, s.
in this country. 2016, Sec. 1]
This cannot be subverted by employing 4. For foreign corporations, the principal
some so-called paralegals supposedly office address in the country of
rendering the alleged support services. incorporation, the specific address of the
The remedy for the apparent breach of this resident agent, the present directors and
prohibition is the concern and province of officers, and the specific location
the Solicitor General who can institute the where it will hold office in the Philippines,
corresponding quo warranto action. [Ulep shall be indicated. [SEC Memorandum
v. The Legal Clinic, B.M. No. 553 (1993)] Circular No. 6, s. 2016, Sec. 2]
The RCC prohibits to foreign corporations from The residence of a corporation is the place
giving donations in aid of any political party or where its principal office is located, as stated in
candidate or for purposes of partisan political its Articles of Incorporation.
activity”. [Sec. 35(i)] Thus, the proper venue is not the actual
principal office but that stated in its Articles
Reasons for requiring purpose clause: (a) of Incorporation.
investor will know what line of business he will A corporation has no residence in the same
be risking his money on; (b) Ultra vires sense in which the term is applied to a
doctrine; (c) third persons dealing with natural person. [Hyatt Elevators v. Goldstar
corporation can determine if the corporation Elevators, G.R. No. 161026 (2005)].
can enter into a transaction. [Campos]
(d) Corporate Term
(c) Principal Office
See c. Corporate Term under 5. Capital
The principal office establishes the residence Structure
of a corporation, which is important in
determining the venue in an action by or (e) Number, Names, Citizenship and
against the corporation or the province where a Residences of the Incorporators
Under the RCC, incorporators undertake to change the name of the corporation
immediately upon receipt of notice from SEC that another corporation, partnership
or person has acquired a prior right to its use, that the name has been declared
Corporate name
not distinguishable from a name already registered or reserved for the use of
another corporation, or that it is contrary to law, public morals, good customs or
public policy. [Sec. 14(11)] See also SEC Memorandum Circular No. 13, s. 2019
A corporation can only have one (1) primary purpose. However, it can have
several secondary purposes.
A corporation has only such powers as are expressly granted to it by law & by its
articles of incorporation, those which may be incidental to such conferred powers,
Purpose clause
those reasonably necessary to accomplish its purposes & those which may be
incident to its existence.
Corporation may not be formed for the purpose of practicing a profession like law,
medicine or accountancy.
● A corporation shall now have perpetual existence unless its AOI provides
Term of existence
otherwise. [Sec. 11]
ii. Non-amendable Items (e) Both the original and the amended articles
together must contain all the provisions
The following items are amendable under Sec. required by law to be set out in the articles
15: (f) If the corporation is governed by a special
1. Change of name of the Corporation; adding law, the amended articles must be
business name accompanied by a favorable
2. Adding to or changing the purpose/s recommendation of the appropriate
3. Change of principal office government agency to the effect that such
4. Change in the number of directors or amendment is in accordance with law.
trustees [Lopez]
5. Increase or decrease in authorized capital (g) Will take effect only:
stock [subject to Sec. 37]; re-classifying a. Upon their approval by the SEC by the
shares in the authorized capital stock; issuance of a certificate of filing of
6. Adding or revising transfer restrictions amended articles; OR
b. From the date of filing with the SEC if not
Requirements for Making Amendments to acted upon within 6 months from the date
AOI of filing for a cause not attributable to the
a. By a majority vote of the BOD or trustees; corporation
and
b. The vote or written assent of Procedure
a. 2/3 of the outstanding capital stock, a. The original and amended articles together
without prejudice to the appraisal shall contain all provisions required by law
right of dissenting stockholders in to be set out in the articles of incorporation
accordance with the provisions of b. The articles, as amended shall be indicated
this Code, by underscoring the change or changes
b. 2/3 of the members if it be a non- made
stock corporation. [Sec. 15] c. A copy shall be submitted to the SEC
unless the AOI provides for higher voting a. Duly certified under oath by the
requirements corporate secretary and a majority
of the directors or trustees
Limitations b. Stating the fact that the
(a) Requirements imposed by the Code or by amendment or amendments have
special laws been duly approved by the required
(b) Must be for a legitimate purpose vote of the directors or trustees and
(c) Must be approved by the directors/trustees stockholders or members
and the stockholders/members through the
vote requirement
(d) Appraisal Right (in specified cases)
one business or trade name. [SEC issues the certificate of incorporation under its
Memorandum Circular No. 13 s. 2019] official seal. [Sec. 18]
Thereupon, the incorporators, stockholders
Change of Corporate Name or members, and their successors
A change of corporate name requires the constitute a body politic and corporate
amendment of the Articles of Incorporation under the name stated in the AOI, for the
which must be approved by: period of time mentioned therein. [Sec. 18]
(1) Majority vote of the board; and AOIs do not become binding as the charter
(2) The vote or written assent of stockholders of the corporation unless they have been
holding 2/3 of the outstanding capital stock. filed and registered with, and certified by
[Sec. 16] the SEC.
Unless the Articles of Incorporation provides for DOCUMENTS TO BE FILED WITH SEC:
a higher voting requirement. a. Articles of Incorporation, and By-Laws (if
crafted prior to incorporation)
Amendment of a corporation’s Articles of b. Certification concerning the amount of
Incorporation to change its corporate name capital stock subscribed and/or paid
does not extinguish the personality of the
original corporation. It is the same corporation Note: Sec. 15 of the OLD Corporation Code
with a different name, and its character is not requiring that at least 25% of amount
changed. Consequently, the “new” corporation subscribed be paid, and a minimum paid-
is still liable for the debts and obligations of the up capital upon incorporation, was
“old” corporation. [Republic Planters Bank v. removed under the RCC.
CA, G.R. No. 93073 (1992)]
Note: SEC Resolution No. 0331 dated July
Use of Corporate Names of Dissolved 20, 2012 no longer requires a bank
Corporations certificate of deposit covering the paid-up
The name of a corporation or partnership that capital if payment for shares is made in
has been dissolved or whose registration has cash; where the capital stock is paid by a
been revoked shall not be used by another combination of cash and property, only the
corporation or partnership: portion paid by way of property will require
a. Within five years from the approval of the the submission of supporting documents.
dissolution; or
b. Within five (5) years from the date of c. Undertaking to change the corporate name
revocation, unless its use has been in case there is another person or entity
allowed at the time of the dissolution or with same or similar name that was
revocation by the stockholders, members previously registered (unless already
or partners who represent a majority of the incorporated in the Articles of
outstanding capital stock or membership of Incorporation)
the dissolved corporation or partnership, as
the case may be. [SEC Memo Circ. No. 13, d. Favorable recommendation from the
s. 2019] appropriate government agency that the
AOI or amendments thereto of banks,
Registration, Incorporation, and banking and quasi-banking institutions,
Commencement of Corporate preneed, insurance and trust companies,
Existence NSSLAS, pawnshops, and other financial
intermediaries, is in accordance with law.
A private corporation organized under the RCC [Sundiang and Aquino; Sec. 16]
commences its corporate existence and
juridical personality from the date the SEC
ISSUANCE OF CERTIFICATE OF
INCORPORATION BY SEC
Effect: Commencement of corporate existence
and juridical personality. [Sec. 18]
Steps in Incorporation
Steps Comments
Promoter:
● Brings together persons who become interested in the
enterprise
● Aids in procuring subscriptions and sets in motion the
Promotional Stage machinery which leads to the formation of the corporation itself
● Formulates the necessary initial business and financial plan
and, if necessary, buys the rights and property which the
business may need, with the understanding that the
corporation, when formed, shall take over the same
Process:
a. SEC shall examine them in order to determine whether they
are in conformity with law
b. If it is not, the SEC must give the incorporators a reasonable
time within which to correct or modify the objectionable
portions.
Nominees for directors receiving the highest The report shall specify a new date for the
number of votes shall be declared elected. election, which shall not be later than sixty (60)
They shall perform their duties as prescribed by days from the scheduled date.
law, rules of good corporate governance, and
bylaws of the corporation. [Sec. 23] SEC Order to Hold Election
If no new date has been designated, or if the
Voting in Non-Stock Corporations rescheduled election is likewise not held:
General Rule: Members of nonstock (1) The Commission may summarily order that
corporations may cast as many votes as there an election be held.
are trustees to be elected but may not cast a. Upon the application of a
more than one (1) vote for one (1) candidate. stockholder, member, director or
trustee; and
Exception: Unless otherwise provided in the b. After verification of the unjustified
articles of incorporation or in the bylaws. [Sec. non-holding of the election
23] (2) The Commission shall have the power to
issue such orders as may be appropriate,
Nominees for trustees receiving the highest including orders directing the issuance of a
number of votes shall be declared elected. notice stating the:
They shall perform their duties as prescribed by a. Time and place of the election,
law, rules of good corporate governance, and b. Designated presiding officer, and
bylaws of the corporation. [Sec. 23] c. The record date or dates for the
determination of stockholders or
Report to SEC members entitled to vote. [Sec. 25]
Within thirty (30) days after the election of the (3) The shares of stock or membership
directors, trustees and officers of the represented at such meeting and entitled to
corporation, the secretary, or any other officer vote shall constitute a quorum for purposes
of the corporation, shall submit to the of conducting an election under this
Commission, the elected trustees’ and section.
officers’: Notwithstanding any provision of the
i. Names articles of incorporation or bylaws to
ii. Nationalities the contrary.
iii. Shareholdings, and
Note: Any 2 or more positions may be held Nature: It is a product of agreement of the
concurrently by the same person, EXCEPT that stockholders or members. [Campos]
no one shall act as president and secretary or
as president and treasurer at the same time, Function: It establishes the rules for internal
unless otherwise allowed in the Code. [Sec 24] government of the corporation [Campos]. It
also regulates the affairs and relationship
The number of officers is not limited to those between and among stockholders, BOD and
three enumerated in Sec. 24. A corporation corporation. [Lopez]
may have such other officers as may be
provided for by its by-laws. [Garcia v. Eastern Note: OPCs are not required to have by-laws.
Telecommunications Philippines, Inc., G.R.
No. 173115 (2009)]. EFFECT OF FAILURE TO FILE THE BY-
LAWS
Qualifications of Corporate Officers
President Secretary Treasurer Does not imply the "demise" of the
corporation. By-laws may be required by law
Director YES NO NO for an orderly governance and management of
corporations but they are not essential to
Filipino NO YES NO
Citizen* corporate birth. Nonetheless, failure to file them
within the period required by law by no means
Residency NO YES YES tolls the automatic dissolution of a corporation.
[Loyola Grand Villas Homeowners Association
Prohibited Secretary President President v. CA G.R. No. 117188 (1997)]
concurrent or
positions
Treasurer Note: Sec. 21 on the effect of failure to formally
* subject to rule if corporation is engaged in a organize within 5 years from incorporation, the
nationalized or partially-nationalized industry corporation’s corporate powers cease and the
corporation is deemed dissolved. Organization
Additional qualifications of officers may be includes: the filing and approval of by-laws with
provided for in the by-laws. [Sec. 46(f)] the SEC and the election of directors and
officers. [Campos]
Matters Usually Found in By-Laws Matters That Cannot Be Provided for in the
a. The time, place and manner of calling and By-laws (must be in the AOI)
conducting regular or special meetings of ● Classification of shares of stock and
the directors or trustees; preferences granted to preferred shares
b. The time and manner of calling and ● Provisions on founder’s shares
conducting regular or special meetings and ● Providing for redeemable shares
mode of notifying the stockholders or ● Provisions on the purposes of the
members thereof; corporation
c. The required quorum in meetings of ● Providing for the corporate term of
stockholders or members and the manner existence
of voting therein; ● Capitalization of stock corporations
● Corporate Name
● Denial of pre-emptive rights [Villanueva]
Power to Increase or Decrease meeting and the purpose for said meeting
Capital Stock or Incur, Create, must be:
Increase Bonded Indebtedness i. Sent to the stockholders at their places
of residence as shown in the books of
[Sec. 37] the corporation and
ii. Served on the stockholders personally,
A corporation may increase or decrease its
OR through electronic means
capital stock or incur, create or increase any
recognized in the corporation’s bylaws
bonded indebtedness. [Sec. 37]
and/or the Commission’s rules as a
valid mode for service of notices.
Power to Increase or Decrease Capital (4) Certification Requirement – A certificate
Stock
must be signed by a majority of the
An increase or decrease of the capital stock
directors of the corporation and
amends the underlying contractual
countersigned by the chairperson and
relationships between and among members of
secretary of the stockholders’ meeting,
the corporation.
setting forth:
(a) That the requirements of this
Aside from the requisites in Sec. 37, when the
section have been complied with;
capital stock is increased or decreased, the
(b) The amount of the increase or
provisions of Sec. 15 on the amendment of the
decrease of the capital stock;
articles of incorporation must also be complied
(c) In case of an increase of the capital
with. [Villanueva]
stock:
i. The amount of capital stock or
Power to Incur, Create, or Increase Bonded number of shares of no-par
Indebtedness
stock thereof actually
“Bonded indebtedness” are long term debts of subscribed,
the corporation, secured by mortgage on real
ii. The names, nationalities and
or personal property of the corporation, which
addresses of the persons
are:
subscribing,
Structured in denominated units of iii. The amount of capital stock or
indebtedness number of no-par stock
Intended to eventually circulate within subscribed by each, and
the investing public as securities, iv. The amount paid by each on the
representing units of investment subscription in cash or property,
Thus, the power to incur, create, or increase or the amount of capital stock or
bonded indebtedness is a form of distributing number of shares of no-par
liability securities to the public, and constitutes stock allotted to each
an aspect of the inherent power of every stockholder, if such increase is
corporation to borrow or to incur loan for the purpose of making
obligations. [Villanueva] effective stock dividend therefor
authorized;
Requirements [Sec. 37] (d) Any bonded indebtedness to be
(1) Approval by a majority vote of the board incurred, created or increased;
of directors or trustees (e) The amount of stock represented at
(2) Approval by two-thirds (2/3) of the the meeting; and
outstanding capital stock or at least (f) The vote authorizing the increase
two-thirds (2/3) of the members at a or decrease of the capital stock, or
stockholders’ meeting duly called for the
the incurring, creating or increasing
purpose
of any bonded indebtedness.
(3) Notice Requirement – Written notice of
(5) Sworn Statement of the Treasurer – A
the time and place of the stockholders’
sworn statement of the corporation’s
treasurer must accompany the filing of the Copies of the certificate of the
certificate, and it must show that: increase/decrease in capital shall:
(a) At least twenty-five percent (25%) of the (1) Be kept on file in the office of the
increase in capital stock has been corporation and
subscribed; and (2) Filed with the Commission and
(b) At least twenty-five percent (25%) of the (3) Attached to the original articles of
amount subscribed has been paid in incorporation. [Sec. 37]
actual cash to the corporation or that
property, the valuation of which is equal to Exercise of Appraisal Right
twenty-five percent (25%) of the In Cases of Increase or Decrease of Capital
subscription, has been transferred to the Sock
corporation The right of appraisal can be exercised in
Note: A treasurer’s affidavit is required in cases of increase of capital stock because it
an increase of capital stock, not in a has the potential effect of diluting the
decrease in capital stock. proportionate interest of a stockholder in the
(6) Prior SEC Approval – The application with corporation.
the Commission shall be made within six
(6) months from the date of approval of the Even with the existence of the pre-emptive
board of directors and stockholders, which right, there is no guaranty that the stockholder
period may be extended for justifiable can preserve his proportional interest, since he
reasons. might not have the financial resources to
(7) Prior PCC Approval – Where appropriate, exercise his pre-emptive right on the increase.
prior approval of the Philippine Competition
Commission is required for any increase or The right of appraisal CANNOT be exercised in
decrease in the capital stock or the cases of decrease in capital stock since the
incurring, creating or increasing of any decrease would result in returning part of the
bonded indebtedness investments of the stockholders, including
(8) SEC Registration – Applicable only to dissenting stockholders. [Villanueva]
bonds issued by a corporation.
In Cases of Incurring, Creating or Increasing
After approval and the issuance by the Bonded Indebtedness
Commission of its certificate of filing: The appraisal right CANNOT be exercised by
(1) The capital stock shall be deemed dissenting stockholders when the corporation
increased or decreased; and validly incurs, creates, or increases bonded
(2) The incurring, creating or increasing of any indebtedness.
bonded indebtedness authorized, as the
certificate of filing may declare To allow them to do so would drain the financial
Provided, That: resources of the corporation, which is contrary
(a) The Commission shall not accept for to the purpose for which the power is
filing any certificate of increase of exercised, which is to raise funds for corporate
capital stock unless accompanied by a affairs. [Villanueva]
sworn statement of the treasurer (with
the abovementioned contents) Power to Deny Pre-Emptive Rights
(b) No decrease in capital stock shall be [Sec. 38]
approved by the Commission if its effect
shall prejudice the rights of corporate Preemptive right
creditors. [Sec. 37] The preferential right of shareholders to
subscribe to all issues or disposition of shares
of any class in proportion to their present
shareholdings. [Sec 38] The purpose of pre-
emptive right is to enable the shareholder to
For such consideration as its board of (2) Notice Requirement – Written notice of
directors or trustees may deem expedient, the proposed action and of the time and
which may be: place for the meeting shall be:
- Money i. Addressed to stockholders or
- Stocks members at their places of
- Bonds, or residence as shown in the books of
- Other instruments for the payment of the corporation; and
money or ii. Deposited to the addressee in the
- Other property or consideration post office with postage prepaid,
Subject to the provisions of Republic Act served personally, OR sent
No. 10667, otherwise known as “Philippine electronically, when allowed by the
Competition Act”, and other related laws. by-laws or done with the consent of
the stockholder. [Sec. 39]
Requisite: A majority vote of its board of
directors or trustees [Sec. 39] Abandonment of Sale/Lease/Mortgage
After obtaining the authorization or approval by
Sale of all or substantially all of corporate the stockholders or members, the board of
assets directors or trustees may abandon such sale,
A corporation may sell all or substantially all of lease, exchange, mortgage, pledge, or other
the its properties and assets, including its disposition of property and assets.
goodwill. [Sec. 39]
However, this is subject to the rights of third
To determine whether a sale or other parties under any contract relating thereto,
disposition shall be deemed to cover all or without further action or approval by the
substantially all the corporate property and stockholders or members. [Sec. 39]
assets:
i. Make a computation based on the Where only the approval of a quorum of the
corporation’s net asset value, as shown BOD/T is required
in its latest financial statements. Corporation is not restricted in its power to sell
ii. Assess whether the corporation would or dispose of its assets without the
be rendered incapable of continuing authorization of shareholders or members:
the business or accomplishing the a. If the same is necessary in the usual
purpose for which it was incorporated. and regular course of business of
[Sec. 39] the corporation or
b. If the proceeds of the sale will be
The exercise of this power does not render the appropriated for the conduct of its
corporation empty, since it is still left with remaining business
assets received in exchange. It always c. If the transaction does not cover all or
receives something of equal value to what has substantially all of the assets. [Sec. 39]
been disposed. [Villanueva]
Exercise of Appraisal Right
Requirements Any stockholder who disagrees from the sale,
(1) Vote of the stockholders representing at lease, exchange, mortgage, pledge and any
least two- thirds (2/3) of the outstanding other disposition may exercise his appraisal
capital stock, or at least two-thirds (2/3) right. [Sec. 39]
of the members, in a stockholders’ or
members’ meeting duly called for the The transfer should not prejudice the
purpose; OR creditors of the assignor
Vote of at least a majority of the trustees The only way the transfer can proceed without
in office in nonstock corporations, where prejudice to the creditors is to hold the
there are no members with voting rights assignee liable for the obligations of the
mortgagee or pledgee is entitled to receive the 1/3 of the total outstanding capital stock
dividends. entitled to vote of the managing
corporation (Interlocking stockholders);
Power to Enter into Management or
Contracts [Sec. 43] ii. A majority of the members of the BOD
of the managing corporation also
Management Contract constitute a majority of the BOD of the
Any contract whereby a corporation managed corporation (Interlocking
undertakes to manage or operate all or directors).
substantially all of the business of another
corporation, whether such contracts are For the managed corporation: There is a need
called service contracts, operating agreements for such ratification as such contract is a
or otherwise. deviation from the principle that corporate
affairs shall be managed by the BOD.
This refers only to a management contract with For the managing corporation: There is a need
another corporation and does not apply to for such ratification as such contract is a
management contracts entered into by a deviation from the principle that the BOD would
corporation with natural persons. Corollary to devote their time and resources for the affairs
this, management contract with a natural of the corporation. [Villanueva]
person need not comply with the requisites of
Sec. 43. Limitations
Basis Ultra Vires Illegal Acts 3. The act reasonably tributary to the
Acts promotion of those ends, in a substantial,
and not in a remote and fanciful sense.
Lawfulness Lack of Illegality;
authority; Unlawful; The test to be applied is whether the act in
Not necessarily against law, question is in direct and immediate furtherance
unlawful, but morals, public of the corporation’s business, fairly incident to
outside the policy, and the express powers and reasonably necessary
powers of the public order to their exercise. If so, the corporation has the
corporation power to do it; otherwise, not. [Montelibano v.
Ratification Can be ratified Cannot be Bacolod-Murcia Milling Co., Inc., G.R. No. L-
ratified 15092 (1962)]
Binding Can bind the Cannot bind the (b) Consequences of Ultra Vires Acts
power parties if wholly parties
or partly Ultra vires acts, which are per se illegal are
executed generally void.
Enforceabil Voidable, and Void and cannot
ity may be be validated While ultra vires acts which are not illegal but
enforced by are within the scope of the articles of
performance, incorporation, are merely voidable and may
ratification or become binding and enforceable when ratified
estoppel by stockholders. [Montelibano v. Bacolod-
Murcia Milling Co., Inc., G.R. No. L-15092
Examples 1. Acts done Acts or (1962)]
beyond the contracts, which
powers of the are per se illegal Consequences of Ultra Vires Acts with
corporation as as being respect to contracts:
provided in the contrary to law.
law or its
a. Executed contract – courts will not set
articles of
incorporation;
aside or interfere with such contracts;
2. Ultra Vires b. Executory contracts – no enforcement
acts of officers even at the suit of either party (void and
and not of the unenforceable);
corporation c. Partly executed and partly executory –
principle of “no unjust enrichment at
expense of another” shall apply;
(a) Applicability of the Ultra Vires Doctrine d. Executory contracts apparently
authorized but Ultra Vires – the principle
The application of the Ultra Vires Doctrine is a of estoppel shall apply.
question, in each case, of the logical relation of
the act to the corporate purpose expressed in Remedies in case of Ultra Vires Acts
the charter. a. State
i. Dissolution of the corporation thru a
It may fairly be considered within the charter quo warranto proceeding
powers if: ii. Injunction
1. The act is one which is lawful in itself, and iii. Suspension or revocation of the
not otherwise prohibited; certificate of registration by the SEC
2. The act is done for the purpose of serving b. Stockholders
corporate ends; AND Injunction
Derivative suit
Ratification (except when a 3rd party is presumption should exist to distinguish one
prejudiced or the act is illegal) share from another.
c. Creditors - Nullification of contract in fraud Sec. 6 of the RCC now requires that the
of creditors distinguishing features be stated also in the
Certificate of Stock.
Doctrine of Individuality of
Subscription Trust Fund Doctrine
The Doctrine of Individuality of Subscription The Trust Fund Doctrine states that the capital
states that a subscription is one entire and stock, properties and other assets of a
indivisible whole contract. It cannot be divided corporation are regarded as equity in trust for
into portions. the payment of corporate creditors.
All funds received by the corporation in
Consequently, where stocks were subscribed payment of the shares of stock shall be
and part of the subscription contract price was held in trust for the corporate creditors and
not paid, the whole subscription shall be other stockholders of the corporation.
considered delinquent, and not only the No fund shall be used to buy back the
shares which correspond to the amount not issued shares of stock except only in
paid. instances specifically allowed by the
Corporation Code. [Boman Environmental
Nevertheless, holders of subscribed shares not Development Corporation v. CA, G.R. No.
fully paid, which are not delinquent, shall have 77860 (1988)]
all the rights of a stockholder. [Sec. 71]
SEC has opined that the entire Effects of the trust fund doctrine
subscription, although not yet fully paid, 1. Dividends must never impair the
may be transferred to a single transferee, subscribed capital stock and must only be
who as a result of the transfer must assume declared out of unrestricted retained
the unpaid balance. [SEC Opinion, 9 Oct. earnings (URE). [Philippine Trust Co. v.
1995] Rivera, G.R. No. L-19761 (1923)]
It is necessary, however, to secure the 2. Subscription commitments cannot be
consent of the corporation because such condoned or remitted.
transfer contemplates a novation which 3. General Rule: The corporation cannot buy
under Art. 1293 (NCC) cannot be made its own shares using the subscribed capital
without consent of the creditor. as the consideration therefore. [NTC v. CA.
G.R. No. 127937 (1999)]
Doctrine of Equality of Shares
Exceptions:
The doctrine of equality of shares states that all 1. Redeemable shares may be acquired even
stocks issued by the corporation are presumed without surplus profit for as long as it will
equal with the same privileges and liabilities, not result to the insolvency of the
provided that the Articles of Incorporation is Corporation;
silent on such differences. [Sec. 6] 2. In cases that the corporation conveys its
stocks in payment of a Debt; or
There is a presumption of equality of the rights 3. In a Close corporation, a stockholder may
and features of shares when nothing is demand the payment of the fair value of
expressly provided to the contrary. shares regardless of existence of retained
Although a corporation has the power to earnings for as long as it will not result to
classify its shares of stock, provide for the insolvency of the corporation
preferences and other conditions, no 4. Rescission of a subscription agreement is
not allowed since it will effectively result in
the unauthorized distribution of the capital
assets and property of the corporation. and assets generally regarded in equity as a
[Ong Yong v. Tiu, G.R. No. 144476 (2003)] trust fund for the payment of corporate debts.
NOTE: Rescission of a subscription agreement All assets and property belonging to the
is not one of the instances when distribution of corporation held in trust for the benefit of
capital assets and property of the corporation creditors that were distributed or in the
is allowed (Ibid). possession of the stockholders, regardless of
full payment of their subscriptions, may be
Exceptions to the Trust Fund Doctrine --- reached by the creditor in satisfaction of its
When Distribution of Corporate Capital is claim.
Allowed
The Trust Fund Doctrine, first enunciated by To make out a prima facie case in a suit
this Court in the 1923 case of Philippine Trust against stockholders of an insolvent
Co. v. Rivera is the underlying principle in the corporation to compel them to contribute to the
procedure for the distribution of capital assets, payment of its debts by making good unpaid
embodied in Corporation Code, which allows balances upon their subscriptions, it is only
the distribution of corporate capital only in three necessary to establish that the stockholders
instances: have not in good faith paid the par value of the
1. Amendment of the AOI to reduce the stocks of the corporation. [Donnina Halley v.
authorized capital stock, Printwell, Inc., G.R. No. 157549 (2011)]
2. Purchase of redeemable shares by the
corporation, regardless of the existence of How Corporate Powers Are
unrestricted retained earnings, and Exercised
3. Dissolution and eventual liquidation of the
corporation. By the Shareholders
The creditors of a corporation have the right to Corporate Acts Requiring All (Voting and
assume that so long as there are debts and Non-Voting) Shareholders’ Approval
liabilities, the BOD will not use corporate assets General Rule: Vote necessary to approve a
to purchase its own shares of stock or to particular corporate act as provided in this
declare dividends to its stockholders when the Code shall be deemed to refer only to stocks
corporation is insolvent. [Steinberg v. Velasco, with voting rights [Sec. 6]
G.R. No. L-30460 (1929)]
Exceptions [Sec. 6]:
Scope of the Trust Fund Doctrine Voting and non-voting shares shall be entitled
The trust fund doctrine is NOT limited to to vote in the following cases:
reaching the stockholder’s unpaid a. Amendment of Articles of Incorporation
subscriptions. [Sec. 15]
A corporation has no legal capacity to b. Adoption, Amendment and Repeal of By-
release an original subscriber to its capital Laws [Sec. 47]
stock from the obligation of paying for his c. Sale, Lease, Mortgage or Other Disposition
shares, in whole or in part, without a of Substantially all corporate assets [Sec.
valuable consideration, or fraudulently, to 39]
the prejudice of creditors. d. Incurring, Creating or Increasing Bonded
The creditor is allowed to maintain an Indebtedness [Sec. 37]
action upon any unpaid subscriptions and e. Increase or Decrease of Capital Stock
thereby steps into the shoes of the [Sec. 37]
corporation for the satisfaction of its debt. f. Merger and Consolidation [Sec. 76-79]
g. Investment of funds in another corporation
The scope of the doctrine when the corporation or business or for any purpose other than
is insolvent also encompasses other property
the primary purpose for which it was authority, but an innocent person cannot be
organized [Sec. 41] prejudiced if he had the right to presume under
h. Dissolution of the Corporation [Secs. 133- the circumstances the authority of the acting
138] officers.
Power to extend or Majority vote of the BOD/T and Can be exercised only in case of
shorten corporate term extension of the corporate term
[Sec. 36] Ratification by the stockholders or [Sec. 36]
members representing at 2/3 of the
outstanding capital stock or of its members [Note: Section 80(a) however
provides that appraisal right may
be exercised in both extension and
shortening of corporate term, which
is an error carried over from the old
Corporation Code. It does not
make sense to grant appraisal right
in case of shortening the
term/dissolution, since the same
would already result in liquidation
of the corporation.]
Power to increase or Majority vote of the BOD Can be exercised only if the
decrease capital stock, or increase of capital stock results in or
incur, create, increase Approval by 2/3 of the outstanding capital has the effect of changing or
bonded indebtedness stock restricting the rights of any
[Sec. 37] stockholder or class of shares, or of
authorizing preferences in any
respect superior to those of
outstanding shares of any class
[Sec. 80(a)];
Power to deny pre- Can be denied by the AOI or an Can be exercised in case it is
emptive rights [Sec. 38] amendment thereto denied through an amendment of
AOI [Sec. 80(a)]
Power to Sell of All or A majority vote of its board of directors or Can be exercised [Sec. 39/ 80(b)]
Substantially All of the trustees
Properties of the
Corporation [Sec. 39] Ratification by the stockholders or
members representing at 2/3 of the
outstanding capital stock or of its members
(Note: Vote of at least a majority of the
trustees in office in nonstock corporations,
where there are no members with voting
rights)
Power to invest corporate Majority vote of the board of directors or Can be exercised [Sec. 41/80(d)]
funds in another trustees and
corporation or business,
or for any other purpose Ratification by the stockholders
[Sec. 41] representing at least 2/3 of the outstanding
capital stock, or of the members
OTHERS
Approval Required Appraisal Right
Proxy
Fundamental Rights of a
Stockholder Stockholders and members may vote in person
or by proxy in all meetings. [Sec. 57]
1. Direct or indirect participation in
management [Sec. 6] The word “proxy” may be understood in two
2. Voting rights [Sec. 6] ways:
3. Right to remove directors [Sec. 27] (1) First, it may refer to the person duly
4. Proprietary rights authorized by a stockholder to vote in his
(a) Right to dividends [Sec. 42 and 70] behalf in a stockholder’s meeting.
(b) Appraisal rights [Sec. 80] (2) Secondly, it may refer to the document
(c) Right to issuance of stock certificate for which evidences this authority. [CAMPOS]
fully paid shares [Sec. 63]
(d) Proportionate participation in the Right to Issue a Proxy
distribution of assets in liquidation [Sec. The right to issue a proxy is vested with public
139] interest when it comes to stock corporations.
(e) Right to transfer of stocks in corporate
books [Sec. 62] • Although it may be regulated under the by-
(f) Pre-emptive right [Sec. 38] laws, it cannot be denied, since it is an
aspect of ownership interest of
5. Right to inspect books and records [Sec.
stockholders.
73]
6. Right to be furnished with the most recent • However, the right of members to vote by
financial statements/reports [Sec. 73] proxy may be denied under the articles of
7. Right to recover stocks unlawfully sold for incorporation or bylaws of a non-stock
delinquent payment of subscription [Sec. corporation. [Sec. 88; CAMPOS]
68]
8. Right to file individual suit, representative Requisites for a Valid and Enforceable
suit and derivative suits Proxy:
1. It must be in writing;
Nature of the Rights of Members 2. Signed by the stockholder or member of
The eleemosynary nature (i.e. charitable) of record; and
every non-stock corporation defines the 3. Filed with the corporation before the
characteristic of membership therein as being scheduled meeting with the Corporate
essentially personal in character and therefore Secretary. [Sec. 57]
essentially non-transferable in nature.
[Villanueva] Period of Effectivity
Unless otherwise provided in the proxy, it shall
Sec. 88 of the Revised Corporation Code be valid only for the meeting for which it is
specifically provides that in a non-stock intended. No proxy shall be valid and effective
corporation, the right of members of any class for a period longer than five (5) years at any
or classes to vote “may be limited, broadened one time. [Sec. 57]
or denied to the extent specified in the articles
of incorporation or the by-laws.” Procedural Matters Relating to Proxies:
1. “Proxy solicitation” involves the securing
and submission of proxies, while “proxy
validation” concerns the validation of such
secured and submitted proxies;
2. The SEC’s power to pass upon the validity Under a voting trust agreement, a stockholder
of proxies in relation to election of a stock corporation parts with the naked or
controversies has effectively been legal title, including the power to vote, of the
withdrawn, tied as it is to its abrogated shares and only retains the beneficial
quasi-judicial powers, and has been ownership of the stock.
transferred to the RTC Special Commercial
Courts pursuant to the terms of Sec. 5.2 of Voting trustee — A share owner vested with
the Securities Regulation Code; colorable and naked title of the shares covered
for the primary purpose of voting upon stocks
Note: The SEC has the power to mpose or that he does not own.
recommend new modes by which a
stockholder, member, director, or trustee A voting trust agreement shall be ineffective
may attend meetings or cast their votes, as and unenforceable unless:
technology may allow, taking into account 1. It is in writing and notarized;
the company’s scale, number of 2. It specifies the terms and conditions
shareholders or members, structure, and thereof; and
other factors consistent with the basic right 3. A certified copy of such agreement is filed
of corporate suffrage. [Sec. 179] with the corporation and with the SEC.
[Sec. 58]
3. Nevertheless, although an intra-corporate
controversy may animate a disgruntled Period of Effectivity
shareholder to complain to the SEC a General Rule: Voting trust agreements shall
corporation’s violations of SEC rules and not exceed five (5) years at any one time.
regulations, that motive alone should not
be sufficient to deprive the SEC of its Exception: Voting trust agreements may be for
investigatory and regulatory powers, a period exceeding five (5) years if it is
especially so since such powers are specifically required as a condition in a loan
exercisable on a motu proprio basis. agreement.
• This envisions a situation where a
The fact that the jurisdiction of the RTC corporation obtains a loan from a bank,
Special Commercial Courts is confined to but as a condition of the loan, the majority
the voting on election of officers, and not all stockholders would be required to
matters which may be voted upon by execute voting trust agreements to
stockholders, elucidates that the power of ensure that the lending institution would
the SEC to regulate proxies remains extant have a controlling interest in the corporate
and could very well be exercised when votes to be taken that may affect the
stockholders vote on matters other than the ability of the borrowing corporation to pay.
election of directors. [GSIS v. C.A., G.R. The voting trust agreement therefore
No. 183905 (2009)] constitutes further security to the lending
institution. (VILLANUEVA, supra at 432)
Voting Trust
• Such voting trust agreement conditioned
upon a loan agreement, however, shall
Voting Trust — An arrangement created by automatically expire upon full payment of
one or more stockholders: the loan. [Sec. 58]
(a) For the purpose of conferring upon a
trustee or trustees the right to vote and Unless the agreement is expressly renewed, all
other rights pertaining to the shares; rights granted in the agreement shall
(b) For a period not exceeding 5 years at any automatically expire at the end of the agreed
time [Sec. 58]. period. [Sec. 58]
Copy must be filed Copy must be filed Note: “Outstanding capital stock” means
with the corporation with SEC and the stocks entitled to VOTE.
corporation
Nevertheless, ALL stockholders,
No transfer Transfer of legal title regardless of classification as voting or
to trustee non-voting, are entitled to vote in the
Proxy exercises Trustee exercises following matters:
voting rights only for absolute voting rights a. Amendment of the articles of
a specific meeting continuously, subject incorporation;
(unless otherwise only to fiduciary duty b. Adoption and amendment of by-laws;
provided) c. Sale, lease, exchange, mortgage,
pledge, or other disposition of all or
Proxy cannot be Trustee can be substantially all of the corporate
director director because he property;
d. Incurring, creating, or increasing
bonded indebtedness;
b. Stockholders owning at least the majority to adopt new by-laws shall be considered
of the outstanding capital stock/majority of revoked when stockholders representing a
members. majority of the outstanding capital stock or a
Includes all stockholders with or without voting majority of the members shall so vote at a
rights. regular or special meeting.
(3) Revocation of delegation to the BOD of (8) Calling a Meeting to Remove Directors
the power to amend or repeal or adopt or Trustees [Sec. 27]
by-laws [Sec. 47] A special meeting for the purpose of removing
any director or trustee must be called:
Requires approval by stockholders owning at 1. By the secretary on order of the president;
least the majority of the outstanding capital or
stock/majority of members. 2. Upon written demand of stockholders
representing or holding at least a majority
(4) Granting compensation other than per of the outstanding capital stock, or a
diems to directors [Sec. 29] majority of the members entitled to vote.
[Sec. 27]
Compensation other than per diems may be
granted to directors by the vote of the (b) By a two-thirds vote
stockholders representing at least a majority
of the outstanding capital stock. (1) Removal of directors or trustees [Sec.
27]
(5) Fixing the consideration for no-par
shares [Sec. 61] Any director or trustee of a corporation may be
removed from office by a vote of —
When the Articles of Incorporation or the BOD • The stockholders holding or representing
does not provide for the value of no-par shares, at least two-thirds (2/3) of the outstanding
the value of such shares shall be determined capital stock; or
by the stockholders representing at least
• At least two-thirds (2/3) of the members
majority of the outstanding capital stock.
entitled to vote in a non-stock corporation.
Note: Such removal shall take place —
(6) Voluntary dissolution of a corporation
a. Either at a regular meeting of the
where no creditors are affected [Sec.
corporation or at a special meeting
134]
called for the purpose; and
b. In either case, after previous notice to
If dissolution of a corporation DOES NOT
stockholders or members of the
prejudice the rights of any creditor having a
corporation of the intention to propose
claim against it, the dissolution may be effected
such removal at the meeting.
by:
a. Majority vote of the BOD/BOT; and
(2) Amendment of AOI [Sec. 15]
b. A resolution adopted by the affirmative vote
of the stockholders owning at least
Amendment of the AOI may be made by:
majority of the outstanding capital
a. A majority vote of the BOD/BOT; and
stock/membership.
b. The vote or written assent of the
stockholders representing at least two-
(7) Revocation of Delegation to the Board
thirds (2/3) of the outstanding capital stock,
of the Power to Amend/Repeal/Adopt
or by the vote or written assent of at least
By-laws [Sec. 47]
two-thirds (2/3) of the members.
Any power delegated to the board of directors
or trustees to amend or repeal the by-laws or
Note: Includes all stockholders with or without Incurring, creating, increasing bonded
voting rights. indebtedness [Sec. 37]
the stockholders or members shall not be b. The vote of such director or trustee was not
necessary. necessary for the approval of the contract;
c. The contract is fair and reasonable under
(10) Stock Dividend declaration [Sec. the circumstances;
42]
In case of corporations vested with
Requires approval by: public interest, material contracts are
a. A majority vote of the BOD; and approved by at least two-thirds (2/3) of the
b. At least 2/3 of the outstanding capital stock. entire membership of the board, with at
least majority of the independent directors
Note: Declaration of cash and property voting to approve the material contract; and
dividends only requires BOD/BOT approval. In case of an officer, the contract has been
previously authorized by the BOD.
(11) Power to enter into management
contracts [Sec. 43] Note: Where any of the first 3 conditions in the
preceding paragraph is absent, in the case of a
General Rule: Requires approval by — contract with a director/trustee, the contract
a. Majority of the BOD/BOT; and may be ratified by the vote of the
b. Stockholders owning at least the majority stockholders representing 2/3 of the
of the outstanding capital stock/majority of outstanding capital stock or at least 2/3 of
members of both the managing and the the members in a meeting called for that
managed corporation. purpose.
Exceptions: In the ff. cases, at least 2/3 votes Full disclosure of the adverse interest of the
of the outstanding capital stock/membership of directors/trustees involved is made at such
the managed corporation is required. BUT meeting and the contract is fair and reasonable
only majority vote is required for the managing under the circumstances. [Sec 31]
corporation:
a. Where a stockholder/s representing (13) Ratifying acts of disloyalty of a
the same interest of both the managing director [Sec. 33]
and the managed corporations own or
control more than one-third (1/3) of the General Rule: Where a director, by virtue of
total outstanding capital stock entitled such office, acquires a business opportunity,
to vote of the managing corporation; or which should belong to the corporation, thereby
b. Where a majority of the members of the obtaining profits to the prejudice of such
managing corporation’s BOD also corporation, the director must account for and
constitute a majority of the managed refund to the latter all such profits.
corporation’s BOD.
Exception: His act may be ratified by a vote of
(12) Ratifying contracts with respect to the stockholders owning or representing at
dealings with directors/trustees [Sec. least 2/3 of the outstanding capital stock.
31]
(14) Plan of merger or consolidation
A contract of the corporation with one or more [Sec. 76]
of its directors is voidable, at the option of such
corporation, unless ALL of the following Requires approval by:
conditions are present: a. Majority of each of the BOD/BOT of the
a. The presence of such director/trustee in the constituent corporations of the plan of merger
board meeting in which the contract was or consolidation; and
approved was not necessary to constitute
a quorum for such meeting;
Ratification of contracts
between interlocking - 2/3 outstanding capital stock
directors [Sec. 32]
Fix the issued price of no-par General Rule: Fixed in the AOI Exception: Majority of the
value shares [Sec. 62] or by majority of the quroum of outstanding capital stock in the
the BOD pursuant to authority absence of provisions in the
under the AOI AOI
Mere silence or abstention does not suffice. See “SUMMARY OF SPECIFIC POWERS“
The stockholder must have voted against the table under “7. Corporate Powers“.
corporate action. [Villanueva]
(b) Manner of Exercise of Right
Amount Paid to Dissenting Stockholder
The amount paid to the stockholder is the fair Requirements for Exercise of Appraisal
value of his shares as of the day prior to the Right [Sec. 81 & 85]
date on which the vote was taken, excluding a. Stockholder must have voted against
any appreciation or depreciation in anticipation the corporate act.
of the corporate action. [Sec. 81] b. Stockholder must make a written
demand on the corporation within 30
days after the vote was taken for When Right to Payment Ceases [Sec. 83,
payment of the fair value of his shares. generally]
o Failure to make demand within General Rule: No demand for payment may be
such period shall be deemed withdrawn.
waiver of the appraisal right.
c. Stockholder must submit his certificate Exceptions: The right may be extinguished in
of stock to the corporation for notation the following instances —
within 10 days after demand for 1. Withdrawal of demand by the stockholders
payment. WITH CONSENT of the corporation
o Otherwise, right to appraisal may 2. Abandonment of the proposed corporate
be terminated at the option of action
corporation. 3. Disapproval by SEC of the proposed
corporate action where such approval is
Effect of Demand for Payment [Sec. 82] necessary
a. ALL rights accruing to such shares, 4. Where SEC determines that such
including voting and dividend rights, shall be stockholder is not entitled to appraisal right
suspended, EXCEPT the right of such 5. Failure to submit the certificates of stock
stockholder to receive payment of the fair representing his shares to the corporation
value thereof. for notation as dissenting shares within 10
b. There is RESTORATION of voting and days after demand for payment, at the
dividend rights if the dissenting stockholder option of the corporation. [Sec. 85]
is not paid the value of his shares within 30
days after the award. Effect of Extinguishment of Right
a. Right of dissenting stockholder to be paid
Note: The award shall be — for the fair value of his shares shall cease;
(a) Agreed upon by the dissenting b. His status as a stockholder shall thereupon
stockholder and corporation; or by restores; and
(b) Determined and appraised by 3 c. All dividend distributions which would have
disinterested persons, if they fail to accrued on his shares shall be paid to him.
agree within 60 days from the date when [Sec. 83]
the corporate action was approved,
these 3 persons shall be — Right to Inspect
1. One named by the shareholder;
2. One named by the corporation; Basis of Right
3. One chosen by 1 & 2. As the beneficial owners of the business, the
stockholders have the right to know the
The findings of the majority of the appraisers financial condition and management of
shall be final. [Sec. 81] corporate affairs.
Records Subject to Inspection [Sec. 73] Requirements for the exercise of the right
Every corporation shall keep and carefully of inspection [Sec. 73]
preserve at its principal office all information a. The records are open to inspection only by
relating to the corporation including, but any director, trustee, stockholder or
not limited to: member of the corporation in person or by
a. The AOI and by-laws of the corporation and a representative.
all their amendments; b. Must be done at reasonable hours on
b. The current ownership structure and voting business days.
rights of the corporation, including lists of c. A demand in writing may be made by the
stockholders or members, group director, trustee or stockholder at their
structures, intra-group relations, ownership expense, for such records or excerpts from
data, and beneficial ownership; the records.
c. The names and addresses of all the d. The inspecting or reproducing party shall
members of the BOD or BOT and the remain bound by confidentiality rules under
executive officers; prevailing laws such as:
d. A record of all business transactions; a. Intellectual Property Code
e. A record of the resolutions of the BOD or b. Data Privacy Act
BOT and of the stockholders or members; c. Securities Regulation Code
f. Copies of the latest repertorial d. Rules of Court
requirements submitted to the
Commission; and Test to Determine Whether the Purpose of
g. The minutes of all meetings of stockholders Inspection is Legitimate
or members, or of the BOD/BOT, which A legitimate purpose is one which is genuine to
shall set forth – the interests of the stockholders as such and
i. Time and place of the meeting not contrary to the interests of the corporation
held; [Gokongwei Jr. v. SEC, G.R. No. L-45911
ii. How meeting was authorized; (1979)].
iii. Notice given;
iv. Agenda; Valid defenses of the officer or agent of the
v. Whether meeting was regular or corporation who refuses to allow
special (its object, if special) inspection and/or reproduction of records:
vi. Those present and absent a. The person demanding to examine and
vii. Every act done or ordered done at copy excerpts from the corporation’s
the meeting records and minutes has improperly used
h. Upon demand of the any information secured through any prior
BOD/BOT/stockholder or member – examination of the records or minutes of
i. Time when any director, trustee, such corporation or of any other
stockholder or member entered or corporation;
left the meeting must be noted in the b. The person was not acting in good faith;
minutes; c. The person was not acting for a legitimate
ii. The yeas and nays must be taken purpose in making the demand to examine
on any motion or proposition, and a or reproduce corporate records;
record thereof carefully made; d. The person is a competitor, director, officer,
iii. The protest of a director, trustee, controlling stockholder or otherwise
stockholder or member on any represents the interests of a competitor.
action or proposed action [Sec. 73]
court is satisfied that justice so requires. Distinguished from Right of First Refusal
[Sec. 8, Rule 65] Pre-emptive Right Right of First
b. Injunction Refusal
c. Action for damages [Sec. 73] Grants stockholders Grants the existing
d. File an action under Sec. 161 to impose a the option to stockholders or the
penal offense by fine subscribe to all issues corporation the option
The unjustified failure or refusal by the or disposition of to purchase the
corporation, or by those responsible for shares of any class, in shares of the
keeping and maintaining corporate proportion to their transferring
records, to comply with the pertinent rules respective stockholder. [Sec. 97]
and provisions of the RCC on inspection shareholdings. [Sec.
38]
and reproduction of records shall be
All stockholders of a Arises only by virtue
punished with a fine ranging from
stock corporation of contract
P10,000.00 to P200,000.00, at the
shall enjoy the pre- stipulations, by which
discretion of the Court
emptive right to the right is strictly
When the violation of this provision is subscribe to all issues construed against the
injurious or detrimental to the public, the or disposition of right of person to
penalty is a fine ranging from P20,000.00 shares of any class, in dispose or deal with
to P400,000.00 [Sec. 161] proportion to their their property.
e. Summary investigation by SEC [Sec. 73] respective
shareholdings. [Sec.
Preemptive Right 38]
A right claimed A right exercisable
Definition against the against another
Pre-emptive right — An option or privilege of corporation on stockholder on his
an existing stockholder to subscribe to a unissued shares of its shares of stock.
proportionate part of shares subsequently capital stock, and [Villanueva]
issued by the corporation before the same can likewise on treasury
be disposed of in favor of others. shares held by the
corporation.
• This right includes all issues and [Villanueva]
disposition of such shares any class.
• It is a common law right and may be Purpose of Pre-emptive Right
exercised by stockholders even without The purpose is to enable the shareholder to
legal provision. retain his proportionate control in the
corporation and to retain his equity in the
Basis of Preemptive Right: Preservation of
surplus.
the existing proportional rights of the
stockholders. [Campos]
Scope of Pre-emptive Right
The broad phrase “all issues or disposition of
shares of any class” is construed to include:
a. New shares issued in pursuance of increase
in capital stock or from the unissued shares
which form part of the ACS; and also
b. Treasury shares
• Treasury shares would come under the
term “disposition”.
• Likewise considering that it is not
included among the exceptions
enumerated therein, where pre-emptive
right shall not extend, the intention is to
include it in its application. [SEC iv. SEC can cancel shares if the 3rd party
Opinion, 14 January 1993] is not innocent
the corporation and indirectly upon the of the corporation or association”. [implied
stockholders. [Bitong v. C.A., G.R. No. from 1st par. of Rule 8, Sec. 1 of the Interim
123553 (1998)] Rules; see also Florete v. Florete, G.R. No.
174909 (2016)]
Parties to a Derivative Suit
In a derivative suit, the suing stockholder is The action brought by the shareholder or
merely a nominal party, while the corporation is member must be in the name of the corporation
the real party in interest. Thus, the action must or association. [Villamor v. Umale, G.R. No.
be brought for the benefit and in the name of 172843 (2014)]
the corporation. [Villanueva]
Requisites of a Derivative Suit according to
The corporation is an unwilling co-plaintiff. Jurisprudence [SMC v. Kahn, G.R. No. 85339
[Rule 3 Section 10, Rules of Court] (1989)]
• The corporation should be made a party to 1. The party bringing the suit should be a
the suit, either as plaintiff or defendant, for shareholder as of the time of the act or
res judicata to apply. transaction complained of, the number of
• BUT the personal injury suffered by the his shares not being material;
stockholder cannot disqualify him from 2. He has tried to exhaust intra-corporate
filing a derivative suit in behalf of the remedies, i.e., has made a demand on the
corporation. It merely gives rise to an BOD for the appropriate relief but the latter
additional cause of action for damages has failed or refused to heed his plea; and
against the erring corporate officers. 3. The cause of action actually devolves on
[Gochan v. Young, G.R. No. 131889 the corporation, the wrongdoing or harm
(2001)]. having been, or being caused to the
corporation and not to the particular
Proper Forum for Derivative Suits stockholder bringing the suit. [Lisam
The Regional Trial Courts exercise jurisdiction Enterprises, Inc., represented by Lolita A.
over derivative suits. [Sec. 5.2., Securities Soriano and Lolita A. Soriano v. Banco de
Regulation Code] Oro Unibank, Inc. et al., G.R. No. 143264
(2012)].
Requisites of Derivative Actions
a. That the person instituting the action be a Note: The “wrong” contemplated in a derivative
stockholder or member at the time the acts suit is one in which the injury alleged be indirect
or transactions subject of the action as far as the stockholders are concerned and
occurred and the time the action was filed; direct only insofar as the corporation is
b. That the stockholder or member exerted all concerned. [de Leon] The reliefs sought pertain
reasonable efforts, and alleges the same to the corporation. [Symaco Trading Corp. v
with particularity in the complaint, to Santos, G.R. No. 142474 (2005)]
exhaust all remedies available under the
AOI, by-laws, laws or rules governing the Stockholder may commence a derivative suit
corporation or partnership to obtain the “for mismanagement, waste or dissipation of
relief he desires; corporate asset because of a special injury to
c. That there is no appraisal right available for him for which he is otherwise without redress.
the act(s) complained of; [Yu v. Yukayguan, G.R. No. 177549 (2009)]
d. That the suit is not a nuisance or
harassment suit; [Rule 8, Interim Rules of
Procedure for Intra-Corporate Exhaustion of Administrative Remedies
Controversies] General Rule: A derivative suit can only be
e. The action brought by the filed when there has been a showing of
stockholder/member must be “in the name exhaustion of intra-corporate remedies.
Exception: But where corporate directors are General Rule: Subscribers for stock are NOT
the ones guilty of a breach of trust, and intra- liable to pay interest on his unpaid subscription.
corporate remedy is futile or useless,
shareholders may institute a derivative suit for Exception: If so required in the by-laws at the
the benefit of the corporation without having to rate fixed in the by-laws. If no rate is fixed in the
exhaust intra-corporate remedies in order to subscription contract, the prevailing legal rate
bring about a redress of the wrong inflicted shall apply. [Sec. 65]
directly upon the corporation and indirectly
upon the stockholders. [Villanueva] Notes:
Transfer for consideration of treasury shares is
Obligations of a Stockholder a sale (or disposition) by the corporation (not
subscription). A transfer of previously issued
(1) Liability to the Corporation for Unpaid shares by a stockholder to a third person in a
Subscription [Sec. 66] sale (or disposition). Transfer of unissued
shares is subscription.
Payment of unpaid subscription or any
percentage thereof, together with any interest Shareholders are not creditors of the
accrued shall be made: corporation with respect to their shareholdings
On the date specified in the subscription thereto and the principle of compensation or
contract; or set-off has no application.
On the date stated in the call made by the
board. Subscription contract is NOT required to be in
writing.
Failure to pay on such date shall:
1. Render the entire balance due and (3) Liability for Watered Stocks [Sec. 64]
payable; and
2. Make the stockholder liable for interest at Definition
the legal rate on such balance, unless a Watered Stocks — Shares issued as fully paid
different interest rate is provided in the when in truth no consideration is paid, or the
subscription contract. consideration received is known to be less than
the par value or issued value of the shares.
A subscription contract is unconditional (i.e., [Sec. 64]
obligation to pay is not subject to any
contingency) and indivisible (as to the amount See b. Watered stocks under 10. Capital Affairs
and transferability). [Fua Cun v. Summers
(1923)] Hence, if the subscriber paid 20% of his Liability of directors or officers [Sec. 64]
subscription, he is not entitled to the issuance Any director or officer of a corporation who:
of certificates corresponding to 20% of the 1. Consents to the issuance of stocks for a
shares. consideration less than its par or issued
value;
Unpaid claim refers to any unpaid subscription, 2. Consents to the issuance of stocks for a
and not to any indebtedness which a consideration other than cash, valued in
subscriber may owe the corporation rising from excess of its fair value; or
any other transaction. [China Banking Corp. v. 3. Having knowledge of the insufficient
C.A., G.R. No. 117604 (1997)] consideration, does not file a written
objection with the corporate secretary.
(2) Liability to the Corporation for Interest
on Unpaid Subscription if so Required The director or officer shall be liable to the
by the By-Laws [Sec. 65] corporation or its creditors, SOLIDARILY with
the stockholder concerned to the corporation
and its creditors for the difference in value. All persons who assume to act as a
[Sec. 64] corporation, knowing it to be without authority
to do so, shall be liable as general partners for
Value received at time of Php XXX all debts, liabilities and damages incurred or
issuance of the stock arising as a result thereof.
Par or issued value (XXX) When any such ostensible corporation is sued
on any transaction entered or on any tort
Liability for watered stock Php XXX committed by it as a corporation, it shall not be
allowed to use as a defense its lack of
Personal liability of corporate directors, corporate personality.
trustees or officers attaches when they consent
to the issuance of watered down stocks or Anyone who assumes an obligation to an
when, having knowledge of such issuance, do ostensible corporation cannot resist
not file with the corporate secretary their written performance thereof on the ground that there
objection. [SPI Technologies Inc. V. Mapua, was in fact no corporation. [Sec. 20]
G.R. No. 191154 (2014)]
Meetings
(4) Liability for Dividends Unlawfully Paid
General Rule: Stockholders’ or members’
The director, trustee or officer shall be liable as approval is expressed in a meeting duly called
a trustee for the corporation and must account and held for the purpose.
for the profits, which would otherwise have
accrued to the corporation when: Exception: In case of amendment of AOI,
• A director, trustee willfully attempts to approval may be expressed by referendum or
acquire, or acquires any interest written assent of the stockholders or members.
adverse to the corporation [Sec. 15]
• In respect of any matter which has been
reposed in them in confidence, and Who May Attend and Vote
upon which, equity imposes a disability a. Stockholders [Sec. 23]
upon themselves to deal in their own a. In person
behalf. [Sec. 30] b. By proxy
c. Via remote communication (only if
The sanction can be found in Sec. 158 which allowed by by-laws or by majority of
can be: BOD/BOT, except if vested with
(a) A fine from P5,000 and not more than public interest)
P1,000 for each day of continuing d. In absentia (only if allowed by by-
violation but in no case to exceed laws or by majority of BOD/BOT,
P2,000,000; except if vested with public interest)
(b) An issuance of a permanent cease-and- e. Note: The SEC shall issue the rules
desist order, suspension or revocation and regulations governing
of the certificate of incorporation, or participation and voting through
dissolution and forfeiture of corporate remote communication or in
assets. absentia.
b. Stockholder-grantor [Sec. 54]
(5) Liability for Assuming to Act as a c. Secured creditor, if expressly empowered
Corporation Knowing it to be Without by the stockholder-grantor [Sec. 54]
Authority d. Executors, administrators, receivers and
other legal representatives duly appointed
by the court, without need of any written
proxy [Sec. 54]
Regular or Special
Regular Special
Annually on a date fixed by the by-laws.
Any time deemed necessary
When or as provided in the by-laws
If not fixed, on any date AFTER April 15 of every
[Sec. 49]
year as determined by the BOD/BOT [Sec. 49]
General Rule : Sent at least 21 days prior to the
meeting
General Rule : At least 1
Exception : A different period is required by the by- week written notice
Written
laws, law or regulation. Exception : A different period
notice
is provided in the by-laws, law
Written notice may be sent to all stockholders or or regulation [Sec. 49]
members of record through electronic mail or such
other manner as the SEC shall allow [Sec. 49]
Notice of meetings shall be sent through means of communication provided in the
by-laws and must contain :
1. Time ;
2. Place ;
3. Purpose;
4. Agenda ;
5. Proxy form which shall be submitted to the corporate secretary within a
reasonable time before the meeting ;
6. When attendance, participation and voting are allowed by remote
communication or in absentia, the requirements and procedures to be followed
when a stockholder/members elects either option ;
7. When the meeting is for election of directors/trustees, the requirements and
procedure for nomination and election [Sec. 50]
1. Minutes of the most recent regular meeting
which shall include :
a) Description of the voting and vote
tabulation procedures used in the previous
meeting ;
b) Description of opportunity given to
stockholders/members to ask questions
and a record of the questions asked and
asnwers given ; A stockholder or
c) Matters discussed and resolutions member may propose the
Agenda
reached ; items to be included in the
d) Record of the voting results for each agenda [Sec. 49].
agenda item ;
e) List of directors/trustees, officers and
stockholders/members who attended the
meeting ;
f) Other items that the SEC may require in the
interest of good corporate governance and
protection of minority stockholders
Regular Special
2. Members’ list for non-stock corporations. For
stock corporations, material information on the
current stokcholders, and their voting rights ;
Regular Special
Stock Corporations
General Rule : Principal office of the corporation as set forth in the AOI
Exception : If not practicable, in the city or municipality where the principal office of
the corporation is located.
Where Note : Any city or municipality in Metro Manila, Metro Cebu, Metro Davao and other
Metropolitan areas shall be considered a city or municipality [Sec. 50].
Non-stock Corporations
Any place even outside the place where the principal office of the corporation is
located, as long as within Philippine territory and proper notice is sent to all
members. [Sec. 92]
General Rule: Stokcholders representing majority of the outstanding capital stock
or majority of the members.
Quorum
Exception: The Code or the by-laws provide otherwise. [Sec. 51]
Where quorum is present at the start of a lawful 2. The yeas and nays on any motion or
meeting, stockholders present cannot, without proposition;
justifiable cause, break the quorum by walking 3. The protest of a director, trustee,
out from said meeting so as to defeat the stockholder or member on any action or
validity of any act proposed and approved by proposed action. [Sec. 73]
the majority. However, stockholders can break
the quorum for justifiable causes. [Johnston v. 9. Board of Directors and
Johnston (1965), CA decision]
Trustees
Minutes and Agenda of Meetings
Repository of Corporate Powers
Agenda in Regular Meetings
See enumeration in the table under i. Regular Doctrine of Centralized Management
or special. BOARD IS SEAT OF CORPORATE POWERS
Indisputably, one of the rights of a stockholder Corporate powers may be directly conferred
is the right to participate in the control or upon corporate officers or agents by statute,
management of the corporation. This is the articles of incorporation, the by-laws, or by
exercised through his vote in the election of resolution or other act of the board of directors.
directors because it is the BOD that controls or [Citibank, N.A. vs. Chua, 220 SCRA 75 (1993)]
manages the corporation. [Gamboa v. Teves,
G.R. No. 176579 (2011)] Tenure, Qualifications, and
Disqualifications of Directors or
Limitations on powers of BOD/BOT
Trustees
(1) Limitations imposed by the Constitution,
statutes, articles of incorporation or by-
Tenure
laws;
(2) Certain acts of the corporation that require
Directors – Term of 1 year from among the
joint action of the stockholders and BOD: holders of stocks registered in the corporation’s
a. Removal of director [Sec. 27] books. [Sec. 22]
b. Amendments of Articles of
Incorporation [Sec. 15]
Trustees – Term not exceeding 3 years from
c. Fundamental changes [Sec. 37] among the members of the corporation. [Sec.
d. Declaration of stock dividends [Sec.
22]
42]
e. Entering into management contracts Holdover Principle
[Sec. 43] Upon failure of a quorum at any meeting of the
f. Fixing of consideration of no-par stockholders or members called for an election,
shares [Sec. 61] the directorate naturally holds over and
g. Fixing of compensation of directors continues to function until another directorate
[Sec. 29] is chosen and qualified.
(3) Cannot exercise powers not possessed by Each director and trustee shall hold office until
the corporation. the successor is elected and qualified. [Sec.
22]
Requirement for Independent Directors Trustees: May be more than fifteen (15) [Sec.
Corporations vested with public interest are 13 and 91]
now required to have independent directors
constituting at least twenty percent (20%) of The RCC removed the minimum number of
the board. [Sec. 22] This is in order to promote directors which stood at five (5) under the old
good governance. code. [Sec. 14, Old Corporation Code]
These corporations include:
(1) Corporations covered by the Securities
Regulation Code, namely:
i. ose whose securities are
registered with the
Page 208 of 450
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW
Note: The right to representation refers to the (3) Grounds other than the above, but the
right to cumulative voting for one candidate. remaining directors can constitute a
quorum.
Requisites for Removal: (4) Grounds other than the above, but the
1) It must take place either at a regular remaining directors cannot constitute a
meeting or special meeting of the quorum for the purpose of filling the
stockholders or members called for the vacancy;
purpose; (5) By reason of an increase in the number of
2) A special meeting for the purpose of directors or trustees.
removing directors or trustees must be
called by: Cause of Procedure
a. The secretary, on order of the Vacancy
president; or
b. The secretary, upon written The election by stockholders
demand of the stockholders shall be held no later than the
Expiration
representing or holding at least a day of such expiration at a
of term
MAJORITY of the capital stock or a meeting called for that
MAJORITY of the members purpose.
entitled to vote;
3) There must be previous notice to the The election may be held on
stockholders or members of the intention to the same day of the meeting
remove a director; and authorizing the removal and
Removal this fact must be so stated in
4) There must be a vote of the stockholders
representing 2/3 of outstanding capital the agenda and notice of said
stock or in case of a nonstock corporation, meeting.
2/3 of members entitled to vote.
Other The election must be held no
New Power of the SEC under the Revised grounds, later than forty-five (45) days
Corporation Code [Sec. 27] but the from the time the vacancy
The Commission shall, motu proprio or upon remaining arose.
verified complaint, and after due notice and directors
hearing, order the removal of a director or can
trustee elected despite the disqualification, or constitute
whose disqualification arose or is discovered a quorum
subsequent to an election.
a. The vacancy must be filled
The removal of a disqualified director shall be by the stockholders or
Other
without prejudice to other sanctions that the members in a regular or special
grounds,
Commission may impose on the board of meeting for that purpose; or
but the
directors or trustees who, with knowledge of b. In case of the necessity of
remaining
the disqualification, failed to remove such emergency action, the vacancy
directors
director or trustee. [Sec. 27] may be temporarily filled from
CANNOT
among the officers of the
constitute
corporation by unanimous
Filling of Vacancies [Sec. 28] a quorum:
vote of the remaining directors
or trustees.
Ways which the filling of a vacancy may
occur: By reason Shall be filled only by an
(1) Expiration of term; of an election at a regular or at a
(2) Removal; increase in special meeting of
the stockholders duly called for the
Term of designated director or trustee Likewise, the limitation placed under Sec. 30
The term of the designated director or trustee (now Sec. 29, RCC) of the Corporation Code
shall cease: that directors cannot receive compensation
(1) Within a reasonable time from the exceeding 10% of the net income of the
termination of the emergency; or corporation would not apply to the
(2) Upon election of the replacement director compensation given to such positions since it
or trustee, whichever comes earlier. [Sec. is being given in their capacity as officers of the
28] corporation and not as board members.
[Western Institute of Technology v. Salas, G.R.
No. 113032 (1997)]
Compensation
c. Gross negligence or bad faith in directing because they are in-charge of day-to-day
the affairs of the corporation; [Sec. 30] activities. [Campos]
d. Acquiring any personal or pecuniary The provisions on seizing corporate
interest in conflict of duty; [Sec. 30] opportunity and disloyalty [Secs. 30 and
e. Consenting to the issuance of watered 33] shall also apply to corporate officers.
stocks, or, having knowledge thereof, [Price v. Innodata Phils., Inc., G.R. No.
failing to file objections with secretary; 178505 (2008)]
[Sec. 64]
f. Agreeing or stipulating in a contract to hold Doctrine of Limited Doctrine of
himself liable with the corporation; or Liability Immunity
g. By virtue of a specific provision of law.
Protects a person
Shields the
LIABILITY FOR WATERED STOCKS acting for and in
incorporators from
Watered Stocks – stocks issued for a behalf of the
corporate liability
consideration less than its par or issued value corporation from
beyond their agreed
or for a consideration in any form other than being himself
contribution to the
cash, valued in excess of its fair value. personally liable for
capital or shareholding
his authorized
Any director or officer of a corporation shall be in the corporation
actions
solidarily liable with the stockholder
concerned to the corporation and its creditors
Strains in Labor Law
for the difference in value for:
The Supreme Court appears to have different
(1) Consenting to the issuance of watered
views regarding the personal liability of officers
stocks or;
when it comes to labor law violations:
(2) Failing express his objection in writing and
● Absent proof that the manager exceeded
file the same with the corporate secretary
his authority in dealing as regards the
despite having knowledge thereof of such
employee, he cannot be held personally
issuance [Sec. 64].
liable for the said employee’s monetary
compensation. (Nicario v. NLRC, GR No.
Personal Liabilities 125340 [1998])
● Officers can be held personally liable for
General rule: Members of the Board, who 13th month pay of employees after the
purport to act in good faith for and on behalf of corporation has ceased to exist. This is
the corporation within the lawful scope of their because the officers are deemed to have
authority, are not liable for the consequences acted on behalf of the corporation.
of their acts. When the acts are of such nature (Restaurante Las Conchas v. Llego, 372
and done under those circumstances, they are Phil 697 [1999])
attributed to the corporation alone and no
personal liability is incurred. [Price v.
Responsibility for Crimes
Innodata Phils., Inc., G.R. No. 178505 (2008)].
Since a corporation is a person by mere legal
Exception: When sufficient proof exists on
fiction, it cannot be proceeded against
record that the officers acted fraudulently,
criminally because it cannot commit a crime in
beyond his authority or when the officer agrees
which personal violence or malicious intent is
to be personally liable on behalf of the
required.
corporation.
Note: However, violations of the Code, if it is
Note:
committed by a corporation, the same may,
Members of the BOD who are also officers after notice and hearing, be dissolved in
are held to a more stringent liability
access to material information about an c. The contract is fair and reasonable under
issuer or a security that is not generally the circumstances. [Sec. 31]
available to the public; or
(d) A person who learns such information by a *Amended from two to three in the Revised
communication from any foregoing Corporation Code.
insiders. [Sec. 3.8, Securities Regulation
Code] Between Corporations with
Contracts Interlocking Directors
By Self-Dealing Directors with the General Rule: A contract between two or more
Corporation corporations having interlocking directors shall
NOT be invalidated on that ground alone. [Sec.
General Rule: A contract of the corporation 32]
with (1) one or more of its directors, trustees,
officers or their spouses and relatives within Exception: If contract is fraudulent or not fair
the fourth civil degree of consanguinity or and reasonable under the circumstances, such
affinity is voidable, at the option of such contract is invalid. [Sec. 32]
corporation. [Sec. 31]
Interlocking, characterized
Exception: Interlocking directors are persons who serve as
Such contract is VALID if all of the following member of the board of directors of two or more
conditions are present: competing corporations or corporations
. The presence of such director or trustee in engaged in practically the same kind of
the board meeting in which the contract business.
was approved was not necessary to
constitute a quorum for such meeting; Interlocking director with nominal and
a. The vote of such director or trustee was not substantial interest
necessary for the approval of the contract; Nominal Interest – His stockholdings are 20%
b. The contract is fair and reasonable under or less of the OCS
the circumstances; and Substantial Interest – His stockholdings
c. In case of corporations vested with public exceed 20% of the OCS
interest: Material contracts are approved
by at least two-thirds (2/3) of the entire If the interest of the interlocking director in one
membership of the board, with at least a of the corporations is substantial, while nominal
majority of the independent directors voting in the other, the contract shall be VALID, if the
to approve the material contract; and following conditions are met, insofar as the
d. In case of an officer: The contract has been latter corporation is concerned:
previously authorized by the BOD. [Sec. 1. The presence of such director or trustee in
31] the board meeting in which the contract
was approved was NOT necessary to
Ratification constitute a quorum for such meeting;
In case of absence of the first three* conditions 2. That the vote of such director or trustee
above, contract may be ratified if: was not necessary for the approval of the
a. Stockholders representing at least 2/3 of contract; and
the outstanding capital stock or at least 2/3 3. That the contract is fair and reasonable
of the members in a meeting called for the under the circumstances.
purpose voted to ratify the contract;
b. There is full disclosure of the adverse Where (a) and (b) are absent, the contract can
interest of the directors or trustees involved be ratified by the vote of the stockholders
is made at such meeting; AND representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members in
a meeting called for the purpose voted to ratify Where by-laws are silent as to creation of
the contract, provided that: executive committee
1. Full disclosure of the adverse interest of the Under Sec. 34 of the RCC, the creation of an
directors/trustees involved is made on such executive committee must be provided for in
meeting; the bylaws of the corporation.
2. The contract is fair and reasonable under
the circumstances. [Sec. 31-32] Unfortunately, the by-laws of the corporation in
this case are silent as to the creation by its
Executive Committee and Other BOD of an executive committee.
Special Committees [Sec. 34] Notwithstanding the silence of the by-laws on
the matter, the SC did not rule that the BOD’s
Creation creation of the executive committee is illegal or
unlawful.
Executive Committee No showing that the "executive
The by-laws may provide for the creation an committee," referred to in Sec. 35 (now
executive committee, composed of not less 34) of the Corporation Code, which is as
than 3 members of the board, to be appointed powerful as the BOD, and in effect acting
by the Board. [Sec. 34] for the board itself, should be
distinguished from other committees
Said committee may act, by majority vote of all which are within the competency of the
its members, on such specific matters within board to create at any time and whose
the competence of the board, as may be actions require ratification and
delegated to it in the by-laws or on a majority confirmation by the board.
vote of the board. [Sec. 34] The BOD has the power to create
positions not provided for in the by-laws
Special Committees since the board is the corporation’s
The board of directors may create special governing body. [Filipinas Port Services
committees of temporary or permanent nature Inc. v. Go, G.R. No. 161886 (2007)]
and to determine the members’ term,
composition, compensation, powers, and Meetings
responsibilities.
Regular or Special
Limitations on Its Power
Kinds of Meetings
The following CANNOT be delegated to the Meetings of directors, trustees, stockholders,
Executive Committee: or members may be regular or special. [Sec.
a. Matters needing stockholder approval 48]
[Sec. 34];
b. Filling up of board vacancies [Sec. 34]; (a) When and Where
c. Amendment, repeal or adoption of new by-
laws [Sec. 34]; When [Sec. 52]
d. Amendment or repeal of any resolution of Regular meetings of directors or trustees
the Board which by its express terms is not shall be held monthly, unless the by-laws
amendable or repealable [Sec. 34]; provide otherwise.
e. Cash dividend distribution [Sec. 34]; and Special meetings of the BOD or trustees
f. Acts which would render the BOD may be held at any time upon the call of the
powerless and free from all responsibilities president or as provided in the by-laws.
imposed on it by law. [Campos]
Where [Sec. 53]
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-laws In the Philippines, teleconferencing and
provide otherwise. videoconferencing of members of BOD of
private corporations is a reality, in light of
(b) Notice Republic Act No. 8792. The Securities and
Exchange Commission issued SEC
Notice of regular or special meetings stating Memorandum Circular No. 15, series of 2001,
the date, time and place of the meeting must on November 30, 2001, providing the
be sent to every director or trustee at least two guidelines to be complied with in relation to
(2) days* prior to the scheduled meeting, such conferences. [Expertravel and Tours, Inc.
unless a longer time is provided by the by-laws. v. CA, G.R. No. 152392 (2005)]
Note: This was previously just one day, under Mandatory Recusal
the old corporation code. A director or trustee who has a potential
interest in any related party transaction must
A director or trustee may waive this recuse from voting on the approval of the
requirement, either expressly or impliedly. related party transaction without prejudice to
[Sec. 52] compliance with the requirements of Section
31 of this Code. [Sec. 52]
(c) Attendance in Meetings
Who Presides
In the old corporation code, directors or
trustees cannot be represented or voted by The chairman, or in his absence, the president
proxies at board meetings. [Sec. 25, CC] shall preside at all meetings of the directors or
trustees as well as of the stockholders or
Allowable Alternative Modes of Attendance members, unless the bylaws provide
Directors or trustees who cannot physically otherwise. [Sec. 53]
attend or vote at board meetings can
participate and vote through: Quorum
(1) Remote communication such as
videoconferencing, teleconferencing; or Quorum to Transact Corporate Business
(2) Other alternative modes of communication General Rule: Majority of the directors or
that allow them reasonable opportunities to trustees. as stated in the articles of
participate. [Sec. 52] incorporation, shall constitute a quorum to
transact corporate business. [Sec. 52]
If a director or trustee intends to participate in
a meeting through remote communication, Exception: Unless the articles of incorporation
he/she shall notify in advance the Presiding or the by-laws provide for a GREATER
Officer and the Corporate Secretary of his/her majority.
intention. The Corporate Secretary shall note
such fact in the Minutes of the meeting. Decisions Reached by Majority of Quorum
General Rule: Every decision reached by at
Corporations may issue their own internal least a majority of the directors or trustees
procedures for the conduct of board meetings constituting a quorum shall be valid as a
through remote communication or other corporate act.
alternative modes of communication to
address administrative, technical and logistical Exception: A vote of a majority of all the
issues. [SEC Memo. Circ. No. 6, s. 2020] members of the board is required in case of
election of officers. [Sec. 52]
Attendance and Voting by Proxy
Directors or trustees cannot attend or vote by
proxy at board meetings. [Sec. 52]
Uncertificated shares or securities are those A transfer made pursuant to the foregoing has
evidenced by electronic or similar records [Sec. the effect of delivery of a security in bearer form
3.14, Securities Regulation Code] or duly indorsed in blank representing the
amount of security or right transferred,
Added provision in Sec. 62 of the Revised including the unrestricted negotiability of that
Corporation Code: security by reason of such delivery.
The Commission may require corporations
whose securities are traded in trading markets Valid as to corporation – when the transfer is
and, which can reasonably demonstrate their recorded in the books of the corporation so as
capability to do so, to issue their securities or to show the names of the parties to the transfer
shares of stocks in uncertificated or scripless and the number of shares transferred [Sec.
form in accordance with the rules of the 43.3, Securities Regulation Code].
Commission.
shares. The absence of delivery is a fatal On the other hand, a person who has
defect which is not cured by mere execution of purchased stock, and who desires to be
a deed of assignment [Rural Bank of Lipa City recognized as a stockholder for the purpose of
v. CA, G.R. No. 124535 (2001)]. voting, must secure such a standing by having
the transfer recorded in the corporate books.
The stock and transfer book is the basis for Until the transfer is registered, the transferee is
ascertaining the persons entitled to the rights not a stockholder, but an outsider.
and subject to the liabilities of a
stockholder. Where a transferee is not yet Issuance
recognized as a stockholder, the corporation is
under no specific legal duty to issue stock (a) Full payment
certificates in the transferee’s name [Ponce v.
Alsons Cement Corp., G.R. NO. 139802 General Rule: No certificate of stock shall be
(2002)]. issued to a subscriber until the full amount of
his subscription together with interest and
Citing Hager v. Bryan (1911): A mandamus expenses (in case of delinquent shares), if any
should not issue to compel the secretary of a is due, has been paid [Sec. 63, RCC].
corporation to make a transfer of the stock on
the books of the company, unless it Exception: Where it was the practice of the
affirmatively appears that he has failed or corporation since its inception to issue
refused so to do, upon the demand either: certificates of stock to its individual
- Of the person in whose name the stock is stockholders for unpaid shares of stock and to
registered, or give full voting power to shares fully paid
[Baltazar v. Lingayen Gulf Electric Power
- Of some person holding a power of
attorney for that purpose from the Company, G.R. No. L-16236 (1965)].
registered owner of the stock.
(b) Payment pro-rata
A transfer of shares is not valid unless recorded
in the books of the corporation. [Sec. 43.4, The entire subscription must be paid first
RCC] before the certificates of stock can be issued.
Partial payments are to be applied pro rata to
The purpose of registration is two-fold: each share of stock subscribed [Nava v Peers
(a)To enable the transferee to exercise all the Mktg. Corp., G.R. No. L-28120 (1976)].
rights of a stockholder, including the right to
vote and to be voted for, and Stock and transfer book
(b) To inform the corporation of any change in
share ownership so that it can ascertain the (a) Contents
persons entitled to the rights and subject to
the liabilities of a stockholder [Batangas Stock corporations must also keep a stock and
Laguna Tayabas Bus Co. v. Bitangas, G.R. transfer book, which shall contain:
No. 137934 (2001)]. a. A record of all stocks in the names of the
stockholders alphabetically arranged
Until challenged in a proper proceeding, a b. The installments paid and unpaid on all
stockholder of record has a right to participate stocks for which subscription has been
in any meeting. made
c. The date of payment of any installment
His vote can be properly counted to determine d. A statement of every alienation, sale or
whether a stockholders’ resolution was transfer of stock made, the date thereof, by
approved, despite the claim of the alleged and to whom made
transferee. e. Such other entries as the by-laws may
prescribe. [Sec. 73, RCC]
Note: The stock and transfer book shall be kept Lost or destroyed certificates
in the principal office of the corporation or in the
office of its stock transfer agent and shall be Procedure for re-issuance in case of loss,
open for inspection by any director or stolen or destroyed certificates:
stockholder of the corporation at reasonable 1) Filing of an affidavit of loss with the
hours on business days. [Sec. 73, RCC] corporation by the registered owner.
2) Verifying the affidavit and other information
(b) Who may make valid entries and evidence with the books of the
corporation by the corporation.
The obligation and duty to make proper entries 3) Publishing by the corporation of a notice of
in stock and transfer books falls on the loss in a newspaper of general circulation
corporate secretary. published —
4) In the place, where the corporation has its
If the corporate secretary refuses to comply, principal office;
the stockholder may rightfully bring suit to 5) Once a week for 3 consecutive weeks;
compel performance. [Torres, Jr. v. CA, G.R. 6) At the expense of the owner of the
No. 120138, Sept. 5, 1997]. certificate of stock.
7) Cancellation of the certificate in the books
(c) Stock transfer agent of the corporation and issuance of new
certificates, after the expiration of 1 year
A stock transfer agent is one engaged from the date of the last publication and
principally in the business of registering there is no contest. The right to make such
transfers of stocks in behalf of a stock contest shall be barred after the expiration
corporation. of the one-year period.
8) Issuance by the corporation of new
The stock transfer agent shall be allowed to certificates before 1 year period if the
operate in the Philippines upon securing a registered owner files a bond and there is
license from the Commission. Provided, That no pending contest regarding the
— ownership of said certificates. [Sec. 72,
(1) A stock corporation is not precluded from RCC]
performing or making transfers of its own
stocks Note: Except in cases of fraud, bad faith, or
negligence on the part of the corporation and
In which case, all the rules and regulations its officers, no action may be brought against
imposed on stock transfer agents shall be the corporation which shall have issued
applicable certificates of stock in lieu of those lost, stolen
or destroyed pursuant to the above procedure.
Except the payment of a license fee herein
provided Situs of the shares of stock
(2) The Commission may require stock
corporations which transfer and/or trade General rule: The situs of shares of stock is
stocks in secondary markets to have an the country where the corporation is domiciled
independent transfer agent. [Sec. 73, RCC] [Wells Fargo Bank v. CIR, G.R. No. L-46720,
June 28, 1940].
The residence of the corporation is the place Issued for consideration other than actual cash
where the principal office of the corporation is (i.e., property or services), the fair valuation of
located as stated in its AOI, even though the which is less than its par or issued value
corporation has closed its office therein and Issue stock dividend when there are no
relocated to another place [Hyatt Elevators and sufficient retained earnings or surplus profit to
Escalators Corp. v. Goldstar Elevator Phils., justify it.
Inc., G.R. No. 161026, 2005]
Note: Subsequent increase in the value of the
Exception: In property taxation – the situs of property used in paying the stock does not do
intangible property, such as shares of stocks, away with the watered stocks, nor cure the
is at the domicile or residence of the owner. defect in issuance. The existence of watered
stocks is determined at the time of issuance of
Exception to the Exception: the stock.
1. When a nonresident alien has shares of
stock in a domestic corporation, then the situs Rationale Behind Prohibition
will be in the Philippines; and Stock watering is prohibited because:
2. For purposes of the estate tax, the gross • Corporation is deprived of needed capital
estate of a resident decedent, whether citizen and the opportunity to market its securities
or alien, or a citizen decedent, whether resident to its own advantage
or nonresident, includes his intangible personal
• Existing and future stockholders who are
property wherever situated [De Leon]. also injured by the dilution of their
proportionate interests in the corporation
Watered stocks • Present and future creditors who are injured
as the corporation is deprived of the assets
Definition
or capital and reduces the value of the
corporate assets, which stand as a
Watered stock are shares issued as fully paid substitute for the stockholders’ personal
when in truth — liability to them
(1) No consideration is paid in any form; or
(2) The consideration received is known to be • Persons who deal with it or purchase its
securities who are deceived because stock
less than the par value or issued value of
watering is invariable accompanied with
the shares [Sec. 64, RCC].
misleading corporate accounts and financial
statements
Watered stocks can either be par or no par
value shares.
Liability of directors for watered
stocks
A watered stock is a stock issued in exchange
for:
A director or officer of a corporation who:
(a) A consideration less than its par value or
1) consents to the issuance of stocks for a
issued price; and
consideration less than its par or issued
(b) A non-cash consideration valued in excess
value;
of its fair value. [Herbosa, 2019]
2) consents to the issuance of stocks for a
consideration other than cash, valued in
Scope
excess of its fair value
Watered stocks include the following:
3) having knowledge of the insufficient
Issued without consideration (bonus share)
consideration, does not file a written
Issued as fully paid when the corporation has
objection with the corporate secretary
received less sum of money than its par or
issued value (discounted share)
shall be solidarily liable with the stockholder • Some of the earlier decisions put the right of
concerned to the corporation and its creditors recovery in such a case upon the so-called
for the difference in value [Sec. 64, RCC]. “trust fund doctrine.”
• The creditors’ right of action to compel the
Trust fund doctrine for liability for making good of the representation as to the
watered stocks corporation’s capital is based on fraud, and
the trust fund doctrine is only another way of
Trust Fund Doctrine expressing the same underlying idea [DE
It is established doctrine that subscription to LEON].
the capital of a corporation constitute a fund to
which creditors have a right to look for Despite the view of foreign authors that the
satisfaction of their claims, and that the fraud theory is the prevailing view, it would
assignee in insolvency can maintain an action seem that in the Philippine jurisdiction, the trust
upon any unpaid stock subscription in order to fund doctrine on watered stock prevails.
realize assets for the payment of its debts
[Philippine Trust Corp. v. Rivera, G.R. No. L-
Payment of balance of
19761 (1923), citing Velasco v. Poizat, (1918)]
subscription [Sec. 66]
A corporation has no power to release an
original subscriber to its capital stock from the Time when the balance of the subscription
obligation of paying for his shares, without a should be paid:
valuable consideration for such release 1) On the date specified in the subscription
contract, without need of demand or call.
• As against creditors. a reduction of the 2) If no date of payment has been specified,
capital stock can take place only in the on the date specified on the call made by
manner and under the conditions prescribed the BOD
by the statute or the charter or the articles of
3) If no date of payment has been specified
incorporation.
on the call made, within 30 days from the
• Moreover, strict compliance with the date of call; and
statutory regulations is necessary 4) When insolvency supervenes upon a
[Philippine Trust Corp. v. Rivera, G.R. No. corporation and the court assumes
L-19761 (1923)]. jurisdiction to wind it up, all unpaid
subscriptions become payable on demand,
Trust Fund Doctrine for Liability for and are at once recoverable, without
Watered Stocks necessity of any prior call.
Where the corporation issues watered stock
and thereby assumes an ostensible Call by board of directors
capitalization in excess of its real assets, the
transaction necessarily involves — The BOD of any stock corporation may, at any
• The misleading of subsequent creditors; time:
and (1) Declare due and payable to the corporation
• A constructive fraud upon creditors, whether unpaid subscriptions to the capital stock;
done with that purpose actually in mind or and
not (2) Collect the same or such percentage
thereof, in either case with accrued interest,
Hence, it is held that recovery may be had by if any, as it may deem necessary.
a creditor in such case, even though the
corporation itself has no cause of action When Payment Should be Made
against the stockholders. Payment shall be made:
(a) On the date specified in the contract of
subscription; or
(b) On the date stated in the call. action for the call [Lingayen Gulf Electric Power
Co., Inc. v. Baltazar, G.R. No. L-4824 (1965)].
Failure to pay on such date shall —
• Render the entire balance due and payable; The right to notice of call, however, may be
and waived by the subscriber [De Leon].
• Make the stockholder liable for interest at
the legal rate on such balance, unless a Sale of delinquent shares [Sec. 67]
different rate of interest is provided for in the
by-laws. Delinquent Shares - shares in which the
corresponding subscription or balance remains
If within 30 days from said date no payment is unpaid after a grace period of 30 days from —
made, all stocks covered by said subscription (a) The date specified in the contract of
shall — subscription; or
(1) Become delinquent; and (b) The date stated in the call made by the
(2) Subject to sale under Sec. 67 of RCC, BOD.
unless the BOD orders otherwise.
All stocks covered by said subscription shall
Requisites for a valid call thereupon become delinquent and shall be
SEC opined on July 21, 1976 that the following subject to delinquency sale, unless the BOD
are the requisites for a valid call: orders otherwise [Sec. 67].
1. It must be made in the manner prescribed by
law; Effect of delinquency [Sec. 70]
2. It must be made by the BOD; and
3. It must operate uniformly upon all the Effects of Delinquency
shareholders. Generally, delinquency suspends the rights of
a subscriber, except the right to receive
There are two instances when call is not dividends
necessary to make the subscriber liable for (1) No delinquent stock shall be voted for
payment of the unpaid subscription: (2) No delinquent stock shall be entitled to vote
When, under the terms of the subscription or to representation at any stockholders’
contract, subscription is payable, not upon meeting.
call, but immediately, or on a specified day, (3) Delinquent stock shall be subject to
or when it is payable in installments at delinquency sale.
specified times; [Sec. 66, RCC] and
If the corporation becomes insolvent, which A subscriber acquires all the rights of a
makes the liability on the unpaid shareholder at the point of subscription. His
subscription due and demandable, political and economic rights are not impaired
regardless of any stipulation to the contrary by the fact that he has unpaid subscription.
in the subscription agreement [Villanueva]. • Delinquency suspends the rights of a
subscriber, except the right to receive
Notice requirement dividends.
• The dividends corresponding to such
Where call is necessary, notice must be given shares, if any, shall be applied against the
to the stockholder concerned. A call without unpaid amount. [Herbosa, 2019].
notice to the subscriber is practically no
call at all. Note: The holder thereof shall NOT be entitled
to any of the rights of a stockholder except the
The notice is regarded as a condition right to dividends. But the dividends it will
precedent to the right of recovery. It must, receive will be subject to Sec. 42, RCC, that is
therefore, be alleged and proved to maintain an —
• Cash dividends shall first be applied to the the stockholder may question the sale as
unpaid balance on the subscription plus provided under Sec. 67, RCC.
costs and expenses; and
• Stock dividends shall be withheld until the Public Auction
unpaid subscription is fully paid. • The highest bidder is one who is willing to
pay the balance of the subscription for the
Call by resolution of the board of least number of shares.
directors [Sec. 67] - The stock so purchased shall be
transferred to such purchases in the
The BOD may, by resolution, order the sale of books of the corporation and a certificate
delinquent stock and shall specifically state — of such stock shall be issued in his favor.
(1) The amount due on each subscription plus - The remaining shares, if any, shall be
all accrued interest, and credited in favor of the delinquent
(2) The date, time and place of the sale, which stockholder who shall likewise be
shall not be less than 30 days nor more than entitled to the issuance of a certificate of
60 days from the date the stocks became stock covering such shares.
delinquent, which is 30 days after the date • If there are no bidders, the corporation must
specified in the contract of subscription or bid for the whole number of shares
on the date stated in the call. regardless of how much the shareholders
has paid. Such stocks will pertain to the
Notice of sale [Sec. 67] corporation as fully paid treasury stocks.
If the BOD resolves to proceed with the sale: Payment by Delinquent Stockholder
Notice of sale and a copy of the resolution shall The delinquent stockholder may stop the
be sent to every delinquent stockholder either auction by paying to the corporation on or
personally or by registered mail. before the date specified for the sale the
Notice of sale shall furthermore be published balance due on his subscription, plus accrued
once a week for 2 consecutive weeks in a interest, costs of advertisement and expenses
newspaper of general circulation in the of the sale.
province or city where the principal office of the
corporation is located. Otherwise, the public auction shall proceed
and the delinquent shares shall be sold to the
Auction sale bidder that will pay the full amount of the
balance of subscription with accrued interest,
Procedure for delinquency sale [Sec. 67, costs and expenses of the sale, for the smallest
RCC] number of shares or fraction of a share.
1. Call for payment made by the BOD.
2. Notice of call served on each stockholder. Irregularities in the delinquency sale [Sec.
3. Notice of delinquency issued by the BOD 68]
upon failure of the stockholder to pay within Action to recover delinquent stock must be on
30 days from date specified. the ground of irregularity or defect in:
4. Service of notice of delinquency on the o the notice of sale or
non-paying subscriber, PLUS publication in o in the sale itself of delinquent stock
a newspaper of general circulation in the
province or city where the principal office of Unless, party seeking to recover first pays or
the corporation is located, once a week for tenders to the party holding the stock the sum
2 consecutive weeks. for which the same was sold, with interest from
the date of sale at the legal rate.
Note: Requirements on notice and publication
are mandatory. Lacking such requirements,
Sale of partially paid shares The SEC has opined that the entire
subscription, although not yet fully paid, may
No shares of stock against which the be transferred to a single transferee, who as a
corporation holds any unpaid claim shall be result of the transfer must assume the unpaid
transferable in the books of the corporation. balance.
[Sec. 62]
It is necessary, however, to secure the
A corporation may refuse to acknowledge and consent of the corporation, since the transfer
register a sale or assignment of shares which of subscription rights and obligations
are not fully paid, and may continue to hold the contemplates a novation of contract which
original subscriber liable on the payment of the under Article 1293 of the Civil Code cannot be
subscription. made without the consent if the creditor
• However, the above principle in Section 62 [Villanueva].
cannot be utilized by the corporation to
refuse to recognize ownership over pledged Sale of fully paid shares
shares purchased at public auction.
• The term “unpaid claims” refers to “any Shares of stock so issued are personal
unpaid claims arising from unpaid property and may be transferred by the delivery
subscription, and not to any indebtedness of the stock certificate or certificates, indorsed
which a subscriber or stockholder may owe by —
the corporation arising from any other (1) The owner; or
transactions. [China Banking Corp. v. CA, (2) The owner’s attorney-in-fact; or
G.R. No. 117604 (1997)] (3) Other person legally authorized to make
the transfer. [Sec. 62]
Sale of a portion of shares not fully
paid Requisites of a valid transfer
Same as requirements for valid transfer of
The SEC has opined on several occasions that stocks.
a stockholder who has not paid the full amount
of his subscription cannot transfer part of his No transfer shall be valid, except as between
subscription in view of the indivisible nature of the parties, until the transfer is recorded in the
a subscription contract. books of the corporation showing:
i. The names of the parties to the transaction
assignments or dispositions of shares of stock • A record of all stocks in the names of the
vis-à-vis pledges, mortgages, attachment or stockholders alphabetically arranged;
levy thereof.
• The installments paid and unpaid on all
• To be valid and binding on third parties, the stocks for which subscription has been
voluntary sale, assignment or disposition of made, and the date of payment of any
shares requires the essential element of installment;
registration in the stock and transfer book; • A statement of every alienation, sale or
• Otherwise the sale, assignment or transfer of stock made, the date thereof,
disposition is considered void as to third by and to whom made; and
parties, even when they have actual notice.
• Such other entries as the by-laws may
prescribe
In contrast, when it comes to pledge,
mortgage, encumbrance, attachment or levy of NOTE: The duty to keep these books is
shares, registration thereof in the stock and imperative and mandatory. The stockholder
transfer book is not essential either for validity can likewise inspect the financial statements of
or as a species of notifying third parties. the corporation [Sec. 73].
[Villanueva].
Financial Statements [Sec. 74]
Corporate books and records A corporation shall furnish a stockholder or
member its most recent financial statement
Records to be kept at principal office within 10 days from receipt of written request.
Every corporation shall keep and carefully At a regular meeting, the Board shall present a
preserve at its principal office all information financial report of the operations of the
including but not limited to: corporation for the preceding year, which shall
■ Articles of incorporation and by-laws and all include financial statements duly signed and
their amendments; certified in accordance with the Code.
■ Current ownership structure and voting
rights of corporation Exception:
■ Names and addresses of all members of However, if the total assets or total liabilities of
BOD/trustees and the executive officers the corporation is less than Six hundred
thousand pesos (P600,000.00), or such other
■ Record of all business transactions
amount as may be determined appropriate by
■ Record of resolutions of BOD/Trustees and the Department of Finance, the financial
of stockholders/members statements may be certified under oath by the
■ Copies of latest reportorial requirements treasurer and the president.
submitted to the Commission; and
■ Minutes of all meetings of Right to inspect corporate records
stockholders/members or of BOD/trustees.
Requirements for the exercise of the right
Stock Corporations [Sec. 73] of inspection [Sec. 74]
Stock corporations must also keep: It must be exercised at reasonable hours on
Books that record all business transactions of business days
the corporation which shall include contract, The inspecting or reproducing party shall
memoranda, journals, ledgers, etc; remain bound by confidentiality rules under
Minute book for meetings of the prevailing laws, such as the rules on trade
stockholders/members; secrets or processes under the Intellectual
Minute book for meetings of the board/trustees; Property Code, Data Privacy Act, and the
Stock and transfer book, which shall contain: Securities Regulation Code.
Directors of a corporation have the unqualified Officer or agent of corporation who refused to
right to inspect the books and records of the allow the inspection and/or reproduction of
corporation at all reasonable times. records shall be liable to the requesting officer
• The right of inspection is not to be for damages and shall be punishable under
denied on the ground that the director or Section 161
shareholder is on unfriendly terms with If refusal is made pursuant to a resolution or
the officers of the corporation whose order of the BOD/trustees, liability for such
records are sought to be inspected. action shall be imposed upon the
directors/trustees who voted on such refusal
• A director or stockholder can make
copies, abstracts, and memoranda of
documents, books, and papers as an Defenses for refusal
incident to the right of inspection, but • Person demanding to examine and
cannot, without an order of a court, be copy excerpts has improperly used any
permitted to take books from the office information secured through any prior
of the corporation. examination of the records of such corp
of any other corp
• However, a director or stockholder does
not have any absolute right to secure • Person demanding to inspect was not
certified copies of the minutes of the acting in good faith or for a legitimate
corporation until these minutes have purpose
been written up and approved by the • Person demanding to inspect is a
directors [Veraguth v. Isabela Sugar, competitor, director, officer, controlling
G.R. No. L-37064 (1932)]. stockholder, or otherwise represents
interests of a competitor [Sec. 73]
A stockholder of a sequestered company has
the right to inspect and/or examine the records Remedies when inspection is refused
of the corporation pursuant to Sec. 74 of the Mandamus
Corporation Code (now Sec. 73, RCC) [Africa Injunction
v. PCGG, G.R. No. 83831 (1992)]. Action for damages
File an action under Sec. 161 to impose a penal
Effect of refusal to inspect corporate offense by fine and/or imprisonment.
records
Under the Rules of Court, the writ of
Refusal to allow inspection is a criminal mandamus should be granted only if the court
offense. Such refusal, when done in violation of is satisfied that justice so requires [Sec. 8, Rule
Sec. 74(4) of the Corporation Code (now Sec. 65].
73, RCC), properly falls within the purview of
Sec. 144 of the same code and thus may be 11. Dissolution And
penalized as an offense [Yujuico and Sumbilla
v. Quiambao and Pilapil, G.R. No. 180416
Liquidation
(2014)]. (please note that the Code’s
provisions have been changed under the RCC) Dissolution of a corporation is the
extinguishment of its franchise and the
Because the obligations provided for in Sec. termination of its corporate existence or
73, RCC fall on the corporation, violation of the business purpose.
same is done by the corporation; thus, criminal
action based on such violation can only be However, for the purpose only of winding up
maintained against corporate officers or other its affairs and liquidating its assets, its
such persons acting on behalf of the corporate existence continues for a period of 3
corporations. years from such dissolution [Sec. 139].
1. Voluntary surrender 1. Expiration of the Note: Where the veil of corporate fiction is
of its charter by the shortened pierced, it does not operate as a cause for the
vote of the BOD/T and corporate term dissolution of the corporation.
the [Sec 36]
stockholders/members Voluntary Dissolution
where no creditors are
affected [Sec 134] (a) Where no creditors are affected
[Sec. 134]
2. By the judgment of 2. By legislative This type of dissolution is initiated by the
the SEC after hearing enactment corporation. It does not prejudice, or is not
of petition for consented by creditors.
voluntary dissolution,
where Procedure
creditors are affected 1. Notice of the meeting should be given to
the stockholders or members by personal
3. Amending the AOI 3. Failure to delivery, registered mail, or by any means
to shorten its term [Sec organize and authorized under its by- laws at least 20
136] commence days prior to the meeting.
business 2. The notice of meeting should also be
within 2 years from published once prior to the meeting
incorporation [Sec a. Notice shall contain the time,
21]
place and object of the meeting
4. In case of a 4. Cessation of b. in a newspaper published in the
corporation sole, by business for 5 years place where the principal office
submitting [Sec 21] of said corporation is located,
to the SEC a verified or if no newspaper is published
declaration of the in such place, then in a
newspaper of general
circulation in the Philippines.
An existing corporation may opt out of the rule NON-USE OF CORPORATE CHARTER [Sec
on perpetual existence by notifying the 21; Sec 138(a)]
Commission, provided it was approved by If a corporation fails to formally organize and
shareholders, and without prejudice to the commence the transaction of its business or
appraisal right of dissenting stockholders. construction of its works within 5 years, its
[Herbosa, 2019] certificate of incorporation shall be deemed
revoked, its corporate powers shall cease and
When such term has expired, a petition for the corporation shall be deemed dissolved
revival of corporate existence may be filed. [Sec. 21].
[Divina]
Dissolution in this case is automatic [Campos].
LEGISLATIVE DISSOLUTION Contrary view: Since there is a defense
The inherent power of Congress to make laws available to the corporation, that is, if its
carries with it the power to amend or repeal failure to organize and commence its
them. Involuntary corporate dissolution may be business is due to causes beyond the
effected through the amendment or repeal of control of the corporation as may be
the Revised Corporation Code [implied from determined by the SEC, therefore, the
Sec. 184, DE LEON]. dissolution is not automatic.
The limitations on the power to dissolve Formal organization includes not only the
corporations by legislative enactment are as adoption of the by-laws but also the
follows: establishment of the body which will administer
1. Under the Constitution, the amendment, the affairs of the corporation and exercise its
alteration, or repeal of the corporate powers
party. In addition, the corporate assets after The RCC provides that any distributable asset
payment of its liabilities shall be forfeited in to an unknown creditor or corporator shall be
favor of the government upon petition of the escheated in favor of the national government.
Commission with the appropriate court. This was previously in favor of the LGU where
such assets are located, under the old Code.
Grounds under other existing laws
The grounds enumerated above are not Difference between Liquidation and
exclusive. There are other grounds to dissolve Rehabilitation
the corporation upon order of the SEC which Liquidation Rehabilitation
may be found in other laws. For example, the
SEC may also suspend or revoke, after proper The winding up of a Contemplates a
notice and hearing, the certificate of corporation so that continuance of
registration of private corporations under any of assets are
corporate life and
the following grounds: distributed to those activities in an effort
Fraud in procuring its certificate of entitled to receive to restore and
incorporation; them. It is the reinstate the
Serious misrepresentation as to what the process of reducing corporation to its
corporation can do or is doing to the great assets to cash,former position of
prejudice of or damage to the general successful operation
discharging liabilities
public; and dividing surplus and solvency. Both
Refusal to comply or defiance of any lawful or loss cannot be
order of the SEC restraining commission of undertaken at the
acts which amount to a grave violation of same time
its franchise; [Phil. Veterans Bank v. Employees Union, G.R.
Failure to file bylaws No. 105364 (2001)].
Failure to file required reports in
appropriate forms as determined by the Winding up of corporate affairs
SEC within the prescribed period (PD No. Under Sec. 139 of the RCC, a corporation
902-A, Sec 6(i)). loses its juridical personality and can no longer
enter into transactions that have the effect of
Methods of Liquidation continuing its business.
Liquidation is the process by which all the The only exception to this is the “winding-up”
assets of the corporation are converted into period which takes place for 3 years after the
liquid assets (cash) in order to facilitate the loss of the corporation’s juridical personality.
payment of obligations to creditors, and the • It continues to be a body corporate for
remaining balance if any is to be distributed to purposes of prosecuting and defending
the stockholders. suits by and against it and to enable it to
• Among corporate creditors, the rules on settle and close its affairs, culminating in
concurrence and preference of credits the disposition and distribution of its
apply. remaining assets.
• It is a proceeding in rem. • It may, during the 3-year term, appoint a
trustee or a receiver who may act beyond
The end of corporate relations does not result that period.
in the immediate termination of corporate
existence. A corporation shall have the A corporation in the process of liquidation has
extended term of 3 years to wind up its no legal authority to engage in any new
corporate affairs and liquidate its assets. business, even if the same is in accordance
[Herbosa] with the primary purpose stated in its article of
incorporation.
liquidate, it is only allowed to continue for trustee//s in liquidation. [Clemente et.al. v. CA,
the purpose of final closure of its business G.R. No. 82407 (1995), citing Gelano v. CA,
and no other purposes. 103 SCRA 90].
In fact, within that period, the corporation is
enjoined from “continuing the business for By Management Committee or
which it was established.” [Alhambra Cigar Rehabilitation Receiver
and Cigarette Mfg. v. SEC, G.R. No. L-
23606 (1968)] In SEC’s judgment dissolving the corporation
and directing disposition of its assets as justice
Conveyance To A Trustee Within A requires, it may appoint a receiver to collect
3-Year Period such assets and pay the debts of the
corporation [Sec. 135].
Liquidation may also be placed in the hands of
a trustee or assignee. All the corporate assets In the exercise of its jurisdiction, the
are conveyed to such trustee or assignee by a Commission possesses the following powers:
resolution of stockholders at any time during (1) To appoint one or more receivers of the
the 3-year period. [Sec. 139] property, real and personal, which is the
subject of the action pending before the
In this method, the 3-year limitation DOES Commission in such other cases whenever
NOT apply, provided that the designation of the necessary in order to preserve the rights of
trustees is made within the period. the parties-litigants and/or protect the
interest of the investing public and creditors;
General rule: There is no time limit within (2) To create and appoint a management
which the trustee must finish the liquidation, committee, board, or body upon petition or
and he may sue and be sued as such even motu propio to undertake the management
beyond the 3-year period. of corporations, partnerships or other
associations not supervised or regulated by
Exception: The trusteeship is limited in its other government agencies in appropriate
duration by the deed of trust. cases. [PD 902-A, as amended by PD 1799,
Sec. 6]
Trustees to whom the corporate assets have
been conveyed pursuant to liquidation may sue While the SEC has the authority to dissolve a
and be sued as such in all matters connected corporation, it does not have the authority to
with the liquidation [National Abaca v. Pore, settle disputes arising from its liquidation. A
G.R. No. L-16779 (1961)]. commercial court is in the best position to
convene all stakeholders, including creditors,
The trustee of a dissolved corporation may to ascertain their claims and determine their
commence a suit which can proceed to final preferences [Consuelo Metals Corporation v.
judgment even beyond the 3-year period of Planters Development Bank G.R. No. 152580
liquidation. [Reburiano v. CA, G.R. No. 102965 (2008)].
(1999)].
WHO IS A REHABILITATION RECEIVER
Unless the trusteeship is limited in its duration • A rehabilitation receiver is a natural or
by the deed of trust, there is no time limit within juridical person appointed by the court
which the trustee must finish liquidation [Board pursuant to RA 10142 or the Financial
of Liquidators v Kalaw, G.R. No. L-18805 Rehabilitation and Insolvency Act (FRIA) of
(1967)]. 2010, whenever necessary in order to
preserve the rights of the parties-litigants
Any corporate creditor, shareholder, member and/or protect the interest of the investing
or other person-in-interest may petition the public and creditors.
courts for the appointment of a different
or underlying purpose. [People v. Menil, 340 Note: Reasons for Dissolution under Sec. 139
SCRA 125 (2000)] Charter expires pursuant to its AOI,
Charter is annulled by forfeiture, or
Treatment of Profits Corporate existence is terminated in any
other manner [Sec. 139, RCC]
Any profit which a non-stock corporation may
obtain incidental to its operations shall, Rules of Distribution of Assets Upon
whenever necessary or proper, be used for Dissolution
the furtherance of the purpose or purposes The assets of a nonstock corporation
for which the corporation was organized, undergoing the process of dissolution for
subject to the provisions of this Title. [Sec. 86, reasons other than those set forth in Section
RCC] 139, shall be applied and distributed as follows:
(a) All liabilities and obligations of the
A non-stock corporation holds its funds in trust corporation shall be paid, satisfied and
for the carrying out of the objectives and discharged, or adequate provision shall be
purposes expressed in its AOI. Thus, if it were made therefor;
to be converted to a stock corporation, it must (b) For the assets of the corporation –
be dissolved first, otherwise, such Type of Asset How Distributed
transformation would be tantamount to an
unauthorized distribution of its assets or Assets held by the Returned, transferred
income to its members. [Villanueva] corporation upon a or conveyed in
condition requiring accordance with such
Earning of Profits Merely Incidental return, transfer or requirements;
conveyance, and which
It is not inconsistent with the nature of a
condition occurs by
nonstock corporation to incidentally earn profits reason of the dissolution
in pursuing its eleemosynary purpose. [CIR v.
University of Visayas, 1 SCRA 669 (1961)] Assets received and held Transferred or
by the corporation conveyed to one or
The incurring of profit or losses does not subject to limitations more corporations,
determine whether an activity is for profit or permitting their use only societies or
for charitable, religious, organizations:
non-profit, what the courts will consider is:
benevolent, educational (1) Engaged in
1. Whether dividends have been declared; or or similar purposes, but activities in the
2. Whether its profit was ever used for NOT held upon a Philippines
personal or individual gain, and not for the condition requiring substantially
purpose of carrying out the objectives of return, transfer or similar to those of
the enterprise. [Manila Sanitarium and conveyance by reason of the dissolving
Hospital v. Gabuco, 7 SCRA 14 (1963)] the dissolution corporation
(2) According to a
Plan and distribution of assets upon plan of distribution
adopted pursuant
dissolution
to this Chapter;
Applicability
The subsequent rules of distribution of assets
are applicable only when the nonstock
corporation undergoing dissolution was
dissolved for reasons other than those set
forth in Section 139. [Sec. 93, RCC]
Distribution of profits
Voting by proxy
Stock Non-stock
Election of Officers
[Sec. 97].
Stock Non-stock
For the use, purpose, exclusive benefit articles. [Iglesia Evangelica Metodista En
and on behalf of the religious Las Filipinas (Corporation Sole) Inc., et al
denomination, sect, or church. v. Bishop Nathanael Lazaro, et al, G.R. No.
This includes hospitals, schools, 184088 (2010)]
colleges, orphan asylums, parsonages,
and cemeteries thereof. [Sec. 110, Filling of Vacancies
RCC] The successors in office of any chief
archbishop, bishop, priest, minister, rabbi, or
Power to Amend AOI presiding elder in a corporation sole:
Note that Sec. 107 allows the application to (1) Shall become the corporation sole on their
religious corporations of the general provisions accession to office; and
governing non-stock corporations, insofar as (2) Shall be permitted to transact business as
applicable. such upon filing a copy of their commission,
certificate of election, or letters of
For non-stock corporations, the power to appointment, duly certified by any notary
amend its Articles of Incorporation lies in its public with the Commission. [Sec. 112,
members. The code requires two-thirds of RCC]
their votes for the approval of such an
amendment. During any vacancy in the office, all the powers
and authority of the corporation sole during
So how will this requirement apply to a such vacancy shall be exercised by the
corporation sole that has technically but one person or persons authorized by the rules,
member (the head of the religious regulations or discipline of the religious
organization) who holds in his hands its broad denomination, sect, or church represented by
corporate powers over the properties, rights, the corporation sole to:
and interests of his religious organization? i. Administer the temporalities and
• Although a non-stock corporation has a ii. Manage the affairs, estate, and
personality that is distinct from those of its properties of the corporation sole. [Sec.
members who established it, its AOI cannot 112, RCC]
be amended solely through the action of its
BOT. The amendment needs the Acquisition of Property
concurrence of at least 2/3 of its A corporation sole may:
membership. (1) Purchase and hold real estate and
• If such approval mechanism is made to personal property for its church, charitable,
operate in a corporation sole, its one benevolent, or educational purposes; and
member in whom all the powers of the (2) Receive bequests or gifts for such
corporation technically belongs, needs purposes. [Sec. 111, RCC]
to get the concurrence of 2/3 of its
membership. The one member is but a Alienation of Property
trustee of its membership. A corporation sole may sell or mortgage real
• There is no point to dissolving the property held by it by:
corporation sole of one member to enable (1) Obtaining an order for that purpose from
the corporation aggregate to emerge from the Regional Trial Court of the province
it. The one member, with the concurrence where the property is situated
of two-thirds of the membership of the (2) Adducing proof that:
organization for whom he acts as trustee, The notice of the application for leave
can self-will the amendment. He can, with to sell or mortgage has been made
membership concurrence, increase the through publication or as directed by
technical number of the members of the the Court; and
corporation from “sole” or one to the
greater number authorized by its amended
One Person Corporation (OPC) – A The ff. may NOT incorporate as OPCs:
corporation with a single stockholder. [Sec. a. Banks and quasi-banks
116, RCC] b. Pre-need, trust, insurance, public and
publicly-listed companies; and
Who May Form OPCs c. Non-chartered GOCCs. [Sec. 116, RCC]
Only the ff. may form OPCs:
(1) A natural person; Capital stock requirement
(2) A trust; or
(3) An estate. A One Person Corporation shall not be
required to have a minimum authorized
Note: A natural person who is licensed to capital stock, except as otherwise provided by
exercise a profession may not organize as a special law. [Sec. 117, RCC]
OPC for the purpose of exercising such
profession, except as otherwise provided Articles of incorporation and by-
under special laws. [Sec. 116, RCC] laws
[China Banking v. Dyne-Sem, G.R. No. 149237 single stockholder, the nominee or
(2006)]. alternate nominee shall:
a. Transfer the shares to the duly
Conversion of corporation to one designated legal heir or estate; and
person corporations and vice-versa b. Notify the Commission of the
transfer.
Conversion from an Ordinary Corporation 2. Within sixty (60) days from the transfer of
to a OPC the shares, the legal heirs shall notify the
When a single stockholder acquires ALL the Commission of their decision to either:
stocks of an ordinary stock corporation, the a. Wind up and dissolve the One
latter may apply for conversion into a One Person Corporation; or
Person Corporation, subject to the submission b. Convert it into an ordinary stock
of such documents as the Commission may corporation.
require.
The ordinary stock corporation converted from
If the application for conversion is approved: a One Person Corporation shall succeed the
(1) The Commission shall issue certificate of latter and be legally responsible for all the
filing of amended articles of incorporation latter’s outstanding liabilities as of the date of
reflecting the conversion conversion. [Sec. 132, RCC]
(2) The OPC converted from an ordinary stock
corporation shall succeed the latter, and be Foreign corporations
legally responsible for all the latter’s
outstanding liabilities as of the date of Foreign Corporation — Those formed,
conversion. [Sec. 131, RCC] organized, or existing under any laws other
than those of the Philippines and whose laws
Conversion from a OPC to an Ordinary allow Filipino citizens and corporations to do
Stock Corporation business in its own country or state [Sec. 140].
A One Person Corporation may be converted
into an ordinary stock corporation after: Bases of authority over foreign
(1) Due notice to the Commission of such fact corporations
and of the circumstances leading to the
conversion; and (a) Consent
Such notice shall be filed with the
Commission within sixty (60) days from As a rule, a foreign corporation can have no
the occurrence of the circumstances legal existence or status beyond the bounds of
leading to the conversion into an the State or sovereignty by which it is created
ordinary stock corporation or incorporated and organized.
(2) Compliance with all other requirements for It exists only in contemplation of law and by
stock corporations under this Code and force of the law
applicable rules.
Where that law ceases to operate, the
If all requirements have been complied with, corporation can have no existence.
the Commission shall issue an amended
certificate of incorporation reflecting the However, this principle does not prevent a
conversion. [Sec. 132, RCC] corporation from acting in another State or
country with the latter’s express or implied
In case of death of the single stockholder: consent.
1. Within seven (7) days from receipt of either
an affidavit of heirship or self- adjudication
executed by a sole heir, or any other legal
document declaring the legal heirs of the
license, subject to the provisions of this Code the Commission to determine whether
and other special laws [Sec 141, RCC]. such corporation is entitled to a license to
transact business in the Philippines, and to
(a) Requisites for issuance of a determine and assess the fees payable
license [Sec. 142, RCC]
deposit with the Commission for the benefit of long as the licensee is solvent. (Sec 143,
present and future creditors of the licensee in RCC)
the Philippines, securities satisfactory to the
Commission, consisting of: In the event the licensee ceases to do business
bonds or other evidence of indebtedness of in the Philippines, its deposits shall be
the Government of the Philippines, its returned:
political subdivisions and instrumentalities, Upon the licensee’s application therefore;
or of government-owned or - controlled and
corporations and entities, Upon proof to the satisfaction of the
shares of stock or debt securities that are Commission that the licensee has no
registered under Republic Act No. 8799, liability to Philippine residents, including
otherwise known as “The Securities the Government of the Republic of the
Regulation Code”, Philippines. [Sec. 143, RCC]
shares of stock in domestic corporations
listed in the stock exchange, shares of (b) Resident agent
stock in domestic insurance companies
and banks, any financial instrument A resident agent may be either:
determined suitable by the Commission, or an individual residing in the Philippines
any combination thereof with an actual (must be of good moral character and
market value of at least Five hundred sound financial standing) or
thousand (P500,000.00) pesos or such a domestic corporation (must likewise be of
other amount that may be set by the sound financial standing and must show
Commission. [Sec. 143, RCC] proof of good standing) lawfully transacting
business in the Philippines. [Sec. 144,
Within 6 months after each fiscal year of the RCC]
licensee, the Commission shall require:
● the licensee to deposit additional The foreign corporation shall file a written
securities or financial instruments power of attorney:
equivalent in actual market value to 2% of (1) Designating a person (Philippine resident),
the amount by which the licensee’s gross on whom summons and other legal
income for that fiscal year exceeds processes may be served in all actions or
P10,000,000.00. other legal proceedings against such
corporation; and
● the deposit of additional securities or
(2) Consenting that service upon such resident
financial instruments if the actual market
value of the deposited securities or agent shall be admitted and held as valid,
financial instruments has decreased by at as if served upon the duly authorized
least 10% of their actual market value at officers of the foreign corporation at its
the time they were deposited. [Sec. 143, home office. [Sec. 144, RCC]
RCC]
It shall be the duty of the resident agent to
The Commission may: immediately notify the Commission in writing of
at its discretion, release part of the any change in the resident agent’s address.
additional deposit if the gross income of the [Sec. 144, RCC]
licensee has decreased, or if the actual
market value of the total deposit has (c) Amendment of license
increased, by more than ten (10%) percent
of their actual market value at the time they A foreign corporation shall obtain an amended
were deposited. license in the event it changes its corporate
allow the licensee to make substitute name, or desires to pursue other or additional
deposits for those already on deposit as purposes in the Philippines.
Surviving Corporation – one of the the carrying amounts and fair values of the
constituent corporations which remain in assets and liabilities of the respective
existence after the merger companies as of the agreed cut-off date;
The method to be used in the merger or
Plan of Merger or Consolidation consolidation of accounts of the
(Sec. 75) companies;
The provisional or pro-forma values, as
Each of the constituent corporations must draw merged or consolidated, using the
up a Plan of Merger or Consolidation which accounting method; and
shall set forth: Such other information as may be
a. Names of the corporation involved; prescribed by the Commission
b. Terms and mode of carrying it to effect;
c. Statement of changes, if any, in the present Procedure
articles of the surviving corporation to be
formed in the case of merger; and with Approval of Plan of Merger or
respect to the consolidated corporation in Consolidation by BOD and
case of consolidation Stockholders of Constituent
Corporations [Sec. 76]
The Plan must be approved by the board of
directors or trustees of each constituent 1. Approval by majority vote of each of the
corporation by majority vote. board of directors or trustees of the
constituent corporations of the plan of
Articles of Merger or Consolidation merger or consolidation.
(Sec. 77) 2. Approval by the stockholders or
members of each of such corporations at
The Articles of Merger or Consolidation: separate corporate meetings duly called for
a. take the place of the AOI of the that purpose.
consolidated corporation; or i. The affirmative vote of stockholders
b. amend the Articles of Incorporation of the representing at least two-thirds (2/3) of
surviving corporation. the outstanding capital stock of each
corporation in the case of stock
Articles of Merger/Consolidation Requisites: corporations or at least two-thirds (2/3)
● Executed by each of the constituent of the members in the case of non-stock
corporations corporations shall be necessary for the
● Signed by the president/vice-president approval of such plan.
● Certified by the secretary/assistant ii. Holders of non-voting shares are
secretary of each corporation entitled to vote on the plan [Sec. 6, par.
6(6)].
Contents 3. Notice of such meetings shall be given to
The Articles must contain the following: all stockholders or members in the same
Plan of the merger/consolidation manner as giving notice of regular or
As to stock corporations, the number of special meetings under Section 49. The
shares outstanding, or in the case of non- notice shall state the purpose of the
stock corporations, the number of meeting and include a copy or a summary
members; of the plan of merger or consolidation.
As to each corporation, the number of
shares or members voting for or against Any dissenting stockholder in stock
such plan, respectively; corporations may exercise his appraisal right
in accordance with the Code. Provided, that if
after the approval by the stockholders of such
plan, the board of directors decides to abandon
the plan, the appraisal right shall be Merger or consolidation does not become
extinguished. effective by mere agreement of the constituent
corporations. The approval of the SEC is
Amendment to the plan of merger or required [PNB v. Andrada Electric and Engr.
consolidation Co., Inc. (2002)].
An amendment to the Plan may be made by
approval of the majority vote of the respective Notwithstanding Sec. 79 (now, sec. 78), parties
boards of directors or trustees of all the may stipulate a specific effective date of
constituent corporations and ratified by the merger (or consolidation) where no 3rd party
affirmative vote of stockholders representing at will be prejudiced [SEC Opinion No. 09-13, July
least two-thirds (2/3) of the outstanding capital 1, 2009].
stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such Limitations
plan, together with any amendment, shall be
considered as the agreement of merger or Consent of appropriate government
consolidation. agency:
In the case of merger or consolidation of banks
Execution of Articles of Merger or or banking institutions, building and loan
Consolidation associations, trust companies, insurance
companies, public utilities, educational
Articles of Merger or Articles of Consolidation institutions and other special corporations
shall be executed by each of the constituent governed by special laws, the favorable
corporations. recommendation of the appropriate
government agency shall first be obtained
Submission to SEC of the Articles [Sec. 78].
Because there is no legal break by the act Power to Coordinate with Other Agencies
of merging, consolidating, it is logical to SEC is expressly granted the power to give
expect that the contractual rights of reasonable notice to and coordinate with the
employees and the existing collective appropriate regulatory agency prior to any such
bargaining agreement, if any, would have publication involving companies under their
to be absorbed by the special regulatory jurisdiction.
surviving/consolidated corporation
However, SC has made contrary rulings. Administration of oath and issuance
of subpoena of Witnesses and
Rule on automatic assumption/absorption does Documents
not impair the right of an employer to terminate
the employment of the absorbed employees for The SEC, through its designated officer has the
a lawful or authorized cause or the right of such power to:
an employee to resign, retire, or otherwise to administer oaths and affirmations
sever his employment, whether before or after issue subpoena and subpoena duces tecum
the merger, subject to existing contractual take testimony in any inquiry or investigation,
obligations (The Philippine Geothermal Inc. and
Employees Union vs. Unocal Philippines, Inc, to perform other acts necessary to the
September 26, 2016) proceedings or to the investigation. [Sec 155,
RCC]
14. Investigations, offenses,
Cease and desist power (Sec. 156)
and penalties
1. When the SEC has reasonable basis to
Authority of Commissioner believe that a person has violated, or is
about to violate this Code, a rule,
Investigation and prosecution of regulation, or order of the Commission, it
offenses may direct such person to desist from
committing the act constituting the
Under Sec. 154 of the RCC (Revised violation.
Corporation Code) the SEC has the power to: 2. SEC may issue a cease and desist order
ex parte to enjoin an act or practice which
1. Power to Investigate is:
a. fraudulent or
The SEC is expressly granted the power to b. can be reasonably expected to
investigate any alleged violation of the cause significant, imminent, and
RCC, or of a rule, regulation, or order irreparable danger or injury to
issued pursuant thereto. public safety or welfare.
After due notice and hearing, when the 2. Violation of Disqualification Provision
Commission finds that any provision of this (Sec. 160)
Code, rules or regulations, or any of the
Commission’s orders has been violated, the Despite the knowledge of the existence of
Commission may impose any or all of the a ground for disqualification as provided in
following sanctions, taking into consideration Section 26 of RCC, a director, trustee or
the extent of participation, nature, effects, officer willfully holds office, or willfully
frequency and seriousness of the violation: conceals or withholds the existence of
Imposition of a fine ranging from P5,000 to P2 grounds for disqualification, they may be
Million, and not more than P1,000 for each day punished under the Code.
of continuing violation but in no case to exceed
P2 Million Penalty:
Issuance of a permanent cease and desist Punished by a fine ranging from Php
order; 10, 000 to Php 200,000 at the court’s
Suspension or revocation of the certificate of discretion, permanently disqualified
incorporation; and from being a director, trustee, or officer
Dissolution of the corporation and forfeiture of of any corporation.
its assets under the conditions in Title XIV of If violation is injurious or detrimental
this Code. to the public – penalty ranges from
Php 20,000 to Php 400,000.
Penalties
Prohibited acts Penalties Who are liable When the violation is
injurious or
detrimental to the
public
1) Unauthorized Use fine ranging from corporation and its
of Corporate Name P10,000 to P200,000 responsible directors
(Sec. 159) or officers in contempt
and/or hold them
administratively, civilly
and/or criminally liable
under this Code and
other applicable laws
and/or revoke the
registration of the
corporation (Sec. 17)
2) Violation of fine ranging from director, trustee or penalty shall be a fine
Disqualification P10,000 to P200,000 officer of any ranging from P20,000
Provision (Sec. at the discretion of the corporation to P400,000
160) court and shall be
permanently
disqualified from being
a director, trustee or
officer of any
corporation
3) Violation of Duty to fine ranging from corporation, or by fine ranging from
Maintain Records, P10,000 to P200,000 those responsible for P20,000 to P400,000
to Allow their at the discretion of the keeping and
Inspection or court, taking into maintaining corporate
Reproduction (Sec. consideration the records
161) seriousness of the
violation and its
implications.
4) Willful Certification fine ranging from auditor or the fine ranging from
of Incomplete, P20,000 to P200,000 responsible person for P40,000 to P400,000
Inaccurate, False, the certification
or Misleading
Statements or
Reports (Sec. 162)
5) Collusion with the fine ranging from independent auditor in fine ranging from
Independent P80,000 to P500,000 collusion with the P100,000 to P600,000
Auditor (Sec. 163) corporation’s directors
or representatives and
the responsible officer
6) Obtaining fine ranging from those responsible for fine ranging from
Corporate P200,000 to P2M the formation of a P400,000 to P5M
Registration corporation through
Through Fraud fraud, or who assisted
(Sec. 164) directly or indirectly
therein,
In imposing penalties and additional monitoring and supervision requirements, the Commission shall
take into consideration the size, nature of the business, and capacity of the corporation.
No court below the Court of Appeals shall have jurisdiction to issue a restraining order, preliminary
injunction, or preliminary mandatory injunction in any case, dispute, or controversy that directly or
indirectly interferes with the exercise of the powers, duties and responsibilities of the Commission that
falls exclusively within its jurisdiction.
SECURITIES
COMMERCIAL LAW
privilege in a corporation which gives the Rationale: This is rooted in comity among
holder of the share or certificate the right to nations.
use the facilities covered by such certificate
and to receive dividends or earnings from b. Certificates issued by a receiver or by a
the corporation. Upon liquidation of the trustee in bankruptcy duly approved by
corporation, the holder shall have the proper adjudicatory body.
proportionate ownership rights over its
assets. [Rule 3.1.15] Rationale: This is not a public offering.
9. Non-proprietary share or certificate – an Besides, protection is already afforded by
evidence of interest, participation or that “proper adjudicatory body” and
privilege over a specific property of a additional SEC protection is not necessary.
corporation that allows the holder of the
share or certificate to use such property c. Any security or its derivatives, the sale or
under certain terms and conditions. The transfer of which, by law, is under the
holder, however, shall not be entitled to supervision and regulation of the Office
dividends from the corporation or to its of the Insurance Commission, Housing and
assets upon its liquidation. [Rule 3.1.13] Land Use Rule Regulatory Board, or the
Bureau of Internal Revenue.
Rationale: The offerees are not the public, Rationale: If broker’s transactions are
but shareholders already familiar with their registered each time, the transactions on
company. the exchange will be unduly hampered.
Besides, the brokers are subject to a “code
5. The sale of capital stock of a of conduct” protective of the interest of the
corporation to its own stockholders investors.
exclusively, where no commission or
other remuneration is paid or given directly 9. Subscriptions for shares of the capitals
or indirectly in connection with the sale of stock of a corporation prior to the
such capital stock. incorporation thereof or in pursuance of
an increase in its authorized capital
Rationale: Same as d. above. stocks, when no expense is incurred, or no
Note the condition for such exemption. commission, compensation or
remuneration is paid or given in connection
6. The issuance of bonds or notes secured with the sale or disposition of such
by mortgage upon real estate or tangible securities, and only when the purpose for
personal property, when the entire soliciting, giving or taking of such
mortgage together with all the bonds or subscription is to comply with the
notes secured thereby are sold to a single requirements of such law as to the
purchaser at a single sale. percentage of the capital stock of a
corporation which should be subscribed
Rationale: This is not a public sale. before it can be registered and duly
incorporated, or its authorized capital
7. The issue and delivery of any security in increased.
exchange for any other security of the
same issuer pursuant to a right of Rationale: This is not a public offering.
conversion entitling the holder of the Besides, the SEC is involved in the
security surrendered in exchange to make subscription process, as a regulator.
such conversion: Provided, That the
security so surrendered has been Note the condition that the exemption
registered under this Code or was, when applies only in respect of issuance for
sold, exempt from the provision of this compliance with the percentage needed
Code, and that the security issued and for an increase in authorized capital stock,
delivered in exchange, if sold at the and the similar condition in f. where no
conversion price, would at the time of such compensation is paid or given.
conversion fall within the class of securities
entitled to registration under this Code. 10. The exchange of securities by the issuer
Upon such conversion, the par value of the with the existing security holders
security surrendered in such exchange exclusively, where no commission or
shall be deemed the price at which the other remuneration is paid or given directly
securities issued and delivered in such or indirectly for soliciting such exchange.
exchange are sold.
Rationale: This is not a public offering.
Rationale: The SEC has already registered Note the condition for exemption.
the convertible security and presumably
also passed upon the security to be issued 11. The sale of securities by an issuer to
upon conversion. fewer than twenty (20) persons in the
(2) Shall include the effect of the week for two (2) consecutive weeks, or in such
securities issue on ownership, on other manner as the SEC shall prescribe.
the mix of ownership, especially
foreign and local ownership [Sec. d. Declaration by the SEC whether the
12.3] registration statement is effective or
(3) Shall be signed by the issuer’s rejected
executive officer, its principal
operating officer, its principal Declaration is made within 45 days from filing
financial officer, its comptroller, its of the registration statement or on such later
principal accounting officer, its date to which the issuer has consented, unless
corporate secretary, or persons applicant has been allowed to amend the
performing similar functions registration statement under Sec. 14. [Sec.
accompanied by a duly verified 12.6]
resolution of the board of directors
of the issuer corporation [Sec. 12.4] e. Statement under oath by the issuer in all
(4) Shall be accompanied by: prospectus that:
a. Written consent of the expert
named as having certified any 1. Registration requirements have been met;
part of the registration and
statement or any document 2. All information are true and correct as
used in connection therewith; represented by the issuer or the one
and making the statement.
b. Where the registration
statement includes shares to Statement under oath must be made upon
be sold by selling shareholders effectivity of the registration statement. [Sec.
- a written certification by such 12.7]
selling shareholders as to the
accuracy of any part of the Grounds for Rejection and/or Revocation of
registration statement the Registration of Securities
contributed to by such selling The SEC may reject a registration statement
shareholders. [Sec. 12.4] and reuse registration of the security
thereunder, or revoke the effectivity of a
b. Payment to the SEC of a fee of not more registration statement and the registration of
than one-tenth of one per centum (1/10 the security thereunder after due notice and
of 1%) of the maximum aggregate price hearing, if it finds that:
at which such securities are proposed
to be offered [Sec. 12.5a] The issuer:
1. Has been judicially declared insolvent;
The Commission shall prescribe, by rule, 2. Has violated any of the provision of this
diminishing fees in inverse proportion to the Code, the rules promulgated pursuant
value of the aggregate price of the offering. thereto, or any order of the Commission
This fee paid to the SEC is called a diminishing of which the issuer has notice in connection
fee. with the offering for which a registration
statement has been filed;
c. Publication of the notice of the filing of 3. Has been or is engaged or is about to
registration statement [Sec. 12.5b] engage in fraudulent transactions;
4. Has made any false or misleading
The notice must be published by the issuer, at representation of material facts in any
its own expense, in two (2) newspapers of prospects concerning the issuer or its
general circulation in the Philippines, once a securities;
To prevent the excessive use of credit for the satisfaction of the call (Mandatory
purchase or carrying of securities [Sec. 48.1] Close-Out Rule).
(2) No person shall, directly or indirectly, by the i. Obtain money or property by means of any
use of any facility of any securities untrue statement of a material fact or any
exchange, effect a short sale in a security omission to state a material fact necessary
registered or listed on any securities in order to make the statements made, in
exchange, where the seller does not intend the light of the circumstances under which
or is unable to make delivery of the they were made, not misleading [Sec.
securities within the prescribed settlement 26.2]
period. ii. Engage in any act, transaction, practice or
(3) No director, officer or principal stockholder course of business which operates or
of a corporation shall make a short sale in would operate as a fraud or deceit upon
securities of the corporation in which he is any person [Sec. 26.3]
a director, officer or principal stockholder.
(4) The SEC may, motu proprio or upon ‘Material fact or information’ means:
recommendation of the Exchange, prohibit Any fact or information that may result in a
short selling indefinitely or for such period change in the market price or value of any of
as it may deem proper for the protection of the issuer’s securities, or may potentially affect
the investors or as an emergency measure the investment decision of an investor. [Sec.
or whenever such short selling is 3.1.12., 2015 SRC-IRR]
necessary or appropriate in the public
interest. [Sec. 24.2-2] PROHIBITED REPRESENTATIONS,
DEALINGS AND SOLICITATIONS [Rule 26.3,
3. Option trading [Sec. 25] 2015 SRC-IRR]
It shall be unlawful for any:
Prohibition on Option Trading under 2015 i. Person to represent that he has been
SRC-IRR registered as a securities intermediary
No member of an Exchange shall, directly or with the SEC, unless such person is
indirectly endorse or guarantee the registered under the Code;
performance of any put, call, straddle, option or ii. Broker Dealer to represent that the
privilege in relation to any security registered registration of the Broker Dealer under the
on a securities exchange. Code, or the failure of the SEC to deny,
suspend or revoke such registration,
The terms "put", "call", "straddle", "option", or indicates in any way that the SEC has
"privilege" shall not include any registered passed upon or approved the financial
warrant, right or convertible security. standing, business or conduct of such
Broker Dealer, or the merits of any
Options – contracts that give the buyer the security or any transaction/s conducted
right, but not the obligation to buy or sell an thereby;
underlying security at a predetermined price on iii. Person to represent that a security is a
or before a predetermined date. [Rule 3.1.9.1] particular type of security when such
representation is inconsistent with a
stated definition under the Code or rules
4. Fraudulent transactions [Sec. or regulations adopted thereunder;
26] iv. Person to represent that a security to be
sold, transferred, pledged, mortgaged,
Fraudulent Transactions encumbered, used for delivery, or any
It shall be unlawful for any person, directly or other purpose to another entity or itself
indirectly, in connection with the purchase or has been legally authorized by the
sale of any securities to: registered owner when such
. Employ any device, scheme, or artifice to representation is not true and
defraud; [Sec. 26.1] documented in writing at the time and date
it was used;
circumstances reasonably calculated to person other than the customer without written
result in the procurement, withholding or authorization of such customer. [Sec. 20.4]
revocation of a proxy. [Rule 20.2.2, 2015 A broker or dealer who holds or acquires the
SRC-IRR] proxy for at least ten percent (10%) or such
percentage as the commission may prescribe
The terms shall not apply to: of the outstanding share of such issuer, shall
a. The performance by any person of submit a report identifying the beneficial owner
ministerial acts on behalf of a person of ten days after such acquisition, for its own
soliciting a proxy; or account or customer to the issuer of security,
b. Any solicitation made otherwise than on to the exchange where the security is traded,
behalf of the issuer where the total number and to the Commission. [Sec. 20.5]
of persons solicited is not more than 19.
[Rule 20.2.2, 2015 SRC-IRR] Note: For proxy or consent solicitation, the
SEC may require that the person making
The SRC regulates proxy solicitation by such filing pay a fee of not more than one-
requiring the issuer to transmit tenth of one percent (1/10 of 1%) of the
1. An information statement, proposed payment in cash, and the value of
2. Proxy form, and any security or property to be transferred in the
3. Management report to every security acquisition, merger or consolidation, or the
holder of the class entitled to vote at least cash and value of any securities proposed to
15 days prior to the conduct of annual or be received upon sale or disposition of such
other stockholders’ meetings. [Rule 20.3.1, assets in case of a solicitation. [Sec. 21]
2015 SRC-IRR]
3. Disclosure rule
Preliminary copies of the information statement
and the proxy form shall be submitted to the Issuers, equity holders, and insiders are
SEC before sending the same to security subject to certain reportorial requirements
holders. [Rule 20.3.3.1, 2015 SRC-IRR] under the SRC.
Types of issuers subject to the reportorial (B) Disclosure by Equity Holders [Sec. 18]
requirements [Sec. 17.2]
An issuer which has sold a class of its Reports by Five per centum Holders of
securities pursuant to a registration statement, Equity Securities [Sec. 18]
Provided however, That the requirement shall In every case in which an issuer is subject to
be suspended for any fiscal year after the year the reportorial requirements, any person who
such registration became effective if such acquires directly or indirectly the beneficial
issuer, as of the first day of any such fiscal year, ownership of more than five of per centum (5%)
has less than one hundred (100) holder of such of such class or in excess of such lesser per
class of securities or such other number as the centum as the Commission by rule may
Commission shall prescribe and it notifies the prescribe, shall, within 10 days after such
Commission of such; acquisition or such reasonable time as fixed by
1. An issuer with a class of securities listed for the Commission, submit to:
trading on an Exchange; and The issuer of the securities;
2. An issuer with assets of at least 50 million The Exchange where the security is traded;
pesos or such other amount as the and
Commission shall prescribe, and having The Commission,
200 or more holders each holding at least a sworn statement containing the following
100 shares of a class of its equity information –
securities. 1. The personal background, identity,
The obligation of such issuer to file reports shall residence, and citizenship of, and the
be terminated ninety (90) days after notification nature of such beneficial ownership by
to the Commission by the issuer that the such person and all other persons by whom
number of its holders holding at least one or on whose behalf the purchases are
hundred (100) shares is reduced to less than effected; in the event the beneficial owner
one hundred (100) [Sec. 17.2] is a juridical person, the line of business of
the beneficial owner shall also be reported;
A “public company” is required to comply 2. If the purpose of the purchases or
with the reportorial requirements set forth in prospective purchases is to acquire control
Section 17.1 of the SRC. Under Rule 3(1)(m), of the business of the issuer of the
a “public company” is defined as “any securities, any plans or proposals which
corporation with a class of equity securities such persons may have that will effect a
listed on an Exchange or with assets in excess major change in its business or corporate
of Fifty Million Pesos (P50,000,000.00) and structure;
having 200 or more holders, at least 200 of 3. The number of shares of such security
which are holding at least 100 shares of a class which are beneficially owned, and the
of its equity securities.” number of shares concerning which there
is a right to acquire, directly or indirectly,
It is clear that a “public company,” as by: (1) such person, and (2) each associate
contemplated by the SRC, is not limited to a of such person, giving the background,
company whose shares of stock are publicly identity, residence, and citizenship of each
listed; even companies like the Bank, whose such associate; and
shares are offered ONLY to a specific group of 4. Information as to any contracts,
people, are considered a public company, arrangements, or understanding with any
provided they meet the requirements person with respect to any securities of the
enumerated. [Philippine Verterans Bank v. issuer including but not limited to transfer,
Callangan G.R. No. 191995 (2011)] joint ventures, loan or option
arrangements, puts or call guarantees or
division of losses or profits, or proxies
naming the persons with whom such
contracts, arrangements, or understanding
have been entered into, and giving the What is required to be disclosed is a fact of
details thereof; special significance, which may be:
5. Such other information as the Commission A material fact which would be likely, on being
may require in the public interest or for the made generally available, to affect the market
protection of investors. price of a security to a significant extent, or
One which a reasonable person would
Note: If it appears to the SEC that securities consider especially important in determining
were acquired by person in the ordinary course his course of action with regard to the shares
of his business and were not acquired for the of stock. [SEC v. Interport Resources
purpose of and do not have the effect of Corporation, G.R. No. 135808 (2008)]
changing or influencing the control of the issuer
nor in connection with any transaction having See also Insider and Material non-public
such purpose or effect it may permit any person information under Insider Trading above.
to file in lieu of the statement required by
subsection 17.1, a notice stating:
The name of such person;
The shares of any equity securities subject to
Subsection 17.1 which are owned by him;
The date of their acquisition; and
Such other information as the commission may
specify [Sec. 18.3]
BANKING
COMMERCIAL LAW
accordance with the provisions of the Rules of 2. To compel the presentation of all:
Court. Books, documents, papers or records
Data on Individual Firms necessary in their judgment to
Data on individual firms, other than banks, ascertain the facts relative to the true
gathered by the Department of Economic condition of any institution
Research and other departments or units of the Books and records of persons and
BSP shall not be made available to any person entities relative to or in connection with
or entity outside of the BSP whether public or the operations, activities or
private. transactions of the institution under
examination
Exception: under order of the court or under
such conditions as may be prescribed by the Note: These powers are subject to the
MB. provision of existing laws protecting or
safeguarding the secrecy or confidentiality of
Collective data on firms may be released to bank deposits as well as investments of private
interested persons or entities. persons, natural or juridical, in debt instruments
issued by the Government.
In the case of banks, provisions of Sec. 27 shall
apply. [Sec. 23] Restraining orders and injunctions
The provisions of Rule 58 (Preliminary
Supervision and Examination Injunction) of the Rules of Court insofar as they
are applicable and not inconsistent with the
The BSP shall have supervision over, and provisions of this Section 25 of the NCBA shall
conduct periodic or special examinations of: govern the issuance and dissolution of the
i. Banking institutions restraining order or injunction.
ii. Quasi-banks
iii. Their subsidiaries engaged in allied General Rule: No restraining order or
activities injunction shall be issued by the court enjoining
- A subsidiary is a corporation more than the BSP from examining any institution subject
50% of the voting stock of which is to supervision or examination by the BSP.
owned by a bank or quasi-bank
iv. Their affiliates engaged in allied Exception: There is convincing proof that the
activities action of the BSP is plainly arbitrary and made
- An affiliate is a corporation the voting in bad faith and the petitioner or plaintiff files
stock of which: with the clerk or judge of the court in which the
action is pending a bond executed in favor of
▪ To the extent of 50% or less, is
the BSP, in an amount to be fixed by the court.
owned by a bank or quasi-bank; or
[Sec. 25]
▪ Is related or linked to such
institution or intermediary through
Bank deposits and investments
common stockholders or such
other factors as may be determined
by the MB. Any director, officer or stockholder who,
together with his related interest, contracts a
The department heads and the examiners of loan or any form of financial accommodation
the supervising and/or examining departments from:
are hereby authorized: 1. His bank; or
2. From a bank:
1. To administer oaths to any director, officer,
or employee of any institution under their a. Which is a subsidiary of a bank holding
respective supervision or subject to their company of which both his bank and
examination the lending bank are subsidiaries; or
Requisites for Placement of a Bank under Note: The conservator is a natural person to be
Conservatorship appointed by the MB. In contrast, the receiver
1. There must be a report submitted by the is generally the Philippine Deposit Insurance
appropriate supervising or examining Corporation (PDIC).
department of the BSP;
2. There must be a finding that the bank or Powers and Duties of a Conservator
quasi-bank falls under either of the grounds a. To take charge of the assets, liabilities, and
for conservatorship; and the management of the institution;
3. The Board of Directors must be informed in b. To reorganize the management;
writing of the order of the MB directing c. To collect all monies and debts due said
conservatorship. [Sec. 29] institution;
d. To exercise all powers necessary to restore
Duration: Shall not exceed 1 year [Sec. 29] its viability;
e. To report and be responsible to the MB;
Expenses and
The expenses attendant to the conservatorship f. To overrule or revoke the actions of the
shall be borne by the bank or quasi-bank previous management and board of
concerned. [Sec. 29] directors of the bank or quasi-bank. [Sec.
29]
Grounds for Termination of
Conservatorship by the MB Note: That the management of the bank is still
a. When the MB is satisfied that the institution with its board of directors and management.
can continue to operate on its own and the However, the conservator may revoke their
conservatorship is no longer necessary; or actions. In contrast, in receivership, the
b. When, on the basis of the report of the receiver takes over the management of the
conservator or of its own findings, the MB bank.
determines that the continuance in
business of the institution would involve The Conservator Cannot Repudiate
probable loss to its depositors or creditors Perfected Contracts
The powers of the conservator of a bank must
Effect: The bank or quasi-bank would then be be related to the preservation of the assets of
placed under receivership. [Sec. 29] the bank, the reorganization of the
management and the restoration of viability.
Effects of Conservatorship Such powers cannot extend to the post-facto
1. Bank/Quasi-bank retains juridical repudiation of perfected transactions,
personality; otherwise they would infringe against the non-
2. Not a precondition to the designation of a impairment clause of the Constitution. [First
receiver [Sec. 30]; and Philippine International Bank v. CA, G.R. No.
3. Perfected transactions cannot be 115849 (1996)]
repudiated. [First Philippine International
Bank v. CA, G.R. No. 115849 (1996)] Remuneration
General Rule: The conservator shall receive
Qualifications of a Conservator remuneration in an amount not to exceed 2/3
The conservator should be competent and of the salary of the president of the institution in
knowledgeable in bank operations and 1 year, payable in 12 equal monthly payments.
management. [Sec. 29]
Exception: A conservator appointed by the MB
The designation of a conservator shall be connected with the BSP. Said conservator shall
vested exclusively in the MB. [Sec. 30] not be entitled to receive any remuneration or
emolument. [Sec. 29]
Closure Requisites
a. Report of the head of the supervising or
Should the MB find that any of the grounds for examining department involving the bank;
receivership is applicable to a bank or quasi- b. Finding of the MB of the existence of any of
bank, the Monetary Board may: the grounds for receivership;
1. Forbid the institution from doing c. Decision of the MB to forbid the institution
business in the Philippines; and from doing business, which decision may
2. Designate the PDIC as receiver of the be done summarily and without need for
banking institution. prior hearing; and
d. Notice in writing to the Board of Directors
Note: This is done summarily and without need informing the institution of the order of the
for prior hearing. [Sec. 30] MB. [Sec. 30]
5. Bank is not liable to pay interest on Thirty thousand pesos (P30,000) a day
deposits which accrued during the period of for each violation, taking into
suspension of operation; consideration the attendant
6. Restriction of bank’s capacity to do new circumstances, such as the nature and
business (new loans, deposits) but with gravity of the violation or irregularity
obligation to collect pre-existing debts; and the size of the bank or quasi-bank;
a. It cannot take new deposits or grant ii. Suspension of rediscounting privileges
new loans. or access to BSP credit facilities;
b. However, it can collect pre-existing iii. Suspension of lending or foreign
debts. exchange operations or authority to
7. Deposits do not become preferred credits. accept new deposits or make new
investments;
8. Administrative sanctions on iv. Suspension of interbank clearing
privileges; and/or
supervised entities v. Revocation of quasi-banking license.
Without prejudice to the criminal sanctions The administrative sanctions need not be
provided in Secs. 34, 35, and 36, the MB may, applied in the order of their severity. [Sec. 37]
at its discretion, impose administrative
sanctions upon any bank or quasi-bank, their
directors and/or officers. 9. Rules on bank deposits and
investments by directors,
Resignation or termination from office shall not officers, stockholders and
exempt such director or officer from
administrative or criminal sanctions. their related interests
Grounds for imposition & Administrative Any director, officer or stockholder who,
sanctions imposed together with his related interest, contracts a
(a) Any willful violation of its charter or by-laws; loan or any form of financial accommodation
(b) Willful delay in the submission of reports or from:
publications thereof as required by law, (1) His bank; or
rules and regulations; (2) From a bank:
(c) Any refusal to permit examination into the a. Which is a subsidiary of a bank holding
affairs of the institution; company of which both his bank and
(d) Any willful making of a false or misleading the lending bank are subsidiaries; or
statement to the MB or the appropriate b. In which a controlling proportion of the
supervising and examining department or shares is owned by the same interest
its examiners; that owns a controlling proportion of the
(e) Any willful failure or refusal to comply with, shares of his bank
or violation of, any banking law or any i. In excess of five percent (5%) of
order, instruction or regulation issued by the capital and surplus of the bank,
the MB, or any order, instruction or ruling or
by the Governor; or ii. In the maximum amount permitted
(f) Any commission of irregularities, and/or by law, whichever is lower
conducting business in an unsafe or shall be required by the lending bank to waive
unsound manner as may be determined by the secrecy of his deposits of whatever
the MB, the following administrative nature in ALL banks in the Philippines.
sanctions, whenever applicable:
i. Fines in amounts as may be Any information obtained from an examination
determined by the MB to be of his deposits shall be held strictly
appropriate, but in no case to exceed confidential and may be used by the
examiners only in connection with their
ii. Required security against bank loans Limitation: The margins between the effective
The MB may issue such regulations as it may exchange rates and the rates established by
deem necessary with respect to the maximum the MB may not exceed the corresponding
permissible maturities of the loans and margins for spot exchange transactions by
investments which the banks may make, and more than the additional costs or expenses
the kind and amount of security to be required involved in each type of transactions. [Sec. 74]
against the various types of credit operations of
the banks. [Sec. 106] b. Purchases and Sales of Foreign
Currency
iii. Portfolio ceilings
The MB may place an upper limit on the The BSP may:
amount of loans and investments which the a. Buy and sell foreign notes and coins, and
banks may hold, or may place a limit on the rate documents and instruments of types
of increase of such assets within specified customarily employed for the international
periods of time. The MB may apply such limits transfer of funds;
to the loans and investments of each bank or b. Engage in future exchange operations; and
to specific categories thereof. c. In order to maintain the convertibility of the
Peso, at the request of any banking
In no case shall the MB establish limits which institution operating in the Philippines, buy
are below the value of the loans or investments any quantity of foreign exchange offered,
of the banks on the date on which they are and sell any quantity of foreign exchange
notified of such restrictions. The restrictions demanded, by such institution, Provided,
shall be applied to all banks uniformly and the foreign exchange offered or demanded
without discrimination. [Sec. 107] is freely convertible to gold or USD. [Sec.
70]
iv. Minimum capital ratios
The MB may prescribe minimum ratios which Limitations: It may only transact with the
the capital and surplus of the banks must bear following entities and persons:
to the volume of their assets, or to specific a. Banking institutions operating in the
categories thereof, and may alter said ratios Philippines;
whenever it deems necessary. [Sec. 108] b. The government, its political subdivisions
and instrumentalities;
11. Rate of exchange c. Foreign or international financial
institutions;
a. Rate of Exchange d. Foreign governments and their
instrumentalities; and
The MB shall: e. Other entities or persons authorized by the
a. Determine the exchange rate policy of the MB to act as foreign exchange dealers
country; under the rules and regulations prescribed
by the MB. [Sec. 70]
i. Foreign currency deposits, which are It is conceded that while the fundamental law
governed by the Foreign Currency has not bothered with the triviality of specifically
Deposit Act addressing privacy rights relative to banking
ii. Funds placed in a bank not in the accounts, there, nevertheless, exists in our
nature of a deposit by private jurisdiction a legitimate expectation of privacy
individuals or entities. These may also governing such accounts. The source of this
not be disclosed, under Subsec. 55.1 of right of expectation is statutory, and it is found
the General Banking Law of 2000. in R.A. No. 1405, otherwise known as the Bank
Secrecy Act of 1955. [BSB Group, Inc., v. Go,
G.R. No. 168644 (2010)]
Trust Accounts
Any violation of this law will subject offender Universal Bank (UB)
upon conviction, to an imprisonment of not As the name implies, a universal bank has the
more than five years or a fine of not more than most banking power, as it has the same powers
twenty thousand pesos or both, in the as a commercial bank, plus the powers:
discretion of the court. [Sec.5] To operate an investment house, whether
as an integral unit or as a subsidiary.
C. GENERAL BANKING In turn, an investment house underwrites
LAW OF 2000 (GBL) securities either on firm underwriting (good
The section numbers hereinafter generally as sold) or best efforts (excess to be
pertain to RA 8791, unless otherwise indicated. returned to the issuer)
To invest in non-allied enterprises
1. Definition and classification
Commercial Bank (KB)
of banks Has the powers defined in Secs. 29. and 53,
infra.
a. Definition of Banks
"Banks" shall refer to entities engaged in the Thrift Bank
lending of funds obtained in the form of Thrift banks are banks that focus on basic
deposits. [Subsec. 3.1] banking services for their clients, with an
emphasis on individuals and small businesses.
How Banks are Structured Thrift banks are primarily governed by RA
Generally, banks are stock corporations. 7906, the Thrift Banks Act.
However, cooperative banks may also be
formed under the Cooperative Code. Thrift banks include:
Savings and mortgage banks;
N.B. Note that under RA 10641, qualified Savings and loan associations; and
foreign banks, with MB approval, may now Private development banks.
enter the local banking system, through any of
the following modes: Rural Banks
1. Acquiring, purchasing, or owning up to These are banks that are formed for the
100% of the voting stock of an existing purpose of providing adequate credit facilities
domestic bank; to farmers and merchants, or to cooperatives
2. Investing in up to 100% of the voting of such farmers and merchants and in general,
stock of a new banking subsidiary the people of the rural communities.
incorporated under the laws of the
Philippines; or They are primarily governed by RA 7353 (Rural
3. Establishing branches with full banking Banks Act).
authority.
Cooperative Banks
However, the foreign bank must be These are banks organized as cooperatives
established, reputable, and financially sound. under RA 6938, the Cooperative Code.
However, RA 11439 (An Act Providing for the Deposit-Substitute Taking or Quasi-
Regulation and Organization of Islamic Banks) Banking
was enacted in the recent past. This law Deposit-substitute taking or quasi-banking is
expressly authorizes the BSP to license more an alternative form of obtaining funds from the
Islamic banks and permit conventional banks to public, other than deposits, through the
open Islamic windows or units. issuance, endorsement, or acceptance of debt
instruments for the borrower's own account, for
Other banks as classified by the BSP the purpose of relending or purchasing of
This includes Land Bank of the Philippines, the receivables and other obligations.
Philippine Veteran’s Bank, and Development
Bank of the Philippines. These instruments may include, but need not
be limited to, bankers’ acceptances,
2. Distinction of banks from promissory notes, participations, certificates of
assignment and similar instruments with
Quasi-banks and trust entities recourse, and repurchase agreements.
which requires all loans to be generally secured has the option [but not the obligation] to
by traditional security devices. exercise. [BPI v. CA and Eastern Plywood,
G.R. No. 104612 (1994)]
Banking Powers and Incidental
Powers 2. Issuing letters of credit;
3. Discounting and negotiating
A commercial bank shall have, in addition to promissory notes, drafts, bills of
the general powers incident to stock exchange, and other evidences of debt;
corporations, all such powers as may be 4. Accepting or creating demand
necessary to carry on the business of deposits;
commercial banking such as: 5. Receiving other types of deposits and
deposit substitutes;
1. Accepting Drafts;
Types of Deposits
General rule: Only a UB and a KB can a. Time or Fixed Deposit - Interest
accept or create demand deposits [Sec. 33] rate stipulated depending on the
number of days. During this period,
Exception: Banks other than a UB or KB the money deposited may not be
with prior approval of, and subject to such withdrawn without incurring
conditions and rules as may be prescribed penalty. High interest rates.
by the MB. [Sec. 33] b. Savings Deposit - Bank pays an
interest rate, but not as high as time
Fixed, savings, and current deposits of deposits.
money in banks and similar institutions c. Demand Deposits/Current or
shall be governed by the provisions Checking Accounts - No interest
concerning simple loan. [Art. 1980, NCC] is paid by the bank because the
Presumption of ownership of deposits depositor can take out his funds
It is presumed that money deposited in a any time. It is called demand
bank account belongs to the person in deposit because the depositor can
whose name the deposit account is withdraw the money he deposited
opened. on the very same day when he
deposited it or at any time
A depositor is presumed to be the owner of thereafter. [Villanueva,
funds standing in his name in a bank Commercial Law Review (2012)]
deposit account; and where a bank is not d. Negotiable Order of Withdrawal
chargeable with notice that the money Accounts – Interest-bearing
deposited in such account is the property of deposit accounts that combine the
some other person than the depositor, the payable on demand feature of
bank is justified in paying out the money to checks and investment feature of
the depositor or upon his order, and cannot savings accounts [Sec. 221,
be liable to any other person as the true Manual of Regulations for Banks]
owner. [Fulton Iron Works Co. v. China
Banking Corporation, G.R. No. 32576 6. Buying and selling foreign exchange
(1930)] and gold or silver bullion;
7. Acquiring marketable bonds and other
No duty to set-off debt securities; and
A bank is under no duty or obligation to 8. Extending credit.
make an application or set-off against the
deposit accounts of a borrower. To apply “Know your customer” rule
the deposit to the payment of a loan is a Before granting a loan or other credit
privilege, a right of set-off which the bank accommodation, a bank must ascertain that the
debtor is capable of fulfilling its commitments to and embrace a culture of fair and responsible
the bank. [Sec. 40] dealings in the conduct of their business.
Banks must treat depositors’ accounts with
The bank may demand from its credit meticulous care;
applicants a statement of their assets and Banks must always to have in mind the
liabilities and of their income and expenditure fiduciary nature of its relationship with their
and such information as may be prescribed by depositors and other clients. [Metrobank v.
law or by rules and regulations of MB to enable Rosales, G.R. No. 183204 (2014);
the bank to properly evaluate the credit Comsavings Bank v. Sps. Capistrano, G.R.
application which includes the corresponding No. 170942 (2013); Equitable Banking v.
financial statements submitted for taxation Special Steel Products, G.R. No. 175350
purposes to the BIR. [Sec. 40] (2012)]
Allowing the execution of a mortgage on Current and savings deposits are loans to
parcels of land as security for a loan not a bank because the bank can use the same
owned by the prospective borrower. and they earn interest. [BPI vs. CA, G.R.
[Canlas v. CA, G.R. No. 112160 (2000)] No. 104612 (1994)]
Crediting the deposit in favor of another Money deposited is commingled with other
depositor, a check where the signature of money constituting a common fund.
the drawer was forged. [Westmont Bank v.
Ong, G.R. No. 132560 (2002)]. Irregular Deposits
Bank deposits are in the nature of irregular
5. Nature of Bank Funds and deposits. Therefore, Art. 1287 of the Civil
Code, which prohibits compensation when one
Bank Deposits of the debts arises from depositum, does NOT
apply. [Serrano vs. Central Bank, G.R. No. L-
The deposit is a contract of loan with the bank 30511 (1980)]
being lent money by the depositor. Under the
Civil Code provisions on loan, this means that
the money deposited with the bank becomes 6. Grant of Loans and Security
its property, which it is free to use, subject to Requirements
the condition that the depositor can demand
repayment, in the form of withdrawals, at any Ratio of net worth to total risk
time. assets
Quasi-deposits Concept: The minimum ratio which the net
Funds placed with bank (as deposit worth of a bank must bear to its total risk assets
substitutes), but which are not in the nature which may include contingent accounts, i.e.,
of a deposit net worth: total risk assets. [Sec. 34]
Must be on a with recourse basis
As UB and KB no longer have to apply for General rule: A bank must conform to the risk-
authority to accept deposit substitutes, this based capital ratio prescribed by the MB.
may now be considered a core banking
function of those banks. Exceptions: The MB may alter or suspend
compliance with such ratio whenever
Creditor-Debtor Relationship necessary for a maximum period of 1 year.
The relationship between a depositor and a 1. In case of a bank merger or consolidation;
bank is that of a creditor and debtor in relation or
to the bank’s deposit functions [Gullas vs. PNB, 2. When a bank is under rehabilitation under
G.R. No. L-43191, (1935)] and not that of a program approved by the BSP; [Sec. 34]
depositor and depositary.
Purpose
The relationship being contractual in nature, A bank must not be allowed to expand the
mandamus is therefore not an available volume of its loans and investments in a
remedy. [Maclaring Lucman vs. Alimatar manner that is disproportionate to its net worth.
Malawi, G.R. No. 159794 (2006)] [Morales (2017)]
2. The MB may restrict or prohibit the group. The bank is prohibited from… placing
acquisition of major assets and the making many eggs in the basket of one client. [It] is a
of new investments by the bank, with the damage-control mechanism [and] a device for
exception of purchases of readily risk amelioration. [Morales (2017)]
marketable evidences of indebtedness of
the Republic of the Philippines and the BSP Basis for Determining Compliance
and any other evidences of indebtedness The basis for determining compliance with the
or obligations the servicing and repayment SBL is the total credit commitment of the bank
of which are fully guaranteed by the to the borrower. [Subsec. 35.1]
Republic of the Philippines, until the
minimum required capital ratio has been Inclusions in the Ceiling
restored. [Sec. 34] 1. The direct liability of the maker or acceptor
of paper discounted with or sold to such
Single borrower’s limit bank and the liability of a general indorser,
drawer or guarantor who obtains a loan or
General rule: The total loans, credit other credit accommodation from or
accommodations and guarantees that may be discounts paper with or sells papers to
extended by a bank to any person, partnership, such bank;
association, or corporation or other entity shall 2. In the case of an individual who owns or
at no time exceed 20% of the net worth of such controls a majority interest in a corporation,
bank. [Subsec. 35.1] partnership, association or any other entity,
the liabilities of said entities to such bank;
Exceptions 3. In the case of a corporation, all liabilities to
1. The MB otherwise prescribes for reasons such bank of all subsidiaries in which such
of national interest. [Subsec. 35.1] Now, corporation owns or controls a majority
the single borrower’s limit is 25% of the net interest; and
worth of the lending bank. 4. In the case of a partnership, association or
2. Wholesale lending activities of government other entity, the liabilities of the members
banks to participating institutions for re- thereof to such bank. [Subsec. 35.3]
lending to end-user borrowers: separate
limit of 35% net worth. [Sec. 362.f, Manual Guidelines on the Wholesale Lending of
of Regulations for Banks] Government Banks
1. It shall apply only to loans granted by
Increase of Limit participating financial institutions (PFIs) on
The MB may increase the limit prescribed by a wholesale basis for on-lending to end-
an additional 10% of the net worth, when: user borrowers;
1. The additional liabilities of any borrower are 2. It shall apply only to loan programs funded
adequately secured by trust receipts, by multilateral, international, or local
shipping documents, warehouse receipts development agencies, organizations, or
or other similar documents transferring or institutions, especially designed for
securing title; wholesale lending activities of government
2. Covering readily marketable, non- banks;
perishable goods; and 3. The end-user borrowers of the PFIs shall
3. Which must be fully covered by insurance. be subject to the 25% SBL, not the
[Subsec. 35.2] increased ceiling of 35%; and
4. Government banks shall observe
Purpose appropriate criteria for accrediting PFIs and
To prevent the bank from making excessive for the grant/renewal of credit lines to
loans and other credit accommodations to a accredited PFIs. [Sec. 362.f, Manual of
single borrower or corporate group, including Regulations for Banks]
guarantees for the account of such borrower or
Prohibited acts of borrowers stipulate that the rate of interest agreed upon
may be increased in the event that the
No borrower of a bank shall: applicable maximum rate of interest is
(1) Fraudulently overvalue property offered as increased by the Monetary Board.
security for a loan or other credit
accommodation from the bank; Provided That:
(2) Furnish false or make misrepresentation or (1) Such stipulation shall be valid only if there
suppression of material facts for the purpose is also a stipulation in the agreement that
of obtaining, renewing, or increasing a loan the rate of interest agreed upon shall be
or other credit accommodation or extending reduced in the event that the applicable
the period thereof; maximum rate of interest is reduced by law
(3) Attempt to defraud the said bank in the event or by the Monetary Board; and
of a court action to recover a loan or other (2) The adjustment in the rate of interest
credit accommodation; or agreed upon shall take effect on or after the
(4) Offer any director, officer, employee or effectivity of the increase or decrease in the
agent of a bank any gift, fee, commission, or maximum rate of interest. [Sec. 305,
any other form of compensation in order to Manual of Regulations for Banks]
influence such persons into approving a loan
or other credit accommodation application. 7. Penalties for violations
[Sec. 55.2]
Fine, imprisonment
Floating interest rates and
Escalation Clauses Unless otherwise herein provided, the violation
of any of the provisions of the GBL shall be
Floating Interest Rates subject to Sections 34, 35, 36 and 37 of the
NCBA. [Sec.66]
The rate of interest chargeable on availments
under the BSP liquidity window to banks shall Refusal to make reports or permit for
be the rate equivalent to the reference rate for examination
ninety (90) days determined and announced by Any officer, owner, agent, manager, director or
the BSP for floating rate loans, plus or minus a officer-in-charge of any institution subject to the
rate to be determined by the BSP on the basis supervision or examination by the BSP within
of the prevailing monetary situation. the purview of the NCBA who, being required
in writing by the MB or by the head of the
The additional or discount rate established for supervising and examining department
any given time shall be made public by the BSP willfully refuses to file the required report or
and applied uniformly to all borrowers during permit any lawful examination into the affairs
that period. of such institution shall be punished by:
(1) A fine of not less than Fifty thousand pesos
The additional rate to be imposed over and (P50,000) nor more than One hundred
above the reference rate shall not be less than thousand pesos (P100,000); or
two (2) percentage points, with the applicable (2) Imprisonment of not less than one (1) year
additional rate to be determined by the BSP on nor more than five (5) years; or
the basis of the prevailing monetary situation. (3) Both fine and imprisonment, in the
[Sec. 284, Manual of Regulations for Banks] discretion of the court. [Sec. 34, NCBA]
(1) A fine of not less than One hundred (c) suspension of lending or foreign exchange
thousand pesos (P100,000) nor more than operations or authority to accept new
Two hundred thousand pesos (P200,000); deposits or make new investments;
or (d) suspension of interbank clearing privileges;
(2) Imprisonment of not more than five (5) and/or
years; (e) revocation of quasi-banking license. [Sec.
(3) Both fine and imprisonment, at the 37, NCBA]
discretion of the court. [Sec. 35, NCBA]
Such administrative sanction may be imposed
Proceedings Upon Violation of This Act and for:
Other Banking Laws, Rules, Regulations, (1) Any willful violation of its charter or bylaws,
Orders or Instructions willful delay in the submission of reports or
Whenever a bank or quasi-bank, or whenever publications thereof as required by law,
any person or entity willfully violates this Act rules and regulations;
or other pertinent banking laws being (2) Any refusal to permit examination into the
enforced or implemented by the Bangko affairs of the institution; any willful making
Sentral or any order, instruction, rule or of a false or misleading statement to the
regulation issued by the Monetary Board, the MB or the appropriate supervising and
person or persons responsible for such examining department or its examiners;
violation shall unless otherwise provided in this (3) Any willful failure or refusal to comply with,
Act be punished by: or violation of, any banking law or any
(1) A fine of not less than Fifty thousand pesos order, instruction or regulation issued by
(P50,000) nor more than Two hundred the MB, or any order, instruction or ruling
thousand pesos (P200,000); or by the BSP Governor; or
(2) Imprisonment of not less than two (2) years (4) Any commission of irregularities, and/or
nor more than ten (10) years; or conducting business in an unsafe or
(3) Both fine and imprisonment at the unsound manner as may be determined by
discretion of the court. the MB.
b. Deposit accounts or transactions which are In PDIC v. Gidwani, 867 SCRA 581 (2018),
fictitious or fraudulent, as determined by Gidwani used his helpers and rank-and-file
PDIC; employees to create several deposit accounts
c. Deposit accounts or transactions ostensibly held by them but actually beneficially
constituting, and/or emanating from, owned by him, for the purpose of increasing his
unsafe and unsound banking practice/s deposit insurance cover. The Supreme Court
a. As determined by PDIC, in consultation held that “the entitlement to a deposit insurance
with the BSP; is based not on the number of bank accounts
b. After due notice and hearing, and held, but on the number of beneficial owners.”
publication of a cease and desist order In this case, there was only one beneficial
issued by PDIC against such deposit owner of the several bank accounts (namely,
accounts or transactions; and Gidwani); hence, he was only entitled to
d. Deposits that are determined to be the P250,000 (then the maximum deposit
proceeds of an unlawful activity as defined insurance cover under the PDIC Charter) for all
under the Anti-Money Laundering Act the deposit accounts.
(Republic Act 9160, as amended). [Sec.
5(g), PDIC Charter, as amended by R.A. Note: No owner/holder of any passbook,
9576 and R.A. 10846] certificate of deposit or other evidence of
deposit shall be recognized as a depositor
Funds placed in the Manila Branch by the head entitled to the rights provided in the PDIC
office or the latter’s other offshore branches are Charter unless the same is determined by
not third-party deposits that are insurable with PDIC to be an authentic document or record of
PDIC, since the Manila Branch and its head the issuing bank. [Sec. 5(j)]
office and such other branches comprise only
one juridical entity; hence, there is no Calculation of liability
depositary-depositor relationship between or
among them [PDIC v. Citibank, N.A., 669 i. Per depositor, per capacity rule
SCRA 191 (2012)]. In determining such amount due to any
depositor, there shall be added together all
Extent of liability deposits in the bank maintained in the same
right and capacity for his or her benefit either in
PDIC covers only the risk of a bank closure his or her own name or in the name of others.
ordered by the Monetary Board. Thus, bank [Sec. 3, R.A. 9576]
losses due to theft, fire, closure by reason of
strike or existence of public disorder, revolution ii. Joint accounts
or civil war, are not covered by PDIC. A joint account regardless of whether the
conjunction ‘and’, ‘or’, ‘and/or’ is used, shall be
Determination of insured deposits insured separately from any individually-
owned deposit account: Provided, That –
The amount of the insured deposit shall be
determined according to such regulations as
the Board of Directors may prescribe.
later in order, but only as against the value (c) Thereafter, PDIC shall be discharged from
of the property not otherwise subjected to any liability on the insured deposit. [Sec.
any special preferred credit. 18, R.A. 9302]
(2) Does not create a lien on specific property;
(3) Creates rights in favor of certain creditors Note: PDIC may waive the
to have the free property of the debtor abovementioned two-year period.
applied in accordance with an order of
preference. [Art. 2244, NCC; Somera] (a) Examination of banks and deposit
accounts
vi. Failure to settle claim of insured
depositor Power to Conduct Examination of Banks
PDIC, as a corporate body, shall have the
General Rule: The failure to settle the claim, power to conduct examination of banks with
within six (6) months from the date of filing prior approval of the Monetary Board,
of claim for insured deposit, shall, upon Provided, That –
conviction, subject the directors, officers or - No examination can be conducted within
employees of PDIC responsible for the delay, twelve (12) months from the last
to imprisonment from six (6) months to one examination date;
year, where such failure was due to – - However, PDIC may conduct a special
1. Grave abuse of discretion, examination, in coordination with the BSP,
2. Gross negligence, as the Board of Directors:
3. Bad faith, or a. By an affirmative vote of a majority
4. Malice of all of its members; and
b. If there is a threatened or
Exception: The six-month period shall not impending closure of a bank [Sec.
apply if the validity of the claim requires the 9(8), PDIC Charter, as amended by
resolution of issues of facts and or law – R.A. 9576 and R.A. 10846]
1. By another office, body or agency; or
2. By PDIC together with such other office, Power to Inquire into Deposit Accounts
body or agency [Sec. 19, PDIC Charter, as PDIC and/or the BSP, may inquire into or
amended by R.A. 10846] examine deposit accounts and all information
related thereto
vii. Failure of depositor to claim insured 1. In case there is a finding of unsafe or
deposits unsound banking practice
2. Notwithstanding the provisions of:
If the depositor in the closed bank shall fail to a. Republic Act No. 1405, as amended
claim his insured deposits with PDIC within b. Republic Act No. 6426, as amended,
two (2) years from actual takeover of the c. Republic Act No. 8791, and
closed bank by the receiver, or does not d. Other laws
enforce his claim filed with the corporation
within two (2) years after the two-year To avoid overlapping of efforts, the
period to file a claim: examination of banks and deposit accounts
(a) All rights of the depositor against shall maximize the efficient use of the relevant
PDIC with respect to the insured deposit reports, information, and findings of the BSP,
shall be barred; which it shall make available to PDIC. [Sec.
(b) However, all rights of the depositor against 9(8), PDIC Charter, as amended by R.A. 9576
the closed bank and its shareholders or the and R.A. 10846]
receivership estate to which PDIC may
have become subrogated, shall thereupon
revert to the depositor.
Refusal to Permit Examination (d) A fine of not less than Fifty thousand pesos
Any unjustified refusal to permit examination (P50,000.00) but not more than Two million
and audit of the deposit records or the affairs of pesos (P2,000,000.00); or
the institution shall, at the discretion of the (e) Both imprisonment and the fine. [Sec.
court, be punished by imposing upon any 26(f)(1)(e), PDIC Charter, as amended by
director, officer, employee or agent of a bank: R.A. 10846]
(a) The penalty of imprisonment of not less
than six (6) years but not more than twelve (c) Prohibition against issuances of
(12) years; or temporary restraining orders
(b) A fine of not less than Fifty thousand pesos
(P50,000.00) but not more than Two million The actions of the Board of Directors of PDIC,
pesos (P2,000,000.00); or namely, determining and prescribing, by
(c) Both imprisonment and the fine. [Sec. regulations, what are considered as deposit
26(f)(1)(b), PDIC Charter, as amended by liabilities of the bank under Section 5(g) shall
R.A. 10846] be final and executory. [Sec.5(g), PDIC
Charter, as amended by R.A. No. 10846]
(b) Prohibition against splitting of
deposits Such actions may only be restrained or set
aside by the Court of Appeals, upon
Splitting of Deposits appropriate petition for certiorari on the ground
Occurs whenever a deposit account with an that –
outstanding balance of more than the statutory a. The action was taken in excess of
maximum amount of insured deposit, jurisdiction; or
maintained under the name of natural or b. The action was taken with such grave
juridical persons, is broken down and abuse of discretion as to amount to a lack
transferred into two or more accounts – or excess of jurisdiction.
In the name/s of natural or juridical persons or The petition for certiorari may only be filed
entities who have no beneficial ownership on within thirty (30) days from notice of denial of
transferred deposits in their names; claim for deposit insurance. [Sec.5(g), PDIC
Either: Charter, as amended by R.A. No. 10846]
- Within one hundred twenty (120) days
immediately preceding a bank holiday; or 5. Concept of bank resolution
- During a bank-declared bank holiday, or
- Within one hundred twenty (120) days Definition
immediately preceding a closure order The term resolution refers to the actions
issued by the Monetary Board of the BSP undertaken by PDIC under Section 11 of the
for the purpose of availing of the maximum PDIC Charter to:
deposit insurance coverage. [Sec. a. Protect depositors, creditors and the DIF;
26(f)(1)(e), PDIC Charter, as amended by b. Safeguard the continuity of essential
R.A. 10846] banking services or maintain financial
stability; and
Penalty for Splitting of Deposits c. Prevent deterioration or dissipation of bank
The splitting of deposits or creation of fictitious assets. [Sec.5(s), PDIC Charter, as
or fraudulent loans or deposit accounts shall, at amended by R.A. No. 10846]
the discretion of the court, be punished by
imposing upon any director, officer, employee
or agent of a bank:
(a) The penalty of imprisonment of not less
than six (6) years but not more than twelve
(12) years; or
(2) Proceed with the takeover and liquidation generally the PDIC. [Sec. 29, R.A. 7653, as
of the closed bank in accordance with the amended]
PDIC Charter.
Note: The designation of a conservator is not a
For this purpose, banks closed by the Monetary precondition to the designation of a receiver.
Board shall no longer be rehabilitated. [Sec. 12, [Sec. 30, R.A. 7653, as amended]
PDIC Charter, as amended by R.A. No. 10846]
Receivership
Designation of PDIC as Receiver
Upon the designation of PDIC as receiver of a Grounds
closed bank, it shall: The Monetary Board may summarily, and
(1) Serve a notice of closure to the highest- without need for prior hearing, forbid the
ranking officer of the bank present in the institution from doing business in the
bank premises; or Philippines and designate the PDIC as
(2) Post the notice of closure in the bank receiver of the banking institution whenever –
premises or on its main entrance, in the
absence of such officer. Upon report of the head of the supervising or
examining department, the Monetary Board
Closure and Takeover of Bank finds that a bank or quasi-bank:
The closure of the bank shall be deemed (a) Is unable to pay its liabilities as they
effective upon the service of the notice of become due in the ordinary course of
closure. business: Provided, That this shall not
include inability to pay caused by
Thereafter, the receiver shall takeover the extraordinary demands induced by
bank and exercise the powers of the receiver financial panic in the banking community;
as provided in the PDIC Charter. [Sec.14(a), (b) Has insufficient realizable assets, as
PDIC Charter, as amended by R.A. No. 10846] determined by the BSP, to meet its
liabilities; or
Conservatorship (c) Cannot continue in business without
involving probable losses to its depositors
Grounds for Appointment of a Conservator or creditors; or
Whenever, on the basis of a report submitted (d) Has willfully violated a cease and desist
by the appropriate supervising or examining order under Section 37 of the New Central
department, the Monetary Board finds that a Bank Act that has become final, involving
bank or quasi-bank is: acts or transactions which amount to fraud
a) In a state of continuing inability; or or a dissipation of the assets of the
b) Unwilling to maintain a condition of liquidity institution; in which cases,
deemed adequate to protect the interest of
depositors and creditors. [Sec. 29, R.A. Note: For a quasi-bank, any person of
7653, as amended] recognized competence in banking or
finance may be designated as receiver.
The designation of a conservator shall be [Sec. 30, R.A. 7653, as amended]
vested exclusively in the Monetary Board.
[Sec. 30, R.A. 7653, as amended] Specific Powers of the PDIC as Receiver
In addition to the powers of a receiver provided
Qualifications of a Conservator under existing laws (see Sec. 30, R.A. 7653),
The conservator should be: PDIC, as receiver of a closed bank, is
(1) Competent and knowledgeable in bank empowered to:
operations and management; (1) Represent and act for and on behalf of the
(2) A natural person to be appointed by the closed bank;
Monetary Board. In contrast, the receiver is
(2) Gather and take charge of all the assets, (12) Utilize available funds of the bank,
records and affairs of the closed bank, and including funds generated by the receiver
administer the same for the benefit of its from the conversion of assets to pay for
creditors; reasonable costs and expenses incurred
(3) Convert the assets of the closed bank to for the preservation of the assets, and
cash or other forms of liquid assets, as far liquidation of, the closed bank, without
as practicable; need for approval of the liquidation court;
(4) Bring suits to enforce liabilities of the For banks with insufficient funds, PDIC is
directors, officers, employees, agents of authorized to advance the foregoing costs
the closed bank and other entities related and expenses, and collect payment, as and
or connected to the closed bank or to when funds become available.
collect, recover, and preserve all assets, (13) Charge reasonable fees for the
including assets over which the bank has liquidation of the bank from the assets of
equitable interest; the bank: Provided, That payment of these
(5) Appoint or hire persons or entities of fees, including any unpaid advances under
recognized competence in banking, the immediately preceding paragraph, shall
finance, asset management or remedial be subject to approval by the liquidation
management, as its deputies, assistants or court;
agents, to perform such powers and (14) Distribute the available assets of the
functions of PDIC as receiver of the closed closed bank, in cash or in kind, to its
bank, or assist in the performance thereof; creditors in accordance with the Rules on
(6) Appoint or hire persons or entities of Concurrence and Preference of Credits
recognized competence in forensic and under the Civil Code or other laws;
fraud investigations; (15) Dispose records of the closed bank that
(7) Pay accrued utilities, rentals and salaries of are no longer needed in the liquidation in
personnel of the closed bank for a period accordance with guidelines set by the PDIC
not exceeding three (3) months, from Board of Directors, notwithstanding the
available funds of the closed bank; laws on archival period and disposal of
(8) Collect loans and other claims of the closed records; and
bank and for this purpose, modify, (g) Exercise such other powers as are inherent
compromise or restructure the terms and and necessary for the effective discharge
conditions of such loans or claims as may of the duties of PDIC as receiver.
be deemed advantageous to the interests [Sec.13(b), PDIC Charter, as added by
of the creditors of the closed bank; R.A. No. 10846]
(9) Hire or retain private counsel as may be
necessary; Liquidation
(10) Borrow or obtain a loan, or mortgage,
pledge or encumber any asset of the closed The receiver is authorized to adopt and
bank, when necessary to preserve or implement, without need of consent of the
prevent dissipation of the assets, or to stockholders, board of directors, creditors or
redeem foreclosed assets of the closed depositors of the closed bank, any or a
bank, or to minimize losses to its depositors combination of the following modes of
and creditors; liquidation:
(11) If the stipulated interest rate on (a) Conventional liquidation; and
deposits is unusually high compared with (h) Purchase of assets and/or assumption of
prevailing applicable interest rates, PDIC liabilities [Sec.13(a), PDIC Charter, as
as receiver, may exercise such powers amended by R.A. No. 10846]
which may include a reduction of the
interest rate to a reasonable rate: Provided,
That any modifications or reductions shall
apply only to earned and unpaid interest;
The placement of a bank under liquidation shall o The proceeds in excess of the
have the following effects: amount secured shall be
(1) On the corporate franchise or existence: returned by the BSP to the
Upon placement by the Monetary Board of receiver.
a bank under liquidation, it shall continue - Any preliminary attachment or
as a body corporate until the termination of garnishment on any of the assets of the
the winding-up period under Section 16 of closed bank existing at the time of
the PDIC Charter. closure shall not give any preference to
- The receiver shall represent the closed the attaching or garnishing party.
bank in all cases by or against the - Upon motion of the receiver, the
closed bank and prosecute and defend preliminary attachment or garnishment
suits by or against it. shall be lifted and/or discharged.
- In no case shall the bank be reopened (4) On labor relations: Notwithstanding the
and permitted to resume banking provisions of the Labor Code, the
business after being placed under employer-employee relationship between
liquidation. the closed bank and its employees shall be
(2) On the powers and functions of its deemed terminated upon service of the
directors, officers and stockholders: notice of closure of the bank in accordance
The powers, voting rights, functions and with the PDIC Charter.
duties, as well as the allowances, - Payment of separation pay or benefits
remuneration and perquisites of the provided for by law shall be made from
directors, officers, and stockholders of such available assets of the bank in
bank are terminated upon its closure. accordance with the Rules on
- Accordingly, the directors, officers, and Concurrence and Preference of Credits
stockholders shall be barred from under the Civil Code or other laws.
interfering in any way with the assets, (5) On contractual obligations: The receiver
records, and affairs of the bank. may cancel, terminate, rescind or repudiate
- The receiver shall exercise all any contract of the closed bank
authorities as may be required to - If the contract is not necessary for the
facilitate the liquidation of the closed orderly liquidation of the bank; or
bank for the benefit of all its creditors. - If the contract is grossly
(3) On the assets: Upon service of notice of disadvantageous to the closed bank; or
closure as provided in Section 14 of the - For any ground provided by law.
PDIC Charter, all the assets of the closed (6) On interest payments: The liability of a
bank shall he deemed in custodia legis in bank to pay interest on deposits and all
the hands of the receiver, and as such, other obligations as of closure shall cease
these assets may not be subject to upon its closure by the Monetary Board
attachment, garnishment, execution, levy without prejudice to the first paragraph of
or any other court processes. Section 85 of Republic Act No. 7653 (the
- A judge, officer of the court or any New Central Bank Act).
person who shall issue, order, process - Thw receiver shall have the authority,
or cause the issuance or without need for approval of the
implementation of the garnishment liquidation court, to assign, as payment
order, levy, attachment or execution, to secured creditors, the bank assets
shall be liable under Section 27 of the serving as collaterals to their respective
PDIC Charter. loans up to the extent of the
- Collaterals securing the loans and outstanding obligations, including
advances granted by the BSP shall not interest as of date of closure of the
be included in the assets of the closed hank, as validated by the receiver.
bank for distribution to other creditors; - The valuation of the asset shall be
based on the prevailing market value of
INTELLECTUAL
PROPERTY LAW
COMMERCIAL LAW
(3) Award actual and other damages in his been introduced anywhere else in the
favor, if warranted by the circumstances. world by the patent owner, or by any
[Sec. 68, RA 8293] party authorized to use the invention.
[Sec. 72.1, RA 8293 as amended by
The action shall be filed within 1 year from the RA 9502]
date of publication made in accordance with b. Parallel Importation: The right to import
Sections 44 and 51, respectively. [Sec. 70, RA the drugs and medicines shall be available
8293] to any government agency or any private
third party; [Sec. 72.1, RA 8293 as
6. Rights Conferred by a Patent amended by RA 9502]
c. Non – Commercial: Where the act is done
Where the To restrain, prohibit and privately and on a non-commercial scale or
subject prevent any unauthorized for a non-commercial purpose: Provided,
matter of a person or entity from making, That it does not significantly prejudice the
patent is a using, offering for sale, selling economic interests of the owner of the
product or importing that product. patent; [Sec. 72.2, RA 8293 as amended
[Sec. 71.1(a), RA 8293] by RA 9502]
Where the To restrain, prevent or prohibit d. Experimental Use: Where the act consists
subject any unauthorized person or of making or using exclusively for
matter of a entity from using the process, experimental use of the invention for
patent is a and from manufacturing, scientific purposes or educational
process dealing in, using, selling or purposes and such other activities directly
offering for sale, or importing related to such scientific or educational
any product obtained directly experimental use; [Sec. 72.3, RA 8293 as
or indirectly from such amended by RA 9502]
process. [Sec. 71.1(b), RA e. Drugs and Medicine: In the case of drugs
8293] and medicines, where the act includes
testing, using, making or selling the
Other Patent owners shall also have
invention including any data related
rights of the right to assign, or transfer
thereto, solely for purposes reasonably
Patent by succession the patent, and
related to the development and submission
Owners to conclude licensing
of information and issuance of approvals
contracts for the same. [Sec.
by government regulatory agencies
71.2, RA 8293]
required under any law of the Philippines or
of another country that regulates the
7. Limitations of Patent Rights manufacture, construction, use or sale of
any product: Provided, That, in order to
The owner of a patent has no right to prevent protect the data submitted by the original
third parties from performing, without his patent holder from unfair commercial use
authorization, the acts referred to in Section 71 provided in Article 39.3 of the Agreement
hereof in the following circumstances: on Trade-Related Aspects of Intellectual
a. Owner’s Consent: Property Rights (TRIPS Agreement), the
1. National exhaustion - Using a patented Intellectual Property Office, in consultation
product which has been put on the with the appropriate government agencies,
market in the Philippines by the owner shall issue the appropriate rules and
of the product, or with his express regulations necessary therein not later than
consent, insofar as such use is 120 days after the enactment of this law;
performed after that product has been [Sec. 72.4, RA 8293 as amended by RA
so put on the said market; 9502]
2. International exhaustion (for drugs and f. Medicine Individual Preparation: Where
medicines) - A drug or medicine has the act consists of the preparation for
Any prior user, who, in good faith was using the CONDITIONS ON THE USE BY THE
invention or has undertaken serious GOVERNMENT OR THIRD PERSONS
preparations to use the invention in his
enterprise or business, before the filing date or Unless otherwise provided herein, the use by
priority date of the application on which a the Government, or third person authorized by
patent is granted, shall have the right to the Government shall be subject, where
continue the use thereof as envisaged in such applicable, to the following provisions:
preparations within the territory where the a. In situations of national emergency or other
patent produces its effect. [Sec. 73.1, RA 8293] circumstances of extreme urgency as
provided under Section 74.1 (c), the right
The right of the prior user may only be holder shall be notified as soon as
transferred or assigned together with his reasonably practicable;
enterprise or business, or with that part of his b. In the case of public non-commercial use
enterprise or business in which the use or of the patent by the patentee, without
preparations for use have been made. [Sec. satisfactory reason, as provided under
73.2, RA 8293] Section 74.1 (d), the right holder shall be
informed promptly: Provided, That, the
All cases arising from the implementation of Under the doctrine of equivalents, an
this provision shall be cognizable by courts with infringement occurs when a device:
appropriate jurisdiction provided by law. No (1) Appropriates a prior invention by
court except the Supreme Court of the incorporating its innovative concept, albeit
Philippines, shall issue any temporary with some modification and change,
restraining order or preliminary injunction or (2) Performs substantially the same function in
such other provisional remedies that will substantially the same way, and
prevent its immediate execution. [Sec. 74.3, (3) Achieves substantially the same result.
RA 8293 as amended by RA 9502] [Godinez v. CA, G.R. No. L-97343 (1993)]
whose rights have been infringed, may bring a Criminal Action: 3 years from date of the
civil action before a court of competent commission of the crime. [Sec. 84, RA 8293]
jurisdiction:
1. To recover from the infringer such Defenses in Actions for
damages sustained thereby, plus Infringement
attorney’s fees and other expenses of
litigation, and In an action for infringement, the defendant, in
2. To secure an injunction for the protection of addition to other defenses available to him,
his rights. [Sec. 76.2, RA 8293] may show the invalidity of the patent, or any
claim thereof, on any of the grounds on which
If the damages are inadequate or cannot be a petition of cancellation can be brought under
readily ascertained with reasonable certainty, Section 61. [Sec. 81, RA 8293]
the court may award, by way of damages, a
sum equivalent to reasonable royalty. [Sec. Patent found invalid may be cancelled
76.3, RA 8293] In an action for infringement, if the court shall
find the patent or any claim to be invalid, it shall
The court may, according to the circumstances cancel the same, and the Director of Legal
of the case, award damages in a sum above Affairs upon receipt of the final judgment of
the amount found as actual damages cancellation by the court, shall record that fact
sustained: Provided, That the award does not in the register of the Office and shall publish a
exceed three (3) times the amount of such notice to that effect in the IPO Gazette. [Sec.
actual damages. [Sec. 76.4, RA 8293] 82, RA 8293]
Civil Action: No damages can be recovered for Compulsory Director Court of Appeals
(General; General & (Rule 43, ROC)
acts of infringement committed more than four Secs. 93, Bureau of
(4) years before the institution of the action for 94-102) Legal Affairs
infringement. [Sec. 79, RA 8293]
Special Director Court of Appeals
Compulsory General (Rule 43, ROC)
Marks
Inventions and any right, title or interest in and
Any visible sign capable of distinguishing the
to patents and inventions covered thereby,
goods (trademark) or services (service mark)
may be assigned or transmitted by inheritance
of an enterprise and shall include a stamped or
or bequest or may be the subject of a license
marked container of goods. [Sec. 121.1, RA
contract. [Sec. 103.2, RA 8293]
8293]
An assignment may be of:
(i) The entire right, title or interest in and
to the patent and the invention covered
thereby, or
(ii) An undivided share of the entire patent
and invention, in which event the
parties become joint owners thereof.
These are words that merely describe the Note: However, when the well-known mark is
product or service or refer to their quality or not registered, its protection is limited, as it only
characteristic. prevents the registration of confusingly similar
marks that are used for identical or similar
General rule: Descriptive marks are not goods or services. [Sec. 123.1(e), RA 8293]
entitled to protection and are too weak to
function as a trademark. While the IP Code expressly provides that the
rights to a mark shall be acquired through
Exception: Doctrine of Secondary meaning, registration, the Supreme Court held that
infra. notwithstanding this express provision in the IP
Code, prior use is still the basis of trademark
Example: “YELLOW PAGES” for telephone ownership. [Berris Agricultural Co., Inc. vs.
directory having yellow pages. Norvy Abyadang, G.R. No. 183404, (2010)]
everyday language or in a bona fide and The Office may accept as prima facie evidence
established trade practice; [Sec. 123.1(i), that the mark has become distinctive, proof of
RA 8293] substantially exclusive and continuous use
j. Consists exclusively of signs or of thereof by the applicant:
indications that may serve in trade to (i) In commerce in the Philippines
designate the kind, quality, quantity, (ii) For 5 years before the date on which the
intended purpose, value, geographical claim of distinctiveness is made. [Sec.
origin, time or production of the goods or 123.2, RA 8293]
rendering of the services, or other
characteristics of the goods or services; DISCLAIMERS
[Sec. 123.1(j), RA 8293] The Office may allow or require the applicant to
k. Consists of shapes that may be disclaim an unregistrable component of an
necessitated by technical factors or by the otherwise registrable mark but such disclaimer
nature of the goods themselves or factors shall not prejudice or affect:
that affect their intrinsic value; [Sec. (i) The applicant’s or owner’s rights then
123.1(k), RA 8293] existing or thereafter arising in the
l. Consists of color alone, unless defined by disclaimed matter; nor
a given form; [Sec. 123.1(l), RA 8293] (ii) The applicant’s or owner’s right on another
m. Is contrary to public order or morality. [Sec. application of later date if the disclaimed
123.1(m), RA 8293] matter became distinctive of the applicant’s
or owner’s goods, business or services.
Other instances when a mark may be [Sec. 126]
registered:
a. When it is part of a composite mark, though The basic purpose of disclaimers is to make of
there should be a disclaimer and the record, that a significant element of a
person who registers them will not acquire composite mark is not being exclusively
ownership thereto; appropriated by itself apart from the composite.
b. If they are contractions of or coined from [Rule 608, Rule on Trademarks]
generic and descriptive terms;
c. If they are used in a fanciful or arbitrary DISCLAIMED WORDS
manner; Words in a mark that are not being claimed for
d. If the mark falls under the Doctrine of exclusive use, including: 1. Generic terms; 2.
Secondary Meaning. Descriptive words; and 3. Those that do not
function as part of the trademark. [Rule 608,
DOCTRINE OF SECONDARY MEANING Rule on Trademarks]
Secondary meaning is acquired when a
descriptive mark or a mark that may serve in Note: Except for generic terms, disclaimed
trade that consists of a shape or color becomes words can later on be registered as part of the
distinctive because of its exclusive and trademark if it acquires distinctiveness.
continuous use in Philippine commerce.
5. Prior use of mark as a
A word or phrase originally incapable of
exclusive appropriation, might have been used Requirement
so long and so exclusively by one producer
with reference to his article that, in that trade While RA 8293 No Longer Requires
and to that branch of the purchasing public, the Prior Use Before Filing the
word or phrase has come to mean that the Application, It Still Requires Use of
article was his product. [Ang v. Teodoro, G.R. the Mark After Filing, Registration
No. L-48226 (1942)] and Renewal
Under the old trademark law or R.A. 166, actual 3. Use of the mark by a company related to
commercial use of a trademark in the the applicant or registrant. [Sec. 152.4, RA
Philippines was required prior to its 8293]
registration. [RA 166, Sec. 2-A] 4. Use of the mark by a person controlled by
the registrant. [Sec. 152.4, RA 8293]
RA 8293 no longer requires prior use before
filing the application (i.e., it shifted to an intent Note: The use of a mark by a company related
to use system). However, the law still requires with, or controlled by the registrant or applicant
use of the mark after filing. shall inure to the latter's benefit: Provided, that
such mark is not used in such manner as to
Declaration of Actual Use (DAU) deceive the public. [Sec.152.4, RA 8293]
The applicant or the registrant is required to file
a Declaration of Actual Use of the mark after Declaration of Non-Use (DNU)
filing and registration. In lieu of a DAU, an applicant or registrant,
when warranted, shall file a Declaration of Non-
Note: Failure to file declaration of actual use Use indicating the grounds or justification
automatically results in the denial of the therefor.
registration or the cancellation of the
registration by operation of law. [Secs. 124.2 & Non-use of a mark may be excused in the
145, RA 8293] following cases:
1. Where the applicant or registrant is
When to File Declaration of Actual Use prohibited from using the mark in
(DAU) commerce because of a requirement
1. Within 3 years from the filing date of the imposed by another government agency
application (3rd Year DAU); prior to putting the goods in the market or
2. Within 1 year from the 5th anniversary of rendering of the services;
the registration of the mark (5th Year DAU); 2. Where a restraining order or injunction was
3. Within 1 year from the date of renewal; and issued by the Bureau of Legal Affairs, the
4. Within 1 year from the 5th anniversary of courts or quasi-judicial bodies prohibiting
each renewal. [Rule 204, Trademark the use of the mark; or
Regulations of 2017] 3. Where the mark is the subject of an
opposition or cancellation case. [Rule 211,
Non-Use of Mark When Excused Trademark Regulations of 2017]
3. The product's quality, quantity, or size, (6) Likelihood that the prior owner will bridge
including the nature of the package, the gap;
wrapper or container; (7) Actual confusion; and
4. The nature and cost of the article; (8) Sophistication of the buyers.
5. The descriptive properties, physical [Polaroid Corp. vs. Polaroid Elecs. Corp.,
attributes or essential characteristics with 287 F. 2d 492, 495 (2d Cir.), (1961), as
reference to their form, composition, cited in Mighty Corp. v. E&J Gallo, G.R. No.
texture or quality; 154342, Jul 14, 2004]
6. The purpose of the goods;
7. Whether the article is bought for immediate Idem Sonans
consumption, that is, day-to-day household
items; The rule on idem sonans is also a test to
8. The fields of manufacture; resolve the confusing similarity of trademarks.
9. The conditions under which the article is A mark with a different spelling but is
usually purchased; and similar in sound with a registered mark
10. The channels of trade through which the when read, may be ruled as being
goods flow, how they are distributed, confusingly-similar with the said registered
marketed, displayed and sold [Mighty mark or senior mark.
Corp. v. E&J Gallo, G.R. No. 154342, Two names are said to be "idem sonantes"
(2004)] if the attentive ear finds difficulty in
distinguishing them when pronounced.
Rationale: The wisdom of this approach is its [Martin v. State, 541 S.W. 2d 605 (1976)]
recognition that each trademark infringement
case presents its own unique set of facts. No Similarity of sound is sufficient to rule that the
single factor is preeminent, nor can the two marks are confusingly similar when applied
presence or absence of one determine, without to merchandise of the same descriptive
analysis of the others, the outcome of an properties. [Marvex Commercial v. Director of
infringement suit. Rather, the court is required Patent, G.R. No. L-19297 (1966)]
to sift the evidence relevant to each of the
criteria. This requires that the entire panoply of
elements constituting the relevant factual
7. Well-Known Marks
landscape be comprehensively examined. It is
a weighing and balancing process. With A well-known mark is a mark which a
reference to this ultimate question, and from a competent authority of the Philippines has
designated to be well-known internationally
balancing of the determinations reached on all
and in the Philippines. [Sec. 123.1(e), RA
of the factors, a conclusion is reached whether
8293]
the parties have a right to the relief sought.
[Mang Inasal Philippines v. IFP Manufacturing
Corporation, G.R. No. 221717 (2017)] "Competent authority" for purposes of
determining whether a mark is well-known,
means:
The Court;
It has been held that where the products are
different, the prior owner’s chance of success The Director General;
is a function of many variables, such as the: The Director of the Bureau of Legal Affairs
(1) Strength of his mark; [Rule 101 (d), Trademark Regulations of
(2) Degree of similarity between the two 2017];
marks; Any administrative agency or office vested
(3) Reciprocal of defendant’s good faith in with quasi-judicial or judicial jurisdiction to
adopting its own mark; hear and adjudicate any action to enforce
(4) Quality of defendant’s product; the rights to a mark. [Dy v. Koninklijke
(5) Proximity of the products;
Philips Electronics, N.V. G.R. No. 186088 If the well-known mark is registered or not
(2017)] registered in the Philippines:
A mark cannot be registered if it is identical
In determining whether a mark is well-known, with, or confusingly similar to, or constitutes a
account shall be taken of the knowledge of the translation of an internationally well-known
relevant sector of the public, rather than the mark if used for identical or similar goods or
public at large, including knowledge in the services. [Sec. 123.1(e)]
Philippines which has been obtained as a
result of the promotion of the mark. [Sec. If the well-known mark is registered in the
123.1(e), RA 8293] Philippines:
A mark cannot be registered if it is identical
Determinants with, or confusingly similar to, or constitutes a
translation of an internationally well-known
1. The duration, extent and geographical area mark even if it is used for goods or services
of any use of the mark; which are NOT similar to those with respect to
2. The market share in the Philippines and which registration is applied. [Sec. 123.1(f)]
other countries of the goods/services to
which the mark applies; Other persons or entities cannot use the
3. The degree of the inherent or acquired registered well-known mark even for unrelated
distinction of the mark; goods, provided that:
4. The quality-image or reputation acquired 1. The use of the mark in relation to those
by the mark; goods or services would indicate a
5. The extent to which the mark has been connection between those goods or
registered in the world; services, and the owner of the registered
6. The exclusivity of the registration attained mark; and
by the mark in the world; 2. That the interests of the owner of the
7. The extent of use of the mark in the world; registered mark are likely to be damaged
8. The exclusivity of use in the world; by such use. [Sec. 123.1(f)]
9. The commercial value attributed to the
mark in the world; 8. Rights Conferred by
10. The record of successful protection of the
rights in the mark;
Registration
11. The outcome of litigations dealing with the
The owner of a registered mark shall have the
issue of whether the mar is well-known;
exclusive right to prevent all third parties
and
not having the owner's consent from using in
12. The presence or absence of identical or
the course of trade:
similar test marks validly registered or used
(i) Identical or similar signs or containers,
on other similar goods or services and
(ii) For goods or services which are identical or
owned by others. [See Rule 103,
similar to those in respect of which the
Trademark Regulations of 2017]
trademark is registered,
(iii) Where such use would result in a likelihood
Note: The determinants need not concur.
of confusion.
Protection Extended to Well- Note: In case of the use of an identical sign for
Known Marks identical goods or services, a likelihood of
confusion shall be presumed. [Sec. 147.1, RA
The owner of a well-known mark has the right 8293 as amended by RA 9502]
to be protected, whether or not the mark is
registered in the Philippines. [Sec. 123.1(e)] Exception: In cases of importation of drugs
and medicines allowed under Section 72.1 of
this Act and of off-patent drugs and medicines, submitted, a trademark could conceivably
third parties can import the same even without remain registered forever);
the owner’s consent, provided that: 2. Territorial (except well-known marks);
Said drugs and medicines bear the 3. Fair Use: The registration of the mark shall
registered marks not confer on the registered owner the right
The registered marks have not been to preclude third parties from using bona
tampered, unlawfully modified, or infringed fide their names, addresses, pseudonyms,
upon [Sec. 147.1, RA 8293 as amended by a geographical name, or exact indications
RA 9502] concerning the kind, quality, quantity,
destination, value, place of origin, or time
When Such Rights Are Conferred of production or of supply, of their goods or
services. Provided That:
The rights of the owner are conferred upon a. Such use is confined to the
registration of the mark, and a mark is deemed purposes of mere identification or
registered on the 31st day from the publication information; and
for purposes of opposition, provided no b. Such use cannot mislead the public
opposition is filed. as to the source of the goods or
On the 31st day from the publication for services. [Sec. 148, RA 8293]
purposes of opposition (if no opposition is 4. Prior User: A registered mark shall have
filed) no effect against any personwho, in good
On the date the decision or final order faith,before the filing date or the priority
giving due course to the application date,was using the mark for the purposes
becomes final and executory (if opposition of his business or enterprise. [Sec. 159.1,
is filed). [See Rule 703, Trademarks RA 8293]
Regulations of 2017] 5. Non-Use: Failure to file declaration of
actual use automatically results in the
Certificates of Registration denial of the registration or the cancellation
A certificate of registration of a mark shall be of the registration by operation of law. [Sec.
prima facie evidence of: 124.2]
1. The validity of the registration,
2. The registrant's ownership of the mark, Assignment and Transfer of
and Application and Registration
3. The registrant's exclusive right to use
the same in connection with the goods 1. An application for registration of a mark, or
or services and those that are related its registration, may be assigned or
thereto specified in the certificate. [Sec. transferred with or without the transfer of
138, RA 8293] the business using the mark. [Sec. 149.1,
RA 8293]
Duration 2. Such assignment or transfer shall,
A certificate of registration shall remain in force however, be null and void if it is liable to
for 10 years from registration and may be mislead the public, particularly as regards
renewed for periods of 10 years at its expiration the nature, source, manufacturing process,
upon payment of the prescribed fee and upon characteristics, or suitability for their
filing of a request. [Sec. 145-146, RA 8293] purpose, of the goods or services to which
the mark is applied. [Sec. 149.2, RA 8293]
Limitations on Such Rights 3. The assignment of the application for
registration of a mark, or its registration,
1. Duration (except that, inasmuch as the shall be in writing and require the
registration of a trademark could be signatures of the contracting parties.
renewed every 10 years, provided a Transfers by mergers or other forms of
Declaration of Actual Use is timely succession may be made by any document
supporting such transfer. [Sec. 149.3, RA 1. Any person who shall, without the consent
8293] of the owner of the registered mark, use in
4. Assignments and transfers shall have no commerce any reproduction, counterfeit,
effect against third parties until they are copy, or colorable imitation of a registered
recorded at the Office. [Sec. 149.5, RA mark or the same container or a dominant
8293] feature thereof:
a. In connection with the sale, offering
Any license contract concerning the for sale, distribution, advertising of
registration of a mark, or an application any goods or services, including
therefor, shall provide for effective control by other preparatory steps necessary
the licensor of the quality of the goods or to carry out the sale of any goods
services of the licensee in connection with or services on; or
which the mark is used. If the license contract b. In connection with which such use
does not provide for such quality control, or if is likely to cause confusion, or to
such quality control is not effectively carried cause mistake, or to deceive. [Sec.
out, the license contract shall not be valid. [Sec. 155.1, RA 8293]
150.1, RA 8293] 2. Any person who shall, without the consent
of the owner of the registered mark:
9. Use by third parties of names, a. Reproduce, counterfeit, copy or
colorably imitate a registered mark
etc. similar to registered mark or a dominant feature thereof; and
b. Apply such reproduction,
Use of Indications by Third Parties for
counterfeit, copy or colorable
Purposes Other than those for which the Mark
imitation to labels, signs, prints,
is Used. — Registration of the mark shall not
packages, wrappers, receptacles
confer on the registered owner the right to
or advertisements, intended to be
preclude third parties from using bona fide their
used in commerce:
names, addresses, pseudonyms, a
i. In connection with the sale,
geographical name, or exact indications
offering for sale, distribution, or
concerning the kind, quality, quantity,
advertising of goods or
destination, value, place of origin, or time of
services on; or
production or of supply, of their goods or
ii. In connection with which such
services: Provided, That such use is confined
use is likely to cause
to the purposes of mere identification or
confusion, or to cause
information and cannot mislead the public as to
mistake, or to deceive. [Sec.
the source of the goods or services. [Sec. 148,
155.2, RA 8293]
RA 8293]
Note: The infringement takes place at the
The IPC deems unlawful any subsequent use momentany of the acts stated in Subsection
of the trade name by a third party, whether as 155.1 or 155.2 are committed, regardless of
a trade name or a mark or collective mark, or whether there is actual sale of goods or
any such use of a similar trade name or mark, services using the infringing material.
likely to mislead the public. [Sec. 165.2 (b), RA
8293] A mere distributor, and not the owner, cannot
assert any protection from trademark
10. Infringement and remedies infringement as it had no right in the first place
to the registration of the disputed trademarks.
Trademark infringement [Superior Commercial Enterprises v. Kunnan
Enterprises, G.R. No. 169974 (2010)]
The ff. shall be liable in a civil action for
infringement:
the curls are of petitioner and that the latter The defendant had otherwise actual notice
has ventured into snack manufacturing or, of the registration. [Sec. 158, RA 8293]
if not, that the petitioner has supplied the
flavorings for respondent's product. Either Penalties
way, the reputation of petitioner would be
taken advantage of and placed at the Independent of the civil and administrative
mercy of respondent. [Mang Inasal sanctions imposed by law, a criminal penalty of
Philippines v. IFP Manufacturing imprisonment from two (2) years to five (5)
Corporation, G.R. No. 221717 (2017)] years and a fine ranging from Fifty thousand
pesos (P50,000) to Two hundred thousand
Damages pesos (P200,000), shall be imposed on any
person who is found guilty of committing any of
The owner of a registered mark may recover the acts mentioned in Section 155, Section 168
damages from any person who infringes his and Subsection 169.1. (Arts. 188 and 189,
rights, and the measure of the damages Revised Penal Code). [Sec. 170, RA 8293]
suffered shall be either:
(i) The reasonable profit which the 11. Unfair Competition
complaining party would have made, had
the defendant not infringed his rights; or The ff. shall be guilty of unfair competition, and
(ii) The profit which the defendant actually shall be subject to an action therefor:
made out of the infringement; or (i) Any person who shall employ deception or
(iii) In the event such measure of damages any other means contrary to good faith, by
cannot be readily ascertained with which he shall pass off the goods
reasonable certainty, then the court may manufactured by him or in which he deals,
award as damages – or his business, or services for those of the
a. A reasonable percentage based one having established such goodwill; or
upon the amount of gross sales of (ii) Any person who shall commit any acts
the defendant; or calculated to produce said result. [Sec.
b. The value of the services in 168.2, RA 8293]
connection with which the mark or
trade name was used in the Particular acts of unfair competition:
infringement of the rights of the a. Selling one’s goods and giving them the
complaining party. [Sec. 156.1, RA general appearance of goods of another
8293] manufacturer or dealer, either:
As to the goods themselves or in the
Requirement of Notice wrapping of the packages in which they
are contained, or the devices or words
The owner of the registered mark shall not be thereon; or
entitled to recover profits or damages unless In any other feature of their
the acts have been committed with appearance, which would be likely to
knowledge that such imitation is likely to influence purchasers to believe that the
cause confusion, or to cause mistake, or to goods offered are those of a
deceive. manufacturer or dealer, other than the
actual manufacturer or dealer. [Sec.
Such knowledge is presumed if: 168.3(a), RA 8293]
The registrant gives notice that his mark is b. Clothing one’s goods with such
registered by displaying with the mark the appearance as shall deceive the public and
words '"Registered Mark" or the letter R defraud another of his legitimate trade, or
within a circle or any subsequent vendor of such goods or
any agent of any vendor engaged in selling
such goods with a like purpose. [Sec. Company, Inc., vs. Foodsphere, G.R. No.
168.3(a), RA 8293] 217781 (2018)]
c. Using any artifice, or device, or employing
any other means calculated to induce the Infringement of Unfair Competition
false belief that such person is offering the Trademark or
services of another who has identified such Trade Name
services in the mind of the public. [Sec. Unauthorized use of Passing off of one’s
168.3(b), RA 8293] a trademark or trade goods as those of
d. Making any false statement in the course name another
of trade or committing any other act Fraudulent intent is Fraudulent intent is
contrary to good faith of a nature calculated unnecessary essential
to discredit the goods, business or services Prior registration of Registration is not
of another. [Sec. 168.3(c), RA 8293] the trademark is a necessary
prerequisite to the
The elements of an action for unfair action
competition are: [In and Out Burger vs. Sehwani, G.R. No.
(1) Confusing similarity in the general 179127 (2008); Prosource International, Inc.
appearance of the goods, and vs. Horphag Research Management S.A., G.R.
(2) Intent to deceive the public and defraud a No. 180073 (2009)]
competitor.
The law on unfair competition is broader and
The confusing similarity may or may not result more inclusive than the law on trademark
from similarity in the marks, but may result from infringement.
other external factors in the packaging or The latter is more limited but it recognizes
presentation of the goods. The intent to a more exclusive right derived from the
deceive and defraud may be inferred from the trademark adoption and registration by the
similarity in appearance of the goods as offered person whose goods or business is first
for sale to the public. Actual fraudulent intent associated with it.
need not be shown. [McDonald’s Corporation Hence, even if one fails to establish his
v. L.G. Big Mak Burger, Inc., et al., G.R. No. exclusive property right to a trademark, he
143993 (2004)] may still obtain relief on the ground of his
competitor’s unfairness or fraud. [Mighty
Who may file an action for unfair competition: Corporation v. E. & J. Gallo Winery, G.R.
A person who has identified in the mind of the No. 154342 (2004)]
publicthe goods he manufactures or deals in,
his business or services from those of others.
12. Registration of marks
Whether or not a registered mark is
employed under the Madrid Protocol
Ratio: Such person has a property right in
the goodwillof the said goods, business or Note: This part contains a simplified discussion
services so identified,and said right shall of the Madrid Protocol. For the full text, please
be protected in the same manner as other refer to the “PROTOCOL RELATING TO THE
property rights. [Sec. 168.1, RA 8293] MADRID AGREEMENT CONCERNING THE
INTERNATIONAL REGISTRATION OF
The "true test," therefore, of unfair competition MARKS”
has thus been "whether the acts of the
defendant have the intent of deceiving or are The President's ratification [to the Madrid
calculated to deceive the ordinary buyer Protocol] is valid and constitutional because
making his purchases under the ordinary [it], being an executive agreement as
conditions of the particular trade to which the determined by the Department of Foreign
controversy relates.” [San Miguel Pure Foods Affairs, does not require the concurrence of the
The “Home” or Office of Origin The refusal of an IP Office to protect the mark
Must be in a territory that is: a Contracting Party will not affect the decisions of other IP Offices.
to the Protocol (e.g. Philippines), or within a
Contracting Organization (e.g. European Independence of International Registration
Union).
Upon expiry of a period of five years from the
The Applicant Must: date of the international registration, such
1. be a national of; registration shall become independent of the
2. be domiciled in; or basic application or the registration resulting
3. have a real and effective industrial or therefrom, or of the basic registration, as the
commercial establishment in – case may be. [Art. 6(2)]
the Contracting State or Contracting
Organization. [Art.2] See discussion above on When protection
under international registration lost in relation
Three-step Process to this concept.
1. Application through the National or
Regional IP Office. Term of Protection
o Applicant needs to have first filed an
application or registered the mark Term
sought to be internationally Registration of a mark at the International
registered through a national or Bureau is effected for ten years. [Art. 6(1)]
regional IP Office.
o Applicant submits international Renewal
application (see Art 3) of the Protocol Any international registration may be renewed
through the same IP Office, which for a period of ten years from the expiry of the
will certify and forward it to the World preceding period, by the mere payment of the
Intellectual Property Organization basic fee, supplementary, and complementary
(WIPO). fees. [Art.7]
2. Formal Examination by WIPO
o WIPO. through its International
Bureau (IB), conducts a formal
examination of the international
application.
o Once approved, the mark is
recorded in the International
Register and published.
o The applicant a certificate of
international registration and notifies
the IP Offices designated where
protection is sought.
Copyright is the legal protection extended to The copyright is distinct from the property in the
the owner of the rights in an “original work”, material object subject to it.
which refers to every literary, scientific and
artistic production. Consequently:
(1) The transfer or assignment of the
Copyright refers to the right granted by a copyright shall NOT itself constitute a
statute to the proprietor of an intellectual transfer of the material object
production to its exclusive use and enjoyment (2) The transfer or assignment of the sole
to the extent specified in the statute. [Olaño v. copy or of one or several copies of the
Lim Eng Co, G.R. 195835 (2016)] work shall NOT imply transfer or
assignment of the copyright. [Sec. 181, RA
1. Basic Principles 8293]
Exceptions
1. When copyright is transferred by
assignment or bequest in favor of the
government [Sec. 176.3];
The person or body corporate, whose name The owners of copyright and related rights or
appears on an audio-visual work in the usual their heirs may designate a society of artists,
manner, shall, in the absence of proof to the writers, composers and other right-holders to
contrary, be presumed to be the maker of said collectively manage their economic or moral
work. [Sec. 219, RA 8293] rights on their behalf.
For the said societies to enforce the
Use of Pseudonyms rights of their members, they shall first
This provision shall be applicable even if the secure the necessary accreditation
name is a pseudonym, where the pseudonym from the Intellectual Property Office.
leaves no doubt as to the identity of the author. [Sec. 183, RA 8293 as amended by RA
[Sec. 219, RA 8293] 10372]
(4) Collection of additional remuneration for [Sec. 185.1, RA 8293; Harper & Row v.
subsequent communication or broadcast of Nation Enterprise, 471 US 539, (1985)]
a performance;
(5) Collection of single equitable remuneration The fact that a work is unpublished shall not by
for the broadcast, other communication to itself bar a finding of fair use if such finding is
the public or public performance of a sound made upon consideration of all the above
recording; and factors. [Sec. 185.2, RA 8293]
(6) Distribution of the abovementioned
collections to the rights holders. [IPOPHL Commercial use of the copyrighted work can
Office Order 13-173 s.2013] be weighed against fair use. [ABS–CBN Corp.
vs. Gozon, G.R. No. 195956 (2015)]
6. Limitations on Copyright
Parody, like other comment and criticism, may
claim fair use. The more transformative the
Fair Use
new work, the less will be the significance of
other factors, like commercialism. The heart of
DOCTRINE OF FAIR USE
any parodist's claim to quote from existing
The fair use of copyrighted work for criticism,
material is the use of some elements of a prior
news reporting, teaching (including multiple
author's composition to create a new one that,
copies for classroom use), research and similar
at least in part, comments on that author's
purposes is not an infringement of copyright.
work. [Campbell v. Acuff-Rose Music Inc., 510
[Sec. 185.1, RA 8293]
U.S. 569 (1994)]
A privilege, in persons other than the owner of
the copyright, to use the copyrighted material Limitations on Protection of
in a reasonable manner without his consent, Neighboring Rights
notwithstanding the monopoly granted to the
owner by the copyright. It is meant to balance Sections 203, 208 and 209 shall not apply
the monopolies enjoyed by the copyright owner where the acts referred to in those Sections are
with the interests of the public and of society. related to:
1. The use by a natural person exclusively for
Decompilation his own personal purposes;
Refers to the reproduction of the code and 2. Using short excerpts for reporting current
translation of the forms of the computer events;
program to achieve the inter-operability of an 3. Use solely for the purpose of teaching or
independently created computer program with for scientific research; and
other programs. This may also constitute fair 4. Fair use of the broadcast subject to certain
use. [Sec. 185.1, RA 8293] conditions. [Sec. 212, RA 8293]
Term of Protection
Factors to consider in determining Fair Use
a. The purpose and character of the use, Duration of Copyright
including whether such use is of a Works Term
commercial nature or is for non-profit Original Literary and Lifetime of author
educational purposes; Artistic Works and for 50 years after
b. The nature of the copyrighted work; including his death [Sec.
c. The amount and substantiality of the Posthumous Works 213.1, RA 8293]
portion used in relation to the copyrighted Derivative Works Lifetime of author
work as a whole; and including and for 50 years after
d. The effect of the use upon the potential Posthumous Works his death [Sec.
market for or value of the copyrighted work 213.1, RA 8293]
lost, destroyed or rendered unusable and due to the infringement, as well as the
copies are not available with the publisher. profits the infringer may have made due to
[Sec. 188.1, RA 8293] such infringement;
In proving profits: The plaintiff shall be
It shall not be permissible to produce a volume required to prove sales only, and the
of a work published in several volumes or to defendant shall be required to prove
produce missing tomes or pages of magazines every element of cost which he claims
or similar works, unless the volume, tome or [Sec. 216.1(b)]
part is out of stock: (3) Such damages which to the court shall
Provided, That every library which, by appear to be just and shall not be regarded
law, is entitled to receive copies of a as penalty, in lieu of actual damages and
printed work, shall be entitled, when profits; [Sec. 216.1(b)]
special reasons so require, to (4) Impounding during the pendency of the
reproduce a copy of a published work action, upon such terms and conditions as
which is considered necessary for the the court may prescribe, sales invoices and
collection of the library but which is out other documents evidencing sales, all
of stock. [Sec. 188.2, RA 8293] articles and their packaging alleged to
infringe a copyright and implements for
Reproduction of Computer Program making them; [Sec. 216.1(c)]
The reproduction in one back-up copy or (5) Deliver under oath for destruction without
adaptation of a computer program shall be any compensation all infringing copies or
permitted, without the authorization of the devices, as well as all plates, molds, or
author of, or other owner of copyright in, a other means for making such infringing
computer program, by the lawful owner of that copies as the court may order; [Sec.
computer program: Provided, That the copy or 216.1(d)]
adaptation is necessary for: (6) Such other terms and conditions, including
a. The use of the computer program in the payment of moral and exemplary
conjunction with a computer for the damages, which the court may deem
purpose, and to the extent, for which the proper, wise and equitable and the
computer program has been obtained; and destruction of infringing copies of the work
b. Archival purposes, and, for the even in the event of acquittal in a criminal
replacement of the lawfully owned copy of case; [Sec. 216.1(e)]
the computer program in the event that the (7) Criminal liability.
lawfully obtained copy of the computer
program is lost, destroyed or rendered The copyright owner may elect, at any time
unusable. [Sec. 189.1, RA 8293] before final judgment is rendered, to recover
instead of actual damages and profits, an
Importation for Personal Purposes award of statutory damages for all
Sec. 190.2 of RA 8293 that limited the infringements involved in an action in a sum
importation of books was repealed by RA equivalent to the filing fee of the infringement
10372. RA 10372 expressly limited the action but not less than Php50,000.00. In
prohibition to import or export only to awarding statutory damages, the court may
counterfeit goods. consider the following factors:
(1) The nature and purpose of the infringing
Remedies act;
(2) The flagrancy of the infringement;
Remedies for Infringement (3) Whether the defendant acted in bad faith;
(1) An injunction restraining such (4) The need for deterrence;
infringement; [Sec. 216.1(a)] (5) Any loss that the plaintiff has suffered or is
(2) Actual damages, including legal costs and likely to suffer by reason of the
other expenses, as he may have incurred infringement; and
(6) Any benefit shown to have accrued to the One hundred fifty thousand pesos
defendant by reason of the infringement. (P150,000) to Five hundred thousand
pesos (P500,000) for the second offense.
In case the infringer was not aware and had no (c) Imprisonment of six (6) years and one (1)
reason to believe that his acts constitute an day to nine (9) years plus a fine ranging
infringement of copyright, the court in its from Five hundred thousand pesos
discretion may reduce the award of statutory (P500,000) to One million five hundred
damages to a sum of not more than Ten thousand pesos (P1,500,000) for the third
thousand pesos (Php10,000.00). [Sec. 216.1] and subsequent offenses.
(d) In all cases, subsidiary imprisonment in
Note: The amount of damages to be awarded cases of insolvency. [Sec. 217.1, RA 8293
shall be doubled against any person who: as amended by RA 10372]
i. Circumvents effective technological
measures; or Determination of Penalty
ii. Having reasonable grounds to know In determining the number of years of
that it will induce, enable, facilitate or imprisonment and the amount of fine, the court
conceal the infringement: shall consider:
a. Remove or alter any electronic 1. The value of the infringing materials that
rights management information the defendant has produced or
from a copy of a work, sound manufactured; and
recording, or fixation of a 2. The damage that the copyright owner has
performance; or suffered by reason of the infringement.
b. Distribute, import for [Sec. 217.2, RA 8293 as amended by RA
distribution, broadcast, or 10372]
communicate to the public
works or copies of works The respective maximum penalty stated in
without authority, knowing that Section 217.1 for the first, second, third and
electronic rights management subsequent offense, shall be imposed when
information has been removed the infringement is committed by:
or altered without authority. (a) The circumvention of effective
[Sec. 216.1(b)] technological measures;
(b) The removal or alteration of any electronic
However, no damages may be recovered rights management information from a
under this Act after the lapse of four (4) years copy of a work, sound recording, or fixation
from the time the cause of action arose. [Sec. of a performance, by a person, knowingly
226, RA 8293] and without authority; or
(c) The distribution, importation for
Criminal penalties distribution, broadcast, or communication
to the public of works or copies of works,
Criminal Penalties for Infringement by a person without authority, knowing that
Any person infringing any right secured by electronic rights management information
provisions of Part IV of this Act or aiding or has been removed or altered without
abetting such infringement shall be guilty of a authority. [Sec. 217.2, RA 8293 as
crime punishable by: amended by RA 10372]
(a) Imprisonment of one (1) year to three (3)
years plus a fine ranging from Fifty Certificate of Registration and Deposit
thousand pesos (P50,000) to One hundred The issuance of the certificates of registration
fifty thousand pesos (P150,000) for the first and deposit as provided by Sec. 2, Rule 7 of
offense. the Copyright Safeguards and Regulations, are
(b) Imprisonment of three (3) years and one (1) purely for recording the date of registration and
day to six (6) years plus a fine ranging from deposit of the work, and are not conclusive as
SPECIAL LAWS
COMMERCIAL LAWS
Implications
A. SECURED Section 66 provides that the PPSA will now
TRANSACTIONS apply over the laws it repeals. The following are
the implications in connection with the
repealing clause:
1. Personal Property Security 1. The system of conventional pledges and
Act chattel mortgages are “replaced with a
framework for secured transactions.”
Definitions and Scope [Somera, The Personal Property Security
Act, 2018]
Scope vis–a–vis Repealing Clause 2. Article 2127 is modified with regard to
property included in a Real Estate
General Rule: The PPSA applies to ALL Mortgage. Under Art. 2127, a REM
transactions that secure an obligation with “extends to natural accessions, to the
movable collateral improvements, growing fruits and the rents
or income not yet received when the
Exceptions [principal] obligation becomes due.” These
Interests in aircrafts personal properties are no longer
Interests in ships covered by Art. 2127. [Somera]
Articles 2093–2123 on Pledges are
repealed, with the exception of Article
Section 66. Repealing Clause.— The
2121 on Legal Pledges.
following laws, and all laws, decrees, orders,
Articles 2140–2141 and Act. No. 1508
and issuances or portions thereof, which are
on Chattel Mortgages are repealed.
inconsistent with the provisions of this Act,
The provisions on special preferred
are hereby repealed, amended, or modified
credits on movables (Articles 2241,
accordingly:
2243, 2246, 2247) are amended.
Sections 1 to 16 of Act No. 1508, otherwise
known as "The Chattel Mortgage Law" The creation of the Registry, as defined
Articles 2085-2123, 2127, 2140-2141, 2241, in Sec. 3(h) of the PPSA repeals the ff.
2243, and 2246-2247 of Republic Act No. laws:
386, otherwise known as the "Civil Code o Sections. 10 & 114–116 of PD
of the Philippines"; No. 1529 (Property
Section 13 of Republic Act No. 5980, as Registration Decree) on the
amended by Republic Act No. 8556, functions of the Register of
Deed & Registration of Chattel
otherwise known as the "Financing
Mortgages,
Company Act of 1998";
o Section 13 of the Financing
Sections 114-116 of Presidential Decree No.
Company Act of 1998 on
1529, otherwise known as the "Property
registry of financial leases and
Registration Decree";
o Section 5(3) of Rep. Act No.
Section 10 of Presidential Decree No. 1529,
4136 (Land Transportation
insofar as the provision thereof is
Code) on the recording of
inconsistent with this Act; and
mortgages, attachments and
Section 5(e) of Republic Act No. 4136, other encumbrances on motor
otherwise known as the "Land vehicles. [Somera]
Transportation and Traffic Code"
Definitions Parties
The parties to a security agreement under the
Security Agreement PPSA are the grantor and the secured
The secured transaction under the PPSA is creditor. [Sec. 3]
called the security agreement.
It is a consensual contract, perfected by Grantor [Sec. 3(c)]
the meeting of the minds of the grantor (1) The person who grants a security interest
and the secured creditor. [Somera] in collateral to secure its own obligation or
o The agreement must be contained that of another person;
in a written contract [Sec.6] (2) A buyer or other transferee of a collateral
o Writing, for the purposes of the that acquires its right subject to a security
PPSA, includes electronic records interest;
[Sec. 3(k)] (3) A transferor in an outright transfer of an
It is an accessory obligation entered into accounts receivable; or
by a person who grants a property right to (4) A lessee of goods.
another person, in order to secure the
payment or performance of an obligation. Secured Creditor [Sec. 3(i)]
[Somera] A secured creditor is a person that has a
security interest.
Security Interest [Sec. 3(j)]
A security interest is a property right in For the purposes of registration and priority
collateral that secures payment or other only, “secured creditor” includes a buyer of
performance of an obligation, regardless of: account receivable and a lessor of goods under
Whether the parties have denominated it an operating lease for not less than one (1)
as a security interest; and year.
The type of asset, the status of the grantor
or secured creditor, or the nature of the 2. Asset-specific rules
secured obligation
o Including the right of a buyer of Future property
accounts receivable and a lessor
under an operating lease for not
less than one (1) year Section 5. Creation of a Security Interest.
(b) A security agreement may provide for the
Proceeds creation of a security interest in a future
Under the PPSA, even when the collateral is property, but the security interest in that
disposed, the security interest extends to its property is created only when the grantor
identifiable or traceable proceeds. [Sec. 8] acquires rights in it or the power to
Covers sales, leases, licenses, exchanges, encumber it.
other forms of disposition
Such security agreement containing a
Proceeds are: provision over future property is akin to a
Any property received upon sale, lease or Contract to Mortgage
other disposition of collateral; or Both secured transactions are preparatory
Whatever is collected on or distributed with contracts wherein the security interest is
respect to collateral, claims arising out of only created or perfected once the grantor
the loss or damage to the collateral, as well is the absolute owner of the future property
as a right to insurance payment or other
compensation for loss or damage of the
collateral. [Sec. 3(f)]
Rights to proceeds and commingled Otherwise, if the tangible asset did not become
funds a fixture, or underwent accession or
commingling, a party who obtains the asset
When the collateral is disposed, the security in good faith will take it free from any
interest extends to the proceeds from such security interest. However, good faith will not
disposition, in the form of funds, even when exist if the movable property was registered
they are credited to a deposit account or before being obtained. [Sec. 21]
money are commingled with other funds or
money. [Sec. 8] Accounts receivables
Despite the fact that they are no longer
identifiable Under Sec. 10 of the PPSA, security interests
Only to the extent that they remain in accounts receivable shall be effective
traceable notwithstanding any agreement between the
grantor and the account debtor or any secured
Rules on Commingled Funds [Sec. 8] creditor limiting in any way the grantor’s right to
1. The security interest in the commingled create a security interest. [Sec. 10(a)]
funds shall be limited to the amount of
the proceeds immediately BEFORE they Likewise, any stipulation limiting the grantor’s
were commingled. right to create a security interest shall be void.
2. If at any time after the commingling, the [Sec. 10(c)]
balance credited to the deposit account
or the amount of the commingled However, the PPSA limits the application of
money is LESS than the amount of the these provisions to accounts receivable arising
proceeds immediately before they were from:
commingled: (1) A contract for the supply or lease of goods
The security interest against the or services other than financial services;
commingled funds or money shall be (2) A construction contract or a contract for the
limited to the lowest amount of the sale or lease of real property; and
commingled funds or money. (3) A contract for the sale, lease or license of
The reckoning period for such amount intellectual property. [Sec. 10(d)]
is between the time when the
proceeds were commingled and the Sec. 10 also shall not affect shall affect any
time the security interest in the obligation or liability of the grantor for breach of
proceeds is claimed. the agreement in Sec. 10(a).
(4) Security interest in a deposit account or embodied by them. [IRR of R.A. 11057,
investment property that is perfected by Section 1.05(kk)]
registration
Section 18. Priority for Perfection by Control.
Security Interests Over Electronic Securities ---xxx---
Section 18. Priority for Perfection by A security interest in a security certificate
Control.— perfected by the secured creditor’s
---xxx--- possession of the certificate shall have
(a) A security interest in electronic priority over a competing security interest
securities not held with an perfected by registration of a notice in the
intermediary perfected by a notation Registry.
of the security interests in the books
maintained for that purpose by or on Priority of Security Interests Over Security
behalf of the issuer shall have priority Certificates
over a security interest in the same (1) Security interest in a security certificate
securities perfected by any other method. perfected by possession of said certificate
(b) A security interest in electronic (2) Security interest in a security certificate
securities not held with an perfected by registration of a notice in the
intermediary perfected by the Registry.
conclusion of a control agreement
shall have priority over a security interest Security Interests Over Instruments or
in the same securities perfected by Negotiable Documents
registration of a notice in the Registry.
(c) The order of priority among competing Section 19. Priority for Instruments and
security interests in electronic securities Negotiable Documents. -A security interest in
not held with an intermediary perfected an instrument or negotiable document that is
by the conclusion of control agreements perfected by possession of the
is determined on the basis of the time instrument or the negotiable document
of conclusion of the control shall have priority over a security interest in
agreements. the instrument or negotiable document that is
perfected by registration of a notice in the
Registry.
Priority of Security Interests Over Non-
Intermediated Electronic Securities
(1) Security interest in non-intermediated Priority of Security Interests Over
electronic securities perfected by a Instruments or Negotiable Documents
notation of such interest in the books of the (1) A security interest in an instrument or
issuer negotiable document that is perfected by
(2) Security interest in non-intermediated possession
electronic securities perfected by control (2) A security interest in an instrument or
The earlier the conclusion of the control negotiable document that is perfected by
agreement, the higher in priority registration
interest in the livestock, if the secured Priority of Security Interests Over Goods
creditor providing credit for food or medicine Lien over goods created by operation of law in
gives written notification to the holder of favor of a person who provides services or
the conflicting perfected security interest materials with respect to the goods, in the
in the same livestock before the grantor ordinary course of business
receives possession of the food or Any perfected security interest over the same
medicine. goods.
of the conflicting perfected (3) Any perfected security interest in the same
security interest in the same types goods.
of inventory, livestock, or intellectual
property. The notification sent to the Priority of Interests Over Inventory,
holder of the conflicting security Intellectual Property or Livestock [Sec. 23]
interest may cover multiple (1) A PMSI in inventory, intellectual property or
transactions between the purchase livestock shall have priority, provided that –
money secured creditor and the The PMSI is perfected when the grantor
grantor without the need to identify receives possession of the inventory or
each transaction. livestock, or acquires rights to intellectual
The purchase money security interest in property;
equipment or consumer goods The secured creditor gives a written
perfected timely in accordance with notification to the holder of the conflicting
subsections (a) and (b), shall have perfected security interest in the same
priority over the rights of a buyer, lessee, types of inventory, livestock, or intellectual
or lien holder which arise between property
delivery of the equipment or consumer o Such notification must be given
goods to the grantor and the time the before the grantor receives
notice is registered. possession of the inventory or
livestock, or acquires rights in
intellectual property; and
Priority of Security Interests Over
o The notification may cover multiple
Equipment and its Proceeds [Sec. 23] transactions between the secured
(a) A PMSI in equipment and its proceeds creditor and the grantor, without
shall have priority, provided that – the need to identify each
a. A notice relating to the PMSI is transaction.
registered within three (3) (2) Any perfected security interest in the same
business days after the grantor inventory, intellectual property or livestock.
receives possession of the
equipment Priority of Perfected Security
(b) Right over the same equipment in favor of Interest Prior to Insolvency
a buyer, lessee, or lien holder which arise Proceedings
between delivery of the equipment to the
grantor and the time the notice is registered
(c) Any perfected security interest in the same Section 22. Effect of the Grantor’s
equipment. Insolvency on the Priority of a Security
Interest. - Subject to the applicable
Priority of Security Interests Over insolvency law, a security interest
Consumer Goods [Sec. 23] perfected prior to the commencement of
(1) A PMSI in consumer goods shall have insolvency proceedings in respect of the
priority, provided that – grantor shall remain perfected and retain
a. A notice relating to the PMSI is the priority it had before the commencement
registered within three (3) of the insolvency proceedings.
business days after the grantor
receives possession of the This section amends Art. 2241, 2243, 2246,
consumer goods 2247 of the Civil Code or the provisions on
(2) Right over the same goods in favor of a special preferred credits on movable property.
buyer, lessee, or lien holder which arise The preference created by these Articles
between delivery of the consumer goods to will be SUBORDINATE to the priority
the grantor and the time the notice is perfected pursuant to the PPSA. [Somera]
registered
The secured creditor shall account to the When Retention May Be Exercised [Sec. 54]
grantor for any surplus, and, unless otherwise The secured creditor may retain the collateral
agreed, the debtor is liable for any deficiency. in the case of:
[Sec. 52]. (1) A proposal for the acquisition of the
collateral in full satisfaction of the
Commercial Reasonableness Requirement secured obligation; or
After repossession and notice, the collateral a. Unless the secured creditor
may be disposed of provided that the creditor receives an objection in writing
acts in a “commercially reasonable manner”. from any person entitled to receive
[Sec. 50(a)] such a proposal within twenty (20)
days after the proposal is sent to
Under Sec. 50, a creditor acts in such manner that person
if he/she “disposes of the collateral in (2) A proposal for the acquisition of the
conformity with commercial practices among collateral in partial satisfaction of the
dealers in that type of property.” [Sec. 50(b)] secured obligation
A disposition is presumed commercially a. Only if the secured creditor
reasonable when approved in any legal receives the affirmative consent of
proceeding. [Sec. 50(d] each addressee of the proposal in
A disposition will still be treated as writing within twenty (20) days after
commercially reasonable even if “a better the proposal is sent to that person.
price could have been obtained by
disposition at a different time or by a 8. Prior interests and the transitional
different method from the time and method period
selected by the secured creditor”. [Sec.
50(c)]. Prior Interests
After default, the secured creditor may propose However, a security interest that is renewed or
to the debtor and grantor to take all or part of extended by a security agreement or other
the collateral in total or partial satisfaction of transaction made or entered into on or after the
the secured obligation, and shall send a effectivity of this Act is NOT considered a
proposal to: prior interest. [Sec. 55(b)]
(1) The debtor and the grantor;
(2) Any other secured creditor or lien holder Creation of Prior Interest
who, five (5) days before the proposal is Creation of prior interest shall be determined
sent to the debtor and the grantor, by prior laws, which are laws that existed or in
perfected its security interest or lien by force before the effectivity of this Act. [Sec. 56]
registration; and
(3) Any other person with an interest in the Effectivity of Prior Interest
collateral who has given a written A prior interest remains effective between the
notification to the secured creditor before parties, notwithstanding its creation did not
the proposal is sent to the debtor and the comply with the creation requirements of this
grantor. [Sec. 54] Act. [Sec. 56]
Perfection of Prior Interest [Sec. 58] (2) It was not perfected under prior law when
(a) A prior interest that was perfected under this Act took effect, and was only perfected
prior law continues to be perfected under this under this Act. [Sec. 58(b)]
Act until the earlier of:
(a) The time the prior interest would cease to Enforcement of Prior Interest [Sec. 59]
be perfected under prior law; and If any step or action has been taken to enforce
(b) The expiration of the transitional period. a prior interest before the effectivity of this Act,
(c) If the perfection requirements of the PPSA enforcement may continue under prior law or
are satisfied before the perfection of a prior may proceed under this Act.
interest ceases in accordance with (a):
(d) The prior interest continues to be perfected Note: Prior law shall apply to a matter that is
under this Act from the time when it was the subject of proceedings before a court
perfected under the prior law. before the effectivity of this Act.
(e) If the prior interest was perfected by the
registration of a notice under prior law, the Transitional Period
time of registration under the prior law shall
be the time to be used for purposes of Transitional period
applying the priority rules of this Act. The period from the date of effectivity of this Act
(f) If the perfection requirements of the PPSA until the date when the Registry has been
are NOT satisfied before the perfection of established and operational. [Sec. 55 (d)]
a prior interest ceases in accordance with
(a): Thus, the transitional period is from September
(g) The prior interest is perfected only from the 7, 2018 until the date when the Registry has
time it is perfected under this Act. been established and operational
(h) A written agreement between a grantor and All pledges and mortgages created
a secured creditor creating a prior interest pursuant to the Civil Code and the Chattel
is sufficient to constitute authorization by Mortgage Law remain effective between
the grantor of the registration of a notice the parties
covering assets described in that But upon expiration of the transitional
agreement under this Act. period, the binding effect as against third
parties of chattel mortgages is lost,
When a Prior Law Over a Prior Interest UNLESS the requirements of the PPSA are
Applies complied with. [Somera]
General Rule — The priority of a prior interest
as against the rights of a competing claimant is Establishment of Electronic Registry
determined by the prior law if:
Section 68. Implementation. —
Notwithstanding the entry into force of this
(1) The security interest and the rights of all Act under Section 67, the implementation of
competing claimant arose before the
the Act shall be conditioned upon the
effectivity of this Act; and
Registry being established and operational
(2) The priority status of these rights has not
under Section 26.
changed since the effectivity of this Act.
[Sec. 58(a)]
Section 26. Establishment of Electronic
Exceptions —The priority status of a prior Registry.
interest has changed (refer to the 2nd instance The Registry shall be established in and
under the general rule, i.e. Sec. 58(a)(2)) only administered by the LRA.
if: The Registry shall provide electronic means
for registration and searching of notices.
(1) It was perfected when this Act took effect,
but ceased to be perfected; or
Based on Sections 68 and 26 of the PPSA, the Reliance on Security Test: When the
implementation of the PPSA is conditioned on mortgagor takes another loan for which
the establishment and operation of the another security was given, it could not be
Registry. The Registry will be administered by inferred that such loan was made in reliance
Land Registration Authority (LRA). solely on the original security with the dragnet
clause, but rather, on the new security given.
To date, the LRA has yet to establish the [Prudential Bank v. Alviar, G.R. No. 150197
Electronic Registry, although it has announced (2005)]
that it is targeting to launch the same on the
sixth month from the promulgation of the IRR, Object of real estate mortgage [Art.
which was issued on Nov. 18, 2019. 2124, NCC]
The mortgagor may still sell the mortgaged If a person binds himself solidarily with the
property, and any stipulation to the contrary is principal debtor, the provisions of Sec. 4, Ch.
void. [Art. 2130, NCC] 3, Title 1 of this Book shall be observed. In
such case the contract is called a
Pactum de non alienando (Sp. pacto de non suretyship
alienando) is prohibited by Art. 2130
a. Stipulations forbidding the mortgagor from General rule: Guaranty is gratuitous
selling the collateral Exception: When there is a stipulation to the
b. Stipulations forbidding the mortgagor from contrary [Art. 2048, NCC]
selling the collateral without the consent of
the mortgagee Obligation secured by guaranty
specified period, and this period has 2) Benefit of division [Art. 2065];
expired; a) However, the benefit of division will
4. When the period for payment has expired; cease if
5. After the lapse of ten years, when the b) Solidary liability has been stipulated
principal obligation has no fixed period for [Art. 2065, NCC]; or
its maturity, unless it be of such nature that c) If any of the exceptions to the benefit of
it cannot be extinguished except within a excussion are present [Somera, Art.
period longer than 10 years; 2059, NCC]
6. If there are reasonable grounds to fear that 3) Right to reimbusement, i.e. to demand
the principal debtor intends to abscond. payment from the other co-guarantors their
proportional share owed to him/her. This is
To protect his interest, a guarantor can available to the co-guarantor who paid the
proceed against the principal debtor by: debt. [Art. 2073, par. 1, NCC]
Obtaining release from the guaranty; OR 4) Right of an insolvent guarantor to have his
Demanding a security that shall protect him share bore by the others, including the
from any proceedings by the creditor payor, in the same proportion [Art. 2073,
and from the danger of insolvency of par. 2, NCC]
the debtor [Art. 2071, NCC] 5) Right to set-up defenses against the paying
co-guarantor those available to the
Right to indemnification principal debtor against the creditor.
a) Exception — Defenses personal to the
The guarantor who pays for a debtor must be debtor are not available to the
indemnified by the latter, guarantor, hence not available as well
to the co–guarantor. [cf. Art. 2081,
The indemnity comprises: NCC]
1. The total amount of the debt 6) Right to Benefit from the release of one
2. The legal interests thereon from the time guarantor [Art. 2078, NCC]
the payment was made known to the
debtor, even though it did not earn interest Requisites for the applicability of Art. 2073,
for the creditor NCC
3. The expenses incurred by the guarantor 1. There are two or more guarantors of the
after having notified the debtor that same debtor for the same debt;
payment had been demanded of him 2. Payment has been made by one guarantor;
4. Damages if they are due [Art. 2066, NCC] 3. The payment was made:
Because of the insolvency of the
Right to subrogation debtor, or
By judicial demand
The guarantor who pays is subrogated by 4. The paying guarantor seeks to be
virtue thereof to all the rights which the indemnified only to the extent of his
creditor had against the debtor. proportionate share in the total obligation.
If the guarantor has compromised with the For purposes of proportionate reimbursement,
creditor, he cannot demand of the debtor more the other guarantors may interpose such
than what he has really paid. [Art. 2067, NCC] defenses against the paying guarantor as are
available to the debtor against the creditor,
Rights of co-guarantors except those that are personal to the debtor
[Art. 2074, NCC]
Rights of a Co-Guarantor
1) Right of excussion against the principal
guarantor and the principal debtor [Art.
2064, NCC];
Exception: The creditor may, prior thereto, Rationale: To give the guarantor the
secure a judgment against the guarantor, who opportunity to allege and substantiate
shall be entitled, however, to a deferment of the whatever defenses he may have against the
execution of said judgment against him, until principal obligation, and chances to set up such
after the properties of the principal debtor shall defenses as are afforded him by law.
have been exhausted, to satisfy the latter’s
obligation. [Tupaz v. CA, G.R. No. 145578 A compromise shall not prejudice a
(2005)] person not party to it [Art. 2063,
NCC]
The creditor has the duty to make
prior demand for payment from the A compromise between creditor and principal
guarantor [Art. 2060, NCC] debtor benefits the guarantor but does not
prejudice him.
The demand is to be made only after judgment
on the debt. A compromise between guarantor and the
creditor benefits but does not prejudice the
The guarantor has the duty to set up principal debtor.
the benefit of excussion [Art. 2060,
NCC] Effects of Guaranty between the
Debtor and the Guarantor
As soon as he is required to pay, the guarantor
must also point out to the creditor available (a) The guarantor has the duty to
property (not in litigation or encumbered) of the notify the debtor before paying the
debtor within the Philippines. creditor [Art. 2068; see also Arts.
1236 and 1237, NCC]
The creditor has the duty to resort to
all legal remedies [Arts. 2058 and Should payment be made without notification
2061, NCC] or against the debtor’s will, and supposing the
debtor has already made a prior payment, the
After the guarantor has fulfilled the conditions debtor would be justified in setting up the
required for making use of the benefit of defense that the obligation has already been
excussion, it becomes the duty of the creditor extinguished by the time the guarantor made
to: the payment. The guarantor will then lose the
1. Exhaust all the property of the debtor right of reimbursement and consequently the
pointed out by the guarantor; right of subrogation.
(b) The guarantor cannot demand However, the mere failure on the part of the
reimbursement for payment made creditor to demand payment after the debt has
by him before the obligation has become due does not, of itself, constitute any
become due [Art. 2069, NCC] extension of time.
General rule: Since a contract of guaranty is (c) When Subrogation is Not Feasible
only subsidiary, the guarantor cannot be liable
for the obligation before the period on which the The guarantors, even though they may be
debtor’s liability will accrue. Any payment solidary, are released from their obligation,
made by the guarantor before the obligation is whenever by some act of the creditor they
due cannot be indemnified by the debtor. The cannot be subrogated to the rights, mortgages
guarantor can only demand reimbursement and preference of the latter. [Art. 2080, NCC]
upon expiration of the period.
Legal and judicial bonds
Exception: Prior consent or subsequent
ratification by the debtor
Art. 2051, par. 1 – A guaranty may be
conventional, legal, or judicial, or
(c) The guarantor may proceed
gratuitous or by onerous title.
against the debtor even before
payment has been made [Art.
It may be constituted, not only in favor of
2071, NCC]
the principal debtor, but also in favor of
the other guarantor, with the latter’s
Extinguishment of guaranty consent, or without his knowledge, or even
over his objection.
General Rule
Bondsman not entitled to excussion [Art. to any other legitimate business or activity of
2084, NCC] the surety.
A judicial bondsman and the sub-surety are not
entitled to the benefit of excussion. Form of surety
Reason: They are not mere guarantors, but Generally
sureties whose liability is primary and solidary.
The contract of a surety is evidenced by a
Effect of negligence of creditor document called surety bond which is
Mere negligence on the part of the creditor in essentially a promise to guarantee the
collecting from the debtor will not relieve the obligation of the obligor. In turn, the obligor
surety from liability. executes an indemnity agreement in favor of
the insurer. [de Leon]
4. Surety
It is an accessory contract unlike a contract of
Concept insurance which is the principal contract itself.
Nature of Liability
Although contractual (limited by the terms of
the contract) and accessory (arises only if
documents of title and draft to the issuing The bank buys or discounts a draft under
bank to recover payment. the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before
Depending on the transaction, the number of negotiation, it has no liability with respect to
parties to the letter of credit may be increased. the seller but after negotiation, a
Thus, the different types of correspondent contractual relationship will then prevail
banks: between the negotiating bank and the
seller. [FEATI Bank and Trust Co. v. CA,
1. Advising/Notifying Bank – the bank G.R. No. 94209 (1991)]
which conveys to the seller the existence of
the credit. Paying Bank – the bank which buys or
discounts the drafts contemplated by
The bank assumes no liability except to the letter of credit, if such draft is to be
notify and/or transmit to the seller the drawn on the opening bank or on
existence of the letter of credit. It is not another designated bank not in the city
privy to the contract of sale between the of the beneficiary. [Lee v. CA, G.R. No.
buyer and the seller. Its relationship is only 117913 (2002)]
with that of the issuing bank.
It undertakes to encash the drafts drawn
The bank may suggest to the seller its by the exporter. [Bank of America v. CA,
willingness to negotiate, but this fact alone G.R. No. 105395 (1993)]
does not imply that the notifying bank
promises to accept the draft drawn under Kinds of letters of credit
the documentary credit. [FEATI Bank and
Trust Co. v. CA, G.R. No. 94209 (1991)] As to the type of the main contract
(a) Commercial Letter of Credit
The services of the notifying bank must (b) Standby Letter of Credit
always be utilized if the letter of credit is to
be advised to the beneficiary through
Commercial Standby
cable. [Lee v. CA, G.R. No. 117913 (2002)]
Letter of Credit Letter of Credit
2. Confirming Bank – lends credence to the Use
letter of credit issued by a lesser known
issuing bank. [Bank of America v. CA, G.R. Used to guarantee or
No. 105395 (1993)] Method of payment in secure an obligation
a contract of sale in a non-sale
The bank which confirms the letter of credit transaction
issued by the opening bank. [Lee v. CA,
Purpose
G.R. No. 117913 (2002)]
Reduces the risk of
The bank assumes a direct obligation to Reduces the risk of
non-payment of
the seller and its liability is a primary one as non-performance of a
purchase price under
if the bank itself had issued the letter of contractual obligation
a contract of sale
credit. [FEATI Bank and Trust Co. v. CA,
G.R. No. 94209 (1991)] When Payable
empowered to call on the letter of credit as (d) The charges, individually itemized, which
a security in case the commercial are paid or to be paid by such person in
transaction does not push through, or the connection with the transaction but which
applicant fails to perform his part of the are not incident to the extension of credit;
transaction. [Transfield Philippines v. (e) The total amount to be financed;
Luzon Hydro, G.R. No. 146717 (2004)] (f) The finance charge expressed in terms of
pesos and centavos;
Justification Aspect (g) The percentage that the finance bears to
A demand for payment under the credit prima the total amount to be financed expressed
facie means that the beneficiary has performed as a simple annual rate on the outstanding
his part of the underlying transaction and is unpaid balance of the obligation. [Sec. 4]
prima facie entitled to payment. The
justification is only prima facie, because the The rationale of this provision is to protect
documents tendered may be proper, while users of credit from a lack of awareness of the
there is a defect in the underlying transaction. true cost thereof, proceeding from the
experience that banks are able to conceal such
true cost by hidden charges, uncertainty of
B. TRUTH IN LENDING rates, deduction of interests from the loans
ACT amount, and the like. The law thereby seeks to
The section numbers hereinafter generally protect debtors by permitting them to fully
pertain to RA 3765 or the Truth in Lending Act, appreciate the true cost of their loan, to enable
unless otherwise indicated. them to give full consent to contract, and the
properly evaluate their options in arriving at
business decisions. [UCPB v Sps.
1. Purpose Beluso.,G.R. 159912 (2007)]
To protect its citizens from a lack of awareness In addition, the contract or document shall
of the true cost of credit to the user by assuring specify additional charges, if any, which will be
a full disclosure of such cost with a view of collected in case certain stipulations in the
preventing the uninformed use of credit to the contract are not met by the debtor. [BSP Memo
detriment of the national economy. [Sec. 2.] No. M-2008-020]
vi. Any option, demand, lien, pledge, or Government or any agency or any political
other claim against, or for the delivery subdivision thereof.
of, property or money; 5) A final judgment hereafter rendered in any
vii. Any purchase, or other acquisition of, criminal proceeding under this Act to the
or any credit upon the security of, any effect that a defendant has willfully violated
obligation of claim arising out of any of this Act shall be prima facie evidence
the foregoing; and against such defendant in an action or
viii. Any transaction or series of proceeding brought by any other party
transactions having a similar purpose against such defendant under this Act as to
or effect. [Sec. 3(2)] all matters respecting which said judgment
would be an estoppel as between the
4. Consequences of Non- parties thereto. [Sec.6]
Compliance
C. ANTI-MONEY
1) Any creditor who in connection with any
credit transaction fails to disclose to any
LAUNDERING ACT
person any information in violation of this
Act or any regulation issued thereunder The section numbers hereinafter generally
shall be liable to such person in the amount pertain to RA 9160 or the Anti-Money
of P100 or in an amount equal to twice the Laundering Act, as amended by RA 9194 and
finance charged required by such creditor RA 10365, unless otherwise indicated.
in connection with such transaction,
whichever is the greater, except that such Money Laundering is a crime where the
liability shall not exceed P2,000 on any proceeds of an unlawful activity are transacted,
thereby making them appear to have originated
credit transaction.
a) Action to recover such penalty may be from legitimate sources.
brought by such person within one year
from the date of the occurrence of the It is governed by RA 9160, as amended by RA
violation, in any court of competent 9194 (2003), RA 10167 (2012), RA 10365
jurisdiction. (2013) and RA 10927 (2017).
b) In any action under this subsection in
which any person is entitled to a 1. Policy of the Law
recovery, the creditor shall be liable for
reasonable attorney's fees and court It is the policy of the State to:
costs as determined by the court. a. Protect and preserve the integrity and
2) Except as specified in subsection (a) of this confidentiality of bank accounts;
section, nothing contained in this Act or any b. Ensure that the Philippines shall not be
regulation contained in this Act or any used as a money laundering site for the
regulation thereunder shall affect the proceeds of any criminal activity.
validity or enforceability of any contract or
transactions. Consistent with its foreign policy, the State
3) Any person who willfully violates any shall extend cooperation in transnational
provision of this Act or any regulation investigations and prosecutions of persons
issued thereunder shall be fined by not less involved in money laundering activities
than P1,00 or more than P5,000 or whenever committed. [Sec. 2]
imprisonment for not less than 6 months,
nor more than one year or both.
4) No punishment or penalty provided by this
Act shall apply to the Philippine
e. Any circumstance relating to the Unlawful activity refers to any act or omission
transaction which is observed to deviate or series or combination thereof involving or
from the profile of the client and/or the having direct relation to the following:
client’s past transactions with the covered a. Kidnapping for ransom under Article 267
institution; of Act No. 3815, otherwise known as the
f. The transaction is in any way related to an Revised Penal Code, as amended;
unlawful activity or offense under this Act b. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15,
that is about to be, is being or has been and 16 of RA 9165, otherwise known as the
committed. [Sec. 3(b-1)] Comprehensive Dangerous Drugs Act
of 2002;
4. Money Laundering; how c. Section 3 paragraphs B, C, E, G, H and I of
RA. 3019, as amended; otherwise known
committed; unlawful and as the Anti-Graft and Corrupt Practices
predicate crimes Act;
d. Plunder under RA 7080, as amended;
Money laundering is a crime whereby the e. Robbery and extortion under Articles
proceeds of an unlawful activity are transacted, 294, 295, 296, 299, 300, 301 and 302 of
thereby making them appear to have originated the Revised Penal Code, as amended;
from legitimate sources. f. Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
Money Laundering is committed by any 1602;
person who, knowing that any monetary g. Piracy on the high seas under the
instrument or property represents, involves, or Revised Penal Code, as amended and
relates to the proceeds of any unlawful activity: Presidential Decree No. 532;
a. Transacts said monetary instrument or h. Qualified theft under Article 310 of the
property; Revised Penal Code, as amended;
b. Converts, transfers, disposes of, moves, i. Swindling under Article 315 of the Revised
acquires, possesses or uses said monetary Penal Code, as amended;
instrument or property; j. Smuggling under RA Nos. 455 and 1937;
c. Conceals or disguises the true nature, k. Violations under RA 8792, otherwise
source, location, disposition, movement or known as the Electronic Commerce Act
ownership of or rights with respect to said of 2000;
monetary instrument or property; l. Hijacking and other violations under RA
d. Attempts or conspires to commit money 6235; destructive arson and murder, as
laundering offenses referred to in defined under the Revised Penal Code, as
paragraphs (a), (b) or (c); amended, including those perpetrated by
e. Aids, abets, assists in or counsels the terrorists against non-combatant persons
commission of the money laundering and similar targets;
offenses referred to in paragraphs (a), (b) m. Fraudulent practices and other violations
or (c) above; and under RA 8799, otherwise known as the
f. Performs or fails to perform any act as a Securities Regulation Code of 2000;
result of which he facilitates the offense of n. Felonies or offenses of a similar nature
money laundering referred to in that are punishable under the penal laws of
paragraphs (a), (b) or (c) above. other countries. [Sec. 3 (i)]
Money laundering is also committed by any RA 10365 further added the following:
covered person who, knowing that a covered a. Terrorism and conspiracy to commit
or suspicious transaction is required under this terrorism as defined and penalized under
Act to be reported to the Anti-Money Sections 3 and 4 of RA No. 9372;
Laundering Council (AMLC), fails to do so. b. Financing of terrorism under Section 4
[Sec. 4, RA 10365]. and offenses punishable under Sections 5,
any means, the proceeds of an unlawful the AMLC, reports on all real estate
activity; transactions involving an amount in excess
c. To institute civil forfeiture proceedings and of Php 500,000 within 15 days from the
all other remedial proceedings through date of registration of the transaction, in a
the Office of the Solicitor General; form to be prescribed by the AMLC. The
d. To cause the filing of complaints with the AMLC may also require the Land
Department of Justice or the Ombudsman Registration Authority and all its Registries
for the prosecution of money laundering of Deeds to submit copies of relevant
offenses; documents of all real estate transactions.
e. To investigate suspicious transactions [Sec. 7]
and covered transactions deemed
suspicious after an investigation by AMLC, 6. Safe Harbor Provision
money laundering activities, and other
violations of this Act; The Safe Harbor Provision states that no
f. To apply before the Court of Appeals, ex administrative, criminal or civil
parte, for the freezing of any monetary proceedings shall lie against any person for
instrument or property alleged to be having made a covered transaction report in
laundered, proceeds from or the regular performance of his duties and in
instrumentalities used/ intended for use in good faith, whether or not such reporting
any unlawful activity (as defined in Section results in any criminal prosecution under this
3(i) hereof); Act or any other Philippine law. [Sec. 9]
g. To implement such measures as may be
necessary and justified under this Act to Lawyers and accountants acting as
counteract money laundering; independent legal professionals are not subject
h. To receive and take action in respect of, to the reporting requirement if the relevant
any request from foreign states for information was obtained in circumstances
assistance in their own anti-money subject to professional secrecy or legal
laundering operations provided in this Act; professional privilege. [Sec. 9(c)]
i. To develop educational programs on the
pernicious effects of money laundering, the
methods and techniques used in money 7. Application for Freeze Orders
laundering, the viable means of preventing
money laundering and the effective ways of Who may apply
prosecuting and punishing offenders; Upon verified ex parte petition by the AMLC
j. To enlist the assistance of any branch, and after determination that probable cause
department, bureau, office, agency or exists that any monetary instrument or property
instrumentality of the government, is in any way related to an unlawful activity, the
including government-owned and - Court of Appeals may issue a freeze order,
controlled corporations, in undertaking any which shall be effective immediately, directing
and all anti-money laundering operations, the concerned covered persons and
which may include the use of its personnel, government agency to desist from allowing any
facilities and resources for the more transaction, withdrawal, transfer, removal,
resolute prevention, detection and conversion, concealment, or other disposition
investigation of money laundering offenses of the subject monetary instrument or property.
and prosecution of offenders; and [Rule 10(a), Revised IRR]
k. To impose administrative sanctions for
the violation of laws, rules, regulations and Effectivity
orders and resolutions issued pursuant The freeze order shall be effective
thereto; [Sec. 7] immediately and shall not exceed six (6)
l. To require the Land Registration Authority months depending upon the circumstances of
and all its Registries of Deeds to submit to the case.
On motion of the AMLC filed before the (5) The covered person shall also submit to
expiration of the original period of the freeze the AMLC, through the internet, an
order, the court may, for good cause shown, electronic detailed return in a format to be
extend its effectivity. Upon the timely filing of prescribed by the latter. [Rule 10(e),
such motion and pending resolution by the Revised IRR]
Court of Appeals, the freeze order shall remain
effective. [Rule 10(a)(3), Revised IRR] 8. Authority to Inquire into Bank
Duties of covered institutions
Deposits
(1) Implement Freeze Order. - Upon receipt of
General Rule: The AMLC may inquire into or
the notice of the freeze order, the covered
examine any particular deposit or investment,
person and government agency concerned
including related accounts, with any banking
shall immediately freeze the monetary
institution or non-bank financial institution upon
instrument or property subject thereof, and
order of any competent court in cases of
shall immediately desist from and not allow
violation of this Act when it has been
any transaction, withdrawal, transfer,
established that there is probable cause that
removal, conversion, other movement or
the deposits or investments involved are
concealment thereof.
related:
(2) Freeze Related Accounts. - Upon receipt of
1) To an unlawful activity as defined in Sec.
the freeze order and upon verification by
3(i); or
the covered person that there are accounts
2) To any money laundering offense under
related to the monetary instrument or
Sec.4
property subject of the freeze order, the
covered person shall immediately freeze
Exception: No court order shall be required in
these related accounts wherever these
the following cases –
may be found. If the related accounts
cannot be determined within 24 hours from a. Kidnapping for ransom under Article 267 of
receipt of the freeze order due to the the RPC
volume and/or complexity of the b. Sections 4,5,7,8,9,10,12,13,14,15 and16
transactions, or any other justifiable of RA No. 9615
factors, the covered person shall effect the c. Hijacking and other violations under RA
freezing of the related accounts within a No. 6235; destructive arson and murder as
reasonable period and shall submit a defined under the RPC
supplemental return thereof to the Court of d. Felonies or offenses of a nature similar to
Appeals and the AMLC within 24 hours those mentioned in Section 3(i) (1), (2), and
from the freezing of said related accounts. (12) which are punishable under the penal
laws of other countries;
(3) Furnish Copy of Freeze Order to Owner or
e. Terrorism and conspiracy to commit
Holder. - The covered person and
terrorism as defined and penalized under
government agency concerned shall
RA No. 9372.
likewise immediately furnish a copy of the
notice of the freeze order upon the owner
or holder of the monetary instrument or Forfeiture Provisions
property or related accounts subject
thereof. Civil Forfeiture
(4) Submit Detailed Return. - Within 24 hours Upon determination by the AMLC that
from receipt of the freeze order, the probable cause exists that any monetary
covered person and government agency instrument or property is in any way related to
concerned shall submit, by personal an unlawful activity or a money laundering
delivery, to the Court of Appeals and to the offense, the AMLC shall file with the
AMLC, a written detailed return on the appropriate court (through the OSG) a
freeze order.
verified ex parte petition for forfeiture. [Sec. Note: This provision shall apply in both civil and
12(a), as amended by RA 10365] criminal forfeiture.
Where filed: With the court which rendered the Mutual Assistance among States
judgment of forfeiture.
Request for Assistance from a Foreign
When filed: Within 15 days from the date of State
the finality of the order of forfeiture, in default of Where a foreign State makes a request for
which the said order shall become final and assistance in the investigation or prosecution
executory. [Sec. 12(b)] of a money laundering offense, the AMLC may
execute the request or refuse to execute the likely to prejudice the national interest of the
same and inform the foreign State of any valid Philippines unless there is a treaty between the
reason for not executing the request or for Philippines and the requesting State relating to
delaying the execution thereof. The principles the provision of assistance in relation to money
of mutuality and reciprocity shall, for this laundering offenses. [Sec.13(d)]
purpose, be at all times recognized. [Sec.13(a),
RA 9160] Requirements for Requests for Mutual
Assistance from Foreign States
Obtaining Assistance from Foreign States A request for mutual assistance from a foreign
The AMLC may make a request to any foreign State must:
State for assistance in: (1) Confirm that an investigation or
(1) Tracking down, freezing, restraining and prosecution is being conducted in respect
seizing assets alleged to be proceeds of of a money launderer named therein or that
any unlawful activity; he has been convicted of any money
(2) Obtaining information that it needs relating laundering offense;
to any covered transaction, money (2) State the grounds on which any person is
laundering offense or any other matter being investigated or prosecuted for money
directly or indirectly related thereto; laundering or the details of his conviction;
(3) To the extent allowed by the law of the (3) Give sufficient particulars as to the identity
foreign State, applying with the proper of said person;
court therein for an order to enter any (4) Give particulars sufficient to identify any
premises belonging to or in the possession covered institution believed to have any
or control of, any or all of the persons information, document, material or object
named in said request, and/or search any which may be of assistance to the
or all such persons named therein and/or investigation or prosecution;
remove any document, material or object (5) Ask from the covered institution concerned
named in said request: Provided, That the any information, document, material or
documents accompanying the request in object which may be of assistance to the
support of the application have been duly investigation or prosecution;
authenticated in accordance with the (6) Specify the manner in which and to whom
applicable law or regulation of the foreign said information, document, material or
State; and object obtained pursuant to said request, is
(4) Applying for an order of forfeiture of any to be produced;
monetary instrument or property in the (7) Give all the particulars necessary for the
proper court in the foreign State: Provided, issuance by the court in the requested
That the request is accompanied by an State of the writs, orders or processes
authenticated copy of the order of the needed by the requesting State; and
regional trial court ordering the forfeiture of (8) Contain such other information as may
said monetary instrument or property of a assist in the execution of the request.
convicted offender and an affidavit of the [Sec.13(e)]
clerk of court stating that the conviction and
the order of forfeiture are final and that no
further appeal lies in respect of either. D. FOREIGN
[Sec.13(c)] INVESTMENTS ACT
Limitations on Request for Mutual The section numbers hereinafter generally
Assistance pertain to RA 7042 or the Foreign Investments
The AMLC may refuse to comply with any Act, as amended by RA 8179, unless otherwise
request for assistance where the action sought indicated.
by the request contravenes any provision of the
Constitution or the execution of a request is
The IRR further does not include the following Two tests applied to determine what
from the definition of “doing business”: constitutes as “Doing business”
a. The publication of a general advertisement 1. Substance Test - whether the foreign
through any print or broadcast media; corporation is continuing the body of the
b. Maintaining a stock of goods in the business or enterprise for which it was
Philippines solely for the purpose of having organized or whether it has substantially
the same processed by another entity in retired from it and turned it over to another.
the Philippines; Under the Substance Test, a foreign
c. Consignment by a foreign entity of corporation is doing business in the country
equipment with a local company to be used if it is continuing the body or substance of
in the processing of products for export; the enterprise of business for which it was
d. Collecting information in the Philippines; organized.
and 2. Continuity Test - implies a continuity of
e. Performing services auxiliary to an existing commercial dealings and arrangements,
isolated contract of sale which are not on a and contemplates, to that extent, the
continuing basis, such as installing in the performance of acts or works or the
Philippines machinery it has manufactured exercise of some of the functions normally
or exported to the Philippines, servicing the incident to, and in the progressive
same, training domestic workers to operate prosecution of, the purpose and object of
it, and similar incidental services. its organization. Under the Continuity Test,
doing business implies a continuity of
The determination of whether a foreign commercial dealings and arrangements, or
corporation is doing business in the Philippines performance of acts normally incidental to
must be based on the facts of each case. the purpose and object of the organization.
[Cargill v Intra Strata Assurance, G.R. No. [Agilent Technologies v Integrated Silicon
168266 (2010)] Technology, G.R. No. 154618 (2004)]
Nationality
Industry
Requirement
80% Filipino
Private radio communications network
ownership
Private recruitment
Contracts for construction and repair of locally-funded public works,
75% Filipino
except: (1) infra projects under RA 7718 (BOT Law), and (2) foreign-
ownership
funded projects
Contracts for construction of defense-related structures
70% Filipino
Advertising
ownership
Exempt properties
E. INSOLVENCY LAWS
Present Property
(1) Family home [Arts. 152, 153 and 155,
NCC]
1. Concurrence and preference (2) Right to receive support, as well as money
of credits or property obtained by such support, shall
not be levied upon on attachment or
Meaning of concurrence and execution. [Art. 205, NCC]
preference (3) Rule 39, Sec. 13
(4) Public Land Act [CA 141, as amended],
Concurrence of credits – implies possession Sec. 118,
by two or more creditors of equal rights or
privileges over the same property or all of the ii. Future Property
property of the debtor, and the value of such (1) A debtor who obtains a discharge from his
property is insufficient to pay in full all the debts on account of insolvency, is not liable
claims. for the unsatisfied claims of his creditors
with said property [Sec. 68 and 69,
Preference of credits – is a method adopted Insolvency Law, Act No. 1956]
to determine and specify the order in which (2) Property in custodia legis
credits should be paid in the final distribution of (3) Property of public dominion
the proceeds of the insolvent’s assets, as
opposed to a lien, which creates a charge on a Classification of credits
particular property. [DBP v. NLRC, G.R. No.
86932 (1990)] Special Preferred Credits [Art. 2241-
2242, NCC]
Preference Implications of Status
The right held by a creditor to be preferred in 1. These credits enjoy preference with
the payment of his claim above others out of respect to the specific movable and
the debtor’s assets. immovable property of the debtor.
2. Special preferred credits exclude all other
The provisions on concurrence and preference claims to the extent of the value of the
of credit do not apply when the situation does affected property.
not involve two or more creditors having They must be discharged first out of the
separate and distinct claims against the same proceeds of the property to which they
debtor who has insufficient property. relate before ordinary preferred credits
are paid.
Consequently, concurrence and preference of If the value of the specific property
credit may only be ascertained in the context of involved is GREATER than the total of
some proceeding, such as insolvency the special preferred credits, the
proceedings, where the claims of the creditors residual value will form part of the free
may be bindingly adjudicated. [Somera] property.
If the value is LESS than the total, the
When Rules of Preference Applicable unsatisfied balance of the credits shall
(1) There are two or more creditors; be paid pro rata. [Art. 2251, NCC]
(2) With separate and distinct claims; 3. These are considered as mortgages or
(3) Against the same debtor; pledges of real or personal property, or
(4) Who has insufficient property; and liens within the purview of legal provisions
(5) Such debtor is insolvent. governing insolvency. [Art. 2243, NCC]
4. These take precedence over ordinary
preferred credits insofar as the property, to
which the liens attach, are concerned. Pro-rating – total amount to be paid is equal
[Somera] to:
(7) For expenses of salvage, upon the goods Trade-related claims of clients or customers of
salvaged; a securities market participant which, for
(8) Credits between the landlord and the purposes of investor protection, are hereby
tenant, arising from the contract of deemed to have absolute priority over all other
tenancy on shares, on the share of each claims of whatever nature or kind insofar as
trade-related assets are concerned. [Sec. 136,
in the fruits or harvest;
RA 10142]
(9) Credits for transportation, upon the
goods carried, for the price of the contract
and incidental expenses, until their N.B. Sec. 136 of RA 10142 (FRIA) creates a
delivery and for thirty days thereafter; special preference of credit in favor of trade-
(10) Credits for lodging and supplies related claims upon trade-related assets. This
special preferred credit enjoys absolute
usually furnished to travellers by hotel
keepers, on the movables belonging to priority over all other claims, including taxes.
the guest as long as such movables are [Somera]
in the hotel, but not for money loaned to
Effect of the PPSA
the guests;
(11) Credits for seeds and expenses for Art. 2241(4) is affected because the
system of conventional pledges and chattel
cultivation and harvest advanced to the
mortgages are “replaced with a framework
debtor, upon the fruits harvested;
for secured transactions” since:
(12) Credits for rent for one year, upon the
o Articles 2093–2123 on Pledges are
personal property of the lessee existing
repealed, with the exception of
on the immovable leased and on the
Article 2121 on Legal Pledges
fruits of the same, but not on money or
o Articles 2140–2141 and Act. No.
instruments of credit;
1508 on Chattel Mortgages are
(13) Claims in favor of the depositor if the
repealed [Somera]
depositary has wrongfully sold the thing
Sec. 22 of the PPSA amends Art. 2241
deposited, upon the price of the sale.
because it provides that “a security
interest perfected prior to the
In the foregoing cases, if the movables to
commencement of insolvency
which the lien or preference attaches have
proceedings in respect of the grantor
been wrongfully taken, the creditor may
shall remain perfected and retain the
demand them from any possessor, within
priority it had before the commencement
thirty days from the unlawful seizure.
of the insolvency proceedings”
Thus, the preference created by these
Article 2241 refers only to specific immovable Articles will be SUBORDINATE to the
property. It does not cover claims for the priority of a security interest perfected
payment of money, which is generic property pursuant to the PPSA. [Somera]
and not specific or determinate. [Cordova v.
Reyes Daway Lim Bernardo Lindo Rosales Special Preferred Credits on
Law Offices, G.R. No. 146555 (2007)] Specific Immovable Property and
Real Rights
Taxes in Art. 2241 and 2242 shall first be
satisfied. [Art. 2243, NCC]
Art. 2242, NCC. With reference to specific
immovable property and real rights of the
Note: Only taxes in Arts. 2241 and 2242, NCC
debtor, the following claims, mortgages and
enjoy a preference; for all other claims, there is
liens shall be preferred, and shall constitute
only a concurrence of credits. [Somera]
an encumbrance on the immovable or real
Trade-related claim preference over trade-
right:
related assets
Taxes due upon the land or building;
For the unpaid price of real property sold, Ordinary Preferred Credits
upon the immovable sold;
Claims of laborers, masons, mechanics and Art. 2244, NCC. With reference to other
other workmen, as well as of architects, property, real and personal, of the debtor,
engineers and contractors, engaged in the following claims or credits shall be
the construction, reconstruction or repair preferred in the order named:
of buildings, canals or other works, upon (1) Proper funeral expenses for the debtor,
said buildings, canals or other works; or children under his or her parental
Claims of furnishers of materials used in the authority who have no property of their
construction, reconstruction, or repair of own, when approved by the court;
buildings, canals or other works, upon (2) Credits for services rendered the
said buildings, canals or other works; insolvent by employees, laborers, or
Mortgage credits recorded in the Registry of household helpers for one year
Property, upon the real estate preceding the commencement of the
mortgaged; proceedings in insolvency;
Expenses for the preservation or (3) Expenses during the last illness of the
improvement of real property when the debtor or of his or her spouse and
law authorizes reimbursement, upon the children under his or her parental
immovable preserved or improved; authority, if they have no property of their
Credits annotated in the Registry of Property, own;
in virtue of a judicial order, by (4) Compensation due the laborers or their
attachments or executions, upon the dependents under laws providing for
property affected, and only as to later indemnity for damages in cases of labor
credits; accident, or illness resulting from the
Claims of co-heirs for warranty in the partition nature of the employment;
of an immovable among them, upon the (5) Credits and advancements made to the
real property thus divided; debtor for support of himself or herself,
Claims of donors or real property for and family, during the last year preceding
pecuniary charges or other conditions the insolvency;
imposed upon the donee, upon the (6) Support during the insolvency
immovable donated; proceedings, and for three months
Credits of insurers, upon the property thereafter;
insured, for the insurance premium for (7) Fines and civil indemnification arising
two years. from a criminal offense;
(8) Legal expenses, and expenses incurred
in the administration of the insolvent's
estate for the common interest of the
creditors, when properly authorized and
approved by the court;
(9) Taxes and assessments due the national
government, other than those mentioned
in Articles 2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any
province, other than those referred to in
Articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city
or municipality, other than those
indicated in Articles 2241, No. 1, and
2242, No. 1;
(12) Damages for death or personal they shall be satisfied pro rata, after the
injuries caused by a quasi-delict; payment of duties, taxes and fees due the
(13) Gifts due to public and private State or any subdivision thereof. [Art. 2247,
institutions of charity or beneficence; NCC]
(14) Credits which, without special iii. Those credits which enjoy preference in
privilege, appear in [a] a public relation to specific real property or real
instrument; or (b) in a final judgment, if rights exclude all others to the extent of the
they have been the subject of litigation. value of the immovable or real right to
These credits shall have preference which the preference refers. [Art. 2248,
among themselves in the order of priority NCC]
of the dates of the instruments and of the iv. If there are two or more credits with respect
judgments, respectively. to the same specific real property or real
rights, they shall be satisfied pro rata, after
the payment of the taxes and assessment
Other Property of the taxes and assessments upon the
The “other property” referred to in Art. 2244 are immovable property or real right. [Art.
those: 2249, NCC]
a. Property not subject to special preferred v. The excess, if any, after the payment of the
credits credits which enjoy preference with respect
b. Property forming part of the free property to specific property, real or personal, shall
(i.e. residual value of the specific property be added to the free property which the
after the satisfaction of the special debtor may have for the payment of other
preferred credits) credits. [Art. 2250, NCC]
Worker preference in case of bankruptcy Those credits which do not enjoy any
In the event of bankruptcy or liquidation of an preference with respect to specific property,
employer’s business, his workers shall enjoy and those which enjoy preference, as to the
first preference as regards their wages and amount not paid, shall be satisfied according
other monetary claims, any provisions of law to to the following rules:
the contrary notwithstanding. Such unpaid Order established by Art. 2244, NCC
wages and monetary claims shall be paid in full Common credits referred to in Art. 2245,
before claims of the government and other NCC shall be paid pro rata regardless of
creditors may be paid. [Art. 110, Labor Code] dates [Art. 2251, NCC].
Common Credits Arts. 2241 and 2242, NCC jointly with Arts.
2246 to 2249, NCC establish a two-tier order of
Art. 2245, NCC. Credits of any other kind or preference. The first tier includes only taxes,
class, or by any other right or title not duties and fees due on specific movable or
comprised in the four preceding articles, shall immovable property. All other special preferred
enjoy no preference. credits stand on the same second tier to be
satisfied pari passu and pro rata, out of any
residual value of the specific property to which
Order of preference of credits such other credits relate. [Republic v. Peralta,
G.R. No. 56568 (1920)]
i. Credits which enjoy preference with
respect to specific movables exclude all
others to the extent of the value of the
personal property to which the preference
refers. [Art. 2246, NCC]
ii. If there are two or more credits with respect
to the same specific movable property,
Rehabilitation refers to the restoration of the A group of debtors may file a petition for
debtor to a condition of successful operation rehabilitation when:
and solvency, if it is shown that: 1. One of more of its members foresee the
a. Its continuance of operation is impossibility of meeting debts when they
economically feasible; and respectively fall due; and
b. Its creditors can recover more, by way of 2. The financial distress would likely
the present value of payments projected in adversely affect the financial condition
the plan, if the debtor continues as a going and/or operations of the other members of
concern than if it is immediately liquidated. the group, and/or the participation of the
[Sec. 4(gg)] other members of the group is essential
under the terms and conditions of the Approval of creditors holding at least
Rehabilitation Plan. 2/3 of the total liabilities of the debtor,
including –
The debtor must file a verified petition for Secured creditors holding more than
rehabilitation with the court, to establish: 50% of the total secured claims; and
(a) The insolvency of the debtor; and Unsecured creditors holding more than
(b) The viability of the rehabilitation. 50% of the total unsecured claims.
[Sec. 76]
ii.Involuntary [Secs. 13 and 14]
Within five working days, and after
Involuntary — Refers to proceedings initiated determination that the petition is sufficient in
by the creditor(s). form and substance, the court shall issue an
Order. [Sec. 77]
Value Requirement for Creditors
The claim(s), or aggregate thereof, must Objections to the Petition or Rehabilitation
amount to at least Php 1 million or at least 25% Plan
of the subscribed capital stock or partners’ Any creditor or other interested party may
contributions, whichever is higher. submit a verified objection to the petition or the
Rehabilitation Plan. The objections shall be
Circumstances for Involuntary limited to the following:
Rehabilitation a. The allegations in the petition or the
There is no genuine issue of fact or law on the Rehabilitation Plan, or the attachments
claims of the creditors; and – thereto, are materially false or misleading;
a. That the due and demandable payments b. The majority of any class of creditors do not
have not been made for at least 60 days; in fact support the Rehabilitation Plan;
or c. The Rehabilitation Plan fails to accurately
b. The debtor has failed generally to meet its account for a claim against the debtor and
liabilities as they fall due (illiquidity); or the claim is not categorically declared as a
c. At least one creditor, other than the contested claim; or
petitoner(s), has initiated foreclosure d. The support of the creditors, or any of
proceedings against the debtor that will them, was induced by fraud. [Sec. 79]
prevent the debtor from paying its debts as
they become due or will render it insolvent. Approval of the Plan
Within 10 days from the date of the second
(b) Pre–Negotiated publication of the Order, the court shall
approve the Rehabilitation Plan unless an
Pre-Negotiated Rehabilitation – An objection is submitted.
insolvency proceeding involving a pre-
negotiated Rehabilitation Plan between the The court has a maximum period of 120 days
debtor and the creditor(s). It commences as an from the date of the filing of the petition to
extrajudicial proceeding but terminates as a approve the Rehabilitation Plan. If the court
judicial proceeding. [Somera] fails to act within the same period, the Plan
shall be deemed approved.
Requirements for Petition
An insolvent debtor, either by itself or jointly Effect of Approval
with any of its creditors, may file a verified Approval of a Plan has the same legal effect
petition for approval of the Pre-Negotiated as confirmation of a Plan in Court-
Rehabilitation Plan that complies with the Supervised Rehabilitation. It also results in a
following: cram down, as it binds not only the debtor but
also all persons affected by it.
(2) There is sufficient cash flow to the commencement date except as may be
maintain the operations of the provided herein [Sec. 16]
debtor;
(3) The debtor's, partners, Exceptions to the Stay or Suspension Order
stockholders, directors and officers a. Cases already pending appeal in the
have been acting in good faith and Supreme Court as of commencement
which due diligence; date Provided, That any final and
(4) The petition is not a sham filing executory judgment arising from such
intended only to delay the appeal shall be referred to the court for
enforcement of the rights of the appropriate action;
creditor's or of any group of b. Subject to the discretion of the court, cases
creditors; and pending or filed at a specialized court or
(5) The debtor would likely be able to quasi-judicial agency which, upon
pursue a viable Rehabilitation determination by the court is capable of
Plan; resolving the claim more quickly, fairly and
e. The petition, the Rehabilitation Plan and efficiently than the court: Provided, That
the attachments thereto do not contain any any final and executory judgment of such
materially false or misleading statement; court or agency shall be referred to the
f. If the petitioner is the debtor, that the debtor court and shall be treated as a non-
has met with its creditor/s representing at disputed claim;
least three-fourths (3/4) of its total c. Enforcement of claims against sureties and
obligations to the extent reasonably other persons solidarily liable with the
possible and made a good faith effort to debtor, and third party or accommodation
reach a consensus on the proposed mortgagors as well as issuers of letters of
Rehabilitation Plan; or if the petitioner/s credit, unless the property subject of the
is/are a creditor or group of creditors, that/ third party or accommodation mortgage is
the petitioner/s has/have met with the necessary for the rehabilitation of the
debtor and made a good faith effort to debtor as determined by the court upon
reach a consensus on the proposed recommendation by the rehabilitation
Rehabilitation Plan; and receiver;
g. The debtor has not committed acts of d. Any form of action of customers or clients
misrepresentation or in fraud of its of a securities market participant to recover
creditor/s or a group of creditors. or otherwise claim moneys and securities
entrusted to the latter in the ordinary
Stay or suspension order course of the latter's business as well as
any action of such securities market
Stay And Suspension Order – An order participant or the appropriate regulatory
included in the Commencement Order that has agency or self-regulatory organization to
the following effects: pay or settle such claims or liabilities;
1. Suspending all actions or proceedings, in e. Actions of a licensed broker or dealer to sell
court or otherwise, for the enforcement of pledged securities of a debtor pursuant to
claims against the debtor; a securities pledge or margin agreement
2. Suspending all actions to enforce any for the settlement of securities transactions
judgment, attachment or provisional in accordance with the provisions of the
remedies against the debtor; Securities Regulation Code and its
3. Prohibiting the debtor from selling, implementing rules and regulations;
encumbering, transferring or disposing in f. Clearing and settlement of financial
any manner any of its properties except in transactions through the facilities of a
the ordinary course of business; and clearing agency or similar entities duly
4. Prohibiting the debtor from making any authorized, registered and/or recognized
payment of its liabilities outstanding as of by the appropriate regulatory agency like
the BSP and the SEC as well as any form d. He is, or was, within two (2) years from the
of actions of such agencies or entities to filing of the petition, an underwriter of the
reimburse themselves for any transactions outstanding securities of the debtor;
settled for the debtor; and e. He is related by consanguinity or affinity
g. Criminal action against individual debtor or within the fourth civil degree to any
owner, partner, director or officer of a individual creditor, owners of a sale
debtor. [Sec. 18] proprietorship-debtor, partners of a
partnership- debtor or to any stockholder,
Rehabilitation receiver director, officer, employee or underwriter of
a corporation-debtor; or
REHABILATION RECEIVER – Any qualified f. He has any other direct or indirect material
person, natural or juridical, may serve as a interest in the debtor or any of the creditors.
receiver. [Sec. 28] [Sec. 40]
mere re-classification of the liability entry days from notification, the receiver shall
and had no effect on the shareholders’ convene the creditors to vote on the Plan.
deficit. [Wonder Book Corporation v.
Philippine Bank of Communications, G.R. The Plan must be approved by all classes of
No. 187316 (2012)] creditors whose rights are adversely modified
or affected. Otherwise, it is deemed rejected.
ii.Liquidation Analysis
As one of the required contents of a The Plan is approved by a class of creditors if
Rehabilitation Plan, a liquidation analysis members of the said class holding more than
sets out for each creditor or each class of 50% of the total claims of the class vote in favor
creditor, as applicable, the amounts they of the Plan. [Sec. 64]
expect to receive under the Rehabilitation
Plan and those that they will receive if If the Plan is approved, the receiver shall
liquidation ensues within one hundred submit the same to the court for confirmation.
twenty (120) days after the filing of the
petition. [FR Rules, Rule 2, Sec. 61 (B)] Objections to Rehabilitation Plan
The creditor may file an objection to the Plan
The total liquidation assets and the with 20 days from receipt of notice that it has
estimated liquidation return to the creditors, been submitted for confirmation.
as well as the fair market value vis-a-vis the
forced liquidation value of the fixed assets Objections are limited to the following:
were not shown. As such, the Court could 1. The creditors’ support was induced by
not ascertain if the petitioning debtor's fraud;
creditors can recover by way of the present 2. The documents or data relied upon in the
value of payments projected in the plan, Plan are materially false or misleading;
more if the debtor continues as a going 3. The Plan is in fact not supported by the
concern than if it is immediately liquidated. voting creditors. [Sec. 66]
[Philippine Asset Growth Two, Inc. v.
Fastech Synergy Phils. Inc., G.R. 206528 If upon hearing, the court finds merit in the
(2016)] objections, it should order the curing of the
defect.
Note:
Effect: The failure of the Rehabilitation Plan If the court determines the debtor acted in bad
to state any material financial commitment faith, or that it is not possible to cure the defect,
to support rehabilitation, as well as to the court shall convert the proceedings into one
include a liquidation analysis, renders the for liquidation.
CA's considerations for approving the
same as actually unsubstantiated, and Confirmation of the Rehabilitation Plan
hence, insufficient to decree the feasibility The court has a maximum period of one year
of respondents' rehabilitation. It is well to from the date of filing to confirm a
emphasize that the remedy of rehabilitation Rehabilitation Plan.
should be denied to corporations that do
not qualify under the Rules. Neither should If no Rehabilitation Plan is confirmed, the
it be allowed to corporations whose sole proceedings may be converted into one for
purpose is to delay the enforcement of any liquidation. [Sec. 72]
of the rights of the creditors. [Ibid]
Confirmation has the following effects:
Approval of the Rehabilitation Plan 1. The Plan and its provisions shall be binding
The receiver shall notify the stakeholders that upon the debtor and all persons who may
the Plan is ready for examination. Within 20 be affected by it;
4. No separate action for the collection of an If the secured creditor maintains his rights
unsecured claim shall be allowed. Such under the security or lien:
actions already pending will be transferred a. The value of the property may be fixed in a
to the Liquidator for him to accept and manner agreed upon by the creditor and
settle or contest. If the liquidator contests the liquidator.
or disputes the claim, the court shall allow,
hear and resolve such contest except when If the value of the property is less than the
the case is already on appeal. In such a claim, the liquidator may convey the
case, the suit may proceed to judgment, property to the secured creditor and the
and any final and executor judgment latter will be admitted in the liquidation
therein for a claim against the debtor shall proceedings as a creditor for the balance.
be filed and allowed in court; and
5. No foreclosure proceeding shall be allowed If its value exceeds the claim secured, the
for a period of one hundred eighty (180) liquidator may convey the property to the
days. creditor and waive the debtor's right of
redemption upon receiving the excess from
Rights of secured creditors the creditor.
Creditor refers to natural or juridical persons b. The liquidator may sell the property and
which have claims against the debtor that satisfy the secured creditor's entire claim
arose on or before the commencement date. from the proceeds of the sale; or
[Sec. 4] c. The secure creditor may enforce the lien or
foreclose on the property pursuant to
General Unsecured Creditor refers to a applicable laws. [Sec. 114]
creditor whose claim or a portion thereof is
neither secured, preferred nor subordinated Cf. Rights of Unsecured Creditors
under the FRIA. General Rule: No separate action for the
collection of an unsecured claim shall be
Secured Creditor refers to a claim secured by allowed. Actions already pending will be
a lien, which is a statutory or contractual claim transferred to the liquidator.
or juridical charge on real or personal property
that legally entitles a creditor to resort to said Exception: When the action is already on
property for payment of the debt or claim appeal, the suit may proceed to judgment, and
secured. any final and executory judgment shall be filed
and allowed. [Sec. 113]
General Rule: Upon issuance of the
Liquidation Order, no foreclosure proceeding Liquidator
shall be allowed for 180 days. [Sec. 113]
Liquidator – Any qualified person, natural or
Exception: However, the Liquidation Order juridical, may serve as a receiver.
shall not affect the right of a secured
creditor to enforce his lien. If the receiver is a juridical entity, he must
designate a natural person as a representative.
During the proceedings, a secured creditor Such representative must possess all the
may: qualifications and none of the disqualifications.
a. Waive his right under the security or lien,
prove his claim in the liquidation Qualifications
proceedings and share in the distribution of The liquidator shall have the same
the assets of the debtor; or qualifications as that of rehabilitator, thus:
b. Maintain his rights under the security or 1. Citizen or resident for at least six (6)
lien. months immediately prior to nomination;
Properties exempted by law shall be set apart b. Any natural and juridical person involved in
from liquidation for the use and benefit of the personal information processing including:
insolvent. [Sec. 130] i. Those personal information controllers and
processors who use equipment that are
The Plan and its implementation shall observe located in the Philippines, although not
the concurrence and preference of credits found or established in the Philippines; or
under the Civil Code. [Sec. 133] ii. Those who maintain an office, branch or
agency in the Philippines subject to the
Sale of Assets in Liquidation immediately succeeding
The liquidator may sell the unencumbered paragraph: Provided, That the
assets of the debtor and convert the same into requirements of Section 5 are complied
money. with. [Sec. 4]
General Rule: The sale shall be made at public Nothing in this Act shall be construed as to
auction. have amended or repealed the provisions of
Republic Act No. 53, which affords the
Exception: A private sale may be allowed with publishers, editors or duly accredited reporters
the approval of the court if: of any newspaper, magazine or periodical of
1. The goods are of perishable nature; general circulation protection from being
2. The goods are likely to quickly deteriorate compelled to reveal the source of any news
in value; report or information appearing in said
3. The goods are disproportionately publication which was related in any
expensive to keep or maintain; or confidence to such publisher, editor, or
4. The private sale is for the best interest of reporter. [Sec. 5]
the debtor and creditors.
This Act does NOT apply to the following [Sec.
4]:
F. DATA PRIVACY ACT a. Information about any individual who is or
OF 2012 was an officer or employee of a
The section numbers hereinafter generally government institution that relates to the
pertain to RA 10173 or Data Privacy Act of position or functions of the individual,
2012, unless otherwise indicated. including:
1. The fact that the individual is or was an
officer or employee of the government
1. Definitions and Scope institution;
2. The title, business address and office
Personal information – Any information telephone number of the individual;
whether recorded in a material form or not: 3. The classification, salary range and
From which the identity of an individual is responsibilities of the position held by
apparent or can be reasonably and directly the individual; and
ascertained by the entity holding the 4. The name of the individual on a
information; or document prepared by the individual in
When put together with other information the course of employment with the
would directly and certainly identify an government.
individual. [Sec. 3(g)]
b. Information about an individual who is or
Scope was performing service under contract for
The Data Privacy Act of 2012 applies to: a government institution that relates to the
a. The processing of ALL types of personal services performed.
information; and
subject, and the extent to which such 8. The designation, or name or identity
access is authorized; and address of the personal
6. The identity and contact details of the information controller;
personal information controller or its
representative; d. Dispute the inaccuracy or error in the
7. The period for which the information personal information and have the
will be stored; and personal information controller correct
8. The existence of their rights, i.e., to it immediately and accordingly
access, correction, as well as the right
to lodge a complaint before the Unless: the request is vexatious or
Commission. otherwise unreasonable.
General Rule: Any information supplied/ Note: If the personal information have been
declaration made to the data subject on corrected, the personal information
these matters shall not be amended controller shall ensure the accessibility of
without prior notification. both the new and the retracted information
and the simultaneous receipt of the new
Exception: notification under (b) shall not and the retracted information by recipients
apply if the personal information is needed thereof.
pursuant to a subpoena or when the
collection and processing are for obvious Provided, That the third parties who have
purposes (e.g., when it is necessary for previously received such processed
the performance of or in relation to a personal information shall he informed of
contract or service or when necessary or its inaccuracy and its rectification upon
desirable in the context of an employer- reasonable request of the data subject.
employee relationship, between the
collector and the data subject) or when the e. Suspend, withdraw or order the
information is being collected and blocking, removal or destruction of his
processed as a result of legal obligation. or her personal information from the
personal information controller’s filing
c. Reasonable access to the following, system
upon demand:
1. Contents of his or her personal
This is upon discovery and substantial
information that were processed; proof that the personal information are
2. Sources from which personal incomplete, outdated, false, unlawfully
information were obtained; obtained, used for unauthorized purposes
3. Names and addresses of recipients of or are no longer necessary for the
the personal information; purposes for which they were collected. In
4. Manner by which such data were this case, the personal information
processed; controller may notify third parties who have
5. Reasons for the disclosure of the previously received such processed
personal information to recipients; personal information.
6. Information on automated processes
where the data will or likely to be made f. Be indemnified
as the sole basis for any decision
significantly affecting or will affect the For any damages sustained due to such
data subject; inaccurate, incomplete, outdated, false,
7. Date when his or her personal unlawfully obtained or unauthorized use of
information concerning the data personal information. [Sec. 16]
subject were last accessed and
modified; and
g. Transmissibility of Rights of the Data (ii) On the basis of such, no activities are
Subject carried out and no decisions are taken
regarding the data subject
The lawful heirs and assigns of the data subject
may invoke the rights of the data subject for Provided, That the personal information shall:
which he or she is an heir or assignee. a. Be held under strict confidentiality
b. Be used only for the declared purpose.
When they may invoke: (1) At any time after the
death of the data subject OR (2) when the data Likewise, the immediately preceding sections
subject is incapacitated or incapable of are not applicable to processing of personal
exercising the above-enumerated rights. [Sec. information gathered for the purpose of
17] investigations in relation to any criminal,
administrative or tax liabilities of a data subject.
h. Right to Data Portability [Sec. 19]
Market – The group of goods or services that restrict, or lessen competition in the
are sufficiently interchangeable or substitutable relevant market;
and the object of competition, and the c. Monitor and undertake consultation with
geographic area where said goods or services stakeholders and affected agencies
are offered. [Sec. 4(i)] d. Stop or redress any anti-competitive
agreement
Scope e. Conduct administrative proceedings,
impose sanctions, fines or penalties for any
This Act shall: noncompliance with or breach of this Act
(1) Be enforceable against any person or and its implementing rules and regulations
entity engaged in any trade, industry and (IRR) and punish for contempt;
commerce in the Republic of the f. Issue subpoena duces tecum and
Philippines. subpoena ad testificandum to require the
(2) Be applicable to international trade having production of books, records, or other
direct, substantial, and reasonably documents or data which relate to any
foreseeable effects in trade, industry, or matter relevant to the investigation
commerce in the Republic of the g. Upon order of the court, undertake
Philippines, including those that result from inspections of business premises and other
acts done outside the Republic of the offices, land and vehicles, as used by the
Philippines. entity,
h. Issue adjustment or divestiture orders
This Act shall NOT apply to: including orders for corporate
(1) The combinations or activities of workers or reorganization or divestment which are
employees; structural remedies, should only be
(2) Agreements or arrangements with their imposed:
employers 1. Where there is no equally effective
behavioral remedy; or
When such combinations, activities, 2. Where any equally effective behavioral
agreements, or arrangements are designed remedy would be more burdensome for
solely to facilitate collective bargaining in the enterprise concerned than the
respect of conditions of employment. [Sec. 3] structural remedy;
i. Deputize any and all enforcement agencies
of the government or enlist the aid and
2. Powers and functions of the
support of any private institution,
Philippine Competition corporation, entity or association, in the
Commission implementation of its powers and functions;
j. Monitor compliance by the person or
The Commission shall have original and entities concerned with the cease and
primary jurisdiction over the enforcement desist order or consent judgment;
and implementation of PCA. The Commission k. Issue advisory opinions and guidelines on
shall exercise the following powers and competition matters and submit annual and
functions: special reports to Congress, including
a. Conduct inquiry, investigate, and hear and proposed legislation;
decide on cases involving any violation of l. Monitor and analyze the practice of
this Act and other existing competition laws competition in markets that affect the
motu proprio or upon receipt of a verified Philippine economy;
complaint m. Conduct, publish, and disseminate studies
b. Review proposed mergers and and reports on anti-competitive conduct
acquisitions, and upon exercise of its and agreements to inform and guide the
powers to review, prohibit mergers and industry and consumers;
acquisitions that will substantially prevent,
In fixing the amount of the fine, the Commission which have no connection with the
shall have regard to both the gravity and the transaction;
duration of the violation. d. Discriminatory behavior - Setting prices
or other terms or conditions that
CRIMINAL PENALTY discriminate unreasonably between
An entity that enters into any anti-competitive customers or sellers of the same goods or
agreement as covered in Sec. 14 shall be services, where the effect may be to lessen
penalized by imprisonment from two (2) to competition substantially:
seven (7) years, and a fine of not less than fifty
million pesos (P50,000,000.00) but not more Exception: That the following shall be
than two hundred fifty million pesos considered permissible price
(P250,000,000.00). The penalty of differentials:
imprisonment shall be imposed upon the 1. Socialized pricing for the less fortunate
responsible officers, and directors of the entity. sector of the economy;
2. Price differential which reasonably or
When the entities involved are juridical approximately reflect differences in the
persons, the penalty of imprisonment shall be cost of manufacture, sale, or delivery
imposed on its officers, directors, or employees resulting from differing methods,
holding managerial positions, who are technical conditions, or quantities in
knowingly and willfully responsible for such which the goods or services are sold or
violation. delivered to the buyers or sellers;
3. Price differential or terms of sale
Abuse of dominant position offered in response to the competitive
price of payments, services or changes
Markets that are dominated by a single or in the facilities furnished by a
handful of large companies are particularly competitor; and
vulnerable to anticompetitive practices. 4. Price changes in response to changing
market conditions, marketability of
In the conduct of their business, dominant goods or services, or volume;
companies (considering their size, scope, and
position of economic strength) may have a e. Imposing restrictions on the lease or
disproportionately severe effect on the market contract for sale or trade of goods or
and its companies. services, such as fixing prices, giving
preferential discounts or rebate upon such
PROHIBITED ACTS price, or imposing conditions not to deal
a. Predatory Pricing - selling goods or with competing entities, the object or effect
services below cost with the object of of the restrictions is to prevent, restrict or
driving competition out of the relevant lessen competition substantially:
market;
b. Imposing barriers to entry or committing Exception:
acts that prevent competitors from growing 1. Permissible franchising, licensing,
within the market in an anti-competitive exclusive merchandising or exclusive
manner distributorship agreements; or
2. Agreements protecting intellectual
Exception: Those that develop in the property rights, confidential
market as a result of or arising from a information, or trade secrets;
superior product or process, business
acumen, or legal rights or laws; f. Making supply of particular goods or
services dependent upon the purchase of
c. Making a transaction subject to acceptance other goods or services from the supplier
by the other parties of other obligations
which have no direct connection with the If the PCC determines that the agreement
main goods or services to be supplied; results in a prohibited merger or
g. Directly or indirectly imposing unfairly low acquisition, it may
purchase prices for the goods or services a. Prohibit the implementation of the
of, among others, marginalized agricultural agreement;
producers, fisherfolk, micro-, small-, b. Prohibit the implementation of the
medium-scale enterprises, and other agreement unless and until it is modified by
marginalized service providers and changes specified by the Commission;
producers; c. Prohibit the implementation of the
h. Exploitative behavior towards agreement unless and until the pertinent
consumers, customers, and/or party or parties enter into legally
competitors - Directly or indirectly enforceable agreements specified by the
imposing unfair purchase or selling price Commission. [Sec. 18]
on their competitors, customers, suppliers
or consumers; ADMINISTRATIVE FINES AND PENALTIES
Exception: Prices that develop in the Second offense: Fine of not less than one
market as a result of or due to a superior hundred million pesos (P100,000,000.00) but
product or process, business acumen or not more than two hundred fifty million pesos
legal rights or laws (P250,000,000.00).
ADMINISTRATIVE FINES AND PENALTIES In fixing the amount of the fine, the Commission
First offense: Fine of up to one hundred million shall have regard to both the gravity and the
pesos (P100,000,000.00). duration of the violation.
each submit a Notification Form and comply substitutable by the consumer or the
with the procedure set forth: customer, by reason of the goods and/or
All acquiring and acquired pre-acquisition services’ characteristics, their prices and
ultimate parent entities; or their intended use; and
Any entity authorized by the ultimate parent 2. The relevant geographic market comprises
entity to file notification on its behalf. the area in which the entity concerned is
The parties shall not consummate the involved in the supply and demand of
transaction before the expiration of the relevant goods and services, in which the conditions
periods provided in this Rule. [Rule 4, Sec.2(b), of competition are sufficiently homogenous
IRR] and which can be distinguished from
neighboring areas because the conditions
In the formation of a joint venture (other than in of competition are different in those areas.
connection with a merger or consolidation), the
contributing entities shall be deemed acquiring For purposes of determining the relevant
entities, and the joint venture shall be deemed market, the following factors, among others,
the acquired entity. [Rule 4, Sec.2(c), IRR] affecting the substitutability among goods or
services constituting such market and the
Exceptions geographic area delineating the boundaries of
the market shall be considered:
The Commission shall, from time to time, adopt (a) The possibilities of substituting the goods
and publish regulations stipulating exceptions or services in question, with others of
or exemptions from the notification domestic or foreign origin, considering the
requirement. [Sec. 19] technological possibilities, extent to which
substitutes are available to consumers and
An internal restructuring within a group of time required for such substitution;
companies is exempt from notification if the (b) The cost of distribution of the good or
acquiring and acquired entities have the same service, its raw materials, its supplements
ultimate parent entity (UPE). and substitutes from other areas and
abroad, considering freight, insurance,
Mergers or acquisitions are not considered import duties and non-tariff restrictions; the
purely internal and, therefore, do not qualify for restrictions imposed by economic agents
the exemption, if the restructuring leads to a or by their associations; and the time
change in control. required to supply the market from those
areas;
Such exemption shall not prevent the (c) The cost and probability of users or
Commission from commencing a motu proprio consumers seeking other markets; and
review of mergers and acquisitions under the (d) National, local or international restrictions
IRR. [PCC Clarificatory Note 16-002] which limit access by users or consumers
to alternate sources of supply or the access
5. Determining the Relevant of suppliers to alternate consumers. [Sec.
24]
Market
6. Determining the control or
The Relevant Market refers to the market in
which a particular good or service is sold and dominance of market
which is a combination of the relevant product
market and the relevant geographic market, In determining whether an entity has market
defined as follows: dominant position, the Commission shall
1. A relevant product market comprises all consider the following:
those goods and/or services which are 1. The share of the entity in the relevant
regarded as interchangeable or market and whether it is able to fix prices