Blue Notes - Commercial Law

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BAR OPERATIONS 2022 COMMERCIAL LAW
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TABLE OF CONTENTS
I. INSURANCE ...................................................................................................................................10
A. BASIC CONCEPTS OF INSURANCE............................................................................................. 11

1. GENERAL OVERVIEW ..................................................................................................................11
2. WHAT MAY AND MAY NOT BE INSURED....................................................................................16
3. INSURABLE INTEREST .................................................................................................................17
4. DOUBLE INSURANCE AND OVER INSURANCE ............................................................................20
5. NO FAULT, SUICIDE, AND INCONTESTABILITY CLAUSES ............................................................21
B. PERFECTION OF THE INSURANCE CONTRACT ........................................................................... 27
1. OFFER AND ACCEPTANCE/ CONSENSUALITY .............................................................................27
2. PREMIUM PAYMENT ..................................................................................................................27
3. NON-DEFAULT OPTIONS IN LIFE INSURANCE.............................................................................29
4. THE POLICY .................................................................................................................................30
C. RIGHTS AND OBLIGATIONS OF PARTIES ................................................................................... 32
D. RESCISSION OF INSURANCE CONTRACTS ................................................................................. 36
1. OVERVIEW OF GENERAL GROUNDS ...........................................................................................36
2. CONCEALMENT...........................................................................................................................37
3. MISREPRESENTATION.................................................................................................................39
4. BREACH OF WARRANTY .............................................................................................................40
5. EXERCISE OF THE RIGHT TO RESCIND OR CANCEL .....................................................................41
6. CANCELLATION OF NON-LIFE INSURANCE .................................................................................42
A. GROUNDS FOR CANCELLATION OF A NON-LIFE POLICY BY THE INSURER: ..............................................42
B. NOTICE .....................................................................................................................................42
C. RENEWAL ..................................................................................................................................43
II. TRANSPORTATION LAW ............................................................................................................... 45
A. COMMON CARRIERS ............................................................................................................... 46

1. CONCEPT ....................................................................................................................................46
2. COMMON CARRIER VS. PRIVATE CARRIER .................................................................................47
3. DILIGENCE REQUIRED .................................................................................................................48
B. OBLIGATIONS AND LIABILITIES ................................................................................................ 48
1. VIGILANCE OVER GOODS ...........................................................................................................50
A. FLOOD, EARTHQUAKE, STORM, LIGHTNING OR OTHER NATURAL DISASTER OR CALAMITY .........................50
B. ACT OF THE PUBLIC ENEMY IN WAR, WHETHER INTERNATIONAL OR CIVIL. .............................................51
C. ACT OR OMISSION OF THE SHIPPER OR OWNER OF THE GOODS . ..........................................................51
D. THE CHARACTER OF THE GOODS OR DEFECTS IN THE PACKING OR IN THE CONTAINERS . ...........................51
E. ORDER OR ACT OF COMPETENT AUTHORITY .....................................................................................51
2. SAFETY OF PASSENGERS .............................................................................................................53
A. LIABILITY FOR ACTS OF OTHERS .....................................................................................................53
B. LIABILITY FOR DELAYS IN THE COMMENCEMENT OF VOYAGE ...............................................................54
C. LIABILITY FOR DEFECTS IN EQUIPMENT AND FACILITIES.......................................................................54
C. DEFENSES AVAILABLE TO A COMMON CARRIER....................................................................... 54
1. PROOF OF NEGLIGENCE .............................................................................................................54
2. DUE DILIGENCE IN THE SELECTION AND SUPERVISION OF EMPLOYEES ...................................54
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3. FORTUITOUS EVENT ...................................................................................................................54

4. CONTRIBUTORY NEGLIGENCE ....................................................................................................54
5. DOCTRINE OF LAST CLEAR CHANCE ...........................................................................................55
D. EXTENT OF LIABILITY............................................................................................................... 55
1. RECOVERABLE DAMAGES ...........................................................................................................55
2. STIPULATIONS LIMITING LIABILITY .............................................................................................62
3. LIMITATIONS UNDER MONTREAL CONVENTION .......................................................................64
E. SUMMARY OF CLAIMS UNDER SPECIAL LAWS ......................................................................... 69
III. CORPORATION LAW (Provisions of B.P. Blg 68, as amended by R.A. No. 11232) ............................ 70
A. GENERAL PRINCIPLES .............................................................................................................. 72

1. NATIONALITY OF CORPORATIONS .............................................................................................74
A. CONTROL TEST ...........................................................................................................................75
B. GRANDFATHER RULE ...................................................................................................................76
2. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY....................................................................77
3. DOCTRINE OF PIERCING THE CORPORATE VEIL .........................................................................79
B. DE FACTO CORPORATION VERSUS CORPORATIONS BY ESTOPPEL ............................................. 82
C. CORPORATE POWERS ............................................................................................................. 83
1. HOW POWERS ARE EXERCISED ..................................................................................................83
A. ULTRA VIRES ACTS ......................................................................................................................84
B. TRUST FUND DOCTRINE ...............................................................................................................84
D. BOARD OF DIRECTORS AND TRUSTEES .................................................................................... 89
1. BASIC PRINCIPLES .......................................................................................................................89
A. DOCTRINE OF CENTRALIZED MANAGEMENT ....................................................................................89
B. BUSINESS JUDGMENT RULE ..........................................................................................................90
2. TENURE, QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS.......................................90
3. ELECTION AND REMOVAL OF DIRECTORS OR TRUSTEES ...........................................................91
A. ELECTION OF DIRECTORS OR TRUSTEES (SEC. 23) ............................................................................91
B. REMOVAL OF DIRECTORS OR TRUSTEES (SEC. 27) ...........................................................................94
4. DUTIES, RESPONSIBILITIES AND LIABILITIES FOR UNLAWFUL ACTS ..........................................94
A. RULES ON FIDUCIARIES’ DUTIES AND LIABILITIES ..............................................................................94
B. SOLIDARY LIABILITIES FOR DAMAGES .............................................................................................95
C. RESPONSIBILITY FOR CRIMES ........................................................................................................96
D. CONTRACTS ...............................................................................................................................96
5. EXECUTIVE AND OTHER SPECIAL COMMITTEES.........................................................................96
6. MEETINGS...................................................................................................................................97
E. STOCKHOLDERS AND MEMBERS ........................................................................................... 101
1. RIGHTS AND OBLIGATIONS OF STOCKHOLDERS AND MEMBERS ............................................101
A. DOCTRINE OF EQUALITY OF SHARES (SEC. 6) .................................................................................101
2. PARTICIPATION IN MANAGEMENT ..........................................................................................101
A. PROXY ....................................................................................................................................101
B. VOTING TRUST .........................................................................................................................101
C. CASES WHEN STOCKHOLDER’S ACTION IS REQUIRED ......................................................................102
3. PROPRIETARY RIGHTS...............................................................................................................103
A. RIGHT TO DIVIDENDS ................................................................................................................103
B. RIGHT TO INSPECT ....................................................................................................................104
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C. PRE-EMPTIVE RIGHT .................................................................................................................106

D. RIGHT OF FIRST REFUSAL ...........................................................................................................106
E. OTHER RIGHTS .........................................................................................................................107
4. REMEDIAL RIGHTS ....................................................................................................................109
5. INTRA-CORPORATE DISPUTES ..................................................................................................109
F. CAPITAL STRUCTURE............................................................................................................. 110
1. SHARES OF STOCK ....................................................................................................................110
A. NATURE OF SHARES OF STOCK ....................................................................................................110
B. CONSIDERATION FOR SHARES OF STOCK (SEC. 61) .........................................................................110
C. WATERED STOCK ......................................................................................................................110
D. SITUS OF THE SHARES OF STOCK ..................................................................................................110
E. CLASSES OF SHARES OF STOCK (SEC. 6) ........................................................................................110
2. CERTIFICATE OF STOCK.............................................................................................................111
A. NATURE OF THE CERTIFICATE (SEC. 62) ........................................................................................111
B. UNCERTIFIED SHARES (SEC. 62) ..................................................................................................112
C. NEGOTIABILITY; REQUIREMENTS FOR VALID TRANSFER OF STOCKS ...................................................112
D. ISSUANCE (SEC. 63) ..................................................................................................................112
E. LOST OR DESTROYED CERTIFICATES (SEC. 72) ...............................................................................112
3. DISPOSITION AND ENCUMBRANCE OF SHARES .......................................................................113
A. SALE OF SHARES .......................................................................................................................113
B. ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES .......................................................................113
C. REQUISITES OF A VALID TRANSFER...............................................................................................114
D. INVOLUNTARY DEALINGS ...........................................................................................................114
G. DISSOLUTION AND LIQUIDATION .......................................................................................... 114
1. MODES OF DISSOLUTION: ........................................................................................................114
A. VOLUNTARY.............................................................................................................................114
B. INVOLUNTARY ..........................................................................................................................116
2. METHODS OF LIQUIDATION .....................................................................................................118
H. OTHER CORPORATIONS ........................................................................................................ 119
1. CLOSE CORPORATIONS.............................................................................................................119
2. NON-STOCK CORPORATIONS ...................................................................................................121
3. FOREIGN CORPORATIONS ........................................................................................................124
A. WHAT CONSTITUTES “DOING BUSINESS”......................................................................................124
B. NECESSITY OF A LICENSE TO DO BUSINESS ....................................................................................126
C. REQUISITES FOR ISSUANCE OF LICENSE .........................................................................................126
D. RESIDENT AGENT ......................................................................................................................127
E. PERSONALITY TO SUE AND SUABILITY ...........................................................................................128
4. ONE PERSON CORPORATIONS .................................................................................................129
I. MERGERS AND CONSOLIDATIONS ......................................................................................... 132
1. CONCEPT ..................................................................................................................................132
2. EFFECTS AND LIMITATIONS OF MERGER AND CONSOLIDATION .............................................134
IV. INTELLECTUAL PROPERTY .......................................................................................................... 137
A. PATENTS .............................................................................................................................. 139

1. PATENTABLE V. NON-PATENTABLE INVENTION ......................................................................139
2. NON-PATENTABLE INVENTIONS ...............................................................................................140
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3. OWNERSHIP OF A PATENT .......................................................................................................141

4. GROUNDS FOR CANCELLATION OF A PATENT .........................................................................141
5. PATENT INFRINGEMENT...........................................................................................................142
B. TRADEMARKS ....................................................................................................................... 144
1. MARKS, COLLECTIVE MARKS, AND TRADE NAMES ..................................................................144
2. ACQUISITION OF OWNERSHIP OF A MARK ..............................................................................144
3. ACQUISITION OF OWNERSHIP OF TRADE NAME .....................................................................145
A. CONCEPT OF ACTUAL USE ..........................................................................................................146
B. EFFECT OF REGISTRATION ..........................................................................................................146
4. WELL-KNOWN MARKS..............................................................................................................147
5. RIGHTS CONFERRED BY REGISTRATION ...................................................................................148
6. CANCELLATION OF REGISTRATION OF A TRADEMARK ............................................................148
7. TRADEMARK INFRINGEMENT...................................................................................................149
A. DAMAGES ...............................................................................................................................150
B. PENALTIES ...............................................................................................................................151
8. UNFAIR COMPETITION .............................................................................................................151
C. COPYRIGHT .......................................................................................................................... 151
1. COPYRIGHTABLE WORKS..........................................................................................................152
2. NON-COPYRIGHTABLE WORKS.................................................................................................153
3. RIGHTS CONFERRED BY A COPYRIGHT .....................................................................................154
4. OWNERSHIP OF COPYRIGHT ....................................................................................................154
5. LIMITATIONS ON COPYRIGHT...................................................................................................155
6. DOCTRINE OF FAIR USE ............................................................................................................156
7. COPYRIGHT INFRINGEMENT ....................................................................................................156
A. REMEDIES ...............................................................................................................................157
B. CRIMINAL PENALTIES ................................................................................................................157
V. ANTI-MONEY LAUNDERING ACT (R.A. 9160, AS AMENDED) ......................................................... 159
A. COVERED INSTITUTIONS AND THEIR OBLIGATIONS ................................................................ 160

1. COVERED INSTITUTIONS ..........................................................................................................160
2. OBLIGATIONS OF COVERED INSTITUTIONS ..............................................................................161
B. COVERED AND SUSPICIOUS TRANSACTIONS .......................................................................... 161
1. COVERED TRANSACTIONS ........................................................................................................161
2. SUSPICIOUS TRANSACTIONS ....................................................................................................161
C. SAFE HARBOR PROVISION..................................................................................................... 162
D. WHEN IS MONEY LAUNDERING COMMITTED (INCLUDING PREDICATE CRIMES) ...................... 162
1. WHEN MONEY LAUNDERING IS COMMITTED..........................................................................162
2. PREDICATE CRIMES ..................................................................................................................162
E. AUTHORITY TO INQUIRE INTO BANK DEPOSITS ..................................................................... 163
F. FREEZING AND FORFEITURE .................................................................................................. 164
1. FREEZING ..................................................................................................................................164
2. CIVIL FORFEITURE .....................................................................................................................165
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VI. ELECTRONIC COMMERCE ACT .................................................................................................... 167
A. LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES, DOCUMENTS, AND SIGNATURES .. 168

B. PRESUMPTION RELATING TO ELECTRONIC SIGNATURES ........................................................ 171
C. ADMISSIBILITY AND EVIDENTIAL WEIGHT OF ELECTRONIC DATA MESSAGE OR ELECTRONIC
DOCUMENT .......................................................................................................................... 171
D. OBLIGATION OF CONFIDENTIALITY ........................................................................................ 171
VII. FINANCIAL REHABILITATION, INSOLVENCY, LIQUIDATION and SUSPENSION OF PAYMENTS (R.A.

No. 10142, FR Rules [A.M. No. 12-12-11-SC], and FLSP Rules [A.M. No.15-04-06-SC]) ....................... 174
A. BASIC CONCEPTS .................................................................................................................. 174

1. REHABILITATION .......................................................................................................................175
2. INSOLVENT ...............................................................................................................................176
3. LIQUIDATION ............................................................................................................................176
4. SUSPENSION OF PAYMENTS .....................................................................................................176
B. MODES OF REHABILITATION ................................................................................................. 176
1. COURT-SUPERVISED REHABILITATION .....................................................................................176
A. VOLUNTARY VS. INVOLUNTARY ...................................................................................................176
B. COMMENCEMENT ORDER (INCLUDING STAY ORDER) .....................................................................178
C. REHABILITATION RECEIVER AND MANAGEMENT COMMITTEE ............................................................ 181
D. DETERMINATION OF CLAIMS .......................................................................................................185
E. REHABILITATION PLAN ...............................................................................................................186
F. CREDITOR APPROVAL AND CONFIRMATION....................................................................................188
G. FAILURE OF REHABILITATION .......................................................................................................189
2. PRE- NEGOTIATED REHABILITATION ........................................................................................190
A. HOW INITIATED ........................................................................................................................190
B. PERIOD AND EFFECT OF APPROVAL .............................................................................................. 191
3. OUT – OF – COURT OR INFORMAL RESTRUCTURING AGREEMENT OR REHABILITATION PLAN
.................................................................................................................................................192
A. MINIMUM REQUIREMENTS ........................................................................................................192
B. STANDSTILL PERIOD...................................................................................................................192
C. CRAM DOWN EFFECT ................................................................................................................192
C. LIQUIDATION ....................................................................................................................... 193
1. VOLUNTARY LIQUIDATION VS. INVOLUNTARY LIQUIDATION VS. CONVERSION .....................193
2. PROCEDURE ..............................................................................................................................196
A. LIQUIDATION ORDER; EFFECTS....................................................................................................197
3. DETERMINATION OF CLAIMS ...................................................................................................200
D. SUSPENSION OF PAYMENTS; SUSPENSION OF PAYMENT ORDER............................................ 200
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I. INSURANCE A. BASIC CONCEPTS OF INSURANCE
1. GENERAL OVERVIEW
TOPIC OUTLINE UNDER THE SYLLABUS
a. Governing Laws
A. BASIC CONCEPTS
1. P.D. No. 612, as amended by R.A. No.
1. General Overview 10607 (hereinafter Insurance Code);
2. What May And May Not Be Insured 2. Special Laws, such as R.A. No. 1161
3. Insurable Interest (Social Security Act)
4. Double Insurance And Over- Insurance 3. Civil Code, for matters not expressly
5. No Fault, Suicide And Incontestability provided for in #1 and #2
Clauses
b. Definition
B. PERFECTION OF THE INSURANCE
CONTRACT Contract of Insurance
1. An agreement;
1. Offer And Acceptance/ Consensual 2. Whereby one undertakes for a
Nature consideration;
2. Premium Payment 3. To indemnify another against loss,
3. Non- Default Options In Life Insurance damage or liability
4. The Policy 4. Arising from an unknown or contingent
event. (Insurance Code, Sec. 2[a]).
C. RIGHTS AND OBLIGATIONS OF
PARTIES NOTE:
a. Insurer A contingent event is one that is not certain to
b. Insured take place.
c. Beneficiary
d. Agent or Trustee An unknown past event is one which had already
e. Partner or Co-Owner happened, but one is unaware if it happened or
f. Assignee not.
g. Mortgagor and Mortgagee
A past event may be a designated event only in
D. RESCISSION OF INSURANCE cases where it has happened already but the
CONTRACTS parties do not know about it, e.g., prior loss of a
ship at sea (applicable only to marine insurance).
1. Overview Of General Grounds (De Leon, The Insurance Code of the Philippines
2. Concealment Annotated [2014])
3. Misrepresentation
4. Breach Of Warranty Consideration Required in Insurance
5. Exercise Of The Right To Rescind Or An insurance business consists in undertaking,
Cancel for a consideration, to indemnify another against
6. Cancellation Of Non-Life Insurance loss, damage or liability arising from an unknown
or contingent event.
The fact that no profit is derived from the making

of insurance contracts, agreements or
transactions or that no separate or direct
consideration is received therefor, shall not be
deemed conclusive to show that the making
thereof does not constitute the doing or
transacting of an insurance business. (Insurance
Code, Sec. 2[b])
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Doing or Transacting an Insurance Business Additional Requisites for Insurance Contract:

1. Making or proposing to make, as insurer (IRADP)
any insurance contract; Making, or a. The insured must possess an interest of
proposing to make, as surety, any some kind susceptible of pecuniary
contract of suretyship as a vocation and estimation, known as insurable interest;
not as merely incidental to any other b. The insured is subject to a risk of loss
legitimate business or activity of the through the destruction or impairment of
surety; that interest by the happening of
2. Doing any kind of business including a designated perils;
reinsurance business, specifically c. The insurer assumes the risk of loss;
recognized as constituting the doing of d. Such assumption is part of a general
an insurance business within the scheme to distribute actual losses
meaning of this Code; among a large group of persons bearing
3. Doing or proposing to do any business in somewhat similar risks;
substance equivalent to any of the e. As consideration for the insurer’s
foregoing in a manner designed to evade promise, the insured makes a ratable
the provisions of this Code. (Insurance contribution called premium, to a general
Code, Sec. 2[b]) insurance fund.
Contract of Suretyship NOTE: The presence of these five elements are

A contract of suretyship is also considered an what separate Insurance from other contracts,
insurance contract, if made by a surety who is and which makes Insurance a “risk-distributing
doing insurance business. (P.D. No. 612, as device” (De Leon, The Insurance Code
amended by R.A. No. 10607 [hereinafter Annotated, 2014)
Insurance Code], Sec. 2[a]).
Risk-distributing device
Suretyship is an agreement whereby a party A contract of insurance is primarily a risk-
called the “surety” guarantees the performance distributing device, a mechanism by which all
by another party called the “principal obligor” of members of a group exposed to a particular risk
an obligation or undertaking in favor of a third contribute premiums to an insurer. From these
party called the “obligee.” contributory funds are paid whatever losses occur
due to exposure to the peril insured against.
It includes official recognizances, stipulations,
bonds or undertakings issued by any company by Test to Determine Whether a Contract is an
virtue of and under the provisions of Act No. 536, Insurance Contract
as amended by Act No. 2206. (Insurance Code, It depends on the nature of the promise, the act
Sec. 177) required to be performed, and the exact nature of
the agreement in the light of the occurrence,
Protection and Indemnity Club – Doing contingency or circumstances under which the
Insurance Business performance becomes requisite. It is not by what
A protection and indemnity club is an association it is called (White Gold Marine Services v. Pioneer
composed of shipowners generally formed for the Insurance, G.R. No. 154514, 2005)
specific purpose of providing insurance cover
against third-party liabilities of its members. It is a Principal Objects and Purpose Test
mutual insurance association. (Steamship Mutual Whether the assumption of risk and
v. Sulpicio Lines, G.R. No. 196072, 2017) indemnification of loss (which are elements of an
insurance business) are the principal object and
c. Elements of an Insurance purpose of the organization or whether they are
Contract merely incidental to its business. If these are the
principal objectives, the business is that of
Requisites of Ordinary Contracts: insurance. But if they are merely incidental and
a. Consent service is the principal purpose, then the
b. Subject-matter business is not insurance. (Philippine Health
c. Cause Care Providers v. CIR, G.R. No. 167330, 2009)
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Contracts for Personal Service Distinguished 2. A Certificate of Authority to operate

from Contracts of Insurance issued by the Insurance Commission
Contracts a law firm enters into with clients which should be renewable every 3
whereby in consideration of periodical payments, years. (New Insurance Code, Sec. 193)
the law firm promises to represent such clients in
all suits for or against them are not insurance b. Insured
contracts but are contracts for personal services; The person in whose favor the contract is
operative and who is indemnified against or is to
A contract by which a corporation, in receive a sum upon the happening of a specified
consideration of a stipulated amount, agrees at its event.
own expense to defend a physician against all
suits for damages for malpractice is one of Requisites in Order that a Person May Be
insurance, and the corporation will be deemed as Insured Under a Contract of Insurance: (CIP)
engaged in the business of insurance since the (Insurance Code, Sec. 3)
purpose of the contract is to indemnify against 1. He must be competent to enter into a
loss and damage. (Philippine Health Care contract;
Providers v. CIR, G.R. No. 167330, 2009) 2. He must possess an insurable interest
in the subject of the insurance; and
d. The Parties to an Insurance 3. He must not be a public enemy (citizen
Contract or subject of a country with whom the
Philippines is at war) (Insurance Code,
a. Insurer Sec. 7)
The party who assumes or accepts the risk of loss
and undertakes for a consideration to indemnify Effect of War on Existing Insurance Contracts
the insured or to pay him a certain sum on the
happening of a specified contingency or event; 1. Property Insurance
An insurance policy ceases to become valid and
An insurer may be: enforceable as soon as the insured becomes a
1. A foreign or domestic company or public enemy.
corporation; or
2. A partnership or an association However, premium paid by the insured (public
enemy) shall be returned by the insurer (Filipinas
Insurance Corporations Compania de Seguros v. Christern Huenefield &
The term insurer or insurance company shall Co., G.R. No. L-2294, 1951)
include all partnerships, associations,
cooperatives or corporations, including 2. Life Insurance
government-owned or -controlled corporations or The contract is abrogated but the insured is
entities, engaged as principals in the insurance entitled to the case or reserve value of the policy
business, excepting mutual benefit associations. (if any), which is the excess of the premiums paid
Unless the context otherwise requires, the term over the actual risk carried during the years when
shall also include professional reinsurers defined the policy had been in force (Constantino v. Asia
in Section 288. Domestic company shall include Life Insurance, G.R. No. L-1669, 1950)
companies formed, organized or existing under
the laws of the Philippines. Foreign company NOTE: Where the loss occurs after the end of the
when used without limitation shall include war, the contract is not revived.
companies formed, organized, or existing under
any laws other than those of the Philippines. Rule on Married Persons
(Insurance Code, Sec. 190) The consent of the spouse is not necessary for
the validity of an insurance policy taken out by a
An Insurance Corporation must have: married person on his or her life or that or his or
1. Sufficient Capital and assets required her children (Insurance Code, Sec. 3, ¶ 2) or that
under the Insurance Code and pertinent of her husband (Insurance Code, Sec. 10)
regulations issued by the Commission;
and [A married woman] may also take out insurance
on her paraphernal or separate property, or on
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property given to her by her husband (Harding v. Insurance Contract v. Gambling Contract
Commercial Union Assurance, G.R. No. L-12707,
1918) INSURANCE GAMBLING
CONTRACT CONTRACT
NOTE: There are only two parties to a contract of
insurance, the insured and the insurer. The The parties seek to The parties
beneficiary is NOT a party to the contract unless distribute possible contemplate gain
he is the party to be insured. loss by reason of through mere
mischance. chance.
NOTE: LGBTQ+ members have the right to
The insurer seeks to The gambler courts
designate their domestic partners as
avoid misfortune. fortune.
beneficiaries. An individual who has secured a life
insurance policy on his or her own life may
The contract tends to The contract tends to
designate any person as beneficiary provided
equalize fortune. increase the
that such designation does not fall under the
inequality of fortune.
enumerations provided in Article 739 of the Civil
Code. (Insurance Commission, Legal Opinion
What one insures Whatever one
No. 2020-02, dated March 04, 2020)
against is not at the person wins from a
e. Subject Matter of an Insurance expense of another wager is lost by the
insured person. other wagering party.
Contract
The purchase of As soon as a party
Risks or Perils That May be Insured insurance does not makes a wager, he
a. Any contingent or unknown event, create a new, and creates a risk of loss
whether past or future, which may therefore, non- to himself where no
damnify (cause damage to) a person existing risk of loss to such risk existed
having an insurable interest; or the purchaser. The previously.
b. Any contingent or unknown event, purchaser faces an
whether past or future, which may create already existing risk
a liability against the person insured of economic loss
(Insurance Code, Sec. 3) (“insurable interest”).
Past Events – Marine Insurance In both cases, one party promises to pay a
A past event which may be insured against is given sum to the other upon the occurrence
peculiar to Marine Insurance. A person insured by of a given future event, the promise being
a contract of marine insurance is presumed to conditioned upon the payment of, or
have knowledge, at the time of insuring, of a prior agreement to pay, a stipulated amount by the
loss, if the information might possibly have other party to the contract. In either case, one
reached him in the usual mode of transmission party may receive more, or much more, than
and at the usual rate of communication. he paid or agreed to pay.
(Insurance Code, Sec. 111)
Contingent Liability
Example: Reinsurance f. Perfection of an Insurance
Contract
NOTE: Sec. 4 does not authorize an insurance
for or against the drawing of any lottery, or for or Consensual Nature of Contract
against any chance or ticket in a lottery drawing a A contract of insurance must be assented to by
prize. (Insurance Code, Sec. 4) both parties, either in person or through their
agents and so long as an application for
Elements of a Lottery insurance has not been either accepted or
a. Consideration; rejected, it is merely a proposal or an offer to
b. Prizes; and make a contract. (Perez v. CA, G.R. No. 112329,
c. Chance 2000)
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Also, according to Enriquez v. Sun Life Voluntary

Assurance (G.R. No. L-15895, 1920): It is not compulsory and the parties may
(1) Submission of application, even with premium incorporate such terms and conditions as they
payment is a mere offer on the part of the may deem convenient which will be binding.
applicant, and does not bind the insurer;
Provided: They are not contrary to law, morals,
(2) An insurance contract is also not perfected good customs, public order, or public policy.
where the applicant dies before the approval of
his application or it does not appear that the Aleatory
acceptance of the application ever came to the It is an aleatory but not a wagering contract.
knowledge of the applicant;
By an aleatory contract, one of the parties or both
(3) An acceptance made by letter shall not bind reciprocally bind themselves to give or to do
the person making the offer except from the time something in consideration of what the other shall
it came to his knowledge. give or do upon the happening of an event which
is uncertain, or which is to occur at an
g. Interpretation of an Insurance indeterminate time. The insurer’s liability depends
Contract upon the happening of an uncertain event which
is to occur at an indeterminate time.
Cardinal Rule: Article 1370(1) of the CC
“If the terms of a contract are clear and leave no Unilateral
doubt upon the intention of the contracting A contract of insurance is executed as to the
parties, the literal meaning of its stipulations shall insured after the payment of the premium. It is
control.” executory as to the insurer since it is not executed
until payment for a loss.
If the terms are clear, they cannot be enlarged or Personal
diminished by judicial construction. The terms of Each party to it, in entering into the insurance
policy constitute the measure of insurer’s liability. contract, takes into account the character, credit
and conduct of the other.
If the terms are ambiguous or if there are
conflicting provisions, they should be interpreted Conditional
strictly against the insurer and liberally in favor of The insurer’s liability is based on the happening
the insured. of the event insured against.
Contra proferentem rule (Ambiguity Doctrine) Contract of Indemnity

In the interpretation of document, ambiguities are General Rule: Indemnity is the basis of all
to be construed against the drafter. property insurance. The insured who has
insurable interest over a property is only entitled
A contract of insurance must be interpreted to to recover the amount of actual loss sustained
carry out the purpose for which the parties and the burden is upon him to establish the
entered the contract: to insure against risk of loss amount of such loss.
or damage to goods.
Exception: life and accident insurance where
The provisions in an insurance contract must be measure of indemnity is the amount fixed in the
read in its entirety o stipulations cannot be policy.
segregated. All parts are reflective of the true
intent of the parties. Uberrimae Fides Contract
The contract of insurance is one of perfect good
h. Characteristics, Nature, And faith not for the insured alone, but equally so for
Principles of Insurance the insurer (Qua Chee Gan v. Law Union Rock,
Contracts G.R. No. L-4611, 1955).
Consensual
Perfected by the meeting of the minds of the
parties (Civil Code, Art. 1315)
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Construction of Insurance Contract – Types of Insurable Risks

Contract of Adhesion 1. Insurance against damage - Ex:
Insurance contracts are contracts of adhesion the Insurance taken by the owner of a house
terms of which must be interpreted and enforced against destruction caused by fire.
stringently against the insurer which prepared the 2. Insurance against liability - Ex: An
contract. insurance taken by the owner of a car
against damage and injury he may cause
Limitations of liability on the part of the insurer or while operating said car, is an insurance
health care provider must be construed in such a against liability.
way as to preclude it from evading its obligations.
Accordingly, they should be scrutinized by the When Insurer is Liable for Past Event
courts with extreme jealousy and care and with a Ordinarily, the event covered by a policy is a
jaundiced eye. (Blue Cross Health Care v. future contingency.
Olivares, G.R. No. 169737, 2008)
For a past event to be covered, the past event
The terms in an insurance policy which are causing the loss must be:
ambiguous, equivocal, or uncertain are to be 1. Unknown to both parties and
construed strictly and most strongly against the 2. They must expressly stipulate that a prior
insurer, and liberally in favor of the insured so as loss is insured by the policy.
to effect the dominant purpose of indemnity or
payment to the insured (Calanoc v. CA, G.R. No. Liable for Fortuitous Event
L-8218, 1955) Insurer cannot exempt himself from his obligation
to insure for the nature of the insurer’s obligation
Principles of Insurance Contract requires the assumption of risk. Thus, an insurer
1. Principle of Insurable Interest is liable for fortuitous events.
2. Principle of Utmost Good Faith
3. Principle of Indemnity Insurance by Married Person
4. Principle of Subrogation A married person may insure his/her own life and
5. Principle of Contribution that of his/her children without the consent of the
6. Principle of Proximate Cause spouse.
Insurance by Minor
2. WHAT MAY AND MAY NOT BE Under the Civil Code, the minor cannot enter into
INSURED a contract of insurance without the consent of the
parents/guardian and if he does, the contract is
What May Be Insured voidable.
Any contingent or unknown event, whether past In such case, the insurer cannot, however, raise
or future, which may damnify a person having an the incapacity of the minor to the contract as
insurable interest, or create a liability against him, defense, as it is voidable at the option of the
may be insured against, subject to the provisions insured and not the insurer:
of this chapter. a. But, emancipation terminates parental
authority over the person and property of
The consent of the spouse is not necessary for the child.
the validity of an insurance policy taken out by a b. Hence, an emancipated minor may
married person on his or her life or that of his or procure any kind of insurance without the
her children. consent of the parents or guardian.
All rights, title and interest in the policy of Effect of Death of Policy’s Original Owner
insurance taken out by an original owner on the In case the original owner of a policy taken on the
life or health of the person insured shall life of another should predecease the latter, all
automatically vest in the latter upon the death of interests in the policy shall automatically vest in
the original owner, unless otherwise provided for the insured unless otherwise provided for in the
in the policy. (Section 3, Insurance Code) policy.
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Thus, even if the original owner of the policy 1. In Life/Health

designated himself as beneficiary in a policy a. Himself, of his spouse and of his
insuring the life of another, the death of the children;
original policy owner shall vest title on the policy
to the insured. If a person will insure the life of another
payable to himself, he must have an
Prohibition Against Gambling insurable interest in the life of the person
The preceding section does not authorize an whose life he is insuring.
insurance for or against the drawing of any lottery,
or for or against any chance or ticket in a lottery b. Any person on whom he depends
drawing a prize. (Section 4, Insurance Code) wholly or in party for education or
support, or in whom he has pecuniary
Reason for Prohibition interest;
Gambling may possibly result in a profit which is
not true in insurance and therefore, gambling of NOTE: Persons obliged to support each
any sort may not be insured. Thus, gambling other: See Family Code, Art. 195
courts fortune; the insured seeks to avoid
misfortune. c. Any person under a legal obligation to
him for the payment of money, or
Gambling tends to increase the inequality of respecting property or services, of
fortune, while the contract of insurance tends to which death or illness might delay or
equalize fortune. prevent the performance; and
3. INSURABLE INTEREST NOTE: A creditor may insure his debtor’s

life for the purpose of protecting his debt,
a. Definition and Nature but only to the extent of the amount of the
debt and the cost of carrying the
Insurable Interest insurance on the debtor’s life.
Interest which the law requires the owner of an
insurance policy to have in the thing or person d. Any person upon whose life any estate
insured. or interest vested in him depends.
General Rule: It is pecuniary in nature.
Life Insurance v. Civil Donation
A person is deemed to have an insurable interest
in the subject matter insured where he has a LIFE INSURANCE CIVIL DONATION
relation or connection with or concern in it that he
will derive pecuniary benefit or advantage from its This is also founded An act of liberality
preservation and will suffer pecuniary loss or on liberality, as the whereby a person
damage from its destruction, termination or injury beneficiary will disposes gratuitously
by the happening of the event insured against. receive the proceeds a thing or right in
(Lalican v. Insular Life Insurance Co, G.R. No. of the said favor of another who
183526, 2009) insurance. accepts it.
b. Distinguishing Life From Non- As a consequence, the proscription in Civil Code,

Life (Property) Insurance Art. 739 should equally operate in life insurance
contracts (Insular Life v. Ebrado, G.R. No. L-
Exception: Life Insurance 44059, 1977)
The expectation of benefit from the continued life Beneficiary

of that person need not necessarily be of Person who is named or designated in a contract
pecuniary nature. of life, health, or accident insurance as the one
who is to receive the benefits which become
payable, according to the terms of the contract,
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upon the death of the insured (44 Am. Jur. 2d. policy, without the need of a court
639 cited in de Leon, 2010, p. 96). authority or a bond.
3. If the premiums are paid out of the
Designation of Beneficiary conjugal funds, the proceeds are
General rule: When one insures his own life, he considered conjugal.
may designate any person as the beneficiary,
whether or not the beneficiary has an insurable If the beneficiary is other than the insured’s
interest in the life of the insured. estate, the source of premiums (either from
paraphernal or conjugal funds) would not be
Exceptions: Persons specified in Article 739 of relevant (BPI v. Posadas, G.R. No. L-34583,
the Civil Code cannot be designated: 1931).
a. Those made between persons who were
guilty of adultery or concubinage Right of Insured to Change Beneficiary in Life
(conviction is not a condition precedent); Insurance
b. Those made between persons found General Rule: The insured shall have the right to
guilty of the same criminal offense, in change the beneficiary he designated in the
consideration thereof; policy. (Insurance Code, Sec. 11)
c. Those made to a public officer or his wife,
descendants or ascendants by reason of Exception: If the insured expressly waived his
his office. right to change the beneficiary, this makes the
latter an irrevocable beneficiary. But despite the
In order for Article 739 to apply, it is not required waiver, he can still change the beneficiary,
that there be a previous conviction for adultery provided that he obtains the beneficiary’s
or concubinage, due to the wording of consent. (Insurance Code, Sec. 11)
“preponderance of evidence” (Insular Life v.
Ebrado, G.R. No. L-44059, 1977) Forfeiture by Beneficiary of Interest in
Insurance Policy
NOTE: LGBTQ+ members have the right to The interest of a beneficiary in a life insurance
designate their domestic partners as policy shall be forfeited when the beneficiary is
beneficiaries. An individual who has secured a life the principal, accomplice, or accessory in willfully
insurance policy on his or her own life may bringing about the death of the insured; in which
designate any person as beneficiary provided event, the share forfeited shall be paid as follows:
that such designation does not fall under the 1. To the other beneficiaries if not
enumerations provided in Article 739 of the Civil disqualified;
Code. (Insurance Commission, Legal Opinion 2. If no other beneficiaries, in accordance
No. 2020-02, dated March 04, 2020) with the policy contract; (e.g. to the
contingent or substitute of beneficiaries)
When is the estate entitled to the proceeds of 3. If the policy contract is silent, to the estate
the insurance? of the insured. (Insurance Code, Sec. 12)
1. Where the insured has not designated
any beneficiary; or 2. In Property
2. When the designated beneficiary is Coverage of Insurable Interest in Property
disqualified by law to receive the 1. Property itself;
proceeds (Heirs of Maramag v. 2. Any relation thereto; or
Maramag, G.R. No. 181132, 2009) 3. Liability in respect thereof (Insurance
Code, Sec. 13)
NOTE:
1. The designation is revocable unless the It may consist of:
right to revoke is expressly waived in the 1. An existing interest;
policy. 2. An inchoate interest founded on an
2. If the insured or beneficiary is a minor, existing interest; or
and the amount involved does not 3. An expectancy, coupled with an existing
exceed P50,000.00, the father, or in his interest in that out of which the
absence or incapacity, the mother may expectancy arises
exercise the minor’s rights under the
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Measure of Insurable Interest in Property

WHEN BENEFICIARY MUST HAVE
The extent to which the insured might be
INSURABLE INTEREST
damnified by loss or injury thereof.
There is no need No contract or policy of
In general, a person has an insurable interest in
for the insurance on property
the property, if he derives pecuniary benefit or
beneficiary to shall be enforceable
advantage from its preservation or would suffer
have insurable except for the benefit of
pecuniary loss, damage or prejudice by its
interest in the life some person having an
destruction whether he has or has no title in, or
insured. insurable interest in the
lien upon, or possession of the property. Hence,
property insured.
pecuniary interest over the property is always
necessary.
Existence of insurable interest is a matter of Change in Interest of Thing

public policy. Hence, the principle of estoppel General rule: A change in interest in the thing
cannot be invoked. insured without a change in insurance does not
transfer the policy but suspends it until the
Insurable Interest in Life v. Property interest in the thing and the interest in the
insurance are vested in the same person.
LIFE PROPERTY
Exceptions
BASIS
Sec. EXCEPTION
May be based on Based on pecuniary
pecuniary interest, interest. 20 Life, health, and accident
affinity, or insurance.
consanguinity.
21 A change of interest in the thing
WHEN INTEREST MUST EXIST insured after the occurrence of an
injury which results in a loss.
In life insurance Must exist when the
(save that effected insurance takes effect 22 A change of interest in one or more
by creditor on life of and when the loss of several things, separately
debtor), it is enough occurs, but need not insured by one policy.
that insurable exist in the meantime.
interest exists at the 23 A change of interest by will or
time the policy takes succession on the death of the
effect and need not insured.
exist at the time of
the loss. 24 A transfer of interest by one of
several partners, joint owners, or
AMOUNT OF INSURABLE INTEREST owners in common, who are jointly
insured, to the others.
General Rule: No Limited to the actual
limit. value of 57 When a policy is so framed that it
Exception: If damage/injury/loss. will inure to the benefit of
insurable interest is whomsoever, during the
based on creditor- continuance of the risk, may
debtor relationship, become the owner of the interest
only to the extent of insured.
the credit or debt.
NOTE: When there is an express prohibition
against alienation in the policy, in case of
alienation, the contract of insurance is not
merely suspended but is avoided. (Civil Code,
Art. 1306)
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Change of Interest That Suspends an since such policy is for the benefit of both the
Insurance Contract mortgagor and mortgagee.
The change of interest contemplated by law is an
absolute transfer of the insured’s entire interest in Upon recovery of the mortgagee to the extent of
the property insured to one not previously his credit from the insurer, the mortgagor is
interested or insured. In the following cases, the released from his indebtedness.
policy is not suspended: (ML2R2)
Insurance by Mortgagee of His Own Interest
a. Execution of a Mortgage The mortgagee may collect from the insurer upon
b. Lease of the insured property the occurrence of the loss to the extent of his
c. Vendor who has a Lien on the property credit.
sold until the purchase price is paid or the
conditions of the sale are performed Unless otherwise stated in the policy, the
d. Judgment debtor whose property has mortgagor has no right to collect the balance of
been sold on execution (Right to the proceeds of the policy after payment of the
redeem) interest of the mortgagee.
e. Mortgagor whose property has been
foreclosed (Right of redemption) The insurer, upon payment to the mortgagee-
insured, becomes subrogated to the rights of the
Extent of Insurable Interest in a Mortgage mortgagee against the mortgagor and may collect
Situation the debt of the mortgagor to the extent of the
Interest of the Mortgagor and the Mortgagee in amount paid to the mortgagee.
the mortgaged property is separate and distinct
from the other. In case both of them take out Standard or Union Mortgage Clause
separate insurance policies on the same If a fire insurance policy contains this, the acts of
property, or one policy covering their respective the mortgagor do not affect the mortgagee. It
interests, there is no double insurance. makes a separate and distinct contract of
insurance on the interest of the mortgagee.
Mortgagor, as owner, may insure the property
mortgaged to the full value of such property. Open or Loss-Payable Mortgage Clause
It is a contract which provides that the payment of
Mortgagee can insure the same only to the extent loss to the mortgagee, if any, will be according to
of the amount of his credit. his interest as it may appear in the contract.
Under such clause, the acts of the mortgagor will
Insurance by Mortgagor for the Benefit of affect the mortgagee.
Mortgagee, or Policy Assigned to the
Mortgagee: 4. DOUBLE INSURANCE AND OVER
The insurance is still deemed to be upon the INSURANCE
interest of the mortgagor who does not cease to
be a party to the original contract. Double insurance exists where the same person
is insured by several insurers separately in
Any act of the mortgagor, prior to the loss, which respect to the same subject and interest.
would otherwise avoid the insurance, will have
the same effects, although the property is in the NOTE: It is not prohibited by law.
hands of the mortgagee. But it may be contractually prohibited by a
provision in an insurance policy.
Any act, which under the contract of insurance is
to be performed by the mortgagor, may be Over insurance exists when the amount of the
performed by the mortgagee with the same effect insurance is beyond the value of the insured’s
as if it has been performed by the mortgagor. insurable interest.
Upon the occurrence of the loss, the mortgagee When there is double insurance and over
is entitled to recover to the extent of his credit and insurance results, the insured can claim in case
the balance, if any, is payable to the mortgagor of loss only up to the agreed valuation or up to the
full insurable value from any, some or all insurers,
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without prejudice to the insurers ratably

Formal written The original contract
apportioning the payments. Insured can also
instrument of insurance and the
recover before or after the loss, from both
evidencing the contract of
insurers the excess premium he has paid.
contract of reinsurance are
insurance. covered by separate
Requisites of Double Insurance:
policies.
a. The person injured is the same;
b. There are two or more insurers insuring
separately; Reinsurance v. Double Insurance
c. The subject matter is the same;
d. The interest insured is also the same; DOUBLE REINSURANCE
e. The risk or peril insured against is INSURANCE
likewise the same.
Involves the same Insurance of
Double Insurance v. Over insurance interest. different interests.
DOUBLE OVER INSURANCE Insurer remains in Insurer becomes an

INSURANCE such capacity. insured in relation to
insurer.
There may be no Amount of insurance
over insurance as is beyond the value Insured in the 1st Original insured has
when the sum total of the insured’s contract is a party in no interest in
of the amounts of insurable interest. interest in the 2nd reinsurance contract.
the policies issued contract.
does not exceed the
insurable interest of Subject of insurance Subject of insurance
the insured. is property. is the original
insurer’s risk.
Several insurers May have only one
involved. insurer involved. Insured has to give Consent of original
his consent. insured, not
necessary.
Reinsurance
One by which an insurer procures a third person
to insure him against loss or liability by reason of
such original insurance. In every reinsurance 5. NO FAULT, SUICIDE, AND
contract, the original contract of insurance and INCONTESTABILITY CLAUSES
the contract of reinsurance are separate and
distinct and covered by separate policies. The a. General Overview
original insured has no interest in a contract of
reinsurance. No Fault of Indemnity
An insurer may be held liable under the “no fault
Insurance v. Reinsurance indemnity” provision in respect of a Compulsory
Motor Vehicle Liability Insurance policy without
INSURANCE REINSURANCE the necessity of proving fault or negligence of any
POLICY kind provided the requisites are present:
1. The claim is for death or injury to any
Written document Any contract by passenger or third party
embodying the terms which an insurer 2. The total indemnity in respect of any
and stipulations of procures a 3rd one person shall be P15000.
the contract of person to insure him 3. The necessary proof of loss under oath
insurance between against loss or to substantiate the claim must be
the insured and liability by reason of submitted.
insurer. an original
insurance. Rules on Claims Under Art. Sec. 391
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The following rules on claim under the “no fault shorter period: Provided, however, That suicide
indemnity” provision where proof of fault or committed in the state of insanity shall be
negligence is not necessary for payment of any compensable regardless of the date of
claim for death or injury to a passenger or third commission. (Section 183, Insurance Code)
party are established:
1. A claim may be made against one Burden of Proof in Suicide Clauses
motor vehicle only. The basic instinct of self-preservation militates
2. If the victim is an occupant of a vehicle, against the commission of suicide. Hence it is
the claim shall lie against the insurer of incumbent upon a party alleging suicide as a
the vehicle in which he is riding, mounting defense, especially in actions involving insurance
or dismounting from. policies to prove it by clear and convincing proof.
3. In any other case (i.e. if the victim is
not an occupant of a vehicle), the claim Incontestability Clause
shall lie against the insurer of the directly Whenever a right to rescind a contract of
offending vehicle. insurance is given to the insurer by any provision
4. In all cases, the right of the party of Chapter I of the Insurance Code (The Contract
paying the claim to recover against the of Insurance), such right must be exercised
owner of the vehicle responsible for the previous to the commencement of an action on
accident shall be maintained. the contract.
Right of Insurer Paying “No Fault Indemnity” After a policy of life insurance made payable on
In all cases, the right of the party paying the claim the death of the insured shall have been in force
to recover against the owner of the vehicle during the lifetime of the insured for a period of
responsible for the accident shall be maintained. two (2) years from the date of its issue or of its
last reinstatement, the insurer cannot prove that
It is of no moment that the vehicle insured is not the policy is void ab initio or is rescindable by
the one that caused accident since the law reason of the fraudulent concealment or
provides that the insured is not the one that misrepresentation of the insured or his agent.
caused the accident since the law provides that (Section 48, Insurance Code)
the insurer paying the claim may recover from the
owner of the vehicle responsible for the accident. Meaning of Incontestable Clause (Sec 48(2))
An incontestable clause is an agreement by
This is precisely the essence of "no fault which the insurance company limits the period of
indemnity" insurance which was introduced to time within which it will interpose objections to the
and made part of our laws in order to provide validity of the policy or set up any defense.
victims of vehicular accident or their heirs
immediate compensation, although in a limited Requisites of Incontestability
amount, pending final determination of who is 1. It must be a life insurance policy.
responsible for the accidental and liable for the 2. It must be payable on the death of the
victim's injuries or death. insured.
3. It must have been in force during the
The "no fault indemnity" provision is part of the lifetime of the insured for a period of two
provisions on compulsory motor vehicle liability years.
insurance and should be read together with the
requirement for compulsory passenger and/ or Effects and Purpose of Incontestability
third party-liability insurance which was When all requisites are present, the insurer can
mandated in order to ensure ready compensation no longer escape liability nor be allowed to prove
for victims of vehicular accidents. that the policy is void ab initio or rescindable.
Suicide Clause The insurer is precluded from contesting the

The insurer in a life insurance contract shall be policy on any ground.
liable in case of suicide only when it is committed
after the policy has been in force for a period of The purpose of the clause was to prevent the
two (2) years from the date of its issue or of its inequities perpetrated by insurance companies of
last reinstatement, unless the policy provides a fishing for evidence to show that the insured
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made false representations in order to escape When the insured concealed in the application for
liability on the policy. reinstatement the fact that she had been suffering
for at least 3 years from bronchial asthma, the
Period of Incontestability period of incontestability should be computed
Old Doctrine: The insurer has 2 years from the from the date of reinstatement.
date of issuance of the life insurance contract or
its last reinstatement within which to contest the b. No Fault Clauses In Casualty
policy, whether or not the insured still lives within Insurance
such period. (Tan v. CA)
It is an insurance covering loss or liability arising
Prevailing Doctrine: The insurer must rescind the from accident or mishap, excluding those falling
life insurance contract on the ground of under those types of insurance such as fire,
concealment or misrepresentation within 2 years suretyship, life or marine. (Section 176, Insurance
from the time the policy was issued provided the Code)
insured is still alive at that time. If the insured is
already dead, the life insurance policy is already Accident or Health Insurance
incontestable even if less than 2 years had Insurance against specified perils which may
elapsed at that time. (Sun Life v. Sibya) affect the person and/or property of the insured.
(ex. Personal Accident, Robbery/Theft Insurance)
Insurer’s Defenses Not Barred by
Incontestable Clause Third Party Liability Insurance
1. That the premiums were not paid. Insurance against specified perils which may give
2. That the insured violated the condition in rise to liability on the party of the insured for
the policy relating to military or naval claims for injuries to or damage to property of
service in times of war. others. (ex. Motor Vehicle Liability, Professional
3. That the insured has no insurable interest Liability, Product Liability)
in the subject matter of the insurance.
4. That the cause of death was expected or Where the contract is one of indemnity against
not covered by the terms of the policy. liability, it becomes operative as soon as the
5. That the fraud committed was of a liability of the person indemnified arises
particularly vicious type such as: irrespective of whether or not he has suffered
a. Where the policy was taken in actual loss (Republic Glass Corp v. Qua, G.R. No.
furthereance of a scheme to 144413, 2004)
murder the insured;
b. Where the insured substituted In a third-party liability insurance contract, the
another person for the medical insurer assumes the obligation of paying the
examination; or injured third party to whom the insured is liable.
c. Where the beneficiary The insurer becomes liable as soon as the liability
feloniously killed the insured. of the insured to the injured third person attaches.
6. That the necessary notice or proof of Prior payment by the insured to the injured third
insured’s death was not given. person is not necessary in order that the
obligation of the insurer may arise. From the
Period of Contestability in Reinstated Policies moment that the insured became liable to the
When the policy lapses and is subsequently third person, the insured acquired an interest in
reinstated, the 2 year period of contestability the insurance contract, which interest may be
should start from the date of last reinstatement garnished like any other credit. (Perla Compania
because a reinstated policy should be viewed as de Seguros v. Ramolete, G.R. No. L-60887,
a new contract. 1991)
Thus, where the insurer asserts that the Right of the Injured Person to Sue Insurer of
reinstatement was obtained through fraud, he the Party at Fault
may raise this defense at any time before the
expiration of the contest period, reckoned from SCENARIO EFFECT
the date of reinstatement.
The contract 3rd persons, to whom
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“No Fault”
provides for the insured is liable,
The concept of accident is not necessarily
indemnity against CAN sue the insurer.
synonymous with “NO FAULT”. It may be utilized
liability to 3rd
simply to distinguish intentional or malicious acts
persons.
from negligent or careless acts of man (Pan
Malayan Insurance Corp. v. CA, G.R. No. 81026,
The contract is for 3rd persons
1990).
indemnity against CANNOT proceed
actual loss or against the insured.
The reinsurance contracts were correctly issued
payment.
in favor of Plaridel. By its nature, reinsurance
(Guingon v. Del Monte, G.R. No. L-22042, 1967) contracts are issued in favor of the direct insurer
because the subject of such contracts is the direct
NOTE: The injured person may sue the insurer insurer’s risk, in this case, Plaridel’s contingent
and the person at fault, notwithstanding the liability to MSAPL, and not the risk assumed
stipulation against suing the insurer (“no-action” under the original policy. With or without
clause) in the policy. (Guingon v. Del Monte, G.R. reinsurance, the obligation of the surety to the
No. L-22042, 1967) party against whom writ of attachment is issued
remains the same (Communication and
NOTE: Where casualty insurance insures against Information Systems Corporation v. Mark
liability, then an injured third party may have Sensing Australia, G.R. No. 192159, 2016).
direct recourse against the insurance. On the
other hand, if the casualty insurance insures c. No Fault Clauses In
against loss, then an injured third party will not be Compulsory Motor Vehicle
able to directly sue the insurer. Liability Insurance (CMVIL)
Rules as to Death or Injury Resulting from A protection coverage that will answer for legal
Accidental Means liability for losses and damages for bodily injuries
and/or property damage that may be sustained by
“Intentional” another arising from the use and operation of a
Implies the exercise of the reasoning faculties, motor vehicle by its owner.
consciousness, and volition.
It is unlawful for any land transportation operator
Where the provision of the policy excludes or owner of a motor vehicle to operate the same
intentional injury, the intention of the person in public highways unless there is an insurance or
inflicting is the controlling factory. guaranty to indemnify the death or bodily injury of
However, if the injuries suffered by the insured a third party or passenger arising from the use
clearly resulted from the intentional act of a third thereof. (Insurance Code, Sec. 387)
person, the insurer is relieved from liability as
stipulated (Biagtan v. The Insular Life Assurance Motor Vehicle
Co. Ltd., G.R. No. 26194, 1972). Shall mean any vehicle propelled by any power
other than muscular power using the public
“Accidental” highways (R.A. No. 4136, Sec. 3[a])
That which happens by chance or fortuitously,
without intention or design, which is unexpected, Exceptions: road rollers, trolley cars, street
unusual and unforeseen (Sun Insurance v. CA, sweepers, sprinklers, lawn mowers, bulldozers,
G.R. No. 92383, 1992) graders, forklifts, amphibian trucks, and cranes if
not used in public highways, vehicles which run
The terms “accident” and “accidental” do not, only on rails or tracks, and tractors, trailers and
without qualification, exclude events resulting in traction engines of all kinds used exclusively for
damage or loss due to fault, recklessness or agricultural purposes.
negligence of third parties. (Pan Malayan
Insurance v. CA, G.R. No. 81026, 1990)
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Scope of Coverage Required b. The total indemnity in respect of any

person shall not be less than fifteen
OWNERS OF OPERATORS OF
thousand pesos (P15,000).
PRIVATE MOTOR LAND c. The following proofs of loss, when
VEHICLES TRANSPORATION submitted under oath, shall be sufficient
evidence to substantiate the claim:
Comprehensive Comprehensive i. Police report of accident; and
against 3rd party against 3rd party ii. Death certificate and evidence
liability for death or liability for death or sufficient to establish the proper
bodily injuries bodily injuries payee; or,
iii. Medical report and evidence or
medical or hospital disbursement
In case a private The insurer may
in respect of which refund is
motor vehicle is being extend additional claimed.
used to transport other risks at its d. Claim may be made against one motor
passengers for option vehicle only;
compensation, such i. Against the insurer of the vehicle
coverage shall, in where one is a passenger
addition, include ii. in any other case, the offending
vehicle
passenger liability
Claimant
Rules of Comprehensive Third-Party Liability The claimant or victim may be a “passenger” or a
Insurance (CTPL): “third party” (Insurance Code, Sec. 391)
Registration of any vehicle will not be made or
renewed without complying with the 1. Passenger
requirements. Any fare paying person being transported and
conveyed in and by a motor vehicle for
The protection may be complied with using any of transportation of passengers for
the following: compensation, including persons expressly
a. Insurance policy authorized by law or by the vehicle’s operator
b. Surety bond or his agents to ride without fare. (Insurance
c. Cash bond Code, Sec. 386[b]]
The purpose of CTPL is to give immediate 2. Third Party

financial assistance to victims of motor vehicle Any person other than a passenger as defined
accidents and/or their dependents, especially if in this section and shall also exclude a
they are poor regardless of the financial capability member of the household, or a member of the
of motor vehicle owners or operators responsible family within the second degree of
for the accident. (First Integrated Bonding and consanguinity or affinity, of a motor vehicle
Ins. Co., Inc. v. Hernando, G.R. No. 51221, owner or land transportation operator, as
1991). likewise defined herein, or his employee in
respect of death, bodily injury, or damage to
“No Fault” Clause property arising out of and in the course of
The injured third party or passenger or heirs of employment (Insurance Code, Sec. 386[c])
the deceased is given the option to file a claim for
death or injury without the necessity of proving Proper Insurer to Claim From
fault or negligence of any kind. In the case of an occupant of a vehicle, claim shall
lie against the insurer of the vehicle in which the
Conditions for Application of No-fault Clause: occupant is riding, mounting or dismounting from.
a. The claim must be for death or bodily If not an occupant, claim shall lie against the
injuries only (property damage/liability insurer of the directly offending vehicle.
not included).
The claimant is not free to choose from which
insurer he will claim the "no-fault indemnity" as
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the law, by using the word "shall," makes it beneficiaries, the proceeds shall be paid in
mandatory that the claim be made against the accordance with the policy contract. If the policy
insurer of such vehicle. That said vehicle might contract is silent, the proceeds shall be paid to the
not be the one that caused the accident is of no estate of the insured. (Insurance Code, Sec. 12)
moment since the law itself provides that the party
paying the claim may recover against the owner Exceptions:
of the vehicle responsible for the accident. (Perla a. Accidental killing;
Compania de Seguros v. Ancheta, G.R. No. L- b. Self-defense; and
49699 August 8, 1988) c. Insanity of the beneficiary at the time he
killed the insured
NOTE: In all cases, the right of the party paying
the claim to recover against the owner of the e. Incontestability Clauses
vehicle responsible for the accident shall be
maintained. (Insurance Code, Sec. 391) In relation to the time to exercise the right to
rescind the insurance contract, it shall be made
d. Liability Of Insurer In Case Of prior to the commencement of an action on the
Suicide Or Death contract, if it be a Non-Life Policy, and before the
incontestability clause sets in, if it be a Life
1. Suicide Policy.
The insurer is LIABLE in the following cases:
a. Suicide was committed after the policy Requisites of Incontestability Clause:
has been in force for a period of two a. The insurance is a life insurance policy.
years from the date of its issue or its last b. It is payable on the death of the insured.
reinstatement; c. It has been in force during the lifetime of
b. Suicide committed in a state of insanity the insured for at least 2 years from its
regardless of the date of the commission date of issue or of its last reinstatement.
of the suicide; or
c. If committed after the lapse of a shorter NOTE: The period of 2 years may be shortened
period in the policy (Insurance Code, but it cannot be extended by stipulation.
Sec. 183)
When incontestability clause sets in
NOTE: Any stipulation extending the two-year Whichever is earlier, between:
period is void. a. Within 2 years from the date of issuance
or its last reinstatement; or
The insurer is NOT liable in the following cases: b. Upon the insurer’s death (Sun Life v.
a. The suicide is not by reason of insanity Sibya, G.R. No. 211212, 2016)
and is committed within the two-year
period; After the two-year period lapses, or when the
b. The suicide is by reason of insanity but is insured dies within the period, the insurer must
not among the risks assumed by the make good on the policy, even though the policy
insurer regardless of the date of was obtained by fraud, concealment, or
commission; and misrepresentation (Sun Life v. Sibya, G.R. No.
c. The insurer can show that the policy was 211212, 2016).
obtained with the intention to commit
suicide even in the absence of any Defenses Not Barred by Incontestability
suicide exclusion in the policy. Clause:
a. Person taking the insurance lacked
2. Killing by the Beneficiary insurable interest as required by law;
General Rule: The interest of a beneficiary in a b. Cause of the death of the insured is
life insurance policy shall be forfeited when the excepted risk;
beneficiary is the principal, accomplice, or c. Premiums have not been paid;
accessory in willfully bringing about the death of d. Conditions of the policy relating to
the insured. In such a case, the share forfeited military or naval service have been
shall pass on to the other beneficiaries, unless violated;
otherwise disqualified. In the absence of other e. The fraud is of a particularly vicious type,
wherein:
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i. The policy was taken in not been either accepted or rejected, there is no
furtherance of a scheme to contract yet as it is merely and offer or proposal
murder the insured; (Insurance, de Leon, p.176).
ii. The insured instituted another
person for the medical Delivery of the Policy
examination; and, The delivery of a policy is not, however, a
iii. The beneficiary feloniously killed prerequisite to a valid contract of insurance. The
the insured; contract may be completed prior to delivery of the
f. Beneficiary failed to furnish proof of policy or even without delivery of the policy
death or to comply with any condition depending on the intention of the parties
imposed by the policy after the loss has (Insurance, de Leon, p.180).
happened; or,
g. Action was not brought within the time
specified. 2. PREMIUM PAYMENT
Premium
B. PERFECTION OF THE INSURANCE Premium is the consideration paid to an insurer
CONTRACT for undertaking to indemnify the insured against a
specified peril.
Consensual Nature of Contract
A contract of insurance must be assented to by An insurer is entitled to payment of the premium
both parties, either in person or through their as soon as the thing insured is exposed to the
agents and so long as an application for peril insured against.
insurance has not been either accepted or
rejected, it is merely a proposal or an offer to Effect of Non-Payment of Premium
make a contract. (Perez v. CA, G.R. No. 112329, General Rule:
2000) Non-payment of first premium - Prevents the
contract from becoming binding notwithstanding
Also, according to Enriquez v. Sun Life the acceptance of the application or the issuance
Assurance (G.R. No. L-15895, 1920): of the policy.
1. Submission of application, even with But non-payment of the balance of the premium
premium payment is a mere offer on the due does not produce the cancellation of the
part of the applicant, and does not bind contract. (Phil. Phoenix Surety & Insurance v.
the insurer; Woodworks, G.R. No. L-22684, Aug. 31, 1967).
2. An insurance contract is also not
perfected where the applicant dies before Subsequent premiums - Does not affect the
the approval of his application or it does validity of the contracts unless, by express
not appear that the acceptance of the stipulation, it is provided that the policy shall in
application ever came to the knowledge that event be suspended or shall lapse.
of the applicant;
3. An acceptance made by letter shall not Exceptions:
bind the person making the offer except a. In case of life and industrial life whenever
from the time it came to his knowledge. the grace period provision applies.
Individual Life or Endowment

1. OFFER AND ACCEPTANCE/ Insurance and Group Life Insurance
CONSENSUALITY Grace period of either thirty (30) days or
one (1) month within which the payment
Delay in Acceptance of any premium after the first may be
A contract of insurance, like other contracts, must made
be assented to by the parties either in person, or
by their agents. Under the law, assent or consent Industrial Life Insurance
is manifested by the meeting of the offer and the Grace period is four (4) weeks, and
acceptance upon the thing and the cause which where premiums are payable monthly,
are to constitute the contract. If an application has either thirty (30) days or one (1) month.
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b. Where there is an acknowledgement in a. There is a valid and binding

the contract or policy of insurance that policy or contract
the premium had already been paid. of insurance and the insured
(Insurance Code, Sec. 79) may demand indemnification in
case of loss.
c. There is an agreement allowing the b. There is no credit on the
insured to pay the premium in premium to speak of and,
installments and partial payment has therefore, none which the insurer
been made at the time of loss (Makati can demand because he has
Tuscany Condominium v. Court of already been paid.
Appeals, G.R. No. 95546, 1992) 2. If the insured did not pay the premium
and the parties did not agree that the
Cf. Where the policy provides for insurer's liability has attached, then there
payment in premium in full before the is no valid or binding contract
“policy shall be deemed effective, valid, of insurance.
and binding upon the company” – the a. The insured cannot demand
partial payment is merely treated as a indemnification if loss occurs and
deposit and does not make the policy neither can the insurer demand
binding. (Sps. Tibay v. CA, G.R. No. payment of the premium.
119655, 1996) 3. If the insured did not actually pay the
premium but the parties have agreed that
d. Where a credit term was agreed upon like the insurer's liability has attached, then
the agreement in where the insurer the insured is considered to have
granted a 60-90-day credit term for the extended credit on the premium.
payment of the premiums despite full a. When the insured accepts the
awareness of Section 77 (UCPB General terms of the credit, there is a
Insurance, Inc. v. Masagana Telemart, valid and binding contract
G.R. No. 137172, 1999) of insurance.
b. The insured must pay the
e. Where the parties are barred by premium before the end of
estoppel. (Jose Marques, et al. vs. Far the credit term; otherwise, he
East Bank and Trust Company, et al. / cannot demand indemnification
Far East Bank and Trust Company, et al. in case of loss.
vs. Jose Marques, et al. G.R. No. c. The insurer may demand the
171379/G.R. No. 171419, 2011). premium, whether or not loss
occurred.
Given the provisions of the Insurance Code,
which is a special law, the applicable rate of Acknowledgment
interest shall be that imposed in a loan or Authority of Agent to Receive Premium
forbearance of money as imposed by the BSP. Where an insurer authorizes an insurance agent
The unpaid amount due from insurer is a or broker to deliver a policy to the insured, it is
forbearance of money. So, the proper rate applies deemed to have authorized said agent to receive
(Stronghold Insurance Co., Inc. v. Pamana Island the premium in its behalf.
Resort Hotel and Marina Club, Inc., G.R. No.
174838, 2016). The insurer is also bound by its agent’s
acknowledgement of receipt of payment of
But NOTE: In the case of Chartis Philippines premium (American Home Assurance Co. v.
Insurance Inc. v. Cyber City Teleservices Ltd Chua, G.R. No. 130421,1999).
(G.R. No 234299), the Supreme Court discussed
a useful evaluation of Section 77 of the Insurance Return/Refund
Code. The essential rules worth noting are as Instances for Refund
follows: The insured is entitled to return of premiums paid
1. If the insured paid the premium, the when:
insurer's liability attaches a. The thing insured was never exposed to
correspondingly. the risks insured against;
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b. Contract is voidable due to the fraud or the date of default for a time either stated
misrepresentation of insurer; or equal to the amount as the net value
c. Insurer never incurred liability; of the policy taken as a single premium,
d. The insurance is for a definite period and will purchase. In case of death of the
the insured surrenders his policy before insured within the extended term, he may
the termination thereof (pre-termination); recover the face value of the policy.
e. Contract is voidable because of the Extended insurance is sometimes called
existence of facts of which the insured "term insurance," "temporary insurance,"
was ignorant without his fault; or "paid-up extended insurance." (De
f. There is over-insurance (but only a Leon, The Insurance Code of the
ratable return of premium); and Philippines Annotated [2014])
g. rescission is granted due to the insurer’s
breach of contract. b. Paid-up Insurance
Where insurance is "paid-up," the
Payment of Interest on Refund of Premium: insured is given the right, upon default,
Sections 243 and 244 of the Insurance Code after the payment of at least three annual
explicitly provide for payment of interest when premiums (Ibid.) to have the policy
there is unjustified refusal or withholding of continued in force from the date of default
payment of claim by the insurer. Article 2209 of for the whole period of the insurance
the Civil Code likewise provides for payment of without further payment of premiums. In
interest when the debtor is in delay. However, in case of death of the insured, he may
cases where the refusal to refund insurance recover only the "paid-up" value of the
premiums is because the insurer wants to rescind policy, usually less than the "paid-up"
the contract due to concealment, the insurance premiums, under the same conditions as
company did not unreasonably deny or withhold the original policy. Technically, the term
the insurance proceeds (Sun Life v. Tan Kit, G.R. "paid-up" insurance is often referred to as
No. 183272, 2014). "reduced paid- up" insurance. (De Leon,
The Insurance Code of the Philippines
3. NON-DEFAULT OPTIONS IN LIFE Annotated [2014])
INSURANCE
c. Automatic Premium Loan
Options to a Policyholder This provision protects against the
The options available to a policyholder in case of unintentional lapse of the contract by
non-payment of premium after three full annual advancing, in the form of policy loan, the
premiums have been paid are: unpaid amount of a premium due. The
a. Received the cash surrender value automatic premium loan is advantageous
b. Apply such value as the premium for an to the policy owner because it helps to
extended insurance continue the contract and all its features
c. Apply such value as the premium for a in full force and effect.
paid-up insurance
d. Secure from such value an automatic Conditions:
premium loan before the expiration of the 1. In the event of default in premium
grace period payment, the Premium Loan provision
shall only apply if requested in writing by
Cash Surrender Value the policyholder either in the application
An amount to be paid to the insured upon or at any time before the expiration of the
surrender of the policy contract. grace period.
2. The moment there is default in premium
Alternatives to Cash Surrender Value payment and no option has been elected
a. Extended Insurance/Term Insurance either in the application or within the time
Where insurance is "extended," the specified in the policy, one of the paid-up
insured is given the right, upon default, options specified therein shall
after the payment of at least three full automatically take effect. (De Leon, The
annual premiums (see Sec. 227[f].), to Insurance Code of the Philippines
have the policy continued in force from Annotated [2014])
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4. THE POLICY the insurer and the insured, the actual value of
the property in the absence of evidence of greater
Insurance Policy or lesser value. (Dev’t Ins. Corp. v. IAC, G.R. No.
A written document issued by the insurer to the L-71360, 1986).
insured, embodying the terms and conditions of
their contract of insurance. Valued Policy
Definite valuation is agreed upon by both parties,
The policy is not necessary for the perfection of and written on the face of the policy; (ex. Marine
the contract. The Policy is only the formal written and Fire Insurances) (Section 51, Insurance
instrument evidencing the contract. It is required, Code)
however, that all policies issued or delivered must
be in the form previously approved by the Running Policy
Insurance Commission. Also called Floating, Adjustable, Blanket or
Declaration Policy; Contemplates successive
Formal Requirements of a Policy insurances and which provides that the subject of
a. In printed form which may contain blank the policy may from time to time be defined.
spaces; (Section 62, Insurance Code)
b. Any word, phrase, clause, mark, sign,
symbol, signature, number or word Void Stipulations in an Insurance Contract
necessary to complete the contract of • Stipulations for the payment of loss
insurance shall be written in the blank whether the person insured has or has
spaces provided therein. (Insurance not any interest in the property insured;
Code, Sec. 50) • The policy shall be received as proof of
such interest; or
Contents of an Insurance Policy • Policies executed by way of gaming or
a. The parties between whom the contract wagering.
is made;
b. The amount to be insured except in the Form NOT REQUIRED to Perfect a Contract of
cases of open or running policies; Insurance
c. The premium, or if the insurance is of a The policy is the formal written instrument
character where the exact premium is evidencing the contract of insurance entered into
only determinable upon the termination between the insured and the insurer. No form is
of the contract, a statement of the basis required to perfect (i.e., to give rise to rights and
and rates upon which the final premium obligations) a contract of insurance although an
is to be determined; insurer is potentially exposed to sanctions if the
d. The property or life insured; following are not complied with.
e. The interest of the insured in property
insured, if he is not the absolute owner Form of Insurance Contracts
thereof; a. No policy, certificate or contract of
f. The risks insured against; and insurance shall be issued or delivered
g. The period during which the insurance is within the Philippines unless in the form
to continue. (Section 50, Insurance previously approved by the
Code) Commissioner; and
b. No application form shall be used with,
Kinds of Policies and no rider, clause, warranty or
Open or Unvalued Policy endorsement shall be attached to,
Value of thing insured is not agreed upon, but left printed or stamped upon such policy,
to be ascertained in case of loss;(ex. Marine and certificate or contract unless the form of
Fire Insurances) . (Section 60, Insurance Code) such application, rider, clause, warranty
or endorsement has been approved by
In an open policy, the value of the property the Commissioner. (Insurance Code,
insured is not agreed upon, although the parties Sec. 232)
may agree on the maximum amount of recovery Delivery
or limit to the liability of the insurer. In case of loss, The BEST EVIDENCE that a contract has been
this amount must be considered, by agreement of entered into between the insurer and the insured
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is the DELIVERY of the policy by the insurer to Assurance Company v. Paz Khu, G.R. No.
the insured. 195176, 2016).
Reinstatement of a Lapsed Policy Riders/Endorsements

A provision that the policyholder shall be entitled Attachment to an insurance policy that modifies
to have the policy reinstated at any time within the conditions of the policy by expanding or
three years from the date of default of premium restricting its benefits or excluding certain
payment unless the cash surrender value has conditions from the coverage.
been duly paid, or the extension period has
expired, upon production of evidence of Formal Requirements of Riders
insurability satisfactory to the company and upon Riders, together with other attachments to the
payment of all overdue premiums and any policy, like clause, warranty or endorsements, are
indebtedness to the company upon said policy, not binding on the insured unless:
with interest rate not exceeding that which would 1. The descriptive title or name thereof is
have been applicable to said premiums and mentioned and written on the blank
indebtedness in the policy years prior to spaces provided in the policy and;
reinstatement. 2. Countersigned by insured or owner.
Requisites for Reinstatement of Lapsed Life Exception: No need to countersign if the rider
Insurance Policy or other attachment is applied for by the
a. Application shall be made within three insured or owner of the policy.
years from the date of lapse;
b. There should be a production of evidence A rider containing an “Automatic Increase
of the good health of the insured: Clause” – one that increases the coverage
c. If the rate of premium depends upon the subject to the attainment of a certain age of the
age of the Beneficiary, there should insured – is not a separate contract. It is part of
likewise be a production of evidence of the original policy which is in the nature of a
his or her good health; conditional obligation (CIR v. Lincoln Philippine
d. There should be presented such other Life Insurance Company, G.R. No. 119176,
evidence of insurability at the date of March 19, 2001).
application for reinstatement;
e. There should be no change which has NOTE: If there is inconsistency between the
taken place in such good health and policy and the rider, the rider prevails, it being a
insurability subsequent to the date of more deliberate expression of the agreement.
such application and before the policy is
reinstated; and Cover Note
f. All overdue premiums and other It is a contract for temporary insurance for a
indebtedness in respect of the policy, reasonable time until the policy or policies can be
together with interest at six per cent, written or issued by the insurer.
compounded annually, should first be Also called: Binding Receipt or Slip, Interim,
paid. (Andres v. Crown Life Insurance Temporary or Provisional Policy
Co., G.R. No. L-10874, 1958)
Rules on Cover Notes:
Insular Life’s argument was that the two-year a. Insurance companies doing business in
contestability period of the reinstated insurance the Philippines may issue cover notes to
policy had not lapsed inasmuch as the insurance bind insurance temporarily, pending the
policy was reinstated only on December 27, issuance of the policy.
1999. The Court NOTEs that the reinstatement b. A cover note shall be deemed to be a
was conditioned upon the payment of additional contract of insurance within the meaning
premium not only prospectively, that is, to cover of Section 1(1) of the Code.
the remainder of the annual period of coverage, c. No cover note shall be issued or renewed
but also retroactively, that is for the period starting unless in the form previously approved
June 22, 1999. An insurance contract is a by the Insurance Commission.
contract of adhesion which must be construed d. A cover note shall be valid and binding
liberally in favor of the insured (The Insular Life for a period not exceeding sixty (60) days
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from the date of its issuance, whether or Every corporation, partnership, or association,
not the premium therefor has been paid, duly authorized to transact insurance business as
but such cover note may be cancelled by elsewhere provided in this Code may be an
either party upon at least seven (7) days’ insurer. (Section 6, Insurance Code)
notice to the other party.
e. If a cover note is not so cancelled, a The term doing an insurance business or
policy of insurance shall, within sixty (60) transacting an insurance business, within the
days after the issuance of such cover meaning of this Code, shall include:
note, be issued in lieu thereof. Such (1) Making or proposing to make, as insurer,
policy shall include within its terms the any insurance contract;
identical insurance bond under the cover (2) Making or proposing to make, as surety,
note and the premium. any contract of suretyship as a vocation
f. Cover notes may be extended or and not as merely incidental to any other
renewed beyond such sixty (60) days legitimate business or activity of the
with the written approval of the surety;
Commissioner if he determines that such (3) Doing any kind of business, including a
extension is not contrary to and is not for reinsurance business, specifically
the purpose of violating any provisions of recognized as constituting the doing of
this Code. The Commissioner may an insurance business within the
promulgate rules and regulations meaning of this Code;
governing such extensions for the (4) Doing or proposing to do any business in
purpose of preventing such violations substance equivalent to any of the
and may by such rules and regulations foregoing in a manner designed to evade
dispense with the requirement of written the provisions of this Code.
approval by him in the case of extension
in compliance with such rules and In the application of the provisions of this Code,
regulations. (Section 52, Insurance the fact that no profit is derived from the making
Code) of insurance contracts, agreements or
g. Insurance companies may impose on transactions or that no separate or direct
cover notes a deposit premium consideration is received therefor, shall not be
equivalent to at least 25% of the deemed conclusive to show that the making
estimated premium of the intended thereof does not constitute the doing or
insurance coverage but in no case less transacting of an insurance business. (Section
than P500.00. (Ins. Cir. Letter, Jan. 17, 2(b), Insurance Code)
1980.) (De Leon, The Insurance Code of
the Philippines Annotated [2014]) Rights and Obligations of Insurer
An insurer is the party who assumes or accepts
The fact that no separate premium was paid on the risk of loss in an insurance contract. An
the cover note before the loss insured against insurer undertakes for a consideration to
occurred, does not militate against its binding indemnify the insured or to pay him a certain sum
effect as an insurance contract. By their nature, on the happening of a specified contingency or
cover notes do not contain particulars that would event.
serve as basis for the computation of the
premiums and consequently, no separate As such, an insurer has the right to receive
premiums are intended or required to be paid premiums to be paid by the insured.
therefor (Pacific Timber Export Corp. v. CA, G.R. • Notwithstanding any agreement to the
No. L-38613, 1982 contrary, no policy or contract of
insurance issued by an insurance
company is valid and binding unless and
C. RIGHTS AND OBLIGATIONS OF until the premium thereof has been paid,
PARTIES except in the case of a life or an industrial
life policy whenever the grace period
a. Insurer provision applies, or whenever under the
broker and agency agreements with duly
Meaning of Insurer
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licensed intermediaries, a ninety (90)-day payment of the insurance proceeds by the

credit extension is given. insurer.
• No credit extension to a duly licensed
intermediary should exceed ninety (90) NOTE: The insured is not always the person to
days from date of issuance of the policy. whom the proceeds are paid, as in the case
(Section 77, Insurance Code) where there is a designated beneficiary.
b. Insured c. Beneficiary
Meaning of Insured Meaning of Beneficiary

The insured is a person to be indemnified, or one The beneficiary is the one who receives a benefit
who is to receive a certain sum upon happening or advantage or who is entitled to the benefit of a
of a specified contingency or event. contract.
Anyone except a public enemy may be insured. Any person may be designated as beneficiary in
(Section 7, Insurance Code) a life insurance contract even though he is a
stranger and has no insurable interest in the life
Public Enemy of the insured.
Public enemy is a nation at war with the
Philippines, and also every citizen or subject of Exception: Those who are forbidden by law to
such nation. Such term does not include robbers, receive donations from the insured:
thieves, and riotous mobs. a. Those made between persons who are
guilty of adultery or concubinage at the
Rights and Obligations of Insured time of the donation;
An insurer is entitled to payment of premium as b. Those made between persons found
soon as the thing insured is exposed to the peril guilty of the same criminal offense in
insured against. (Section 77, Insurance Code) consideration thereof; and
• An acknowledgment in a policy or c. Those made to a public officer or his wife,
contract of insurance or the receipt of descendants and ascendants, by reason
premium is conclusive evidence of its of his office.
payment, so far as to make the policy
binding, notwithstanding any stipulation Though the general principle stands, it is still
therein that it shall not be binding until the necessary that such designation of a beneficiary
premium is actually paid. (Section 79, be made in good faith without fraud or intent to
Insurance Code) enter into a wagering contract.
• An insurer may also contract and accept (Philippine Commercial Laws: The Insurance
payments, in addition to regular Code Vol. 1 Commentary, Hernando B. Perez)
premium, for the purpose of paying future
premiums on the policy or to increase the Rights and Obligations of Beneficiary
benefits thereof. (Section 84, Insurance A beneficiary is the one to whom the insurance is
Code) payable, or who is entitled to the proceeds of the
policy on the occurrence of the event designated.
Furthermore, since contracts of insurance are
contracts uberrimae fidei (i.e. good faith), the On the matter of consent
insurer has a right to depend on the utmost good In cases of a revocable beneficiary, the
faith of the insured regarding the nature of the risk policyowner is given the right to change
to be assumed. The doctrines of warranties, beneficiaries at any time before the insured’s
representation, and concealment are predicated death, and without the consent of the beneficiary.
upon the principle of good faith. (Philippine On the other hand, the policyowner may not
Commercial Laws: The Insurance Code Vol. 1 change an irrevocable beneficiary, nor may the
Commentary, Hernando B. Perez) insured add other beneficiaries without the
irrevocable beneficiary's consent.
On the other hand, as a matter of right, an insured a. The insured also cannot obtain a policy
is the person whose loss is the occasion for the loan or cash surrender value on the policy
without the consent of the irrevocable
beneficiary because the latter’s vested
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right extends to all benefits accruing to the or rejecting the application. (Great Pacific Life v.
policy. CA)
b. Should the insured discontinue paying
premiums, the beneficiary may continue Rights and Obligations of Agent
paying it and be entitled to automatic An agent must exercise the required degree of
extended term or paid-up insurance diligence in performing his duties so as to avoid
options. committing an act of negligence. This entails the
(Philippine Commercial Laws: The Insurance timely collection of premiums to avoid situations
Code Vol. 1 Commentary, Hernando B. Perez) of non-payment by the insured.
Furthermore, the interest of a beneficiary in a life An insurer is not liable for a loss caused by the
insurance policy shall be forfeited when the willful act or though the connivance of the insured;
beneficiary is the principal, accomplice, or but he is not exonerated by the negligence of the
accessory in willfully bringing about the death of insured, or of the insurance agents or others.
the insured. (Section 89, Insurance Code)
• In such a case, the share forfeited shall
pass on to the other beneficiaries, unless In case of industrial life insurance, the policy shall
otherwise disqualified. not lapse for non-payment of premium if such
• In the absence of other beneficiaries, the non-payment was due to the failure of the insurer
proceeds shall be paid in accordance to send its representative or agent to the insured
with the policy contract. at the residence of the insured or someplace
• If the policy contract is silent, the indicated by him for the purpose of collecting such
proceeds shall be paid to the estate of the premium.
insured. (Section 12, Insurance Code)
NOTE: However, this does not apply when the
d. Agent or Trustee premium on the policy remains unpaid for a
period of 3 months or 12 weeks after the grace
Agent or Trustee period has expired.
Insurance agents are the legal representatives of
insurers, the principals. A contract of insurance e. Partner or Co-Owner
must be assented to by both parties either in
person or by their agents. Insurance Procured by Partner
A partner has an insurable interest in the property
Insurance Procured by Agent of the partnership which will support a separate
When property is in the possession of an agent, policy for his benefit.
the principal may insure the same as owner, while
the agent who is responsible for such property When a partner takes a policy on the partnership
may likewise insure the same. property in his own name, it includes his separate
interest alone, unless the “terms of the policy
If insurance is procured by an agent and intended should be such as are applicable to the joint or
to cover interest of the principal, this fact must be common interest.”
stated in the policy.
Reason why interest of others not included: the
If the agent secures the policy in his name alone, policy procured by them shall be applied
it covers only the interest of the agent and the exclusively to the proper interest of the person in
principal has no right of action against the insurer. whose name or for whose benefit it is made
unless otherwise specified.
Agreement Between Applicant and Agent

In an agreement between the applicant and the
agent, there is no liability until the principal
approves the risk and receipt is given by the
agent. The acceptance is conditional and is
subordinated to the act of the company approving
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f. Assignee
EXTENT OF RECOVERY
Meaning of Assignee
Cannot recover that Cannot recover that
An assignee merely acquires the rights of the
which exceeds the which (1) exceeds
insured. Thus, if the insured procured the policy
full amount of loss. the amount of credit
by fraud or misrepresentation, then the assignee
at the time of loss
of the policy cannot be entitled to the proceeds as
AND (2) exceeds the
well.
value of the property
mortgaged.
g. Mortgagor and Mortgagee
Insuring Mortgaged Property Who May Insure Mortgaged Property

Unless the policy otherwise provides, where a When a property is mortgaged, the mortgagor
mortgagor of the property effects insurance in his and mortgagee may take out separate policies
own name providing that the loss shall be payable with the same or different insurance companies.
to the mortgagee, or assigns a policy of insurance The mortgagor may insure the property
to a mortgagee, the insurance is deemed to be mortgaged to the full value of such property, while
upon the interest of the mortgagor, who does not the mortgagee can insure the same only to the
cease to be a party to the original contract, and extent of the amount of credit.
any act of his, prior to the loss, which would
otherwise avoid the insurance, will have the same Insurance by Mortgagor Without Assigning
effect, although the property is in the hands of the Loss to Mortgagee
mortgagee, but any act which, under the contract Where the mortgagor insures the property
of insurance, is to be performed by the mortgagor, mortgaged without making the loss payable to the
may be perform by the mortgagee therein named, mortgagee, upon occurrence of the loss, only the
with the same effect as if it had been performed mortgagor may recover from insurer since the
by the mortgagor. (Section 8, Insurance Code) policy taken by the mortgagor shall be applied
exclusively to his interest.
MORTGAGOR MORTGAGEE
However, the mortgage constituted shall extend
EXTENT OF INTEREST to the proceeds of the indemnity paid by the
insurer of the mortgaged property upon
As owner, he has an As creditor with occurrence of the loss and thus the mortgagee
insurable interest to security, has an has a lien on the proceeds of the policy.
extent of the value of insurable interest in
the property. the mortgaged Insurance by Mortgagor Making Loss Payable
property to the to Mortgagee
extent of the debt 1. The insurance is still deemed to be upon
secured and does the interest of the mortgagor, who does
not exceed beyond not cease to be a party to the original
the value of the contract.
mortgaged property.
Mortgagee is not It is an insurance on the property of the
insuring the property mortgagor as owner and not on the
itself but his interest interest of the mortgagee, and
or lien thereon as accordingly, the contract is one between
security of the the insurer and the mortgagor who is the
mortgagor’s debt. insured and not one between the insurer
and the mortgagee.
CONTINUING OF INTEREST
2. Any act of the mortgagor prior to the loss,
Interest continues Interest continues which would otherwise avoid the
even if the debt has only until the insurance, will have the same effect
been paid. mortgage debt is although the property is in the hands of
extinguished. the mortgagee.
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3. Any act which, under the insurance, is to mortgagor’s interest, and the mortgagor
be performed by the mortgagee with the continues to be a party to the contract, while
same effect as if it has been performed mortgagee is simply a beneficiary of the
by the mortgagor. insurance to the extent of the unpaid
indebtedness and does not make the mortgagee
4. Upon concurrence of the loss, the a party to the contract.
mortgagee is entitled to recover to the
extent of his credit and the balance, if Open Mortgage Clause
any, is payable to the mortgagor since If an insurer assents to the transfer of an
such policy is for the benefit of both the insurance from a mortgagor to a mortgagee, and,
mortgagor and the mortgagee. at the time of his assent, imposes further
obligations on the assignee, making a new
The mortgagee is the proper party to contract with him, the acts of the mortgagor
prosecute an action for a loss sustained cannot affect the rights of said assignee. (Section
under a policy of insurance where the 9, Insurance Code)
loss was made payable to him, and such
action may be brought by the mortgagee Essentially, when the mortgagor insures the
even without including the mortgagor as property mortgaged and makes the loss payable
party. to the mortgagee, the mortgagor does not cease
to be a party to the contract and thus, any act of
5. Upon recovery by the mortgagee to the his which would avoid the policy shall have the
extent of his credit from the insurer, the same effect.
mortgagor is released from his
indebtedness. Union Mortgage Clause
A union mortgage clause, or its equivalent,
Policy Assignment to ME Not a Payment creates the relation of insured and insurer
In case the mortgagor insures the mortgaged between the mortgagee and the insurance
property and assigns the policy to the mortgagee, company independent of the contract with the
such assignment is merely to afford the mortgagor.
mortgagee a greater security for the settlement of
the mortgagor’s obligation and should not be If an insurer assents to the transfer of an
construed as payment. insurance from the mortgagor to the mortgagee,
at the time of his assent, imposes further
By such assignment, the mortgagee obligations on the assignee, making a new
indebtedness is not extinguished until such time contract with him, the act of the mortgagor cannot
as the mortgagee has collected the proceeds of affect the rights of said assignee.
the policy from the insurer after the occurrence of
the loss.
D. RESCISSION OF INSURANCE
Effect of “Mortgagee Redemption” Insurance CONTRACTS
(MRI) Procured by the Mortgagor
“Mortgagee redemption” insurance is a kind of life 1. OVERVIEW OF GENERAL
insurance procured by the mortgagor with the GROUNDS
mortgagee as beneficiary up to the extent of the
mortgage indebtedness. Primary Concerns of the Insurer
• Correct estimation of risk which enables
In case the mortgagor-insured dies, the proceeds insurer to determine if he will approve the
of such insurance will be applied to the payment policy application and if so, at what
of the mortgage debt to the mortgagee, thereby premium rate;
relieving the heirs of the mortgagor of the burden
• Delimitation of the risk;
of paying debt.
• Control of risk to guard against increase
in risk;
Where the mortgagor pays the insurance
premium under the MRI, making the loss payable • Determine if loss occurs and if so, the
amount thereof.
to the mortgagee, the insurance is still on the
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Devices of Insurer in Ascertaining and the [insured], its concealment must of itself
Controlling Risks necessarily be a fraud." When one knows a
a. Concealment material fact and conceals it, "it is difficult to see
b. Representation how the inference of a fraudulent intent or
c. Warranties intentional concealment can be avoided.” Thus, a
i. Statements or promises by the concealment, regardless of actual intent to
insured, whether expressed, defraud, "is equivalent to a false representation."
implied, affirmative or (Insular Life vs Heirs of Alvarez, G.R. No.
promissory, set forth in the policy 207526)
itself or incorporated in it by
proper reference, the untruth or Exception: When the concealment is made by
non-fulfilment of which in any the insured in relation to the falsity of a warranty,
respect, and without reference to the non-disclosure must be intentional and
whether the insurer was in fact fraudulent in order that the contract may be
prejudiced by such untruth or rescinded. (Section 29, Insurance Code)
non-fulfilment renders the policy
voidable by the insurer. Effect of Concealment
d. Conditions General Rule: Concealment, whether intentional
e. Exceptions or not, entitles the injured party to rescind a
i. Stipulations excluding certain contract of insurance (Section 27, Insurance
specified risks that otherwise Code, even if the death or loss is due to a cause
would be included under the not related to the concealed matter. (Sunlife v.
general language describing the CA, G.R. No. 105135, 1995)
risks assumed.
Exceptions:
a. Incontestability Clause (Insurance Code,
2. CONCEALMENT Secs. 48 and 233[b])
b. Concealment made after the contract has
Definition become effective;
A neglect to communicate that which a party c. Waiver or estoppel;
knows and ought to communicate (Section 26, d. In marine insurance, in situations where
Insurance Code) concealment does not vitiate the entire
contract, but merely exonerates the
Requisites of Concealment (KDNA) insurer from a loss resulting from the risk
a. A party knows the fact which he neglects concealed (Section 112, Insurance
to communicate or disclose to the other; Code).
b. Such party concealing is duty bound to
disclose such fact to the other; Instances When Concealment Made by an
c. Such party concealing makes no Agent Procuring Insurance Binds Principal
warranty of the fact concealed; and a. Where it was the duty of the agent to
d. The other party has not the means of acquire and communicate information of
ascertaining the fact concealed. the facts in question;
b. Where it was possible for the agent, in
Proof of Fraud in Concealment the exercise of reasonable diligence, to
General Rule: Fraud need not be proven in order have made the communication before
to prove concealment. the making of the insurance contract.
Good faith is not a defense. (Saturnino vs Phil. Failure on the part of the insured to disclose such
American Life Insurance, G. R. No. L-16163, facts known to his agent, or wholly due to the fault
1963) of the agent, will avoid the policy, despite the
good faith of the insured.
Proof of fraudulent intent is unnecessary for the
rescission of an insurance contract on account of
concealment. It is because in insurance
contracts, concealing material facts is inherently
fraudulent: "if a material fact is actually known to
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Duty to Communicate Waiver of Disclosure of Material Facts

Items to disclose to the other, in good faith, a. By the terms of the insurance (express
even without inquiry waiver); or
● Party concealing must have knowledge b. By the neglect to make inquiry as to such
of the facts concealed; facts, where they are distinctly implied in
● Facts concealed must be material to the other facts which information is
risk; communicated (implied waiver). (Section
● Party is duty bound to disclose such fact 33, Insurance Code)
to the other;
● Party concealing makes no warranty as No duty to disclose opinions
to the facts concealed; Neither party is bound to communicate his mere
● Other party has no other means of opinion, speculation, intention or expectation
ascertaining the facts concealed. even upon inquiry, because such opinion would
add nothing to the appraisal of the application.
Items to disclose upon inquiry (Section 35, Insurance Code)
General Rule: Neither party to the insurance
contract is bound to communicate information on Materiality
the following matters Materiality is to be determined not by the event,
but solely by the probable and reasonable
Exception: influence of the facts upon the party to whom the
Except in answer to the inquiries of the other: communication is due:
a. Those of which the other knows; • In forming his estimate of the
b. That which, in the exercise of ordinary disadvantages of the proposed
care, the other ought to know and of contract; or
which the former has no reason to • In making his inquiries. (Section 31,
suppose his ignorance, i.e. political Insurance Code)
situation, general usages of trade;
c. Those of which the other waives Test of Materiality
communication; Was the insurer misled or deceived into entering
d. Those which prove or tend to prove the a contract obligation or in fixing the premium of
existence of the risk excluded by a insurance by a withholding of material information
warranty and which are not otherwise or facts within the assured’s knowledge or
material; and presumed knowledge? (Argente v. West Coast
e. Those which relate to a risk excepted Life, G.R. No. L-24899, 1928)
from the policy and which are not
otherwise material. (Section 30, It is sufficient that his non-disclosure misled the
Insurance Code) insurer in forming his estimates of the risks of the
proposed insurance policy or in making inquiries
Disclosure of Insurable Interest (Sunlife Assurance Company v. CA, G.R. No.
General rule: The insured is not required to 105135, 1995).
communicate the nature (or kind) or the amount
of his insurable interest in the life or property The materiality of the existence of other
insured to the insurer. insurance contracts against fire upon the same
property insured, when its disclosure is one of the
Exceptions: conditions specified in the fire insurance policy, is
a. When the insurer makes inquiry from the not open to doubt (Union Mfg. v. Phil. Guaranty,
insured of the nature or amount of the G.R. No. L-27932, October 30, 1972)
latter’s insurable interest, whether in life
or property insurance; Materiality in Medical Examinations
b. Insurance policy must specify the interest General rule: non-disclosure is concealment.
of the insured in the property insured, if In non-medical insurance (which does away with
he is not the absolute owner thereof. the usual medical examination before the policy
is issued), the waiver by said insurance company
makes the previous health conditions of the
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insured more material (Saturnino v. Phil. Form

American Life Ins., G.R. No. L-16163, 1963) Oral or written. (Section 36, Insurance Code)
Where the applicant concealed the fact that he When Made

had pneumonia, diabetes or syphilis, the policy is It may be made orally or in writing. It may be
avoided although the cause of the death (e.g., made at the time of, or before, the issuance of the
plane crash) be totally unconnected with the policy. (Section 37, Insurance Code)
material fact concealed or misrepresented.
It may be altered or withdrawn before the
The withholding by the applicant, father of one- insurance is effected, but not afterwards. (Section
year-old insured, of the fact that his daughter was 41, Insurance Code)
typically a mongoloid child, of which he was fully
aware, as such a congenital physical defect could Requisites for Misrepresentations (UWiM)
never be ensconced nor disguised, in supplying 1. The insured stated a fact which is untrue;
essential data for the insurance application form 2. Such fact was stated with knowledge that
which fact is material to the contract, constitutes it is untrue and with intent to deceive or
fraudulent concealment (Great Pacific v. CA, which he states positively as true without
G.R. No. L-31845, 1979) knowing it to be true and which has a
tendency to mislead;
Exception: Imprecise description of information 3. Such fact in either case is material to the
is not concealment. risk.
Where the insured lacked sufficient medical Misrepresentation as Affirmative Defense

knowledge as to enable him to distinguish Misrepresentation is an affirmative defense. To
between “peptic ulcer” and “tumor” the insured avoid liability, the insurer has the duty to establish
cannot claim that he was deceived into entering such a defense by satisfactory and convincing
into the contract. evidence. (Ng Gan Zee v. Asian Crusader, G.R.
No. L-30685, 1983)
In the absence of evidence that the insured had
sufficient medical knowledge as to enable him to The fraudulent intent on the part of the insured
distinguish between "peptic ulcer" and a "tumor," must be established to entitle the insurer to
his statement that said tumor was "associated rescind the contract. Misrepresentation as a
with peptic ulcer of the stomach" should be defense of the insurer to avoid liability is an
construed as an expression made in good faith of affirmative defense and the duty to establish such
his belief as to the nature of his ailment and defense by satisfactory and convincing evidence
operation. Such statement must be presumed to rests upon the insurer. (Manulife Philippines v.
have been made by him without knowledge of its Ybanez, G.R. No. 204736, 2016)
incorrectness and without any deliberate intent on
his part to mislead the insurer. (Ng Zee v. Asian Kinds of Representation
Crusader, G.R. No. L-30685, 1983) 1. Affirmative - an affirmation of a fact
existing when the contracts begins; or
2. Promissory - a statement by the insured
3. MISREPRESENTATION concerning what is to happen during the
term of the insurance.
Definition
It is a factual statement made by the insured at Effect of Expressions of Opinion or
the time of, or prior to, the issuance of the policy, Expectation on Insurance Policy
to give information to the insurer and otherwise A representation of the expectation, intention,
induce him to enter into the insurance contract. belief, opinion or judgment of the insured,
although false, WILL NOT AVOID a policy of
A representation cannot qualify an express insurance if there is no actual fraud in inducing
provision in a contract of insurance but it may the acceptance of the risk, or its acceptance at
qualify an implied warranty. (Section 40, a lower rate of premium (Philam Health Systems
Insurance Code) v. CA, G.R. No. 125678, 2002);
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However, in a marine insurance, information of The Insurance Code dispenses with proof of
the belief or expectation of a third person, in fraudulent intent in cases of rescission due to
reference to a material fact, is material. (Section concealment, but not so in cases of rescission
110, Insurance Code) due to false representations. Concealment of
material facts is fraudulent in and of itself. (The
Adoption of Misrepresentation Insular Life Assurance Co., Ltd. v. Heirs of
An insured who signed the pension plan Alvarez, G.R. Nos. 207526 & 210156, 2018)
application, adopted as his own the written
representations and declarations embodied in it
(Ma. Lourdes S. Florendo vs. Philam Plans, Inc., 4. BREACH OF WARRANTY
Perla Abcede, et al., G.R. No. 186983, 2012).
Definition
Effect of Misrepresentation A statement or promise set forth in the policy or
If there is misrepresentation, the injured party is by reference incorporated therein, the untruth or
entitled to rescind from the time when the nonfulfillment of which in any respect, and without
representation becomes false. (Section 45, reference to whether insurer was in fact
Insurance Code) prejudiced by such untruth or non-fulfillment,
renders the policy VOIDABLE by the insurer.
Test of Materiality
The injured party can rescind the contract: Kinds
a. When the representation fails to 1. Express – An agreement contained in
correspond with the facts (Insurance the policy or clearly incorporated therein
Code, Sec. 44); and as part thereof whereby the insured
b. When it is false in a material point stipulates that certain facts relating to the
(Insurance Code, Sec. 45) risk are or shall be true or certain acts
relating to the same subjects have been
NOTE: The materiality of a representation is or shall be done.
determined by the same rules as the materiality 2. Implied – Warranties that are deemed
of concealment. (Section 46, Insurance Code) included in the contract, although not
expressly mentioned. They are found
Concealment vs Misrepresentation usually in marine insurance.
3. Affirmative – Asserts the existence of a
CONCEALMENT MISREPRESENTATION fact or condition at the time it is made;
4. Promissory – The insured stipulates that
The insured The insured makes certain facts or conditions shall exist or
withholds information erroneous thin shall be done or omitted.
of material facts from statements of facts
the insurer. with the intent of Warranty v. Representations
inducing the insurer
to enter into the WARRANTY REPRESENTATION
insurance contract.
Part of the contract. Collateral
Passive form of the Active form of the inducement.
act. act.
Written on the policy Need not be written.
Usually occurs prior May be made at the or in a valid rider or
to making of the time of the attachment. (except
insurance contract. insurance of the for implied
contract. warranties)
In cases of rescission In cases of Generally, Should be

due to concealment, rescission due to conclusively established to be
proof of fraudulent misrepresentation, presumed to be material.
intent not necessary proof of fraudulent material.
intent necessary
Falsity or non- Falsity renders the
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clause (General Insurance and Surety Corp. v.

fulfillment operates policy voidable or
Ng Hua, G.R. No 14373, 1960).
as a breach of rescissible on the
contract. ground of fraud.
5. EXERCISE OF THE RIGHT TO
Facts warranted must Requires only to be
be strictly complied substantially true. RESCIND OR CANCEL
with.
Right of Insurer to Rescind
Time to Exercise the Right to Rescind
Form 1. Non-Life Policy – Prior to the
Where express warranty must be contained commencement of an action on the
1. The policy itself; or contract.
2. In another instrument signed by the 2. Life Policy – Before the incontestability
insured and referred to in the policy as clause sets in.
making a part of it.
Incontestable Clause in Life Insurance
Effect of Omission or Breach Requisites of Incontestability Clause:
General Rule: The violation of a material a. The insurance is a life insurance policy.
warranty or other material provision of the policy b. It is payable on the death of the insured.
gives the insurer the right to rescind the insurance c. It has been in force during the lifetime of
policy (Section 74, Insurance Code) the insured for at least 2 years from its
date of issue or of its last reinstatement.
NOTE: A policy may declare that a violation of
specified provisions thereof shall avoid it. NOTE: The period of 2 years may be shortened
Otherwise, the breach of an immaterial provision but it cannot be extended by stipulation.
does not avoid the policy. (Section 75, Insurance
Code) When Incontestability Clause Sets In
Whichever is earlier, between:
Exception: The below instances of warranties a. Within 2 years from the date of issuance
relating to the future or its last reinstatement; or
a. Loss occurs before the time of b. Upon the insurer’s death (Sun Life v.
performance of the warranty; Sibya, G.R. No. 211212, 2016)
b. The performance becomes unlawful;
c. Performance becomes impossible. After the two-year period lapses, or when the
(Section 73, Insurance Code) insured dies within the period, the insurer must
make good on the policy, even though the policy
NOTE: Waiver or estoppel may also prevent the was obtained by fraud, concealment, or
insurer from being discharged from liability misrepresentation (Sun Life v. Sibya, G.R. No.
(Pioneer v. Yap, G.R. No. L-36232, 1974) 211212, 2016).
Other Insurance Clause – This is a clause in the Defenses Not Barred by the Incontestability
policy that provides that the policy shall be void if Clause
the insured procures additional insurance without a. Person taking the insurance lacked
the consent of the insurer. The purpose is to insurable interest as required by law;
prevent over-insurance and thus to avert the b. Cause of the death of the insured is
possibility of a perpetration of fraud. It is a excepted risk;
warranty that entitles the insurer to rescind in c. Premiums have not been paid;
case of breach. d. Conditions of the policy relating to
military or naval service have been
The “other insurance clause” may be subject to violated;
waiver but the waiver must either be express or if e. The fraud is of a particularly vicious type,
it is to be implied from conduct mainly, said wherein:
conduct must be clearly indicative of a clear intent i. The policy was taken in
to waive such right. There must be clear showing furtherance of a scheme to
that the insurer knew about the violation of the murder the insured;
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ii. The insured instituted another Requisites for Cancellation by Insurer (Other
person for the medical Than Life Insurance Contracts)
examination; and, a. Prior notice of cancellation to insured;
iii. The beneficiary feloniously killed b. Notice must be based on the occurrence
the insured; after effective date of the policy of one or
f. Beneficiary failed to furnish proof of more of the grounds mentioned;
death or to comply with any condition c. Notice must be in writing, mailed or
imposed by the policy after the loss has delivered to the insured at the address
happened; or, shown in the policy; and
g. Action was not brought within the time d. Notice must state the grounds relied
specified. upon and upon request of insured, to
furnish facts on which cancellation is
Insurer is Liable if: based.
a. Loss, the proximate cause of which is the
peril insured against; Prior Notice is required to prevent the
b. Loss, the immediate cause of which is the cancellation of the policy, without allowing the
peril insured against except where insured ample opportunity to negotiate for other
proximate cause is an excepted peril; insurance in its stead for his own protection
c. Loss through the negligence of insured (Saura Import & Export v. Phil. International
except where there was gross Surety, G.R. No. L-15184, 1963).
negligence amount to willful act; and
d. Loss caused by efforts to rescue the thing b. Notice
from peril insured against – if during the
course of rescue, the thing is exposed to When Insurer is Liable for Loss
a peril not insured against, which a. Unless otherwise provided by the policy,
permanently deprives the insured of its an insurer is liable for a loss of which a
possession, in whole or in part. peril insured against was the proximate
cause, although a peril not contemplated
Insurer is Not Liable if: by the contract may have been a remote
a. Loss by insured’s willful act or gross cause of the loss (Insurance Code, Sec.
negligence; 86)
b. Loss due to connivance of the insured; b. The thing insured is rescued from a peril
c. Loss where the excepted peril is the insured against that would otherwise
proximate cause. have caused a loss, if, in the course of
such rescue, the thing is exposed to a
peril not insured against, which
6. CANCELLATION OF NON-LIFE permanently deprives the insured of its
INSURANCE possession, in whole or in part; or where
a loss is caused by efforts to rescue the
a. Grounds for Cancellation of a thing insured from a peril insured against
Non-Life Policy by the Insurer: c. The proximate cause of which is the peril
insured against
1. Non-payment of premium; d. Immediate cause of which is the peril
2. Conviction of a crime out of acts insured against except where proximate
increasing the hazard insured against; cause is an excepted peril;
3. Fraud or material misrepresentation; e. Loss through the negligence of insured
4. Willful or reckless acts or omissions except where there was gross
increasing the risk insured against; negligence amount to willful act; and
5. Physical changes in the property insured f. Loss caused by efforts to rescue the thing
making it uninsurable; and from peril insured against – if during the
6. Determination by the Insurance course of rescue, the thing is exposed to
Commissioner that the policy would a peril not insured against, which
violate the Insurance Code. (Sec. 64, permanently deprives the insured of its
Insurance Code) possession, in whole or in part.
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When Insurer is Not Liable for Loss NOTE: A notice of claim under Compulsory Motor
a. Loss of which the peril insured against Vehicle Insurance must be filed within 6 months
was only a remote cause. (Insurance from the date of the accident.
Code, Sec. 86)
b. Loss caused by the willful act or through Periods For The Filing Of Actions
the connivance of the insured; but he is A condition, stipulation, or agreement in any
not exonerated by the negligence of the policy of insurance, limiting the time for
insured, or of the insurance agents or commencing an action thereunder to a period of
others (Insurance Code, Sec. 89) less than one (1) year from the time when the
c. Loss by insured’s willful act or gross cause of action accrues, is void. (Section 63,
negligence; Insurance Code)
d. Loss due to connivance of the insured;
e. Loss where the excepted peril is the Any person having any claim upon the policy
proximate cause. issued pursuant to Compulsory Motor Vehicle
Liability Insurance shall, without any unnecessary
Mandatory Requirement of Notice of Loss and delay, present to the insurance company
Proof of Loss concerned a written notice of claim setting forth
The requirement of the notice of loss and the nature, extent and duration of the injuries
obligation to file a proof of loss are conditions with sustained as certified by a duly licensed
which the insured MUST comply before there is physician.
any liability on the part of the insurer. a. Notice of claim must be filed within six (6)
months from the date of accident,
When to Give Notice of Loss otherwise, the claim shall be deemed
Without unnecessary delay or within a waived.
reasonable time. b. Action or suit for recovery of damage due
to loss or injury must be brought, in
A requirement of the policy that notice of loss be proper cases, with the Commissioner or
given immediately or forthwith requires the giving the courts within one (1) year from denial
of notice within a reasonable time. (Bachrach v. of the claim, otherwise, the claimant’s
Britain Am. Assur. Co., G.R. No. L-5715, 1910) right of action shall prescribe.
(Section 397, Insurance Code)
Form of Notice or Proof of Loss
In case of loss upon fire insurance, the law Payment Of Proceeds
requires written notice. (Section 90, Insurance Life Insurance
Code) The proceeds shall be paid immediately upon the
For other kinds of insurance, absent any maturity of the policy (survival benefits) if there is
stipulation in the policy, notice or proof may be such a maturity date.
given orally or in writing. If the policy matures by the death of the insured,
within sixty (60) days after presentation of the
When Defects in Notice of Loss are Waived claim and filing of the proof of the death of the
All defects in a notice of loss, or in preliminary insured.
proof thereof, which the insured might remedy,
and which the insurer omits to specify to him, Property Insurance
without unnecessary delay, as grounds of Proceeds shall be paid within thirty (30) days after
objection, are waived. (Section 92, Insurance proof of loss is received by the insurer and
Code) ascertainment of the loss or damage is made
either by agreement or by arbitration.
When Delay in the Presentation of Notice or If no ascertainment is made within 60 days after
Proof of Loss is Deemed Waived receipt of proof of loss, the loss shall be paid
Delay in the presentation to an insurer of notice within 90 days.
or proof of loss is waived if caused by any act of
him, or if he omits to take objection promptly and
specifically upon that ground. (Section 93,
Insurance Code)
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c. Renewal
Renewal of Non-Life Insurance

The insured shall be entitled to renew the policy
upon payment of the premium due on the
effective date of the renewal. Policy written:
a. Term of less than one (1) year -
considered as if written for a term of one
(1) year
b. Term longer than one (1) year or any
policy with no fixed expiration date -
considered as if written for successive
policy periods or terms of one (1) year
Exception: The insurer at least forty-five (45)

days in advance of the end of the policy period
mails or delivers to the named insured at the
address shown in the policy notice of its intention
not to renew the policy or to condition
its renewal upon reduction of limits or elimination
of coverages. (Section 66, Insurance Code)
-- end of topic --
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II. TRANSPORTATION LAW Overview of Topics Under Transportation Law

TOPIC SUBTOPICS/LEGAL BASIS
LAND Common Carriers - Civil Code
SEA Maritime Transportation - Code
of Commerce, COGSA
A. COMMON CARRIERS
Subtopics:
1. Concept
a. Maritime Contracts – Bills of
2. Common carrier vs. private carrier
Lading and Charter Parties
3. Diligence required
b. Persons in Maritime Law –
Shipowner, Ship agent,
B. OBLIGATIONS AND LIABILITIES
Captain, Sailing Mate,
1. Vigilance over goods
2. Safety of passengers Supercargo
c. Limited Liability rule
d. Maritime Accidents –
C. DEFENSES AVAILABLE TO A COMMON
General Average, Arrivals
CARRIER
under Stress, Collisions,
1. Proof of negligence
Shipwreck and Salvage
2. Due diligence in the selection and
e. COGSA
supervision of employees
3. Fortuitous event AIR Montreal Convention
4. Contributory negligence REGISTERED Extent of Liability
5. Doctrine of last clear chance OWNER
RULE
D. EXTENT OF LIABILITY
1. Recoverable damages
2. Stipulations limiting liability A. COMMON CARRIERS
3. Limitations under the Montreal Convention
Contract of Transportation
A contract of transportation is a consensual contract
perfected by meeting of the minds. Natural or
juridical persons bind themselves to transport
persons, goods, or both for compensation offering
their services to the public.
1. CONCEPT
Parties to the Contract of Transportation
Carriage of Passengers
Carrier
Party who binds himself to transport persons,
goods, or both. It may be a common carrier or a
private carrier.
Passenger
One who travels in a public conveyance by virtue of
an express or implied contract with the common
carrier, paying fare or what is the equivalent thereof
(Jesusa Vda. de Nueca v. Manila Railroad
Company, G.R. No. 31731-R, 1968)
Carriage of Goods
Shipper
Person who delivers the goods to the carrier for
transportation and pays the consideration, or on
whose behalf the payment is made
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Carrier 2. COMMON CARRIER VS. PRIVATE

(See earlier discussion) CARRIER
Consignee Private carriers

Party who receives the goods or cargo. The Persons or entities who undertake to transport
consignee and the shipper may be the same. goods or persons from one place or another by
special agreement in a particular instance only,
Governing Laws: without making the activity a vocation or without
(a) New Civil Code holding himself out to the public as ready to act for
all who may desire his/her/its services, either
(b) Code of Commerce
gratuitously or for hire. (Sps. Pereña v. Sps. Zarate,
(c) Special Laws 693 Phil. 373)
In all matters not regulated by the Civil Code, the
rights and obligations of common carriers shall be
Common Carriers v. Private Carriers
governed by the Code of Commerce and by special
COMMON CARRIERS PRIVATE CARRIERS
laws. (Civil Code, Art. 1766)
Holds himself / herself Engage with particular
Elements of a Common Carrier: / itself for all people individuals or groups
(a) Persons, corporations, firms, or indiscriminately only
associations; Governed by the Civil Governed by the Civil
Code provisions Code provisions on
(b) Engaged in the business of carrying or
related to common obligations and
transporting passengers or goods or both; carriers, the Public contracts
(c) By land, water, or air; Service Act, Code of
(d) For compensation; and Commerce, and other
(e) Offering their services to the public. (Civil special laws regarding
Code, Art. 1732) transportation.
Required to exercise Only required to
Tests to Determine Whether the Entity is a extraordinary diligence exercise ordinary
Common Carrier diligence
(a) It must be engaged in the business of Common carriers are No presumption of
carrying goods for others as a public presumed to be at fault fault or negligence is
employment and must hold itself out as or negligent in cases present for private
ready to engage in the transportation of of losses of the effects carriers.
of the passengers or
goods generally as a business and not as a
injuries caused to
casual occupation; passengers
(b) It must undertake to carry goods of the kind
Stipulations limiting Stipulations limiting
that to which its business is confined;
liability are governed liability are governed
(c) It must undertake to carry by the method by
by law by principle of
which his business is conducted, and over “autonomy of
its established roads; contracts”
(d) The transportation must be for hire. (First
Philippine Industrial Corporation v. CA, 360
Phil. 852) The distinction between a common carrier and
private carrier lies in the character of the business,
The “true” test for a common carrier is not the such that if the undertaking is a single transaction,
quantity or extent of the business actually not a part of the general business or occupation,
transacted, or the number and character of the although involving the carriage of goods for a fee,
conveyances used in the activity, but whether the the person or corporation offering such service is a
undertaking is part of an activity engaged in by the private carrier.
carrier that he has held out to the general public as (Schmitz Transport v. Transport Venture, G.R. No.
his business or occupation. (Sps. Pereña v. Sps. 150255, 2005)
Zarate, 693 Phil. 373)
Doctrinal Pronouncements Related to the
Determination of Common Carriers
• The Civil Code does not distinguish between one
whose principal activity is the carrying of goods
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and one who does such carrying of goods only merely arranging for their transportation, it
as an ancillary activity. (A.F. Sanchez Brokerage becomes liable as a common carrier for loss or
Inc. v. CA, 488 Phil. 430) damage to goods. (Unsworth Transport v. CA,
• The Civil Code does not distinguish between a G.R. No. 166250, 2010)
person or enterprise offering transportation
services on a regular or scheduled basis and one Person, Partnership, Firm or Corporation NOT
offering such service on an unscheduled basis. as a Common Carrier
(De Guzman v. CA, 250 Phil. 613) • A travel agency is NOT a common carrier. Its
• The Civil Code does not distinguish between a covenant with its customers is simply to make
carrier offering its services to the general travel arrangements in their behalf. The
population and one who offers its services only relationship between the travel agency and the
from a narrow segment of the general population passenger is, at most, one of agency
(Id.) (Crisostomo v. CA, G.R. No. 138334, 2003)
• The Civil Code makes no distinction as to the • An exclusive contractor and hauler, rendering or
means of transportation as long as it is done offering its services to an individual or entity
through land, water, or air. (First Philippine (FGU Insurance v. G.P. Sarmiento Trucking,
Industrial Corporation v. CA, 360 Phil. 852) G.R. No. 141910, 2002)
• A carrier will be considered a common carrier
regardless of whether it owns the vehicle it used 3. DILIGENCE REQUIRED
or has to actually hire one as long as the entity
holds itself out to the public for transport of goods Extraordinary Diligence or Responsibility of
as a business. (Torres-Madrid Brokerage, Inc. v. Common Carriers Regarding Passengers and
FEB Mitsui Marine Insurance Co., 789 Phil. 413) Goods
Common carriers are required to exercise
Certificate of Public Convenience extraordinary diligence both over the goods and
It is not a requisite to incur liability under the Civil over the safety of the passengers they are
Code provisions governing common carriers. (De transporting, according to all the circumstances of
Guzman v. CA, 250 Phil. 613) each case. (Civil Code, Art. 1733)
Person, Partnership, Firm or Corporation as a The Common Carrier Is Not an Insurer of

Common Carrier Absolute Safety
• A customs broker is a COMMON CARRIER due It has been held that airline passengers must take
to transportation of goods being integral to the such risks incident to the mode of travel. In this
nature of the business (Calvo v. UCPB, G.R. No. regard, adverse weather conditions or extreme
148496, 2002) climatic changes are some of the perils involved in
• Under the Petroleum Act of the Philippines (R.A. air travel, the consequences of which the passenger
No. 387), oil pipeline operators are considered must assume or expect. After all, common carriers
common carriers (First Philippine Industrial Corp are not the insurer of all risks.
v. CA, G.R. No. 125948, 1998) (Japan Airlines v. CA, G.R. No. 118664, 1998)
• The operator of a beach resort that accepts
clients by virtue of a tour package – contracts In Transportation of Goods vs Passengers
that included transportation to and from the GOODS PASSENGERS
resort and the point of departure is considered To transport with To carry passengers safely
as a common carrier. Its services are so greatest skill and as far as human care and
intertwined with its main business as to be utmost foresight foresight can provide,
properly considered ancillary thereto. (Cruz v. Utmost vigilance of Using utmost diligence of a
Sun Holidays, G.R. No. 186312, 2010) very cautious very cautious person,
• The bus principally used as a bus service for person, according With due regard for all the
school children, and which was hired by a group to all circumstances (Sulpicio v.
of persons although the owners were not circumstances First Lepanto, G.R. No.
engaged in the business of public transportation 140349, 2005).
is a common carrier (Fabre, Jr. v. CA, G.R. No.
11127, 1996)
• A freight forwarder’s liability is limited to
damages arising from its own negligence,
including negligence in choosing the carrier;
however, where the forwarder contracts to
deliver goods to their destination instead of
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B. OBLIGATIONS AND LIABILITIES Other Doctrinal Pronouncements

• Surrender of the original Bill of Lading is NOT a
START AND END OF EXERCISE OF condition precedent for a Common Carrier to be
EXTRAORDINARY DILIGENCE discharged of its contractual obligation. If
surrender of the original Bill of Lading is not an
A. IN TRANSPORTATION OF GOODS option, acknowledgment of the delivery by
Lasts from the time the goods are unconditionally signing the delivery receipt suffices (National
placed in the possession of, and received by the Trucking and Forwarding v. Lorenzo Shipping,
carrier for transportation until the same are G.R. No. 153563, 2005)
delivered, actually or constructively, by the carrier to • Delivery of the cargo to the customs authorities
the consignee or to the person who has a right to is not delivery to the consignee or “to the person
receive them or to his duly authorized agent and a who has a right to receive them,” The goods are
reasonable time is given him to remove the goods. still in the hands of the government and the
(Nedlloyd B.V. Rotterdam v Glow Laks, G.R. No. owner cannot exercise dominion over them.
156330, 2014) However, the parties may agree to limit the
liability of the carrier. (Lu Do v. Binamira, G.R.
Doctrines: No. L-9840, 1957)
• Even during the time of the storage at
warehouse of common carrier at place of B. IN TRANSPORTATION OF
destination, until consignee is advised of good’s PASSENGERS
arrival and has had opportunity to remove or As to the commencement of the duty to exercise
dispose of them. (Civil Code, Art. 1738) extraordinary diligence, there are two views:
• The fact that only a portion of the goods had
been delivered and loaded to the carrier does not Liberal View v. Strict View
impair the contract of carriage, as the goods still LIBERAL The liberal view is based only on
remained in the custody and control of the VIEW perfection of contract (or meeting of
carrier. (Ganzon v. CA, 244 Phil. 664) the minds) between carrier and
• Actual delivery: Actual delivery is when passenger.
possession has been turned over to the STRICT The strict view is based on both
consignee or to his duly authorized agent and a VIEW perfection of contract (or meeting of
reasonable time is given to him to remove the the minds) between carrier and
goods (Westwind Shipping Corporation v. UCPB passenger and actual physical
General Insurance Co., Inc., 722 Phil. 38) contact of passenger with the
• Constructive delivery: Delivery of the bill of vehicle, ship or airplane.
lading to the consignee or any person who has a
right to receive the goods under the bill of lading For buses, a bus slowing down means that it is
can be considered as a constructive delivery. offering itself to prospective passengers as a
After all, the issuance of a bill of lading is prima common carrier. A passenger who signals for a ride
facie evidence of the receipt of the goods by the with his thumb signifies that he is offering himself as
carrier (Saludo v. CA, G.R. No. 95536) a passenger. (Dangwa v. CA, G.R. No. 95582,
1991)
SPECIAL RULE WHEN THERE IS TEMPORARY
UNLOADING OR STORAGE NOTE:
General Rule: Common carriers are still required to • The duty to exercise extraordinary diligence
exercise extraordinary diligence over the goods, terminates, when the passenger alights from the
even if the goods are temporarily unloaded or stored vehicle at the place of destination and has
in transit. reasonable opportunity to leave the common
carrier’s premises.
Exception: Common carriers are not required to • The duty to exercise extraordinary diligence
exercise extraordinary diligence anymore if the commences when the passenger places himself
shipper/owner has made use of their right of in the care and control of the common carrier
stoppage in transitu. (Civil Code, Art. 1737) who accepts him/her as a passenger.
• For passengers of ships, the Supreme Court has
Stoppage In Transitu ruled that a reasonable time to leave and pick up
Right of an unpaid seller to stop delivery and regain baggage is an hour after arrival (Aboitiz Shipping
possession of the goods while they are in transit to v. CA, G.R. No. 84458, 1989).
the buyer who has been declared
bankrupt/insolvent.
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NOTE: Do not confuse perfection of the contract of 1. VIGILANCE OVER GOODS

carriage with the commencement of the duty to
exercise extraordinary diligence. The contract of Presumption of Negligence
carriage may be perfected in January while the duty General Rule: The common carrier is presumed to
to exercise extraordinary diligence may only start or have been at fault or to have acted negligently when
commence in March. the goods transported are lost, destroyed or
deteriorated, or when a passenger dies or is injured.
For example: It is possible for a law student to enter This is not a conclusive but disputable presumption,
into a perfected contract with the carrier (such as and it may be overcome by contrary evidence of
buying a ticket online) in June before the Bar Exam defenses.
for a trip or voyage scheduled in December after the
Bar Exam. The duty to exercise extraordinary Exceptions (Civil Code, Art. 1734): When the same
diligence over the safety of the law student will is due to any of the following causes only:
obviously not start or begin in June but only when (a) Flood, earthquake, storm, lightning or other
the law student actually boards the ship or airplane natural disaster or calamity
in December (this is the strict view which is more
(b) Act of the public enemy in war, whether
logical and less absurd than the liberal view)
international or civil.
Doctrines (c) Act or omission of the shipper or owner of
(a) Waiting for carrier or boarding of carrier the goods
• A public vehicle, once it stops, is in effect making (d) The character of the goods or defects in the
a continuous offer to prospective passengers. packing or in the containers
Hence, it becomes the duty of the drivers and (e) Order or act of competent authority
conductors to do no act which would have the
effect of increasing the peril to a passenger while
he/she was attempting to board the vehicle. a. Flood, earthquake, storm,
(Dangwa Transportation Co., Inc. v. CA, 278 lightning or other natural
Phil. 629) disaster or calamity
• It is the duty of common carriers to stop their
conveyances at a reasonable length of time in Conditions To Avail of Defense
order to afford the passengers an opportunity to
(a) Natural disaster was the proximate & only
board and enter. Carriers become liable for cause
injuries suffered by boarding passengers (b) Exercise of diligence to prevent or minimize
resulting from the starting up or jerking of the
loss before, during and after the occurrence
vehicle while boarding. (Id.) of the natural disaster
(c) No delay (Civil Code, Art. 1740)
(b) Arrival at destination
• The duty to exercise extraordinary diligence Requisites for Caso Fortuito Which Would
terminates, when the passenger alights from the Exempt the Carrier from Liability
vehicle at the place of destination and has (a) The event must be independent of human
reasonable opportunity to leave the common will
carrier’s premises. (Aboitiz Shipping Corporation (b) The occurrence must render it impossible
v. CA, 258-A Phil. 665)
for the debtor to fulfill the obligation in a
• All persons who remain on the premises a
normal manner
reasonable time after leaving the conveyance
are deemed passengers. What constitutes as a (c) The obligor must be free of participation in,
“reasonable time” is to be determined from all the or aggravation of, the injury to the creditor,
circumstances, which includes a reasonable and
time to see after his/her baggage and prepare for (d) The event must have been impossible to
his/her departure. (Id.) foresee, or if it could be foreseen, must
• For passengers of ships, the SC has ruled that have been impossible to avoid.
a reasonable time to leave and pick up baggage
is an hour after arrival (Id.) Doctrinal Pronouncements
• Fire may not be considered a natural disaster or
calamity, unless it is caused by lightning or by
other natural disasters or calamities (Eastern
Shipping Lines v. IAC, G.R. No. 69044, 1987)
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• Heavy seas and rains are not Caso Fortuito, but d. The character of the goods or
normal occurrences that an ocean-going vessel defects in the packing or in the
would encounter (Id.) containers.
• Mechanical defects are not force majeure if the
same were discoverable by regular and
Conditions to Avail of Defense:
adequate inspections (Necesito v. Paras, G.R.
(a) Exercise of due diligence to forestall or
No. L-10605, 1958)
• A tire blow-out is not considered a fortuitous prevent loss
event, as there are human factors involved in the (b) Immediate protest by the carrier if the
situation (Yobido v. CA, G.R. No. 113003, 1997) problem with the goods or the packing or
• Hijacking is not an exempting cause under Art. containers is visible; otherwise, carrier may
1734. However, common carriers are not held be in estoppel
liable for the acts or events which cannot be
foreseen or are inevitable, provided that they This particular exempting cause only refers to cases
exercised extraordinary diligence (De Guzman when goods are lost or damaged while in transit as
v. CA, G.R. No. L-47822, 1988) a result of:
• If the common carrier negligently incurs in delay (a) Natural decay of perishable goods;
in transporting the goods, a natural disaster shall (b) Fermentation or evaporation of substances
not free such carrier from responsibility. (Civil liable therefor;
Code, Art. 1740) (c) Necessary and natural wear and tear of
• This defense cannot be availed of when the goods in transport;
carrier is negligent. (d) Defects in the packages; or
(e) Natural propensities of animals. (Belgian
b. Act of the public enemy in war,
Overseas Chartering and Shipping N.V. v.
whether international or civil.
Philippine First Insurance Co., Inc., 432
Phil. 567)
Conditions to Avail of Defense
(a) Act was the proximate & only cause
If the improper packaging is known to the carrier or
(b) Exercise of diligence to prevent or minimize his/her/its employees or the improper packaging is
loss before, during and after the act apparent under ordinary observation but
(c) No delay (Civil Code, Art. 1740) nevertheless accepts it without protest, Art. 1734,
paragraph 4 will not relieve the carrier from any
c. Act or omission of the shipper liability (Calvo v. UCPB General Insurance Co., Inc.,
or owner of the goods. 429 Phil. 244)
Conditions to Avail of Defense e. Order or act of competent

(a) If proximate cause, exempting authority.
(b) If contributory negligence, mitigating
(c) Immediate protest by the carrier; otherwise, Condition to Avail of Defense
carrier may be in estoppel Said public authority had the power to issue the
order. (Civil Code, Art. 1740)
When the private respondent did furnish the
Similar conditions
common carrier with an inaccurate weight of the
payloader, the common carrier is nonetheless liable, The order was lawful; or the order was issued under
for the damage caused to the machinery could have legal processes of authority. (Ganzon v. CA, 244
been avoided by the exercise of reasonable skill and Phil. 644)
attention on its part in overseeing the unloading of
such a heavy equipment. It was the duty of its Chief Summary Table: Art. 1734 and Defenses
Officer to determine the weight of heavy cargoes DEFENSES CONDITIONS TO AVAIL
before accepting them (Compania Maritima v. CA,
Flood, storm, Proximate and only cause;
G.R. No. 31379, 1997)
earthquake,
lightning, or other Exercise of diligence to
natural disaster or prevent or minimize loss;
calamity and
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Act of the public Inspection Duties

enemy in war, No delay General Rule: Carrier may only inquire into the
whether nature of the passenger’s baggage, but not search
nor inspect its contents
international or
civil Inquiry may be made as to the nature of passengers’
Act or omission of If owner or shipper is the baggage, but beyond this, constitutional boundaries
the shipper or proximate cause, exempting are already in danger of being transgressed (Nocum
owner of the v. Laguna Tayabas, G.R. No. L-23733, October 31,
goods If there is contributory 1969).
negligence, mitigating
Exception: While there is no law that authorizes
Immediate protest by carrier; bus operators to open the luggage of their
else: estoppel passengers, RA 6235 (Acts Inimical to Civil
Aviation) gives airline companies authority to open
The character of Exercise of due diligence to and investigate packages and cargoes loaded on
the goods or forestall or prevent loss board. Should the personnel of the airline fail to
defects in the discover explosives, it could only be due to their
packing or in the Immediate protest by carrier; failure to exercise the utmost diligence of very
containers otherwise, estoppel cautious persons.
Order or act of Said public authority had the Declaration of Passenger of Contents of a
competent public power to issue the order Package which Injured Other Passengers
The carrier is not liable. It exercised extraordinary
authority
The order or act of the diligence. It is to be presumed that a passenger will
competent public authority not take with him anything dangerous to the life and
needs to be a legal or lawful limbs of his co-passengers, not to speak of his own.
order or act. It cannot be Not to be considered lightly is the right to privacy to
illegal nor unlawful. which each passenger is entitled. (Nocum v. Laguna
(Ganzon v CA) Tayabas Bus Co., G.R. No. L-23733, 1969)
Liability for Baggage of Passengers NOTE: The Supreme Court ruled in Fortune
Distinctions between Hand-Carried Baggage and Express v. CA (G.R. No. 119756, 1999) that: “Under
Checked-In Baggage the circumstances, simple precautionary measures
HAND-CARRIED CHECK-IN to protect the safety of passengers, such as frisking
passengers and inspecting their baggages,
LEGAL NATURE OF BAGGAGE preferably with non-intrusive gadgets such as metal
For hand-carried baggage, The checked-in detectors, before allowing them on board could have
the responsibility of the baggage is been employed without violating the passenger’s
carrier will be governed by considered constitutional rights. In Gacal v. Philippine Air Lines,
the Civil Code provisions on “goods” and the Inc., a common carrier can be liable for failing to
hotelkeepers and passenger is prevent a hijacking by frisking passengers and
innkeepers. Hand-carried considered the inspecting their baggages.”
baggage are considered shipper/consignee.
items of necessary deposit. Requisites for Common Carrier’s Liability for
Common carriers shall be Hand-Carried Baggage (Necessary Deposit)
treated as depositaries. (a) Notice was given to the common carrier, or
IN CUSTODY OF to their employees, of the baggage brought
Passenger Carrier by the passengers; and
(b) Passenger took precautions which the
APPLICABLE RULE common carrier advised relative to the care
Civil Code, Arts. 1998, 2000- Civil Code, Arts. and vigilance of their baggage (Civil Code,
2003 1733-1753 Art. 1998)
DILIGENCE BY COMMON CARRIER
Diligence of a depositary Extraordinary
(ordinary diligence) diligence
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Instances When Common Carrier is Not • One who rides any part of the vehicle which is
Responsible for the Loss and Injury to unsuitable or dangerous or which he knows is
Passengers’ Hand-Carried Baggage not designed or intended for passengers
(a) Those which may proceed from any Force
Majeure (Civil Code, Art. 2000) Presumption of Negligence
(b) Loss due to the act of passenger or his If the passenger is injured or killed, there is a
agents or if the loss arises from the presumption of negligence against a carrier. (Civil
character of the things (Civil Code, Art. Code, Art. 1756)
2000); and
It is presumed that a person driving a motor vehicle
(c) Acts of thief or robber, done with the use of
has been negligent if at the time of the mishap, he
arms or through irresistible force (Civil was violating a traffic regulation, unless there is
Code, Art. 2001) proof to the contrary. (Sps. Estrada v. Philippine
Rabbit, G.R. 203902, 2017)
The relationship between the consignee and the
arrastre operator is bailor-bailee or depositor- Presumption of negligence applies so long as:
depositary. An arrastre operator does not render • A contract exists between the passenger and the
any service of a maritime nature. (Unknown Owner common carrier; and
of MV China vs. Asian Terminals, G.R. No 195661, • The injury or death took place during the
2015) existence of the contract (Sulpicio Lines, Inc. v.
Sesante, G.R. No. 172682)
Thus, an arrastre operator should adhere to the
same degree of diligence as that legally expected of Defenses Available to Common Carrier:
a warehouseman or a common carrier as set forth (a) Fortuitous event
in Warehouse Receipts Act and Article 1733 of the
(b) Extraordinary diligence
Civil Code. As custodian of the shipment discharged
from the vessel, the arrastre operator must take (c) Passenger is the proximate cause of death
good care of the same and turn it over to the party or injury
entitled to its possession. (Marina Port Service, Inc. (d) Employees could not have prevented by
v. American Home Assurance Corporation, G.R. ordinary diligence the willful act or
201822, 2015) negligence of other passengers or strangers
(which caused the death)
(e) If the contract of carriage is gratuitous and
2. SAFETY OF PASSENGERS there is no willful act or negligence on the
part of the carrier, a stipulation limiting
Passenger
liability is valid
One who travels in a public conveyance by virtue of
an express or implied contract with the common
carrier paying fare or what is equivalent thereof. a. Liability for Acts of Others
(Jesusa Vda. De Nueca v. Manila Railroad
Company, G.R. No. 31731-R, 1968) Employees
Common carriers are liable even if the employees
The following are NOT passengers may have acted beyond the scope of their authority
or in violation of the orders of the common carrier.
• One who has not yet boarded any part of a
vehicle regardless of whether or not he has a
ticket; NOTE: If the cause of action alleged by the plaintiff
passenger in the complaint is based on culpa
• One who remains on a carrier for an
contractual or breach of contract, the defendant
unreasonable length of time after he has been
carrier may not use the defense of diligence in the
afforded every safe opportunity to alight;
selection or supervision of employees. However, if
• One who has boarded by fraud, stealth, or
the cause of action alleged by the plaintiff passenger
deceit;
in the complaint is based on culpa aquiliana or
• One who attempts to board a moving vehicle, quasi-delict, the defendant carrier may use the
although he has a ticket, unless he attempt be defense of diligence in the selection or supervision
with the knowledge and consent of the carrier; of employees.
• One who has boarded a wrong vehicle, has been
properly informed of such fact, and on alighting, The driver and the owner of the vehicle, regardless
is injured by the carrier; or of relationship, are solidarily liable to the injuries
caused to a victim of an accident involving the
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vehicle owner and driven by 2 different persons. In order to prove the exercise of extraordinary
(Dela Cruz v. Octaviano, G.R. 219649, 2017) diligence, the carrier must do more than merely
showing the possibility that some other party could
Passengers be responsible for the damage. (Calvo v. UCPB
Common Carriers are liable if its employees could General Insurance, Co., Inc., 429 Phil. 244)
have prevented by ordinary diligence the willful act
or negligence of other passengers or strangers. 2. DUE DILIGENCE IN THE SELECTION
AND SUPERVISION OF
b. Liability for delays in the EMPLOYEES
commencement of voyage
The defense of the exercise of all the diligence of a
If the departure of a vessel is delayed, the good father in the selection and supervision of their
passengers have the right to: employees is appropriate only in quasi-delict or
(a) Remain on board; and culpa aquiliana. Such defense is not available in
(b) Be furnished with food for the account of the culpa contractual and therefore, a common carrier
vessel. (Code of Commerce, Art. 698) cannot raise such defense in action brought by its
passengers based on contract.
These rights will not be present if the delay is due to
an accidental cause or force majeure. (Code of The driver and the owner of the vehicle, regardless
Commerce, Art. 698) of relationship, are solidarily liable to the injuries
caused to a victim of an accident involving the
If the delay exceeds ten days, the passengers are vehicle owner and driven by 2 different persons.
entitled to: (Dela Cruz v. Octaviano, G.R. 219649, 2017)
(a) The return of the passage, should the
passengers request it; and 3. FORTUITOUS EVENT
(b) Demand indemnity for losses and damages,
if the delay is caused exclusively by the Conditions To Avail of Defense
captain or agent. (Code of Commerce, Art. (a) Natural disaster was the proximate & only
698) cause
(b) Exercise of diligence to prevent or minimize
c. Liability for defects in loss before, during and after the occurrence
equipment and facilities of the natural disaster
(c) No delay (Civil Code, Art. 1740)
The carrier will be liable for the accident if the cause
of the accident is a mechanical defect of the Requisites for Caso Fortuito Which Would
conveyance or the fault of the equipment which was Exempt the Carrier from Liability
easily discoverable if the vehicle had been (a) The event must be independent of human will
subjected to more thorough or rigid inspections. (La (b) The occurrence must render it impossible for
Mallorca v. De Jesus, 123 Phil. 857) the debtor to fulfill the obligation in a normal
manner
(c) The obligor must be free of participation in, or
C. DEFENSES AVAILABLE TO A
aggravation of, the injury to the creditor, and
COMMON CARRIER (d) The event must have been impossible to
foresee, or if it could be foreseen, must have
1. PROOF OF NEGLIGENCE
been impossible to avoid.
Common carriers are presumed to be or negligent if
the goods transported by them are lost, destroyed,
4. CONTRIBUTORY NEGLIGENCE
or deteriorated. This also applies to deaths and
injuries caused to passengers. (Civil Code, Art. General Rule: If the shipper/owner contributed to
1735 & Art. 1756) the loss, destruction, or deterioration of the goods
caused proximately by the common carrier, the
To overcome this presumption, the common carrier carrier’s liability shall be equitably reduced. (Civil
must prove that he exercised extraordinary diligence Code, Art. 1741)
in transporting the goods and/or passengers.
Exception: In collision cases (moving object strikes
another moving object) and allision cases (moving
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object strikes a stationary object). In such cases, the Rule on Moral Damages
parties are liable for their own damage. General Rule: Moral damages are not recoverable
in actions for damages predicated on a breach of
5. DOCTRINE OF LAST CLEAR contract of carriage.
CHANCE
Exceptions: Moral Damages may be awarded in a
That the person who has the last fair chance to breach of contract caused by the common carrier
avoid the impending harm and fails to do so is where:
chargeable with the consequences, without • There is death of a passenger (Civil Code, Art.
reference to the prior negligence of the other party. 1764)
(Picart v. Smith, G.R. No. L-12219, 1918) • In breach of contract of carriage, there must be
fraud, bad faith, or death (Sps. Estrada v.
The doctrine of last clear chance states that where Philippine Rabbit Bus Lines, G.R. No. 203902,
both parties are negligent but the negligent act of 2017)
one is appreciably later than that of the other, or • The carrier was guilty of fraud or bad faith even
where it is impossible to determine whose fault or if there is no death. Only injured passengers are
negligence caused the loss, the one who had the entitled to moral damages due to injuries In case
last clear opportunity to avoid the loss but failed to of death, only compulsory heirs are entitled to
do so is chargeable with the loss. (Lapanday claim moral damages. (Sulpicio Lines, Inc. v.
Agricultural and Development Corporation v. Curso, G.R. No. 157009)
Angala, G.R. No. 153076, 2007)
NOTE: Attorney’s Fees are considered as actual
The rule is that the antecedent negligence of a damages. There are two kinds of attorney’s fees –
person does not preclude recovery of damages one for the client and one for the attorney. In
caused by the supervening negligence of the latter, transportation law, what is relevant is attorney’s fees
who had the last fair chance to prevent the for the client and not for the attorney.
impending harm by the exercise of due diligence.
(PNR v. Vizcara, G.R. No. 190022, 2012) MARITIME TRANSPORTATION
I. Maritime Contracts (Bills of Lading and Charter
NOTE: Last Clear Chance Doctrine does not apply Parties)
in maritime law. Neither does the concept of
contributory negligence. (Reason: Code of Bill of Lading
Commerce provides for specific rules on allocation A written acknowledgment of the receipt of the
of liabilities – see Art. 827) goods and an agreement to transport and deliver
them at a specified place to a person named or on
his/her order. It is signed by the captain and shipper,
D. EXTENT OF LIABILITY and furnished to the consignee (Saludo v. CA, G.R.
No. 95536)
1. RECOVERABLE DAMAGES
NOTE: It is not indispensable to the creation of a
Common Carriers and Civil Code contract of carriage. The contract itself arises from
Damages can be awarded in cases of injuries the moment the goods are delivered by the shipper
suffered by or deaths of passengers in accordance to the carrier and the carrier agrees to carry them.
with the provisions of the Civil Code on Damages.
(Civil Code, Art. 1764) Contents
(a) The name, registry, and tonnage of the
Kinds of Damages vessel;
(a) Actual or Compensatory Damages (b) The name of the captain and the captain’s
(b) Moral Damages domicile;
(c) Exemplary Damages (c) The port of loading and unloading;
(d) Nominal Damages (d) The name of the shipper;
(e) Temperate Damages (e) The name of the consignee, if the bill of
(f) Liquidated Damages lading is issued to order;
(f) The quantity, quality, number of packages,
and marks of the merchandise; and
(g) The freight and the primage stipulated
(Code of Commerce, Art. 706)
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Three-Fold Character (Purposes) (Republic of the Philippines v. Lorenzo Shipping

1. It is receipt of the goods shipped; Corporation, 491 Phil. 151)
The issuance of a bill of lading carries the
presumption that the goods were delivered to the Refusal of consignee to take delivery
carrier issuing the bill and is prima facie evidence of Instances When Consignee Can Refuse to Accept
the receipt of the goods by the carrier (Saludo v. CA, the Goods
G.R. No. 95536) (a) Only a PART of the goods are delivered, and it
2. It is a contract between the parties; and cannot make use of the goods without the others
The acceptance of a paper containing the terms of (Code of Commerce, Art. 363)
a proposed contract generally constitutes an (b) If the goods are DAMAGED and thus rendered
acceptance of the contract and all of its terms and useless for the purposes of sale or consumption.
conditions of which the acceptor has actual or
In this instance, the consignee may leave the
constructive notice. (Keng Hua Paper Products, Co.,
Inc. v. CA, 349 Phil. 925) goods to the carrier and demand payment for the
3. It is a symbolic representation of the goods, goods at its current market price (Code of
i.e., it is a document of title Commerce, Art. 365)
(c) When there is DELAY on account of the fault of
In the charter of the entire vessel, the bill of lading
issued by the master to the charterer is in fact a the carrier. This is considered to be an
receipt and document of title, not a contract. (Home abandonment. In this case, the carrier shall
Insurance v. American Steamship Agencies, Inc., satisfy the total value of the goods as if the goods
131 Phil. 552) were lost or misplaced. (Code of Commerce, Art.
371)
Delivery of Goods
Common carriers are obliged to deliver the goods in Period for Filing Claims
the same condition which they were at the time of The period of filing of claims will depend on whether
their receipt, without any detriment or impairment. the damage or average can be determined from the
(Code of Commerce, Art. 363) exterior of the packaging:
This obligation will not apply if the goods suffered CAN BE Claims should be filed upon
damage or impairment: ASCERTAINED the receipt of the package;
Due to accidents; A.
Due to force majeure; or CANNOT BE Claims should be filed within
By virtue of the nature or defect of the goods ASCERTAINED twenty-four (24) hours
(Code of Commerce, Art. 363 & Code of following the receipt of the
Commerce, Art. 361) goods.
Period of delivery No claims shall be admitted against the Common

The period of delivery will depend on what is carrier with regard to the condition of the goods after
provided on the bill of lading. the lapse of these periods. (Code of Commerce, Art.
366)
NO FIXED First shipment of the same or
PERIOD similar goods which the carrier may Claims are conditions precedent to the accrual of a
make to the point of delivery. (Code right of action to recover damages. (Southern Lines,
of Commerce, Art. 358) Inc. v. CA, 114 Phil. 198)
STIPULA Within the period provided in the bill
TED of lading. (Code of Commerce, Art. Period for Filing Actions
PERIOD 370) Actions relating to the delivery of cargo or to the
indemnity for delays and damages suffered by the
goods transported prescribe after one (1) year.
Delivery without surrender of bill of lading
The surrender of the bill of the original bill of lading The prescriptive period will be counted from:
is not a condition precedent for a common carrier to (a) The day of delivery of the cargo at the place of
be discharged of its contractual obligation. its destination; or
(b) From the day on which it should be delivered
If the surrender is not possible, acknowledgment of
delivery by singing the delivery receipt suffices. according to the conditions of its transportation.
(Code of Commerce, Art. 952)
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Claim v. Suit General Categories or Kinds of Charter Party

CLAIM File a CLAIM against the carrier: DEMISE / CONTRACT OF
Upon receipt of the goods; or BAREBOAT AFFREIGHTMENT
Within 24 hours following the receipt of The charterer mans The owner of a vessel
the merchandise the vessel with its own leases the whole or
SUIT The CLAIM is a condition precedent to people, and is part of its space to haul
the filing of a SUIT. considered the owner goods for another.
pro hac vice (for this
The consignee shall file a SUIT within 1 occasion only).
year from either: Owner retains
Delivery of the goods; or Owner completely and possession, command,
Denial of the claim exclusively and navigation of the
relinquishing ship.
Effects of Stipulations possession,
a. Change of Route command, and
General Rule: Common carriers cannot change the navigation to the
agreed route to which the transportation is to be charterer.
made. (Code of Commerce, Art. 359) Charterer is liable for Shipowner is liable for
damages damages
Exception: When the carrier is obliged to change Carrier is converted to Carrier remains as
its route due to force majeure. If the transportation private carrier – common carrier –
costs increase in such an instance, the carrier shall ordinary diligence extraordinary diligence
be reimbursed for the increase. (Id.)
a. Bareboat/demise charter
NOTE: If the carrier changes its route without just Under a Bareboat/Demise Charter, the charterer
cause, the carrier shall be liable to pay damages mans the vessel with his own people and becomes,
suffered by the goods for any cause. If no route was in effect, the owner of the ship for the voyage or
agreed upon, the carrier must select the shortest, service stipulated, subject to the liability for
least expensive, and practically passable route. (Id.) damages caused by negligence. (San Miguel
Corporation v. Heirs of Inguito, 433 Phil. 428)
b. Change in the Consignment of Goods
The shipper may change the consignment of the Conversion of a Common Carrier into a Private
goods delivered to the common carrier as long as Carrier
the place of delivery is not changed. The change is A charter party may transform a common carrier into
considered a novation. The carrier shall comply with a private carrier. However, it must be a bareboat or
this change, provided that the bill of lading be demise charter where the charterer mans the vessel
returned to the carrier at the time of the making the with his own people and becomes, in effect, the
change of the consignee. (Code of Commerce, Art. owner for the voyage or service stipulated (Caltex v.
360) Sulpicio Lines, G.R. No. 131166, 1999)
All expenses arising from the change of b. Time charter

consignment shall be shouldered by the shipper. The leased vessel is leased to the charterer for a
(Code of Commerce, Art. 360) fixed period of time. (San Miguel Corporation v.
Heirs of Inguito, 433 Phil. 428)
Charter Party
It is a contract by virtue of which the owner or the c. Voyage/trip charter
agent of a vessel binds himself to transport The ship is leased for a single voyage. (San Miguel
merchandise or persons at a fixed price. (San Corporation v. Heirs of Inguito, 433 Phil. 428)
Miguel Corporation v. Heirs of Inguito, 433 Phil. 428)
II. Persons in Maritime Law (Shipowner, Ship
A Charter Party may either be: agent, Captain, Sailing Mate, Supercargo)
(a) Bareboat or demise charters; or
(b) Contracts of affreightment, which includes Persons Participating in Maritime Commerce
i. time charters and (a) Ship owner and/or ship agent – the ship agent is
ii. voyage charters (San Miguel the person entrusted with the provisioning of a
Corporation v. Heirs of Inguito, 433 vessel or who represents her in the port in which
Phil. 428) she may be found
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(b) Captain or Master — the person in charge of the (d) Expenses for repairs on the vessel before its loss
vessel and navigates it. The captain also acts as (Luzon Stevedoring v CA, G.R. No. L-58897,
the general agent of the ship owner. 1987)
(c) Other officers of the vessel (i.e. sailing mate,
second mate, third mate, marine engineer) Who Can Exercise the Right of Abandonment
(d) Supercargo — the person specially employed by General Rule: Only the ship owner and the ship
the owner of cargo to take charge of and sell to agent can make an abandonment.
the best advantage merchandise which has
Exception: In cases of co-ownership of a vessel, a
been shipped, and to purchase returning
co-owner may exempt himself from liability by the
cargoes and to receive freight abandonment of the part of the vessel belonging to
him.
Basic Functions of a Captain
A master or captain, for purposes of maritime Abandonment may be done to avoid liability in
commerce, is one who has command of a vessel. A the following cases:
captain commonly performs three (3) distinct roles: (a) For civil liability to third persons arising from the
(a) he is a general agent of the shipowner; conduct of the captain in the vigilance over the
(b) he is also commander and technical director of goods which the vessel carried;
the vessel; and (b) For the proportionate contribution of co-owners
(c) he is a representative of the country under of the vessel to a common fund for the results of
whose flag he navigates. (Inter-Orient Maritime the acts of the captain referred to in Art. 587 of
Enterprises, Inc. vs NLRC, G.R. No. 115286, the Code of Commerce; and
1994). (c) For the civil liability incurred by the ship owner in
case of collision.
Liability for acts of captain
The ship owner and ship agent shall be civilly liable Exemption of Agent
for the: The ship agent shall also be civilly liable for the
(a) Acts of the captain; and indemnities in favor of third persons which arose
(b) The obligations contracted by the captain to from the conduct of the captain in the care of the
repair, equip, and provision the vessel, provided goods. However, the agent may exempt himself
the creditor proves that the amount claimed was from this liability by abandoning the vessel with all
invested therein. (Code of Commerce, Art. 586) her equipment and the freight he may have earned
during the voyage. (Code of Commerce, Art. 587)
When Ship Owner/Ship Agent is NOT Liable
The ship owner and ship agent shall NOT be liable IV. Maritime Accidents – General Average,
for obligations contracted by the captain which Arrivals under Stress, Collisions, Shipwreck and
exceeds the powers and privileges granted to the Salvage
latter. However, the owner and agent will be again
liable if the amounts claimed were used for the Averages
benefit of the vessel. (Code of Commerce, Art. 588) 1. All extraordinary or accidental expenses which
may be incurred during the navigation for the
III. Limited Liability Rule preservation of the vessel or cargo, or both; or
General Rule: The liability of the ship owner is 2. All damage or deterioration the vessel may suffer
limited to the value of the vessel, its equipment, and from the time she puts to sea from the port of
freight. The rule is “no vessel, no liability.” (Code of departure until she casts anchor in the port of
Commerce, Art. 837) destination, and those suffered by the
merchandise from the time it is loaded in the port
Exceptions: of shipment until it is unloaded in the port of
(a) The injury or death is due either to the fault of the consignment. (Code of Commerce, Art. 806)
shipowner or to the concurring negligence of the
shipowner and captain Averages shall either be:
(b) The vessel is insured 1. Simple or Particular Average – The expenses
and damages caused to the vessel or to her
(c) Workmen’s Compensation Cases (Chua Yek
cargo which have not redounded to the benefit
Hong v. Intermediate Appellate Court, 248 Phil. of all persons interested in the vessel and her
422) cargo. (Code of Commerce, Art. 809)
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This shall be borne by the owner of the goods which (a) the lack of provisions
gave rise to the expense or suffered the damage. (b) well-founded fear of seizure, privateers or pirates
(Code of Commerce, Art. 810) (c) by reason of any accident of the sea disabling
her to navigate
2. General or Gross Average – The expenses and
damages which are deliberately caused in order The captain shall assemble the officers and shall
to save the vessel, her cargo, or both at the same call the persons interested in the cargo who may be
time, from a real known risk. (Code of present, and who may attend the meeting without
Commerce, Art. 811) the right to vote; and if, after examining the
circumstances of the case, the reasons should be
This shall be borne by all persons having an interest considered well founded
in the vessel and cargo at the time of the occurrence (a) it shall be decided to make the nearest and most
of the average. (Code of Commerce, Art. 812)
convenient port
To incur the expenses and cause of damages as (b) drafting and entering in the logbook the proper
general/gross average, there must be: minutes, which shall be signed by all.
(a) A resolution of the captain, adopted after
deliberation with the sailing mate and other The captain shall have the deciding vote and the
officers of the vessel; and persons interested in the cargo may make the
(b) A hearing with the persons interested in the objections and protests they may deem proper,
which shall be entered in the minutes in order that
cargo who may be present. (Code of
they may make use thereof in the manner they may
Commerce, Art. 813) consider advisable. (Code of Commerce, Art. 819)
Four Requisites of General Average Arrival under stress not legal

Tolentino, in his commentaries on the Code of (a) Lack of provisions should arise from the failure
Commerce, gives the following requisites for to take the necessary provisions for the voyage,
general average:
according to usage and custom, or if they should
(a) First, there must be a common danger. This
have been rendered useless or lost through bad
means, that both the ship and the cargo, after
stowage or negligence in their care.
has been loaded, are subject to the same
(b) If the risk of enemies, privateers, or pirates
danger, whether during the voyage, or in the port
should not have been well known, manifest, and
of loading or unloading; that the danger arises
based on positive and justifiable facts.
from the accidents of the sea, dispositions of the
(c) If the injury to the vessel should have been
authority, or faults of men, provided that the
caused by reason of her not being repaired,
circumstances producing the peril should be
rigged, equipped, and arranged in a convenient
ascertained and imminent or may rationally be
manner for the voyage, or by reason of some
said to be certain and imminent. This last
erroneous order of the captain.
requirement exclude measures undertaken
(d) Whenever malice, negligence, want of foresight,
against a distant peril.
or lack of skill on the part of the captain is the
(b) Second, that for the common safety part of the
reason for the act causing the damage. (Code of
vessel or of the cargo or both is sacrificed
Commerce, Art. 820)
deliberately.
(c) Third, that from the expenses or damages
Expenses
caused follows the successful saving of the
General Rule: For the account of shipowner or
vessel and cargo. agent
(d) Fourth, that the expenses or damages should Exception: Damage caused by reason of arrival
have been incurred or inflicted after taking under stress, provided the latter is legitimate
proper legal steps and authority. (A. Magsaysay, Exception to Exception: Otherwise, the shipowner
Inc. v Anastacio Agan, G.R. No. L-6393, 1955) or agent and captain shall be jointly liable. (Code of
Commerce, Art. 821)
Arrivals Under Stress
When is there arrival under stress Collisions and allisions
If the captain during the navigation should believe Collisions
that the vessel cannot continue the voyage to the The impact of two or more vessels, both of which
port of destination on account of are moving.
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Allisions (f) If a storm or force majeure forces a properly

The impact between a moving vessel against a anchored and moored vessel to collide with other
stationary object. vessels in her immediate vicinity, the damages
caused shall be considered as a
Zones of Collision and the Doctrine of Error in simple/particular average. (Code of Commerce,
Extremis:
Art. 832)
(a) First Zone – All the time up to the moment
the risk of collision begins;
Doctrine of Last Clear Chance
(b) Second Zone – All the time from the (See Discussion under C. Defenses Available to a
moment the risk of collision begins up to the Common Carrier)
moment the collision becomes a practical
certainty; and Shipwreck
(c) Third Zone – All the time when the collision It covers all types of loss/wreck of a vessel at sea
is certain up to the point of impact. (A. either by being swallowed up by the waves or by
Urrutia Co v. Baco River Plantation Co., 26 running against another vessel or thing at sea or at
Phil. 632) the coast and the vessel is rendered incapable of
navigation.
Doctrine of Error in Extremis
A sudden movement by a faultless vessel during the Liability in Shipwrecks
third zone of collision with another vessel which is at General Rule: The losses and deteriorations
fault during the second zone of collision will not suffered by a vessel and her cargo by reason of
make the faultless vessel responsible for any fault shipwreck or stranding shall be individually for the
due to the sudden movement. (A. Urrutia Co v. Baco account of the owners, the part of the wreck which
River Plantation Co., 26 Phil. 632) may be saved belonging to them in the same
proportion. (Code of Commerce, Art. 840)
Rules Governing Collisions
(a) If a vessel collides with another through the fault, Exception: If the wreck or stranding should arise
through the malice, negligence, or lack of skill of the
negligence, or lack of skill of the captain, sailing
captain, or because the vessel put to sea
mate, or any other member of the crew, the insufficiently repaired and prepared, the owner or
owner of the vessel at fault shall be liable for the the freighters may demand indemnity of the captain
suffered losses and damages after appraisal for the damages caused to the vessel or cargo by
(Code of Commerce, Art. 826) the accident. (Code of Commerce, Art. 841)
(b) If both colliding vessels are at fault, each vessel
shall be liable for its own damages. Moreover, Salvage
both vessels shall be solidarily liable to the Elements of a Valid Salvage
damages suffered by their cargoes. (Code of (a) A marine peril
Commerce, Art. 827) (b) Service voluntarily rendered when not
(c) If it cannot be determined which of the two required as an existing duty or from special
vessels are at fault, it will be considered as if both contract
vessels are at fault. Therefore, both vessels shall (c) Success, in whole or in part, or that the
be liable for their own damages but solidarily services rendered contributed to such
liable for the damages suffered by their cargoes. success (Barrios vs. Go Thong, G.R. No. L-
This is also called as the Doctrine of Inscrutable 17192, 1963)
Fault. (Code of Commerce, Art. 828)
(d) If a vessel is forced to collide with another by Contract of Towage
A contract to render service whereby a vessel pulls
reason of accident or force majeure, each vessel
or tows another from one place to another for
shall be liable for their own damage. (Code of compensation. It is not a contract of carriage or
Commerce, Art. 830) transportation. Only the owner of the towing vessel
(e) If a vessel is forced to collide with another by a can ask for compensation.
third vessel, the owner of the third vessel shall
indemnify all losses and damages caused. The Salvage v. Towage
captain of the third vessel will then be liable to SALVAGE TOWAGE
the owner of the third vessel. (Code of Crew of salvaging ship Crew of the towing ship
Commerce, Article 832) is entitled to salvage, does not have any
and can look to the
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salvaged vessel for its interest or rights with with part of the crew, in which case, the captain shall
share the remuneration appear before the nearest authority and make a
pursuant to the sworn statement of the facts.
contract. Only the
owner of the tugboat Salvage - it is the compensation allowed to persons
will receive by whose voluntary assistance a ship at sea or her
compensation in cargo or both have been saved in whole or in part
towage. from an impending peril, or such property recovered
Salvor takes Tower has no from actual peril or loss.
possession and may possessory lien; only
retain possession until an action for recovery In case of shipwreck, derelict, or recapture; a
he is paid of sum of money. service which one person renders to the owner of a
Court has power to Court has no power to ship or goods by his own labor, preserving the
reduce the amount of change amount in goods or ship which the owner or those entrusted
remuneration if towage even if with the care of them either abandoned in distress
unconscionable unconscionable at sea or are unable to protect and secure.
Maritime Protest Derelict

It is a written statement under oath, made by the It is a ship or cargo which is abandoned and
master of a vessel, after the occurrence of an deserted at sea by those who are in charge of it,
accident or disaster in which the vessel or cargo is without any hope of recovering it, or without any
lost or injured, with respect to the circumstances intention of returning to it.
attending such occurrence.
NOTE: Different liabilities may arise depending on
It is intended to show that the loss or damage the type of vessel or contract
resulted from a peril of the sea, or some other cause (a) Common Carrier – governed by the Civil Code
for which neither master nor owner was responsible, (as discussed above)
and concludes with a protest against any liability of Charter Party – governed by Code of Commerce
the owner for such loss or damage. (Maritime Commerce)
Contracts of Carriage by sea to and from the PH in
It is a condition precedent or prerequisite to recovery foreign trade – Carriage of Goods by Sea Act
of damages arising from collisions and other
maritime accidents (Code of Commerce, Art. 835) V. COGSA (Carriage of Goods by Sea Act)
Application
Made by whom: Captain
The COGSA is the applicable law for all contracts of
When made: Within 24 hours from the time the
carriage by sea to and from the Philippines in foreign
collision took place (Code of Commerce, Art. 835);
trade. (COGSA, Sec. 1 & Cua v. Wallem Philippines
Upon arrival at the place of destination, the captain
Shipping, Inc., 690 Phil. 491)
shall ratify the protest within 24 hours.
Made before whom:
However, it may also apply to domestic trade
(a) Competent authority at the point of collision
provided there is a Paramount Clause in the
or at the first port of arrival, if collision took contract.
place in the Philippines
Philippine consul, if the collision took place Paramount Clause
abroad (Code of Commerce, Art. 835) A stipulation or clause either on the bill of lading or
charter party stipulating the laws that the parties
Maritime Protest is Required In The Following agreed to be used for that particular transport.
Cases:
(a) Collision; Responsibility of the Carrier under the COGSA
(b) Arrival under stress The responsibility of the carrier begins when the
(c) Shipwreck; and goods are brought to the carrier and crosses one
(d) In case the vessel has gone through a hurricane side of the vessel (portside). It ceases only when the
or when the captain believes that the cargo has goods cross the other side (starboard side). This is
also known as the “tackle to tackle” rule.
suffered damages.
Requisites of Contracts Covered by COGSA
Maritime Protest shall also be done if the vessel (a) Contracts for the carriage of goods
having been wrecked, the captain is saved alone or
(b) By sea
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(c) To and from Philippine ports In such instances, the Civil Code rules on
(d) In foreign trade prescription shall apply.
Shipper’s Guaranty upon Delivery of the Goods Period of prescription

to Carrier for Shipment Actions must be brought within one (1) year after:
The shipper guarantees at the time of shipment the (a) Delivery of the goods; or
accuracy of the marks, number, quantity, and weight (b) The date when the goods should have been
of the goods. The shipper shall indemnify the carrier delivered. (COGSA, Sec. 3[6])
against all losses, damages and expenses arising
from errors or inaccuracies. Failure to file within the prescriptive period will
discharge the common carrier and the vessel from
The carrier shall be bound before and at the liability. (COGSA, Sec. 3[6])
beginning of the voyage, to exercise due diligence
to: However, the shipper shall not lose the right to
(a) Make the ship seaworthy initiate an action against the carrier or the vessel if
(b) Properly man, equip, and supply the ship no notice of loss or damage is given. (COGSA, Sec.
(c) Make the holds, refrigerating and cooling 3[6])
chambers, and all other parts of the ship in
which goods are carried, fit and safe for When The One-Year Period in COGSA Is
reception, carriage, and preservation. Interrupted:
(a) When an action is filed in court; (Universal
Notice of loss or damage Shipping Lines v. IAC, G.R. No. 74125,
When there is loss or damage of the goods, there 1990); and
must be a written notice that provides: (b) When there is a contrary agreement
(a) The general nature of such loss or damage between the parties. (Stevens v.
(b) Given to the carrier or his agent Norddeuscher, G.R. No. L-17730, 1962)
(c) At the port of discharge or at the time of the
removal of the goods. Limitation of liability
• Carriers and vessels shall be liable for any loss
If the loss or damage is not apparent, the notice or damage in connection with the transportation
must be given within 3 days from delivery. The of goods. However, such liability is limited to:
notice of loss or damage may be endorsed upon the • Maximum of $500 per package or, if not
receipt for the goods given by the person taking shipped in packages, per customary freight unit
delivery thereof. (e.g., metric ton).
• Carriers and vessels will be subject to greater
The notice or writing need not be given if the state liability if the nature and value of goods are
of the goods at the time of their receipt has been the declared by shipper and inserted in into the bill
subject of Joint Survey Inspection. (COGSA, Sec. of lading; declaration is prima facie evidence and
3(6)) not conclusive on carrier.
• Shipper and carrier may agree on another
Under COGSA, the filing of a notice of claim is NOT maximum amount, but not more than amount of
a condition precedent to filing a suit (UCPB v. damage actually sustained. The fixed maximum
Aboitiz Shipping G.R. No. 168433, 2009) amount must also not be less than $500 per
package/per customary freight unit. (COGSA,
“Loss” contemplates merely a situation where no Sec. 6 [5])
delivery at all was made by the shipper of the goods
because the same had perished, gone out of
commerce, or disappeared in much a way that their 2. STIPULATIONS LIMITING LIABILITY
existence is unknown, or they cannot be recovered.
It does not include a situation where: IN TRANSPORTATION OF GOODS
• There was indeed delivery — but delivery to the Stipulations for Limitations of Liability
wrong person, or a misdelivery (Ang. V. (a) Degree less than extraordinary diligence
American Steamship, G.R. No. L-22491, 1967) (b) Limitation of liability to a fixed amount
• Damage arising from delay or late delivery
(Mitsui O.S.K. Lines v. CA, G.R. No. 119571, (a) Degree less than extraordinary Diligence
1998). The Common carrier and the shipper/owner can
stipulate in limiting the carrier’s liability for the loss,
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destruction, or deterioration of the goods to be A Stipulation in a Contract of Transportation of

transported to a degree less than extraordinary Goods Limiting Liability is Void if:
diligence. This stipulation is valid if it is: (a) Unreasonable
1. In writing, signed by the shipper or owner; (b) Unjust
2. Supported by a valuable consideration other (c) Contrary to public policy
than the service rendered by the carrier; and
3. Reasonable, just, and not contrary to public Liability in the Absence of a Rejection Clause in
policy (Civil Code, Art. 1744) a Contract of Carriage of Goods
In the absence of a “rejection clause” in a contract
Other Stipulations Limiting Liability of Common of carriage of goods, Articles 361, 362, 364, 365 of
Carrier the Code of Commerce become applicable. The
A stipulation limiting the common carrier’s liability: aforementioned provisions, in summary, state that if
(a) May be annulled by the shipper/owner if the the goods are delivered but arrived at the
carrier refused to carry the goods, unless destination in damaged condition, the remedies to
the shipper/owner agreed to such be pursued by the consignee depend on the extent
stipulation (Civil Code, Art. 1746) of damage on the goods. (Loadstar Shipping
(b) Cannot be availed of if the common carrier, Company, Incorporated v. Malayan Insurance
without just cause, delays the transportation Company, Incorporated, G.R. No. 185565, 2014)
of the goods, or changes the stipulated or
usual route in cases of loss, destruction, or (b) Limitation of liability to a fixed amount
deterioration of the goods. (Civil Code, Art. A contract can fix the sum that may be recovered by
1747) the shipper/owner in case of loss, destruction, or
deterioration of the goods. It must be:
(c) For delay on account of strikes or riots is
(a) Reasonable and just under the
valid. (Civil Code, Art. 1748)
circumstances; and
(d) To the value of the goods appearing in the
(b) Fairly and freely agreed upon. (Civil Code,
bill of lading is valid, unless the
Art. 1750)
shipper/owner declares a greater value.
(Civil Code, Art. 1749) Limitation of liability in absence of declaration
of greater value
Determination if stipulation is within public General Rule: A stipulation limiting the carrier’s
policy liability to the value of the goods appearing in the bill
The fact that the common carrier has no competitor of lading is valid.
along the line or route, or a part thereof, to which the Exception: A passenger who declares a greater or
contract refers shall be taken into consideration on higher value must also pay additional freight. (Civil
the question of whether a stipulation limiting the Code, Art. 1749)
common carrier's liability is reasonable, just, and in
consonance with public policy. (Civil Code, Art. Multi-Carriers
1751) When there are several carriers who successively
transport goods, or there is a single “through bill of
NOTE: Presumption of negligence against the lading” issued by one carrier and honored by other
carrier in cases of loss, destruction, or deterioration carriers, the following are the rules:
of the goods is still present despite stipulations (a) Last carrier assumes the obligation of the
limiting liability. (Civil Code, Art. 1752.) previous carriers. But last carrier, if not
directly responsible, may proceed against
Factors to be considered when refusing previous carriers.
stipulations limiting liability
(b) Shipper/consignee has cause of action
(a) Refusal to carry goods, UNLESS stipulation
against carrier who executed the contract or
limiting liability is signed by shipper (Civil
other carriers who received goods without
Code, Art. 1746)
reservation.
(b) Delay or deviation, without just cause (Civil
(c) Carriers who made a reservation may still
Code, Art. 1747)
be liable for their own acts.
(c) Lack or presence of competition (Civil Code,
Art. 1751)
NOTE: Carriers with reservations are NOT relieved
of responsibilities for their own acts
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Prohibited Stipulations in a Contract of 3. LIMITATIONS UNDER MONTREAL

Carriage CONVENTION
(a) That the goods are transported at the risk of
the Owner or shipper; Convention for the Unification of Certain Rules for
(b) That the common carrier will not be Liable International Carriage by Air - Montreal, 28 May
for any loss, destruction, or deterioration of 1999
the goods;
(c) That the common carrier need not observe Application
any Diligence in the custody of the goods; It applies to all international carriage of persons,
(d) That the common carrier shall exercise a baggage or cargo performed by aircraft for reward.
It applies equally to gratuitous carriage by aircraft
degree of diligence less than that of a good
performed by an air transport undertaking. (Article 1
Father of a family, or of a man of ordinary par. 1)
prudence in the vigilance over the movables
transported; International Carriage (Article 1 par 2)
(e) That the common carrier shall not be COVERED NOT COVERED
responsible for the acts or omission of his or Any carriage in which, Carriage between
its Employees; according to the agreement two points within
(f) That the common carrier's liability for acts between the parties, the the territory of a
committed by Thieves, or of robbers who do place of departure and the single State Party
not act with grave or irresistible threat, place of destination, without an agreed
violence or force, is dispensed with or whether or not there be a stopping place
break in the carriage or a within the territory
diminished;
transshipment, are situated of another State
(g) That the common carrier is not responsible either within the territories (Article 1 par 2)
for the loss, destruction, or deterioration of of two States Parties, or
goods on account of the defective condition within the territory of a
of the car, vehicle, ship, airplane, or other single State Party if there is
equipment used in the contract of carriage. an agreed stopping place
within the territory of
IN TRANSPORTATION OF PASSENGERS another State, even if that
Void Stipulations State is not a State Party.
General Rule: The responsibility of a common
carrier cannot be dispensed with or lessened by
stipulation, by posting of notices, or by statements Successive Carriage
on tickets. A reduced fare cannot justify limited Carriage to be performed by several successive
liability. carriers is deemed, for the purposes of this
Convention, to be one undivided carriage if it has
Exception: If the carriage is gratuitous or for free, been regarded by the parties as a single operation,
a stipulation limiting liability is valid. whether it had been agreed upon under the form of
Exception to the Exception: The stipulation does a single contract or of a series of contracts, and it
not cover willful acts or gross negligence of the does not lose its international character merely
carrier. (Civil Code, Arts. 1757-1759) because one contract or a series of contracts is to
be performed entirely within the territory of the same
Reason: Waiver of future fraud or gross State. (Article 1, par 3)
negligence is invalid (Civil Code, Art. 1172)
Actions of Passenger Against Carrier in
NOTE: Moral damages may be recovered in an Transportation of: (Article 36)
action for breach of contract of transportation when GOODS PASSENGER
death results. Even if the passenger does not die, 1. Passenger or General Rule:
the passenger can recover moral damages if the consignor will have The passenger or any
carrier is guilty of fraud or bad faith. However, only a right of action person entitled to
the passenger is entitled to moral damages not against the first compensation in
anyone else. carrier respect of him or her
2. The passenger or can take action only
consignee who is against the carrier
entitled to delivery which performed the
will have a right of carriage during which
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action against the the accident or the resulted from its fault or that of its servants or
last carrier delay occurred agents.
3. Further, each may Exception: (d) If the carrier admits the loss of the checked
take action against By express agreement, baggage, or if the checked baggage has not
the carrier which the first carrier has arrived at the expiration of twenty-one days after
performed the assumed liability for
the date on which it ought to have arrived, the
carriage during the whole journey.
passenger is entitled to enforce against the
which the
destruction, loss, carrier the rights which flow from the contract of
damage or delay carriage.
took place.
These carriers will be Damage to Cargo (Article 18)
jointly and severally General Rule: The carrier is liable for damage
liable to the passenger sustained in the event of the destruction or loss of,
or to the consignor or or damage to, cargo upon condition only that the
consignee. event which caused the damage so sustained took
place during the carriage by air.
Combined Carriage
In the case of combined carriage performed partly Exception: Not liable if and to the extent it proves
by air and partly by any other mode of carriage, the that the destruction, or loss of, or damage to, the
provisions of this Convention shall, subject to cargo resulted from one or more of the following:
paragraph 4 of Article 18, apply only to the carriage (a) inherent defect, quality or vice of that cargo;
by air, provided that the carriage by air falls within (b) defective packing of that cargo performed
the terms of Article 1. (Article 38) by a person other than the carrier or its
servants or agents;
Prima facie evidence (c) an act of war or an armed conflict;
The air waybill or the cargo receipt is prima facie (d) an act of public authority carried out in
evidence of the conclusion of the contract, of the connection with the entry, exit or transit of
acceptance of the cargo and of the conditions of
the cargo.
carriage mentioned therein. (Article 11, par 1)
Carriage by air
Damage to Baggage (Article 17) Period during which the cargo is in the charge of the
Baggage carrier.
Baggage means both checked baggage and
unchecked baggage. (Article 17, par 4) NOTE: The period of the carriage by air does not
extend to any carriage by land, by sea or by inland
Liabilities of carrier: waterway performed outside an airport. If, however,
(a) Liable for damage sustained in case of death or such carriage takes place in the performance of a
bodily injury of a passenger upon condition only contract for carriage by air, for the purpose of
that the accident which caused the death or loading, delivery or transshipment, any damage is
presumed, subject to proof to the contrary, to have
injury took place on board the aircraft or in the
been the result of an event which took place during
course of any of the operations of embarking or the carriage by air. If a carrier, without the consent
disembarking. of the consignor, substitutes carriage by another
(b) Liable for damage sustained in case of mode of transport for the whole or part of a carriage
destruction or loss of, or of damage to, checked intended by the agreement between the parties to
baggage upon condition only that the event be carriage by air, such carriage by another mode
which caused the destruction, loss or damage of transport is deemed to be within the period of
took place on board the aircraft or during any carriage by air.
period within which the checked baggage was in
the charge of the carrier. However, the carrier is Delay (Article 19)
General Rule: The carrier is liable for damage
not liable if and to the extent that the damage
occasioned by delay in the carriage by air of
resulted from the inherent defect, quality, or vice passengers, baggage, or cargo.
of the baggage. Exception: If it proves that it and its servants and
(c) In the case of unchecked baggage, including agents took all measures that could reasonably be
personal items, the carrier is liable if the damage required to avoid the damage or that it was
impossible for it or them to take such measures.
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Defenses Available to Carrier (Article 20) Exception: The passenger has made, at the time
If the carrier proves the following, the carrier shall be when the checked baggage was handed over to the
wholly or partly exonerated from its liability to the carrier, a special declaration of interest in delivery at
extent of damage contributed: destination and has paid a supplementary sum if the
If the carrier proves that the damage was caused or case so requires. In that case the carrier will be
contributed to by the negligence or other wrongful liable to pay a sum not exceeding the declared sum,
act or omission of the person claiming unless it proves that the sum is greater than the
compensation, or the person from whom he or she passenger’s actual interest in delivery at destination.
derives his or her rights
When by reason of death or injury of a passenger (c) In the carriage of cargo, the liability of the
compensation is claimed by a person other than the carrier in the case of destruction, loss,
passenger damage or delay
Advance Payments (Article 28) General Rule: Limited to a sum of 17 Special

In the case of aircraft accidents resulting in death or Drawing Rights per kilogram
injury of passengers, the carrier shall, if required by Exception: The consignor has made, at the time
its national law, make advance payments without when the package was handed over to the carrier, a
delay to a natural person or persons who are entitled special declaration of interest in delivery at
to claim compensation in order to meet the destination and has paid a supplementary sum if the
immediate economic needs of such persons. case so requires.
In that case the carrier will be liable to pay a sum not
Such advance payments shall not constitute a exceeding the declared sum, unless it proves that
recognition of liability and may be offset against any the sum is greater than the consignor’s actual
amounts subsequently paid as damages by the interest in delivery at destination.
carrier.
Weight of Package in case of destruction, loss,
Limitations and Extent of Compensation damage or delay of a part of the cargo, or of an
Compensation in Case of Death or Injury of object contained therein
Passengers (Article 21) The weight to be taken into consideration in
(a) Damages not exceeding 100 000 Special determining the amount to which the carrier’s liability
Drawing Rights - the carrier shall not be able is limited shall be only the total weight of the
to exclude or limit its liability. package or packages concerned. If the destruction,
(b) Damages exceeding 100 000 Special etc. affects the value of other packages covered by
Drawing Rights – the carrier is liable unless the same air waybill, or the same receipt or, if they
the carrier proves that: were not issued, by the same record preserved by
1. Such damage was not due to the the other means referred to in paragraph 2 of Article
4, the total weight of such package or packages
negligence or other wrongful act or
shall also be taken into consideration in determining
omission of the carrier or its servants or the limit of liability.
agents; or
2. Such damage was solely due to the Exemption from liability
negligence or other wrongful act or No liability for damage caused by delay or damage
omission of a third party. in the carriage of baggage (1st and 2nd type of
liability) if it is proven:
Limits of Liability in Relation to Delay, Baggage Damage resulted from an act or omission of the
and Cargo (Article 22) carrier, its servants, or agents, done with intent to
cause damage or recklessly and with knowledge
(a) Damage caused by delay that damage would probably result; provided that, in
the case of such act or omission of a servant or
Liability of the carrier for each passenger is limited agent, it is also proved that such servant or agent
to 4 150 Special Drawing Rights was acting within the scope of its employment.
(b) In the carriage of baggage, in case of Additional compensation (Article 22, par 6)
destruction, loss, damage or delay The limits prescribed in Articles 21 and 22 shall not
prevent the court from awarding, in accordance with
General Rule: Liability is limited to limited to 1 000 its own law, in addition, the whole or part of the court
Special Drawing Rights for each passenger costs and of the other expenses of the litigation
incurred by the plaintiff, including interest.
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The foregoing provision shall not apply if the amount

of the damages awarded, excluding court costs and At the latest, within seven days
other expenses of the litigation, does not exceed the from the date of receipt in the
sum which the carrier has offered in writing to the case of checked baggage and
plaintiff within a period of six months from the date fourteen days from the date of
of the occurrence causing the damage, or before the receipt in the case of cargo
commencement of the action, if that is later. DELAY Complaint must be made at the
latest within twenty-one days
Valid Stipulation (Article 25) from the date on which the
A carrier may stipulate that the contract of carriage baggage or cargo have been
shall be subject to higher limits of liability than those placed at his or her disposal.
provided for in this Convention or to no limits of
liability whatsoever. Effect of Non-compliance
General Rule: If no complaint is made within the
Void Stipulation (Article 26) times aforesaid, no action shall lie against the carrier
Any provision tending to relieve the carrier of liability Exception: Fraud
or to fix a lower limit than that which is laid down in
this Convention shall be null and void Right to Damages
NOTE: It does not result to the nullity of the whole It shall be extinguished if an action is not brought
contract within a period of two years, reckoned from:
(a) the date of arrival at the destination, or
Aggregation of Claims (Article 30) (b) from the date on which the aircraft ought to
Available conditions and limits of liability have arrived, or
If an action is brought against a servant or agent of (c) from the date on which the carriage
the carrier arising out of damage to which the stopped.
Convention relates, such servant or agent, if they
prove that they acted within the scope of their The method of calculating that period shall be
employment, shall be entitled to avail themselves of determined by the law of the court seised of the
the conditions and limits of liability which the carrier case. Lex Fori (or the law of the forum).
itself is entitled to invoke under this Convention.
ADDITIONAL TOPICS
Aggregate Amount
The aggregate of the amounts recoverable from the Registered Owner Rule for Common Carriers
carrier, its servants and agents, in that case, shall General rule: The registered owner is liable directly
not exceed the said limits. and primarily to the general public or to third persons
and not the actual owner or driver of the vehicle.
NOTE: Save in respect of the carriage of cargo, Reason: For easy identification.
availability of limits and limits on aggregate amount Recourse: The registered owner may seek
shall not apply if it is proved that the damage reimbursement from the actual owner or driver of the
resulted from an act or omission of the servant or vehicle (the real party at fault) by filing a cross-claim
agent done with intent to cause damage or or third-party complaint in the same case. (BA
recklessly and with knowledge that damage would Finance v. CA, G.R. No. 98275, 1992)
probably result.
Exception: In case of a stolen vehicle, the
Prescription registered owner may not be held liable. The
Timely Notice of Complaints (Article 31) Supreme Court has ruled that to rule otherwise
Every complaint must be made in writing and given would be absurd (Duavit v CA, G.R. No. 82318,
or dispatched within the times aforesaid. 1989)
RECEIPT Prima facie evidence that the Registered Owner Rule Still Applies Even in
WITHOUT same has been delivered in good Sales / Leases
COMPLAINT condition and in accordance with The Registered Owner is not allowed to escape
the document of carriage or with responsibility by proving that a 3rd person is the
the record preserved actual and real owner (Villanueva v. Domingo, G.R.
No. 144274, 2004)
DAMAGE Complain to the carrier forthwith
after the discovery of the
damage
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The registered owner rule applies even if the

registered owner leased the vehicle to another who
is the actual operator.
Defense: The lessor-owner should register the

lease contract with the LTO in order for the lessor-
owner to be free from liability (PCI Leasing and
Finance v. UCPB General Insurance, G.R. No.
162267, 2008)
Kabit System
Kabit system is an arrangement whereby a person
who has been granted a certificate of public
convenience allows other persons who own motor
vehicles to operate under his license sometimes for
a fee or percentage of the earnings.
• This is contrary to public policy and therefore
void and inexistent under Art. 1409 of the Civil
Code. This arrangement is a circumvention of
the requirement for license.
• Registered owner and buyer who enter into said
transaction are in pari delicto. Therefore, the
courts will not help either of them. (Clean hands
doctrine)
Apportioning Of Liability
While the Court ruled in previous cases that the
registered owner or operator of a passenger vehicle
is jointly and severally liable with the driver of the
said vehicle for damages incurred by passengers or
third persons as a consequence of injuries or death
sustained in the operation of the said vehicle, in no
case is the actual owner of the passenger vehicle
exempted from liability. In fact, the registered owner
or operator has the right to be indemnified by the
real or actual owner of the amount that he may be
required to pay as damage for the injury caused.
(R Transport vs. Luisito Yu, G.R. No 174161, 2015)
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E. SUMMARY OF CLAIMS UNDER

SPECIAL LAWS
CODE OF COMMERCE COGSA WARSAW / MONTREAL
(Carriage of Goods by Sea
Act)
WHEN APPLICABLE Philippines to Philippines – International to PH (sea) International to PH (air)
overland and coastwise
(sea)
CONDITION Yes No Yes
PRECEDENT TO FILE
A JUDICIAL CLAIM
WHEN TO FILE Apparent Apparent (Montreal updated)
NOTICE IF Immediately Immediately at the port of Date of receipt for checked
APPARENT/HIDDEN discharge before or at the time baggage – 7 days (damage)
DEFECT of removal
Date of receipt of cargo – 14
days (damage)
Hidden Hidden
GR: 24h from receipt 3 days from delivery Date on which the baggage or
XPN: If parties agree to a cargo have been placed at his
shorter period disposal – 21 days (delay)
NOTE: In case of fraud of air

carrier, period shall not apply
(Montreal Art. 31 (4))
WHEN TO FILE A Written – 10 years 1 year after delivery of goods 2 years from the date of
JUDICIAL ACTION arrival at the place of
Oral – 6 years OR destination
date when the goods should OR

have been delivered
from date on which the aircraft
(1-year period is extendible by ought to have arrived
agreement)*
OR
Suspends the prescriptive
period but does not renew: from the date on which the
• Judicial action transportation stopped
• Written extra judicial
demand NOTE: If cause of action
• Written based on tort or quasi-delict –
acknowledgment of 4 years
debt
NOTE: If plaintiff was
NOTE: Mis-delivery and delay forestalled from filing an
not contemplated under action because of airline’s
COGSA. 10 years to file under delaying tactics – 2-year
written contract. period DOES NOT APPLY
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III. CORPORATION LAW (PROVISIONS OF e. Classes of shares of stock

2. Certificate of stock
B.P. BLG 68, AS AMENDED BY R.A. NO.
a. Nature of the certificate
11232) b. Uncertified shares
c. Negotiability; Requirements for valid
TOPIC OUTLINE UNDER THE SYLLABUS transfer of stocks
d. Issuance
A. GENERAL PRINCIPLES e. Lost or destroyed certificates
1. Nationality of Corporations 3. Disposition and encumberance of shares
a. Control Test a. Sales of shares
b. Grandfather Rule b. Allowable restrictions on the sale of
2. Doctrine of Separate Juridical Personality shares
3. Doctrine of Piercing the Corporate Veil c. Requisites of a valid transfer
d. Involuntary dealings
B. DE FACTO CORPORATION VERSUS
CORPORATIONS BY ESTOPPEL G. DISSOLUTION AND LIQUIDATION
1. Modes of dissolution
C. CORPORATE POWERS a. Voluntary and involuntary dissolution
1. How powers are exercised 2. Methods of liquidation
a. Ultra vires doctrine
b. Trust fund doctrine H. OTHER CORPORATIONS
1. Close corporations
D. BOARD OF DIRECTORS AND TRUSTEES 2. Non-stock corporations
1. Basic principles 3. Foreign corporations
a. Doctrine of centralized management a. What constitutes “doing business”
b. Business judgment rule b. Necessity of a license to do business
2. Tenure and qualifications of directors or c. Requisites for issuance of a license
trustees d. Resident agent
3. Election and removal of directors or trustees e. Personality to sue and suability
4. Duties, responsibilities and liabilities for 4. One-person corporations
unlawful acts
I. MERGERS AND CONSOLIDATIONS
E. STOCKHOLDERS AND MEMBERS 1. Concept
1. Rights and obligations of stockholders 2. Effect and limitations
a. Doctrine of equality of shares
2. Participation in management
a. Proxy
b. Voting trust
c. Case when stockholders’ action is
required
(1) By a majority vote
(2) By a two-thirds vote
(3) By cumulative voting
3. Propriety rights
a. Right to dividends
b. Right to inspect
c. Pre-emptive right
d. Right of first refusal
4. Remedial rights
5. Intra-corporate disputes (individual vs.
representative vs. derivative suits)
F. CAPITAL STRUCTURE
1. Shares of stock
a. Nature of shares of stock
b. Consideration for shares of stock
c. Watered stock
d. Situs of the shares of stock
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A. GENERAL PRINCIPLES Freely transferable Cannot be

without the consent of transferred without
DEFINITION OF A CORPORATION other stockholders the consent of the
A corporation is an artificial being created by (unless there is a other partners
operation of law, having the right of succession and stipulation to the
the powers, attributes and properties expressly contrary)
authorized by law or incident to its existence. (RCC,1 SUCCESSION
Sec. 2) Existence continues Death of a partner
even as persons who ends the partnership
ATTRIBUTES OF A CORPORATION (Sec. 2) compose it change
1. Artificial being
2. Created by operation of law CAN CORPORATIONS BE PARTNERS IN A
3. Has right of succession – A corporation PARTNERSHIP?
has the capacity for continuous existence Corporations have the power to enter into a
despite changes in stockholders/members partnership, joint venture, merger, consolidation, or
4. Has only the powers, attributes, and any other commercial agreement with natural and
juridical persons. (Sec. 35(h))
properties authorized by law or incident to
its existence
CAN A DEFECTIVE CORPORATION RESULT
INTO A PARTNERSHIP?
CORPORATE FICTION
There are two views:
A corporation has a personality separate and distinct
from the persons composing it. (Civil Code, Arts. 44-
47; PNB v. Andrada Electric & Engineering Co., G.R. First View: No Partnership
No. 142936, 2002). When investors intended only to invest in a corporate
venture with no intention of participating in its
DISTINGUISH A CORPORATION FROM A corporate affairs, and the corporation was not
PARTNERSHIP formed, no partnership relation is established by the
failure to incorporate, such investors cannot even be
CORPORATION PARTNERSHIP
held liable for the contracts and transactions sued
MANNER OF CREATION
upon. (Pioneer Insurance v. CA, G.R. No. 84197,
Commences only from By mere agreement 1989)
the issuance of a
Certificate of
Second View: Partnership Exists
Incorporation by the
However, when there was a clear intention to form a
SEC, or, in proper
partnership venture through a corporate vehicle
cases, passage of a
(there was intention to be active participants in the
special law
corporation’s business), even those who did not
NUMBER OF ORGANIZERS directly participate in the contract or transaction being
Any person/s but not At least 2 sued upon, but benefitted therefrom may be held
more than fifteen (15).2 liable as general partners. (Lim Tong Lim v.
POWERS Philippine Fishing Gear, G.R. No. 136448, 1999)
Restricted due to limited Subject to the
powers agreement of CLASSES OF CORPORATIONS
partners
In Relation To The State
AUTHORITY OF THOSE WHO COMPOSE IT
a. Private corporations – Formed by private persons
Stockholders are not Mutual agency
alone, by or with the State pursuant to a special
agents of the between partners
charter or through a general enabling act such as the
corporation in the
Corporation Code.
absence of express
authority
b. Public corporations - Formed or organized for the
TRANSFERS OF INTEREST
government of a portion of the state (e.g., barangay,
municipality, city and province) Created for political
1 2
For purposes of this part of the reviewer, unless otherwise NOTE: There is no 5 person minimum anymore for the
specified, all references refer to the Revised Corporation number of organizers (i.e., incorporators) of a Corporation
Code, Republic Act no. 11232. (hereinafter RCC) under the RCC. (see discussion at page 15, Subheading 5.A)
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purposes connected with the public good in the Philippines directly or through its instrumentalities
administration of the civil government either wholly or, where applicable as in the case of
stock corporations, to the extent of at least a majority
PUBLIC PRIVATE of its outstanding capital stock
CORPORATION CORPORATION (R.A. No. 10149)
Government holds the Government may hold
controlling interest the controlling interest NOTE:
• A GOCC when organized under the
Created by its charter Created under the Corporation Code is still a private
Corporation Code corporation. But being a GOCC makes it
subject to laws and provisions applicable to
However, GOCCs the Government or its entities and subject to
may also be created the control of the Government (Cervantes v.
by special charter Auditor General, G.R. No. L-4043, 1952).
Created for a public Generally created for • The GOCC Governance Act (R.A. 10149),
purpose profit generation which governs compensation and position
classification systems within the GOCC
Exists primarily for the
Sector, does not distinguish between
government of a
chartered and non-chartered GOCCs, and
portion of the state
its provisions apply equally to both. (GSIS
Subject to control and
Family Bank Employees Union v.
supervision by the
Villanueva, G.R. No. 210773, 2019).
State or its agency
• In order to qualify as a GOCC, one must be
organized either as a stock or non-stock
NOTE:
corporation. Section 31 defines a stock
• Ownership of the government of the majority corporation as one whose “capital stock is
of the shares of a corporation does not by divided into shares and ... authorized to
itself constitute such an entity as a public distribute to the holders of such shares
corporation. (National Coal Co., v. Collector dividends.” Although BCDA has an
of Internal Revenue, G.R. No. L-22619, authorized capital of P100 Billion, however,
1994). it is not divided into shares of stock; it has no
• When the law vests corporate powers in a voting shares; and has no provision which
government instrumentality, it does not authorizes the distribution of dividends and
necessarily become a corporation; a GOCC allotment of surplus and profits to BCDA’s
must be organized as a stock or non-stock stockholders. It cannot qualify also as a non-
corporation. (MIAA v. CA, G.R. No. 155650, stock corporation because its primary
2006) purpose do not fall within the purposes
• Test to determine whether a corporation is enumerated under Section 88. (BCDA v.
public or private: If the corporation is created CIR, G.R. No. 205925, 20 June 2018)
by the State as the latter’s own agency or • However, there is now formal administrative
instrumentality to help it in carrying out its and statutory recognition of “government
governmental functions, then that instrumentalities with corporate
corporation is considered public; otherwise it powers/government corporate entities,”
is private. (Philippine Society for the which may not fall within the definition of
Prevention of Cruelty to Animals v. COA, stock and non-stock corporations, but are
G.R. No. 169752, 2007) government instrumentalities that are vested
with corporate powers. (LRTA v. Quezon
c. Quasi-public corporation - A species of private City, G.R. No. 221626, 2019)
corporations created by special law and required to • Under the Constitution, the COA has audit
render public service or supply public wants; Usually jurisdiction over both GOCCs with original
covers school districts, water districts and the like. charters (subject to COA pre-audit) and
those without original charters (those
d. Government owned and controlled corporations organized under the Corporation Code—
(GOCCs) - Created under a special law or charter, or subject to post-audit). (Alejandrino v. COA,
any agency organized as a stock or non-stock G.R. No. 245400, 2019)
corporation, vested with functions relating to public
needs whether governmental or proprietary in nature,
and owned by the Government of the Republic of the
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As to Place of Incorporation b. Corporation sole – Formed by one person who

a. Domestic – one incorporated under laws of the may be the chief archbishop, bishop, minister, rabbi,
Philippines or other presiding elder of any religious
denomination, sect or church. (Sec. 108)
b. Foreign – one formed, organized or existing under Purpose: created to administer and manage the
any laws other than those of the Philippines, and affairs, properties, temporalities of the church to
whose laws allow Filipino citizens and corporations which the holder of the office belongs and also to
to do business in its own country. (Sec. 140) transmit the same to his successor in office.
As To Existence of Stocks c. Close Corporation- a corporation where:

a. Stock corporation - Stock corporations are those stockholders of record shall not exceed twenty (20);
which have capital stock divided into shares and are all the issued stock shall be subject to one or more
authorized to distribute to the holders of such shares, specified restrictions on transfer permitted by this
dividends, or allotments of the surplus profits on the Title; and the corporation shall not list in any stock
basis of the shares held. (Sec. 3) exchange or make any public offering of its stocks of
any class.
b. Nonstock corporation (Secs. 86-87) - A corporation
where no part of its income is distributable as Notwithstanding, a corporation shall not be deemed
dividends to members, trustees or officers. Any profit a close corporation when at least 2/3 of its voting
obtained as an incident to its operations shall, stock is owned or controlled by another corporation
whenever necessary or proper, be used for the which is not a close corporation within the meaning
furtherance of the purpose for which the corporation of this Code. (Sec. 95)
was organized.
d. One Person Corporation- a corporation with a
As To Control single stockholder. Only a natural person, trust, or an
a. Holding company – one that controls another as a estate may form a One Person Corporation. Banks
subsidiary or affiliate by the power to elect its and quasi-banks, pre-need, trust, insurance, public
management; one which holds shares in other and publicly-listed companies, and non-chartered
companies for purposes of control rather than for government-owned and -controlled corporations may
mere investment. (SEC Opinion No. 15-15) not incorporate as One Person Corporations. A
natural person who is licensed to exercise a
b. Affiliate company – one that is subject to common profession may not organize as a One Person
control of a parent or holding company and operated Corporation for the purpose of exercising such
as part of a system. (SEC Opinion No. 15-15) profession except as otherwise provided under
special laws.
c. Parent and subsidiary companies – when a
corporation has a controlling financial interest in one 1. NATIONALITY OF CORPORATIONS
or more corporations, the one having control is
known as the “parent company” and the controlled Serves as a legal basis for subjecting the enterprise
corporations are known as the “subsidiary or its activities to the laws, the economic and fiscal
companies”. powers, and various social and financial policies of
the state to which it is supposed to belong.
As To Purpose of Incorporation
a. Municipal corporation Tests to determine the nationality of
b. Religious corporation corporations:
c. Educational corporation 1. Place of Incorporation
d. Charitable, Scientific or Vocational corporation 2. Control Test
e. Business corporation 3. Grandfather Rule3
4. War-time – in times of war, nationality of
As To Number of Members corporation is determined by the character or
a. Aggregate - a corporation which consists of many citizenship of its controlling stockholders
persons united to form a body politic and corporate
5. Investment Test
(IEMELIF v. Lazaro, G.R. No. 184088, 2010).
6. Place of Principal Business
3
Emphasis on no. 2 & 3 for they are expressly indicated in the
bar syllabus.
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In order to determine the nationality of a corporation, Mere legal title is not enough. Full beneficial
the following steps should apply: ownership of 60 percent of the outstanding capital
stocks, coupled with 60 percent of the voting rights,
1st Step: The nationality of a corporation is is constitutionally required for the State's grant of
determined by the country under whose laws it is authority to operate a public utility. Thus, voting rights
incorporated (Place of Incorporation Test). of stocks which have been assigned or transferred to
aliens cannot be considered held by Philippine
2nd Step: If the corporation is applying for a (2nd) citizens or nationals (cannot give proxies to vote).
franchise for public utility and etc. which requires a (Roy III v. Herbosa, et al., G.R. No. 207246, 2016)
certain percentage of control of stock, the Test of
Controlling Ownership (i.e., the Control Test) would The definition of “beneficial owner or beneficial
be applied. ownership in the SRC-IRR, which is in consonance
with the concept of “full beneficial ownership” in the
3rd step: If there is doubt as to the domestic control FIA-IRR, is relevant in resolving only the question of
of the percentage of stock in a corporation with who is the beneficial owner or has beneficial
corporate stockholders, Grandfather test would be ownership of each “specific stock” of the public utility
applied (Narra Nickel Mining and Development Corp. whose stocks are under review. If the Filipino has the
v. Redmont Consolidated Mines Corp., G.R. No. voting power of the “specific stock”, i.e., he can vote
195580, 2014) the stock or direct another to vote for him, or the
Filipino has the investment power over the “specific
a. Control Test stock”, i.e., he can dispose of that “specific stock” or
direct another to vote or dispose it for him, then such
In cases involving properties, business or industries Filipino is the “beneficial owner” of that “specific
reserved for Filipinos, in addition to the place of stock.” Being considered Filipino, that “specific stock”
incorporation test, the nationality of a corporation is is then to be counted as part of the 60% Filipino
determined by the nationality of the “controlling ownership requirement under the Constitution. The
stockholders”. right to the dividends, jus fruendi—a right emanating
from ownership of that “specific stock” necessary
Absent any doubt, the Control Test shall be used in accrues to its Filipino “beneficial owner.” (Roy III v.
determining the nationality of a corporation specially Herbosa, G.R. No. 207246 (Resolution), 18 April
in cases where foreign ownership restrictions apply. 2017.)
(SEC OGC Opinion No. 16-19)
General Rule: The Control Test requires compliance
[T]here are two cases in determining the nationality with the Place of Incorporation Test.
of the Investee Corporation. The first case is the
‘liberal rule’, later coined by the SEC as the Control Exception: A corporation organized abroad and
Test in its 30 May 1990 Opinion, and pertains to the registered as doing business in the Philippines under
portion in said Paragraph 7 of the 1967 SEC Rules the Corporation Code, whose capital outstanding
which states, ‘(s)hares belonging to corporations or stock and entitled to vote is wholly owned by Filipinos
partnerships at least 60% of the capital of which is is a Philippine National. (SEC Opinion No. 04-14 in
owned by Filipino citizens shall be considered as of reference to the Foreign Investments Act)
Philippine nationality.’ Under the liberal Control Test,
there is no need to further trace the ownership of the Some instances wherein the Control Test
60% (or more) Filipino stockholdings of the Investing applies:
Corporation since a corporation which is at least 60% a. Exploitation of natural resources (> 60%)
Filipino-owned is considered as Filipino. (Narra ● Sec 2, Art XII, 1987 Constitution – policy of
Nickel Mining and Development Corp. v. Redmont the State is to ensure that the exploitation of
Consolidated Mines Corp., G.R. No. 195580, 2014). natural resources or the pursuit of the
activities deemed to be of public or national
The required percentage of Filipino ownership interest are in the control of the Filipinos
shall be applied to both:
● The State may directly undertake such
a. The total number of outstanding shares of stock
activities, or it may enter into co-production,
entitled to vote in the election of directors, and
joint venture, or production sharing
b. The total number of outstanding shares of stock,
agreements with:
whether or not entitled to vote in the election of
o Filipino citizens; or
directors. (SEC Memorandum Circular No. 8, s.
o Corporations or associations, at
2013, Sec. 2)
least 60% owned by such citizens
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b. Public Utilities (> 60%) b. Grandfather Rule

● Sec 11, Art XII, 1987 Constitution – requires
that only domestic corporations with at least Where corporate shareholders are present (and
60% of the capital stock owned by Filipinos when the Filipino-foreign equity ownership is in
may own and operate public utilities in the doubt), the percentage of the Filipino equity in
Philippines corporations is computed by attributing the nationality
● The nationality test for public utilities applies of the second or subsequent tier of ownership to
determine the nationality of the corporate
not at the time of the grant of the primary
shareholder
franchise that makes a corporation a
juridical person, but at the grant of the Example: MV Corporation and AC Corporation have
secondary franchise that authorizes the equal interest in XYZ Company. MV Corporation is
corporation to engage in a nationalized 60% owned by Filipinos, while AC Corporation is
industry. (People v. Quasha, G.R. No. L- 50% owned by Filipinos. By the grandfather rule, MV
6055, 1953) Corporation would have a 30% Filipino interest in
● The Constitution requires a franchise for XYZ Company (60% of 50%), while AC Corporation
operating a public utility; however, it does not would have a 25% Filipino interest in XYZ Company
require a franchise before one can own the (50% of 50%). Hence, the total Filipino interest is only
facilities needed to operate a public utility so 55%.
long as it does not operate them to serve the
public.(Tatad v. Garcia, Jr., G.R. No. 114222, The Control Test is still the prevailing mode of
1995). determining whether or not a corporation is a Filipino
c. Mass Media (100%) corporation within the ambit of the natural resources
● Sec 11, Art XVI, 1987 Constitution – provisions of the Constitution. But when in the mind
ownership of mass media shall be limited to of the court there is doubt based on attendant facts
the citizens of the Philippines, or to and circumstances, in the 60-40 Filipino equity
corporations, cooperatives or associations, ownership in the corporation, then it may apply the
grandfather rule (Narra Nickel Mining and
wholly-owned and managed by such
Development Corp. v. Redmont Consolidated Mines
citizens (100% Filipino management of the Corp., G.R. No. 195580, 2014).
entity)
● Cable Industry - CATV as “a form of mass
media which must, therefore, be owned and The “grandfather rule” does not eschew, but in fact
managed by Filipino citizens, or supplements the “control test”, as the latter implements
corporations, cooperatives or associations, Filipinization provisions of the Constitution. (Narra Nickel
wholly-owned and managed by Filipino Mining and Development Corp. v. Redmont
citizens pursuant to the mandate of the Consolidated Mines Corp., G.R. No. 195580, 2015).
Constitution.” (DOJ Opinion No. 95, series of
1999). OTHER TESTS
d. Advertising Industry (> 70%) A. War-Time Test
● Sec 11, Art XVI, 1987 Constitution – only In times of war, nationality of corporation is
Filipino citizens or corporations or determined by the character or citizenship of its
associations at least 70% of the capital of controlling stockholders
which is owned by such citizens shall be
B. Place of Principal Business Test
allowed to engage in the advertising agency
Residence of a corporation is the place where its
e. NEDA could advise Congress to set limitations of principal office is located, as stated in its Articles of
stock ownership in Corporations vested with Public Incorporation.
Interests (Sec. 176)
The place where the principal office of the
Double 60% Rule corporation is to be located is one of the required
Where a corporation and its non-Filipino stockholders contents of the articles of incorporation to be filed
own stock in a SEC-registered enterprise, at least with the SEC (Hyatt Elevators v. Goldstar, G.R. No.
60% of the outstanding capital stock and entitled to 161026, 2005).
vote of both corporations and at least 60% of the
members of the Board of Directors of both Applied to determine whether a state has jurisdiction
corporations must be Filipino citizens (R.A. No. 7042, over the existence and legal character of a
Sec. 3[a], as amended) corporation, its capacity or powers, internal
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organization, capital structure, the rights and A corporate officer who caused the tort act to be
liabilities of directors, officers, and shareholders committed in the name of the corporation is also
towards each other and to creditors and third personally liable as a joint-tortfeasor.
persons.
The failure of the corporate employer to comply with
a legal duty, such as under the Labor Code to grant
2. DOCTRINE OF SEPARATE separation pay to employees constitutes tort and its
JURIDICAL PERSONALITY stockholder who was actively engaged in the
management of the business should be held
General Rule: The Corporation has a separate and personally liable (Naguiat v. NLRC, G.R. No. 116123,
1997).
distinct juridical personality from its directors, officers,
trustees and shareholders (Doctrine of Separate A corporation can be held liable for the tortious acts
Juridical Personality). of a corporate officer, in the absence of a prior
express direction from the BOD, if such was
Exception: When the corporation is used as a cloak connected to the business of the corporation.
for fraud, illegality, or in other certain circumstances,
the courts may disregard the separate and distinct The remedy of the corporation is to recover damages
personality of the corporation and treat the against the acting corporate officer responsible for
corporation as a mere collection of individuals the tortious act.
undertaking business as a group (Doctrine of
b) Crimes
Piercing the Veil of Corporate Fiction).
General rule: Corporations cannot commit felonies
under the RPC for it is incapable of the requisite
A corporation is a juridical entity with a legal intent to commit these crimes.
personality separate and distinct from those acting
for and on its behalf, and, in general, from the people It also cannot commit crimes that are punishable
comprising it; the obligations incurred by the under special laws because crimes are personal in
corporation, acting through its directors, officers and nature requiring personal performance of overt acts.
employees are its sole liabilities (Santos v NLRC,
G.R. No. 101699, 1996). A corporation cannot be arrested and imprisoned;
hence, cannot be penalized for a crime punishable by
While a share of stock represents a proportionate or imprisonment.
aliquot interest in the property of the corporation, it
does not vest the owner thereof with any legal right Exceptions: If the crime is committed by a
or title to any of the corporate property, his interest in corporation, the directors, officers, employees or
such property being equitable or beneficial in nature. other officers thereof responsible for the offense shall
Shareholders are in no legal sense the owners of be charged and penalized for the crime, precisely
corporate property, which is owned by the because of the nature of the crime and the penalty
corporation as a distinct legal person (Magsaysay- therefore. However, the corporation may be charged
Labrador v CA, G.R. No. 58168, 1989). and prosecuted for a crime if the imposable penalty
is fine (Ching v. Secretary of Justice, G.R. No.
CORPORATE LIABILITY 164317, 2006).
I. Liability for Torts and Crimes When a law expressly provides that a corporation
may be proceeded against criminally, the responsible
a) Torts officer will be held personally liable for the crimes
A corporation is civilly liable in the same manner as committed by the corporation. However, such liability
natural persons for torts, because the rules governing will only attach to the officer when the corporation is
the liability of a principal for a tort committed by an directly required by law to do an act in a given
agent are the same whether the principal be a natural manner, and the same law makes the person who
person or a corporation, and whether the agent be a fails to perform the act in the prescribed manner
natural or artificial person. That a principal is liable for expressly liable criminally (Sia v. Court of Appeals,
every tort which he expressly directs or authorizes, is G.R. No. 108222, 1997). For example:
just as true of a corporation as a natural person (PNB 1) Under the Anti-Money Laundering Act,
v. CA, G.R. No. L-27155, 1978). juridical persons are also defined as
offenders.
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2) The RCC provides situations where ● The State can freely open the books of the
corporations are liable for criminal corporation to ensure that it does not exceed
sanctions: its powers
a) SEC. 161. Violation of Duty to Implications of the Existence of the Corporate
Maintain Records, to Allow their Veil or a Separate and Distinct Juridical
Inspection or Reproduction; Personality
b) SEC. 165. Fraudulent Conduct of
Business; A. Controlling interest of and/or dealings in
c) SEC. 166. Acting as Intermediaries shareholdings
for Graft and Corrupt Practices;
Ownership of a majority of capital stock and the fact
d) SEC. 167. Engaging Intermediaries
for Graft and Corrupt Practices that majority of directors of a corporation are the
directors of another corporation creates no employer-
II. Recovery of Moral Damages employee relationship with the latter’s employees
(DBP v. NLRC, G.R. No. 86932, 1990; Francisco, et
General rule: A corporation cannot recover moral al. v. Mejia, G.R. No. 141617, 2001).
damages as it cannot suffer physical suffering and
mental anguish (Prime White Cement v IAC, G.R. The mere fact that a stockholder sells his shares of
No. L-68555, 1993). stock in the corporation during the pendency of a
collection case against the corporation, does not
Exception: A corporation with a good reputation, if
besmirched, is allowed to recover moral damages make such stockholder personally liable for the
upon proof of existence of factual basis of damage corporate debt, since the disposing stockholder has
(actual injury) and its causal relation (Crystal v. BPI, no personal obligation to the creditor, and it is the
G.R. No. 172428, 2008). inherent right of the stockholder to dispose of his
shares of stock anytime he so desires (Remo, Jr. v.
The following Constitutional rights apply to a
IAC, G.R. No. L-67626, 1989).
corporation:
a. Due process
Mere substantial identity of the incorporators of the
The due process clause is universal in its
two corporations does not necessarily imply fraud,
application to all persons without regard to any
nor warrant the piercing of the veil of corporate
differences of race, color, or nationality. Private
corporations, likewise, are “persons” within the fiction. In the absence of clear and convincing
scope of the guaranty insofar as their property is evidence to show that the corporate personalities
concerned.” (Smith Bell & Co. v. Natividad, G.R. were used to perpetuate fraud, or circumvent the law,
No. 15574, 1919). the corporations are to be treated as distinct and
b. Equal protection of the law (Smith Bell & Co. separate from each other (Laguio v. NLRC, G.R. No.
v. Natividad, G.R. No. 15574, 1919) 108936, 1996).
c. Unreasonable searches and seizures
(Stonehill v. Diokno, G.R. No. L-19550, 1967). B. Transaction amongst the corporation
and stockholders
In organizing itself as a collective body, the
corporation waives no constitutional immunities The transfer of the corporate assets to the
applicable to it. Its property cannot be taken without stockholder is not in the nature of a partition but is a
compensation; can only be proceeded against by due conveyance from one party to another (Stockholders
process of law; and is protected against unlawful of F. Guanzon and Sons, Inc. v. Register of Deeds of
discrimination (Bache & Co. (Phil.), Inc. v. Ruiz, G.R.
Manila, G.R. No. L-18216, 1962).
No. 32409, 1971, citing Hale v. Henkel, 201 U.S. 43,
50 L.Ed. 652.).
NOTE: A corporation may not be made to answer for
NOTE: The right against self-incrimination has no acts or liabilities of its stockholders or those of the
application to juridical persons. (Bataan Shipyard v. legal entities which it may be connected and vice-
PCGG, G.R. No. 75885, 1987) versa (ARB Constructions Co., Inc. v. Court of
● The right against self-incrimination refers Appeals, G.R. No. 126554, 2000).
only to testimonial compulsion;
● A corporation cannot testify; and
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C. Pertaining to privileges enjoyed any allegation, much less, even a scintilla of

substantiation, that the parties interest in the
The tax privileges enjoyed by a corporation do not corporation are so considerable as to merit a
extend to its stockholders. A corporation has a declaration of unity of their civil personalities (CKH
personality distinct from that of its stockholders, Industrial and Development Corp. v. CA, G.R. No.
111890, 1997).
enabling the taxing power to reach the latter when
they receive dividends from the corporation. It must Even when the foreclosure on the assets of the
be considered as settled in this jurisdiction that corporation was wrongful and done in bad faith, the
dividends of a domestic corporation which are paid stockholders of the corporation have no standing to
and delivered in cash to foreign corporations as recover for themselves moral damages. Otherwise, it
stockholders are subject to the payment of the would amount to the appropriation by, and the
distribution to, such stockholders of part of the
income tax, the exemption clause to the charter [of
corporation’s assets before the dissolution of the
the domestic corporation] notwithstanding. (Manila corporation and the liquidation of its debts and
Gas Corporation. v. Collector of Internal Revenue, liabilities (APT v. CA, G.R. No. 121171, 1998).
G.R. No.L-42780, 1936).
Where real properties included in the inventory of the
D. Assumption as a corporate officer estate of a decedent are in the possession of and are
registered in the name of the corporations, in the
Being an officer or stockholder of a corporation does absence of any cogency to shred the veil of corporate
not by itself make one’s property also of the fiction, the presumption of conclusiveness of said
corporation, and vice-versa, for they are separate titles in favor of said corporations should stand
undisturbed (Lim v. CA, G.R. No. 124715, 2000).
entities, and that shareholders are in no legal sense
the owners of corporate property which is owned by
the corporation as a distinct legal person (Good Earth 3. DOCTRINE OF PIERCING THE
Emporium, Inc. v. CA, G.R. No. 82797, 1991). CORPORATE VEIL
The mere fact that one is president of the corporation Under certain circumstances, the courts may
does not render the property he owns or possesses disregard the separate and distinct personality of the
the property of the corporation, since that president, corporation from its members or stockholders and
as an individual, and the corporation, are separate treat the corporation as a mere collection of
entities (Cruz v. Dalisay, A.M. No. R-181-D, 1987). individuals or an aggregation of persons undertaking
business as a group such as when the corporate
E. Properties, obligations and debts legal entity is used as a cloak for fraud or illegality
(Kukan Int’l v Reyes, G.R. No. 182729, 2010).
A corporation has no legal standing to file a suit for
recovery of certain parcels of land owned by its It is an equitable doctrine used as a last resort only
members in their individual capacity, even when the when the objective is to hold the officers and/or
corporation is organized for the benefit of the stockholders liable. Thus, in one case, it cannot be
members (Sulo ng Bayan v. Araneta, Inc., G.R. No. applied in order to declare a foreclosure proceeding
L-31061, 1976). a nullity (Umali v. CA, GR No. 89561, 1990).
The corporate debt or credit is not the debt or credit Being merely an equitable remedy, employment of
of the stockholder nor is the stockholder’s debt or the piercing doctrine can only be for the “protection
credit that of the corporation (Traders Royal Bank v. of the interests of innocent third persons dealing
CA, G.R. No. L-78412, 1989). with the corporate entity which the law aims to
protect by this doctrine” (Traders Royal Bank v. Court
Stockholders have no personality to intervene in a of Appeals, G.R. No. 93397, 1997).
collection case covering the loans of the corporation
on the ground that the interest of shareholders in Classification of piercing cases:
corporate property is purely inchoate (Saw v. CA, a. Fraud piercing – when a corporate entity is
G.R. No. 90580, 1991). used to commit fraud or justify a wrong or to
defend a crime.
The interests of payees in promissory notes cannot b. Alter-ego piercing – when a corporate entity is
be off-set against the obligations between the used to defeat public convenience or is merely
corporations to which they are stockholders absent a farce since the corporation is merely the alter
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ego, business conduit, or instrumentality of a enforced against the stockholders or officers of

person or another entity. the corporation.
c. Equity cases – when piercing the corporate
fiction is necessary to achieve justice or equity. II. Tests for Applicability of the Doctrine of
Piercing the Veil of Corporate Fiction: (CUP)
NOTE: The three cases may appear together in one a. Control – not mere stock control but Complete
application (R.F. Sugay & Co. v. Reyes, G.R. No. L- Domination – not only of finances, but of policy
20451, 1964). and business practice in respect to the
transaction attacked and must have been such
I. Grounds for application of the different types that the corporate entity as to this transaction
of piercing had at the time no separate mind, will or
existence of its own.
For Fraud Cases: b. Such control must have been Used by the
1. There must have been fraud or an evil motive defendant to commit a fraud or wrong to
in the affected transaction, and the mere perpetuate the violation of a statutory or other
proof of control of the corporation by itself would positive legal breach of duty, or a dishonest and
not authorize piercing; and an unjust act in contravention of the plaintiff’s
2. The main action should seek for the legal right; and,
enforcement of pecuniary claims pertaining c. The said control and breach of duty must have
to the corporation against corporate officers or Proximately caused the injury or unjust loss
stockholders. complained of (Concept Builders Inc. v. NLRC,
108734, 1996).
Example cases:
a) Where a stockholder, who has absolute control These were expanded as three-pronged tests:
over the affairs of the corporation, entered into a 1. The first prong is the "instrumentality" or
contract with another corporation through fraud "control" test. This test requires that the
and false representations, such stockholder shall subsidiary be completely under the control and
be liable solidarily with co-defendant corporation domination of the parent corporation or
even when the contract sued upon was entered shareholder. It seeks to establish whether the
into on behalf of the corporation (NAMARCO v. corporation has no autonomy and the parent
Associated Finance Co.,G.R. No. L-20886, 1967). corporation or shareholder "is operating the
b) Piercing is allowed where the corporation is used business directly for itself or themselves."
as a means to appropriate a property by fraud 2. The second prong is the "fraud" test. This test
which property was later resold to the controlling requires that the conduct in using the
stockholders. (Heirs of Ramon Durano, Sr. v. Uy, corporation be unjust, fraudulent or wrongful.
G.R no.136456, 2000). 3. The third prong is the "harm" test. This test
c) Fraud and bad faith on the part of certain requires the plaintiff to show that the
corporate officers or stockholders may warrant defendant’s control, exerted in a fraudulent,
the piercing of the veil of corporate fiction so that illegal or otherwise unfair manner toward it,
the said individual may not seek refuge therein, caused the harm suffered (PNB v. Hydro
but may be held individually and personally liable Resources Contractors Corporations, G.R. no.
for his or her actions. (Lafarge Cement Phils., Inc. 167530, 2013).
v. Continental Cement Corp., G.R. no. 155173,
2004) Factors to Consider in cases of Parent and
Subsidiary corporations in Alter-ego Piercing:
For Alter-ego Cases: ● The parent corporation owns all or most of the
● The doctrine applies in this case even in the capital of the subsidiary.
absence of evil intent; it applies because of the ● The parent and subsidiary corporations have
direct violation of a central corporate law common directors or officers.
principle of separating ownership from ● The parent company finances the subsidiary.
management. ● The parent company subscribed to all the
● The doctrine in such cases is based on estoppel: capital stock of the subsidiary or otherwise
if stockholders do not respect the separate entity, caused its incorporation.
others cannot also be expected to be bound by ● The subsidiary has grossly inadequate capital.
the separate juridical entity. ● The parent corporation pays the salaries and
● Piercing in alter ego cases may prevail even other expenses or losses of the subsidiary.
when no monetary claims are sought to be ● The subsidiary has substantially no business
except with the parent corporation or no assets
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except those conveyed to or by the parent (Sibagat Timber Corp. v. Garcia, G.R. No.
corporation. 98185, 1992)
● The papers of the parent corporation or in the h) Thinly-capitalized corporations (McConnel v.
statements of its officers, the subsidiary is Court of Appeals, G.R. No. L-10510, 1961).
described as a department or subdivision of the i) Parent-subsidiary relationship. (Koppel (Phil.),
parent corporation, or its business or financial Inc. v. Yatco, G.R. No. L-47673,1946; Philippine
responsibility is referred to as the parent Veterans Investment Development Corporation
corporation’s own. v. CA, G.R. No. 85266, 1990)
● The parent corporation uses the property of the j) Affiliated companies (Guatson International
subsidiary as its own. Travel and Tours, Inc. v. NLRC, G.R. No.
● The directors or executives of the subsidiary do 100322, 1994)
not act independently in the interest of the
subsidiary but take their orders from the parent NOTE: While each of the above situations resulted in
corporation. the Court piercing the veil of corporate fiction, the
● The formal legal requirements of the subsidiary elements – control, injury to others, etc. – were also
are not observed (Phil. National Bank v. Ritratto present and likewise determinants.
Group, Inc., GR No. 142616, 2001).
Summary of Probative Factors
NOTE: Mere ownership by a single stockholder or by (Philippine National Bank vs. Ritratto Group, Inc., et
another corporation of all or substantially all of the al., G.R. No. 142616, 2001; Concept Builders, Inc. v.
capital stock of the corporation does not justify the NLRC, G.R. No. 108734, 1996)
application of the doctrine (Francisco v. Mejia, G.R. Whether the separate personality of the corporation
No. 141617, 2001). should be pierced depends on questions of facts,
appropriately pleaded. Mere allegation that a
Example of situations wherein the Doctrine of corporation is the alter ego of the individual
Piercing the Corporate Veil was used: stockholders is insufficient. The presumption is that
a) Where the stock of a corporation is owned by the stockholders or officers and the corporation are
one person whereby the corporation functions distinct entities. The burden of proving otherwise is
only for the benefit of such individual owner, the on the party seeking to have the court pierce the veil
corporation and the individual should be deemed of corporate entity (Ramoso v. CA, G.R. No. 117416,
the same (Arnold v. Willets and Patterson, Ltd., 2000).
G.R. No. L-20214, 1923).
b) When the corporation is merely an adjunct, For Equity Cases:
business conduit or alter ego of another These are cases, where there is no fraud or alter ego
corporation, the fiction of separate and distinct circumstances that can warrant the piercing of the
corporation entities should be disregarded (Tan corporate veil. This mainly used to render justice in
Boon Bee & Co. v. Jarencio, G.R. No. L-41337, the situation at hand, or to brush aside technical
1988). defenses.
c) Employment of same workers; single place of
business, etc. (La Campana Coffee Factory v. For example:
Kaisahan ng Manggagawa, G.R. No. L-5677, (a) When used to confuse legitimate issues
1953). (Telephone Engineering and Service Co., Inc. V.
d) Use of nominees (Marvel Building v. David, G.R. WCC, G.R. No. L-28694, 1981).
No. L-508, 1951) (b) When used to raise issues relating only to
e) Avoidance of tax. (Yutivo Sons Hardware v. technicalities (Emilio Cano Ent. v. CIR, G.R. No.
Court of Tax Appeals, G.R. No. L-13203, 1961; L-20502, 1965).
Liddell& Co. v. Collector of Internal Revenue,
G.R. No. L-9687, 1961). The veil may not always be pierced, especially in
f) Mixing of bank deposit accounts. (Ramirez the following circumstances:
Telephone Corp. v. Bank of America, G.R. No. L-
22614, 1969). (a) Piercing is a remedy of last resort and is not
g) Where it appears that two business enterprises available when other remedies are still
are owned, conducted, and controlled by the available (Umali v. CA, G.R. No. 89561, 1990).
same parties, both law and equity will, when (b) One cannot successfully invoke the piercing
necessary to protect the rights of third persons, doctrine when it was proven that the act done
disregard the legal fiction that two corporations was contrary to the existing rules, which were
are distinct entities and treat them as identical well-known to the officers of the one invoking
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it (Traders Royal Bank v. Court of Appeals, G.R. filed under Section 5(e) of Pres. Decree No. 902-
No. 93397, 1997). A, on the ground that the petitioning individuals
(c) Piercing is forbidden unless the remedy sought should be treated as the real petitioners to the
is to make the stockholder, officer or another exclusion of the petitioning corporate debtor
corporation pecuniarily liable for corporate (Union Bank v. CA, G.R. No. 131729, 1998).
debts (Umali v. CA, G.R. No. 89561, 1990; (h) Changing of the petitioner’s subsidiary liabilities
Indophil Textile Mill Workers Union-PTGWO v. by converting them to guarantors of bad debts
Calica, G.R. No. 96490, 1992). cannot be done by piercing the veil of corporate
identity (Ramoso v. CA, G.R. No. 117416, 2000)
NOTE: However, piercing in alter ego cases may (i) Piercing doctrine is meant to prevent fraud, and
prevail even when no monetary claims are cannot be employed to perpetrate fraud or a
sought to be enforced against the stockholders wrong (Araneta, Inc. v. Tuason, G.R. No. L-
or officers of the corporation. (e.g. piercing for 2886, 1952).
other purposes such as laborer’s rights) (j) Corporate persons are entitled to due process
protection. Thus, failure to implead a
(d) Piercing is forbidden when the personal corporation in a suit for recovery of ill-gotten
obligations of an individual are sought to be wealth against its stockholders cannot bind
enforced against the corporation (Robledo v. the corporation itself; otherwise, its
NLRC, G.R. No. 110358, 1994). fundamental right to due process will be violated.
(COCOFED v. Republic, G.R. No. 177857-58,
NOTE: As an exception to this rule, the Supreme 2016)
Court allowed such piercing by applying the (k) Mere ownership of all or nearly all of the capital
concept of “reverse piercing”. In a traditional stocks of a corporation is not in itself a sufficient
veil-piercing action, a court disregards the reason for disregarding the fiction of separate
existence of the corporate entity so a claimant corporate personalities. The probate court
can reach the assets of a corporate insider. In a applied doctrine of piercing the corporate veil
reverse piercing action, however, the plaintiff since Rosario had no other properties that
seeks to reach the assets of a corporation to comprise her estate other than her shares.
satisfy claims against a corporate insider." Although the intention to protect the shares from
dissipation is laudable, it is still an error to order
Reverse Piercing has two (2) types: tenants to remit payments to the estate. Also, the
1. Outsider reverse piercing - occurs when a court has not acquired jurisdiction over Primrose
party with a claim against an individual or and its properties. Piercing applies to the
corporation attempts to be repaid with assets of determination of liability not of jurisdiction. It
a corporation owned or substantially controlled is not available to confer jurisdiction over a
by the defendant. party not impleaded in a case. (Mayor v. Tiu,
2. Insider reverse piercing - the controlling G.R. No. 203770, 2016)
members will attempt to ignore the corporate
fiction in order to take advantage of a benefit
available to the corporation, such as an interest B. DE FACTO CORPORATION VERSUS
in a lawsuit or protection of personal assets. CORPORATIONS BY ESTOPPEL
(International Academy of Management and
Economics vs. Litton and Company, G.R. No. As To Legal Status
191525, 2017). a. De jure corporation
● Corporation organized in accordance with
(e) To disregard the separate juridical personality of
a corporation, the wrongdoing must be clearly requirements of law;
and convincingly established. It cannot be ● Every corporation is deemed to be a de jure
presumed (DBP vs. CA, G.R. No. 126200, 2001). until proven otherwise
(f) Piercing of the veil of corporate fiction is not
allowed when it is resorted to justify under a b. De facto corporation (Sec. 19)
theory of co-ownership the continued use ● A corporation claiming in good faith to be a
and possession by stockholders of corporate corporation under the Corporation Code but
properties (Boyer-Roxas v. Court of Appeals, where there exists a flaw in its incorporation
G.R. No. 100866, 1992). or it falls short of the requirements provided
(g) The piercing doctrine cannot be availed of in by law.
order to dislodge from the jurisdiction of the
SEC the petition for suspension of payments
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● It is the result of an attempt to incorporate C. CORPORATE POWERS

under an existing law coupled with the
exercise of corporate powers. 1. HOW POWERS ARE EXERCISED
● A de facto corporation will incur the same
obligations; have the same powers and By the Shareholders
rights as a de jure corporation.
● The due incorporation of any corporation NOTE: Generally, the vote requirement of the
claiming in good faith to be a corporation shareholders or members are joined with a vote of,
under the Corporation Code, and its right to or a ratification by, a majority of the Board of Directors
exercise corporate powers, shall not be
Vote of stockholders representing 2/3 of the
inquired into collaterally in any private suit.
outstanding capital stock or 2/3 of members (as
● Under the Rules of Court Rule 66, inquiry applicable) are needed in the following instances:
must be done by the Solicitor General in a
quo warranto proceeding where the main 1. Extension or shortening of corporate term
issue is the right to exist as a corporation 2. Increase or decrease of capital stock or the
creation of bonded indebtedness
Elements of a de facto corporation 3. Power to deny pre-emptive right, in these cases:
a. Valid law under which incorporated; a. Shares issued in good faith in exchange for
b. Attempt in good faith to incorporate or property for corporate purposes
“colorable compliance;” b. Shares in payment of previously contracted
c. Assumption of corporate powers; and debts
d. Issuance of certificate of incorporation. 4. Sale of all or substantially all corporate assets
(Arnold Hall v. Piccio, G.R. No. L-2598, 5. Investing corporate funds in another corporation
1950) or business or for any other purpose other than
its primary purpose
NOTE: A corporation which has failed to file its by- 6. Power to enter into management contracts in the
laws within the prescribed period does not ipso facto
following instances:
lose its powers as such (Sawadjaan v. CA, G.R. No.
141735, 2005). a. where stockholders representing the same
interest of both the managing and the
c. Corporation by estoppel (Sec. 20); managed corporations own more than one-
All persons who assume to act as a corporation third (1/3) of the total outstanding capital
knowing it to be without authority to do so shall be stock entitled to vote of the managing
liable as general partners for all debts, liabilities and corporation; or
damages incurred or arising as a result thereof b. where a majority of the members of the
Board of Directors of the managing
When such ostensible corporation is sued on any corporation also constitute a majority of the
transaction entered by it as a corporation or on any members of the Board of Directors of the
tort committed by it as such, it shall not be allowed to managed corporation
use its lack of corporate personality as a defense. 7. Declaration of stock dividend
Anyone who assumes an obligation to an ostensible However, among the “powers of corporations”
corporation as such cannot resist performance only majority vote is needed in:
thereof on the ground that there was in fact no
Power to enter into management contracts, except in
corporation.
instances mentioned in number six (6) of the
d. Corporation by prescription preceding section
The Roman Catholic Church is a corporation by
prescription, with acknowledged juridical personality By the Board of Directors
inasmuch as it is an institution which antedated by
almost a thousand years any other personality in The Board of Directors is the main agency by which
Europe (Barlin v Ramirez, G.R. No. L-2832, 1906). all corporate powers and authority are exercised
General rule: Under Sec. 52 of the RCC, the majority

approval of the Board of Directors is needed to bind
the corporation to any corporate act – whether or not
stockholder approval is also required.
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The following are some of the instances when a. First type: Acts done beyond the powers of the
majority vote of the Board is needed: corporation as provided for in the law or its
a. Extension or shortening of the corporate term articles of incorporation (Sec. 44)
b. Increase or decrease of capital stock or the b. Second type: Acts or contracts entered into on
creation of bonded indebtedness behalf of the corporation by persons without
c. Sale or other disposition corporate assets corporate authority, even though the contract is
d. Sale or other dispositions of all or substantially within the powers of the corporation (Manila
all corporate assets (with 2/3 stockholders or Metal Container Corp. v. PNB, G.R. No. 166862,
members authorization, Sec 39) 2006) and
e. Acquisition of its own shares c. Third type: Acts or contracts, which are per se
f. Investment of corporate funds in any corporation illegal as being contrary to law.
or business or for any purpose other than its
primary purpose (with 2/3 stockholders Consequences of Ultra Vires Acts
ratification, Sec. 41) Executed contract – Courts will generally not set
g. Declaration of cash, property, and stock aside or interfere with such contracts;
dividends (if stock dividends, it must be joined Executory contracts – No enforcement even at the
with 2/3 vote of shareholders, sec. 42) suit of either party (void and unenforceable);
h. Entering into management contracts Partly executed and partly executory – Principle
(accompanied by the approval of the against unjust enrichment shall apply.
shareholders or members, Sec. 43)
Ultra vires test: It is a question, therefore, in each
By the Officers case, of the logical relation of the act to the corporate
purpose expressed in the charter. If that act is one
The officers shall manage the corporation and which is lawful in itself, and not otherwise prohibited,
perform such duties as may be provided in the is done for the purpose of serving corporate ends,
bylaws and/or as resolved by the board of directors. and is reasonably tributary to the promotion of those
(Sec. 24) ends, in a substantial, and not in a remote and
fanciful, sense, it may fairly be considered within
Executive Committee (Sec. 34) charter powers. The test to be applied is whether the
General rule: If the bylaws so provide, the board act in question is in direct and immediate furtherance
may create an Executive Committee composed of at of the corporation’s business, fairly incident to the
least three (3) directors. The Executive Committee express powers and reasonably necessary to their
may act, by majority vote, on specific matters within exercise. If so, the corporation has the power to do it;
the competence of the board as delegated to it. Such otherwise, not. (University of Mindanao, Inc. v.
an Executive Committee may be established if the Bangko Sentral ng Pilipinas, G.R. 194964-65, 2016)
bylaws so provide.
Exception: b. Trust Fund Doctrine

1. Acts where stockholders’ approval is also
needed The subscriptions to the capital stock of a corporation
2. Filling vacancies within the Board of constitute a fund to which the creditors have a right
Directors to look for satisfaction of their claims and that the
3. Amending, repealing or adopting by-laws assignee in insolvency can maintain an action upon
any unpaid stock subscription in order to realize
4. Amending or repealing resolutions of the
assets for the payment of its debts. (Phil. Trust Co. v.
Board where the resolution by express
Rivera, G.R. No. L-19761, 1923)
terms is not so amendable or repealable by
the Executive Committee [Hence,] there can be no distribution of assets among
5. Distribution of cash dividends the stockholders without first paying corporate
creditors; any disposition of corporate funds to the
a. Ultra Vires Acts prejudice of creditors is null and void. (Boman
Environmental Dev. Corp. v. Court of Appeals, G.R.
Applicability of Ultra Vires Doctrine No. 77860, 1988). This is without prejudice to the
An act not within the express or implied, and ability of a corporation to effect distributions to its
incidental powers of the corporation. stockholders by way of dividends charged against
unrestricted retained earnings.
Types of Ultra Vires Cases
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Coverage of the Trust Fund Doctrine General Express Powers under the Corporation
Code (Sec. 35)
1. In case of Solvency: The coverage of the trust a. Sue and be sued in its corporate name;
fund doctrine is only up to the extent of the b. Succession;
“subscribed capital stock” of the corporation. In c. Adopt and use a corporate Seal;
this sense, the unrestricted retained earnings do d. Amend Articles of Incorporation
not constitute part of the capital stock. Hence, e. Adopt, amend or repeal By-laws;
the corporation is at liberty to pay out assets to f. For stock corporations – Issue stocks to
the stockholders by way of dividends up to the subscribers and to sell treasury stocks; for non-
extent of the unrestricted retained earnings. stock corporations – admit members;
g. Purchase, receive, take, or grant, hold, convey,
2. In case of Insolvency: The trust fund doctrine is sell, lease, pledge, mortgage and otherwise deal
not limited to reaching the stockholders’ unpaid with real and personal property, pursuant to its
subscriptions. The scope of the doctrine when lawful business;
the corporation is insolvent encompasses h. Enter into Partnership, joint venture, merger,
not only the capital stock, but also other consolidation, or any other commercial
property and assets generally regarded in agreement with natural and juridical persons;
equity as a trust fund for the payment of i. Reasonable Donations for public welfare,
corporate debts. Thus, the Trust Fund Doctrine hospital, charitable, cultural, scientific, civil or
extends to all assets (not just subscribed capital similar purposes (Prohibited for foreign
stock) when a corporation becomes insolvent. corporations: for partisan political activity;
(Halley v. Printwell, G.R. No. 157549, 2011) j. Establish pension, retirement and other Plans for
the benefit of directors, trustees, officers and
3. Releasing Subscribers: where the corporation employees; and
released the subscribers to the capital stock from k. Other powers essential or necessary to carry out
their subscriptions without valuable its purposes.
consideration. (Ong Yong v. Tiu, G.R.
No.144476, 2003) B. Specific Powers: Theory of Specific
Capacity
CORPORATE POWERS
The specific capacity theory maintains that the
A. General Powers: Theory of General corporation cannot exercise powers except those
Capacity expressly/impliedly given.
The general capacity theory maintains that a Some of the Specific Powers Granted by the
corporation is said to hold such powers as are not RCC:
prohibited or withheld from it by general law. 1) Power to extend or shorten corporate term
(Sec. 36)
a. Express powers – Those expressly authorized 2) Power to increase or decrease capital stock
by the Corporation Code and other laws, and its or incur, create, increase bonded
Articles of Incorporation or Charter indebtedness (Sec. 37)
b. Implied/necessary powers – Those that can be 3) Power to deny pre-emptive rights (Sec. 38)
inferred from or necessary for the exercise of the 4) Power to sell or dispose corporate assets
express powers or for the pursuit of its purposes (Sec. 39)
as provided in the Charter. Examples are powers 5) Power to acquire own shares (Sec. 40)
related to the same line of business (e.g. 6) Power to invest corporate funds in another
stevedoring services to unload coal to its pier for corporation or business (Sec. 41)
corporations supplying electric power) 7) Power to declare dividends (Sec. 42)
c. Incidental/inherent powers – Those that are 8) Power to enter into management contract
deemed to be within the capacity of corporate (Sec. 43)
entities. These “necessarily flow” from the
business and attach at the moment of creation
without regard to express powers or primary
purpose.
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C. Power to Extend or Shorten corporate ● With prior approval of the SEC

term (Sec. 36) o The application with the SEC shall be
made within six (6) months from the
There should be a written notice of date of approval of the board of directors
stockholders/members meeting stating: and stockholders, which period may be
a. Proposed action and time and place of extended for justifiable reasons.
meeting ● Accompanied by a sworn statement of the
b. Addressed to each stockholder/ member treasurer showing that the 25-25 rule has
c. Deposited to the addressee in post office, been complied with
with postage prepaid or served personally;
25-25 Rule
NOTE: When allowed in the by-laws or done with the The SEC shall not accept for filing any certificate of
consent of the stockholder, sent electronically in increase of capital stock unless accompanied by a
accordance with the rules and regulations of the SEC sworn statement of the treasurer of the corporation
on the use of electronic data messages lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five percent
Vote needed: (25%) of the increase in capital stock has been
a. Board majority (in board meeting) and subscribed and that at least twenty-five percent
b. Ratified by two – thirds (2/3) of the (25%) of the amount subscribed has been paid in
actual cash to the corporation or that property, the
Outstanding Capital Stock or members in a
valuation of which is equal to twenty-five percent
meeting – mere written assent is not enough
(25%) of the subscription, has been transferred to
the corporation:
NOTE: No extension may be made earlier than three
(3) years prior to the original or subsequent expiry NOTE: No decrease of capital stock shall be
date(s) unless there are justifiable reasons for an approved by the SEC if it will prejudice the rights of
earlier extension as may be determined by the corporate creditors
Commission.
From and after the approval by the SEC and the
The extension of the corporate term shall take effect issuance of its certificate of filing, capital stock shall
only on the day following the original or subsequent stand increased or decreased as the certificate may
expiry date(s). declare
Appraisal rights available to dissenting Incur, create, or increase bonded indebtedness
stockholders (non-stock):
a. In case of extension of term – right of There should be no incurring, creating or increasing
appraisal exists any bonded indebtedness unless:
b. In shortening of term – right of appraisal ● Approved by majority of the board
recognized in Sec 81(1) – amendment of ● Approved by at least two - thirds (2/3) of
Articles to shorten or extend corporate term members in a meeting
● With notice of the proposal and meeting
D. Power to Increase or Decrease Capital given to stockholders
Stock or Incur, Create, Increase Bonded ● With prior approval of the SEC
Indebtedness (Sec. 37) Bonds issued by a corporation shall be registered
with the SEC, which shall have the authority to
Power to increase or decrease capital stock - determine the sufficiency of the terms thereof.
Provided that in the case of an increase in capital
stock, the 25-25 rule is complied with, as approved E. Power to Deny Pre-Emptive Rights (Sec.
by the SEC. 38)
There shall be no increase or decrease of capital General rule: Stockholders have the pre-emptive
stock unless: right to subscribe to all issues or disposition of shares
● Approved by majority of the board by the corporation of any class in proportion to their
● Approved by at least two – thirds (2/3) of the shareholdings
Outstanding Capital Stock in a meeting
● With notice of the proposal and meeting Exception:
given to stockholders- given personally or ● Denied by the Articles of Incorporation or
through electronic means if allowed amendment thereto;
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● Shares are issued in compliance with laws in the post office with postage prepaid, or when
requiring minimum stock ownership by the allowed by the by-laws or done with the consent of
public the stockholder, sent electronically
● Shares issued in good faith in exchange for Dissenting stockholders have appraisal rights.
property for corporate purposes approved
by 2/3 of the OUTSTANDING CAPITAL After authorization or approval by the
STOCK stockholders/members, the Board may however,
● Shares in payment of previously contracted abandon proposed action without prior
debts approved by 2/3 of OUTSTANDING authorization/approval of stockholders/members,
CAPITAL STOCK subject to rights of 3rd parties
F. Power to Sell or Dispose Corporate However, stockholders’/members’ authorization not

Assets (Sec. 39) needed if:
a. Disposition of property and assets is
This Power is subject to the provisions of the necessary in the usual and regular course of
“Philippine Competition Act”, and other related laws. business, or
b. If the proceeds of sale or disposition is
Votes Required: appropriated for the conduct of the
Power to Sell or Dispose Corporate Assets (Not remaining business
all or Substantially All)
G. Power to Acquire Own Shares (Sec. 40)
Majority Vote by Board of Directors or Trustees
ONLY Requirements:
1. Corporation has unrestricted retained earnings
Power to Sell All or Substantially All Corporate in its books to cover the shares to be purchased
Assets Including its Goodwill or acquired,
Needs vote of: 2. It is for a legitimate corporate purpose or
a. Majority Vote by Board of Directors or purposes, including the following cases:
Trustees a. To eliminate fractional shares arising out of
b. 2/3 of Outstanding Capital Stock or stock dividends;
members b. To collect or compromise an indebtedness
to the corporation, arising out of unpaid
NOTE: In nonstock corporations where there are subscription, in a delinquency sale, and to
no members with voting rights, the vote of at least purchase delinquent shares sold during said
a majority of the trustees in office will be sale;
sufficient authorization for the corporation to enter c. To pay dissenting or withdrawing
into any transaction authorized by this section. stockholders entitled to payment for their
shares under the provisions of the
“Sale of all or substantially all corporate assets” Corporation Code.
Net Asset Value Test
The determination of whether or not the sale involves Shares of stock which have been issued and fully
all or substantially all of the corporation’s properties paid for, but subsequently reacquired by the issuing
and assets must be computed based on its net corporation through purchase, redemption, donation,
asset value, as shown in its latest financial or some other lawful means are Treasury Shares.
statements. Such shares may again be disposed of for a
reasonable price fixed by the board of directors (Sec.
Incapacity Test 9) subject to stockholders’ preemptive rights.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if H. Power to Invest Corporate Funds in
thereby the corporation would be rendered another Corporation or For Non-Primary
incapable of continuing the business or Purpose (Sec. 41)
accomplishing the purpose for which it was
incorporated. (Sec. 39) Needs vote of:
a. Board majority in meeting
Notice b. Two – thirds (2/3) of Outstanding Capital
Written notice of stockholder/member meeting Stock or members - Stockholders/members’
proposing said action served personally at their approval not needed if investment in stock of
places of residence and deposited to the addressee
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other corporations is reasonably necessary J. Power to Enter Into Management

to accomplish primary purpose Contract (Sec. 43)
c. Written notice of proposed investment and
time and place of meeting sent to Where one corporation undertakes to manage all or
stockholders substantially all of the business of another
d. Dissenting stockholders have appraisal corporation, whether the contract is called “service
rights contracts” or “operating agreement”
Investment by a sugar central in the equity of a jute- General Rule: Contract may not exceed 5 yrs per
bag manufacturing company used in packing sugar, term
falls within the implied powers of the sugar central as
part of its primary purpose (De La Rama v. Ma-ao Exception: Contracts relating to exploration,
Sugar Central, G.R. No. L-17504, 1969) development, exploitation or utilization of natural
resources, where pertinent laws or regulations will
I. Power to Declare Dividends (Sec. 42) govern
General Rule: Only Board action is needed A management contract is not an agency contract,
and therefore is not revocable at will (Nielson v.
Exception: Stock dividends where stockholder Lepanto, G.R. No. L-21601, 1968)
action is needed
1. Cash dividends due on delinquent stock This needs approval of:
should first be applied to unpaid balance 1. Board of Directors of both managing and
plus cost and expenses managed corporation
2. Stock dividends shall be withheld from 2. Majority of outstanding shares or members
delinquent stockholders until the unpaid of both managed and managing corporation
subscription is fully paid 3. But 2/3 vote of outstanding stock/members
3. Stock dividends need two – thirds (2/3) of of managed corporation necessary in the ff:
Outstanding Capital Stock a. Where stockholders of both managing
4. Dividends are payable out of unrestricted and managed corporation (the common
retained earnings stockholders) own or control more than
5. Stock corporations cannot retain surplus 1/3 or the outstanding stock of
profits more than 100% of paid-in capital managing corporation
stock unless: b. Where majority of directors in both
a. Needed for corporate expansion corporations are the same
projects approved by the board
b. Or prohibited by loan agreement K. Doctrine of Individuality of Subscription
which prohibits declaration of
dividends without financial No certificate of stock shall be issued to a subscriber
institution’s consent until the full amount of the subscription together with
c. Or needed under special interest and expenses (in case of delinquent shares),
if any is due, has been paid. (Sec. 63)
circumstances
6. Unless otherwise provided in the articles of
The foregoing provision sets forth the Doctrine of
incorporation, distribution of dividends is Indivisibility/Individuality of Subscription. This
done on a pro rata basis. doctrine espouses that the subscription contract is
one, entire, indivisible and whole contract which
The power to declare dividends under [Sec. 42 of cannot be divided into portions. It cannot be divided
RCC] is with the Board of Directors, and can be into portions so that no stockholder shall be entitled
declared only out of its unrestricted retained to a certificate of stock until said stockholder has paid
earnings. Assuming that a corporate director was the entire value of the shares subscribed, including
authorized by the Board to fix the monthly dividends, the interest and expenses. The Doctrine of
dividends can be declared only out of unrestricted Indivisibility of Subscription is absolute since the
retained earnings of a corporation, which earnings above-quoted Section 64 speaks of no exception.
cannot obviously be fixed and predetermined 5 years
in advance. (Ongkingco v. Sugiyama, G.R. No. The purpose of the prohibition is to prevent the partial
217787, 2019). disposition of a subscription which is not fully paid,
because if it is permitted, and the subscriber
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subsequently becomes delinquent in the payment of positions of trusteeship in relation to the

his subscription, the corporation may not be able to stockholders.
sell as many of his subscribed shares as would be
necessary to cover the total amount due from him, Doctrine of Ratification
which is authorized under section [67]. (SEC OGC The corporation may ratify the unauthorized acts of
Opinion No. 16-05) its corporate officer. The substance of the doctrine is
confirmation after conduct, amounting to a substitute
for a prior authority. Ratification can be made either
D. BOARD OF DIRECTORS AND expressly or impliedly like silence or acquiescence
TRUSTEES and acceptance of benefits (Yasuma v. Heirs of
Cecilio De Villa, G.R. No. 150350, 2006). But illegal
acts cannot be ratified.
1. BASIC PRINCIPLES
Doctrine of Apparent Authority
a. Doctrine of Centralized If a corporation knowingly permits one of its officers,
Management or any other agent, to act within the scope of an
apparent authority, it holds him out to the public
Unless otherwise provided in this Code, the board of possessing the power to so do those acts; and thus,
directors or trustees shall exercise the corporate the corporation will, as against anyone who has in
powers, conduct all business, and control all good faith dealt with it through such agent, be
properties of the corporation (Sec. 22). estopped from denying the agent’s authority.
(Francisco v. GSIS, G.R. No. L-18287, 1963)
Powers of the Board of Directors
General Rule: The Board of Directors ALONE, Apparent authority may be ascertained through:
acting as a body, exercises the powers of the a. The general manner in which the
corporation. corporation holds out an officer or agent as
having the power to act or, in other words,
Exceptions: Other persons or groups within the the apparent authority to act in general, with
corporation may do so similarly: which it clothes him; or
a. If (1) there is a management contract and b. The acquiescence in his acts of a particular
(2) powers are delegated by majority of the nature, with actual or constructive
board to an executive committee; knowledge thereof, whether within or
b. Corporate officers (e.g. the President) via beyond the scope of his ordinary powers.
authority from (1) law, (2) corporate by-
laws; and (3) authorization from the board, If a private corporation intentionally or negligently
either expressly or impliedly by habit, clothes its officers or agents with apparent power to
custom or acquiescence in the general perform acts for it, the corporation will be estopped to
course of business; deny that the apparent authority is real as to innocent
c. A corporate agent in transactions with third persons dealing in good faith with such officers
third persons to the extent of the authority or agents.
to do so has been conferred upon him;
d. Those with apparent authority (doctrine NOTE:
of apparent authority). It requires presentation of evidence of similar acts
executed either in its favor or in favor of other parties.
Theories on Source of Board Power It is not the quantity of similar acts which establishes
a. Directly-Vested / Original Power apparent authority, but the vesting of a corporate
Pursuant to Section 22, the source of power officer with the power to bind the corporation
of the Board of Directors is primarily and (People’s Aircargo and Warehousing Co., Inc. v. CA.,
directly-vested by law; it is not a delegated G.R. No. 117847, 1998).
power from the stockholders or members of
the corporation When the officers or agents of a corporation exceed
b. Delegated Powers from Stockholders their powers in entering into contracts or doing other
The Board of Directors is a creation of the acts, the corporation, when it has knowledge thereof,
stockholders and controls and directs the must promptly disaffirm the contract or act and allow
affairs of the corporation by delegation of the the other party or third persons to act in the belief that
stockholders. By drawing to themselves the it was authorized or has been ratified. If it acquiesces,
powers of the corporation, they occupy with knowledge of the facts, or fails to disaffirm,
ratification will be implied or else it will be estopped
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to deny ratification (Premiere Development Bank vs. Each director/trustee shall hold office until the
CA, G.R. No. 159352, 2004). successor is elected and qualified.
Efren was Bonanza’s General Property Manager Qualifications of Directors

while Miguel was the President. Bonanza leased the a. Must own at least one (1) share of the capital
lot to Efren but eventually notified the latter about the stock of the corporation in his own name or
rescission of lease. Using the Doctrine of Apparent must be a member in the case of non-stock
Authority, Bonanza was estopped from denying the corporations
existence and enforceability of Lease Contract after i. Any director who ceases to be the
it effectively ratified the lease by accepting proceeds owner of at least one (1) share of
throughout several years. Also, while it is true that the
the capital stock of the corporation
doctrine cannot be invoked by one who is not a third
of which he is a director shall
party, an officer of a corporation can actually be a
third person in contract with the corporation. thereby cease to be a director. (Sec.
(Quesada, et al. v. Bonanza Restaurants, Inc., G.R. 22)
No. 207500, 2016) b. He must not be disqualified under the RCC
(Sec. 26)
c. He must possess other qualifications as may
b. Business Judgment Rule be prescribed in the by-laws of the
corporation. (Gokongwei, Jr. v. SEC, G.R.
Questions of policy or management are left solely to No. L-45911, 1979)
the honest decision of officers and directors of a d. He must be of legal age
corporation and the courts are without authority to
substitute their judgment for the judgment of the Disqualifications of Directors, Trustees, or
board of directors; the board is the business manager Officers (Sec. 26)
of the corporation and so long as it acts in good faith A person shall be disqualified from being a director,
its orders are not reviewable by the courts or the trustee, or officer of any corporation if, within five (5)
SEC. The directors are also not liable to the years prior to the election or appointment as
stockholders in performing such acts (Philippine such, the person was:
Stock Exchange, Inc. v. CA, GR No. 130644, 1997). a. Convicted by final judgment:
i. Of an offense punishable by
Coverage of the Rule: Two Branches imprisonment for a period
a. Resolutions and transactions entered into by the exceeding six (6) years;
Board of Directors within the powers of the ii. For violating this Code; and
corporation cannot be reversed by the courts not iii. For violating “The Securities
even on the behest of the stockholders of the Regulation Code”;
corporation; and b. Found administratively liable for any offense
b. Directors and officers acting within such involving fraud acts; and
business judgment cannot be held personally
c. By a foreign court or equivalent foreign
liable for the consequences of such acts. regulatory authority for acts, violations or
misconduct similar to those enumerated in
paragraphs (a) and (b) above.
2. TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF Grounds not exclusive
DIRECTORS The foregoing is without prejudice to qualifications or
other disqualifications, which the SEC or the
Term of Office (Sec. 22) Philippine Competition Commission may impose in
Directors its promotion of good corporate governance or as a
Shall be elected for a term of one (1) year from sanction in its administrative proceedings. (Sec. 26)
among the holders of stocks registered in the
corporation’s books By-law provisions that prohibit directors who have
interests in competitor corporations are reasonable in
Trustees order to protect the interests of the company
(Gokongwei v. SEC, G.R. No. L-45911, 1979)
Shall be elected for a term not exceeding three (3)
years from among the members of the corporation.
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Hold-Over Principle Corporations required to have Independent

Directors/Trustees may continue to hold office Directors
despite the lapse of one year until their successors
are elected and qualified. The board of the following corporations vested with
public interest shall have independent directors
Remaining members of the board of directors cannot constituting at least twenty percent (20%) of such
elect another director to fill in a vacancy caused by board:
the resignation of a hold-over director. The hold-over a. Corporations covered by “The Securities
period is not part of the term of office of a member of Regulation Code”, namely:
the board of directors. (Valle Verde Country Club v. i. those whose securities are
Africa, G.R. No. 151969, 2009) registered with the SEC,
ii. corporations listed with an
Thus, when during the holdover period, a director exchange, or
resigns from the board, the vacancy can only be
iii. corporations with assets of at least
filled-up by the stockholders, since there is no term
left to fill-up pursuant to the provisions of Section 29 Fifty million pesos
which mandates that a vacancy occurring in the (P50,000,000.00) and having two
board of directors caused by the expiration of a hundred (200) or more holders of
member’s term shall be filled by the corporation’s shares, each holding at least one
stockholders. (Valle Verde Country Club v. Africa, hundred (100) shares of a class of
G.R. No. 151969, 2009) its equity shares;
b. Banks and quasi-banks, NSSLAs,
A director continuing to serve after one year from his pawnshops, corporations engaged in money
election (on a holdover capacity), cannot be service business, pre-need, trust and
considered as extending his term. This hold-over insurance companies, and other financial
period is not part of his term, which, as declared, had intermediaries; and
already expired. (Valle Verde Country Club v. Africa, c. Other corporations engaged in business
G.R. No. 151969, 2009)
vested with public interest similar to the
Requirement of Independent Directors (Sec. 22) above, as may be determined by the SEC,
considering such factors:
An independent director is a person who, apart i. such as the extent of minority
from shareholdings and fees received from the ownership,
corporation, is independent of management and free ii. type of financial products or
from any business or other relationship which could, securities issued or offered to
or could reasonably be perceived to materially investors,
interfere with the exercise of independent judgment iii. public interest involved in the nature
in carrying out the responsibilities as a director. of business operations, and
iv. other analogous factors.
Requirements:
Independent directors must be:
1. independent of management and free from 3. ELECTION AND REMOVAL OF
any relationship which could materially
DIRECTORS OR TRUSTEES
interfere with the exercise of independent
judgment as a director
a. Election of Directors or
2. a shareholder and receive fees from the
corporation
Trustees (Sec. 23)
3. elected by the shareholders present or
Manner of Election
entitled to vote in absentia during the a. In any form; or
election of directors. b. By ballot when requested by any voting
4. subject to rules and regulations governing stockholder or member
their qualifications, disqualifications, voting c. In stock corporations, voting may be in
requirements, duration of term and term person or by proxy
limit, maximum number of board
memberships and other requirements that Time to Determine Voting Right
the SEC will prescribe. a. At the time fixed in by- laws
b. If by- laws are silent, at time of election
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I. Cumulative Voting and Straight Voting At all elections of directors or trustees, there must be
present, either in person or through a representative
a. Straight voting – Every stockholder may vote authorized to act by written proxy:
the number of outstanding capital stock in his ● Stock Corporation – owners majority of
own name for as many persons as there are outstanding capital stock (i.e., total shares
directors to be elected; or in non-stock of stock issued under binding subscription
corporations, members may cast as many votes contracts to subscribers or stockholders,
as there are trustees to be elected but may not whether fully or partially paid, except
cast more than one vote for one candidate. (In treasury shares)
straight voting, the votes are spread out evenly ● Non-stock Corporation – majority of
among all the elective positions) members entitled to vote
b. Cumulative voting for one candidate – a
stockholder may accumulate his shares and give NOTE: When so authorized in the bylaws or by a
one candidate as many votes as the number of majority of the board of directors, the stockholders or
directors to be elected multiplied by the number members may also vote through remote
of his shares shall equal; communication or in absentia. The right to vote
through such modes may be exercised in
c. Cumulative voting by distribution – a
corporations vested with public interest,
stockholder may also cumulate his shares by
notwithstanding the absence of a provision in the by-
multiplying the number of his shares by the laws of such corporations. (sec. 23)
number of directors to be elected and distribute
the same among as many candidates as he shall Who Elects Directors or Trustees
see fit ● By the stockholders/members as
provided in the by-laws (traditionally during
Methods of Voting in Relation to Type of annual SH/M meetings
Corporation ● By the board, if still constituting quorum for
vacancies in the interim (i.e. between
A. Stock Corporations
annual meetings) due to causes other than
Stockholders entitled to vote shall have the right to
removal or expiry of term (Sec. 28)
vote the number of shares of stock standing in their
own names in the stock books of the corporation at ● If the vacancies are due to removal or
the time fixed in the bylaws or where the bylaws are expiry of term, the directors/trustees must
silent, at the time of the election be elected by the stockholders/members
at a meeting for this purpose (special
The stockholder may use: meeting)
1. Straight Voting
2. Cumulative voting for one candidate How Elected
3. Cumulative voting by distribution ● By owners of majority of outstanding capital
stock or by members in annual
NOTE: The total number of votes cast shall not stockholders’/members’ meeting
exceed the number of shares owned by the ● Stockholders/members may be present in
stockholders as shown in the books of the person or by written proxy
corporation multiplied by the whole number of ● For stock corporations: Number of votes =
directors to be elected; and that no delinquent stock (no. of shares) x (no. of directors to be
shall be voted.
elected)
● By straight voting or cumulative voting,
B. Non-stock Corporations
General Rule: Members of nonstock corporations which is all votes may be cast for a
may use Straight Voting, i.e. cast as many votes as candidate or distributed among the
there are trustees to be elected but may not cast candidates
more than one (1) vote for one (1) candidate. ● For non-stock corporations: Unless
otherwise provided in the articles of
Exception: Unless otherwise provided in the articles incorporation or in the by-laws, members of
of incorporation or in the bylaws. (Sec. 23) non-stock corporations may cast as many
votes as there are trustees to be elected but
may not cast more than one vote for one
II. Quorum candidate.
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● Viva voce (live voice) or must be by ballot if Report Of Election of Directors, Trustees and
requested Officers
● Delinquent shares and treasury shares Within thirty (30) days after the election of the
cannot vote directors, trustees and officers of the corporation, the
● Candidates with highest number of votes secretary, or any other officer of the corporation, shall
submit to the SEC, the names, nationalities,
will be declared elected
shareholdings, and residence addresses of the
directors, trustees, and officers elected. (Sec. 25)
Election Rules on Stock and Non-Stock
Corporations
Only the directors and officers of the corporation
STOCK NON-STOCK whose names appear in the report submitted to the
CORPORATION CORPORATION SEC are deemed legally constituted to bind the
Owners of a majority A majority of the corporation in bringing a suit on behalf of the
of outstanding capital members, either in corporation (Premium Marble Resources v. CA, G.R.
stock, either in person person or by No. 96551, 1996).
or by representative representative
authorized to act by authorized to act by Non-holding of Election
written proxy, must be written proxy, must be The non-holding of elections and the reasons shall
present at the election present at the election be reported to the SEC within thirty (30) days from
of the directors of the trustees the date of the scheduled election. The report shall
Cumulative voting or Cumulative voting is specify a new date for the election, which shall not be
Straight voting can be not available, unless later than sixty (60) days from the scheduled date.
used; a matter of right allowed by the articles
granted by law to or by-laws. If no new date has been designated, or if the
each stockholder with rescheduled election is likewise not held, the SEC
voting rights. The Board may be may, upon the application of a stockholder, member,
elected by region. director or trustee, and after verification of the
Directors are elected unjustified non-holding of the election, summarily
at large. order that an election be held.
Alien Membership in Board of Directors The SEC shall have the power to issue such orders
P.D. No. 715: "election of aliens as members of the as may be appropriate, including:
board of directors of governing body of corporations a. orders directing the issuance of a notice
or associations engaging in partially nationalized stating the time and place of the election,
activity shall be allowed in proportion to their b. designated presiding officer, and
allowable participation or share in the capital of such
c. the record date or dates for the
entities."
determination of stockholders or members
Non-Filipino citizens may become members of the entitled to vote.
board of directors of a bank to the extent of the
foreign participation in the equity of said bank. Notwithstanding any provision of the articles of
(General Banking Law, Sec. 15) incorporation or bylaws to the contrary, the shares of
stock or membership represented at such meeting
Filling Vacancies in Board - Permissive and entitled to vote shall constitute a quorum for
The filling of vacancies in the board by the remaining purposes of conducting an election under this
directors or trustees constituting a quorum as section. (Sec. 25)
provided for by Section [28] is merely permissive, not
mandatory, and the vacancies may still be filled-up Cessation from Office
by the stockholders of members in a regular or Should a director, trustee or officer die, resign or in
special meeting called for the purpose. However, any manner cease to hold office, the secretary, or the
when the by-laws of the corporation contain a specific director, trustee or officer of the corporation, or in
mode of filling- up existing vacancies in the board, the case of death, the officer’s heirs shall, within seven
same is mandatory (Tan v. Sycip, G.R. No. 153468, (7) days from knowledge thereof, report in writing
2006). such fact to the SEC. (Sec. 25)
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b. Removal of Directors or a. the vote of at least a majority of the

Trustees (Sec. 27) remaining directors or trustees, if still
constituting a quorum;
Requisites of Removal from the Board b. if not, said vacancies must be filled by the
a. It must take place either at a regular meeting stockholders or members in a regular or
or special meeting of the stockholders or special meeting called for that purpose.
members called for the purpose;
b. There must be previous notice to the Cases when Emergency Action is Required
stockholders or members of the intention to Requirements:
remove; a. If the vacancy prevents the remaining
c. The removal must be by a vote of the directors from constituting a quorum
stockholders representing 2/3 of the b. emergency action is required to prevent
outstanding capital stock or 2/3 of the grave, substantial, and irreparable loss or
members, as the case may be; damage to the corporation
d. The director may be removed with or without
cause unless he was elected by the minority, Effects:
a. The vacancy may be temporarily filled from
in which case, it is required that there is
cause for removal. among the officers of the corporation by
unanimous vote of the remaining directors or
NOTE: trustees.
The SEC shall, motu proprio or upon verified b. The action by the designated director or
complaint, and after due notice and hearing, order trustee shall be limited to the emergency
the removal of a director or trustee elected despite action necessary,
the disqualification, or whose disqualification arose or c. The term shall cease within a reasonable
is discovered subsequent to an election. This is time from the termination of the emergency
without prejudice to other sanctions that the SEC or upon election of the replacement director
may impose on the board of directors or trustees or trustee, whichever comes earlier.
who, with knowledge of the disqualification, failed to d. The corporation must notify the SEC within
remove such director or trustee. three (3) days from the creation of the
emergency board, stating therein the reason
Filling of Vacancies (Sec. 28)
for its creation.
Replacement director or trustee - A director or
trustee elected to fill a vacancy and shall serve only Vacancy filled by reason of an increase in the
for the unexpired term of the predecessor in office. number of directors or trustees
How Elections should be held: This vacancy shall be filled only by an election at a
In all elections to fill vacancies under this section, the regular or at a special meeting of stockholders or
procedure set forth in Sections 23 and 25 of this Code members duly called for the purpose, or in the same
shall apply. meeting authorizing the increase of directors or
trustees if so stated in the notice of the meeting.
When Elections may be held:
a. Due to term expiration- the election shall be 4. DUTIES, RESPONSIBILITIES AND
held no later than the day of such LIABILITIES FOR UNLAWFUL ACTS
expiration at a meeting called for that
purpose. a. Rules on Fiduciaries’ Duties and
b. Result of removal- the election may be held Liabilities
on the same day of the meeting authorizing
the removal and this fact must be so stated Three-Fold Duties of Directors (Strategic Alliance
in the agenda and notice of said meeting. Development Corporation v. Radstock, G.R. No.
c. In all other cases, the election must be held 178158, 2009)
no later than forty-five (45) days from the
a. Duty of Obedience (Basis: Sec. 24)
time the vacancy arose.
To direct the affairs of the corporation only in
accordance with the purposes for which it was
Vacancy NOT by removal or expiration of term organized
May be filled by:
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b. Duty of Loyalty (Basis: Secs. 30 & 33) intended to attach penal sanctions to said sections, it
Directors or trustees shall not acquire any personal could have expressly stated such intent in the same
or pecuniary interest in conflict with their duty as such manner it did for Section 74 of the same Code that
directors or trustees. the violation thereof is likewise considered an offense
under Section 144. (Ient v. Tullet, Inc., G.R. No.
Disloyalty: Sec. 30(2) vs. Sec. 33 189158, 2016)
SEC. 30(2) SEC. 33
Applicable to directors, Applicable to b. Solidary Liabilities for Damages
trustees, and officers directors only
Liability under Sec. 30(1)
No ratification allowed Allows ratification of Directors or trustees who willfully and knowingly:
a transaction by the a. vote for or assent to patently unlawful acts of
director the corporation
Covers stock and non- Covers stock b. are guilty of gross negligence or bad faith in
stock corporations corporations only directing the affairs of the corporation
c. acquire any personal or pecuniary interest in
c. Duty of Diligence (Basis: Sec. 30) conflict with their duty as such directors or
Directors and/or trustees shall not willfully and trustees
knowingly vote for or assent to patently unlawful acts shall be liable jointly and severally for all damages
of the corporation or act in bad faith or with gross resulting therefrom suffered by the corporation, its
negligence in directing the affairs of the corporation. stockholders or members and other persons.
Doctrine of Corporate Opportunity Liability for Watered Stocks

If there is presented to a corporate officer or director
a business opportunity, which the corporation has an Directors or officers consenting to issuance of
interest or a reasonable expectancy, the self-interest watered stocks are solidarily liable with the
of the officer or director will be brought into conflict stockholder concerned, to the corporation or its
with that of his corporation. The law does not permit creditors for the difference between the fair value
him to seize the opportunity even if he will use his received (by the corporation at the time of the
own funds in the venture. If he seizes the opportunity issuance) and the par or issued value of the stock
thereby obtaining profits to the expense of the issued. (Sec. 64)
corporation, he must account all the profits by 2. Personal Liabilities
refunding the same to the corporation. Personal liability of a corporate director, trustee or
officer may so validly attach, as a rule, only when:
Requisites of Doctrine of Corporate Opportunity 1. He assents:
a. The Corporation is financially able to a. To a patently unlawful act of the
undertake the business opportunity. corporation, or
b. From the nature of the business opportunity, b. For bad faith, or gross negligence in
it is in line with the corporation’s business directing its affairs, or
and is of practical advantage to the c. For conflict of interest, resulting in
corporation. damages to the corporation, its
c. The corporation has an interest or a stockholders or other persons (solidary
reasonable expectancy, by embracing the liability under Sec. 30(1));
opportunity. 2. He attempts to acquire, or acquires any interest
adverse to the corporation in respect of any
Consequence of violation matter which has been reposed in them in
a. Directors must account for all the profits by confidence (liable as a trustee for the corporation
refunding the same to the corporation under Sec. 30(2))
b. Directors may be removed from the board. 3. He consents to the issuance of watered stocks
or who, having knowledge thereof, does not
Exception: The act of the director has been ratified forthwith file with the corporate secretary his
by a vote of the stockholders owning or representing written objection thereto (solidary liability under
at least two-thirds (2/3) of the outstanding capital Sec. 64);
stock.
4. He agrees to hold himself personally and
solidarily liable with the corporation; or
Violations of Secs. 30 and 33 are not penal
offenses in relation Sec. 158: Had the Legislature
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5. He is made, by a specific provision of law, to within the fourth civil degree of consanguinity or
personally answer for his corporate action affinity is voidable at the option of such corporation,
(Tramat Mercantile, Inc. v. CA, G.R. No. 111008, unless the following are present:
1994). a. The presence of such director/trustee in the
Board meeting in which the contract was
Case law states that to hold a director or officer approved was not necessary to constitute a
personally liable for corporate obligations, two quorum.
requisites must concur: b. The vote of such director or trustee was not
1. it must be alleged in the complaint that the necessary for the contract’s approval.
director or officer assented to patently c. The contract is fair and reasonable
unlawful acts of the corporation or that the d. In case of corporations vested with public
officer was guilty of gross negligence or bad interest, material contracts are approved by at
faith; and least two-thirds (2/3) of the entire membership of
2. there must be proof that the officer acted in the board, with at least a majority of the
bad faith. (Freyssinet Filipinas Corp. v. independent directors voting to approve the
Lapuz, G.R. No. 226722, 2019) material contract; and
e. In case of an officer, the contract with him has
been previously authorized by the Board.
c. Responsibility for Crimes
Where any of the first three (3) conditions set forth in
General rule: The Board being generally a policy- the is absent such contract may be ratified by:
making body, directors as such cannot be held liable a. the vote of the stockholders representing at
under a criminal statute making those in charge of the least two-thirds (2/3) of the outstanding capital
management of the corporation liable for the criminal stock or of at least two-thirds (2/3) of the
acts done in pursuit of corporate operations. members in a meeting called for the purpose;
and
The members of the Board generally do not concern
themselves with the day-to-day affairs of the b. Full disclosure of the adverse interest of the
corporation, except those corporate officers who are directors or trustees involved is made at such
charged with the running of the business of the meeting and the contract is fair and reasonable
corporation and are concomitantly members of the under the circumstances.
Board, like the President. (Federated Dealers Assn.
v. Del Rosario, G.R. No. 202639, 2016). II. Contracts Between Corporations with
Interlocking Directors (Sec. 32)
Exception: To be held criminally liable for the acts of
a corporation, there must be a showing that its A contract between two (2) or more corporations
officers, directors, and shareholders actively having interlocking directors shall not be invalidated
participated in or had the power to prevent the on that ground alone. These are valid so long as
wrongful act. (SEC v. Price Richardson Corp., G.R. there is no fraud and the contract is fair and
No. 197032, 2017) reasonable. However, if the director’s interest is
3. Special Fact Doctrine nominal in one of the contracting corporations (not
Under the Special Facts Doctrine, although a director exceeding 20% of the outstanding capital stock), then
does not stand in fiduciary relation to the stockholder, the contract must comply with the requisites provided
he is under legal obligation to make fair and full supra, Sec. 31, otherwise voidable.
disclosure of pertinent official information where
special circumstances exist, giving rise to the
obligation to disclose. (Soledad M. Cagampang, The 5. EXECUTIVE AND OTHER SPECIAL
Fiduciary Duties of Corporate Directors Under COMMITTEES
Philippine Law, 46 Phil. L. J., 513, 562 [1971])
I. Creation
d. Contracts
If the bylaws so provide, the board may create an
I. By Self-Dealing Directors with the executive committee composed of at least three (3)
Corporation (Sec. 31) directors. Said committee may act, by majority vote
of all its members, on such specific matters within the
A contract of the corporation with its director/s or competence of the board, as may be delegated to it
trustee/s or officer/s, or their spouses and relatives in the bylaws or by majority vote of the board.
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II. Limitations II. Notice of Meeting

When
Powers That Cannot Be Delegated to the Written notice of regular meetings shall be sent to
Executive Committee stockholders or members of record at least twenty-
a. Approval of action requiring concurrence of one (21) days prior to the meeting. (Sec. 49)
stockholders;
b. Filling of vacancies in the board; How
c. Adoption, amendment or repeal of by-laws; Written notice to regular meetings may be sent to the
d. Amendment or repeal of board resolution which stockholders or members of record through:
by its terms cannot be amended or repealed; a. Means of communication provided in the
e. Distribution of cash dividends. (Sec. 34) bylaws (Sec. 50)
b. Electronic mail (Sec.49)
Special Committees (Sec. 34) c. Such other manner as the SEC shall allow
under its guidelines.
The board of directors may create special
committees of temporary or permanent nature and to Notice of Meetings shall state the time place and
determine the members’ term, composition, purpose of the meeting and shall be accompanied by:
compensation, powers, and responsibilities. 1. Agenda for the meeting
2. Proxy form
Other delegations of authority 3. Requirements and procedures to be
a. The Board may delegate such powers to either followed in case a stockholder elects and is
an executive committee or officials or contracted allowed to participate, attend and vote by
managers. remote communication.
b. The delegation, except for the executive 4. Requirements and procedures for
committee, must be for specific purposes. nomination and in case the meeting is for
i. Accordingly, the general rules of agency election of directors. (Sec. 50)
as to the binding effects of their acts
would apply. Section 50 of the Corporation Code expressly allows
ii. For such officers to be deemed fully a shorter period of notice of stockholders’ meetings
clothed by the corporation to exercise a that those provided under its default two (2) week
power of the Board, the latter must period, provided the same is provided for in the By-
specially authorize them to do so (ABS- Laws, (Ricafort v. Dicdican, 787 SCRA 163, 2016);
CBN Broadcasting Corporation v. CA, such period set in the by-laws is valid even when the
GR No. 128690, 1999). period is reckoned from the mailing of the notice
rather than when it is actually received by the
stockholder of record, (Guy v. Guy, 790 SCRA 288,
2016)
6. MEETINGS
III. Place and time of meetings
The corporation’s by-laws can provide otherwise to
Where
all the rules hereunder, so long as minimum
The meetings of stockholders or members whether
requirements are satisfied.
regular or special shall be held in the principal office
of the corporation as set forth in the articles or if not
I. Regular or Special: practicable, in the city or municipality where the
Regular - held annually on a date fixed in the by- principal office of the corporation is located. (Sec.
laws, or if not so fixed, on date after April 15 of every 49)
year as determined by the board of directors or
trustees.(Sec. 49) When
a. Regular - held annually
Special - held at any time deemed necessary or as b. Special - held at any time deemed necessary
provided in the by- laws. Provided that at least 1 week
written notice shall be sent to all stockholders or Who calls for the meetings
members, unless otherwise provided in the by- laws. In case the ff. shall occur:
Note that notice of any meeting may be waived, 1. There is no person designated by the by-
expressly or impliedly by any stockholder or member. laws to call a meeting, or
2. The person authorized unjustly refuses to
call a meeting,
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The SEC upon petition of a stockholder/ member, determining the existence of a quorum during
and on the showing of good cause therefore, may member’s meetings. Dead members shall not be
issue an order directing the petitioner to call a counted (Tan v. Sycip, G.R. No. 153468, 2006).
meeting of the corporation by giving proper notice
required by this Code or the bylaws, with the Quorum of Board
petitioner presiding thereat until at least a majority of General Rule: A majority of the directors or trustees
stockholders/ members present have chosen a as stated in the articles of incorporation shall
presiding officer. (Sec. 49). constitute a quorum to transact corporate business
Who presides over the meetings Exception: Unless the articles of incorporation or the
General Rule: The chairman by-laws provides for a greater majority (Sec. 52)
Exceptions:
1. In the absence of the chairman, the Valid Corporate Acts
president shall preside at all meetings of the General Rule: Every decision reached by at least a
directors or trustees as well as of the majority of the directors or trustees constituting a
stockholders or members, unless the bylaws quorum are considered valid.
provide otherwise.
2. In the following cases: Exception: The election of officers shall require the
(1) there is no person designated by the by- vote of a majority of all the members of the
board.(Sec. 52)
laws to call a meeting, or
(2) the person authorized unjustly refuses to
NOTE: A director or trustee who has a potential
call a meeting,
interest in any related party transaction must recuse
The petitioning stockholders / member shall
from voting on the approval of the related party
preside until at least a majority of
transaction without prejudice to compliance with the
stockholders/ members present have
requirements of Section 31 of this Code.
chosen a presiding officer. (Sec 49)
.
Rule on Abstention
IV. Quorum
In case of abstention during a board meeting on a
General rule: Majority of the outstanding capital
vote taken on any issue, the general rule is that an
stock, or of the members, shall constitute a quorum
abstention is counted in favor of the issue that won
(Sec. 51)
the majority vote; since by their act of abstention, the
abstaining directors are deem to abide by the rule of
Outstanding Capital Stock
the majority. (Lopez v. Ericta, G.R. No. L-32991,
The total shares of stock issued under binding
1972)
subscription agreements to subscribers or
stockholders, whether or not fully or partially paid,
V. Minutes and agenda of meetings
except treasury shares
Minutes of the meeting
Exceptions: 1. Records of all business transactions and
a. The bylaws provides for a greater majority minutes of all meetings shall be kept and
(Sec. 51) carefully preserved at a corporation’s
b. If the rescheduled election of principal office
directors/trustees is held, the voting shares 2. It shall set forth in detail:
of stock or membership represented at the a. The time and place of the meeting held
meeting ordered by the SEC shall constitute b. How it was authorized
a quorum for purposes of conducting an c. The notice given
election under this Section 25. d. The agenda therefor
c. In cases where greater vote for an act or e. Whether the meeting was regular or
business is required by law as when the special, its object if special
required vote is 2/3 of the outstanding capital f. Those present and absent, and
stock, or membership as the case may be. g. Every act done or ordered done at the
meeting.
NOTE: For stock corporations, the “quorum” referred h. Upon the demand of any director,
to in Section 52 of the Corporation Code is based on trustee, stockholder or member, the
the number of outstanding voting stocks. For non- time when any director, trustee,
stock corporations, only those who are actual, living stockholder or member entered or left
members with voting rights shall be counted in
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the meeting must be noted in the Agenda of meetings (Sec. 49)

minutes; At each regular meeting of stockholders or members,
i. On a similar demand, the yeas and nays the board of directors or trustees shall endeavor to
must be taken on any motion or present to stockholders or members the following:
proposition, and a record thereof a. The minutes of the most recent regular
carefully made. meeting
j. The protest of any director, trustee, b. A members’ list for non-stock corporations
stockholder or member on any action or and, for stock corporations, material
proposed action must be recorded in full information on the current stockholders, and
upon their. (Sec. 75) their voting rights;
c. A detailed, descriptive, balanced and
The signing of the minutes by all the members of the comprehensible assessment of the
board is not required—there is no provision in the corporation’s performance,
Corporation Code that requires that the minutes of d. A financial report for the preceding year,
the meeting should be signed by all the members of e. An explanation of the dividend policy and the
the board. The signature of the corporate secretary fact of payment of dividends
gives the minutes of the meeting probative value and f. Director or trustee profiles
credibility (People v. Dumlao, G.R. No. 168918, g. A director or trustee attendance report,
2009). indicating the attendance of each director or
trustee at each of the meetings of the board
The entries contained in the minutes are prima facie
and its committees and in regular or special
evidence of what actually took place during the
stockholder meetings;
meeting, pursuant to Section 44, Rule 130 of the
Revised Rule on Evidence (People v. Dumlao, G.R. h. Appraisals and performance reports for the
No. 168918, 2009). board and the criteria and procedure for
assessment;
Resolution vs. Minutes Of The Meeting i. A director or trustee compensation report
(People v. Dumlao, G.R. No. 168918, 2009) j. Director disclosures on self-dealings and
RESOLUTION MINUTES OF THE related party transactions; and/or
MEETING k. The profiles of directors nominated or
seeking election or reelection.
A formal action by a A brief statement not
corporate board of only of what transpired at
directors or other a meeting, usually of
corporate body stockholders/members
authorizing a particular or directors/trustees, but
act, transaction, or also at a meeting of an
appointment executive committee
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Comparison Between Stockholder’s And Director’s Meeting

STOCKHOLDERS’ MEETING DIRECTOR’S/ TRUSTEES’ MEETING
Types of Regular and Special Regular and Special
Meetings
Place of Held in the principal office of the corporation as set Anywhere in or outside of the Philippines, unless the by-
Meetings forth in the articles of incorporation, or if not laws provide otherwise
practicable, in the city or municipality where the
principal office of the corporation is located.
When held REGULAR – held annually on a date fixed by the by- REGULAR – held monthly
laws, or if not so fixed, on any date after April 15
every year as determined by the board of directors
or trustees
SPECIAL – held at any time deemed necessary or SPECIAL – held at any time upon the call of the
as provided in the by- laws President
Notice of REGULAR – notice must be sent at least 21 days Notice must be sent at least two (2) days prior to the
Meeting before the meeting scheduled meeting, unless a longer time is provided in
SPECIAL – notice must be sent at least 1 week. the bylaws. Notice may be waived expressly or impliedly,
Notice may be waived, expressly or impliedly, by any by any Director or Trustee
stockholder or member
Who General Rule: Person designated in the bylaws The chairman or, in his absence, the president shall
presides In default: Chairman, and in his absence, the preside
president
Quorum Majority of the outstanding capital stock, or of the Majority of the number of directors and trustees as fixed
members. in the articles of incorporation, unless the articles of
EXCEPT:(a) greater majority is provided in the incorporation or the by-laws provides for a greater
bylaws (b) in cases where greater vote for an act or majority.
business is required by law.
NOTE: For stock corporations, quorum is based on

outstanding voting stocks. For non-stock
corporations, only those who are actual, living
members with voting rights shall be counted.(Tan v.
Sycip, G.R. No. 153468, 2006
Total outstanding capital stocks, without distinction

as to disputed or undisputed shares of stock, is the
basis in determining the presence of
quorum. (Villongco v. Yabut, G.R. Nos. 225022 &
225024, 2018)
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E. STOCKHOLDERS AND MEMBERS Requisites for Valid Proxy

1. The proxy shall be in writing;
1. RIGHTS AND OBLIGATIONS OF 2. Signed by the stockholder or member; and
STOCKHOLDERS AND MEMBERS 3. Filed before the scheduled meeting with the
corporate secretary (Sec. 57)
a. Doctrine of Equality of Shares
Duration of Proxy
(Sec. 6)
General Rule: It shall be valid only for the meeting
for which it is intended.
Under the doctrine of equality of shares – all stocks
issued by the corporation are presumed equal with
Exception: Unless otherwise provided in the proxy
the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such differences NOTE: No proxy shall be valid and effective for a
(CIR vs. CA, G.R. No. 108576, 1999) period longer than five (5) years at any one time.
Each share shall be equal in all respects to every The by-laws of the corporation may prescribe a
other share, except as otherwise provided in the particular form for proxy and fix the deadline for its
articles of incorporation and in the certificate of submission.
stock. (Sec. 6)
Generally, proxies, even those with irrevocable
The following are important rights of stockholders, terms, have always been considered as revocable,
which continue to exist even when the shares have unless coupled with an interest, and their revocation
been sequestered: may be by formal notice, orally, or by conduct as by
a. Right to attend meetings and to vote the appearance of the stockholder or member giving
b. Right to receive dividends the proxy, or the issuance of a subsequent proxy, or
c. Right to receive distributions upon liquidation of the sale of shares.
the corporation
d. Right to inspect the books of the corporation NOTE: Proxies, who are not stockholders or
e. Pre-emptive rights (Cojuangco, Jr. vs. Roxas, members, cannot be elected as a director or trustee.
G.R. No. 91925, 1991) (Lim v. Moldex Land, Inc., G.R. No. 206038, 2017)
2. PARTICIPATION IN MANAGEMENT Proxy Disputes—Jurisdiction

The regular courts now have the power to hear and
decide cases involving all matters and conduct of
a. Proxy
the elections of directors, including validation of
proxies. The power of SEC to regulate proxies
Section 57 of the Corporation Code provides that
remains only in instances when stockholders vote
stockholders and members may vote in person or by on matters other than the election of directors (SEC
proxy in all meetings of stockholders or members. v. CA, G.R. No. 187702/189014, 2014).
b. Voting Trust Requisites for Valid Voting Trust

a. In writing and notarized
A stockholder confers upon a trustee the right to b. Specifying the terms and conditions
vote and other rights pertaining to the shares for a c. A certified copy must be filed with the
period not exceeding 5 years at any one time. (Sec. corporation and with the SEC. (Sec. 58)
58).
Duration
However, if the voting trust was a requirement for a General Rule: Not exceeding 5 years
loan agreement, period may exceed 5 years but
shall automatically expire upon full payment of the Exception: If the voting trust was a requirement for
loan. a loan agreement, period may exceed 5 years but
shall automatically expire upon full payment of the
Pooling or voting agreements – two or more loan.
stockholders agree that their shares shall be voted
as a unit. Usually concerned with the election of No voting trust must be used for the purposes of
directors to gain control of the management. fraud. Stockholders who are defrauded by their
trustees have a right to revoke the trust and recover
damages from such trustee.
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Voting Trust v. Proxy f. A transferee of stock if his stock transfer is not

VOTING TRUST PROXY registered in the stock and transfer book of the
Trustee votes as Proxy holder votes as corporation and does not have a proxy from or
owner agent voting trust agreement with the transferor may
not vote the purchased/acquired shares.
Agreement must be Proxy need not be
g. A stockholder who mortgages or grants a
notarized notarized
security interest over his shares retains the right
Trustee acquires legal Proxy has no legal to vote unless he gives authority for the creditor
title to the shares of title to the shares of to vote.
the transferring the principal
stockholder; only c. Cases When Stockholder’s
beneficial title remains Action is Required
with the stockholder
Trustee may vote in Proxy must vote in 1. CONCURRENCE OF MAJORITY of the
person or by proxy person outstanding capital stock (by majority vote) in
unless the agreement
concurrence with an affirmative vote of a
provides otherwise
majority of the Board of Directors:
Trustee is not limited Proxy can only act at
to act at any particular a specified a. To enter into management contract if any
meeting stockholder’s meeting of the two instances stated above are
(if not continuing) absent;
Trustee can vote and Proxy can only vote in b. To adopt, amend or repeal the by-laws
exercise all the rights the absence of the c. To dissolve the corporation voluntarily
of the stockholder owners of the stock where no creditors are affected;
even when the latter
is present 2. CONCURRENCE OF 2/3 OF OUTSTANDING
Agreement must not Proxy cannot exceed CAPITAL STOCK (by 2/3 vote) (See similar
exceed 5 years at any 5 years at any one enumeration in the specific express powers of
one time, except time the corporation)
when the same is a. Extend or shorten corporate term;
made a condition of a
b. Increase/Decrease Corporate Stock;
loan
c. Incur, Create Bonded Indebtedness;
Voting right is Right to vote is
divorced from the inherent or d. Deny pre-emptive right;
ownership of stocks inseparable from the e. Sell, dispose, lease, encumber all or
right to ownership of substantially all of corporate assets;
the stock f. Investing another corporation, business
Agreement is Revocable anytime, other than the primary purpose;
irrevocable except if coupled with g. Declare stock dividends
interest h. Enter into management contract if (1) a
stockholder or stockholders representing
Limitations on Right to Vote the same interest of both the managing
a. Where the Articles of Incorporation provides for and the managed corporations own or
classification of shares pursuant to Sec. 6, non- control more than 1/3 of the total
voting shares are not entitled to vote except as outstanding capital entitled to vote of the
other provided in the said section. managing corporation; or (2) a majority of
b. Preferred or redeemable shares may be the members of the board of directors of
deprived of the right to vote unless otherwise the managing corporation also constitute
provided. a majority of the members of the board of
c. Fractional shares of stock cannot be voted the managed corporation;
unless they constitute at least one full share. i. Amend the Articles of Incorporation
d. Treasury shares have no voting rights as long
as they remain in treasury. 3. BY CUMULATIVE VOTING
e. Holders of stock declared delinquent by the a. See discussion on election of directors
board for unpaid subscription have no voting
rights.
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4. WITHOUT BOARD RESOLUTION No declaration of dividends can be valid if there are

a. 2/3 of outstanding capital stock – delegate no sufficient unrestricted retained earnings.
to the board the power to amend the by-
laws; Stock Corporations are prohibited from retaining
b. Majority of the outstanding capital stock – surplus profits in excess of 100% of their paid-in
revoke the power of the board to amend the capital stock, except:
by-laws which was previously delegated. 1. When justified by definite corporate expansion
c. Removal of directors by a vote of the projects or programs approved by the board of
stockholders representing at least 2/3 of directors
the outstanding capital stock; 2. Corporation is prohibited under a loan
d. To approve the granting of compensation to agreement from declaring dividends without the
the Board of Directors; creditor’s consent.
3. Under special circumstances such as when
The term “outstanding capital stock (OCS),”
there is a need for special reserve for probable
means the total shares of stock issued under
binding subscription contracts to subscribers or contingencies
stockholders, whether fully or partially paid, except
treasury shares. (Sec. 173) Form of Dividends
1. Cash Dividends (revocable before
MANNER OF VOTING (Sec. 57) announcement).
Stockholders and members may vote in person or 2. Property Dividends (revocable before
by proxy in all meetings of stockholders or announcement).
members. 3. Stock Dividends, which requires, aside from the
declaration by the Board, the approval of 2/3 of
Voting through remote communication or in the outstanding capital stock (revocable before
absentia; Requisites issuance).
1. Authorized in the by-laws or by a majority
of the board of directors NOTE: No dividends can be declared out of capital,
2. Votes are received before the corporation except liquidating dividends distributed at
finishes the tally of votes. dissolution.
Effect: A stockholder or member who participates Right Of Appraisal

through remote communication or in absentia, shall The right to withdraw from the corporation and
be deemed present for purposes of quorum. demand payment of the fair value of his shares after
dissenting from certain corporate acts involving
The corporation shall establish the appropriate fundamental changes in corporate structure.
requirements and procedures for voting through
remote communication and in absentia, taking into 1. When available
account the company’s scale, number of a. Extension or shortening of corporate term;
shareholders or members, structure and other (Sec. 36)
factors consistent with the basic right of corporate b. In case any amendment to the articles of
suffrage. incorporation has the effect of changing or
restricting the rights of any stockholders or
class of shares, or of authorizing
3. PROPRIETARY RIGHTS
preferences in any respect superior to
those of outstanding shares of any class;
a. Right To Dividends
(Sec. 80)
c. Investing of corporate funds for any
The right to dividends vests at the time of its
declaration by the Board of Directors. purpose other than the primary purpose;
(Sec. 80)
Although stock certificates grant the stockholder the d. Sell or dispose all or substantially all assets
right to receive quarterly dividends of 1%, of corporation;(Sec. 80)
cumulative and participating, the stockholders do e. Merger or consolidation.(Sec. 80)
not become entitled to the payment thereof without
necessity of a prior declaration of dividends.
(Republic Planters Bank v. Hon. Agana, Sr., G.R.
No. 51765, 1997)
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2. Manner of exercise of right (Sec 81, RCC) Also, a corporation shall furnish a stockholder or
1. A written demand on the corporation within member, within 10 days from receipt of their written
30 days after the vote was taken (failure to request, its most recent financial statement (Sec.
do so means waiver);(Sec. 81) 74).
2. From the time of demand, all rights accruing
to such shares including voting and The first three are the formulation of the old code.
dividend rights shall be suspended except Under the Revised Corporation Code, inspection
rights covers a’’ “corporate records, regardless of
the right of such stockholder to receive
the form in which they are stored” (see Sec. 73)
payment of the fair value of stockholder’s
shares. (Sec. 82) Stock and transfer book
3. Ten (10) days from demand, the dissenting Record of:
stockholder must submit his certificates of 1. All stocks in the names of the stockholders
stocks for notation that such certificates alphabetically arranged;
represent dissenting shares. (Sec. 85) 2. The installment paid and unpaid on all stock for
4. The price to be paid is the fair value of the which subscription has been made, and the
shares on the date the vote was taken; date of payment of any installment;
(Sec. 81) 3. A statement of every alienation, sale or transfer
5. The fair value shall be agreed upon by the of stock made; and
corporation and the dissenting stockholders 4. Such other entries as the by-laws may
within 60 days from the date the vote was prescribe.
taken. In case there is no agreement, the
fair value shall be determined by a majority NOTE:
of the 3 distinguished persons one of whom Section [73], while specific in the kinds of records
shall be named by the stockholder another that must be maintained, is not limiting, thus, the
by the corporation and the third by the two inspection right is applicable to the stock and
who were chosen; (Sec. 81) transfer book (Yujuico v. Quiambao, G.R. No.
6. The right of appraisal is extinguished when: 180416, 2014)
(Sec. 83)
a. He withdraws the demand with the The corporate secretary is the officer who is duly
authorized to make entries on the stock and transfer
corporation’s consent;
book (Gokongwei v. SEC, GR No. 45911, 1979).
b. The proposed action is
abandoned; All transfers of shares not entered in the stock and
c. The SEC disapproves of such transfer book of the corporation are invalid as to
action where approval is attaching or execution creditors of the assignors, as
necessary well as to the corporation and to subsequent
d. The SEC determines that such purchasers in good faith and to all persons
dissenting stockholder is not interested, except the parties to such transfers: “All
entitled to the appraisal right. transfers not so entered on the books of the
7. If the dissenting stockholder is not paid corporation are absolutely void; not because they
within 30 days from the award, he shall are without notice or fraudulent in law or fact, but
automatically be restored to all his rights as because they are made so void by statute (Uson vs.
Diosomito, G.R. No. 42135, 1935).
stockholder. (Sec. 82)
The entries are considered prima facie evidence
b. Right To Inspect only and may be subject to proof to the contrary
(Bitong v. CA, G.R. No. 123553, 1998).
Records that can be inspected
Corporate records, regardless of the form in which The stock and transfer book of the corporation
they are stored, shall be open to inspection by any cannot be used as the sole basis for determining the
director, trustee, stockholder or member of the quorum as it does not reflect the totality of shares
corporation in person or by a representative at which have been subscribed, and more so when the
reasonable hours on business days, and a demand articles of incorporation show a significantly larger
in writing may be made by such director, trustee or amount of shares issued and outstanding as
stockholder at their expense, for copies of such compared to that listed in the stock and transfer
records or excerpts from said records. (Sec. 73).
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book (Lanuza v. Court of Appeals, G.R. No. 131394, for purposes of blackmail or extortion.
2005). (Terelay Investment and Development
Grounds for Not Allowing Inspection by a Corp. v. Yulo, G.R. No. 160924, 2015)
Stockholder
a. If the person demanding to examine the The Right to Inspect Corporate Records is
records has improperly used any Subject to Confidentiality rules
information secured for prior examination,
b. He is not acting in good faith, The inspecting or reproducing party shall remain
c. A requesting party who is not a stockholder bound by confidentiality rules under prevailing laws,
or member of record, or is a competitor such as:
1. Trade secrets or processes under Republic
shall have no right to inspect or demand
Act No. 8293, or the “Intellectual Property
reproduction of corporate records. (Sec.
Code of the Philippines”, as amended,
73)
2. Republic Act No. 10173, or the “Data
Competitor- competitor, director, officer, controlling Privacy Act of 2012”,
stockholder or otherwise represents the interests of 3. Republic Act No. 8799, or “The Securities
a competitor shall have no right to inspect or Regulation Code”, and
demand reproduction of corporate records. (Sec. 4. the Rules of Court. (Sec. 73)
73)
Doctrinal Rulings on Right to Inspect
In one case, the Supreme Court clarified that the 1. The demand for inspection should cover
right of inspection may only be exercised by a only reasonable hours on business days;
stockholder of record. As such, the corporation may 2. The stockholder, member, director or
validly set up the defense in its refusal to grant a trustees demanding the right is one who
claim of the right of inspection on the ground that the has not improperly used any information
person is not a stockholder of record. (Puno v. Puno secured through any previous examination
Enterprises Inc., GR No. 177066, September 11, of the records;
2009)
3. The demand must be accompanied with
statement of the purpose of the inspection,
In Terelay Investment and Development Corp. v.
Yulo, the court ruled that although the corporation which must show good faith or legitimate
may deny a stockholder's request to inspect purpose.
corporate records, the corporation must show that 4. Illegitimate purposes include to obtain
the purpose of the shareholder is improper by way corporate secrets (formula), nuisance suit,
of defense. or to embarrass the company. (Africa v.
PCGG, G.R. No. 83831, 1992)
The purposes held to justify a demand for 5. If the corporation or its officers contest such
inspection are the following: purpose or contend that there is evil motive
1. To ascertain the financial condition of the behind the inspection, the burden of proof
company or the propriety of dividends; is with the corporation or such officer to
2. The value of the shares of stock for sale or show the same.
investment;
6. The RTC, and not the Sandiganbayan, has
3. Whether there has been mismanagement;
4. In anticipation of shareholders' meetings to jurisdiction over a stockholder’s suit to
obtain a mailing list of shareholders to enforce its right to inspect under the
solicit proxies or influence voting; Corporation Code where the case does not
5. To obtain information in aid of litigation with involve a sequestration-related incident, but
the corporation or its officers as to an intra-corporate controversy (Abad v.
corporate transactions. PHILCOMSAT, G.R. No. 200620, 2015)
7. A stockholder’s right to inspect corporate
The improper purposes which may warrant the records subsists during the period of
denial of the right of inspection: liquidation (three year period for dissolution
1. Obtaining of information as to business per Sec. 145). (Chua v. SEC, G.R. No.
secrets or to aid a competitor; 216146, 2016)
2. To secure business "prospects" or
8. An action for injunction and, consequently,
investment or advertising lists;
a writ of preliminary injunction filed by a
3. To find technical defects in corporate
transactions in order to bring "strike suits" corporation is generally unavailable to
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prevent stockholders from exercising their ● The one requesting to inspect was not acting in
right to inspection…[C]orporations may good faith or for a legitimate purpose in making
raise their objections to the right his demand
of inspection through affirmative defense in Criminal sanctions under Sec. 161
an ordinary civil action for specific Refer to discussion at the respective topic below
performance or damages, or through a
comment (if one is required) in a petition c. Pre-Emptive Right
for mandamus. (Philippine Associated
Smelting and Refining Corp. v. Lim, G.R. The shareholders’ right to subscribe to all issues or
No. 172948, 2016) dispositions of shares of any class in proportion to
his present stockholdings, the purpose being to
enable the shareholder to retain his proportionate
Remedies If Right to Inspect is Denied
control in the corporation and to retain his equity in
Mandamus
the surplus.
Refusal to allow stockholders (or members of a non-
stock corporation) to examine books of the company
Instances When Preemptive Right Is Not
is not a ground for appointing a receiver (or creating
Available
a mgt. committee) since there are other adequate
a. Shares to be issued to comply with laws
remedies, such as mandamus. (Ao-as v. CA, G.R.
No. 128464, 2006) requiring stock offering or minimum stock
ownership by the public;
Damages b. Shares issued in good faith with approval of the
Administrative Sanction (Sec. 158) stockholders representing 2/3 of the
Requisites for Section [158] to Apply (Ang-Abaya v. outstanding capital stock in exchange for
Ang, G.R. no. 178511, 2008) property needed for corporate purposes;
c. Shares issued in good faith with approval of the
● A director, trustee, stockholder or member has stockholders representing 2/3 of the
made a prior demand in writing for a copy of outstanding capital stock issued in payment of
excerpts from the corporations records or previously contracted debts;
minutes; d. In case the right is denied in the Articles of
● Any officer or agent of the concerned Incorporation;
corporation shall refuse to allow the said e. Waiver of the right by the stockholder;
director, trustee, stockholder or member of the f. If the shares of a corporation are offered and not
corporation to examine and copy said excerpts; subscribed and purchased by the stockholders,
● If refusal is made per a resolution or order of the and the shares are being offered again, there is
board of directors or trustees, the liability under no pre-emptive right with respect to the latter
this section for such action shall be imposed offer of shares (Benito v. SEC, G.R. No. L-
upon the directors or trustees who voted for 56655, 1983)
refusal;
● Where the officer or agent of the corporation d. Right of First Refusal
sets up the defense that the person demanding
to examine and copy excerpts from the The right of first refusal provides that a stockholder
corporation’s records and minutes has who may wish to sell or assign his shares must first
improperly used any information secured offer the shares to the corporation or to the existing
through any prior examination of the records or stockholders of the corporation, under terms and
conditions which are reasonable; and that only when
minutes of such corporation or of any other
the corporation or the other stockholders do not or
corporation, or was not acting in good faith or fail to exercise their option, is the offering
for a legitimate purpose in making his demand, stockholder at liberty to dispose of his shares to third
the contrary must be shown or proved. parties.
● The person demanding to examine has
improperly used any information secured Pre-Emptive Right v. Right of First Refusal
through any prior examination of the records or PRE-EMPTIVE RIGHT OF FIRST
minutes of such corporation or for any other RIGHT REFUSAL
corporation; and Generally may be Arises only by virtue
exercised, subject to of contractual
stipulations or by law
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limitations in (g) Investment of corporate funds in another

Corporation Code corporation or business in accordance with
this Code; and
Covers unissued Covers shares (h) Dissolution of the corporation
shares offered for already issued
subscriptions
May be exercised by Can only be exercised
mere trustees or by the owner and not
conservators mere trustee or
(Republic v. conservator, since it is
Sandiganbayan, G.R. an act of ownership
No. 107789, 2003) (Republic v.
Sandiganbayan, G.R.
No. 107789, 2003)
Right claimed against Right exercisable
the Corporation, against the seller-
where the stockholder stockholder
must pay
NOTE:
A corporation has no power to prevent or restrain
transfers of its shares, unless such power is
expressly conferred in the Articles of Incorporation
or the law. (Fleischer v. Botica Nolasco Co., G.R.
No. L-23241, 1925)
A provision in the by-laws granting the right of first

refusal (and therefore, restrains trade) is void and
does not bind third parties (Fleischer v. Botica
Nolasco Co., G.R. No. L-23241, 1925)
By-laws are intended merely for the protection of the

corporation and prescribe relation, not restriction;
they are always subject to the charter of the
corporation. (Rural Bank of Salinas v. CA, G.R. No.
96674, 1992)
4. Right to Vote
The right to vote is given to the shareholders but can
be limited if stipulated in the Articles of Incorporation
and the Certificate of Stock.
However, holders of nonvoting shares shall

nevertheless be entitled to vote on the following
matters:
(a) Amendment of the articles of incorporation
(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge,
or other disposition of all or substantially all
of the corporate property;
(d) Incurring, creating, or increasing bonded
indebtedness;
(e) Increase or decrease of authorized capital
stock;
(f) Merger or consolidation of the corporation
with another corporation or other
corporations;
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e. Other Rights the articles of incorporation or by- laws provide

for a plan of distribution. Otherwise, a plan of
Right to issuance of stock certificate for fully distribution may be adopted in the process of
paid shares dissolution by:
Under Section 64 of the Corporation Code, no a. Majority vote of the Board of
certificate of stock shall be issued to a subscriber Trustees
until the full amount of his subscription together with b. Adopted by at least 2/3 of the
interest and expenses (in case of delinquent members having voting rights
shares), if any is due, has been paid. A subscriber (Secs. 93–94)
must first totally pay his subscription before a
certificate of stock covering shares subscribed and Right to transfer of stocks in corporate books;
paid for could be issued to him. But an unpaid Requirements for valid transfer of stocks
subscription (not declared delinquent) can be voted 1. There must be delivery of the stock certificate
upon in corporate meetings. Such delinquent shares with intent to transfer title;
are also entitled to dividends, subject to the rules set 2. The certificate must be endorsed by the owner,
forth in Section 43 of the Corporation Code on or his attorney-in-fact, or other persons legally
delinquent shares. authorized to make the transfer; and
3. To be valid against third parties, the transfer
Nevertheless, Section 64 does not prohibit the must be recorded in the books of the
corporation from “dividing” the subscription of a corporation
subscriber by considering portion thereof as fully
paid and issuing a corresponding certificate over the NOTE: The delivery of the stock certificate duly
paid- up shares. Thus, in the absence of provisions endorsed by the owner is the operative act of
in the by- laws to the contrary, a corporation may transfer of shares from the lawful owner to the new
apply payments made by subscribers on account of transferee. (Bitong v. Court of Appeals, G.R. No.
their subscriptions either as: 123553, 1998)
1. Full payment for the corresponding
number of shares, the par value of which is The delivery contemplated in Section [73], however,
covered by such payment; or pertains to the delivery of the certificate of shares
2. Payment pro rata to each and all the entire by the transferor to the transferee, that is, from
number of shares subscribed for the original stockholder named in the certificate to
the person or entity the stockholder was transferring
Once an alternative is chosen, it must be applied the shares to, whether by sale or some other valid
uniformly to all stockholders similarly situated, and form of absolute conveyance of ownership. It does
therefore, it cannot be changed without the consent not pertain to the surrender of the stock certificate to
of all stockholders who might be affected. the corporation. (Teng v. SEC, G.R. No. 184332,
2016)
Proportionate participation in the distribution of
assets in liquidation However: The surrender of the original certificate of
stock is necessary before the issuance of a new one
● Stockholders and stock corporation –
so that the old certificate may be cancelled. A
Except by decrease of capital stock, and as corporation is not bound and cannot be required to
otherwise allowed by the Corporation Code, no issue a new certificate unless the original certificate
corporation shall distribute any of its assets or is produced and surrendered. (Teng v. SEC, G.R.
property to its stockholders except upon lawful No. 184332, 2016)
dissolution and after payment of all its liabilities
(Sec. 122) A transfer of shares not recorded in the stock and
● Members and foundations – Upon dissolution transfer book is non- existent as far as the
of a non-stock corporation, all liabilities and corporation is concerned, and consequently, a
obligations must first be paid, and assets petition for mandamus filed by a transferee,
received and held subject to limitations compelling it to issue the corresponding certificates
permitting their use for specified eleemosynary in the name of the transferee would be without
basis. It is only when the transfer has been recorded
purposes shall be properly transferred or
in the stock and transfer book that a corporation may
returned, then the net assets remaining, if any,
rightfully regard the transferee as one of its
shall be distributed to the members, or any stockholders. From this time, the consequent
class or classes of members, to the extent that obligations on the part of the corporation to
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recognize such right as it is mandated by law to c. No appraisal rights are available for the act or
recognize arises (Ponce v. Alsons Cement, G.R. acts complained of; and
No. 139802, 2002). d. The suit is not a nuisance or harassment suit
(Interim Rules of Procedure for Intra-Corporate
NOTE: In Andaya v. Rural Bank of Cabadbaran, Controversies, A.M. No. 01-2-04-SC, 2001).
Inc., G.R. No. 188769, 2016, the Court ruled that the
registration of a transfer of shares of stock is a As a general rule, corporate litigation must be
ministerial duty on the part of the corporation. commenced by the corporation itself, with the
Aggrieved parties may then resort to the remedy of imprimatur of the board of directors, which, pursuant
mandamus to compel corporations that wrongfully to the law, wields the power to sue. Therefore, since
or unjustifiably refuse to record the transfer or to the derivative suit is a remedy of last resort, it must
issue new certificates of stock. This remedy is be shown that the board, to the detriment of the
available even upon the instance of a bona fide corporation and without a valid business
transferee who is able to establish a clear legal consideration, refuses to remedy a corporate wrong.
right to the registration of the transfer. A derivative suit may only be instituted after such an
omission. Simply put, derivative suits take a back
Obligations of a Stockholder seat to board-sanctioned litigation whenever the
a. Liability to the corporation for unpaid corporation is willing and able to sue in its own
subscription; name. (Ago Realty & Dev. Corp. v. Ago, G.R. No.s
b. Liability to the creditors of the corporation for 210906 & 211203, 2019)
unpaid subscription;
c. Liability to the corporation for interest on
unpaid subscription if so required by the by- 5. INTRA-CORPORATE DISPUTES
laws;
d. Liability for watered stock; Individual vs. Representative vs. Derivative
e. Liability for dividends unlawfully paid; Suits (Ching v. Subic Bay, G.R. No. 174353, 2014)
INDIVIDUAL Those brought by the
SUIT shareholder in his own
4. REMEDIAL RIGHTS name against the
corporation when a wrong
One or more stockholders/members in the name is directly inflicted against
and on behalf of the corporation may bring a him
derivative suit to redress wrongs committed against REPRESENT - Those brought by the
it, or protect/vindicate corporate rights whenever the ATIVE stockholder on behalf of
officials of the corporation refuse to sue, or the ones CLASS SUIT himself and all other
to be sued, or has control of the corporation. (Ching stockholders similarly
v. Subic Bay, G.R. No. 174353, 2014) situated when a wrong is
committed against a group
Requisites of Derivative Suit of stockholders.
a. He (Plaintiff) was a stockholder or member at
the time the acts or transactions subject of the DERIVATIVE Those brought by one or
action was filed; SUIT more
b. He exerted all reasonable efforts, and alleges stockholders/members in
the same with particularity in the complaint, to the name and on behalf of
exhaust all remedies available under the the corporation to redress
articles of incorporation, by-laws, laws or rules wrongs committed against
governing the corporation or partnership to it, or protect/vindicate
obtain the relief he desires; corporate rights whenever
the officials of the
The exhaustion of intra-corporate remedies corporation refuse to sue,
cannot be dispensed even if the company is a or the ones to be sued, or
family corporation (Yu v. Yukayguan, G.R. No. has control of the
177549, 2009; Ang v. Sps. Ang, G.R. No. corporation.
201675, 2013)
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NOTE: A lawyer engaged as counsel for a determined by the stockholders or the board of
corporation cannot represent members of the Board directors, subject to the approval of the
in a derivative suit against them. To do so would be Commission.
tantamount to conflicting interest between the Board
and the corporation (Hornilla v. Salunat, A.C. 5804, Shares of stock shall not be issued in exchange for
2003). promissory notes or future service. The same
considerations provided in this section, insofar as
applicable, may be used for the issuance of bonds
F. CAPITAL STRUCTURE by the corporation.
1. SHARES OF STOCK The issued price of no-par value shares may be
fixed in the articles of incorporation or by the board
a. Nature of Shares of Stock of directors pursuant to authority conferred by the
articles of incorporation or the bylaws, or if not so
Shares of stock are intangible personal property fixed, by the stockholders representing at least a
with an intrinsic pecuniary value. They represent majority of the outstanding capital stock at a meeting
aliquot parts of the corporation’s capital and are duly called for the purpose.
symbolized by a stock certificate.
c. Watered Stock
They do not represent proprietary rights of
shareholders to the assets or properties of the Watered stocks are issued for less than the par
corporation. value or issued value or for a consideration other
than cash, valued in excess of its fair value.
b. Consideration for Shares of Liability of Directors for Watered Stocks

Stock (Sec. 61) The issuance of watered stocks is prohibited. When
a director or officer of a corporation either (a)
Stocks shall not be issued for a consideration less consents or (b) having knowledge of the insufficient
than the par or issued price thereof. consideration, does not file a written objection with
the corporate secretary, they shall be liable to the
Consideration for the issuance of stock may be: corporation or its creditors, solidarily with the
(a) Actual cash paid to the corporation stockholder concerned for the difference between
(b) Property, tangible or intangible, actually the value received at the time of issuance of the
received by the corporation and necessary stock and the par or issued value of the same.
or convenient for its use and lawful
purposes at a fair valuation equal to the par d. Situs of the Shares of Stock
or issued value of the stock issued;
(c) Labor performed for or services actually Situs of shares is the domicile of the corporation that
rendered to the corporation; issued them. (Wells Fargo Bank and Union v.
Collector, G.R. No. L-46720, 1940)
Note: This refers to service already
performed since a value can be assigned to e. Classes of Shares of Stock
such service. It cannot be future services. (Sec. 6)
(d) Previously incurred indebtedness of the The classification of shares, their corresponding
corporation; rights, privileges, or restrictions, and their stated par
(e) Amounts transferred from unrestricted value, if any, must be indicated in the articles of
retained earnings to stated capital; incorporation.
(f) Outstanding shares exchanged for stocks in
the event of reclassification or conversion; i. Common and Preferred shares
(g) Shares of stock in another corporation; • Common shares are also called ordinary
and/or shares and they share in profits pro-rata
(h) Other generally accepted form of
• Preferred shares may be preferred (a) as
consideration.
to dividends, or (b) as to distribution of
If the consideration is other than actual cash, or assets during liquidation, or (c) as to any
consists of intangible property such as patents or other manner stated in the Articles, not
copyrights, the valuation thereof shall initially be violative of the Corp Code. If authorized by
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Articles, Board may fix terms. It is ALWAYS Since Section 7 makes no distinction (and is found
with a stated par value. under General Provisions), then it must mean that
founders’ shares may be applied to both stock and
ii. Par Value and No-Par Value nonstock corporations. Although [Section 88 of the
● Par value shares - with a pre-stated Revised Corporation Code] allows in a nonstock
amount or denomination corporation to limit, broaden or deny the right of
members of any class, the specific provision of
● Non- par value - no pre-stated value
Section 7 to founders’ share must prevail, and that
the nonstock corporation can lawfully suspend or
Non-par value shares are deemed fully paid and
define the voting rights of its members, but with
non-assessable so holders of such are not liable to
respect to founders’ share, the exclusive right to
the corporation or its creditors.
vote and be voted for of the founders’ share should
expire after five years from the approval of the SEC.
The consideration received is treated as capital and
(Forest Hills and Country Club, Inc. v. Kings
cannot be declared as dividends.
Properties Corp., G.R. No. 212833, 2019).
Because they are vested with public interest, the
b. Redeemable shares – Expressly provided
following types of corporations may only issue
in articles; may be purchased/taken up
par value shares:
a. Banks upon expiration of the period of said shares
b. Trust Companies purchased whether or not there are
c. Insurance Companies unrestricted retained earnings; may be
d. Public Utilities deprived of voting rights.
e. Building and Loan Associations. c. Treasury stocks – stocks previously
issued and fully paid for and reacquired by
iii. Voting and Non- Voting Shares the corporation through lawful means
● Voting share with complete voting rights (purchase, donation, etc.); not entitled to
● Non - voting shares are preferred or vote and no dividends could be declared
redeemable shares that have limited voting thereon as corporations cannot declare
rights. dividends to itself.
Non-Voting Shares Have Voting Rights In The Escrow shares – those held by a third person to be
Following Matters: released only upon the performance of a condition
a. Amendment of Articles or the happening of a certain event contained in the
agreement.
b. Adoption/ Amendment of By- Laws
c. Sale, lease, exchange, mortgage, pledge or
Preferred cumulative participating share of
dispose of all or substantially all of corporate stock - Share entitling its holder to preference in
property the payment of dividends ahead of common
d. Incur, create, increase bonded indebtedness stockholders and to be paid the dividends due for
e. Increase, decrease capital stock prior years and to participate further with common
f. Merger/ consolidation with another corporation stockholders in dividend declarations.
g. Investment of funds in another corporation
h. Dissolution of corporation Over-Issued Stock – Stock issued in excess of
authorized capital stock; null and void.
Other Classes of Shares: (Secs. 7, 8, 9)
a. Founder’s shares – Given rights and
privileges not enjoyed by owners of other 2. CERTIFICATE OF STOCK
stocks; exclusive right to vote/be voted in
the election of directors shall not exceed 5 a. Nature of the Certificate (Sec.
years. 62)
NOTE: such exclusive right shall not be
allowed if its exercise will violate the A stock certificate is a written instrument signed by
“Anti-Dummy Law”; the “Foreign the proper corporate officers stating or
Investments Act of 1991”; and other acknowledging that the person named in the
pertinent laws. document is the owner of a designated number of
shares of its stock. (Lao v. Lao, G.R. No. 170585,
2008)
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A stock certificate is not necessary to render one a under the law, except only insofar as such rights or
shareholder in a corporation; nevertheless, it is the defenses are subject to the limitations imposed by
paper representative or tangible evidence of the the principles governing estoppel. (Delos Santos v.
share itself and the various interests therein. The Republic, G.R. No. L-4818, 1955)
stock certificate expresses the contract between the
corporation and the shareholder, but it is not The rule is that the endorsement of the stock
essential to the existence of a share in or the certificate by the owner or his attorney-in-fact or any
creation of the relationship with the shareholder. other person legally authorized to make the transfer
(Tan v. SEC, G.R. No. 95696, 1992) shall be sufficient to effect the transfer of shares
only if the same is coupled with delivery. The
A stock certificate could not be considered issued in delivery of the stock certificate duly endorsed by the
contemplation of law unless signed by the president owner is the operative act of transfer of shares from
or vice-president and countersigned by the the lawful owner to the new transferee. But to be
secretary or assistance secretary. (Bitong v. Court valid against third parties, the transfer must be
of Appeals, G.R. No. 102726, 1994) recorded in the corporate books. (Bitong v. Court of
Appeals, G.R. No. 102726, 1994)
Certificates of stock are not the actual shares of
stock in the corporation and merely expresses the Since physical delivery of stock certificates is one of
contract between the corporation and the the essential requisites for the transfer of ownership
shareholder. Therefore, when a buyer of shares of the stocks purchased, then the failure of the
gives notice to original seller for the latter’s exercise seller-registered owner to delivery the stock
of his right of first refusal and the original seller failed certificates would constitute a material breach that
to respond, there was already the valid offer by the warrants the rescission of the sale of the shares
buyer that triggered the running of the period for the upon the option of the buyer. (Fil-Estate Golf v.
exercise of the right of first refusal in spite of the fact Vertex Sales and Trading, G.R. No. 202079, 2013)
that no certificate of stock had been issued yet in the
name of the buyer. (Makati Sports Club v. Cheng, d. Issuance (Sec. 63)
G.R. No. 178523, 2010)
No certificate of stock shall be issued to a subscriber
The shares evidenced by said certificates, until the full amount of the subscription together with
meanwhile, are regarded as property and the owner interest and expenses (in case of delinquent
of such shares may, as a general rule, dispose of shares), if any is due, has been paid.
them as he sees fit, unless the corporation has been
dissolved, or unless the right to do so is properly e. Lost or Destroyed Certificates
restricted, or the owner's privilege of disposing of his (Sec. 72)
shares has been hampered by his own action. (Teng
v. SEC, G.R. No. 184332, 2016) The following procedure shall be followed by a
corporation in issuing new certificates of stock in lieu
b. Uncertified Shares (Sec. 62) of those which have been lost, stolen or destroyed:
a. The registered owner of a certificate of
The Commission may require corporations whose stock in a corporation or such person’s
securities are traded in trading markets, and which legal representative shall file with the
can reasonably demonstrate their capability to do so corporation an affidavit in triplicate
to issue their securities or shares of stocks in setting forth, if possible:
uncertificated or scripless form in accordance with i. The circumstances as to how the
the rules of the Commission. certificate was lost, stolen or
destroyed,
c. Negotiability; Requirements for ii. The number of shares represented
Valid Transfer of Stocks by such certificate,
iii. The serial number of the certificate
Quasi-Negotiable Character of Certificate of and the name of the corporation
Stock which issued the same.
A stock certificate is merely a quasi-negotiable iv. The owner of such certificate of
instrument in the sense that it may be transferred by stock shall also submit such
endorsement, coupled with delivery; but it is not other information and evidence
negotiable because the holder thereof takes it as may be deemed necessary;
without prejudice to such rights or defenses as the and
registered owners or transferor’s creditors may have
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b. After verifying the affidavit and other owners of shares for purposes of liquidation. It is
information and evidence with the books of well-settled that unless proven otherwise, the “stock
the corporation, the corporation shall and transfer book” is the best evidence to establish
publish a notice in a newspaper of general stock ownership.
circulation in the place where the
corporation has its principal office, once a 3. DISPOSITION AND ENCUMBRANCE
week for three (3) consecutive weeks at the OF SHARES
expense of the registered owner of the
certificate of stock which has been lost, a. Sale of Shares
stolen or destroyed.
c. The notice shall state the name of the General Rule: Shares are not owned or are the
corporation, the name of the registered assets of the corporation—they are owned by the
owner, the serial number of the certificate, shareholders of record. Based on the Doctrine of
the number of shares represented by such Free Transferability of Shares, the sale of shares
certificate, and shall state that after the may be made by shareholders as this is their
expiration of one (1) year from the date of property right.
the last publication, if no contest has been
presented to the corporation regarding
Exception: Right of First Refusal
the certificate of stock, the right to make
such contest shall be barred and the
Under Sec. 62 of RCC, certain minimum requisites
corporation shall cancel the lost, destroyed
must be complied with for there to be a valid
or stolen certificate of stock in its books.
transfer of stocks:
d. In lieu thereof, the corporation shall issue a
(a) there must be delivery of the stock
new certificate of stock, unless the
certificate;
registered owner files a bond or other
(b) the certificate must have been endorsed by
security as may be required, effective for
the owner or his attorney-in-fact or other
a period of one (1) year, for such amount
persons legally authorized to make the
and in such form and with such sureties as
transfer; and to be valid against third parties,
may be satisfactory to the board of
the transfer must be recorded in the corporate
directors, in which case a new certificate
books.
may be issued even before the expiration
of the one (1) year period provided herein.
e. If a contest has been presented to the No transfer, however, shall be valid, except as
corporation or if an action is pending in between the parties, until the transfer is recorded in
court regarding the ownership of the the books of the corporation showing the names of
certificate of stock which has been lost, the parties to the transaction, the date of the
stolen or destroyed, the issuance of the transfer, the number of the certificate or certificates,
new certificate of stock in lieu thereof and the number of shares transferred. (Sec. 62)
shall be suspended until the court renders
a final decision regarding the ownership of No shares of stock against which the corporation
the certificate of stock which has been lost, holds any unpaid claim shall be transferable in the
stolen or destroyed. books of the corporation. (Sec. 62)
Except in case of fraud, bad faith, or negligence on b. Allowable restrictions on the

the part of the corporation and its officers, no action sale of shares
may be brought against any corporation which shall
have issued certificate of stock in lieu of those lost, The following are allowable restrictions on the sale
stolen or destroyed pursuant to the procedure of shares:
above-described.
(a) Pledge or Mortgage (Fua Cun v. Summers,
Exception (SEC Opinion 28 Jan. 1999) G.R. No. 19441, 1923)
While Sec. 72 of RCC appears to be mandatory, the Shares for which no stock certificate has been
same admits exceptions, such that a corporation issued may validly be mortgaged in whole (and not
may voluntarily issue a new certificate in lieu of the just with respect to the portion paid-up) and the
original stock certificate which has been lost without corporation receiving notice thereof is bound to
complying with the requirements under said section. respect the security arrangement. The “unpaid
It would be an internal matter for the corporation to claims” under Sec. 62 of RCC refers to any unpaid
find measures in ascertaining who are the real subscription, and not to any indebtedness which a
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shareholder may owe the corporation arising from d. Involuntary Dealings

any other transactions, like unpaid monthly dues.
(b) Equitable Mortgage Assignment (APT v. As between two contending judgment creditors:
Sandiganbayan, G.R. No. 109376, 2000) The first to have the writ served upon the proper
The assignment of voting shares as security for a officer of the corporation would be preferred.
loan operates to give the assignee not only the right
to vote on the shares, but would also treat the As between an attaching/levying creditor where
assignee as the owner of the shares (not just an there has been proper service of the writ to the
equitable mortgage). proper corporate officer (even when not
registered in the stock and transfer book) and
(c) Attachments and Executions (Chemphil the buyer/assignee of the shares: If writ was
Export & Import Corp. v. CA, G,R. Nos. 112438-39, properly served upon the corporate officer ahead of
1995) the registration of the sale/assignment in the stock
Attachments of shares are not included in the term and transfer book (even when the sale or
“transfer” as provided in Sec. 62 of RCC. Both the assignment was perfected and consummated
Revised Rules of Court and RCC do not require ahead of the pledge or mortgage), the
annotation in the stock and transfer book for the pledge/mortgage would still be preferred because
attachment of shares to be valid and binding on the the registration of the sale/assignment would still be
corporation and third parties. preferred because the registration of the
sale/assignment in the stock and transfer book is a
(d) Other Encumbrances on Shares necessary ingredient to make the sale/assignment
The process of registering lis pendens is binding on third parties, including the
inapplicable to shares which are personal pledgee/mortgage.
properties; however, formal notice given to the
Corporate Secretary of claims to the shall be NOTE: A bona fide transfer of shares, not registered
deemed equivalent of registration of an in the corporate books, is not valid as against a
encumbrance or assignment of the shares on the subsequent lawful attachment of said shares,
corporate books; and that by virtue of such regardless of whether the attaching creditor had
registration through notice to the corporation, actual notice of said transfer or not. All transfers not
pending litigation, third parties, or potential so entered on the corporate books are absolutely
transferees pendente lite, may therefore be charged void; not because they are without notice or
with constructive notice of claimants lien/title over fraudulent in law or fact, but because they are made
the subject shares and the pending litigation so void by statute. (Garcia v. Jomouad, G.R. No.
involving the same. (MR Holdings, Ltd. v. Bajar, 133969, 2000)
G.R. No. 153478, 2012)
G. DISSOLUTION AND LIQUIDATION
c. Requisites of a Valid Transfer
Dissolution
Under Sec. 62 of RCC, certain minimum requisites Extinguishment of the franchise of a corporation and
must be complied with for there to be a valid the initiation of the termination of its corporate
transfer of stocks: existence
(a) there must be delivery of the stock certificate;
(b) the certificate must have been endorsed by the However, the corporation shall nevertheless be
owner or his attorney-in-fact or other persons legally continued as a body corporate for three (3) years
authorized to make the transfer; and to be valid after the time when it would have been so dissolved,
against third parties, the transfer must be recorded for the purpose of prosecuting and defending suits
in the corporate books. by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to
No transfer, however, shall be valid, except as distribute its assets, but not for the purpose of
between the parties, until the transfer is recorded in continuing the business for which it was established.
the books of the corporation showing the names of (Sec. 122)
the parties to the transaction, the date of the
transfer, the number of the certificate or certificates, 1. MODES OF DISSOLUTION:
and the number of shares transferred. (Sec. 62)
a. Voluntary
A. WHERE NO CREDITORS ARE AFFECTED
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1. A verified petition for dissolution shall be

Procedure where no creditors are affected by filed with the SEC.
the dissolution of the corporation: 2. The petition shall be:
1. A meeting must be held on the call of a. signed by a majority of the
directors or trustees; corporation’s board of directors or
2. Notice of the meeting should be given to the trustees
stockholders by personal delivery or b. verified by its president or
registered mail at least twenty (20) days secretary or one of its directors or
prior to the meeting; trustees
3. The notice of meeting should also be c. shall set forth all claims and
published for once in a newspaper demands against it
published in the principal place of business, d. that its dissolution was resolved
otherwise, in a newspaper of general upon by the affirmative vote of the
circulation stockholders representing at least
4. The resolution to dissolve must be two-thirds (2/3) of the outstanding
approved by the majority of the capital stock or at least two-thirds
directors/trustees and approved by the (2/3) of the members at a meeting
stockholders representing at least majority of its stockholders or members
of the outstanding capital stock or majority called for that purpose.
of members; 3. The petition shall likewise state:
5. A verified request for dissolution is then a. the reason for the dissolution;
filed with the SEC stating: b. the form, manner, and time when
a. the reason for dissolution the notices were given;
b. the form, manner and time when c. the date, place, and time of the
the notices were given meeting in which the vote was
c. names of the stockholders and made.
directors or members and trustees 4. The corporation shall submit to the SEC the
who approved the dissolution following:
d. the date, place, and time of the a. a copy of the resolution authorizing
meeting in which the vote was the dissolution, certified by a
made; and majority of the board of directors or
e. details of publication trustees and countersigned by the
6. In addition, the following shall be submitted secretary of the corporation; and
to the SEC: b. list of all its creditors.
a. Copy of the resolution authorizing 5. By an order reciting the purpose of the
the dissolution, certified by a petition, the SEC shall fix a deadline for
majority of the board and filing objections to the petition (shall not be
countersigned by the secretary; less than thirty (30) days nor more than
b. Proof of publication sixty (60) days after the entry of the order).
c. Favorable recommendation from 6. Publication: Before such the deadline, a
the appropriate regulatory agency, copy of the order shall be published at least
when necessary. once a week for three (3) consecutive
7. The SEC shall, within 15 days from the weeks in a newspaper of general
receipt of the verified request for circulation published in the municipality or
dissolution, and in the absence of any city where the principal office of the
withdrawal within said period, approve the corporation is situated, otherwise, in a
request and issue the certificate of newspaper of general circulation in the
dissolution, upon which the dissolution will Philippines
take effect. (Sec. 134) 7. Posting: A similar copy shall be posted for
three (3) consecutive weeks in three (3)
B. WHERE CREDITORS ARE AFFECTED public places in such municipality or city.
8. After the expiration of the time to file
Procedure where the dissolution of the
objections, a hearing shall be conducted
corporation may prejudice the rights of any
creditor:
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upon prior five (5) day notice to hear the incorporators, directors, trustees,
objections; shareholders, or members necessary to
9. Judgment shall be rendered dissolving the request for dissolution.
corporation and directing the disposition of 2. Upon receipt of a withdrawal of request for
assets; the judgment may include dissolution, the SEC shall withhold action
appointment of a receiver. on the request for dissolution and shall,
10. The dissolution shall take effect only upon after investigation:
issuance by the SEC of a certificate of a. Make a pronouncement that the
dissolution* (Sec. 135) request for dissolution is deemed
withdrawn;
C. BY SHORTENING CORPORATE TERM b. Direct a joint meeting of the board
of directors or trustees and the
Procedure on voluntary dissolution by stockholders or members for the
shortening of the corporate term (Sec. 36): purpose of ascertaining whether to
1. A private corporation may extend or proceed with dissolution; or
shorten its term by amending the the c. Issue such other orders as it may
articles of incorporation when approved by deem appropriate. (Sec. 137)
a majority vote of the board of directors or
trustees, and ratified at a meeting by the Procedure on Withdrawal of Petition for
stockholders or members representing at Dissolution
least two-thirds (2/3) of the outstanding A withdrawal of the petition for dissolution shall be
capital stock or of its members. in the form of a motion and similar in substance to a
2. Written notice of the proposed action and withdrawal of request for dissolution but shall be
the time and place of the meeting shall be verified and filed prior to publication of the order
sent to stockholders or members setting the deadline for filing objections to the
3. In case of extension of corporate term, a petition. (Sec. 137
dissenting stockholder may exercise the
b. Involuntary
right of appraisal under the conditions
provided in this Code. (Sec. 137)
A corporation may be dissolved by the SEC motu
proprio or upon filing of a verified complaint by any
NOTE: Under Sec. 11, the RCC now allows the interested party. (Sec. 138)
revival of a the corporate existence of an Expired
Corporation. Grounds for dissolution of the corporation:
a. Non-use of corporate charter as provided
If a corporation’s term has expired, it may apply for
under Section 21 of this Code;
a revival of its corporate existence, together with
b. Continuous inoperation of a corporation as
all the rights and privileges under its certificate of
incorporation and subject to all of its duties, debts provided under Section 21 of this Code;
and liabilities existing prior to its revival. Upon c. Upon receipt of a lawful court order
approval by the SEC, the corporation shall be dissolving the corporation;
deemed revived and a certificate of revival of d. Upon finding by final judgment that the
corporate existence shall be issued, giving it corporation procured its incorporation
perpetual existence, unless its application for through fraud;
revival provides otherwise. (Sec. 11) e. Upon finding by final judgment that the
corporation:
D. WITHDRAWAL OF DISSOLUTION 1. Was created for the purpose of
committing, concealing or aiding
Procedure on Withdrawal of Request for the SEC of securities violations,
Dissolution:
smuggling, tax evasion, money
1. Withdrawal of Request of Dissolution: Not
laundering, or graft and corrupt
later than 15 days from the receipt by SEC
practices;
of the request for dissolution, the
2. Committed or aided in the SEC of
withdrawal thereof shall be made in writing,
securities violations, smuggling,
duly verified by any incorporator, director,
tax evasion, money laundering, or
trustee, shareholder, or member and
graft and corrupt practices, and its
signed by the same number of
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stockholders knew of the same; entity with capacity to transact the

and legitimate business for which it was created
3. Repeatedly and knowingly
tolerated the SEC of graft and “Commenced Business” under SEC Rules
corrupt practices or other When the corporation has performed preparatory
fraudulent or illegal acts by its acts geared towards the fulfillment of the purposes
directors, trustees, officers, or for which it was established such as but not limited
employees. (Sec. 138) to the following:
● Entering into contracts or negotiations for
If the corporation is ordered dissolved by final lease or sale of properties to be used as
judgment pursuant to the grounds set forth in business or factory site;
subparagraph (e) hereof, its assets, after payment ● Making plans for and the construction of the
of its liabilities, shall, upon petition of the SEC with factory; and
the appropriate court, be forfeited in favor of the ● Taking steps to expedite the construction of
national government. Such forfeiture shall be the company’s working equipment
without prejudice to the rights of innocent
stockholders and employees for services rendered, In the event of failure to file for an extension if a
and to the application of other penalty or sanction corporation’s term has expired, it may apply for a
under this Code or other laws. (Sec. 138) revival of its corporate existence, together with all
the rights and privileges under its certificate of
The SEC shall give reasonable notice to, and incorporation and subject to all of its duties, debts
coordinate with, the appropriate regulatory agency and liabilities existing prior to its revival. Upon
prior to the involuntary dissolution of companies approval by the SEC, the corporation shall be
under their special regulatory jurisdiction.(Sec. 138) deemed revived and a certificate of revival of
corporate existence shall be issued, giving it
Non-use of corporate charter (Sec. 21) perpetual existence, unless its application for revival
If a corporation does not formally organize and provides otherwise.
commence its business within 5 years
Demands of Minority for Dissolution
Effect: certificate of incorporation shall be deemed Corporate dissolution due to mismanagement of
revoked following the end of the 5-year period majority stockholder is too drastic a remedy,
especially when the situation can be remedied such
Continuous Inoperation (Sec. 21) as giving minority stockholders a veto power to any
If a corporation has commenced its business but decision (Chase v. Buencamino, G.R. No. 20395,
subsequently becomes inoperative for a period of at 1985).
least 5 consecutive years
● Effect: after due notice and hearing, the Effects of Dissolution
corporation will be put on delinquent (a) Vesting of legal title to the corporate property in
status the stockholders, who become co-owners
● Remedy: it shall have a period of 2 years to thereof
resume operations. Otherwise, certificate (b) The corporation ceases to be a body corporate
of incorporation will likewise be revoked. to continue the business for which it was
established.
“Organization” under SEC Rules
● Adoption of the by-laws and the filing and The termination of the life of a juridical entity does
approval of the same with and by the SEC not by itself cause the extinction or diminution of the
if the same were not adopted and filed rights and liability of such entity, since it is allowed
simultaneously with the articles of to continue as a juridical entity for three (3) years for
incorporation; the purpose of prosecuting and defending suits by
● Election of the Board of Directors or or against it and enabling it to settle and close its
Trustees and of the officers; affairs, to dispose of and convey its property, and to
● Establishment of the principal office; and distribute its assets (Republic v. Tancinco, G.R. No.
139256, 2002).
● Providing for the subscription and payment
of the capital stock and the taking of such A board resolution to dissolve the corporation does
steps as are necessary to endow the legal not operate to so dissolve the juridical entity. For
dissolution to be effective “the requirements
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mandated by the Corporation Code should have apply provided the designation of the trustee is
been strictly complied with” (Vesagas v. Court of made within said period.
Appeals, G.R. No. 142924, 2001)
c. Through Receiver – created by means of
When the period of corporate life expires, the judicial or quasi-judicial appointment of the
corporation ceases to be a body corporate for the receiver. The receiver is actually an officer of
purpose of continuing the business for which it was the court and must therefore be accountable to
organized (PNB v. Court of First Instance of Rizal,
the court.
Pasig, Br. XXI, G.R. No. 63201, 1992).
NOTE: If there is no Board of Directors or Trustees,
A party’s stockholding in a corporation, whether
those having pecuniary interest in the assets,
existing or dissolved, is a property right which he
including not only the shareholders but likewise the
may vindicate against another party who has
creditors of the corporation, acting for and in its
deprived him thereof.
behalf, may liquidate (Alabang Dev’t v. Alabang Hills
Village Ass’n, G.R. No. 196950, 2014)
Stockholders may convey their respective
shareholdings toward the creation of a new
corporation to continue the business of the old or Liquidation after Three Years
If full liquidation can only be effected after the 3-year
they may reincorporate by filing new articles of
period and there is no trustee, the directors may be
incorporation and by-laws.
permitted to complete the liquidation by continuing
as trustees by legal implication (Reburiano v. CA,
Liquidation
G.R. No. 102965, 1999).
Process by which all the assets of the corporation
are converted into liquid assets in order to facilitate
The trustee may continue to prosecute a case
the payment of obligations to creditors, and the
commenced by the corporation within three years
remaining balance if any is to be distributed to the
from its dissolution until rendition of the final
stockholders.
judgment, even if such judgment is rendered beyond
the three-year period allowed by Section [139].
NOTE: There is no time limit within which the
However, an already defunct corporation cannot
trustees must complete a liquidation placed in their
initiate a suit after the lapse of the three-year period.
hands (Vigilla et.al. v. Philippine College of
(Alabang Dev’t v. Alabang Hills Village Ass’n, G.R.
Criminology, G.R. No. 200094, 2013).
No. 196950, 2014)
2. METHODS OF LIQUIDATION NOTE: When a corporation threatened by

bankruptcy is taken over by a receiver, all the
creditors shall stand on equal footing. Not one of
a. Through Board of Directors or Trustees –
them should be given preference by paying one or
normal method of procedure some of them ahead of the others.
Even if no trustee is appointed or designated during The Civil Code provisions on concurrence and
the three-year period of the liquidation of the preference of credits are applicable to the liquidation
corporation, the Court has held that the Board of proceedings.
Directors may be permitted to complete the
corporate liquidation by continuing as trustees by A corporation in the process of liquidation has no
legal implication (Vigilla et al. v Philippine College of legal authority to engage in any new business, even
Criminology, G.R. No. 200094, 2013) if the same is in accordance with the primary
purpose stated in its articles of incorporation.
NOTE: This only concerns the matters/actions that
are initiated during the 3 year grace period. The When a Corporation Must Wind Up (Sec. 139)
Board cannot be considered as trustees for matters If it is dissolved by:
initiated after the 3-year period. a. By expiry of term or
b. Is annulled by forfeiture, or otherwise, or
b. Through Trustee – at any time during the three
c. Is terminated In any other manner
years of liquidation, a corporation is authorized
and empowered to convey all of its property to Effects of Winding Up of Affairs: (Sec. 139)
trustees for the benefit of stockholders, a. Continues as a corporate body for 3 years
members, creditors, and other persons in to prosecute and defend suits against it,
interest. The three (3)-year limitation will not
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close its affairs, dispose and convey its Suppletory Effect

property and distribute assets The provisions of other Titles of the Corporation
b. Cannot continue business for which it was Code shall apply suppletorily except insofar as Title
established of Close Corporation otherwise provides. (Sec. 95)
c. Can convey property to trustees for the
benefit of the stockholders/members, Management of a close corporation
The articles of incorporation of a close corporation
creditors and other persons in interest
may provide that the business of the corporation
i. Legal interest vests in
shall be managed by the stockholders of the
business
corporation rather than by a board of directors.
ii. Beneficial interest remains
a. When they manage, stockholders are liable
with stockholders/ members,
as directors;
creditors
b. There is no need to call a meeting to elect
d. Assets distributable to unknown creditors,
directors;
stockholders/ members, persons in interest
c. To the extent that the stockholders are
or those who cannot be found shall be
actively engaged in the management, said
escheated to the city or municipality where
stockholders shall be liable for corporate
the assets are located.
torts unless the corporation has obtained
e. Distribution of assets only upon lawful
reasonably adequate liability insurance.
dissolution and payment of all debts and
liabilities.
Companies That Cannot Be Close Corporations
Exceptions: (MIPES-BOO)
a. Decrease of capital stock a. Mining companies;
b. As otherwise allowed in the b. Insurance companies;
Corporation Code c. Public utilities;
d. Educational institutions;
e. Stock exchanges;
H. OTHER CORPORATIONS f. Banks;
g. Oil companies;
1. CLOSE CORPORATIONS
h. Other corporations declared to be vested
with public interest.
I. Characteristics of a close corporation
A close corporation, within the meaning of the
Corporation Code, is one whose articles of II. Validity Of Restrictions On Transfers Of
incorporation provides that: Shares (Sec 97)
1. All the corporation's issued stock of all classes, Restrictions on the right to transfer shares must
appear in:
exclusive of treasury shares, shall be held of
1. The articles of incorporation;
record by not more than a specified number of
persons, not exceeding twenty (20).
2. The by-laws; and
2. All the issued stock of all classes shall be 3. In the certificate of stock
subject to one or more specified restrictions on
Otherwise, the same shall not be binding on any
transfer permitted by this Title.
purchaser thereof in good faith.
3. The corporation shall not list in any stock
exchange or make any public offering of any of Said restrictions shall not be more onerous than
its stock of any class. granting the existing stockholders or the corporation
the option to purchase the shares of the transferring
Notwithstanding the foregoing, a corporation shall stockholder with such reasonable terms, conditions
not be deemed a close corporation when at least or period stated therein.
two-thirds (2/3) of its voting stock or voting rights is
owned or controlled by another corporation which is If upon the expiration of said period, the existing
not a close corporation within the meaning of the stockholders or the corporation fails to exercise the
Corporation Code. (Sec. 95) option to purchase, the transferring stockholder may
sell his shares to any third person.
III. Effects of Issuance or Transfer of Stock in

Breach of Qualifying Conditions. –
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(a) If shares of stock of a close corporation are have to either rescind the transfer or
issued or transferred to any person who is recover the stock under any express or
not eligible to be a holder thereof under any implied warranty. (Sec. 98)
provision of the articles of incorporation,
and if the certificate for such stock NOTE: Even if the transfer of shares is made in
conspicuously shows the qualifications of violation of the restrictions enumerated under [Sec.
the persons entitled to be holders of record 98 of RCC], such transfer is still valid if it has been
thereof, such person is conclusively consented to by all the shareholders of the close
presumed to have notice of the fact of corporation and the corporation cannot refuse to
the ineligibility to be a stockholder. register the transfer of shares in the name of the
(b) If the articles of incorporation of a close transferee. (Florete, Sr. v. Florete, Jr., G.R. No.
corporation states the number of persons, 223321, 2018)
not exceeding twenty (20), who are entitled
to be stockholders of record, and if the Need for factual determination of close
certificate for such stock conspicuously corporation to apply
states such number, and the issuance or Before courts can allow the operation of Section 98
transfer of stock to any person would cause to a case, there must first be a factual determination
the stock to be held by more than such that the corporation is indeed a close corporation.
number of persons, the person to whom There needs to be a presentation of evidence on the
such stock is issued or transferred is relevant restrictions in the articles of incorporation
conclusively presumed to have notice of and by-laws of the corporation. (Rural Bank of
this fact. Andaya v. Cabadbaran, G.R. No. 188769, 2016)
(c) If a stock certificate of a close corporation
conspicuously shows a restriction on IV. When board meeting is unnecessary or
transfer of the corporation’s stock and the improperly held (Sec. 100)
transferee acquires the stock in violation of General Rule: Any action taken by the directors
such restriction, the transferee is without a board meeting shall be deemed INVALID.
conclusively presumed to have notice of Exception: The following shall nonetheless be valid
the fact that the stock was acquired in despite the lack of a valid board meeting, unless the
violation of the restriction. by-laws provide otherwise
(d) Whenever a person to whom stock of a 1. Before or after such action is taken, a
close corporation has been issued or written consent thereto is signed by all the
transferred has or is conclusively presumed directors; or
under this section to have notice of: 2. All the stockholders have actual or implied
(i) the person’s ineligibility to be a knowledge of the action and make no
stockholder of the corporation; or prompt objection in writing; or
(ii) that the transfer of stock would
3. The directors are accustomed to take
cause the stock of the corporation
informal action with the express or implied
to be held by more than the
number of persons permitted acquiescence of all the stockholders; or
under its articles of incorporation; 4. All the directors have express or implied
or knowledge of the action in question and
(iii) that the transfer violates a none of them makes a prompt objection in
restriction on transfer of stock, and writing.
the corporation may, at its option,
refuse to register the transfer in the An action within the corporate powers taken at a
name of the transferee. meeting held without proper call or notice, is
(e) The provisions of subsection (d) shall not deemed ratified by a director who failed to attend,
be applicable if the transfer of stock, though unless after having knowledge thereof, the
contrary to subsections (a), (b) or (c), has director promptly files his written objection with the
been consented to by all the stockholders secretary of the corporation.
of the close corporation, or if the close
corporation has amended its articles of V. Pre-Emptive Rights Of Stockholders In Close
incorporation in accordance with this Title. Corporations (Sec 101)
(f) The term “transfer”, as used in this section, General Rule: It shall extend to all stock to be
is not limited to a transfer for value. issued, including reissuance of treasury shares,
(g) The provisions of this section shall not whether for money, property or personal services, or
impair any right which the transferee may in payment of corporate debts
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Exception: Unless the articles of incorporation dissolve a petition to the stockholder

provide otherwise. close dissolution vote is
corporation required for
VII. Amendment of the articles of incorporation when there is dissolution
(Sec. 102) a deadlock
Any amendment to the articles of incorporation situation
which seeks to delete or remove any provision
required by this Title or to reduce a quorum or voting 2. NON-STOCK CORPORATIONS
requirement stated in said articles of incorporation
shall require the affirmative vote of at least two- I. Definition
thirds (2/3) of the outstanding capital stock, A non-stock corporation is one where no part of its
whether with or without voting rights, or of such income is distributable as dividends to its members,
greater proportion of shares as may be specifically trustees, or officers, subject to the provisions of the
provided in the articles of incorporation for Corporation Code on dissolution
amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose. Any profit which a non-stock corporation may obtain
as an incident to its operations shall, whenever
VII. Deadlocks (Sec. 103) necessary or proper, be used for the furtherance of
the purpose or purposes for which the corporation
Power To Buy-Back Shares Of Close was organized, subject to the provisions of this Title.
Corporations v. Appraisal Right In Stock (Sec. 86)
Corporations
CLOSE CLOSE STOCK Requisites:
CORP (Sec. CORP (Sec. CORP 1. Does not have a capital stock divided into
103 – 104 – share
Deadlocks) Withdrawal) 2. No part of its income is distributable as
Exercised by Exercised by Exercised by dividends to its member
the the the 3. They must be formed or organized for
corporation stockholder stockholder
purposes specified in Sec. 87
Exercisable Exercisable There are
only in a for any reason certain
Conversion between Stock and Non-Stock
deadlock instances
Corporation
situation where
A non-stock corporation cannot be converted into a
appraisal
stock corporation through mere amendment of its
rights can be
Articles of Incorporation as this would be in violation
exercised
of Section 87 which prohibits distribution of income
Can be Available only Available only as dividends to members. (SEC Opinion, 20 March
directed either against the against the 1995) However, a non-stock corporation can be
against the corporation corporation converted into a stock corporation only if the
corporation or members dissolve it first and then organize a stock
any other corporation. The result is a new corporation. (SEC
stockholder Opinion, 13 May 1992)
Available Limited only in Unrestricted
even without a situation retained On the other hand, a stock corporation may be
unrestricted when the earnings are converted into a non-stock corporation by mere
retained corporation required for amendment provided all the requirements are
earnings and has sufficient buyback to complied with. Its rights and liabilities will remain.
not subject to assets in its happen,
any formula books generally Theory on Non-Stock Corporations
A non-stock corporation may only be formed or
Compelling Dissolution In Close Corporations v. organized for charitable, religious, educational,
Stock Corporations professional, cultural, fraternal, literary, scientific,
CLOSE CLOSE STOCK social, civic or other similar purposes. It may not
CORP (Sec. CORP (Sec. CORP engage in undertakings such as the investment
104) 105) business where profit is the main or underlying
SEC is given A stockholder Majority of the purpose. Although the non-stock corporation may
express must make a Board plus obtain profits as an incident to its operation such
power to written 2/3 profits are not to be distributed among its members
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but must be used for the furtherance of its purposes There can be May not include a
(People v. Menil, G.R. No. 115054-66, 1999). secondary purposes purpose which would
change or contradict
The incurring of profit or losses does not determine its nature in AOI
whether an activity is for profit or non-profit, and the KIND OF BOARD
courts will consider whether dividends have been Board of Directors Board of Trustees
declared or its members or that is property, effects
or profit was ever used for personal or individual
gain, and not for the purpose of carrying out the NUMBER OF BOARD MEMBERS
objectives of the enterprise (Manila Sanitarium and Must not be more May be more than
Hospital v. Gabuco, G.R. No. 13873, 1963). than 15 15
In a mutual life insurance corporation, organized as EXC: Special
a non-stock nonprofit corporation, the so-called corporations
“dividend” that is received by members- TERM OF BOARD MEMBERS
policyholders is not a portion of profits set aside for
1 year 3 years, but AOI or
distribution to the stockholders in proportion to their
subscription to the capital stock of a corporation. by-laws may provide
One, a mutual company has no capital stock to Constant terms otherwise
which subscription is necessary; there are no
stockholders to speak of, but only members. And, 5 years - educational
two, the amount they receive does not partake of the institutions
nature of a profit or income. The quasi-appearance
of profit will not change its character; it remains an Staggered terms
overpayment, a benefit to which the member- HOW BOARD MEMBERS ARE ELECTED
policyholder is equitably entitled (Republic v. Sunlife Elected by the Directly elected by
Assurance Company of Canada, GR No. 158085, stockholders (per the members, unless
2005). Corp. Code) AOI provides
otherwise
Delinquency in Membership Dues of Non-Stock MANNER OF VOTING
Corporations Straight or Straight voting,
A non-stock corporation may seize and dispose of cumulative voting unless AOI or by-
the membership share of a fully-paid member on
laws provide
account of his unpaid monthly dues, when such
otherwise
corporation is authorized to do so under the by-laws,
CAN MEMBERSHIP BE TRANSFERRED?
even when no provision on the matter appears in the
articles of incorporation, and in spite of the fact that Generally yes Generally no, EXC: if
Sec. 67 of Corporation Code on delinquency sale AOI or by-laws
pertains to payment of shares subscription. (Valley provide otherwise
Golf v. De Caram, G.R. No. 155805, 2000) CAN A STOCKHOLDER/MEMBER
DISENGAGE FROM THE CORPORATION?
Comparative Table: Stock v. Non-Stock Can sell to other Articles or by-laws
Corporations stockholders OR specifically provide
STOCK NON-STOCK exercise of appraisal for the method of
CORPORATION CORPORATION rights termination
CAN THEY EARN PROFIT?
Yes Yes Number of Trustees
A non-stock corporation may OR may not have
more than 15 trustees.
DISTRIBUTION OF DIVIDENDS
Yes No NOTE: However, SEC has adopted a policy of
requiring registrant corporations to submit an
explanation if its articles or by-laws provide for more
NAME OF “CONSTITUENTS”
than 15 members of the Board. (Sec. 91)
Stockholders Members
LIMITATION TO PURPOSE
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Term distributed to its incorporators, members, trustees,

Trustees shall hold office for a period of three (3) or officers. (SEC Opinion, 13 November 1990, XXIV
years until their successors are elected and qualified SEC Quarterly Bulletin 63)
(Sec. 91)
NOTE:
Qualifications of Trustees Despite its nomenclature, the essence of a non-
Only ONE qualification under Sec. 92: Membership stock non-profit corporation is not the non-existence
in the corporation. Nonetheless, the member who of shares of stock to cover its capital (it is legally
may be elected as trustee may just be a nominee. A possible for a corporation having capital stock to still
trustee who ceases to be a member of the be considered a non-stock corporation), but that:
corporation can no longer act as a trustee. a. Its primary purpose should be any of those
under Sec. 88 of the Corporation Code, and
NOTE: An independent trustee of a non-stock b. There is a prohibition in the articles of
corporation vested with public interest need not be incorporation and by-laws that no part of the
a member of such non-stock corporation (Sec. 91) income or any form of dividend is distributable
to the members, trustees, and officers of the
For stock corporations, the "quorum" referred to in
corporation (CIR v. Club Filipino Inc. de Cebu,
Section 52 of the Corporation Code is based on the
number of outstanding voting stocks. For nonstock G.R. No. L-12719, 1962)
corporations, only those who are actual, living i. Even though the corporation may
members with voting rights shall be counted in incidentally earn profits from its
determining the existence of a quorum during operations. (CIR v. University of
members' meetings. Dead members shall not be Visayas, G.R. No. L-13554, 1961)
counted. (Tan v. Sycip, G.R. No. 153468 August 17,
2006) IV. Plan and Distribution of Assets upon
Dissolution
II. Purposes Rules of Distribution of Assets upon Dissolution
A non-stock corporation may be formed or The assets of a nonstock corporation undergoing
organized for the following purposes: the process of dissolution for reasons other than
a. Charitable, those set forth in Section 139 of the RCC (every
b. Religious, corporation whose charter expires pursuant to its
c. Educational, articles of incorporation, is annulled by forfeiture, or
d. Professional, whose corporate existence is terminated in any
e. Cultural, other manner) shall be applied and distributed as
follows:
f. Recreation,
1. All liabilities and obligations of the
g. Fraternal,
corporation shall be paid, satisfied and
h. Literary,
discharged, or adequate provision shall be
i. Scientific,
made therefore;
j. Social,
2. Assets held by the corporation upon a
k. Civic Service,
condition requiring return, transfer or
l. Similar purposes, like trade, industry,
conveyance, and which condition occurs by
agriculture and like chambers, or
reason of the dissolution, shall be returned,
m. Any combination of thereof (Sec. 87)
transferred or conveyed in accordance with
such requirements;
In the Articles of Incorporation, a non-stock
corporation may not include a purpose which would 3. Assets received and held by the
change or contradict its nature as such. corporation subject to limitations permitting
their use only for charitable, religious,
III. Treatment Of Profits benevolent, educational or similar
Non-stock non-profit corporations may actually earn purposes, but not held upon a condition
profits incidentally from its operations, provided requiring return, transfer or conveyance by
that the profits are devoted to their purpose. reason of the dissolution, shall be
transferred or conveyed to one or more
The mere fact that a non-stock corporation may earn corporations, societies or organizations
profit does not make it a profit-making corporation, engaged in activities in the Philippines
where such profit is used to carry out the purposes substantially similar to those of the
set forth in the Articles of Incorporation and is not
dissolving corporation according to a plan
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of distribution adopted pursuant to this or not organized for profit, as may be specified in
Chapter; a plan of distribution as adopted by the Board of
4. Assets other than those mentioned in the Trustees and ratified by the members.
preceding paragraphs, if any, shall be
distributed in accordance with the In a regular non-stock corporation it is possible for
provisions of the articles of incorporation or its net assets and accumulated “earnings” from its
operations, to inure to the benefit of private
the by-laws, to the extent that the articles of
individuals (e.g., its own members) or entities, but
incorporation or the by-laws, determine the only as a consequence of dissolution.
distributive rights of members, or any class
or classes of members, or provide for Suppletory Effect
distribution; and The provisions governing stock corporation, when
5. In any other case, assets may be pertinent, shall be applicable to non-stock
distributed to such persons, societies, corporations, except as may be covered by specific
organizations or corporations, whether or provisions of this Title.
not organized for profit, as may be specified
in a plan of distribution adopted pursuant to
this Chapter.(Sec. 93) 3. FOREIGN CORPORATIONS
Plan of Distribution of Assets A corporation formed, organized or existing under

A non-stock corporation in the process of dissolution any law other than those of the Philippines, and
may adopt a plan providing for the distribution of whose laws allow Filipino citizens and corporations
assets, not inconsistent with the RCC, in the to do business in its own country or state. (Sec. 140)
following manner:
A foreign corporation is one which owes its
1. The board of trustees shall, by majority existence to the laws of another state, and
vote, adopt a resolution recommending a generally, has no legal existence within the state in
which it is foreign (Avon Insurance PLC v. Court of
plan of distribution and directing the
Appeals, G.R. No. 97642, 1997).
submission thereof to a vote at a regular or
special meeting of members having voting A fundamental rule of international jurisdiction is that
rights; no state can by its laws, and no court which is only
2. Each member entitled to vote shall be given a creature of the state, can by its judgments and
a written notice setting forth the proposed decrees, directly bind or affect property or persons
plan of distribution or a summary thereof beyond the limits of that state (Time, Inc. v. Reyes,
and the date, time and place of such GR No. 28882, 1971).
meeting within the time and in the manner
provided in this Code for the giving of notice Bases of Authority over Foreign Corporations
of meetings; and
3. Such plan of distribution shall be adopted 1. Consent - It is the voluntary surrender of
upon approval of at least two-thirds (2/3) of jurisdiction over its person in a pending suit before
the host state (Salonga, Private International Law,
the members having voting rights present
1979 ed., p.344).
or represented by proxy at such meeting.
2. “Doing Business” with regard to Foreign
NOTE: Corporations - Continuity of commercial dealings
Although a non-stock corporation cannot distribute incident to prosecution of purpose and object of the
incidental profits or dividends to its members, organization. Isolated, occasional or casual
trustees and officers during its corporate term, in the transactions do not amount to engaging in business.
event of dissolution, after the payment of all But where the isolated act is not incidental/casual
liabilities and return of assets received subject to but indicates the foreign corporation’s intention to do
limitations permitting their use, the remaining assets other business, said single act constitutes engaging
may be distributed to the members, as provided for in business in the Philippines.
in the articles of incorporation of by-laws.
In the absence of distribution rules, the remaining

assets may be distributed to such persons,
societies, organizations, or corporations, whether
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a. What constitutes “Doing progressive prosecution of, the purpose and object
Business” of its organization.
a. Isolated Transactions Test: where a foreign Taken together, “Doing Business In The Philippines”
must cover transactions and series of transactions
corporation needs to obtain a license and fails
in pursuit of the main business goals of the
to do so, whether it should be denied legal
corporation and done with the intent to continue the
standing to obtain remedies from local courts same in the Philippines.
and administrative agencies or not, depends
therefore on the issue whether it will engage in c. Contract Test: if the salient points of a contract
business in the Philippines. Not every activity do not find themselves in the Philippines,
undertaken in the Philippines amounts to doing Philippine authorities have no business
business as to require a foreign corporation to subjecting the parties to local registration and
obtain such license. licensing requirements (Pacific Vegetable Oil
Corp. v Singzon, G.R. No. 7917, 1955)
Single or isolated acts, contracts, or transactions of
foreign corporations are not regarded as a doing or “Doing Business” Under The Foreign
carrying on of business. Typical examples of these Investment Act and IRR
are the making of a single contract, sale, sale with
the taking of a note and mortgage in the state to “Doing Business” in the Philippines - Includes:
secure payment thereof, purchase, or note, or the a. Soliciting orders, service contracts, opening
mere commission of a tort. In these instances, there offices, whether called “liaison” offices or
is no purpose to do any other business within the
branches;
country (MR. Holdings, Ltd. V. Bajar, G.R. No.
138104, 2002). b. Appointing representatives or distributors
domiciled in the Philippines;
However, where a single act or transaction is not
merely incidental or casual but indicates the NOTE: Includes “appointing representatives or
foreign corporation's intention to do other distributors in the Philippines” but not when the
business in the Philippines, said single act or representative or distributor “transacts business in
transaction constitutes doing business (Far East its name and for its own account.” (Alfred Hahn v.
Int'l. v. Nankai Kogyo, G.R. No. 13525, 1962). CA, G.R. No.113074, 1997)
Need to Allege: The fact that a foreign corporation c. Participating in the management, supervision,
is not doing business in the Philippines must be or control of any domestic business, firm, entity,
alleged, if a foreign corporation desires to sue in or corporation in the Philippines; and
Philippines courts under the “isolated transactions d. Any other act or acts that imply a continuity of
rule” (Atlantic Mutual Inc. Co. v. Cebu Stevedoring commercial dealings or arrangements, and
Co., G.R. No. 18961, 1966); if not alleged, it can be contemplate to that extent the performance of
dismissed for lack of capacity to sue by the plaintiff acts or works, or the exercise of some of the
(Commissioner of Customs v. K.M.K. Gani, G.R. No. functions normally incident to, and in
73722, 1990). progressive prosecution of, commercial gain or
of the purpose and object of the business
b. Twin Characterization Test (Mentholatum Co.
organization
Inc v. Mangaliman G.R. No. 47701, 1941)
NOTE: “Doing business” was upheld against
Substance Test: Consider the body or Pioneer International for soliciting orders and
substance of the business or the enterprise for
service contracts in the performance of acts that
which it was ORGANIZED or whether it has imply continuity of commercial dealings. Pioneer
substantially retired from it and turned it over to International’s alleged acts in actively negotiating to
another.
employ Todaro to run its pre-mixed concrete
operations in the Philippines, which acts are
Continuity Test: That doing business implies a hypothetically admitted in Pioneer International’s
continuity of commercial dealings and
motion to dismiss, are not mere acts of a passive
arrangements and contemplates, to that extent, the
investor in a domestic corporation. Such are
performance of acts or works or the exercise of managerial and operational acts in directing and
some of the functions normally incidental to, and in establishing commercial operations in the
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Philippines. (Pioneer International, LTD v. Guadiz, c. Requisites for Issuance of

G.R. No. 156848, 2007) License
Does Not Include: A foreign corporation applying for a license to
a. Mere investment as a shareholder by a foreign transact business in the Philippines shall submit to
entity in domestic corporations duly registered the SEC the following:
to do business, and/or the exercise of rights as 1. A copy of its articles of incorporation and
such investor; bylaws, certified in accordance with law and
b. Having a nominee director or officer to their translation to an official language of the
represent its interests in such corporation; Philippines, if necessary.
c. Appointing a representative or distributor 2. The application shall be under oath and shall
domiciled in the Philippines which transacts specifically set forth the following:
business in its own name and for its own a. The date and term of incorporation;
account; b. The address, including the street
d. The publication of a general advertisement number, of the principal office of the
through any print or broadcast media; corporation in the country or State of
e. Maintaining a stock of goods in the Philippines incorporation;
solely for the purpose of having the same c. The name and address of its resident
processed by another entity in the Philippines; agent authorized to accept summons
f. Consignment by a foreign entity of equipment and process in all legal proceedings
with a local company to be used in the and all notices affecting the
processing of products for export; corporation, pending the establishment
g. Collecting information in the Philippines; and of a local office;
h. Performing services auxiliary to an existing
d. The place in the Philippines where the
isolated contract of sale which are not on a
corporation intends to operate;
continuing basis, such as Installing in the
e. The specific purpose or purposes
Philippine machinery it has manufactured or
which the corporation intends to
exported to the Philippines, servicing the same,
pursue in the transaction of its
training domestic workers to operate it, and
business in the Philippines: Provided,
similar incidental services.
That said purpose or purposes are
those specifically stated in the
No foreign corporation transacting business in the
Philippines without a license, or its successors or certificate of authority issued by the
assigns, shall be permitted to maintain or intervene appropriate government agency;
in any action, suit or proceeding in any court or f. The names and addresses of the
administrative agency of the Philippines; but such present directors and officers of the
corporation may be sued or proceeded against corporation;
before Philippine courts or administrative tribunals g. A statement of its authorized capital
on any valid cause of action recognized under stock and the aggregate number of
Philippine laws (Lorenzo Shipping Corp. v. Chubb & shares which the corporation has
Sons, Inc., et al., G.R. No. 147724, 2004). authority to issue, itemized by class,
par value of shares, shares without par
b. Necessity of a License to Do value, and series, if any;
Business h. A statement of its outstanding capital
stock and the aggregate number of
1. To place foreign corporations under the
shares which the corporation has
jurisdiction of the courts
issued, itemized by class, par value of
2. To place foreign corporations in the same
shares, shares without par value, and
footing as domestic corporations
series, if any;
3. Protection for the public in dealing with said
i. A statement of the amount actually
corporations.
paid in; and
j. Such additional information as may be
necessary or appropriate in order to
enable the Commission to determine
whether such corporation is entitled to
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a license to transact business in the Service of Process upon a Foreign Corporation

Philippines, and to determine and Through A Resident Agent
assess the fees payable. Before a foreign corporation can be issued a license
3. The application shall be accompanied by the to transact business in the Philippines, such
following: corporation must first file with the SEC
1. A written power of attorney designating some
a. A certificate under oath duly executed
person who must be a resident of the
by the authorized official or officials of
Philippines, on whom any summons and other
the jurisdiction of its incorporation,
legal processes may be served in all actions or
attesting to the fact that the laws of the
other legal proceedings against such
country or State of the applicant allow
corporation;
Filipino citizens and corporations to do
2. Consent that service upon such resident agent
business therein, and that the applicant
shall be admitted and held as valid as if served
is an existing corporation in good
upon the duly authorized officers of the foreign
standing. If the certificate is in a foreign
corporation at its home office.
language, a translation thereof in
a. Whenever such service of summons or
English under oath of the translator
other process is made upon the SEC,
shall be attached to the application.
it must, within 10 days thereafter,
b. A statement under oath of the
transmit by mail a copy of such
president or any other person
summons or other legal process to the
authorized by the corporation, showing
corporation at its home or principal
to the satisfaction of the Commission
office. When SEC sends such copy, it
and when appropriate, other
shall constitute a necessary part of and
governmental agencies that the
shall complete such service
applicant is solvent and in sound
b. In case of a change of address of the
financial condition, setting forth the
resident agent, it shall be his or its duty
assets and liabilities of the corporation
to immediately notify the SEC in
as of the date not exceeding one (1)
writing. (Sec. 145)
year immediately prior to the filing of
the application.
3. Amendment of license (Sec. 148)
4. Foreign banking, financial, and insurance
a. A foreign corporation authorized to
corporations shall, in addition to the above
transact business in the Philippines
requirements, comply with the provisions of
shall obtain an amended license in the
existing laws applicable to them.
event it changes its corporate name, or
5. In the case of all other foreign corporations, no
desires to pursue other or additional
application for license to transact business in
purposes in the Philippines, by
the Philippines shall be accepted by the
submitting an application with the
Commission without previous authority from the
Commission, favorably endorsed by
appropriate government agency, whenever
the appropriate government agency
required by law. (Sec. 142)
in the proper cases.
Amendment of the Articles of Incorporation or

d. Resident Agent By-laws of Foreign Corporations
Who may be a Resident Agent Sixty (60) days after the effectivity of the
a. Individual residing in the Philippines of amendment of the articles of incorporation or bylaws
good moral character and of sound of a foreign corporation authorized to transact
financial standing business in the Philippines, such foreign corporation
b. Domestic corporation lawfully transacting shall, file with the Commission, and in the proper
business in the Philippines, with a sound cases, with the appropriate government agency, a
financial standing and must show proof that duly authenticated copy of the amended articles of
it is in good standing as certified by the SEC incorporation or bylaws, indicating clearly in capital
(Sec. 144) letters or underscoring the change or changes
made, duly certified by the authorized official or
officials of the country or State of incorporation.
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Such filing shall not in itself enlarge or alter the Rules Regarding A Foreign Corporation’s Right
purpose or purposes for which such corporation is to Bring Suit in the Philippines
authorized to transact business in the Philippines. (Agilent Technologies v. Integrated Silicon, G.R. No.
(Sec. 147) 154618, 2004)
FOREIGN CORP CAN FC SUE IN PH
e. Personality to Sue and STATUS
Suability Doing business in Cannot sue before
Philippines without a Philippine courts
Section 35 of the RCC enumerates the express license
powers of a corporation, which includes the Not doing business in Can sue before
corporation’s ability to sue and be sued. the Philippines Philippine courts on
an isolated
The power of the corporation to sue and be sued in transaction or on a
any court is lodged with the board of directors that cause of action
exercises its corporate powers. (Bitong v. CA, G.R. entirely independent
No. 123553, 1998) of any business
transaction
Suability of Foreign Corporations Doing business in the Can sue before
Every foreign corporation Philippines without a Philippine courts due
a. Doing business in the Philippines with a license, but Philippine to estoppel
license may sue and can be sued in the citizen or entity has
Philippines contracted with said
b. Doing business in the Philippines without a corporation or derived
license cannot sue, but may be sued in the benefits from the
Foreign Corporation
Philippines
Doing business in the Can sue before
c. Not doing business in the Philippines, or on
Philippines and has Philippine courts on
isolated transactions may sue and can be the required license any transaction
sued (if jurisdiction can be acquired)
Capability to Sue and Suability of Foreign
Instances When Unlicensed Foreign Corporations W/N Doing Business
Corporations May Be Allowed To Sue: DOING BUSINESS IN THE NOT DOING
a. Isolated transactions; PHILIPPINES BUSINESS IN
b. Action to protect good name, goodwill, and THE
reputation of a foreign corporation; PHILIPPINES
c. The subject contracts provide that LICENSED UNLICENSED ISOLATED
Philippine Courts will be venue to TRANSACTIONS
controversies;
d. A license subsequently granted enables YES, can NO, cannot Yes, can sue;
the foreign corporation to sue on contracts sue sue;
executed before the grant of the license EXC: if
EXC: transactions
(Eriks Ltd. v. Court of Appeals, G.R. No.
estoppel exhibits intent to
118843, 1997); do business,
e. Recovery of misdelivered property; Foreign
f. Where the defendant is estopped. Corporation
needs license to
The Intellectual Property Code provides that any sue
foreign corporation not engaged in business in the YES, can YES, can be sued
Philippines and a national of a country which is a be sued
party to any convention, treaty or agreement relating Qualifier: as long as summons
to intellectual property rights or the repression of were properly served (to acquire
unfair competition, to which the Philippines is also a jurisdiction)
party or extends reciprocal rights, may sue in
trademark or service mark enforcement action 5. Grounds for Revocation of License
(Sehwani Inc v. In-n-Out Burger, G.R. No. 171053,
Section 151 provides that the SEC may cancel the
2007).
certificate or license of a foreign corporation on any
of the following grounds:
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a. Failure to file its annual report or pay any profession. EXC: unless otherwise
fees as required by Code; provided by special laws. (Sec. 116)
b. Failure to appoint and maintain a resident
agent; II. Capital stock requirement (Sec. 117)
c. Failure to inform SEC of the change of General Rule: A One Person Corporation is not
resident agent or the latter’s change of required to have a minimum authorized capital
stock.
address;
d. Failure to submit a copy of amended Exception: As otherwise provided by special law.
articles of incorporation or by- laws; or
articles of merger or consolidation; NOTE: Unless required by applicable laws or
e. A misrepresentation of any material regulations, no portion of the authorized capital is
matters in reports; required to be paid up at the time of incorporation.
f. Failure to pay any and all taxes, imposts, (SEC Circular No. 7, Series of 2019)
assessments or penalties;
g. Engaged in a business not authorized by III. Articles of incorporation and by-laws
SEC; Requirements for filing the Articles of Incorporation:
h. Acting as a dummy of a foreign corporation i. In accordance with Sec. 14 of the RCC.
not licensed to do business in the ii. If the single stockholder is a trust or an
estate - the name, nationality, and
Philippines; or
residence of the trustee, administrator,
i. Any other ground as would render it unfit to
executor, guardian, conservator, custodian,
transact business in the Philippines. or other person exercising fiduciary duties
together with the proof of such authority to
Law applicable to Foreign Corporations (Sec. act on behalf of the trust or estate
146) iii. Name, nationality, residence of the
General Rule: A foreign corporation lawfully doing nominee and alternate nominee, and the
business in the Philippines shall be bound by all extent, coverage and limitation of the
laws, rules and regulations applicable to domestic authority. (Sec. 118)
corporations of the same class
NOTE: OPCs are NOT required to file their
Exceptions: corporate bylaws. (Sec. 119)
1. Those which provide for the creation,
formation, organization or dissolution of IV. Corporate name
corporations or It should Indicate the letters “OPC” either below or
2. Those which fix the relations, liabilities, at the end of their corporate name. (Sec. 120)
responsibilities, or duties of stockholders,
members, or officers of corporations to V. Corporate structure and officers
each other or to the corporation. One Person Corporation (OPC) (Sec. 116)
A corporation with a single stockholder
4. ONE PERSON CORPORATIONS Who may form?

1. Natural person – must be of legal age
I. Excepted Corporations 2. Undertake in writing to faithfully administer
The following are not allowed to incorporate as the One Person Corporation’s funds to be
OPC: received as treasurer
a. Banks, 3. To disburse and invest the same according
b. Non-bank financial institutions, to the articles of incorporation as approved
c. Quasi-banks, by the SEC
d. Pre-need,
e. Trust, Natural Person
f. Insurance public and publicly listed a. A foreign natural person may put up an
companies, OPC subject to applicable capital
g. Non-chartered GOCCs; and requirement and constitutional and
h. Natural person who is licensed to exercise statutory restrictions on foreign
a profession may not organize an OPC for participation in certain investment areas or
the purpose of exercising such a activities (SEC Memorandum 7-2019)
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b. Trust – does not refer to a trust entity, but ACS SURETY BOND
the subject being managed by a trustee. If COVERAGE
the single stockholder is a trustee, 1 to 1,000,000 1,000,000
administrator, executor, guardian, 1,000,001 to 2,000,000
conservator, custodian, or other person 2,000,000
exercising fiduciary duties 2,000,001 to 3,000,000
i. Proof of authority to act on behalf 3,000,000
of the trust or estate must be
3,000,001 to 4,000,000
submitted at the time of
4,000,000
incorporation (SEC
4,000,001 to 5,000,000
Memorandum 7-2019)
5,000,000
c. Estate
5,000,001 and above Equal to the OPC’s
ACS
Who may NOT form?
1. Banks and quasi-banks, non-bank financial
institutions (SEC Memorandum 7-2019) • Bond shall be renewed every two (2) years
2. Pre-need, trust, insurance, public and or as often as may be required, upon review
publicly-listed companies of the Audited Financial Statements/
3. Non-chartered government-owned and - Financial Statements certified under oath
controlled by the company’s President/Treasurer
4. Natural person who is licensed to exercise • Bond is a continuing requirement as long as
a profession to form an OPC for the the single stockholder is the self-appointed
purpose of exercising such profession Treasurer of the OPC
• Bond may be cancelled upon proof of
Exception: as provided under special laws appointment of another person as the
Treasurer and Filing of Amended Form for
The single stockholder shall be the sole director Appointment of Officers
and president of the One Person Corporation. (Sec.
121) Special Functions of the Corporate
Secretary(Sec. 123)
When to appoint officers? (Sec. 122) In addition to the functions designated by the One
Within fifteen (15) days from the issuance of its Person Corporation, the corporate secretary shall:
certificate of incorporation 1. Be responsible for maintaining the minutes
book and/or records of the corporation
Who to appoint? 2. Notify the nominee or alternate nominee of
a. Treasurer the death or incapacity of the single
b. Corporate secretary stockholder
c. Other officers as may be deemed a. Notice shall be given no later than
necessary five (5) days from such occurrence
3. Notify the SEC of the death of the single
Who and when to notify? stockholder
Securities and Exchange Commission (SEC) a. Within five (5) days from such
a. within five (5) days from appointment occurrence !!
b. using the Appointment Form as may be b. State the names, residence
prescribed by the SEC (SEC Memorandum addresses, and contact details of
7-2019) all known legal heirs
4. Call the nominee or alternate nominee and
Single stockholder allowed? the known legal heirs to a meeting and
a. Corporate secretary – NO advise the legal heirs with regard to:
b. Treasurer – YES a. The election of a new director
b. Amendment of the articles of
Conditions: Give bond to the SEC in such a sum as incorporation
may be required c. Other ancillary and/or
consequential matters
BOND REQUIREMENT as per SEC Memorandum
7-2019: VI. Nominee
1. Designated by a single stockholder
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2. In the event of the single stockholder’s Minimum Capital Stock Required for One Person
death or incapacity, nominee takes the Corporation (Sec. 117)
place of the single stockholder as director General rule: No minimum authorized capital stock
and shall manage the corporation’s affairs Exception: As otherwise provided by special law
3. Written consent of both nominee and
alternate nominee (SEC Memorandum 7- Required Paid Up Capital (SEC Memorandum 7-
2019) – to be attached in the application of 2019)
incorporation General rule: No portion of authorized capital stock
a. May be withdrawn in writing any is required to be paid up at the time of incorporation
time before the death or incapacity Exception: As otherwise required by applicable
of the single stockholder laws or regulations
4. May be changed at any time
a. By submitting to the SEC the VII. Minutes and records
names of the new nominees and
their corresponding written A One Person Corporation shall maintain a minutes
consent book which shall contain all actions, decisions, and
b. Articles of Incorporation need NOT resolutions taken by the One Person Corporation.
be amended (SEC Memorandum (Sec. 127)
7-2019)
When action is needed on any matter, it shall be
What shall be contained in articles of sufficient to prepare a written resolution, signed and
incorporation with regard to the nominee and dated by the single stockholder, and recorded in the
alternate nominee? minutes book of the One Person Corporation. The
a. Names of Nominees and Alternate date of recording in the minutes book shall be
Nominees deemed to be the date of the meeting for all
b. Residence addresses purposes under this Code. (Sec. 128)
c. Contact details
d. Extent and limitations of their authority in VIII. Liability (Sec. 130)
managing the affairs of the One Person
Corporation. A sole shareholder claiming limited liability has the
burden of affirmatively showing that:
Term of Nominee and Alternate Nominee (Sec. 1. The corporation was adequately financed.
125) 2. The property of the One Person
Incapacity of the single stockholder Corporation is independent of the
TEMPORARY Until the stockholder, by self- stockholder’s personal property.
determination, regains the
The principles of piercing the corporate veil applies
capacity to assume such duties
with equal force to One Person Corporations as with
other corporations
DEATH OR Until the legal heirs of the single
PERMANENT stockholder have been lawfully IX. Conversion of corporation to OPC and vice-
determined, and the heirs have versa
designated one of them or have
agreed that the estate shall be the Conversion from an Ordinary Corporation to a
single stockholder of the One OPC (Sec. 131)
When a single stockholder acquires all the stocks of
Person Corporation
an ordinary stock corporation, the latter may apply
for conversion into a OPC, subject to the submission
of such documents as the SEC may require. If the
Alternate Nominee application for conversion is approved, the SEC
a. Shall sit as director and manage the One shall issue certificate of filing of amended articles of
Person Corporation in case of the incorporation reflecting the conversion.
nominee’s inability, incapacity, death, or
refusal to discharge the functions as Conversion from an OPC to an Ordinary Stock
director and manager of the corporation Corporation (Sec. 132)
b. For the same term and under the same A One Person Corporation may be converted into
conditions applicable to the nominee an ordinary stock corporation after due notice to the
SEC of such fact and of the circumstances leading
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to the conversion, and after compliance with all Merger or consolidation does not become effective
other requirements for stock corporations under this by mere agreement of the constituent corporations.
Code and applicable rules. Such notice shall be filed The approval of the SEC is required (PNB v.
with the SEC within sixty (60) days from the Andrada Electric & Engr. Co., Inc., G.R. No. 142936,
occurrence of the circumstances leading to the 2002)
conversion into an ordinary stock corporation. If all
requirements have been complied with, the SEC Mere Acquisition/Transfer (3 Levels)
shall issue an amended certificate of incorporation MERGER/CONSOLIDATION TRANSFER OF
reflecting the conversion. PROPERTY
Loss of separate existence A NEW
In case of death of the single stockholder, the by the absorbed corporation corporation is
nominee or alternate nominee shall transfer the (in mergers) or the created, and
shares to the duly designated legal heir or estate constituent corporations (in constituent
within seven (7) days from receipt of either an consolidation) corporations are
affidavit of heirship or self- adjudication executed by EXTINGUISHED.
a sole heir, or any other legal document declaring
the legal heirs of the single stockholder and notify 1) ASSETS-ONLY LEVEL
the SEC of the transfer. Within sixty (60) days from General Rule: A corporation that purchases the
the transfer of the shares, the legal heirs shall notify assets of another will not be liable for the debts and
the SEC of their decision to either wind up and liabilities of the selling corporation provided the
dissolve the One Person Corporation or convert it former acted in good faith.
into an ordinary stock corporation.
Except, when the following circumstances are
NOTE: The Converted Corporations shall succeed present:
the former corporation and be legally responsible for 1. where the purchasers expressly or
all the latter’s outstanding liabilities as of the date of impliedly agrees to assume the debts
conversion. 2. where the selling corporation fraudulently
enters into the transactions to escape
liability for those debts
I. MERGERS AND CONSOLIDATIONS 3. where the purchasing corporation is merely
a continuation of the selling corporation
1. CONCEPT
4. where the transaction amounts to a
consolidation or merger of the corporations
Merger
A union whereby one or more existing corporations (Edward J. Nell Co. v Pacific Farms Inc., G.R.
are absorbed by another corporation that survives No. L-20850, 1965)
and continues the combined business (Villanueva,
2018). 2) BUSINESS ENTERPRISE LEVEL
Purchase of substantially all the assets of the
Consolidation corporation extending to its “going concern” (ability
The union of two or more existing corporations. A to do business and make money, goodwill, clientele,
new corporation is created, and consolidating stock-in-trade, etc). There is case law, based on
corporations are extinguished. (PNB v. Andrada equity, that holds the transferee liable for the
Electric & Engineering Co., G.R. No. 142936, [April debts and liabilities of the transferor. A “free and
17, 2002], 430 PHIL 882-903) harmless clause” holding the transferee free from
the liabilities of the transferor is binding only
Differentiating Merger from Consolidation between them and cannot prejudice creditors who
MERGER CONSOLIDATION are not parties thereto. (Y-I Leisure Philippines, Inc.
A corporation A NEW corporation is et al. v James Yu, G.R. No. 207161, 2015)
ABSORBS another created, and
corporation and constituent NOTE: The sale under [Sec. 39] does not
REMAINS IN corporations are contemplate an ordinary sale of all corporate assets;
EXISTENCE while the EXTINGUISHED.
the transfer must be of such degree that the
other is DISSOLVED transferor corporation is rendered incapable of
continuing its business or its corporate purpose. (Y-
The power to merge or consolidate is not within the I Leisure Philippines, Inc. et al. v James Yu, G.R.
inherent powers of the corporation. Therefore, it No. 207161, 2015)
must be expressly granted by law.
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However, not every transfer of the entire corporate b. Plan of Merger or Consolidation (Sec. 75)
assets would qualify under Section [39]. It does not The plan of merger or consolidation shall set forth
apply: the ff:
1. If the sale of the entire property and assets 1. The names of the constituent corporations;
is necessary in the usual and regular 2. The terms of the merger or consolidation
course of business of corporation, or and the mode of carrying the same into
2. If the proceeds of the sale or other effect;
disposition of such property and assets will 3. A statement of the changes, if any, in the
be appropriated for the conduct of its articles of incorporation of the surviving
remaining business.
corporation in case of merger; and, in case
Thus, the litmus test to determine the applicability of
of consolidation, all the statements required
Section [39] would be the capacity of the corporation
to continue its business after the sale of all or to be set forth in the articles of incorporation
substantially all its assets.(Y-I Leisure Philippines, for corporations organized under this Code;
Inc. et al. v James Yu, G.R. No. 207161, 2015) and
4. Such other provisions with respect to the
3) EQUITY LEVEL proposed merger or consolidation as are
Purchaser takes control of the business by deemed necessary or desirable.
purchasing the shareholdings. Purchasing
corporation is still protected by the limited liability NOTE: The plan of merger has to be approved by
feature but the same can be pierced. majority of the board of each constituent
corporation; it has to be approved by affirmative vote
In order to transfer ownership of shares of stock not of stockholders representing ⅔ of the outstanding
traded in the Stock Exchange, it is necessary to capital stock or ⅔ of the members in case of a non-
secure a Certificate of Authorizing Registration stock corporation.
(CAR) pursuant to the process laid down in RMO
No. 15-03. The receipts of the payment of the tax c. Articles of Merger or Consolidation (Sec. 78)
should also be filed with and recorded by the The articles must be signed by the president or vice
secretary of the corporation pursuant to Section 11 president and certified by the secretary or assistant
of RR. No. 06-08. secretary setting forth:
i. The plan of the merger or the plan of
a. Constituent and consolidated corporations consolidation;
CONSTITUENT CONSOLIDATED ii. As to stock corporations, the number of
CORPORATION CORPORATION shares outstanding, or in the case of
The corporations that The corporation non-stock corporations, the number of
shall cease to exist formed after the members;
after joining together consolidation of two iii. As to each corporation, the number of
through consolidation constituent shares or members voting for or
(Bank of Commerce v. corporations against such plan, respectively;
Radio Philippines iv. The carrying amounts and fair values
Network, Inc., G.R. of the assets and liabilities of the
No. 195615, [April 21,
respective companies as of the agreed
2014], 733 PHIL 491-
cut-off date;
581) names of the
corporations v. The method to be used in the merger
proposing to merge or or consolidation of accounts of the
consolidate, companies;
hereinafter referred to vi. The provisional or pro-forma values, as
as the constituent merged or consolidated, using the
corporations accounting method; and
vii. Such other information as may be
The constituent corporations shall become a single prescribed by the SEC.
corporation which, in case of merger, shall be the
surviving corporation designated in the plan of d. Procedure of Consolidation or Merger
merger; and, in case of consolidation, shall be the STEP 1: Drawing up of the Plan of Merger or
consolidated corporation designated in the plan of Consolidation (Sec. 75)
consolidation
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The board of constituent corporations shall draw up b. As to stock corporations, the number of
a plan of merger or consolidation. It shall contain the shares outstanding, or in the case of
following: non-stock corporations, the number of
a. The names of the constituent members;
corporations; c. As to each corporation, the number of
b. The terms of the merger or shares or members voting for or against
consolidation and the mode of carrying such plan, respectively;
the same into effect; d. The carrying amounts and fair values of
c. A statement of the changes, if any, in the assets and liabilities of the
the articles of incorporation of the respective companies as of the agreed
surviving corporation in case of cut-off date;
merger; and, in case of consolidation, e. The method to be used in the merger or
all the statements required to be set consolidation of accounts of the
forth in the articles of incorporation for companies;
corporations organized under this f. The provisional or pro-forma values, as
Code; and merged or consolidated, using the
d. Such other provisions with respect to accounting method; and
the proposed merger or consolidation g. Such other information as may be
as are deemed necessary or desirable. prescribed by the SEC.
STEP 2: Board Approval (Sec. 75) STEP 5: Approval by the SEC

The plan of merger or consolidation shall be The Articles of Merger or Articles of Consolidation
approved by majority vote of each of the boards of shall be submitted to the SEC for approval.
the corporations involved at separate meetings; However, in the case of special corporations, like
banks, insurance companies, building and loan
STEP 3: Stockholders’ or Members’ Approval associations, etc., the favorable recommendation of
(Sec. 76) the appropriate government agency shall first be
1. Notice of such meeting should be given to obtained.
all stockholders or members at least 1 week 1. If the SEC is satisfied that the merger or
before the meeting. consolidation of the corporations
2. The plan has to be approved by a vote of concerned is legal, it shall issue a certificate
stockholders representing ⅔ of the of merger or of consolidation, at which time
outstanding capital stock, if a stock the merger or consolidation shall be
corporation, or ⅔ of the members of the effective.
non- stock corporation. 2. If the SEC is not satisfied, it shall set a
3. Dissenting stockholders may exercise their hearing to give the corporations concerned
the opportunity to be heard. Written notice
right of appraisal. However, if the board
of the date, time and place of hearing shall
abandons the plan, such right is be given to each constituent corporation at
extinguished. least two (2) weeks before said hearing.
4. Any amendment to the plan must be
approved by the same votes of the board e. Effectivity of Merger or Consolidation
members or trustees and stockholders or A merger does not become effective upon the mere
members required for the original plan. agreement of the constituent corporations, but open
approval of the articles of merger by the SEC issuing
STEP 4: Articles of Merger or Consolidation the certificate of merger as required by Section 79
(Sec. 77) of the Corporation Code (Bank of Commerce v.
Once the required number of stockholders or Heirs of Rodolfo dela Cruz).
members approved of the plan, Articles of Merger or
Articles of Consolidation shall be executed by each 2. EFFECTS AND LIMITATIONS OF
of the constituent corporations, to be signed by the MERGER AND CONSOLIDATION
president or vice-president and certified by the
secretary or assistant secretary of each corporation, Effects of Merger or Consolidation
setting forth: 1. Constituent corporations become a single
a. The plan of the merger or the plan of corporation
consolidation; a. Merger: surviving corporation
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b. Consolidation: consolidated
corporation under Parties to a merger or acquisition agreement without
the plan of complying with the thresholds are prohibited from
consolidation consummating their agreement until thirty (30) days
2. Separate existence of constituent after providing notification to the Commission in the
corporations cease EXCEPT that of the form and containing the information specified in the
surviving or consolidated corporation regulations issued by the Commission. A
3. Surviving or consolidated corporation transaction that meets the thresholds and does not
possesses the rights privileges immunities; comply with the notification requirements and
and powers and is subject to all duties and waiting periods set out in Section 5 shall be
liabilities of a corporation organized under considered void and will subject the parties to an
this Code administrative fine of one percent (1%) to five
4. ALL of the following are deemed percent (5%) of the value of the transaction. (Sec.
transferred to and vested in such surviving 17 of R.A. no. 10667; PCA Rule 4, as amended by
or consolidated corporation: PCC Resolution No. 02-2020)
(BY OPERATION OF LAW)
a. Rights Thresholds for compulsory notification
b. Privileges M&A transactions whose definitive agreements are
c. Immunities executed on or after 1 March 2020 will be subject to
d. Franchises of each constituent mandatory notification to the PCC if they meet the
corporation ff. thresholds:
e. Real or personal property
f. Receivables due on whatever
SIZE OF PARTY (i) the aggregate annual
account (hence
gross revenues in, into or
surviving/consolidated corp has
from the Philippines, or (ii)
the power to file an action for
the value of the assets in the
recovery) including:
Philippines of the ultimate
i. subscriptions to shares
parent entity (UPE) of either
and other choses in
the acquiring or acquired
action
entities exceeds PhP 6 billion
ii. and every other interest
of, belonging to, or due to
SIZE OF The size of transaction will
each constituent
TRANSACTION be met if the transaction
corporation
value, as determined below,
5. Regarding liabilities and pending claims:
exceeds PhP 2.4 billion.
a. Liabilities and obligations of each
constituent corporation:
i. Surviving or consolidated Merger or acquisition agreements that substantially
corporation shall be prevent, restrict or lessen competition in the relevant
responsible market or in the market for goods or services as may
b. Pending claim, action or be determined by the Commission shall be
proceeding brought by or against prohibited. (Sec. 20 of R.A. no. 10667)
any constituent corporation
i. may be prosecuted by or Exemptions: Notwithstanding such prohibition, the
against the surviving or PCC would allow such merger or acquisition
consolidated corporation provided the parties prove the following:
c. The rights of creditors or liens (a) The concentration has brought about or is
upon the property of such likely to bring about gains in efficiencies that
constituent corporations are not are greater than the effects of any limitation on
impaired competition that result or likely to result from
d. Employee contracts the merger or acquisition agreement; or
(b) A party to the merger or acquisition agreement
Limitations of Merger or Consolidation is faced with actual or imminent financial
Under the Philippine Competition Act (R.A. no. failure, and the agreement represents the least
10667), the Philippine Competition Commission can anti-competitive arrangement among the
review the mergers and acquisitions of a known alternative uses for the failing entity’s
corporation/s based on the factors it deems to be assets.(Sec. 21 of R.A. no. 10667)
relevant. (Sec. 16 of R.A. no. 10667)
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IV. INTELLECTUAL PROPERTY INTELLECTUAL PROPERTY RIGHTS IN

GENERAL
TOPIC OUTLINE UNDER THE SYLLABUS Intellectual Property Rights
The State recognizes that an effective intellectual
A. PATENTS
1. Patentable Vs. Non-Patentable and industrial property system is vital to the
Inventions development of domestic and creative activity,
2. Ownership Of A Patent facilitates transfer of technology, attracts foreign
3. Grounds For Cancellation Of A investments, and ensures market access for our
Patent products. The use of intellectual property bears a
4. Patent Infringement social function. To this end, the State shall promote
the diffusion of knowledge and information for the
B. TRADEMARKS promotion of national development and progress
1. Marks Vs. Collective Marks Vs. and the common good. (Sec. 2, IP Code)
Trade Names
2. Acquisition Of Ownership
a. Concept Of Actual Use All agreements concerning industrial property are
b. Effect Of Registration intimately connected with economic development.
3. Well-Known Marks Industrial property encourages investments in new
4. Rights Conferred By Registration ideas and inventions and stimulates creative efforts
5. Cancellation Of Registration for the satisfaction of human needs. They speed up
6. Trademark Infringement transfer of technology and industrialization, and
7. Unfair Competition thereby bring about social and economic progress.
(Mirpuri v. Court of Appeals, G.R. No. 114508,
C. COPYRIGHTS 1999).
1. Copyrightable Works
2. Non-Copyrightable Works
Intellectual property protection is merely a means
3. Rights Conferred By Copyright
towards the end of making society benefit from the
4. Ownership Of A Copyright
creation of its men and women of talent and genius.
5. Limitations On Copyright
This is the essence of intellectual property laws, and
6. Doctrine Of Fair Use
it explains why certain products of ingenuity that are
7. Copyright Infringement
concealed from the public are outside the pale of
protection afforded by the law. It also explains why
the author or the creator enjoys no more rights than
are consistent with public welfare. (ABS-CBN
Broadcasting Corp. v. Philippine Multi-Media
System, Inc., G.R. Nos. 175769-70, 2009).
Differences Between Copyright, Trademarks,

And Patents
RATIONALE
1. To promote creativity
Copyright 2. To encourage creation of
works
1. To indicate origin or
ownership of the articles to
which they are attached
2. To guarantee that those
Trademarks
articles come up to a certain
standard of quality
3. To advertise the articles
which they symbolize
1. To foster and reward
Patents
invention;
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2. To promote disclosures of The validity of the patent issued by the Philippines

inventions to stimulate Patent Office and the question over the
further innovation inventiveness, novelty, and usefulness of the
3. To ensure that ideas in the improved process therein specified and described
public domain remain there are matters which are better determined by the
for the free use of the public Philippines Patent Office. The technical staff of the
SUBJECT MATTER Philippines Patent Office, composed of experts in
Original intellectual creations in their field, have, by the issuance of the patent in
Copyright the literary and artistic domain question, accepted the thinness of the private
(literary and artistic works) respondent's new tiles as a discovery. There is a
Any visible sign capable of presumption that the Philippines Patent Office has
Trademarks correctly determined the patentability of the
distinguishing the goods
A product, process or any improvement by the private respondent of the
Patents improvement thereof which is a process in question. (Aguas v. De Leon, G.R. No. L-
technical solution of a problem 32160, 1982)
ELEMENTS
1. Literary or artistic work
2. Independently created 1. PATENTABLE V. NON-
Copyright (originality) PATENTABLE INVENTION
3. Involves minimal or a
modicum of creativity PATENTABLE NON-PATENTABLE
1. Visible sign INVENTIONS INVENTIONS
2. Capable of distinguishing Any technical 1. Discoveries,
Trademarks
[distinctive] the goods or solution of a problem scientific theories
services of an enterprise in any field of human and mathematical
1. Technical solution of a activity which is: methods.
problem in a field of human (a) new, involves 2. Schemes, rules
activity an and methods of
Patents 2. Must be new (novelty) (b) inventive performing mental
3. Involves an inventive step; step and is acts, playing
(non-obvious) (c) industrially games or doing
4. Industrially applicable applicable business and
WHEN PROTECTION BEGINS shall be program for
Upon creation (but registration patentable. computers.
Copyright needed only to recover damages It may be, or may relate 3. Methods for human
in cases of infringement) to: or animal treatment
Upon grant of trademark (a) a product, or by surgery or
Trademarks (b) process, or an therapy and
registration
Patents Upon grant of patent (c) improvement diagnostic methods
TERM OF PROTECTION of any of the practiced on the
Generally, during the life of the foregoing. human or animal
Copyright author and for 50 years after his (Sec. 21, IP body.
death [life + 50] Code) 4. Plant varieties or
10 years, renewable for periods animal breeds or
of 10 years after the expiration of biological process
Trademarks for the production
the original term (perpetual
protection as long as renewed) of plants or
Patents 20 years from grant animals.
5. Aesthetic
creations; and
A. PATENTS 6. Anything contrary
to public order or
A patent is a grant issued by the Intellectual morality.
Property Office of the Philippines (IPOPHL).
(Sec. 22, IP Code)
Through the patent, a patent holder is given the
exclusive right to exclude others from making, using,
importing, and selling the patented innovation for a
limited period of time.
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Patentable invention In the case of drugs and medicines, there is no

Any technical solution of a problem in any field of inventive step if the invention results from:
human activity which is (a) new, involves an (b) 1. the mere discovery of a new form or new
inventive step and is (c) industrially applicable property of a known substance which does not
shall be patentable. It may be, or may relate to, a result in the enhancement of the known efficacy
product, or process, or an improvement of any of the of that substance,
foregoing. (Sec. 21, IP Code) 2. the mere discovery of any new property or new
use for a known substance, or
a. Novelty 3. the mere use of a known process unless such
known process results in a new product that
An invention shall not be considered new if it forms employs at least one new reactant. (Sec. 26.2,
part of a prior art. (Sec. 23, IP Code). Novelty is an IP Code)
essential requisite of patentability of an invention or
discovery. An invention is not new if it has been Industrial Applicability
disclosed or used in public, or sold in the market An invention that can be produced and used in any
before the patent application for the invention is industry shall be industrially applicable. (Sec. 27, IP
filed. (Manzano v. Court of Appeals, G.R. No. Code). Industrial applicability refers to an invention’s
113388, 1997). real-life benefit and practical use.
Prior Art – It consists of: 2. NON-PATENTABLE INVENTIONS

a. Everything which has been made available to
the public anywhere in the world, before the The following shall be excluded from patent
filing date or the priority date of the application protection:
claiming the invention; and
b. The whole contents of an application for a 1. Discoveries, scientific theories and
patent, utility model, or industrial design mathematical methods, and in the case of drugs
registration, published in accordance with this and medicines, the mere discovery of a new
Act, filed or effective in the Philippines, with a form or new property of a known substance
filing or priority date that is earlier than the filing which does not result in the enhancement of the
or priority date of the application: Provided known efficacy of that substance, or the mere
i. An application which has validly discovery of any new property or new use for a
claimed the filing date of an earlier known substance, or the mere use of a known
application shall be prior art with effect process unless such known process results in a
as of the filing date of such earlier new product that employs at least one new
application; reactant.
ii. The applicant or the inventor identified
in both applications are not one and the For the purpose of this clause, salts, esters,
same. (Sec. 24, IP Code) ethers, polymorphs, metabolites, pure form,
particle size, isomers, mixtures of isomers,
Inventive Step complexes, combinations, and other derivatives
An invention involves an inventive step if, having of a known substance shall be considered to be
regard to prior art, it is not obvious to a person the same substance, unless they differ
skilled in the art at the time of the filing date or significantly in properties with regard to efficacy;
priority date of the application claiming the invention.
(Sec. 26.1, IP Code) For drugs and medicines, the following are
unpatentable:
Person Skilled in the Art (POSITA)
A hypothetical person presumed to be an ordinary a. Discovery of a new form or new property
practitioner aware of what was common general of a known substance UNLESS it results in
knowledge in the art at the relevant date. He or she the enhancement of the substance’s
is also presumed to have: efficacy;
1. knowledge of all references that are sufficiently b. Discovery of any new property or use of
related to one another and to the pertinent art; a known substance; and
2. knowledge of all arts reasonably pertinent to the c. Mere use of a known process UNLESS
particular problems with which the inventor was such process results in a new product that
involved; and employs at least one new reactant.
3. normal means and capacity for routine work and
experimentation at his or her disposal.
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2. Schemes, rules and methods of performing have jointly made an invention, the right to a patent
mental acts, playing games or doing business, shall belong to them jointly. (Sec. 28, IP Code)
and programs for computers;
First-to-File Rule
General Rule: Computer programs are If two (2) or more persons have made the invention
subjects of copyright. separately and independently of each other, the
Exceptions: The computer program is still right to the patent shall belong to the person who
subject of copyright protection; in addition, the filed an application for such invention, or where two
machine or article described below may be or more applications are filed for the same invention,
patentable if the computer program: to the applicant who has the earliest filing date or the
(1) is implemented by a particular machine in a earliest priority date. (Sec. 29, IP Code)
non-conventional and non-trivial manner,
or Invention Created Pursuant to a Commission
(2) transforms an article from one state to The person who commissions the work shall own
another, then it may be patentable. the patent, unless otherwise provided in the
contract. (Sec. 30, IP Code)
3. Methods for treatment of the human or animal
body by surgery or therapy and diagnostic If an employee made the invention in the course of
methods practiced on the human or animal his regular employment, the patent shall belong to:
body; 1. The employee, the inventive activity is not
part of his regular duties (even if the
NOTE: This prohibition, however, does not employee uses the time, facilities, and
apply to products and compositions for use in materials of the employer);
any of these methods. 2. The employer, if the invention is the result
of the performance of the employee’s
4. Plant varieties or animal breeds or essentially regular duties UNLESS there is an
biological process for the production of plants or agreement to the contrary.
animals;
Right of Priority
NOTE: This provision shall not apply to micro- An application for patent filed by any person who
organisms and non-biological and has previously applied for the same invention in
microbiological processes. Further, Congress another country which by treaty, convention, or law
may enact a law providing sui generis protection affords similar privileges to Filipino citizens, shall be
of plant varieties and animal breeds and a considered as filed as of the date of filing the foreign
system of community intellectual rights application, provided that:
protection. 1. The local application expressly claims
priority;
NOTE: Congress has already enacted the Plan 2. It is filed within twelve (12) months from the
Variety Protection Act which grants a Certificate date the earliest foreign application was
of Plant Variety Protection for varieties that are: filed; and
(a) new, (b) distinct, (c) uniform, and (d) 3. A certified copy of the foreign application
stable. (Sec. 4, Plant Variety Protection Act) together with an English translation is filed
within six (6) months from the date of filing
5. Aesthetic creations; and in the Philippines.
6. Anything which is contrary to public order or 4. GROUNDS FOR CANCELLATION OF

morality. (Sec. 22, IP Code) A PATENT
3. OWNERSHIP OF A PATENT Any interested person may, upon payment of the
required fee, petition to cancel the patent or any
Term of Patent claim thereof, or parts of the claim, on any of the
The term of a patent shall be 20 years from the following grounds:
filing date of the application. (Sec. 54, IP Code) 1. That what is claimed as the invention is not
new or patentable;
Right to a Patent 2. That the patent does not disclose the
The right to a patent belongs to the inventor, his invention in a manner sufficiently clear and
heirs, or assigns. When two (2) or more persons complete for it to be carried out by any
person skilled in the art; or
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3. That the patent is contrary to public order a. Tests in Patent Infringement

or morality.
1. Literal Infringement
NOTE: Where the grounds for cancellation relate to Resort must be had to the words of the claim. If
some of the claims or parts of the claim, cancellation accused matter clearly falls within the claim, then
may be effected to such extent only. there is literal infringement.
5. PATENT INFRINGEMENT To determine whether the particular item falls within

the literal meaning of the patent claims, the Court
Consists of the following acts: a. Compares the claims of the patent and the
(1) making, using, offering for sale, selling, or accused product within the overall context
importing a patented product or a product of the claims and specifications, and
obtained directly or indirectly from a b. Determines whether there is exact identity
patented process; or of all material elements. (Godines v. Court
(2) use of a patented process without the of Appeals, G.R. No. 97343, 1993)
authorization of the patentee constitutes
patent infringement. 2. Doctrine of Equivalents
Infringement also occurs when a device
NOTE: appropriates a prior invention by incorporating its
To be able to effectively and legally preclude others innovative concept and, albeit with some
from copying and profiting from the invention, a modification and change, performs substantially the
patent is a primordial requirement. No patent, no same function in substantially the same way to
protection. (Pearl & Dean (Phil.) v. Shoemart, G.R. achieve substantially the same result. (Smith Kline
No. 148222, 2003) Beckman Corp. v. Court of Appeals, G.R. No.
126627, 2003)
There can be no infringement of a patent until a
patent has been issued, since whatever right one Under the doctrine of equivalents, there is still patent
has to the invention covered by the patent arises infringement when:
alone from the grant of patent. (Creser Precision a. There is an appropriation of the inventive
Systems, Inc. v. Court of Appeals, G.R. No. 118708, step of a prior invention;
1998) b. The subsequent invention has been
modified or changed; and
Exception: c. Despite such changes, the subsequent
The applicant shall have all the rights of a patentee invention performs substantially the same
under Section 76 against any person who, without function in substantially the same way to
his authorization, exercised any of the rights achieve substantially the same result.
conferred under Section 71 of this Act in relation to
the invention claimed in the published patent Rationale: Such imitation would leave room for the
application, as if a patent had been granted for that unscrupulous copyist to make unimportant and
invention. (Sec 46, IP Code) insubstantial changes and substitutions in the
patent which, though adding nothing, would be
In order to infringe a patent, a machine or device enough to take the copied matter outside the claim,
must perform the same function, or accomplish the and hence outside the reach of the law. (Godines v.
same result by identical or substantially identical Court of Appeals, G.R. No. 97343, 1993)
means and the principle or mode of operation must
be substantially the same. (Del Rosario v. Court of b. Civil and Criminal Action
Appeals, G.R. No. 115106, 1996)
Criminal Action for Repetition of Infringement
However: The exclusive right of a patentee to
If infringement is repeated by the infringer or by
make, use and sell a patented product, article or
anyone in connivance with him after finality of the
process exists only during the term of the patent.
judgment of the court against the infringer, the
(Phil Pharmawealth, Inc. v. Pfizer, Inc., G.R. No.
offenders shall be criminally liable therefor and,
167715, 2010)
upon conviction, shall suffer imprisonment for the
period of not less than six (6) months but not more
than three (3) years and/or a fine of not less than
One hundred thousand pesos (P100,000) but not
more than Three hundred thousand pesos
(P300,000), at the discretion of the court.
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NOTE: This criminal action is without prejudice to had known, or had reasonable grounds to
the institution of a civil action for damages, know of the patent.
The criminal action herein provided shall prescribe
in three (3) years from date of the commission of NOTE: It is presumed that the infringer had
the crime. (Sec. 84, IP Code) known of the patent if the words “Philippine
Patent” and the number of the patent
The burden of proof to substantiate a charge for appear on the patented product or on the
patent infringement rests on the plaintiff. (Smith container or package or the advertising
Kline Beckman Corp. v. Court of Appeals, G.R. No. material of the patented product or process.
126627, 2003)
Contributory Infringer – jointly and severally liable
Right to File an Infringement Action by a Foreign with the infringer if he:
National a. actively induces the infringement of a
Any foreign national or juridical entity who meets the patent; or
requirements of Section 3 (Rule on Reciprocity) and b. provides the infringer with a component of
not engaged in business in the Philippines, to which a patented product or of a product
a patent has been granted or assigned under this produced by a patented process knowing it
Act, may bring an action for infringement of patent, to be used for infringing the patented
whether or not it is licensed to do business in the invention.
Philippines under existing law. (Sec. 77, IP Code).
2. Criminal Action
1. Civil Action If infringement is repeated by the infringer or by
Any patentee, or anyone possessing any right, title anyone in connivance with him after finality of the
or interest in and to the patented invention, whose judgment against the infringer, the offenders shall,
rights have been infringed, may bring a civil action without prejudice to the institution of a civil action for
before a court of competent jurisdiction, to recover damages, be criminally liable. Upon conviction, the
from the infringer such damages sustained thereby, offenders shall suffer:
plus attorney’s fees and other expenses of litigation, a. imprisonment for the period of not less than
and to secure an injunction for the protection of his six months but not more than three years,
rights. (Sec. 76, IP Code). and/or
b. a fine of not less than P100,000 but not
Civil remedies for infringement: more than P300,000.
(1) recovery of damages, attorney’s fees, and
litigation costs; and c. Prescriptive Period
(2) injunction.
1. No damages can be recovered for acts of
Rules on Civil Remedies infringement committed more than four (4)
1. If the damages are inadequate or cannot be years before the institution of the action for
readily ascertained with reasonable infringement. (Sec. 79, IP Code)
certainty, the court may award by way of 2. The criminal action for repetition of infringement
damages a sum equivalent to reasonable shall prescribe in three (3) years from date of
royalty. the commission of the crime. (Sec. 84, IP Code)
2. The court may award damages in a sum
above the amount found as actual d. Defenses in Action for Infringement
damages sustained.
In an action for infringement, the defendant may
NOTE: The amount may award an amount
show the invalidity of the patent, or any claim
more than the actual damages but must not
thereof, on any of the following grounds:
exceed three (3) times the amount of actual
a. That what is claimed as the invention is not
damages.
new or patentable;
b. That the patent does not disclose the
3. The court may order that the infringing
invention in a manner sufficiently clear
goods, materials and implements
and complete for it to be carried out by any
predominantly used in the infringement be
person skilled in the art; or
destroyed without compensation.
c. That the patent is contrary to public order
4. Damages cannot be recovered for acts of
or morality.
infringement committed before the infringer
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NOTE: These are the same grounds for the Spectrum of Distinctiveness of Trademark
cancellation of a patent. (Zantarain’s Inc. v. Old Grove Smokehouse, 698
F.2d 786, 1983) (from weakest to strongest)
B. TRADEMARKS 1. Generic – refers to a particular genus or class
of which an individual article or service is a
Modern authorities on trademark law view member (e.g. escalator, cellophane, etc.)
trademarks as performing three distinct functions: a. It can never attain trademark
(1) they indicate origin or ownership of the protection.
articles to which they are attached; b. If a registered trademark becomes
(2) they guarantee that those articles come up generic as to a particular product or
to a certain standard of quality; and service, the mark’s registration is
(3) they advertise the articles they symbolize. subject to cancellation.
(Mirpuri v. Court of Appeals, G.R. No. 2. Descriptive – identifies a characteristic or
114508, 1999) quality of an article or service such as its color,
odor, function, dimensions, or ingredients
1. MARKS, COLLECTIVE MARKS, AND General Rule: It is not ordinarily protectable as

TRADE NAMES a trademark because, like a generic term, it
belongs to the public domain. (Ong Ai Gui v.
Mark Any visible sign capable of: Director of Patents, G.R. No. L-6235, 1955)
a. distinguishing the goods
(trademark) or services Exception: When the doctrine of secondary
(service mark) of an meaning applies in such a way that it has
enterprise and acquired a secondary meaning in the minds of
b. shall include a stamped or the consumers. (Sec. 123.2)
marked container of goods.
(Sec. 121.1, IP Code) 3. Suggestive – requires the consumer to
exercise the imagination in order to draw a
Collective Any visible sign designated as such
conclusion as to the nature of the goods or
Mark in the application for registration
services
and capable of distinguishing the
4. Arbitrary or Fanciful – bear no relationship to
origin or any other common
the products or services to which they are
characteristic, including the quality
applied; protectable without proof of secondary
of goods or services of different
meaning (e.g. Adidas, Rolex, etc.)
enterprises which use the sign
under the control of the registered
2. ACQUISITION OF OWNERSHIP OF A
owner of the collective mark. (Sec.
121.2, IP Code) MARK
Trade Any name or designation
Name identifying or distinguishing an The rights in a mark shall be acquired through
enterprise (Sec. 121.3, IP Code); registration made validly in accordance with the
provisions of this law. (Zuneca Pharmaceutical v.
A name or designation may not be used as a trade Natrapharm, Inc., G.R. No. 211850, 2020)
name if, by its nature or the use to which such name
or designation may be put: NOTE: Any person who shall procure registration in
1. It is contrary to public order or morals; the Office of a mark by a false or fraudulent
2. It is liable to deceive trade circles or the declaration or representation, whether oral or in
public as to the nature of the enterprise writing, or by any false means, shall be liable in a
identified by that name; or civil action by any person injured thereby for any
3. It is similar to a mark or a trade name damages sustained in consequence thereof. (Sec.
owned by another person and its use would 162, IP Code)
likely mislead the public.
The registration of trademark under the law is
A trade name refers to the business and its goodwill; required to give notice to the entire world that a mark
a trademark refers to the goods. (Canon Kabushiki has already been registered. The failure to give
Kaisha v. Court of Appeals, G.R. No. 120900, 2000) notice of registration bars recovery of damages for
trademark infringement, without prejudice to other
causes of action based on other laws. (Cagayan
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Valley Enterprises, Inc. v. Court of Appeals, G.R. A certificate of registration may be renewed for
No. 78413, 1989) periods of 10 years at its expiration upon payment
of the prescribed fee and upon filing of a request.
The owner of the registered mark shall not be
entitled to recover profits or damages in any suit for 3. ACQUISITION OF OWNERSHIP OF
infringement, unless the acts have been committed TRADE NAME
with knowledge that such limitation is likely to cause
confusion, to cause mistake, or to deceive. Such Notwithstanding any laws or regulations providing
knowledge is presumed if the registrant gives notice for any obligation to register trade names, such
that his mark is registered by displaying with the names shall be protected, even prior to or without
mark the words “Registered Mark” or the letter R registration, against any unlawful act committed by
within a circle or if the defendant had otherwise third parties. (Sec. 165.2.a, IP Code)
actual notice of the registration. (Sec. 158, IP Code)
In particular, any subsequent use of the trade name
Doctrine of Secondary Meaning by a third party, whether as a trade name or a mark
A word or phrase originally incapable of exclusive or collective mark, or any such use of a similar trade
appropriation with reference to an article in the name or mark, likely to mislead the public, shall be
market (because it is geographically or otherwise deemed unlawful. (Sec. 165.2.b, IP Code)
descriptive) might nevertheless have been used for
so long and so exclusively by one producer with Doctrine of Secondary Meaning Applicable to
reference to his article that, in the trade and to that Trade Names
branch of the purchasing public, the word or phrase The doctrine’s application has been extended to
has come to mean that the article was his property. corporate names since the right to use a corporate
(Pearl & Dean (Phil.) v. Shoemart, G.R. No. 148222, name to the exclusion of others is based upon the
2003) same principle which underlies the right to use a
particular trademark or tradename. (Lyceum of the
Secondary meaning is established when a Philippines, Inc. v. Court of Appeals, G.R. No.
descriptive mark no longer causes the public to 101897, 1993)
associate the goods with a particular place but to
associate the goods with a particular source. (Shang Non-Registrable Marks
Properties Realty Corp. v. St. Francis Development A mark cannot be registered if it:
Corp., G.R. No. 190706, 2014) a. Consists of immoral, deceptive or
scandalous matter, or matter which may
Requirements for a Geographically-descriptive disparage or falsely suggest a connection
Mark to Acquire Secondary Meaning with persons, living or dead, institutions,
1. The secondary meaning must have arisen beliefs, or national symbols, or bring them
as a result of substantial commercial use of into contempt or disrepute;
a mark in the Philippines; and b. Consists of the flag or coat of arms or other
2. Such use must result in the distinctiveness insignia of the Philippines or any of its
of the mark insofar as the goods or the political subdivisions, or of any foreign
products are concerned. nation, or any simulation thereof;
NOTE: Proof of substantially exclusive and c. Consists of a name, portrait or signature
continuous commercial use in the identifying a particular living individual
Philippines for five (5) years before the date except by his written consent, or the name,
on which the claim of distinctiveness is signature, or portrait of a deceased
made is prima facie evidence of President of the Philippines, during the life
distinctiveness. (Sec. 123.2, IP Code) of his widow, if any, except by written
consent of the widow;
Duration and Renewal d. Is identical with a registered mark
A certificate of registration shall remain in force for belonging to a different proprietor or a mark
10 years: Provided, That the registrant shall file a with an earlier filing or priority date, in
declaration of actual use and evidence to that effect, respect of:
or shall show valid reasons based on the existence i. The same goods or services, or
of obstacles to such use, as prescribed by the
ii. Closely related goods or services,
Regulations, within 1 year from the fifth anniversary or
of the date of the registration of the mark. Otherwise, iii. If it nearly resembles such a mark
the mark shall be removed from the Register by the as to be likely to deceive or cause
Office. confusion;
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e. Is identical with, or confusingly similar to, or l. Consists of color alone, unless defined by
constitutes a translation of a mark which is a given form; or
considered by the competent authority of m. Is contrary to public order or morality. (Sec.
the Philippines to be well-known 123.1, IP Code)
internationally and in the Philippines,
whether or not it is registered here, as being
already the mark of a person other than the a. Concept of Actual Use
applicant for registration, and used for
identical or similar goods or services; Declaration of Actual Use
Within 3 years from the filing date of the application,
NOTE: In determining whether a mark is the applicant or the registrant shall file a declaration
well-known, account shall be taken of the of actual use of the mark with evidence to that effect.
knowledge of the relevant sector of the Failure to do so shall result to a refusal of the
public, rather than of the public at large, application or removal of the mark from the Register
including knowledge in the Philippines by the Director. (Section 124.2, IP Code)
which has been obtained as a result of the
promotion of the mark. A certificate of registration shall remain in force for
ten (10) years. (Section 145, IP Code)
f. Is identical with, or confusingly similar to, or
constitutes a translation of a mark Best Proof of Actual Use
considered well-known in accordance with The most convincing proof of use of a mark in
the preceding paragraph, which is commerce is testimony of such witnesses as
registered in the Philippines with respect to customers, or the orders of buyers during a certain
goods or services which are not similar to period. (Converse Rubber Corporation v. Universal
those with respect to which registration is Rubber Products, 147 SCRA 154, 1987)
applied for.
Abandonment of Mark
NOTE: Under this provision, (i) the use of Once a trademark is considered abandoned, the
the mark in relation to those goods or protection accorded by the IPC, or in this case the
services must indicate a connection old Trademark Law, is also withdrawn. (ABS-CBN v.
between those goods or services, and the Director of Bureau of Trademarks, GR. No. 217916,
owner of the registered mark; and (ii) the 2018)
interests of the owner of the registered
mark are likely to be damaged by such use. Internet Use of a Mark
Use of mark on the Internet must be shown to result
g. Is likely to mislead the public, particularly as into a within-State sale, or at the very least,
to the nature, quality, characteristics or discernibly intended to target customers that reside
geographical origin of the goods or in that country. This being so, the use of the mark
services; on an interactive website, for instance, may be said
h. Consists exclusively of signs that are to target local customers when they contain specific
generic for the goods or services that they details regarding or pertaining to the target State,
seek to identify; sufficiently showing an intent towards realizing a
i. Consists exclusively of signs or of within-State commercial activity or interaction. (W
indications that have become customary or Land Holding Inc. v. Starwood Hotels and Resorts
usual to designate the goods or services in Worldwide Inc., G.R. No. 222366. 2017)
everyday language or in bona fide and
established trade practice; b. Effect of Registration
j. Consists exclusively of signs or of
indications that may serve in trade to Administrative Confirmation
designate the kind, quality, quantity, Registration is only an administrative confirmation of
intended purpose, value, geographical the existence of the right of ownership of the mark,
origin, time or production of the goods or but does not perfect such right; actual use thereof is
rendering of the services, or other the perfecting ingredient. The registration of a
characteristics of the goods or services; trademark unaccompanied by actual use thereof in
k. Consists of shapes that may be the country accords the registrant only the standing
necessitated by technical factors or by the to sue for infringement in Philippine courts. (Philip
nature of the goods themselves or factors Morris v. Fortune Tobacco, G.R. No. 91332, 1993)
that affect their intrinsic value;
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A certificate of registration of a mark shall be prima been filed in or in respect of the Member
facie evidence of the validity of the registration, the State;
registrant’s ownership of the mark, and of the 2. that the mark is well known in, or that the
registrant’s exclusive right to use the same in mark has been registered, or that an
connection with the goods or services and those that application for registration of the mark has
are related thereto specified in the certificate. been filed in or in respect of, any jurisdiction
(Section 138, IP Code) other than the Member State;
3. that the mark is well known by the public at
4. WELL-KNOWN MARKS large in the Member State. (Part I, Art. 2.3,
1999 Joint Recommendation Concerning
The countries of the Union undertake, ex officio if Provisions on the Protection of Well-Known
their legislation so permits, or at the request of an Marks cited with approval in Sehwani v. In-
interested party, to refuse or to cancel the N-Out)
registration, and to prohibit the use, of a trademark
which constitutes a reproduction, an imitation, or a It is easily recognizable as the trade name and mark
translation, liable to create confusion, of a mark of Harvard University of Cambridge,
considered by the competent authority of the Massachusetts, U.S.A., internationally known as
country of registration or use to be well known in that one of the leading educational institutions in the
country as being already the mark of a person world. As such, even before Harvard University
entitled to the benefits of this Convention and used applied for registration of the mark Harvard in the
for identical or similar goods. These provisions shall Philippines, the mark was already protected under
also apply when the essential part of the mark Article 6b and Article 8 of the Paris Convention.
constitutes a reproduction of any such well-known (Fredco Manufacturing v. Harvard University, G.R.
mark or an imitation liable to create confusion No. 185917, 2011)
therewith. (Art. 6bis, Paris Convention)
Criteria for determining whether a mark is well-
NOTE: The essential requirement under this Article known:
is that the trademark to be protected must be “well- 1. Duration, extent and geographical area of
known” in the country where protection is sought. any use of the mark, in particular, the
The power to determine whether a trademark is duration, extent and geographical area of
well-known lies in the “competent authority of the any promotion of the mark, including
country of registration or use.” This competent advertising or publicity and the
authority would be either the registering authority, if presentation, at fairs or exhibitions, of the
it has the power to decide this, or the courts of the goods and/or services to which the mark
country in question if the issue comes before a applies;
court. (Sehwani, Inc. v. In-N-Out Burger, Inc., G.R. 2. Market share, in the Philippines and in
No. 171053, 2007) other countries, of the goods and/or
services to which the mark applies;
The question of whether or not respondent's 3. Degree of the inherent or acquired
trademarks are considered “well-known” is factual in distinction of the mark;
nature, involving as it does the appreciation of 4. Quality-image or reputation acquired by the
evidence adduced before the BLA-IPO. The settled mark;
rule is that the factual findings of quasi-judicial 5. Extent to which the mark has been
agencies, like the IPO, which have acquired registered in the world;
expertise because their jurisdiction is confined to 6. Exclusivity of registration attained by the
specific matters, are generally accorded not only mark in the world;
respect, but, at times, even finality if such findings 7. Extent to which the mark has been used in
are supported by substantial evidence. (Sehwani, the world;
Inc. v. In-N-Out Burger, Inc., G.R. No. 171053, 8. Exclusivity of use attained by the mark in
2007) the world;
9. Commercial value attributed to the mark in
Factors Which Shall NOT be Required in the world;
Determining Whether a Mark is a Well-known 10. Record of successful protection of the
Mark: rights in the mark;
1. that the mark has been used in, or that the 11. Outcome of litigations dealing with the
mark has been registered, or that an issue of whether the mark is a well-known
application for registration of the mark has mark; and
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12. Presence or absence of identical or similar who believes that he is or will be damaged by the
marks validly registered for or used on registration of a mark under this act as follows:
identical or similar goods or services and
owned by persons other than the person 1. Within 5 years from the date of registration
claiming that his mark is a well-known of the mark under;
mark. 2. at any time, if the registered mark becomes
the
(Rule 102, Rules and Regulations On a. generic name for the goods or
Trademarks, Servicemarks, Tradenames and services, or a portion thereof, for
Marked or Stamped Containers) which it is registered;
b. has been abandoned;
5. RIGHTS CONFERRED BY c. registration was obtained through
REGISTRATION fraud or contrary to the provisions
of the Act;
The owner of a registered mark shall have the
exclusive right: Registration through fraud or in
1. to prevent all third parties not having the bad faith should be sufficiently
owner’s consent established. Otherwise, it is
2. from using in the course of trade identical considered to have acquired all the
or similar signs or containers for goods or rights of a trademark owner under
services which are identical or similar to the IP Code.
those in respect of which the trademark is (Zuneca Parmaceutical v
registered Natrapharm, G,R. 185917, 2011)
3. where such use would result in a likelihood
of confusion. d. the mark is being used by, or with
the permission of, the registrant so
NOTE: In case of the use of an identical sign for as to misrepresent the source of
identical goods or services, a likelihood of confusion the goods or services on or in
shall be presumed. (Sec. 147.1, IP Code) connection with which the mark is
used.
The exclusive right of the owner of a well-known The primary significance of the registered
mark which is registered in the Philippines, shall mark to the relevant public rather than
extend to goods and services which are not similar purchaser motivation shall be the test for
to those in respect of which the mark is registered, determining whether the registered mark
Provided: has become the generic name of goods or
1. That the use of that mark in relation to those services on or in connection with which it
goods or services would indicate a has been used.
connection between those goods or 3. At any time, if the registered owner of the
services and the owner of the registered mark without legitimate reason
mark; and a. Fails to use the mark within the
2. That the interests of the owner of the Philippines or
registered mark are likely to be damaged by b. To cause it to be used in the
such use. (Sec. 147.2, IP Code) Philippines by virtue of a license
during an uninterrupted period of 3
The ownership of a trademark or tradename is a years or longer. (Sec. 151.1, IP
property right that the owner is entitled to protect. Code)
However, when a trademark is used by a party for a
product in which the other party does not deal, the
Court Has The Authority to Determine Right to
use of the same trademark on the latter's product
Registration
cannot be validly objected to. (Canon Kabushiki
Kaisha v. Court of Appeals, G.R. No. 120900, 2000) In any action involving a registered mark, the court
may determine the right to registration, order the
cancellation of a registration, in whole or in part, and
6. CANCELLATION OF otherwise rectify the register with respect to the
registration of any party to the action in the exercise
REGISTRATION OF A TRADEMARK of this. Judgment and orders shall be certified by the
court to the Director, who shall make appropriate
A petition to cancel a registration of a mark may be
filed with the Bureau of Legal Affairs by any person
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entry upon the records of the Bureau, and shall be of each particular case. (Philip Morris, Inc. v.
controlled thereby. (Section161, IP Code) Fortune Tobacco Corp., G.R. No. 158589, 2006)
Filing of a suit to enforce a mark v. Petition to Elements of Trademark Infringement

cancel a mark To establish trademark infringement, the following
The filing of a suit to enforce the registered mark elements must be shown:
with the proper court or agency shall exclude any i. The validity of plaintiff’s mark;
other court or agency from assuming jurisdiction ii. The plaintiff’s ownership of the mark;
over a subsequently filed petition to cancel the same and
mark. On the other hand, the earlier filing of petition iii. The use of the mark or its colorable
to cancel the mark with the Bureau of Legal Affairs imitation by the alleged infringer results
shall not constitute a prejudicial question that must in “likelihood of confusion.”
be resolved before an action to enforce the rights to (McDonald's Corp. v. L.C. Big Mak
same registered mark may be decided. (Sec. 17, Burger, Inc., G.R. No. 143993, 2004)
R.A. No. 166a)
Two Tests In Determine Likelihood And
7. TRADEMARK INFRINGEMENT Confusion
1. The dominancy test focuses on the
A person shall be liable for trademark infringement similarity of the prevalent features of the
if, without the consent of the owner of the registered competing trademarks that might cause
mark, he: confusion or deception;
i. Uses in commerce any reproduction or 2. The holistic test requires the court to
colorable imitation of a registered mark or consider the entirety of the marks as
the same container or a dominant feature applied to the products, including the labels
thereof in connection with the sale, offering and packaging, in determining confusing
for sale, distribution, advertising of any similarity.( Kolin v. Kolin, G.R. No. 209843,
goods or services which is likely to cause 2015)
confusion, or to cause mistake, or to
deceive; The phrase “colorable imitation” denotes such a
“close or ingenious imitation as to be calculated to
NOTE: This includes other preparatory deceive ordinary persons, or such a resemblance to
steps necessary to carry out the sale of any the original as to deceive an ordinary purchaser
goods or services. giving such attention as a purchaser usually gives,
and to cause him to purchase the one supposing it
ii. Reproduces or colorably imitates a to be the other”. (Etepha, A.G. v. Director of Patents,
registered mark or a dominant feature G.R. No. L-20635, 1966)
thereof and applies such reproduction or
colorable imitation to signs, packages, or Factors To Consider In Relatedness
advertisements intended to be used in Goods should be tested against several factors
commerce upon or in connection with the before arriving at a sound conclusion on the
sale, offering for sale, distribution, or question of relatedness. Such as:
advertising of goods or services which (a) the business (and its location) to which the
likely to cause confusion, or to cause goods belong;
mistake, or to deceive. (b) the class of product to which the goods
belong;
NOTE: It is immaterial that there was no actual sale (c) the product's quality, quantity, or size,
of goods or services using the infringing material as including the nature of the package,
long as the acts mentioned were actually committed. wrapper or container;
(Sec. 155, IP Code) (d) the nature and cost of the articles;
(e) the descriptive properties, physical
The “likelihood of confusion” is the gravamen of attributes or essential characteristics with
trademark infringement. But likelihood of confusion reference to their form, composition,
is a relative concept, the particular, and sometimes texture or quality;
peculiar, circumstances of each case being (f) the purpose of the goods;
determinative of its existence. Thus, in trademark (g) whether the article is bought for immediate
infringement cases, more than in other kinds of consumption, that is, day-to-day
litigation, precedents must be evaluated in the light household items;
(h) the fields of manufacture;
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(i) the conditions under which the article is infringer, the owner of the right infringed
usually purchased; and shall be entitled as against such infringer
(j) the channels of trade through which the only to an injunction against future printing.
goods flow, how they are distributed, 3. Where the infringement complained of is
marketed, displayed and sold. (Kolin v. contained in or is part of paid advertisement
Kolin, G.R. No. 209843, 2015) in a periodical or in an electronic
communication, the remedies of the owner
The use of an identical or colorable imitation of a of the right infringed as against the
registered trademark by a person for the same publisher or distributor of periodical or
goods or services or closely related goods or electronic communication shall be limited to
services of another party constitutes infringement. It an injunction against the presentation of
is a form of unfair competition because there is an such advertising matter in future issues.
attempt to get a free ride on the reputation and
selling power of another manufacturer by passing of NOTE: This shall apply only to innocent
one’s goods as identical or produced by the same infringers.
manufacturer as those carrying the other mark
(brand). (Commissioner of Internal Revenue v. San 4. There shall be no infringement of
Miguel Corp., G.R. Nos. 205045 & 205723, 2017) trademarks or tradenames of imported or
sold drugs and medicines as well as
The general impression of the ordinary purchaser imported or sold off-patent drugs and
buying under the normally prevalent conditions in medicines PROVIDED, the marks
trade and giving the attention such purchasers appearing thereon have been registered
usually give in buying that class of goods, is the marks that have not been tampered or
touchstone. (Del Monte Corp v. Court of Appeals, unlawfully modified.
G.R. No. 78325, 1990)
a. Damages
Right of Foreign Corporation to Sue in
Trademark or Service Mark Enforcement Action The owner of a registered mark may recover
Any foreign national or juridical person who meets damages from any person who infringes his rights.
the requirements of Section 3 of the IP Code and The measure of the damages suffered shall be
does not engage in business in the Philippines may either:
bring a civil or administrative action hereunder for 1. The reasonable profit which the
opposition, cancellation, infringement, unfair complaining party would have made had
competition, or false designation of origin and false the defendant not infringed his rights, or
description, whether or not it is licensed to do 2. The profit which the defendant actually
business in the Philippines under existing laws. made out of the infringement.
(Sec. 160, IP Code)
If the measure of damages cannot be readily
Limitations to Actions for Infringement ascertained with reasonable certainty, the court may
1. A registered mark shall have no effect award as damages a reasonable percentage based
against any person who, in good faith, upon the amount of gross sales of the defendant or
before the filing date or the priority date, the value of the services in connection with which
was using the mark for the purposes of his the mark or trade name was used in the
business or enterprise. infringement of the rights of the complaining party.
(Sec. 156.1, IP Code)
NOTE: Such right may only be transferred
or assigned together with his enterprise or NOTE: Where there was actual intent to mislead the
business or with that part of his enterprise public or to defraud the complainant, the court may
or business in which the mark is used. double the amount of damages to be awarded. (Sec.
156.3, IP Code)
NOTE: cf. (Zuneca v. Natrapharm, G.R.
No. 211850, 2020 - wherein the SC held On application of the complainant, the court may
that the first to file rule shall prevail against impound during the pendency of the action, sales
a user of a mark in good faith.) invoices and other documents evidencing sales.
2. Where an infringer who is engaged solely
in the business of printing the mark or other
infringing materials for others is an innocent
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Requirement of Notice actionable unfair competition. (Alhambra Cigar vs.

In any suit for infringement, the owner of the Mojica, G.R. No. L-8937, 1914)
registered mark shall not be entitled to recover
profits or damages UNLESS the acts have been Essentially, what the law punishes is the act of
committed with knowledge that such imitation is giving one’s goods the general appearance of the
likely to cause confusion, or to cause mistake, or to goods of another, which would likely mislead the
deceive. Such knowledge is presumed if: buyer into believing that such goods belong to the
1. The registrant gives notice that his mark is latter. (Manuel C. Espiritu et. al. v. Petron Corp. et.
registered by displaying with the mark the al., G.R. No. 170891, 2009)
words “Registered Mark” or the letter R
within a circle, or The “true test” of unfair competition is whether the
2. The defendant had otherwise actual notice acts of the defendant have the intent of deceiving or
of the registration. (Sec. 158, IP Code) are calculated to deceive the ordinary buyer making
his purchases under the ordinary conditions of the
b. Penalties particular trade to which the controversy relates.
One of the essential requisites in an action to
Independent of the civil and administrative restrain unfair competition is proof of fraud; the
sanctions imposed by law, a criminal penalty of intent to deceive, actual or probable must be shown
imprisonment from 2 to 5 years and a fine ranging before the right to recover can exist. (Superior
from P50,000 to P200,000 shall be imposed on any Commercial Enterprises v. Kunnan Enterprises Ltd.,
person who is found guilty of committing any of the et. al., G.R. No. 169974, 2010)
acts of trademark infringement, unfair competition,
or false description or representation. (Sec. 170, IP Trademark Infringement vs. Unfair Competition
Code) The law on unfair competition is broader and more
inclusive than the law on trademark infringement.
Power of Court to Order Infringing Material Trademark infringement is more limited, but it
Destroyed recognizes a more exclusive right derived from the
In any action involving a violation of a right of the trademark adoption and registration by the person
owner of the registered mark, the court may order whose goods or business is first associated with it.
that goods found to be infringing be disposed of The law on trademarks is a specialized subject
outside the channels of commerce in such a manner distinct from the law on unfair competition, although
as to avoid any harm caused to the right holder or the two subjects are entwined with each other and
destroyed without compensation of any sort. (Sec. are dealt with together in the IP Code.
157.1, IP Code)
Hence, even if one fails to establish his exclusive
8. UNFAIR COMPETITION property right to a trademark, he may still obtain
relief on the ground of his competitor's unfairness or
A person who has identified in the mind of the public fraud. Conduct constitutes unfair competition if the
the goods he manufactures or deals in, his business effect is to pass off on the public the goods of one
or services from those of others, whether or not a man as the goods of another. It is not necessary that
registered mark is employed, has a property right in any particular means should be used to this end.
the goodwill of the said goods, business or services (Mighty Corp. v. E. & J. Gallo Winery, G.R. No.
so identified, which will be protected in the same 154342, 2004)
manner as other property rights. (Sec. 168.1, IP
Code) Trademark Unfair
Infringement Competition
Any person who shall employ deception or any other Passing off of
Unauthorized
means contrary to good faith by which he shall pass one’s goods as
Essence use of a
off the goods manufactured by him or in which he those of
trademark
deals, or his business, or services for those of the another
one having established such goodwill, or who shall Fraudulent
Unnecessary Essential
commit any acts calculated to produce said result, Intent
shall be guilty of unfair competition. (Sec. 168.2, IP Prior Prerequisite to
Unnecessary
Code) Registration the action
Any conduct the end and probable effect of which is

to deceive the public or pass off the goods or
business of a person as that for another constitutes
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C. COPYRIGHT originator; maker; one who completes a work of

science or literature.” (Burrow-Giles Lithographic
BASIC PRINCIPLES Company v. Sarony, 111 U.S. 53, 1884)
NOTE: The author must be a natural person. (Sec.

Copyright is not primarily about providing the
171.1, IP Code)
strongest possible protection for copyright owners
so that they have the highest possible incentive to
1. COPYRIGHTABLE WORKS
create more works. The control given to copyright
owners is only a means to an end: the promotion of
a. Original Literary or Artistic Works
knowledge and learning. The goal of copyright is to
promote creativity and encourage creation of works.
(ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015) These are original intellectual creations in the
literary and artistic domain protected from the
The copyright for a work is acquired by an moment of their creation and shall include in
intellectual creator from the moment of creation particular:
even in the absence of registration and deposit
a. Books, pamphlets, articles and other writings;
(Columbia Pictures v. CA, G.R. No. 110318, 1996)
b. Periodicals and newspapers;
c. Lectures, sermons, addresses, dissertations
The focus of copyright is the usefulness of the
prepared for oral delivery, whether or not
artistic design, and not its marketability. The central
reduced in writing or other material form;
inquiry is whether the article is a work of art. (Ching
d. Letters;
v. Salinas Sr., G.R. No. 161295, 2005)
e. Dramatic or dramatico-musical compositions;
choreographic works or entertainment in dumb
Idea-Expression Dichotomy
shows;
Unlike a patent, a copyright gives no exclusive right
f. Musical compositions, with or without words;
to the art disclosed; protection is given only to the
g. Works of drawing, painting, architecture,
expression of the idea — not the idea itself. (Mazer
sculpture, engraving, lithography or other works
v. Stein, 347 U.S. 201, 1954)
of art; models or designs for works of art;
Purely Statutory Right
Work of Architecture
Copyright is purely a statutory right. Being a
Copyright in a work of architecture shall include
statutory grant, the rights are only such as the
the right to control the erection of any building
statute confers, and may be obtained and enjoyed
which reproduces the whole or a substantial
only with respect to the subjects and by the persons,
part of the work either in its original form or in
and on terms and conditions specified in the statute.
any form recognizably derived from the original
(Joaquin, Jr. v. Drilon, G.R. No. 108946, 1999)
NOTE: The copyright in any such work shall not
Originality
include the right to control the reconstruction or
Originality is the sine qua non of copyright. If the
rehabilitation in the same style as the original of
basic design reflected in a work or art does not owe
a building to which that copyright relates. (Sec.
its origin to the putative copyright holder, then that
186, IP Code)
person must add something original to that design,
and then only the original addition may be
h. Original ornamental designs or models for
copyrighted. (Meshwerks, Inc. v. Toyota Motor
articles of manufacture, whether or not
Sales U.S.A., 528 F.3d 1258, 2008)
registrable as an industrial design, and other
works of applied art;
Originality requires only that the author make the
i. Illustrations, maps, plans, sketches, charts and
selection or arrangement independently (i.e.,
three-dimensional works relative to geography,
without copying that selection or arrangement from
topography, architecture or science;
another work), and that it display some minimal level
j. Drawings or plastic works of a scientific or
of creativity. (Feist Publications, Inc. v. Rural
technical character;
Telephone Service Co., Inc., 499 U.S. 340, 1991)
k. Photographic works including works produced
by a process analogous to photography; lantern
NOTE: The requisite level of creativity is extremely
slides;
low; even a slight amount will suffice.
l. Audiovisual works and cinematographic works
and works produced by a process analogous to
Authorship
cinematography or any process for making
An author is “he to whom anything owes its origin;
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audio-visual recordings; 2. NON-COPYRIGHTABLE WORKS

m. Pictorial illustrations and advertisements;
n. Computer programs; and No protection shall extend to any:
1. Idea, procedure, system, method or
Computer operation, concept, principle, discovery or
An electronic or similar device having mere data [IPSMOC-PDD];
information-processing capabilities 2. News of the day and other miscellaneous
facts having the character of mere items of
Computer Program press information; or
A set of instructions expressed in words, codes, 3. Official text of a legislative, administrative
schemes or in any other form, which is capable or legal nature, as well as any official
when incorporated in a medium that the translation thereof. (Sec. 175, IP Code)
computer can read, or causing the computer to
perform or achieve a particular task or result. The expression of an idea is protected by copyright,
not the idea itself.
o. Other literary, scholarly, scientific and artistic
works. It is axiomatic that copyright protection does not
(Sec. 172.1, IP Code) extend to news "events" or the facts or ideas which
are the subject of news reports. But it is equally well-
NOTE: Works are protected by the sole fact of their settled that copyright protection does extend to the
creation, irrespective of their mode or form of reports themselves, as distinguished from the
expression, as well as of their content, quality and substance of the information contained in the
purpose. (Sec. 172.2, IP Code) reports. Copyright protects the manner of
expression of news reports, "the particular form or
collocation of words in which the writer has
b. Derivative Works communicated it." Such protection extends to
The following derivative works shall be protected by electronic news reports as well as written reports.
copyright:
The idea/expression dichotomy is a complex
1. Dramatizations, translations, adaptations, matter if one is trying to determine whether a certain
abridgments, arrangements, and other material is a copy of another. This dichotomy would
alterations of literary or artistic works; and be more relevant in determining, for instance,
2. Collections of literary, scholarly or artistic works, whether a stage play was an infringement of an
and compilations of data and other materials author’s book involving the same characters and
which are original by reason of the selection or setting. In this case, however, respondents admitted
coordination or arrangement of their contents. that the material under review — which is the
(Sec. 173.1, IP Code) subject of the controversy — is an exact copy of the
original. Respondents did not subject ABS-CBN’s
Derivative works shall be protected as new works, footage to any editing of their own. The news
provided however, that such new work: footage did not undergo any transformation where
there is a need to track elements of the original.
a. Shall not affect the force of any subsisting (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015)
copyright upon the original works employed or
any part thereof, or Works of the Government
b. Shall not be construed to imply any right to such A work of the Government is a work created by an
use of the original works, or officer or employee of the Philippine Government or
c. Shall not be construed to secure or extend any of its subdivisions and instrumentalities,
copyright in such original works. including government-owned or controlled
corporations as part of his regularly prescribed
Published Edition of Work official duties. (Sec. 171.11, IP Code)
In addition to the right to publish granted by the
author, his heirs, or assigns, the publisher shall have No copyright shall subsist in any work of the
a copyright consisting merely of the right of Government of the Philippines. However, the
reproduction of the typographical arrangement of Government is not precluded from receiving and
the published edition of the work. (Sec. 174, IP holding copyrights transferred to it by assignment,
Code) bequest or otherwise.
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General Rule: Prior approval of the government of the original or the copy which is the
agency or office wherein the work is created shall be subject of the rental;
necessary for exploitation of such work for profit.
Rental
Such agency or office may impose as a condition Transfer of the possession of the original or
the payment of royalties. a copy of a work or a sound recording for a
limited period of time, for profit-making
Exception: No prior approval or conditions shall be purposes
required for the use of any purpose of:
1. Statutes, rules and regulations, or 5. Public display of the original or a copy of the
2. Speeches, lectures, sermons, addresses, work;
and dissertations, pronounced, read or 6. Public performance of the work; and
rendered in courts of justice, before
administrative agencies, in deliberative Definitions of Public Performance
assemblies, and in meetings of public a. For Non-audiovisual work – reciting,
character. playing, dancing, acting or otherwise
performing the work, either directly or
NOTE: The author of speeches, lectures, by means of any device or process
sermons, addresses, and dissertations b. For Audiovisual work – showing of its
mentioned in the preceding paragraphs images in sequence and the making of
shall have the exclusive right of making a the sounds accompanying it audible
collection of his works. c. For Sound recording – making the
recorded sounds audible at a place or
Publication or republication by the government in a at places where persons outside the
public document of any copyrighted work shall not normal circle of a family and that
be taken to cause any abridgment or annulment of family’s closest social acquaintances
the copyright or to authorize any use or are or can be present
appropriation of such work without the consent of
the copyright owner. (Sec. 176.3, IP Code) 7. Other communication to the public of the
work, e.g. online/Internet.
3. RIGHTS CONFERRED BY A
COPYRIGHT Communication to the public
Any communication to the public, including
Copyright or Economic Rights broadcasting, rebroadcasting, retransmitting by
Copyright or economic rights shall consist of the cable, broadcasting, and retransmitting by
exclusive right to carry out, authorize or prevent the satellite, and includes the making of a work
following acts: available to the public by wire or wireless means
in such a way that members of the public may
1. Reproduction of the work or substantial access these works from a place and time
portion of the work; individually chosen by them
Reproduction 4. OWNERSHIP OF COPYRIGHT

Making of 1 or more copies, temporary or
permanent, in whole or in part, of a work or Rules on Ownership
a sound recording in any manner or form Copyright ownership shall be governed by the
following rules:
2. Dramatization, translation, adaptation, TYPE OF
OWNERSHIP
abridgment, arrangement or other WORK
transformation of the work; Original
Copyright belongs to the
3. The first public distribution of the original Literary and
author of the work.
and each copy of the work by sale or other Artistic Works
forms of transfer of ownership; • Co-authors shall be the
4. Rental of the original or a copy of an original owners of the
audiovisual or cinematographic work, a copyright.
Joint
work embodied in a sound recording, a • In the absence of
Authorship
computer program, a compilation of data agreement, rights shall be
and other materials or a musical work in governed by the rules on
graphic form, irrespective of the ownership co-ownership.
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NOTE: If a work of joint 5. LIMITATIONS ON COPYRIGHT

authorship consists of parts
that can be used separately Fair Use
and the author of each part The fair use of a copyrighted work for criticism,
can be identified, the author of comment, news reporting, teaching including limited
each part shall be the original number of copies for classroom use, scholarship,
owner of the copyright in the research, and similar purposes is not an
part that he has created. infringement of copyright.
Copyright shall belong to:
1. Employee: creation of the In determining whether the use made of a work in
object of copyright is not a any particular case is fair use, the factors to be
part of his regular duties considered shall include: [PuCha-Nat-Su-E]
even if the employee uses 1. The purpose and character of the use,
the time, facilities and including whether such use is of a
Employee’s
materials of the employer. commercial nature or is for non-profit
Work
2. Employer: work is the educational purposes;
result of the performance
of his regularly-assigned The purpose and character requirement is
duties, UNLESS there is important in view of copyright’s goal to
an agreement, express or promote creativity and encourage creation
implied, to the contrary of works. Hence, commercial use of the
Ownership of the work belongs copyrighted work can be weighed against
to the person other than the fair use.
employer who commissioned
Independent the work and who pays for it. The “transformative test” is generally used
Contractor’s in reviewing the purpose and character of
Work Copyright remains with the the usage of the copyrighted work. Courts
creator, unless there is a must look into whether the copy of the work
written stipulation to the adds “new expression, meaning or
contrary. message” to transform it into something
• Copyright belongs to the else. (ABS-CBN Corp. v. Gozon, G.R. No.
producer, the author of the 195956, 2015)
scenario, the composer of
the music, the film 2. The nature of the copyrighted work;
director, and the author of
the work so adapted. If the nature of the work is more factual than
• The producer shall creative, then fair use will be weighed in
exercise the copyright to favor of the user. (ABS-CBN Corp. v.
Audiovisual an extent required for the Gozon, G.R. No. 195956, 2015)
Work exhibition of the work in
any manner. 3. The amount and substantiality of the
portion used in relation to the copyrighted
work as a whole; and
Exception: Right to collect
performing license fees for the An exact reproduction of a copyrighted
performance of musical work, compared to a small portion of it, can
compositions, with or without result in the conclusion that its use is not
words, which are incorporated fair.
into the work
Copyright belongs to the writer However, there may also be cases where,
subject to the provisions of though the entirety of the copyrighted work
Article 723 of the Civil Code is used without consent, its purpose
wherein it provides that the determines that the usage is still fair. For
Letters
court may authorize their example, a parody using a substantial
publication or dissemination if amount of copyrighted work may be
the public good or the interest permissible as fair use as opposed to a
of justice so requires. copy of a work produced purely for
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economic gain. (id) possession an article which he knows, or ought to

know, to be an infringing copy of the work for the
4. The effect of the use upon the potential purpose of:
market for or value of the copyrighted work.
(Sec. 185.1, IP Code) a. Selling, letting for hire, or by way of trade
offering or exposing for sale, or hire, the
If a court finds that the use had or will have article
a negative impact on the copyrighted b. Distributing the article for purpose of trade,
work's market, then the use is deemed or for any other purpose to an extent that
unfair. (ABS-CBN Corp. v. Gozon, G.R. No. will prejudice the rights of the copyright
195956, 2015) owner in the work; or
c. Trade exhibit of the article in public. (Sec.
NOTE: That a work is unpublished shall not by itself 217.3, IP Code)
bar a finding of fair use if such finding is made upon
consideration of all the above factors. (Sec. 185.2, Copyright Infringement
IP Code) Infringement of a copyright is a trespass on a private
domain owned and occupied by the owner of the
6. DOCTRINE OF FAIR USE copyright, and, therefore, protected by law, and
infringement of copyright, or piracy, which is a
Fair use is a privilege to use the copyrighted synonymous term in this connection, consists in the
material in a reasonable manner without the consent doing by any person, without the consent of the
of the copyright owner or as copying the theme or owner of the copyright, of anything the sole right to
ideas rather than their expression. Fair use is an do which is conferred by statute on the owner of the
exception to the copyright owner’s monopoly of the copyright. (Columbia Pictures, Inc. v. Court of
use of the work to avoid stifling the very creativity Appeals, G.R. No. 110318, 1996)
which that law is designed to foster. (ABS-CBN
Corp. v. Gozon, G.R. No. 195956, 2015) Gravamen of Copyright Infringement
The gravamen of copyright infringement is not
No question of fair or unfair use arises, however, if merely the unauthorized “manufacturing” of
no copying is proved to begin with. This is in intellectual works but rather the unauthorized
consonance with the principle that there can be no performance of any of the acts covered by Sec. 177
infringement if there was no copying. It is only where (economic rights). Hence, any person who performs
some form of copying has been shown that it any of the acts thereunder without obtaining the
becomes necessary to determine whether it has copyright owner’s prior consent renders himself
been carried to an “unfair,” that is, illegal, extent. civilly and criminally liable for copyright
(Habana v. Robles, G.R. No. 131522, 1999) infringement. (NBI - Microsoft Corp. v. Hwang, G.R.
No. 147043, 2005)
7. COPYRIGHT INFRINGEMENT
When Committed
Any person infringes a right protected under the IP By any person who shall use original literary or
Code when one: artistic works, or derivative works, without the
copyright owner’s consent in such a manner as to
a. Directly commits an infringement (direct violate the foregoing copy and economic rights. For
infringement); a claim of copyright infringement to prevail, the
b. Benefits from the infringing activity of evidence on record must demonstrate:
another person who commits an a. Ownership of a validly copyrighted material
infringement if the person benefiting has by the complainant; and
been given notice of the infringing activity b. Infringement of the copyright by the
and has the right and ability to control the respondent. (Olano v. Eng Co, G.R. No.
activities of the other person (vicarious 195835, 2016)
infringement); or
c. With knowledge of infringing activity, The Intellectual Property Code is malum prohibitum
induces, causes or materially contributes to and prescribes a strict liability for copyright
the infringing conduct of another (direct infringement. Good faith, lack of knowledge of the
infringement). (Sec. 216, IP Code) copyright, or lack of intent to infringe is not a defense
against copyright infringement. (ABS-CBN Corp. v.
Also includes the act of any person who at the time Gozon, G.R. No. 195956, 2015)
when copyright subsists in a work has in his
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a. Remedies actual damages and profits, an award of statutory

damages for all infringements involved in an action
Any person infringing a right protected under the IP in a sum equivalent to the filing fee of the
Code shall be liable: infringement action but not less than P50,000.00.
a. To an injunction restraining such infringement.
In awarding statutory damages, the court may
The court may also order the defendant to consider the following factors:
desist from an infringement to prevent the entry
into the channels of commerce of imported 1. The nature and purpose of the infringing
goods that involve an infringement, immediately act;
after customs clearance of such goods. 2. The flagrancy of the infringement;
3. Whether the defendant acted in bad faith;
b. To pay to the copyright proprietor or his assigns 4. The need for deterrence;
or heirs such actual damages, including legal 5. Any loss that the plaintiff has suffered or is
costs and other expenses, as he may have likely to suffer by reason of the
incurred due to the infringement as well as the infringement; and
profits the infringer may have made due to such 6. Any benefit shown to have accrued to the
infringement. defendant by reason of the infringement.
NOTE: In proving profits, the plaintiff shall be
required to prove sales only and the defendant
shall be required to prove every element of cost b. Criminal Penalties
which he claims or, in lieu of actual damages
and profits, such damages which, to the court, Where Filed
shall appear to be just and shall not be regarded The copyright owner can file a criminal, civil or
as penalty. administrative action for copyright infringement.
The amount of damages to be awarded shall be Place of Filing

doubled against any person who: Filed in the court situated in
1. Circumvents effective technological Criminal Case the place where the violation
measures; or occurred
2. Having reasonable grounds to know that it Filed at the Bureau of Legal
will induce, enable, facilitate or conceal the Administrative Affairs at the Intellectual
infringement, remove or alter any electronic Case Property Office of the
rights management information from a copy Philippines
of a work Filed in the appropriate court
located at the place where the
c. Deliver under oath, for impounding during the defendant resides/is located,
Civil Case
pendency of the action, upon such terms and or where the plaintiff resides/is
conditions as the court may prescribe, sales located, at the option of the
invoices and other documents evidencing plaintiff
sales, all articles and their packaging alleged to
infringe a copyright and implements for making Penalties
them. Imprisonment of between 1 to
d. Deliver under oath for destruction without any First Offense 3 years and a fine of between
compensation all infringing copies or devices, 50,000 to 150,000 pesos
as well as all plates, molds, or other means for Imprisonment of 3 years and 1
making such infringing copies as the court may Second day to six years plus a fine of
order. Offense between 150,000 to 500,000
e. Such other terms and conditions, including the pesos
payment of moral and exemplary damages, Imprisonment of 6 years and 1
Third and
which the court may deem proper, wise and day to 9 years plus a fine
Subsequent
equitable and the destruction of infringing ranging from 500,000 to
copies of the work even in the event of acquittal Offenses
1,500,000 pesos
in a criminal case.
Statutory Damages In all cases, subsidiary imprisonment in cases of
The copyright owner may elect, at any time before insolvency. (Sec. 217.1, IP Code)
final judgment is rendered, to recover instead of
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In Determining Number of Years of

Imprisonment and Amount of Fine
The court shall consider the value of the infringing
materials that the defendant has produced or
manufactured and the damage that the copyright
owner has suffered by reason of the infringement:
Provided, That the respective maximum penalty
stated in Section 217.1. (a), (b) and (c) herein for the
first, second, third and subsequent offense, shall be
imposed when the infringement is committed by:
a. The circumvention of effective

technological measures;
b. The removal or alteration of any electronic
rights management information from a copy
of a work, sound recording, or fixation of a
performance, by a person, knowingly and
without authority; or
c. The distribution, importation for distribution,
broadcast, or communication to the public
of works or copies of works, by a person
without authority, knowing that electronic
rights management information has been
removed or altered without authority. (Sec.
217.2, IP Code)
-- end of topic --
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V. ANTI-MONEY LAUNDERING ACT (R.A. A. COVERED INSTITUTIONS AND THEIR

9160, AS AMENDED) OBLIGATIONS
1. COVERED INSTITUTIONS
A. COVERED INSTITUTIONS AND THEIR
OBLIGATIONS a. Banks, non-banks, quasi-banks, trust
1. Covered Institutions entities, foreign exchange dealers,
2. Obligations of Covered Institution pawnshops, money changers, remittance
and transfer companies and other similar
B. COVERED AND SUSPICIOUS entities and all other persons and their
TRANSACTIONS subsidiaries and affiliates supervised or
1. Covered Transactions regulated by the Bangko Sentral ng
2. Suspicious Transactions Pilipinas (BSP) or regulated by the Bangko
Sentral ng Pilipinas (BSP)
C. SAFE HARBOR PROVISION b. insurance companies, pre-need companies
and all other persons supervised or
D. WHEN IS MONEY LAUNDERING regulated by the Insurance Commission
COMMITTED (INCLUDING PREDICATE (IC) (i) securities dealers, brokers,
CRIMES) salesmen, investment houses and other
1. When money laundering is committed similar persons managing securities or
2. Predicate crimes rendering services as investment agent,
advisor, or consultant, (ii) mutual funds,
E. AUTHORITY TO INQUIRE INTO BANK close-end investment companies, common
DEPOSITS trust funds, and other similar persons, and
1. Authority of the AMLC to inquire into a (iii) other entities administering or otherwise
deposit or investment dealing in currency, commodities or
2. CA action on application within 24 hours financial derivatives based thereon,
3. Authority of BSP to check compliance valuable objects, cash substitutes and
4. Definition of related accounts other similar monetary instruments or
5. Court order as requisite to inquiry property supervised or regulated by the
6. Authority to Inquire or Examine must Securities and Exchange Commission
comply with constitutional provisions on (SEC);
search and seizure c. jewelry dealers in precious metals, who, as
a business, trade in precious metals, for
F. FREEZING AND FORFEITURE transactions in excess of One million pesos
1. Freezing (P1,000,000.00);
2. Civil Forfeiture d. jewelry dealers in precious stones, who, as
a business, trade in precious stones, for
transactions in excess of One million pesos
(P1,000,000.00);
e. company service providers which, as a
business, provide any of the following
services to third parties: (i) acting as a
formation agent of juridical persons; (ii)
acting as (or arranging for another person
to act as) a director or corporate secretary
of a company, a partner of a partnership, or
a similar position in relation to other juridical
persons; (iii) providing a registered office,
business address or accommodation,
correspondence or administrative address
for a company, a partnership or any other
legal person or arrangement; and (iv)
acting as (or arranging for another person
to act as) a nominee shareholder for
another person;
f. persons who provide any of the following
services:
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g. managing of client money, securities or for at least five (5) years from the
other assets; dates when they were closed.
h. management of bank, savings or securities d. Reporting to the AMLC all covered
accounts; transactions and suspicious transactions
i. organization of contributions for the within 5 working days from occurrence
creation, operation or management of thereof, unless the AMLC prescribes a
companies; and different period not exceeding 15 days
j. creation, operation or management of (Sec. 9)
juridical persons or arrangements, and
buying and selling business entities. B. COVERED AND SUSPICIOUS
k. casinos, including internet and ship-based TRANSACTIONS
casinos, with respect to their casino cash
transactions related to their gaming
1. COVERED TRANSACTIONS
operations;
l. Real estate developers and brokers;
a. Transaction in cash or other
m. Offshore gaming operators, as well as their
equivalent monetary instrument
service providers, supervised, accredited
involving a total amount in excess of
or regulated by the Philippine Amusement
Five hundred thousand pesos
and Gaming Corporation (PAGCOR) or any
(P500,000.00) within one (1)
government agency.
banking day;
b. For casinos, including internet and
Notwithstanding the foregoing, the term 'covered
ship-based casinos, a single casino
persons' shall exclude lawyers and accountants cash transaction involving an
acting as independent legal professionals in relation amount in excess of Five million
to information concerning their clients or where pesos (P5,000,000.00) or its
disclosure of information would compromise client equivalent in any other currency;
confidences or the attorney-client relationship: c. For real estate developers and
Provided, That these lawyers and accountants are brokers, a single cash transaction
involving an amount in excess of
authorized to practice in the Philippines and shall
Seven Million Five Hundred
continue to be subject to the provisions of their Thousand Pesos (P7,500,000.00) or
respective codes of conduct and/or professional its equivalent in any other currency.
responsibility or any of its amendments. (Sec. 3)
2. OBLIGATIONS OF COVERED 2. SUSPICIOUS TRANSACTIONS

INSTITUTIONS
'Suspicious transactions' are transactions with
Covered institutions shall: covered persons, regardless of the amounts
a. Establish and record the true identity of involved, where any of the following circumstances
their clients based on official documents exist:
b. Maintain a system of verifying the true a. There is no underlying legal or trade
identity of their clients and, in case of obligation, purpose or economic
corporate clients, require a system of justification;
verifying their b. The client is not properly identified;
1. Legal existence and c. The amount involved is not commensurate
organizational structure with the business or financial capacity of
2. Authority and identification of all the client;
persons purporting on their d. Taking into account all known
behalf circumstances, it may be perceived that the
c. Maintain and safely store all records of all client's transaction is structured in order to
transactions for 5 years from the dates of avoid being the subject of reporting
transactions requirements under the Act;
1. With respect to closed accounts, e. Any circumstance relating to the
the records on customer transaction which is observed to deviate
identification, account files and from the profile of the client and/or the
business correspondence, shall client's past transactions with the covered
be preserved and safely stored person;
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f. The transaction is in any way related to an 2. PREDICATE CRIMES

unlawful activity or offense under this Act
that is about to be, is being or has been 'Unlawful activity ' refers to any act or omission or
committed; or series or combination thereof involving or having
g. Any transaction that is similar or analogous relation to the following:
to any of the foregoing. (Sec. 3)
a. Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
C. SAFE HARBOR PROVISION Revised Penal Code, as amended;
b. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15
No administrative, criminal or civil proceedings, shall
and 16 of Republic Act No. 9165, otherwise
lie against any person for having made a covered or
known as the Comprehensive Dangerous
suspicious transaction report in the regular
Drugs Act of 2002
performance of his duties in good faith, whether or
c. Section 3 paragraphs B, C, E, G, H and I of
not such reporting results in any criminal
Republic Act No. 3019, as amended,
prosecution under this Act or any other law. (Sec. 9)
otherwise known as the Anti-Graft and
Corrupt Practices Act;
D. WHEN IS MONEY LAUNDERING d. Plunder under Republic Act No. 7080, as
COMMITTED (INCLUDING PREDICATE amended;
CRIMES) e. Robbery and extortion under Articles 294,
295, 296, 299, 300, 301 and 302 of the
1. WHEN MONEY LAUNDERING IS Revised Penal Code, as amended;
f. Jueteng and Masiao punished as illegal
COMMITTED
gambling under Presidential Decree No.
1602;
Money laundering is committed by any person g. Piracy on the high seas under the Revised
who, knowing that any monetary instrument or Penal Code, as amended and Presidential
property represents, involves, or relates to the Decree No. 532;
proceeds of any unlawful activity: h. Qualified theft under Article 310 of the RPC,
a. transacts said monetary instrument or as amended;
property; i. Swindling under Article 315 and Other
b. converts, transfers, disposes of, moves, Forms of Swindling under Article 316 of the
acquires, possesses or uses said monetary RPC, as amended;
instrument or property; j. Smuggling under RA 455 and RA 1937;
c. conceals or disguises the true nature, k. Violations of RA 8792 or the Electronic
source, location, disposition, movement or Commerce Act of 2000;
ownership of or rights with respect to said l. Hijacking and other violations under RA
monetary instrument or property; 6235; destructive arson and murder, as
d. attempts or conspires to commit money defined under the RPC, as amended;
laundering offenses referred to in m. Terrorism and conspiracy to commit
paragraphs (a), (b) or (c); terrorism as defined and penalized under
e. aids, abets, assists in or counsels the Sections 3 and 4 of RA 9372;
commission of the money laundering n. Financing of terrorism under Section 4 and
offenses referred to in paragraphs (a), (b) offenses punishable under Sections 5, 6, 7
or (c) above; and and 8 of RA 10168, or the Terrorism
f. performs or fails to perform any act as a Financing Prevention and Suppression Act
result of which he facilitates the offense of of 2012:
money laundering referred to in paragraphs o. Bribery under Articles 210, 211 and 211-A
(a), (b) or (c) above. of the RPC, as amended, and Corruption of
Public Officers under Article 212 of the
Money laundering is also committed by any covered RPC, as amended;
person who, knowing that a covered or p. Frauds and Illegal Exactions and
suspicious transaction is required under this Transactions under Articles 213, 214, 215
Act to be reported to the Anti-Money Laundering and 216 of the RPC as amended;
Council (AMLC), fails to do so. q. Malversation of Public Funds and Property
under Articles 217 and 222 of the RPC, as
amended;
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r. Forgeries and Counterfeiting under Articles Code of 1997, as amended, where the
163, 166, 167, 168, 169 and 176 of the deficiency basic tax due in the final
RPC, as amended; assessment is in excess of Twenty-five
s. Violations of Sections 4 to 6 of RA. 9208, or million pesos (P25,000,000.00) per taxable
the Anti-Trafficking in Persons Act of 2003; year, for each tax type covered and there
t. Violations of Sections 78 to 79 of Chapter has been a finding of probable cause by the
IV, of PD 705, or the Revised Forestry competent authority: Provided further, That
Code of the Philippines, as amended; there must be a finding of fraud, willful
u. Violations of Sections 86 to 106 of Chapter misrepresenting or malicious intent on the
VI, of RA 8550, or the Philippine Fisheries part of the taxpayer: Provided, finally, That
Code of 1998; in no case shall the AMLC institute
v. Violations of Sections 101 to 107, and 110 forfeiture proceedings to recover monetary
of RA 7942, or the Philippine Mining Act of instruments, property or proceeds
1995; representing, involving, or relating to a tax
w. Violations of Section 27(c), (e), (f), (g) and crime, if the same has already been
(i), of RA 9147, or the Wildlife Resources recovered or collected by the Bureau of
Conservation and Protection Act; Internal Revenue (BIR) in a separate
x. Violation of Section 7(b) of RA 9072, or the proceeding and
National Caves and Cave Resources jj. Felonies or offenses of a similar nature that
Management Protection Act; are punishable under the penal laws of
y. Violation of RA 6539, or the Anti- other countries. (Sec. 2, RA 10365)
Carnapping Act of 2002, as amended;
z. Violations of Sections 1, 3 and 5 of PD
1866, as amended, or the decree Codifying E. AUTHORITY TO INQUIRE INTO BANK
the Laws on Illegal/Unlawful Possession, DEPOSITS
Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or
Explosives;
1. AUTHORITY OF THE AMLC TO
aa. Violation of PD 1612, otherwise known as INQUIRE INTO A DEPOSIT OR
the Anti-Fencing Law; INVESTMENT; EX PARTE
bb. Violation of Section 6 of RA 8042, or the APPLICATION
Migrant Workers and Overseas Filipinos
Act of 1995, as amended by Republic Act Notwithstanding the provisions of Republic Act No.
No. 10022; 1405, as amended, R.A. No. 6426, as amended,
cc. Violation of RA 8293, or the Intellectual R.A. No. 8791, and other laws, the AMLC may
Property Code of the Philippines; inquire into or examine any particular deposit or
dd. Violation of Section 4 of RA 9995, or the investment, including related accounts, with any
Anti-Photo and Video Voyeurism Act of banking institution or non-bank financial
2009; institution upon order of any competent court
ee. Violation of Section 4 of RA 9775, or the based on an ex parte application in cases of
Anti-Child Pornography Act of 2009; violations of this Act, when it has been established
ff. Violations of Sections 5, 7, 8, 9, 10(c), (d) that there is probable cause that the deposits or
and (e), 11, 12 and 14 of RA 7610, or the investments, including related accounts involved,
Special Protection of Children Against are related to an unlawful activity as defined in
Abuse, Exploitation and Discrimination; Section 3(i) hereof or a money laundering
gg. Fraudulent practices and other violations offense under Section 4 hereof; except that no
under RA 8799, or the Securities court order shall be required in cases involving
Regulation Code of 2000; activities defined in Section 3(i)(1), (2), and (12)
hh. Violation of Section 9 (a)(3) of Republic Act hereof, and felonies or offenses of a nature defined
No. 10697, otherwise known as the in Section 3(i)(1), (2), and (12) hereof, and felonies
"Strategic Trade Management Act", in or offenses of a nature similar to those
relation to the proliferation of weapons of mentioned in Section 3(i)(1), (2), and (12), which
mass destruction and its financing pursuant are Punishable under the penal laws of other
to United Nations Security Council countries, and terrorism and conspiracy to
Resolution Numbers 1718 of 2006 and commit terrorism as defined and penalized under
2231 of 2015; Republic Act No. 9372.
ii. Violation of Section 254 of Chapter
II, Title X of the National Internal Revenue
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2. CA ACTION ON APPLICATION 1. FREEZING

WITHIN 24 HOURS
a. Period of effectivity of the
The Court of Appeals shall act on the Freeze Order; Issuing Court
application to inquire into or examine any
depositor or investment with any banking institution Upon a verified ex parte petition by the AMLC and
or non-bank financial institution within twenty-four after determination that probable cause exists that
(24) hours from filing of the application. any monetary instrument or property is in any way
related to an unlawful activity as defined in Section
3. AUTHORITY OF BSP TO CHECK 3(i) hereof, the Court of Appeals may issue a freeze
COMPLIANCE OF COVERED order which shall be effective immediately, for a
INSTITUTIONS period of twenty (20) days.
To ensure compliance with this Act, the Bangko The twenty (20)-day period may be extended after
Sentral ng Pilipinas may, in the course of a the conduct of a summary hearing. However, the
periodic or special examination, check the total period of the freeze order issued by the Court
compliance of a Covered institution with the of Appeals shall not exceed six (6) months.
requirements of the AMLA and its implementing
rules and regulations. NOTE: If there is no case filed against a person
whose account has been frozen within the period
4. DEFINITION OF RELATED determined by the Court of Appeals, not exceeding
ACCOUNTS six (6) months, the freeze order shall be deemed
ipso facto lifted
For purposes of this section, 'related accounts' shall
refer to accounts, the funds and sources of which b. Summary Hearing to Determine
originated from and/or are materially linked to the Modification of Freeze Order;
monetary instrument(s) or property(ies) subject of Period; Total Period of Freeze
the freeze order(s). Order
5. COURT ORDER AS REQUISITE TO

INQUIRY Within the twenty (20)-day period, the Court of
Appeals shall conduct a summary hearing, with
A court order ex parte must first be obtained notice to the parties, to determine whether or not
before the AMLC can inquire into these related to modify or lift the freeze order, or extend its
Accounts: Provided, That the procedure for the ex effectivity.
parte application of the ex parte court order for the
principal account shall be the same with that of c. Freeze order vis a vis Asset
the related accounts. preservation order of the RTC
6. AUTHORITY TO INQUIRE OR This is without prejudice to an asset preservation

EXAMINE MUST COMPLY WITH order that the Regional Trial Court having
CONSTITUTIONAL PROVISIONS ON jurisdiction over the appropriate anti-money
laundering case or civil forfeiture case may issue on
SEARCH AND SEIZURE
the same account depending on the circumstances
The authority to inquire into or examine the main of the case, where the Court of Appeals will remand
account and the related accounts shall comply the case and its records
with the requirements of Article III, Sections 2
and 3 of the 1987 Constitution, which are hereby d. Period within which Petition to
incorporated by reference. Freeze must be acted upon by
the CA
F. FREEZING AND FORFEITURE
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In any case, the court should act on the petition to principle of effective judicial protection:
freeze within twenty-four (24) hours from filing of the Provided, That the person whose property or funds
petition. If the application is filed a day before a have been frozen may withdraw such sums as the
nonworking day, the computation of the twenty-four AMLC determines to be reasonably needed for
(24)-hour period shall exclude the nonworking days. monthly family needs and sustenance including the
services of counsel and the family medical needs of
e. Scope of Freeze Order such person.
The freeze order or asset preservation order issued The AMLC, if circumstances warrant, may
under this Act shall be limited only to the amount initiate civil forfeiture proceedings to preserve
of cash or monetary instrument or value of the assets and to protect it from dissipation. No
property that court finds there is probable cause court shall issue a temporary restraining order or a
to be considered as proceeds of a predicate writ of injunction against the freeze order, except
offense, and the freeze order or asset preservation the Court of Appeals or the Supreme Court.
order shall not apply to amounts in the same
account in excess of the amount or value of the
proceeds of the predicate offense. 2. CIVIL FORFEITURE
f. Motion to Lift Freeze Order a. Filing of petition for forfeiture;

applicable rules
A person whose account has been frozen may file a
motion to lift the freeze order and the court must Upon determination by the AMLC that probable
resolve this motion before the expiration of the cause exists that any monetary instrument or
freeze order. property is in any way related to an unlawful
activity as defined in Section 3(i) or a money
g. Prohibition on courts against laundering offense under Section 4 hereof, the
injunction of freeze order; AMLC shall file with the appropriate court through
exception the Office of the Solicitor General, a verified ex
parte petition for forfeiture, and the Rules of
No court shall issue a temporary restraining order or Court on Civil Forfeiture shall apply
a writ of injunction against any freeze order, except
the Supreme Court. b. Scope of forfeiture
h. Special rules on targeted The forfeiture shall include those other monetary
financial sanctions in relation instrument or property having an equivalent
to proliferation of weapons of value to that of the monetary instrument or
mass destruction and their property found to be related in any way to an
financing unlawful activity or a money laundering offense,
when with due diligence, the former cannot be
For purposes of implementing targeted financial located, or it has been substantially altered,
sanctions in relation to proliferation of weapons destroyed, diminished in value or otherwise
of mass destruction and its financing, as rendered worthless by any act or omission, or it has
provided under Section 3(15), the AMLC shall have been concealed, removed, converted, or otherwise
the power to issue, ex parte, an order to freeze transferred, or it is located outside the Philippines or
without delay. has been placed or brought outside the jurisdiction
of the court, or it has been commingled with other
The freeze order shall be effective until the basis for monetary instrument or jurisdiction of the court, or it
its issuance shall have been lifted. During the has been commingled with other monetary
effectivity of the freeze order, the aggrieved party instrument or property belonging to either the
may, within twenty (20) days from issuance, file offender himself or a third person or entity, thereby
with the Court of Appeals a petition to determine rendering the same difficult to identify or be
the basis of the freeze order according to the segregated for purposes of forfeiture.
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c. Claim on Forfeited assets e. Prohibition on courts against

injunction of preservations
Where the court has issued an order of forfeiture orders; exception
of the monetary instrument or property in a
criminal prosecution for any money laundering No court shall issue a temporary restraining order
offense defined under Section 4 of this Act, the (TRO) or a writ of injunction against any provisional
offender or any other person claiming an asset preservation order or asset preservation
interest therein may apply, by verified petition, for order, except the Court of Appeals or the
a declaration that the same legitimately belongs Supreme Court.
to him and for segregation or exclusion of the
monetary instrument or property corresponding
thereto.
-- end of topic --
The verified petition shall be filed with the court
which rendered the judgment of forfeiture, within
fifteen (15) days from the date of the finality of
the order of forfeiture, in default of which the said
order shall become final and executory. This
provision shall apply in both civil and criminal
forfeiture
d. Payment in Lieu of Forfeiture
Where the court has issued an order of forfeiture

of the monetary instrument or property subject
of a money laundering offense defined under
Section 4, and said order cannot be enforced
because any particular monetary instrument or
property cannot, with due diligence, be located,
or it has been substantially altered, destroyed,
diminished in value or otherwise rendered worthless
by any act or omission, directly or indirectly,
attributable to the offender, or it has been
concealed, removed, converted, or otherwise
transferred to prevent the same from being found or
to avoid forfeiture thereof, or it is located outside the
Philippines or has been placed or brought outside
the jurisdiction of the court, or it has been
commingled with other monetary instruments or
property belonging to either the offender himself or
a third person or entity, thereby rendering the same
difficult to identify or be segregated for purposes of
forfeiture, the court may, instead of enforcing the
order of forfeiture of the monetary instrument or
property or part thereof or interest therein,
accordingly order the convicted offender to pay
an amount equal to the value of said monetary
instrument or property. This provision shall apply in
both civil and criminal forfeiture.
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VI. ELECTRONIC COMMERCE ACT A. LEGAL RECOGNITION OF

ELECTRONIC DATA MESSAGES,
TOPIC OUTLINE UNDER THE SYLLABUS DOCUMENTS, AND SIGNATURES
A. LEGAL RECOGNITION OF ELECTRONIC 1. LEGAL RECOGNITION OF
DATA MESSAGES, DOCUMENTS, AND ELECTRONIC DATA MESSAGES
SIGNATURES
AND ELECTRONIC DOCUMENTS
B. PRESUMPTION RELATING TO (SECTIONS 6 & 7)
ELECTRONIC SIGNATURES
Information shall not be denied validity or
enforceability solely on the ground that it is in the
C. ADMISSIBILITY AND EVIDENTIAL
form of an electronic data message or electronic
WEIGHT OF ELECTRONIC DATA document, purporting to give rise to such legal
MESSAGE OR ELECTRONIC DOCUMENT effect. (Section 7, IRR)
D. OBLIGATION OF CONFIDENTIALITY Legal Effect, Validity or Enforceability
Electronic data messages or electronic documents
shall have the legal effect, validity or enforceability
as any other document or legal writing. (Section 7,
IRR) In particular:
1. A requirement under law that information is in
writing is satisfied if the information is in the form
of an electronic data message or electronic
document. (Section 7(a), IRR)
2. A requirement under law for a person to provide
information in writing to another person is
satisfied by the provision of the information in
an electronic data message or electronic
document. (Section 7(b), IRR)
3. A requirement under law for a person to provide
information to another person in a specified
non-electronic form is satisfied by the provision
of the information in an electronic data message
or electronic document if the information is
provided in the same or substantially the same
form. (Section 7(c), IRR)
4. Nothing limits the operation of any requirement
under law for information to be posted or
displayed in specified manner, time or location;
or for any information or document to be
communicated by a specified method unless
and until a functional equivalent shall have been
developed, installed, and implemented.
(Section 7(d), IRR)
Document Required in Writing (Section 10, IRR)

Where the law requires a document to be in writing,
or obliges the parties to conform to a writing, or
provides consequences in the event information is
not presented or retained in its original form, an
electronic document or electronic data message will
be sufficient if the latter:
1. Maintains its integrity and reliability; and
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2. Can be authenticated so as to be usable for circumstances, including any relevant

subsequent reference in that: agreement;
i. It has remained complete and 3. It is necessary for the party sought to be bound,
unaltered, apart from the addition of in order to proceed further with the transaction,
any endorsement and any authorized to have executed or provided the electronic
change, or any change which arises in signature; and
the normal course of communication, 4. The other party is authorized and enabled to
storage and display; and verify the electronic signature and to make the
ii. It is reliable in the light of the purpose decision to proceed with the transaction
for which it was generated and in the authenticated by the same
light of all relevant circumstances.
Presumptions Relating to Electronic Signatures
NOTE: This requirement applies whether the (Section 9, ECA)
requirement therein is in the form of an obligation or 1. The electronic signature is the signature of the
whether the law simply provides consequences for person to whom it correlates; and
the information not being presented or retained in its 2. The electronic signature was affixed by that
original form. person with the intention of signing or approving
the electronic document unless the person
Incorporation by Reference relying on the electronically signed electronic
Information shall not be denied validity or
document knows or has notice of defects in or
enforceability solely on the ground that it is not
contained in an electronic data message or unreliability of the signature or reliance on the
electronic document but is merely incorporated by electronic signature is not reasonable under the
reference therein. (Section 8, IRR) circumstances.
Best Evidence 3. ORIGINAL DOCUMENTS (SECTION

An electronic data message or electronic document 10)
meeting and complying with the requirements of
Sections 6 or 7 of ECA shall be the best evidence of Where the law requires information to be presented
the agreement and transaction contained therein. or retained in its original form, that requirement is
(Section 11, IRR) met by an electronic data message or electronic
document if:
NOTE: A person is not required to use or accept 1. There exists a reliable assurance as to the
information contained in electronic data messages, integrity of the electronic document or
electronic documents, or electronic signatures, but electronic data message from the time
a person's consent to do so may be inferred from
when it was first generated in its final form
the person's conduct. (Section 9, IRR)
and such integrity is shown by evidence
2. LEGAL RECOGNITION OF aliunde (that is, evidence other than the
ELECTRONIC SIGNATURES electronic data message itself) or
otherwise; and (Section 11(a), IRR)
(SECTION 8)
2. The electronic document or electronic data
An electronic signature on the electronic document message is capable of being displayed to
shall be equivalent to the signature of a person on a the person to whom it is to be presented.
written document if the signature is an electronic (Section 11(b), IRR)
signature and proved by showing that a prescribed
procedure, not alterable by the parties interested in In relation to the existence of a reliable assurance
the electronic document, existed under which: as to the integrity of the electronic document or
1. A method is used to identify the party sought to electronic data message, as provided under Section
be bound and to indicate said party's access to 11(a) of the IRR:
the electronic document necessary for his 1. The criteria for assessing integrity shall be
consent or approval through the electronic whether the information has remained
signature; complete and unaltered, apart from the
2. Said method is reliable and appropriate for the addition of any endorsement and any
purpose for which the electronic document was change which arises in the normal course
generated or communicated, in the light of all
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of communication, storage and display; and on printed or hard copies of the electronic
(Section 11(c)(i), IRR) documents or electronic data messages by
2. The standard of reliability required shall be electronic notaries, service providers and other duly
assessed in the light of the purpose for recognized or appointed certification authorities.
which the information was generated and in
Burden of Proving Authenticity
the light of all the relevant circumstances.
The person seeking to introduce an electronic data
(Section 11(c)(ii), IRR) message or electronic document in any legal
proceeding has the burden of proving its authenticity
4. AUTHENTICATION OF by evidence capable of supporting a finding that the
ELECTRONIC DATA MESSAGES electronic data message or electronic document is
AND ELECTRONIC DOCUMENTS what the person claims it to be.
(SECTION 11)
Establishment of Integrity of Information and
Authentication, Substantiation, and Validation Communication System
Procedures In the absence of evidence to the contrary, the
Until the Supreme Court by appropriate rules shall integrity of the information and communication
have so provided, electronic documents, electronic system in which an electronic data message or
data messages and electronic signatures, shall be electronic document is recorded or stored may be
authenticated by demonstrating, substantiating and established in any legal proceeding:
validating a claimed identity of a user, device, or 1. By evidence that at all material times the
another entity in an information or communication information and communication system or other
system, among other ways, as follows: similar device was operating in a manner that
1. The electronic signature shall be authenticated did not affect the integrity of the electronic data
by proof that a letter, character, number or other message or electronic document, and there are
symbol in electronic form representing the no other reasonable grounds to doubt the
persons named in and attached to or logically integrity of the information and communication
associated with an electronic data message, system;
electronic document, or that the appropriate 2. By showing that the electronic data message or
methodology or security procedures, when electronic document was recorded or stored by
applicable, were employed or adopted by a a party to the proceedings who is adverse in
person and executed or adopted by such interest to the party using it; or
person, with the intention of authenticating or 3. By showing that the electronic data message or
approving an electronic data message or electronic document was recorded or stored in the
electronic document; usual and ordinary course of business by a person
2. The electronic data message or electronic who is not a party to the proceedings and who did
document shall be authenticated by proof that not act under the control of the party using the
an appropriate security procedure, when record.
applicable was adopted and employed for the
purpose of verifying the originator of an 5. RETENTION OF ELECTRONIC
electronic data message or electronic DATA MESSAGE OR ELECTRONIC
document, or detecting error or alteration in the
DOCUMENT (SECTION 13)
communication, content or storage of an
electronic document or electronic data Notwithstanding any provision of law, rule or
message from a specific point, which, using regulation to the contrary, the requirement in any
algorithm or codes, identifying words or provision of law that certain documents be retained
numbers, encryptions, answers back or in their original form is satisfied by retaining them in
acknowledgment procedures, or similar security the form of an electronic data message or electronic
devices. document which:
1. Remains accessible so as to be usable for
Other Authentication Procedures subsequent reference; (Section 20(a)(i), IRR)
The Supreme Court may adopt such other 2. Is retained in the format in which it was
authentication procedures, including the use of generated, sent or received, or in a format
electronic notarization systems as necessary and which can be demonstrated to accurately
advisable, as well as the certificate of authentication represent the electronic data message or
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electronic document generated, sent or 1. The electronic signature is the signature of

received; and (Section 20(a)(ii), IRR) the person to whom it correlates; and (IRR,
3. Where applicable, enables the identification of Section 14 (a))
its originator and addressee, as well as the 2. The electronic signature was affixed by that
determination of the date and the time it was person with the intention of signing or
sent or received. (Section 20(a)(iii), IRR) approving the electronic data message or
electronic document unless the person
NOTE: This requirement is satisfied by using the relying on the electronically signed
services of a third party, provided that the conditions electronic data message or electronic
set forth above are met. (Section 20(b), IRR) document knows or has notice of defects in
or unreliability of the signature or reliance
Relevant government agencies tasked with
on the electronic signature is not
enforcing or implementing applicable laws relating
to the retention of certain documents may, by reasonable under the circumstances.
appropriate issuances, impose regulations to (Section 14(b), IRR)
ensure the integrity, reliability of such documents
and its proper implementation. (Section 20(c), IRR) C. ADMISSIBILITY AND EVIDENTIAL
WEIGHT OF ELECTRONIC DATA
6. PROOF BY AFFIDAVIT AND MESSAGE OR ELECTRONIC
CROSS-EXAMINATION (SECTIONS
DOCUMENT
14 AND 15; SECTION 19, IRR)
Admissibility And Evidential Weight Of
Proof by Affidavit Electronic Data Messages And Electronic
The matters on admissibility and evidentiary weight, Documents (Section 12)
and on the presumption of integrity of electronic For evidentiary purposes, an electronic document or
signatures, may be presumed to have been electronic data message shall be the functional
established by an affidavit given to the best of the equivalent of a written document under existing
deponent's or affiant's personal knowledge subject laws. (Section 18, IRR)
to the rights of parties in interest to cross-examine
such deponent or affiant as a matter of right. Admissibility
(Section 19, IRR) In any legal proceeding, nothing in the application of
the rules on evidence shall deny the admissibility of
Cross-Examination an electronic data message or electronic document
A deponent of an affidavit that has been introduced in evidence:
in evidence may be cross-examined as of right by a 1. On the sole ground that it is in electronic form;
party to the proceedings who is adverse in interest or (Section 18(a), IRR)
to the party who has introduced the affidavit or has 2. On the ground that it is not in the standard
caused the affidavit to be introduced. (Section
written form. (Section 18(b), IRR)
15(1), ECA)
NOTE: The DPA and IRR does not modify any
The person who is not a party to the proceedings
statutory rule relating to the admissibility of
and who did not act under the control of the party
electronic data messages or electronic documents,
using the electronic data message or electronic
except the rules relating to authentication and best
document may also be cross-examined provided
evidence. (Section 18, IRR)
that the electronic data message or electronic
document was recorded or stored in the usual and
Evidential Weight
ordinary course of business by the former. (Section
In assessing the evidential weight of an electronic
15(2), ECA)
data message or electronic document, the reliability
of the manner in which it was generated, stored or
B. PRESUMPTION RELATING TO communicated, the reliability of the manner in which
ELECTRONIC SIGNATURES its originator was identified, and other relevant factor
shall be given due regard. (Section 18, IRR)
In any proceedings involving an electronic
signature, the proof of the electronic signature shall
give rise to the rebuttable presumption that:
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D. OBLIGATION OF CONFIDENTIALITY
Except for the purposes authorized under ECA, any

person who obtained access to any electronic key,
electronic data message or electronic document,
book, register, correspondence, information, or
other material pursuant to any powers conferred
under ECA, shall not convey to or share the same
with any other person. (Section 32, ECA)
--- end of topic ---
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VII. FINANCIAL REHABILITATION, A. BASIC CONCEPTS

INSOLVENCY, LIQUIDATION AND
Nature of FRIA Proceedings:
SUSPENSION OF PAYMENTS (R.A. NO.
10142, FR RULES [A.M. NO. 12-12-11- a. In Rem – Jurisdiction over all persons
SC], AND FLSP RULES [A.M. NO.15-04- affected by the proceedings shall be
considered as acquired upon publication of
06-SC]) the notice of the commencement of the
proceedings in any newspaper of general
TOPIC OUTLINE UNDER THE SYLLABUS: circulation in the Philippines as prescribed
under the Supreme Court rules of procedure
A. BASIC CONCEPTS b. Summary
1. Rehabilitation c. Non-adversarial (FRIA, RA 10142, Sec. 3)
2. Insolvent
3. Liquidation NOTE: Summary proceedings settle
4. Suspension of payments controversies or dispose of cases in a relatively
prompt and simple manner. (Concurring Opinion
B. MODES OF REHABILITATION of C.J. Sereno in Poe-Llamanzares v. Commission
1. Court-supervised rehabilitation on Elections, G.R. Nos. 221697 & 221698-700,
a. Voluntary vs. involuntary citing Black's Law Dictionary 1242 8th ed.)
b. Commencement order (including
stay order)
c. Rehabilitation receiver and The following are prohibited pleadings:
management committee (a) motion to dismiss;
d. Determination of claims
(b) motion for a bill of particulars;
e. Rehabilitation plan
f. Creditor approval and (c) petition for relief;
confirmation (d) motion for extension;
g. Failure of rehabilitation (e) motion for postponement and other
2. Pre-negotiated rehabilitation motions of similar intent;
a. How initiated
(f) reply;
b. Period and effect of approval
3. Out-of-Court or Informal Restructuring (g) rejoinder;
Agreement or Rehabilitation Plan (h) intervention; and
a. Minimum requirements (i) any pleading or motion similar to, or of like
b. Standstill period effect as, any of the foregoing.
c. Cram down effect
C. LIQUIDATION Any order issued by the court under these Rules is

1. Voluntary liquidation vs. involuntary immediately executory. Reliefs ordered by the trial
liquidation vs. conversion or appellate courts (arising from a review of the trial
2. Procedure court’s orders) shall take into account the need for
a. Liquidation order; effects resolution of the proceedings in a just, equitable,
3. Determination of claims and speedy manner. (FR Rules, Rule 1, Sec. 4;
FLSP Rules, Rule 1, Sec. 3)
D. SUSPENSION OF PAYMENTS;
SUSPENSION OF PAYMENT ORDER NOTE: The principle of res judicata applies to
rehabilitation proceedings. The element of identity
of parties only requires substantial identity of
parties. Thus, if there was already a previous
decision involving one creditor and one debtor which
was decided with finality, and there is another claim
involving a different creditor litigating the same
matter as the previous decision, the previous
decision is res judicata and should apply to the
second claim. (Pryce Corp. v. Chinabank, G.R. No.
172302, 18 Feb. 2014)
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Debtors under FRIA b. Claims against directors and officers of the

The term “debtor” shall refer to (PICS): debtor arising from acts done in the
discharge of their functions falling within the
1. Partnership duly registered with the SEC; scope of their authority.
2. Individual debtor who has become insolvent;
3. Corporation duly organized and existing This inclusion does not prohibit the creditors or third
under Philippine laws; or parties from filing cases against the directors and
4. Sole Proprietorship registered with the DTI officers acting in their personal capacities.
(FRIA, RA 10142, Sec. 4[k])
Proceedings Covered By FRIA
DEBTOR PROCEEDING
NOTE: An individual debtor shall refer to a natural SOLE Voluntary Rehabilitation
person who is a resident and citizen of the
PROPRIETORSHIP (FRIA, RA 10142, Sec.
Philippines that has become insolvent (FRIA, RA
PARTNERSHIP 12);
10142, Sec. 4[o])
CORPORATION Involuntary Rehabilitation
NOTE: A debtor may file for rehabilitation despite (FRIA, RA 10142, Sec.
having already defaulted on its obligations to its 13);
creditor. If the petition for rehabilitation is sufficient Pre-Negotiated
and the rehabilitation plan feasible, rehabilitation Rehabilitation (FRIA, RA
should proceed. (Metrobank v. Liberty Corrugated, 10142, Sec. 76);
G.R. No. 184317, 25 Jan. 2017) Voluntary Liquidation
(FRIA, RA 10142, Sec.
COVERAGE 90);
Included Involuntary Liquidation
1. Juridical and natural persons who are debtors (FRIA, RA 10142, Sec.
(FRIA, RA 10142, Sec. 4[k]); 91)
2. Government FIs and GOCCs unless the charter INDIVIDUAL Suspension of Payment
provides otherwise) (FRIA, RA 10142, last DEBTOR (FRIA, RA 10142, Sec.
paragraph of Sec. 5) 94)
3. Foreign corporations undergoing rehab Voluntary Liquidation
proceedings abroad but also doing business in (FRIA, RA 10142, Sec.
the country (FRIA, RA 10142, Sec. 139-142,)
103)
Involuntary Liquidation
Excluded (FRIA, RA 10142, Sec.
1. Banks 105)
2. Insurance companies
3. Pre-need companies
4. National and local government agencies and Prospective application
units (FRIA, RA 10142, Sec. 5) Sec. 146 of the FRIA, which makes it applicable to
"all further proceedings in insolvency, suspension of
CREDITORS AND CLAIMS UNDER FRIA payments and rehabilitation cases . . . except to the
Creditor extent that in the opinion of the court their
A natural or juridical person which has a claim application would not be feasible or would work
against the debtor that arose on or before the injustice," still presupposes a prospective
commencement date (FRIA, RA 10142, Sec. 4[h]) application.
Claims The wording of the law clearly shows that it is

All claims or demands of whatever nature or applicable to all further proceedings. (Situs Dev.
character against the debtor or its property, whether Corp v. Asiatrust Bank, G.R. No. 233850, 2019)
for money or otherwise, liquidated or unliquidated,
fixed or contingent, matured or unmatured, disputed 1. REHABILITATION
or undisputed, including, but not limited to:
a. All claims of the government, whether Refers to the restoration of the debtor to a
national or local, including taxes, tariffs and condition of successful operation and solvency, if
customs duties; and it is shown that its continuance of operation is
economically feasible and its creditors can recover
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by way of the present value of payments projected filing of his petition. He shall attach to his petition, as
in the plan, more if the debtor continues as a going a minimum:
concern than if it is immediately liquidated. (FRIA,
RA 10142, Sec. 4[gg] (a) a schedule of debts and liabilities;
(b) an inventory of assets; and
Rehabilitation contemplates a continuance of (c) a proposed agreement with his creditors.
corporate life and activities in an effort to restore (FRIA, RA 10142, Sec. 94)
and reinstate the corporation to its former position
of successful operation and solvency (Wonder The manner of approval of the proposed agreement
Book Corporation v. Phil. Bank of is as follows:
Communications, G.R. No. 187316, 2012)
1. Quorum requirement for a valid creditors’
The basic issues in rehabilitation proceedings meeting - The presence of creditors holding
concern the viability and desirability of continuing claims amounting to at least three-fifths (3/5) of
the business operations of distressed the liabilities shall be necessary for holding a
corporations, all with a view of effectively restoring meeting (FRIA, RA 10142, Sec. 96)
to a state of solvency or to its former healthy 2. Vote requirement for approval of the proposed
financial condition through the adoption of a agreement - To form a majority, it is necessary:
rehabilitation plan (BPI Family Savings Bank v. St. (a) that two-thirds (2/3) of the creditors voting
Michael Medical Center, G.R. No. 205469, 2015) unite upon the same proposition; and
(b) that the claims represented by said majority
2. INSOLVENT
vote amount to at least three-fifths (3/5) of
Insolvent shall refer to the financial condition of a the total liabilities of the debtor mentioned in
debtor that is generally unable to pay its or his the petition; (FRIA, RA 10142, Sec. 97 [d]).
liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its The suspension order shall lapse when three (3)
or his assets. (FRIA, RA 10142, Sec. 4[p],) months shall have passed without the proposed
agreement being accepted by the creditors or as
Ground
soon as such agreement is denied. (FRIA, RA
An individual debtor possesses sufficient property
to cover all his debts but foresees the impossibility 10142, Sec. 96)
of meeting them when they respectively fall due
(FRIA, RA 10142, Sec. 94) If the individual debtor fails, wholly or in part, to
perform the agreement decided upon at the meeting
3. LIQUIDATION of the creditors, all the rights which the creditors had
against the individual debtor before the agreement
In Liquidation, corporations preserve their assets in shall revest in them, and the individual debtor may
order to sell them. Without these assets, business be subject to insolvency proceedings. (FRIA, RA
operations are effectively discontinued. The 10142, Sec. 102)
proceeds of the sale are distributed equitably among
creditors, and surplus is divided or losses are re- B. MODES OF REHABILITATION
allocated. (Viva Shipping Lines v. Keppel
Philippines Mining, G.R. No. 177382, 2016) 1. COURT-SUPERVISED
REHABILITATION
4. SUSPENSION OF PAYMENTS
a. Voluntary vs. Involuntary
Procedure in suspension of payment
An individual debtor who, possessing sufficient VOLUNTARY INVOLUNTARY
property to cover all his debts but foreseeing the
impossibility of meeting them when they debtor-initiated creditor-initiated
respectively fall due, may file a verified petition that (FRIA, RA 10142, (FRIA, RA 10142,
he be declared in the state of suspension of Sec. 12, RA 10142) Sec. 13 & 14)
payments by the court of the province or city in
which he has resided for six (6) months prior to the
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1. One or more of its members foresee the

Voluntary Rehabilitation (debtor-initiated) impossibility of meeting debts when they
(FRIA, RA 10142, Sec. 12, RA 10142) respectively fall due, and
2. The financial distress would likely adversely
Filed by: affect the financial condition and/or operations of
1. If sole proprietorship, owner the other members of the group and/or the
2. If partnership, majority of partners participation of the other members of the group
3. If corporation, majority of directors/trustees, is essential under the terms and conditions of
authorized by stockholders representing at least the proposed Rehabilitation Plan. (FR Rules,
2/3 of the outstanding capital stock or 2/3 of the Rule 2, Sec. 1)
members in non-stock corporations
Petition for Voluntary Proceedings
Ground: Insolvent and may be rehabilitated The petition shall be verified to establish the
insolvency of the debtor and the viability of its
NOTE: The venue for a petition for voluntary rehabilitation, and include, whether as an
insolvency proceeding is the RTC of the province or attachment or as part of the body of the petition, as
city where the insolvent debtor resides, as stated in a minimum the following:
the Articles of Incorporation. However, when it is
uncontroverted that the insolvent corporation a. Identification of the debtor, its principal
abandoned the old principal office, the corporation activities and its addresses;
is considered a resident of the city where its actual b. Statement of the fact of and the cause of the
principal office is currently found. (Pilipinas Shell debtor's insolvency or inability to pay its
Petroleum Corp. v. Royal Ferry Services, Inc., G.R. obligations as they become due;
No. 188146, 1 Feb. 2017) c. The specific relief sought pursuant to the
FRIA;
Initiation of Voluntary Proceedings d. The grounds upon which the petition is
Who may Petition for Voluntary Rehabilitation based;
e. Other information that may be required
1. The owner in case of a sole proprietorship, or under the FRIA depending on the form of
2. A majority of the partners in case of a relief requested;
partnership, or f. Schedule of the debtor's debts and liabilities
3. A majority vote of the board of directors or including a list of creditors with their
trustees and authorized by the vote of the addresses, amounts of claims and
stockholders representing at least two-thirds collaterals, or securities, if any;
(2/3) of the outstanding capital stock, in stock g. An inventory of all its assets including
corporations, or of the members, in case of non- receivables and claims against third parties;
stock corporation h. A Rehabilitation Plan;
i. The names of at least 3 nominees to the
A group of debtors shall refer to: position of rehabilitation receiver; and
j. Other documents required to be filed with
1. corporations that are financially related to one
the petition pursuant to the FRIA and the
another as parent corporations, subsidiaries or
rules of procedure as may be promulgated
affiliates;
by the Supreme Court.
2. partnerships that are owned more than fifty
percent (50%) by the same person; and
3. single proprietorships that are owned by the Involuntary Rehabilitation (creditor-initiated)
same person. When the petition covers a group (FRIA, RA 10142, Sec. 13 & 14)
of debtors, all reference under these rules to
debtor shall include and apply to the group of Filed by:
debtors (FRIA, RA 10142, Sec. 4[n])
1. Any creditor or group of creditors with a
Grounds for Voluntary Rehabilitation claim of at least P1,000,000; or
A group of debtors may jointly file for rehabilitation 2. At least 25% of subscribed capital stock or
when: partners’ contributions, whichever is higher
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Ground: shall be filed in the Regional Trial Court

1. The creditors’ due and demandable claims have which has jurisdiction over the principal
not been paid for at least 60 days or that the office of any of the debtors alleged to be
debtor has failed generally to meet its liabilities insolvent, as specified in its articles of
as they fall due; or incorporation or partnership, or registration
2. A creditor, other than the petitioners, has papers with the DTI in cases of sole
initiated foreclosure proceedings against the proprietorship, as the case may be. (FR
debtor that will prevent the debtor from paying Rules, Rule 1, Sec. 6)
its debts as they become due or will render it
insolvent NOTE: The petition for court assistance to execute
or implement either a standstill agreement or out of
court restructuring agreement may be filed with the
NOTE: The creditors must establish that the debtor RTC having jurisdiction over the place in which the
may be rehabilitated insolvent debtor resides or has its principal place of
business (FR Rules, Rule 4, Sec. 8)
Petition for Involuntary Proceedings

The creditor/s' petition for rehabilitation shall be B. Action on the Petition
verified to establish the substantial likelihood that 1. If the court finds the petition to be
the debtor may be rehabilitated, and include: substantial in form and substance, the
commencement order shall be issued
a. Identification of the debtor its principal within 5 working days from its filing
activities and its address; 2. If found deficient within the same period,
b. The circumstances sufficient to support a the court may give 5 working days from
petition to initiate involuntary rehabilitation receipt of the notice of order to satisfy the
proceedings under Section 13 of the FRIA; deficiency.
c. The specific relief sought under the FRIA; 3. The court shall dismiss the petition if the
d. A Rehabilitation Plan; deficiency is not complied within the
e. The names of at least 3 nominees to the extended 5-day period (FR Rules, Rule 2,
position of rehabilitation receiver; Sec. 7)
f. Other information that may be required
under the FRIA depending on the form of b. Commencement Order
relief requested; and (Including Stay Order)
g. Other documents required to be filed with
the petition pursuant to the FRIA and the Commencement Order
rules of procedure as may be promulgated Rehabilitation proceedings commence upon the
by the Supreme Court. issuance of the Commencement Order. The
Commencement Order contains the following:
Common Provisions to Voluntary and
Involuntary Proceedings 1. Identify the debtor, its principal business or
activities and its principal place of business;
A. Venue 2. Summarize the ground/s for initiating the
Shall be filed with the RTC which has proceedings;
jurisdiction over the principal office of the 3. State the relief sought under the FRIA and any
debtor alleged to be insolvent as specified requirement or procedure particular to the relief
in its articles of incorporation or partnership sought;
or in its registration papers with the 4. State the legal effects of the Commencement
Department of Trade and Industry (DTI) in Order;
cases of sole proprietorship, as the case 5. Declare that the debtor is under rehabilitation;
may be. 6. Direct the publication of the Commencement
Order in a newspaper of general circulation in
A petition for voluntary or involuntary the Philippines once a week for at least 2
rehabilitation involving a group of debtors consecutive weeks, with the first publication to
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be made within 7 days from the time of its Effects of the Commencement Order
issuance; 1. Vest the rehabilitation with all the powers and
7. If the petitioner is the debtor direct the service by functions provided for the FRIA, such as the right
personal delivery of a copy of the petition on to review and obtain records to which the
each creditor holding at least 10% of the total debtor's management and directors have
liabilities of the debtor as determined from the access, including bank accounts or whatever
schedule attached to the petition within 5 days; nature of the debtor subject to the approval by
if the petitioner/s is/are creditor/s, direct the the court of the performance bond filed by the
service by personal delivery of a copy of the rehabilitation receiver;
petition on the debtor within 5 days; 2. Prohibit or otherwise serve as the legal basis
8. Appoint a rehabilitation receiver who may or not rendering null and void the results of any
be from among the nominees of the petitioner/s extrajudicial activity or process to seize property,
and who shall exercise such powers and duties sell encumbered property, or otherwise attempt
defined in the FRIA as well as the procedural to collection or enforce a claim against the
rules that the Supreme Court will promulgate; debtor after commencement date unless
9. Summarize the requirements and deadlines for otherwise allowed in the FRIA, subject to the
creditors to establish their claims against the provisions of Section 50 hereof;
debtor and direct all creditors to their claims with 3. Exempt the debtor from liability for taxes and
the court at least 5 days before the initial fees, including penalties, interests, and charges
hearing; due to the government;
10. Direct Bureau of internal Revenue (BIR) to file 4. Serve as the legal basis for rendering null and
and serve on the debtor its comment on or void any setoff after the commencement date of
opposition to the petition or its claim/s against any debt owed to the debtor by any of the
the debtor under such procedures as the debtor's creditors;
Supreme Court provide; 5. Serve as the legal basis for rendering null and
11. Prohibit the debtor's suppliers of goods or void the perfection of any lien against the
services from withholding the supply of goods debtor's property after the commencement date;
and services in the ordinary course of business and
for as long as the debtor makes payments for 6. Consolidate the resolution of all legal
the services or goods supplied after the proceedings by and against the debtor to the
issuance of the Commencement Order; court; provided, however, that the court may
12. Authorize the payment of administrative allow the continuation of cases on other courts
expenses as they become due; where the debtor had initiated the suit. (FR
13. Set the case for initial hearing, which shall not Rules, Rule 2, Sec. 9)
be more than 40 days from the date of filing of
the petition for the purpose of determining Effectivity and Duration of the Commencement
whether there is substantial likelihood for the Order
debtor to be rehabilitated; The Commencement Order shall be effective for the
14. Make available copies of the petition and duration of the rehabilitation proceedings, unless:
rehabilitation plan for examination and copying
by any interested party; a. Earlier lifted by the court;
15. Indicate the location or locations at which b. The Rehabilitation Plan is seasonably
documents regarding the debtor and the confirmed or approved; or
proceedings under Act may be reviewed and c. The Rehabilitation proceedings are ordered
copied; terminated by the court (FR Rules, Rule 2,
16. State that any creditor or debtor who is not the Sec. 11)
petitioner, may submit the name or nominate
any other qualified person to the position of NOTE: “Commencement date” refers to the date
rehabilitation receiver at least 5 days before the on which the court issues the Commencement
initial hearing; Order, which shall be retroactive to the date of
17. Include a Stay or Suspension Order. (FRIA, RA filing of the petition for voluntary or involuntary
10142, Sec. 16) proceedings.
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NOTE: The effects of the Commencement Order The issuance of a stay order does not deprive
shall be reckoned from the date of the filing of the creditors the right to enforce their claims against the
petition for corporate rehabilitation, be it voluntary debtor. It does not affect the right to commence
or involuntary. actions or proceedings in order to preserve ad
cautelam a claim against the debtor and to toll the
The determination of the date of the filing of the running of the prescriptive period to file the claim.
petition for rehabilitation is relevant in ascertaining (Allied Banking Corp. v. Equitable PCI Bank, Inc.,
the extent of the legal effects of a Commencement G.R. No. 191939, 2018)
Order. (Land Bank of the Philippines v. Polillo
Paradise Island Corporation,G.R. No. 211537,
2019) Claims against sureties and other persons solidarily
liable with the debtor is not barred by a stay order.
(Trade and Investment Development Corporation of
Stay or Suspension Order the Philippines v. Philippine Veterans Bank, G.R.
Effects (FRIA, RA 10142, Sec. 16[q]) No. 233850, 2019)
(a) Suspend all actions or proceedings, in
When a stay order is issued, the rehabilitation court
court or otherwise, for the enforcement of
is only empowered to suspend claims against the
claims against the debtor;
(b) Suspend all actions to enforce any debtor, its guarantors, and sureties who are not
judgment, attachment or other provisional solidarily liable with the debtor. Hence, the making
remedies against the debtor; of claims against sureties and other persons
(c) Prohibit the debtor from selling, solidarily liable with the debtor is not barred by a stay
encumbrancing, transferring or disposing in order. (Situs Dev. Corp v. Asiatrust Bank, G.R. No.
any manner any of its properties (except in 233850,2019)
the ordinary course of business); and
(d) Prohibit the debtor from making any NOTE: Stay Order may now cover third-party or
payment of its liabilities outstanding as of accommodation mortgages, in which the “mortgage
the commencement date (except as may be is necessary for the rehabilitation of the debtor as
provided in the order) determined by the court upon recommendation by
the rehabilitation receiver.” (Situs Dev. Corp v.
NOTE: The effects of a Stay Order are immediate, Asiatrust Bank, G.R. No. 233850,2019)
and shall also be retroactive to the date of the filing
of the petition. Effect of violating Stay or Suspension order:
For the Debtor:
Once due notice is made through publication, the Debtor shall be liable for double the value of the
rehabilitation court may nullify actions inconsistent property sold, embezzled, or disposed of or double
with the stay order but which may have been taken the transaction involved (FRIA, RA 10142, Sec.
prior to publication. Because prior to publication, 10)
creditors may not yet be aware that they are to
desist from pursuing claims against the insolvent For the Creditor
debtor. (Allied Banking Corp. v. Equitable PCI Bank, NOTE: The creditors must ventilate their claims
Inc., G.R. No. 191939, 2018) before the rehabilitation court, and any “attempts
to seek legal or other resource against the
The issuance of the Commencement Order and the distressed corporation shall be sufficient to
Suspension or Stay Order, and any other provision support a finding of indirect contempt of court.”
of the Act, shall not in any way diminish or impair the (Bureau of Internal Revenue v. Lepanto Ceramics,
security or lien of a secured creditor, or the value of Inc., G.R. No. 224764, 2017)
his lien or security, except that his right to enforce
the security or lien may be suspended during the
term of the Stay Order. The court may allow the Exceptions to stay order: (FRIA, RA 10142 Sec.
enforcement of the security or lien if the property is 18
not necessary for the rehabilitation of the debtor. 1. Cases already pending in the SC as of the
(FR Rules, Rule 2, Sec. 59) commencement date;
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2. Cases pending or filed at a specialized court or the trial court has ample discretion to call a hearing
quasi-judicial agency; prior to the issuance of a stay order, so long as said
3. Enforcement actions against: hearing is held within the 5-day period from the filing
a. Sureties and other persons solidarily liable of the petition. (Pryce Corp. v. Chinabank, G.R. No.
with the debtor 172302, 18 Feb. 2014)
b. Third party or accommodation mortgagors
c. Unless the property subject of the third party What is the rationale of the Stay Order? (Bar
or accommodation mortgagor is necessary 2006)
for the rehabilitation of the debtor, as “The justification for the suspension of actions or
determined by the court upon claims, without distinction, pending rehabilitation
recommendation of the rehabilitation proceedings is to enable the management
receiver committee or rehabilitation receiver to effectively
d. Issuers of letters of credit exercise its/his powers free from any judicial or
4. Any action of customers/clients of a securities extra-judicial interference that might unduly hinder
market participant to recover money/securities or prevent the "rescue" of the debtor company.
entrusted to the latter in the ordinary course of
To allow such other actions to continue would only
business, and any action of such securities
add to the burden of the management committee
market participant or the appropriate regulatory
or rehabilitation receiver, whose time, effort and
agency/self-regulatory organization to pay or
resources would be wasted in defending claims
settle such claims or liabilities;
against the corporation instead of being directed
5. Actions of a licensed broker/dealer to sell
toward its restructuring and rehabilitation.”
pledged securities of a debtor, pursuant to a
securities pledge or margin agreement for the
c. Rehabilitation receiver and
settlement of securities transactions;
management committee
6. Clearing and settlement of financial transactions
through the facilities of a clearing agency or Rehabilitation Receiver
similar entity duly authorized, registered and/or The person or persons, natural or juridical,
recognized by the appropriate regulatory agency appointed as such by the court pursuant to the FRIA
(like BSP, SEC, etc.) as well as any form of and which shall be entrusted with such powers and
actions of such agencies to reimburse duties as set forth herein. (FRIA, R.A. 10142, Sec.
themselves for any transactions settled by the 4(hh))
debtor; and
7. Criminal actions against the individual debtor or Minimum Qualifications of a Rehabilitation
owner, partner, director, or officer of the debtor. Receiver
NOTE: Determining the date when ownership of the A. If the rehabilitation receiver is a natural
subject properties was vested upon the creditor is person:
crucial. If the ownership was vested prior to the filing 1. Citizen of the Philippines or a resident of
of the petition for corporate rehabilitation, the effect
the Philippines in the 6 months prior to
of such sale is to release the debtor from its
outstanding obligation. In other words there is no nomination;
more creditor-debtor relationship to speak of. Thus, 2. Not been earlier dismissed as a
the Stay Order does not apply anymore as Section rehabilitation receiver;
17 of the FRIA extends only to processes which 3. As far as practicable, has expertise and
occurred after the commencement date. (Land Bank acumen to manage and operate a business
of the Philippines v. Polillo Paradise Island similar in size and complexity of that of the
Corporation, G.R. No. 211537, 2019) debtor;
4. Has a general familiarity with the rights of
NOTE: there is no need for a hearing before the creditors subject to suspension of payment
issuance of a stay order. The Interim Rules only or rehabilitation and a general
require an initial hearing before the court will give understanding of the duties and obligations
due course to or dismiss a petition. Nevertheless, of a rehabilitation receiver;
neither do the Interim Rules prohibit the holding of a
hearing before the issuance of a stay order. Thus,
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5. Of good moral character and with Additional Requirements for Representatives of

acknowledged integrity, impartiality and Juridical Persons
independence;
6. No conflict of interest; 1. Duly designated and authorized to act for
7. Has an operating knowledge in and on behalf of the juridical entity;
management, finance, and rehabilitation of 2. Must be a director, officer, stockholder or
distressed companies; and partner of the juridical entity; and
8. Willing and able to file a bond in such 3. Must submit a sworn undertaking that he
amount as determined by the court (FR shall be solidarily liable with his firm for all
Rules, Rule 2, Sec. 21[A]) the obligations and responsibilities of a
rehabilitation receiver. (FR Rules, Rule 2,
NOTE: The conflict of interest requirement may be Sec. 21)
waived, expressly or impliedly, by a party who may
be prejudiced thereby. (FRIA, RA 10142, Sec. 29[d]) NOTE: Other qualifications and disqualifications of
the rehabilitation receiver shall be set forth in
procedural rules, taking into consideration the
B. If the rehabilitation receiver is a juridical nature of the business of the debtor and the need to
person: protect the interest of all stakeholders concerned.
1. Duly authorized to do business in the
Philippines for at least six (6) years prior to Principal Duties of the Rehabilitation Receiver
its appointment;
2. Good standing as certified by the (a) Preserving and maximizing the value of the
appropriate regulatory agency/ies; assets of the debtor during the proceedings;
3. No conflict of interest; (b) Determining the viability of the
4. Not been earlier dismissed as a rehabilitation;
rehabilitation receiver; (c) Preparing and recommending a
5. Must submit the name of the person Rehabilitation Plan to the court; and
designated to discharge the responsibilities Implementing the approved Rehabilitation
and powers of a rehabilitation receiver and Plan (FR Rules, Rule 2, Sec. 26)
the names of the employees and other
persons authorized to assist the designated NOTE: In contrast, a liquidator has the principal duty
representative, together with a sworn of preserving and maximizing the value and
certification that these persons possess the recovering the assets of the debtor, with the end in
qualifications and none of the view of liquidating them and discharging to the
disqualifications required from natural extent possible all the claims against the debtor.
persons; (FLSP Rules, Rule 4, Sec. 12)
6. Must submit a sworn undertaking, duly
approved in accordance with law, binding REHABILITATION LIQUIDATOR
itself to be solidarily liable with the persons RECEIVER
designated by it to discharge the functions Preserve and maximize Preserve and
and responsibilities of a rehabilitation the value of the assets maximize the value of
receiver; of the debtor the assets of the
7. Willing and able to file a bond in such debtor
amount as may be determined by the court; Determine the viability Recover the assets of
8. Not disqualified to discharge the duties of a of rehabilitation the debtor
rehabilitation receiver under the Preparing, Liquidating the assets
Constitution and other relevant laws (FR Recommending the of the debtor; and
Rules, Rule 2, Sec. 21) Rehabilitation Plan; Discharging the
and, Implementing the claims of the debtor
approved (FLSP Rules, Rule 4,
Rehabilitation Plan Sec. 12)
(FR Rules, Rule 2, Sec.
26)
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NOTE: Additionally, the liquidator shall have the Without limiting the generality of the foregoing, an
right and duty to take all reasonable steps to individual shall be deemed to have a conflict of
manage and dispose of the debtor's assets with a interest if:
view towards maximizing the proceeds therefrom, to
pay creditors and stockholders, and to terminate the 1. He is a creditor, owner, partner or stockholder of
debtor's legal existence. the debtor;
2. He is engaged in a line of business which
NOTE: The determination of the validity and the competes with that of the debtor;
approval of the rehabilitation plan is not the 3. He is, or was, within 5 years from the filing of the
responsibility of the rehabilitation receiver, but petition, a director, officer, owner, partner or
remains the function of the court – notwithstanding employee of the debtor or any of the creditors,
the credentials of the court-appointed rehabilitation or the auditor or accountant of the debtor;
receiver. While the court may consider the receiver's 4. He is, or was, within 2 years from the filing of the
report favorably recommending the debtor's petition, an underwriter of the outstanding
rehabilitation, it is not bound thereby if, in its securities of the debtor;
judgment, the debtor's rehabilitation is not feasible. 5. is related by consanguinity or affinity within the
(Land Bank of the Philippines v. Fastech Synergy fourth civil degree to any individual creditor,
Philippines, Inc., G.R. No. 206150, 2017) owner/s of a sale proprietorship-debtor, partners
of a partnership-debtor or to any stockholder,
Removal of a Rehabilitation Receiver director, officer, employee or underwriter of a
The rehabilitation receiver may be removed at any corporation-debtor; or
time by the court, either: 6. He has any other direct or indirect material
interest in the debtor or any of the creditors. (FR
a. Motu proprio; or Rules, Rule 2, Sec. 22)
b. Upon motion by any creditor/s holding more
than 50% of the total obligations of the NOTE:
debtor (FR Rules, Rule 2, Sec. 27) Any rehabilitation receiver, member of the
management committee or persons employed or
Grounds for Removal contracted by them possessing any conflict of
interest shall make the appropriate disclosure either
1. Incompetence, gross negligence, failure to to the court or to the creditors in case of out-of-court
perform or failure to exercise the proper degree rehabilitation proceedings. (FRIA, R.A. 10142, Sec.
of care in the performance of his duties and 40)
powers; Any party to the proceeding adversely affected by
2. Lack of a particular or specialized competency the appointment of any person with a conflict of
required by the specific case; interest to any of the positions enumerated above
3. Illegal acts or conduct in the performance of his may however waive his right to object to such
duties and powers; appointment and, if the waiver is unreasonably
4. Lack of qualification or presence of any withheld, the court may disregard the conflict of
disqualification; interest, taking into account the general interest of
5. Conflict of interest that arises after his the stakeholders. (FR Rules, Rule 2, Sec. 24)
appointment;
6. Manifest lack of independence that is Management of Debtor’s Business
detrimental to the general body of the General Rule: The management of the juridical
stakeholders; debtor shall remain with existing management.
7. Failure, without just cause, to perform any of his Exception: Displacement of Existing Management
powers and functions under these Rules; or by the Rehabilitation Committee
8. Any of the grounds for removing a trustee under
the general principles of trusts. NOTE:
Upon motion of any interested party and within the
Cases of Conflict of Interest soonest possible time, the court may appoint and
An individual shall be deemed to have a conflict of direct the rehabilitation receiver to assume the
powers of management of the debtor, or appoint a
interest if he is so situated as to be materially
management committee that will undertake the
influenced in the exercise of his judgment for or management of the debtor, upon clear and
against any party to the proceedings.
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convincing evidence of any of the following b. Assume the powers, rights and
circumstances: responsibilities of the debtor (FR Rules,
Rule 2, Sec. 33)
a. Actual or imminent danger of dissipation,
loss, wastage or destruction of the debtor's
NOTE: A majority of all members shall be necessary
assets or other properties; or
for the management committee to act or make a
b. Paralyzation of the business operations of
decision (FR Rules, Rule 2, Sec. 35)
the debtor; or
c. Gross mismanagement of the debtor, fraud
Composition of the Management Committee
or other wrongful conduct on the part of, or
The management committee shall be composed of
gross or willful violation of the Act by the
three qualified members appointed by the court, as
existing management of the debtor or the
follows:
owner, partner, director, officer or
a. Nominated by the debtor;
representative/s in management of the
b. Nominated by the creditor/s holding more
debtor.
than 50% of the total obligations of the
debtor;
NOTE: In case the court appoints the rehabilitation
c. A chairman nominated by the first and
receiver to assume the management of the debtor,
second members within 10 days from the
the court may:
appointment (FR Rules, Rule 2, Sec. 34)
(a) Require the rehabilitation receiver to post an
additional bond;
NOTE: The management committee may overrule
(b) Authorize him to engage the services or to
or revoke the actions of the previous management
employ persons or entities to assist him in
or governing body of the debtor (FR Rules, Rule 2,
the discharge of his managerial functions;
Sec. 33)
and
(c) Authorize a commensurate increase in his
Powers and Duties of the Management
compensation.
Committee
The specific powers and duties of the management
Rules and Liability on Conflicting Decisions
committee, whose members shall also be
• In case the rehabilitation receiver is a juridical
considered as officers of the court, are the following:
person, the acts of its designated
representative shall be presumed to be carried 1. Investigate the acts, conduct, properties,
out in accordance with the authority vested in liabilities, and financial condition of the
him by the juridical entity which he represents. corporation, association or partnership under
• In case of conflict, the decision of the governing management;
body of the juridical entity shall prevail. 2. Examine under oath the directors and officers of
the entity and any other witnesses that the
NOTE: However, the rehabilitation receiver and its committee may deem appropriate;
representative/s shall remain solidarily liable for all 3. Report to the court any ascertained fact
obligations and responsibilities, subject to the right pertaining to the causes of the problems, fraud,
of withdrawal prior to the implementation of the misconduct, mismanagement and irregularities
disputed decision. committed by any other person;
4. Use the services of or employ such person or
NOTE: Upon assumption of management, the persons, such as lawyers, accountants,
receiver shall exercise the same powers granted auditors, appraisers and staff as are necessary
under Sec. 26 in addition to the powers granted to to perform its functions and duties as
the management committee (FR Rules, Rule 2, Sec. management committee;
32) 5. Report to the court any material adverse change
in the business of the entity under management;
Management Committee 6. Evaluate the existing equity, capital, assets and
Role of the Management Committee liabilities, earnings, and operations of the entity
Take custody of and control all assets owned or under management;
possessed by the debtor; 7. Determine and recommend to the court the best
a. Take the place of the management and way to salvage and protect the interest of the
governing body of the debtor; and creditors, stockholders and the general public,
including the rehabilitation of the entity under
management;
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8. Prohibit and report to the court any d. Determination of claims

encumbrance, transfer, or disposition of the
debtor’s property outside of the ordinary course Establishment of Preliminary Registry of Claims
of business or beyond what is allowed by the Within twenty (20)-days from his assumption into
court office, the rehabilitation receiver shall establish a
9. Prohibit and report to the court payments made preliminary registry of claims based on the schedule
outside the ordinary course of business;
of debts and liabilities provided in the petition. (FR
10. Have unlimited access to the employees,
premises, books, records and financial Rules, Rule 2, Sec. 44)
documents of the entity under management
during business hours; NOTE: All claims included in the registry of claims
11. Inspect, copy, photocopy or photograph any must be duly supported by sufficient evidence.
document, paper, book, account or letter,
whether in the possession of the entity or other Inspection of Registry of Claims
persons, that pertain to the business of the The rehabilitation receiver shall make the registry
debtor; available for public inspection and give notice to the
12. Gain entry into any property owned by the entity debtor, creditors and stakeholders on where and
under management for the purposes of
when they may inspect it by causing the publication
inspecting, measuring, surveying, or taking
photos or videos of any designated relevant of the place/s and date/s of inspection in a
object or operation thereon; newspaper of general circulation in the Philippines
13. Bring to the attention of the court any material once every week for two (2) consecutive weeks.
change affecting the entity’s ability to meet its
obligations; The period of inspection shall not exceed fifteen
14. Take the appropriate steps to modify, nullify, or (15) days from the last publication. (FR Rules,
revoke transactions coming to its knowledge Rule 2, Sec. 44)
which it deems detrimental or prejudicial to the
interest of the entity under management;
Opposition or Challenge of Claims
15. Recommend the termination of the proceedings
Within thirty (30) days from the expiration of the
and the dissolution of the entity if it determines
that the continuance in business of such entity period to inspect the registry of claims, the debtor,
will no longer work to the best interest of the creditors, stakeholders and other interested parties
stakeholders and creditors; may submit to the court a challenge to the claim/s,
16. Apply to the court for any order or directive that as listed in the registry of claims serving a certified
it may deem necessary or desirable to aid it in copy on the rehabilitation receiver and the creditor
the exercise of its powers and performance of its holding the challenged claim/s. (FR Rules, Rule 2,
duties and functions, including the power to Sec. 45)
examine parties and witnesses under oath; and
17. Exercise such other powers as the court may, Appeal to the Court
from time to time confer upon it. (FR Rules, Rule
The aggrieved party may seek the review of the
2, Sec. 33)
decision of the rehabilitation receiver on a claim by
Qualifications of Members of the Management filing a motion with the rehabilitation court within five
Committee (5) days from receipt of the rehabilitation
Same as with rehabilitation receivers (FR Rules, receiver's assailed decision, which shall be
Rule 2, Sec. 36) decided by the court at the soonest possible time.
(FR Rules, Rule 2, Sec. 46)
Immunity from Suit
The rehabilitation receiver, the members of the Submission of Claims to the Court
management committee, and all persons they Upon the expiration of the thirty (30)-day period, the
engage shall not be subject to any action, claim or rehabilitation receiver shall submit to the court the
demand for any act or omission in good faith in the registry of claims. The registry of claims shall
exercise of their powers and functions (FR Rules, include the following lists of (1) claims that have not
Rule 2, Sec. 38) been subject to challenge; (2) claims resolved by the
rehabilitation receiver after these have been
challenged; and (3) disputed but unresolved claims.
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e. Rehabilitation plan 7. Specify the treatment of each class or subclass

described in subsections 4 and 5 (i.e., voting
Rehabilitation Plan creditors);
A plan by which the financial well-being and viability 8. Provide for equal treatment of all claims within
of an insolvent debtor can be restored using various the same class or subclass, unless a particular
means including, but not limited to, debt creditor agrees to a less favorable treatment;
forgiveness, debt rescheduling, reorganization or 9. Ensure that the payments made under the
quasi- reorganization, dacion en pago, debt-equity Rehabilitation Plan (which shall include
conversion and sale of the business (or parts of it) proposed dates of payment and specific
as a going concern, or setting-up of new business amounts on such dates to be paid to each and
entity, or other similar arrangements as may be every creditor) will follow the priority established
approved by the court or creditors. (FRIA, RA under the provisions of the Civil Code on
10142, Sec. 4[ii]) concurrence and preference of credits and other
applicable laws;
NOTE: Rehabilitation plan should be genuine and 10. Maintain the security interest of secured
made in good faith. (Philippine Bank of creditors and preserve the liquidation value of
Communications v. Basic Polyprinters and the security unless this has been waived or
Packaging Corporation, G.R. No. 187581, 2014) modified voluntarily;
11. Include relevant foreign ownership limits or
Minimum Contents of a Rehabilitation Plan information, if any;
12. Disclose all payments to creditors for pre-
1. Specify the underlying assumptions, the commencement debts made during the
financial goals and procedures proposed to proceedings and the justifications for these
accomplish these goals, including the duration payments;
and coverage of the rehabilitation; 13. Describe the disputed claims and the
2. Contain a liquidation analysis setting out for provisioning of funds to account for appropriate
each creditor or each class of creditor, as payments should the claim be ruled valid or its
applicable, the amounts they expect to receive amount adjusted;
under the Rehabilitation Plan and those that 14. Identify the debtor's role in the implementation
they will receive if liquidation ensues within one of the Rehabilitation Plan;
hundred twenty (120) days after the filing of the 15. State any rehabilitation covenants of the debtor,
petition; whose breach shall be considered a material
3. Contain information sufficient to give the various breach of the Rehabilitation Plan;
classes of creditors a reasonable basis for 16. Identify those responsible for the future
determining whether supporting the Plan is in management of the debtor and the supervision
their financial interest when compared to the and implementation of the Rehabilitation Plan,
immediate liquidation of the debtor, including their affiliation with the debtor and their
any reduction of principal interest and penalties remuneration;
payable to the creditors; 17. Address the treatment of claims arising after the
4. Establish classes of voting creditors; confirmation of the Rehabilitation Plan;
5. Establish subclasses of voting creditors if prior 18. Require the debtor and its counter-parties to
approval has been granted by the court; adhere to the terms of all contracts that the
6. Indicate how the insolvent debtor will be debtor has chosen to confirm;
rehabilitated, among others, through: debt 19. Arrange for the payment of all outstanding
forgiveness; debt rescheduling; reorganization administrative expenses as a condition to the
or quasi-reorganization; dacion en pago; debt- Rehabilitation Plan's approval unless such
to-equity conversion; payment of unpaid condition has been waived in writing by the
subscriptions by shareholders; sale of the creditors concerned;
business as a going concern; setting-up of a new 20. Arrange for the payment of all outstanding taxes
business entity or other similar arrangements, to and assessments, or an adjusted amount
restore the financial well-being and viability of pursuant to a compromise settlement with the
the insolvent debtor; BIR or other applicable tax authorities;
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21. Include a certified copy of a certificate of tax corporation in financing the proposed rehabilitation
clearance or evidence of a compromise plan.
settlement with the BIR;
22. Include a valid and binding resolution of a This commitment may include the voluntary
meeting of the debtor's stockholders to increase undertakings of the stockholders or the would-be
the shares by the required amount in cases investors of the debtor-corporation indicating their
where the Rehabilitation Plan contemplates an readiness, willingness, and ability to contribute
additional issuance of shares by the debtor; funds or property to guarantee the continued
23. State the compensation and status, if any, of the successful operation of the debtor-corporation
rehabilitation receiver before and after the during the period of rehabilitation. (Land Bank of the
approval of the Rehabilitation Plan; Philippines v. Fastech Synergy Philippines, Inc.,
24. Contain provisions for conciliation and mediation G.R. No. 206150, 2017)
as a prerequisite to court assistance or
intervention; The submitted commitments by the corporation
25. Include material financial undertakings or must not be identical to another corporation’s
commitments to support the Rehabilitation commitment. Submitting identical commitments
Plan; pertaining to their respective rehabilitation plan
26. Contain provisions for monitoring the negates firm assurances that could convince
implementation of the Rehabilitation Plan, creditors, future investors and the general public of
including, requiring the rehabilitation receiver its financial and operational viability. (Philippine
Bank of Communications v. Basic Polyprinters and
and/or debtor to make reports from time to time;
Packaging Corporation, G.R. No. 187581,2014)
27. Contain the manner of its implementation, giving
due regard to the interests of secured creditors Effect of Non-compliance
such as the non- impairment of their security It is well to emphasize that the remedy of
liens or interests; and rehabilitation should be denied to corporations that
28. Contain such other relevant information to do not qualify under the Rules. Neither should it be
enable a reasonable investor to make an allowed to corporations whose sole purpose is to
informed decision on the feasibility of the delay the enforcement of any of the rights of the
Rehabilitation Plan. creditors. (Land Bank of the Philippines v. Fastech
Synergy Philippines, Inc., G.R. No. 206150, 2017)
Liquidation Analysis
Liquidation analysis must be attached to the Test of Economic Feasibility
rehabilitation plan. Such failure would not allow the If the results of such examination and analysis
Court to “properly determine whether its creditors show that there is a real opportunity to rehabilitate
could recover by way of the present value of the the corporation in view of the assumptions made
payments projected in the plan than if the assets and financial goals stated in the proposed
were to be sold by a liquidator.” (MTV Klinika Health rehabilitation plan, then it may be said that a
Spa Inc. v. BDO Leasing and Finance, Inc., G.R. No. rehabilitation is feasible.
216123, 2017)
On the other hand, if the results of the financial
The liquidation analysis may include the following: examination and analysis clearly indicate that there
a. Total liquidation assets; lies no reasonable probability that the distressed
b. Estimated liquidation return to the creditors; corporation could be revived and that liquidation
c. Fair market value vis-à-vis the forced would, in fact, better subserve the interests of its
liquidation value of the fixed assets. (Land stakeholders, then it may be said that a
Bank of the Philippines v. Fastech Synergy rehabilitation would not be feasible. (Land Bank of
Philippines, Inc., G.R. No. 206150, 2017) the Philippines v. Fastech Synergy Philippines,
Inc., G.R. No. 206150, 2017)
Material Financial Commitment in a
Rehabilitation Plan Present Value Recovery as a measure of
A material financial commitment becomes Economic Feasibility:
significant in gauging the resolve, determination, Due to the suspension of payments and the
earnestness and good faith of the distressed changing value of money, it would be unfair if the
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creditor merely receives the face value of the debt (Land Bank of the Philippines v. Fastech Synergy
by the time the creditor is paid. Present value of Philippines, Inc., G.R. No. 206150, 2017)
the credit takes into account the interest that the
amount of money would have earned if the creditor Rehabilitation should not be allowed when the
were paid on time. corporation’s purpose is only to delay the
enforcement of the rights of its creditors. (MTV
Trial courts must ensure that the projected cash Klinika Health Spa Inc. v. BDO Leasing and
flow from a business' rehabilitation plan allows for Finance, Inc.,G.R. No. 216123, 2017)
the closest present value recovery for its creditors.
If the projected cash flow is realistic and allows the f. Creditor approval and
corporation to meet all its obligations, then courts confirmation
should favor rehabilitation over liquidation.
However, if the projected cash flow is unrealistic, Approval of the Rehabilitation Plan
then courts should consider converting the Within 20 days from notice to creditors and
proceedings into that for liquidation to protect the stakeholders, the creditors shall be convened for
creditors. (Viva Shippings Lines v. Keppel purposes of voting on the approval of the
Philippines Mining, G.R. No. 177382, 2016) Rehabilitation Plan. The Plan shall be deemed
rejected unless approved by all classes of
Characteristics of an economically feasible creditors. (FRIA, RA 10142, Sec. 64)
rehabilitation plan:
a. The debtor has assets that can generate The Plan is deemed to have been approved by a
more cash if used in its daily operations than class of creditors if members of the said class
if sold; holding more than 50% of the total class vote in
b. Liquidity issues can be addressed by a favor of the plan (FR Rules, Rule 2, Sec. 62)
practicable business plan that will generate
enough cash to sustain daily operations; Confirmation of Plan Notwithstanding Rejection
c. The debtor has a definite source of (Cram Down Power of the Courts)
financing for the proper and full Notwithstanding the rejection of the Rehabilitation
implementation of a Rehabilitation Plan that Plan, the court may, motu proprio or upon motion of
is anchored on realistic assumptions and any interested party within ten (10) days from notice
goals. (Viva Shippings Lines v. Keppel of the rejection of the Rehabilitation Plan, confirm
Philippines Mining, G.R. No. 177382, 2016) the Plan if all of the following circumstances are
present:
Characteristics of a rehabilitation plan that is 1. The Rehabilitation Plan complies with the
infeasible: requirements specified in the FRIA and the FR
(a) The absence of a sound and workable Rules;
business plan. 2. The rehabilitation receiver recommends the
(b) Baseless and unexplained assumptions, confirmation of the Rehabilitation Plan;
targets and goals; 3. The shareholders, owners or partners of the
(c) Speculative capital infusion or complete juridical debtor lose at least their controlling
lack thereof for the execution of the interest as a result of the Rehabilitation Plan;
business plan; and
(d) Cash flow cannot sustain daily operations; 4. The Rehabilitation Plan would likely provide the
and objecting class of creditors with compensation,
(e) Negative net worth and the assets are near which has a net present value greater than that
full depreciation or fully depreciated (Viva which they would have received if the debtor
Shippings Lines v. Keppel Philippines were under liquidation. (FR Rules, Rule 2, Sec.
Mining, G.R. No. 177382, 2016) 62)
NOTE: These characteristics indicate that the sole NOTE: The rehabilitation receiver shall submit the
purpose of the rehabilitation plan is to delay the approved Plan to the court for confirmation. Within
enforcement of any of the rights of the creditors. five (5) days from receipt of the Rehabilitation Plan,
the court shall notify the creditors that the
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Rehabilitation Plan has been submitted for made adequate provisions for paying such
confirmation. (FR Rules, Rule 2, Sec. 63) claims.
b. If the court finds that there is no substantial
NOTE: Objections by creditors may be filed 20 days likelihood that the debtor can be
from notice (FR Rules, Rule 2, Sec. 64). rehabilitated, it shall not confirm the
Rehabilitation Plan and, instead, declare a
Grounds for Objection on the Rehabilitation failure of rehabilitation.
Plan c. The court shall have the power to approve
or implement the Rehabilitation Plan
1. The creditors' support was induced by fraud; despite the lack of approval, or objection
2. The documents or data relied upon in the from the owners, partners or stockholders
Rehabilitation Plan are materially false or of the insolvent debtor: provided, that the
misleading; or terms thereof are necessary to restore the
3. The Rehabilitation Plan is in fact not supported financial well-being and viability of the
by the voting creditors. (FR Rules, Rule 2, Sec. insolvent debtor.
64) d. The order confirming the Rehabilitation
Plan shall specify the portions approved by
Creditor’s Opposition to Rehabilitation the court and the portions rejected during
If a creditor, whose interests remain well- consideration or cured by the rehabilitation
preserved under the existing rehabilitation plan, still receiver. (FR Rules, Rule 2, Sec. 66)
declines to accept interests pegged at reasonable e. The approval of the Rehabilitation Plan
rates during the period of rehabilitation, and, in shall not affect the rights of creditors to
turn, proposes rates which are largely counter- pursue separate actions against general
productive to the rehabilitation, then it may be said partners of a partnership to the extent they
that the creditor's opposition is manifestly are liable under relevant legislation for the
unreasonable. debts thereof. (FR Rules, Rule 2, Sec. 68)
f. Amounts of any indebtedness or
Opposition of a distressed corporation's majority obligations reduced or forgiven in
creditor is manifestly unreasonable if it counter- connection with a Plan's approval shall not
proposes unrealistic payment terms and conditions be subject to any tax. (FR Rules, Rule 2,
which would, more likely than not, impede rather Sec. 69)
than aid its rehabilitation. (Bank of Philippine g. Court is not bound by the report if
Islands v. Sarabia Manor Hotel Corporation, G.R. rehabilitation, in its judgment, will not be
No. 175844, 2013) viable. (MTV Klinika Health Spa Inc. v. BDO
Leasing and Finance, Inc.,G.R. No.
Confirmation of the Rehabilitation Plan 216123, 2017)
The court shall issue an order confirming the
Rehabilitation Plan in any of the following instances: g. Failure of rehabilitation
(a) No objections are filed within the twenty Cases of Failure of Rehabilitation:
(20)-day period from receipt of notice from 1. Dismissal of the petition by the court;
the court that a Rehabilitation Plan has been 2. Failure to submit a Rehabilitation Plan;
submitted to court; 3. A Rehabilitation Plan is not confirmed by the
(b) court finds the objections lacking in merit; court;
(c) The basis for the objection has been cured; 4. Under the Rehabilitation Plan submitted by the
or debtor, there is no substantial likelihood that the
(d) The debtor has complied with the order to debtor can be rehabilitated within a reasonable
cure the objection. period based on the requirements of Section 21
of the Act;
NOTE: 5. The Rehabilitation Plan or its amendment is
a. The court may confirm the Rehabilitation approved by the court but in the implementation
Plan notwithstanding unresolved disputes thereof, the debtor fails to perform its obligations
over claims if the Rehabilitation Plan has thereunder (or has committed a breach of the
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terms of the Plan) or there is a failure to realize declaring a successful implementation

the objectives, targets or goals set forth therein, of the Rehabilitation Plan or a failure of
including the timelines and conditions for the rehabilitation. (FR Rules, Rule 2, Sec. 73)
settlement of the obligations due to the creditors
and other claimants; NOTE: If the termination of proceedings is due to
6. Determination that the Rehabilitation Plan may failure of rehabilitation or dismissal of the petition for
no longer be implemented in accordance with its reasons other than technical grounds, the
terms, conditions, restrictions, or assumptions; proceedings shall be immediately converted to
7. There is a finding that fraud was committed in liquidation proceedings. (FR Rules, Rule 2, Sec.
securing the approval of the Rehabilitation Plan 74)
or its amendment; Termination of Rehabilitation Proceedings
8. In cases falling under Section 65 of this Rule, Termination of the proceedings shall result in the
where, after finding merit in the objection/s following:
raised against the confirmation of the 1. The discharge of the rehabilitation receiver
Rehabilitation Plan, the defect is not cured within subject to his submission of a final accounting;
such time as the court may order, or if the court and
determines that the debtor acted in bad faith, or 2. The lifting of the Stay Order and any other court
that it is not feasible to cure the defect; and order holding in abeyance any action for the
9. Failure of the debtor to comply with these Rules, enforcement of a claim against the debtor. (FR
the Rules of Court, or any order of the court. (FR Rules, Rule 2, Sec. 74)
Rules, Rule 2, Sec. 73)
2. PRE- NEGOTIATED
Remedies for a Breach/Failure of Rehabilitation REHABILITATION
Upon a breach of, or failure of the Rehabilitation
Plan, the court, upon motion by an affected party, a. How initiated
and after hearing, may:
1. Issue an order directing that the breach be cured Filed by: An insolvent debtor, by itself or jointly
within a specified period of time, failing which the with any of its creditors
proceedings may be converted to liquidation
proceedings; NOTE: Must be supported by a an affidavit
2. Issue an order converting the proceedings to showing the written approval/endorsement by:
liquidation proceedings; (a) Creditors holding at least 2/3 of total
3. Allow the debtor or rehabilitation receiver to liabilities of the debtor;
submit amendments whose approval shall be (b) Secured creditors holding more than 50% of
governed by the same requirements for creditor total secured claims; and
approval and court confirmation of a (c) Unsecured creditors holding more than
Rehabilitation Plan; 50% of total unsecured claims (Sec. 76,
4. Issue any other order to remedy the breach RA 10142)
consistent with the [FRIA] and [FR Rules], other
applicable law and the best interests of the NOTE: Pre-Negotiated Rehabilitation Plans, when
creditors; or approved by the court, have the same legal effect as
5. Enforce the applicable provisions of the confirmation of a judicially supervised plan. (FRIA,
Rehabilitation Plan through a writ of execution. RA 10142, Sec. 82)
Pre-Negotiated Rehabilitation Petition
Motion Termination of Rehabilitation An insolvent debtor, by itself or jointly with any of its
Proceedings creditors, may file a verified petition with the court
a. At any time from the filing of the petition, for the approval of a pre-negotiated Rehabilitation
any interested party or the rehabilitation Plan which has been endorsed or approved by
receiver may file a motion for the creditors holding at least two-thirds (2/3) of the total
termination of the proceedings. liabilities of the debtor, including secured creditors
b. After hearing the motion, the court may holding more than 50% of the total secured claims
order the proceedings terminated by either of the debtor and unsecured creditors holding more
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than 50% of the total unsecured claims of the Within 10 days from the date of the second
debtor. publication of the Order, the court shall approve the
Rehabilitation Plan unless a creditor or other
The petition shall include as a minimum: interested party submits an objection to it in
accordance with the next succeeding section.
1. Schedule of the debtor's debts and liabilities; (FRIA, RA 10142, Sec. 78)
2. Inventory of the debtor's assets;
3. The pre-negotiated Rehabilitation Plan, NOTE: There must be no verified objection to the
including the names of at least 3 qualified petition or Rehabilitation Plan filed within 8 days
nominees for rehabilitation receiver; and from the date of the second publication of the Order,
4. Summary of disputed claims against the debtor for the aforementioned approval to be made. (FR
and a report on the provisioning of funds to Rules, Rule 3, Sec. 4)
account for appropriate payments should any
such claims be ruled valid or their amounts Objections to the Pre-Negotiated Plan
adjusted. (FRIA, RA 10142, Sec. 76) Any creditor or other interested party may submit to
the court a verified objection to the petition or the
If Petition Deemed Sufficient Rehabilitation Plan not later than 8 days from the
Within five (5) working days, and after determination date of the second publication of the Order.
that the petition is sufficient in form and substance,
the court shall issue an Order which shall; The grounds for objection are limited to the
following:
1. Identify the debtor, its principal business of a. Allegations in the petition or the Rehabilitation
activity/ies and its principal place of business; Plan or the attachments thereto are materially
2. Declare that the debtor is under rehabilitation; false or misleading;
3. Summarize the grounds for the filling of the b. Majority of any class of creditors do not in fact
petition; support the Rehabilitation Plan;
4. Direct the publication of the Order in a c. The Rehabilitation Plan fails to accurately
newspaper of general circulation in the account for a claim against the debtor and the
Philippines once a week for at least 2 claim in not categorically declared as a
consecutive weeks, with the first publication to contested claim; or
be made within 7 days from the time of its d. Support of the creditors, or any of them was
issuance; induced by fraud.
5. Direct the service by personal delivery of a copy
of the petition on each creditor who is not a NOTE: Copies of any objection to the petition of the
petitioner holding at least 10% of the total Rehabilitation Plan shall be served on the debtor,
liabilities of the debtor, as determined in the the rehabilitation receiver (if applicable), the secured
schedule attached to the petition, within 3 days; creditor with the largest claim and who supports the
6. State that copies of the petition and the Rehabilitation Plan, and the unsecured creditor with
Rehabilitation Plan are available for examination the largest claim and who supports the
and copying by any interested party; Rehabilitation Plan. (FRIA, RA 10142, Sec. 79)
7. State that creditors and other interested parties
opposing the petition or Rehabilitation Plan may b. Period and effect of Approval
file their objections or comments thereto within a
period of not later than 20 days from the second Period of Approval
publication of the Order; The court shall have a maximum period of one
8. Appoint a rehabilitation receiver, if provided for hundred twenty (120) days from the filing of the
in the Plan; and petition to approve or disapprove the Pre-
9. Include a Suspension or Stay Order as Negotiated Rehabilitation Plan.
described in the FRIA. (FRIA, RA 10142, Sec. If the court fails to so act within the said period, the
77) Pre-Negotiated Rehabilitation Plan shall be deemed
approved.
Approval of the Pre-Negotiated Plan
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In such a case, the court shall certify that no action 3. OUT – OF – COURT OR INFORMAL
has been made within the one hundred twenty RESTRUCTURING AGREEMENT OR
(120)-day period and the Pre-Negotiated Plan is REHABILITATION PLAN
deemed approved. (FR Rules, Rule 3, Sec. 8)
a. Minimum requirements
Effect of Approval
Approval of the Pre-Negotiated Rehabilitation Plan 1. The debtor must agree to the out-of-court or
shall have the same legal effect as confirmation of a informal restructuring/workout agreement or
rehabilitation plan. (FR Rules, Rule 3, Sec. 9) Rehabilitation Plan;
2. Must be approved by creditors representing at
COURT-SUPERVISED PRE- least:
REHABILITATION NEGOTIATED
REHABILITATION a. 85% of total liabilities, secured and
PERIOD OF 20 days from the 120 days unsecured, of the debtor;
APPROV- date of notification from the filing b. 67% of secured obligations of the debtor;
AL and
to creditors and of the petition
stakeholders for (max) (FR c. 75% of unsecured obligations of the debtor;
examination of the Rules, Rule 3, (FRIA, RA 10142, Sec. 84)and
Rehabilitation Plan Sec. 8) 3. Publication of the notice of the OCRA once a
(FR Rules, Rule 2, week for at least three (3) consecutive weeks in
Sec. 62) a newspaper of general circulation in the
EFFECT OF Submission to the Confirmation Philippines. (FR Rules, Rule 4, Sec. 1)
APPROV- court for of
AL
confirmation of Rehabilitation b. Standstill period
Rehabilitation Plan Plan (FR
Standstill period:
(FR Rules, Rule 2, Rules, Rule 3,
a. May be agreed upon by the parties pending
Sec. 66) Sec. 9)
EFFECT OF
negotiation and finalization of the plan;
Deemed Rejected Deemed
NON- b. Shall cover not only the negotiating parties
(FR Rules, Rule 2, Approved (FR
APPROV- but also all other creditors; (FRIA, RA
Sec. 62) Rules, Rule 3,
AL 10142, Sec. 85)
Sec. 8)
Requirements:
Procedure in Pre-negotiated Rehabilitation
1. Filing of the petition by debtor (FR Rules, Rule 1. Approved by creditors representing more than
3, Sec. 1) 50% of total liabilities;
2. Issuance of Court Order (FR Rules, Rule 3, Sec. 2. Notice is published in a newspaper of general
2) circulation in the Philippines once a week for 2
3. Publication of Order and Notification of consecutive weeks; and
Creditors (FR Rules, Rule 3, Sec. 2) 3. Standstill period does not exceed 120 days
4. Verified Objection to the petition or from date of effectivity (FRIA, RA 10142, Sec.
Rehabilitation Plan (FR Rules, Rule 3, Sec. 5) 85)
5. Comments (FR Rules, Rule 3, Sec. 6)
c. Cram Down Effect
6. Hearing on Objections (FR Rules, Rule 3, Sec.
7) Requisites for the application of Cram Down
7. Approval of the Plan (FR Rules, Rule 3, Sec. 4) Power of the Courts
Notwithstanding the rejection of the Rehabilitation
Plan, the court may confirm the Plan if all of the
following circumstances are present:
1. The Rehabilitation Plan complies with the

requirements specified in the FRIA and the FR
Rules;
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2. The rehabilitation receiver recommends the whose present value projected in the plan
confirmation of the Rehabilitation Plan; would be greater than that which they would
3. The shareholders, owners or partners of the have received if the assets of the debtor
juridical debtor lose at least their controlling were sold by a liquidator within a six (6)
interest as a result of the Rehabilitation Plan; month period from the date of filing of the
and petition; and
4. The Rehabilitation Plan would likely provide the (c) The rehabilitation receiver has
objecting class of creditors with compensation, recommended approval of the plan.
which has a net present value greater than that (Victorio-Aquino v. Pacific Plans, G.R. No.
which they would have received if the debtor 193108, 2014)
were under liquidation. (FR Rules, Rule 2, Sec.
62) Effects of Confirmation of Rehabilitation Plan
Two Aspects of the Cram Down Power of The 1. The Plan and its provisions shall bind the debtor
Rehabilitation Court and all persons who may be affected thereby,
including the creditors, whether or not such
a. Approval despite opposition; and persons have participated in the proceedings or
b. Binding effect of the approved plan opposed the Plan or whether or not their claims
have been scheduled;
Cram-Down 2. The debtor shall comply with the provisions of
The power of the rehabilitation court to approve and the Plan and shall take all actions necessary to
implement a rehabilitation plan notwithstanding the carry them out;
objection of the majority of creditors. The “cram- 3. Payments shall be made to the creditors in
down” clause is necessary to curb the majority accordance with the provisions of the Plan;
creditors’ natural tendency to dictate their own terms 4. Contracts and other arrangements between the
and conditions to the rehabilitation, absent due debtor and its creditors shall remain valid and
regard to the greater long-term benefit of all continue to apply to the extent that they do not
stakeholders. Otherwise stated, it forces the conflict with the provisions of the Plan;
creditors to accept the terms and conditions of the 5. Any compromises on amounts or rescheduling
rehabilitation plan, preferring long-term viability over of timing of payments by the debtor shall be
immediate but incomplete recovery. (Bank of the binding on the creditors regardless of whether or
Philippine Islands vs. Sarabia Manor Hotel not the Plan is successfully implemented; and
Corporation, GR No. 175844, 2013) 6. Claims arising after the approval of the Plan that
are otherwise not treated by the Plan are not
This power forces the creditors to accept the terms subject to any Suspension Order. (FR Rules,
and conditions of the rehabilitation plan, preferring Rule 2, Sec. 67)
long-term viability over immediate but incomplete
recovery. (Bank of Philippine Islands v. Sarabia NOTE: A creditor whose claim is not listed in the
Manor Hotel Corporation, G.R. No. 175844, 2013) schedule of debts and liabilities and who fails to file
a notice of claim in accordance with the
NOTE: The Court may approve a rehabilitation plan Commencement Order but subsequently files a
over the objection of the creditors, if, in its judgment, belated claim shall not be entitled to participate in
the rehabilitation of the debtors is feasible and the the rehabilitation proceedings but shall be entitled to
opposition of the creditors is manifestly receive distributions arising therefrom. (FRIA, R.A.
unreasonable. R.A. 10142, Sec. 23)
The criteria for manifest unreasonableness are: C. LIQUIDATION
(a) The rehabilitation plan complies with the 1. VOLUNTARY LIQUIDATION VS.
requirements specified in Section 18 of Rule INVOLUNTARY LIQUIDATION VS.
3, A.M. No. 00-8-10-SC; CONVERSION
(b) The rehabilitation plan would provide the
objecting class of creditors with payments Voluntary Liquidation – Filed by Juridical Debtors
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Party Applicant – An insolvent debtor may apply for signed by the chairman and the secretary of the
liquidation by filing a petition for liquidation meeting
Where to file the application 3. Schedule of the debtor's debts and liabilities
RTC which has jurisdiction over its principal office including a list of creditors with their addresses,
as specified in its articles of incorporation or amounts of claims and collaterals, or securities,
partnership. Where the principal office of the if any;
corporation or partnership as registered with the 4. Inventory of all its assets including receivables
Securities and Exchange Commission (SEC) is in and claims against third parties; and
Metro Manila, the petition must be filed in the RTC 5. Schedule of current income and expenditures
Court of the city or municipality where the head within three (3) months prior to the filing of the
office is located. petition;
6. List of all properties acquired by the debtor in the
NOTE: When there is a pending court-supervised or immediately preceding two (2) years;
pre-negotiated rehabilitation proceeding, the debtor 7. List of all properties sold, disposed of, or
may file a motion in the same court where the donated by the debtor in the immediately
rehabilitation proceedings are pending to convert preceding two (2) years;
the rehabilitation proceedings into liquidation 8. Schedule of the debtor's executory contracts
proceedings. and unexpired leases;
9. Audited financial statements of the debtor for the
If the court finds the petition or motion, as the case immediately preceding three (3) years; and
may be, to be sufficient in form and substance, it 10. Income tax return of the debtor for the
shall issue the Liquidation Order. Otherwise, the immediately preceding year
court shall dismiss the petition or deny the motion.
(FLSP Rules, Rule 2, Secs. 2-3) Voluntary Liquidation – Filed by Individual Debtors
Party Applicant
Petition for Voluntary Liquidation An individual debtor whose properties are not
The petition shall be verified, shall establish the sufficient to cover his liabilities, and owing debts
insolvency of the debtor and shall indicate the exceeding Php500,000.00, may apply to be
names of at least 3 nominees to the position of discharged from his debts and liabilities by filing a
liquidator. verified petition with the court of the province or city
in which he has resided for 6 months prior to the
It shall include, as minimum attachments, the filing of such petition. (FLSP Rules, Rule 3, Sec. 11)
following:
Petition for Voluntary Liquidation
1. Certificate attesting to the holding of a meeting The petition shall indicate the names of at least 3
of the Board of Directors of a stock corporation nominees to the position of commissioner and shall
or the Board of Trustees of a non-stock include, as minimum attachments, the following:
corporation, as the case may be, called for the
purpose and the approval during the meeting of 1. Schedule of debts and liabilities, including a list
a resolution to file the petition, signed by the of creditors with their addresses, amount of
secretary of the meeting and at least a majority claims and collaterals, if any;
of the members of the Board present during the 2. Inventory of all the debtor's assets, including
meeting; receivables and claims against third parties;
2. Certificate attesting to the holding of a meeting 3. Schedule of current income and expenditures
of the stockholders, members or partners within three (3) months prior to the filing of the
comprising the debtor, as the case may be, petition;
called for the purpose and the approval during 4. Income tax return of the debtor for the
the meeting of a resolution to file the petition by immediately preceding year;
the stockholders holding at least two-thirds (2/3) 5. List of all properties acquired by the debtor in the
of the outstanding capital stock of the stock immediately preceding two (2) years;
corporation, or two-thirds (2/3) of the members 6. List of all properties sold, disposed of, or
or partners in case of a non-stock corporation, donated by the debtor in the immediately
association or partnership, as the case may be, preceding two (2) years; and
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7. Schedule of the debtor's executory contracts (c) Audited financial statements of the debtor
and unexpired leases (FLSP Rules, Rule 3, Sec. for the immediately preceding three (3)
11) years. (FLSP Rules, Rule 2, Sec. 4)
NOTE: If the court finds the petition sufficient in form NOTE: The petitioners shall post a bond in an
and substance it shall, within five (5) working days amount at least equal in value to the aggregate of
issue the Liquidation Order (FLSP Rules, Rule 3, their claims, conditioned upon payment to the debtor
Sec. 12) of all expenses and damages it may incur by reason
of the filing of the petition if the same is later denied
Involuntary Liquidation – Filed Juridical Debtors or dismissed by the court, or withdrawn by the
Party Applicant to Petition for Liquidation petitioners without the consent of the debtor. (FLSP
The applicants must be 3 or more creditors whose Rules, Rule 2, Sec. 5)
claim(s) is/are:
Involuntary Liquidation – Filed by Individual
a. At least P1,000,000.00; or Debtors
b. At least 25% of the subscribed capital stock Party Applicant
or partners’ contributions (FLSP Rules, Rule Any creditor or group of creditors with a claim of, or
2, Sec. 4) with claims aggregating at least Php500,000.00
may file a verified petition for liquidation with the
Where to file the Petition court of the province or city in which the individual
RTC which has jurisdiction over its principal office debtor resides. (FLSP Rules, Rule 3, Sec. 13)
as specified in its articles of incorporation or
partnership. Where the principal office of the Acts of Insolvency
corporation or partnership as registered with the The following shall be considered acts of insolvency,
Securities and Exchange Commission (SEC) is in and the petition for liquidation shall set forth or
Metro Manila, the petition must be filed in the RTC allege at least one of such acts:
Court of the city or municipality where the head
office is located. 1. Such person is about to depart or has departed
from the Republic of the Philippines, with intent
Petition for Involuntary Liquidation to defraud his creditors;
The motion shall be verified, shall indicate the 2. Being absent from the Republic of the
names of at least 3 nominees to the position of Philippines, with intent to defraud his creditors,
liquidator, and must show that: he remains absent;
3. He conceals himself to avoid the service of legal
(a) There is no genuine issue of fact or law on process for the purpose of hindering or delaying
the claims/s of the petitioner/s, and that the the liquidation or of defrauding his creditors;
due and demandable payments thereon 4. He conceals, or is removing, any of his property
have not been made for at least one to avoid its being attached or taken on legal
hundred eighty (180) days or that the debtor process;
has failed generally to meet its liabilities as 5. He has suffered his property to remain under
they fall due; and attachment or legal process for 3 days for the
b. There is no substantial likelihood that the purpose of hindering or delaying the liquidation
debtor may be rehabilitated (FRIA, RA or of defrauding his creditors;
10142, Sec. 91) 6. He has confessed or offered to allow judgment
in favor of any creditor or claimant for the
The petition shall also include information to the purpose of hindering or delaying the liquidation
best knowledge of the petitioners on: or of defrauding any creditors or claimant;
7. He has willfully suffered judgment to be taken
(a) The schedule of debts and liabilities, against him by default for the purpose of
including a list of its known creditors with hindering or delaying the liquidation or of
their addresses, amounts of claims and defrauding his creditors;
collaterals, or securities, if any; 8. He has suffered or procured his property to be
(b) The debtor's assets, including receivables taken on legal process with intent to give a
and claims against third parties; and
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preference to one or more of his creditors and 3. Section 75 of the FRIA or if termination of
thereby hinder or delay the liquidation or defraud proceedings is due to failure of rehabilitation or
any one of his creditors; dismissal of the petition for reasons other than
9. He has made any assignment, gift, sale, technical grounds, the proceedings shall be
conveyance or transfer of his estate, property, immediately converted to liquidation; or
rights or credits with intent to hinder or delay the 4. Section 90 of the FRIA or if during the pendency
liquidation or defraud his creditors; of court-supervised or pre-negotiated
10. He has, in contemplation of insolvency, made rehabilitation proceedings, the debtor may also
any payment, gift, grant, sale, conveyance or initiate liquidation proceedings by filing a motion
transfer of his estate, property, rights or credits; in the same court where the rehabilitation
11. Being a merchant or tradesman, he has proceedings are pending to convert the
generally defaulted in the payment of his current rehabilitation proceedings into liquidation
obligations for a period of 30 days; proceedings.
12. For a period of 30 days, he has failed, after 5. At any other time upon the recommendation of
demand, to pay any moneys deposited with him the rehabilitation receiver that the rehabilitation
or received by him in a fiduciary; and of the debtor is not feasible.
13. An execution having been issued against him on
final judgment for money, he shall have been 2. PROCEDURE
found to be without sufficient property subject to
execution to satisfy the judgment. (FLSP Rules, Motion to Convert Rehabilitation Proceedings
Rule 3, Sec. 13) into Liquidated Proceedings
At any time during the pendency of or after a
Court Action in Involuntary Liquidation rehabilitation court-supervised or pre-negotiated
a. The court shall issue an Order requiring the rehabilitation proceedings, creditors may compel a
individual debtor to show cause, at a time debtor who is undergoing rehabilitation to liquidate
and place to be fixed by the said court, why instead. The following are the requisites:
he should not be adjudged an insolvent.
(FLSP Rules, Rule 3, Sec. 15) The applicants must be made up of 3 or more
b. Upon good cause shown, the court may creditors whose claim(s) is/are:
issue an Order forbidding the individual
a. At least P1,000,000; or
debtor from making payments of any of his
b. At least 25% of the subscribed capital stock
debts, and transferring any property
or partners’ contributions
belonging to him. However, nothing
contained herein shall affect or impair the
NOTE: The motion shall be verified & shall
rights of a secured creditor to enforce his
contain/set forth the same matters mentioned in the
lien in accordance with its terms.
FLSP Rules, Sec. 4. (FLSP Rules, Rule 2, Sec. 6)
Conversion
Action on the Petition or Motion
During the pendency of court-supervised or pre-
If the petition or motion is sufficient in form and
negotiated rehabilitation proceedings, the court may
substance, the court shall issue an Order:
order the conversion of rehabilitation proceedings to
liquidation proceedings pursuant to:
1. Directing the publication of the petition or motion
in a newspaper of general circulation once a
1. Section 25(c) of the FRIA which states that
week for 2 consecutive weeks;
conversions can be done when the debtor is
2. Directing the debtor and all creditors who are not
insolvent and there is no substantial likelihood
the petitioners to file their comment on the
for the debtor to be successfully rehabilitated; or
petition or motion within 15 days from the date
2. Section 72 of the FRIA or if no Rehabilitation
of last publication; and
Plan is confirmed within 1 year from the date of
3. Directing that a copy of the petition or motion be
the filing of a petition to confirm the rehabilitation
plan, the proceedings may, upon motion or motu served on the debtor and on all known creditors,
unless they exceed 20 in number, in which case,
proprio, be converted into one for the liquidation
service shall be made on at least the first 20
of the debtor; or
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largest known creditors of the debtor in terms of a. Liquidation Order; Effects

credits held. However, if there are more than 20
known creditors (who are not petitioners) and The Liquidation Order shall:
one or more of them acquired their credit/s within 1. Declare the debtor insolvent;
the 6-month period immediately preceding the 2. Order the liquidation of the debtor and, in the
filing of the petition, the number of creditors to case of a juridical debtor, declare it as dissolved;
be served copies of the petition shall be 3. Order the sheriff to take possession and control
increased by the same number. of all the property of the debtor, except those
that may be exempt from execution;
NOTE: If, after considering the comments filed, the 4. Order the publication of the petition or motion in
court determines that the petition or motion is a newspaper of general circulation once a week
meritorious, it shall issue the Liquidation Order. for 2 consecutive weeks;
(FLSP Rules, Rule 2, Sec. 8) 5. Direct payments of any claims and conveyance
of any property due the debtor to the liquidator;
NOTE: After notice and hearing, the court where 6. Prohibit payments by the debtor and the transfer
rehabilitation proceedings are pending may also of any property by the debtor;
order the conversion of rehabilitation proceedings 7. Direct all creditors to file their claims with the
into liquidation proceedings in those cases liquidator within the period set by the rules of
authorized by law, or at any other time upon the procedure
recommendation of the rehabilitation receiver or 8. Authorize the payment of administrative
management committee that the rehabilitation of the expenses as they become due;
debtor is no longer feasible. (FLSP Rules, Rule 2, 9. State that the debtor and creditors who are not
Sec. 9) petitioner/s may submit the names of other
nominees to the position of liquidator; and
Thereupon, the court shall issue the Liquidation 10. Set the case for hearing for the election and
Order. appointment of the liquidator, which date shall
not be less than 30 days nor more than 45 days
Procedure in Filing for Liquidation from the date of the last publication. (FRIA, RA
1. Filing of Petition 10142, Sec. 112 ; FLSP Rules, Rule 4, Sec. 2)
2. Issuance of Court Order
3. Publication of Petition and Notification of Effects of the Liquidation Order
Parties Upon issuance of the Liquidation Order:
4. Filing of Comments
5. Hearing on the petition or motion 1. Juridical debtor shall be deemed dissolved and
6. Issuance of Liquidation Order its corporate or juridical existence terminated;
7. Publication of Liquidation Order 2. Legal title to and control of all the assets of the
8. Hearing debtor, except those that may be exempt from
9. Appointment of Liquidator (FLSP Rules, Rule 4, execution, shall be deemed vested in the
Sec. 9-10) liquidator or, pending his election or
10. Registry of Claims (FLSP Rules, Rule 4, Sec. appointment, with the court;
17) 3. All contracts of the debtor shall be deemed
11. Opposition or challenge to claims (FLSP Rules, terminated and/or breached, unless the
Rule 4, Sec.19) liquidator, within 90 days from the date of his
12. Submissions of disputed claims to court (FLSP assumption of office, declares otherwise and the
Rules, Rule 4, Sec. 20) contracting party agrees;
13. Submission of Liquidation Plan (FLSP Rules, 4. No separate action for the collection of an
Rule 4, Sec. 23) unsecured claim shall be allowed. Such actions
14. Implementation of the Liquidation Plan already pending will be transferred to the
15. Complete Implementation of Plan Liquidator for him to accept and settle or contest.
16. Termination of Proceedings (FLSP Rules, Rule If the liquidator contests or disputes the claim,
4, Sec. 29) the court shall allow, hear and resolve such
17. Discharge of Liquidator (FLSP Rules, Rule 4, contest except when the case is already on
Sec. 16) appeal. In such a case, the suit may proceed to
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judgment, and any final and executor judgment 2. Liquidator may sell the property and satisfy the
therein for a claim against the debtor shall be secured creditor's entire claim from the
filed and allowed in court; and proceeds of the sale; or
5. No foreclosure proceeding shall be allowed for a 3. Secure creditor may enforce the lien or foreclose
period of 180 days. (FLSP Rules, Rule 4, Sec. on the property pursuant to applicable laws.
3) (FLSP Rules, Rule 4, Sec. 7)
Effect of Liquidation Order on the Rights of The Liquidator

Secured Creditors The Liquidator is a natural person or juridical entity
The Liquidation Order shall not affect the right of a appointed as such by the court and entrusted with
secured creditor to enforce his lien in accordance such powers and duties.
with the applicable contract or law, unless he waives
his right. (FLSP Rules, Rule 4, Sec. 4) If the liquidator is a juridical entity, it must designate
a natural person who possesses all the
Options available to a secured creditor qualifications and none of the disqualifications as its
A secured creditor may: representative, it being understood that the juridical
entity and the representative are solidarity liable for
a. Waive his right under the security or lien, all obligations and responsibilities of the liquidator.
prove his claim in the liquidation (FLSP Rules, Rule 4, Sec. 8)
proceedings and share in the distribution of
the assets of the debtor; or Election of a Liquidator
b. Maintain his rights under the security or lien. The creditors entitled to vote will elect the liquidator
in open court.
NOTE: Failure to file a manifestation means that the
secured creditor is deemed to have opted to The nominee receiving the highest number of votes
maintain his right under the security or lien (FLSP cast in terms of amount of claims and who is
Rules, Rule 4, Sec. 5) qualified shall be appointed as the liquidator.
Nature of Waiver NOTE: Only creditors who have filed their claims
A secured creditor shall not be deemed to have within the period set by the court, and whose claims
waived his right under the security or lien unless the are not barred by the statute of limitations, will be
waiver is made in a public document, in unequivocal allowed to vote in the election of the liquidator.
language, and with full knowledge of the
consequences of his action. If a secured creditor A secured creditor will not be allowed to vote unless:
waives his right, he shall be entitled to participate in a. He waives his security or lien; or
the liquidation proceedings as an unsecured b. Has the value of the property subject of his
creditor. (FLSP Rules, Rule 4, Sec. 6) security or lien fixed by agreement with the
liquidator, and is admitted for the balance of
If the secured creditor maintains his rights his claim. (FLSP Rules, Rule 4, Sec. 9)
under the security or lien:
Appointment of a Liquidator
1. The value of the property may be fixed in a The court may appoint the liquidator if:
manner agreed upon by the creditor and the a. On the date set for the election of the
liquidator. When the value of the property is less liquidator, the creditors do not attend;
than the claim it secures, the liquidator may b. Creditors who attend, fail or refuse to elect
convey the property to the secured creditor and a liquidator;
the latter will be admitted in the liquidation c. After being elected, the liquidator fails to
proceedings as a creditor for the balance. If its qualify ; or
value exceeds the claim secured, the liquidator d. Vacancy occurs for any reason whatsoever,
may convey the property to the creditor and In any of the cases provided herein, the
waive the debtor's right of redemption upon court may instead set another hearing of the
receiving the excess from the creditor; election of the liquidator. (FLSP Rules, Rule
4, Sec. 10)
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reasonable to assist him in the discharge of his

Qualifications of a Liquidator duties.
The liquidator shall have the same qualifications as
the rehabilitation receiver: In addition to the rights and duties of a rehabilitation
receiver, the liquidator, shall have the right and duty
1. Citizen of the Philippines or a resident of the to take all reasonable steps to manage and dispose
Philippines in the 6 months immediately of the debtor's assets with a view towards
preceding his nomination; maximizing the proceedings therefrom, to pay
2. Good moral character and with acknowledged creditors and stockholders, and to terminate the
integrity, impartiality and independence; debtor's legal existence. Other duties of the
3. Has the requisite knowledge of insolvency and liquidator in accordance with this section may be
other relevant commercial laws, rules and established by procedural rules. (FLSP Rules, Rule
procedures, as well as the relevant training 4, Sec. 12)
and/or experience that may be necessary to
enable him to properly discharge the duties and Removal of Liquidator
obligations of a rehabilitation receiver; and The liquidator may be removed at any time by the
4. Has no conflict of interest: Provided, that such court either motu proprio or upon motion by the
conflict of interest may be waived, expressly or debtor or any creditor or creditors on any of the
impliedly, by a party who may be prejudiced following grounds:
thereby. (FLSP Rules, Rule 4, Sec. 8)
1. He did not actually receive the highest number
Powers, Duties and Responsibilities of a of votes during the election for liquidator;
Liquidator 2. Incompetence, gross negligence, failure to
The liquidator shall be deemed an officer of the court perform or exercise the proper degree of care in
with the principal duly of preserving and maximizing the performance of his duties and powers;
the value and recovering the assets of the debtor, 3. Lack of a particular or specialized competency
with the end of liquidating them and discharging to required by the specific case;
the extent possible all the claims against the debtor. 4. Illegal acts or conduct in the performance of his
The powers, duties and responsibilities of the duties and powers;
liquidator shall include, but not limited to: 5. Lack of any of the qualifications stated under
Section 8 of the FLSP Rules or presence of any
1. Sue and recover all the assets, debts and disqualification;
claims, belonging or due to the debtor; 6. Conflict of interest, unless, waived, expressly or
2. Take possession of all the property of the debtor impliedly, by a party who may be prejudiced
except property exempt by law from execution; thereby;
3. Sell, with the approval of the court, any property 7. Partiality or lack of independence; or
of the debtor which has come into his Any other ground analogous to the foregoing. (FLSP
possession or control; Rules, Rule 4, Sec. 13)
4. Redeem all mortgages and pledges, and so
satisfy any judgement which may be an Liquidation Plan
encumbrance on any property sold by him; Within 3 months from his assumption into office, the
5. Settle all accounts between the debtor and his Liquidator shall submit a Liquidation Plan to the
creditors, subject to the approval of the court; court. The Liquidation Plan shall, as a minimum
6. Recover any property or its value, fraudulently enumerate all the assets of the debtor and a
conveyed by the debtor; schedule of liquidation of the assets and payment of
7. Recommend to the court the creation of a the claims. (FLSP Rules, Rule 4, Sec. 23)
creditors' committee which will assist him in the
discharge of the functions and which shall have Properties Exempt from Liquidation
powers as the court deems just, reasonable and It shall be the duty of the court, upon petition and
necessary; and after hearing, to exempt and set apart, for the use
8. Upon approval of the court, to engage such and benefit of the said insolvent, such real and
professional as may be necessary and personal property as is by law exempt from
execution, and also a homestead.
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have fixed the value of the property subject of their

However, no such petition shall be heard as security or lien by agreement with the liquidator and
aforesaid until it is first proved that notice of the is admitted as a creditor for the balance, shall be
hearing of the application therefor has been duly considered as unsecured creditors.
given by the clerk, by causing such notice to be
posted it at least 3 public places in the province or The liquidator shall make the registry available for
city at least 10 days prior to the time of such hearing, public inspection and provide publication notice to
which notice shall set forth the name of the said creditors, individual debtors owner/s of the sole
insolvent debtor, and the time and place appointed proprietorship-debtor, the partners of the
for the hearing of such application, and shall briefly partnership-debtor and shareholders or members of
indicate the homestead sought to be exempted or the corporation-debtor, on where and when they
the property sought to be set aside; and the decree may inspect it. All claims must be duly proven before
must show that such proof was made to the being paid. (FLSP Rules, Rule 4, Sec. 17)
satisfaction of the court, and shall be conclusive
evidence of that fact. (FRIA, R.A. 10142, Sec. 130) Challenging/Opposing Claims
Within thirty 30 days from the expiration of the
Preference of Credit period for filing of applications for recognition of
General Rule: The Liquidation Plan and its claims:
Implementation shall ensure that the concurrence 1. creditors,
and preference of credits as enumerated in the Civil 2. individual debtors,
Code and other relevant laws shall be observed 3. owner/s of the sole proprietorship-debtor,
4. partners of the partnership-debtor and
Exception: Unless a preferred creditor voluntarily 5. shareholders or members of the corporation-
waives his preferred right. debtor and
6. other interested parties
NOTE: For purposes of this chapter, credits for
services rendered by employees or laborers to the May submit a challenge to claim or claims to the
debtor shall enjoy first preference under Article 2244 court, serving a certified copy on the liquidator and
of the Civil Code, unless the claims constitute legal the creditor holding the challenged claim.
liens under Article 2241 and 2242 thereof. (FLSP
Rules, Rule 4, Sec. 25) Upon the expiration of the 30 day period, the
rehabilitation receiver shall submit to the court the
Court Action upon Completion of Liquidation – registry of claims containing the undisputed claims
Removal from Registry of Legal Entries and that have not been subject to challenge. Such
Termination of Liquidation Proceeding claims shall become final upon the filling of the
Upon determining that the liquidation has been register and may be subsequently set aside only on
completed, the court shall issue an Order approving grounds or fraud, accident, mistake or inexcusable
the report and ordering the SEC to remove the neglect. (FLSP Rules, Rule 4, Sec. 19)
debtor from the registry of legal entities.
Right of Set-Off
Upon receipt of evidence showing that the debtor If the debtor and creditor are mutually debtor and
has been removed from the registry of legal entities creditor of each other, one debt shall be set off
at the SEC, the court shall issue an Order against the other and only the balance, if any, shall
terminating the proceedings. (FLSP Rules, Rule 4, be allowed in the liquidation proceedings. (FLSP
Sec. 29) Rules, Rule 4, Sec. 18)
3. DETERMINATION OF CLAIMS
Registry of Claims
Within 20 days from his assumption into office the
liquidator shall prepare a preliminary registry of
claims of secured and unsecured creditors. Secured
creditors who have waived their security or lien, or
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D. SUSPENSION OF PAYMENTS; from the date of such Order and designating the
SUSPENSION OF PAYMENT date, time and place of the meeting;
3. Directing such creditors to prepare and present
ORDER written evidence of their claims before the
scheduled creditors' meeting;
NOTE: This is only applicable for the Individual 4. Directing the publication of the said order in a
Debtor newspaper of general circulation published in
the province or city in which the petition is filed
Party Applicant once a week for 2 consecutive weeks, with the
An individual debtor who, possessing sufficient first publication to be made within seven 7 days
property to cover all his debts but foreseeing the from the time of the issuance of the Order;
impossibility of meeting them when they 5. Directing the clerk of court to cause the sending
respectively fall due, may file a verified petition that of a copy of the Order by registered mail,
he be declared in the state of suspension of postage prepaid, to all creditors named in the
payments by the court of the province or city in schedule of debts and liabilities;
which he has resides for six (6) months prior to the 6. Forbidding the individual debtor from selling,
filing of his petition. (FLSP Rules, Rule 3, Sec. 1) transferring, encumbering or disposing in any
manner of his property, except those used in the
Petition for Suspension of Payments ordinary operations of commerce or of industry
The petition shall indicate the names of at least 3 in which the petitioning individual debtor is
nominees to the position of commissioner and shall engaged so long as the proceedings relative to
include, as minimum attachments, the following: the suspension of payments are pending;
7. Prohibiting the individual debtor from making
1. Schedule of debts and liabilities, including a list any payment outside of the necessary or
of creditors with their addresses, amount of legitimate expenses of his business or industry,
claims and collaterals, if any; so long as the proceedings relative to the
2. Inventory of all the debtor's assets, including suspension of payments are pending; and
receivables and claims against third parties; 8. Appointing a commissioner to preside over the
3. Schedule of current income and expenditures creditors' meeting. (FLSP Rules, Rule 3, Sec. 2)
within three (3) months prior to the filing of the
petition; Actions Suspended by a Suspension Order
4. Income tax return of the debtor for the Upon motion filed by the individual debtor, the court
immediately preceding year; may issue an order suspending any pending
5. List of all properties acquired by the debtor in the execution against the individual debtor. Properties
immediately preceding two (2) years; held as security by secured creditors shall not be the
6. List of all properties sold, disposed of, or subject of such suspension order.
donated by the debtor in the immediately
preceding two (2) years; The suspension order shall lapse when three (3)
7. Schedule of the debtor's executory contracts months shall have passed without the proposed
and unexpired leases; and agreement being accepted by the creditors or as
8. Proposed agreement with the creditors. (FLSP soon as such agreement is denied. (FLSP Rules,
Rules, Rule 3, Sec. 1) Rule 3, Sec. 3)
Court Action in Suspension of Payments -- end of topic --
If the court finds the petition sufficient in form and
substance, it shall, within 5 working days from the
filing of the petition, issue a Suspension of
Payments Order:
1. Prohibiting creditors from suing or instituting

proceedings for collection against the debtor,
except: (i) creditors having claims for personal
labor, maintenance, expense of last illness and
funeral of the wife or children of the debtor
incurred within 60 days immediately prior to the
filing of the petition; and (ii) secured creditors;
2. Calling a meeting of all the creditors named in
the schedule of debts and liabilities at such time
not less than 15 days nor more than 40 days
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PI14B PIFA14BA1

A. BASIC CONCEPTS OF INSURANCE............................................................................................. 11

II. TRANSPORTATION LAW ............................................................................................................... 45

A. COMMON CARRIERS ............................................................................................................... 46

3. FORTUITOUS EVENT ...................................................................................................................54

A. GENERAL PRINCIPLES .............................................................................................................. 72

C. PRE-EMPTIVE RIGHT .................................................................................................................106

IV. INTELLECTUAL PROPERTY .......................................................................................................... 137

A. PATENTS .............................................................................................................................. 139

3. OWNERSHIP OF A PATENT .......................................................................................................141

V. ANTI-MONEY LAUNDERING ACT (R.A. 9160, AS AMENDED) ......................................................... 159

A. COVERED INSTITUTIONS AND THEIR OBLIGATIONS ................................................................ 160

VI. ELECTRONIC COMMERCE ACT .................................................................................................... 167

A. LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES, DOCUMENTS, AND SIGNATURES .. 168

VII. FINANCIAL REHABILITATION, INSOLVENCY, LIQUIDATION and SUSPENSION OF PAYMENTS (R.A.

A. BASIC CONCEPTS .................................................................................................................. 174

I. INSURANCE A. BASIC CONCEPTS OF INSURANCE

The fact that no profit is derived from the making

Doing or Transacting an Insurance Business Additional Requisites for Insurance Contract:

Contract of Suretyship NOTE: The presence of these five elements are

Contracts for Personal Service Distinguished 2. A Certificate of Authority to operate

Also, according to Enriquez v. Sun Life Voluntary

Contra proferentem rule (Ambiguity Doctrine) Contract of Indemnity

Construction of Insurance Contract – Types of Insurable Risks

Thus, even if the original owner of the policy 1. In Life/Health

3. INSURABLE INTEREST NOTE: A creditor may insure his debtor’s

b. Distinguishing Life From Non- As a consequence, the proscription in Civil Code,

The expectation of benefit from the continued life Beneficiary

Measure of Insurable Interest in Property

Existence of insurable interest is a matter of Change in Interest of Thing

without prejudice to the insurers ratably

DOUBLE OVER INSURANCE Insurer remains in Insurer becomes an

Suicide Clause The insurer is precluded from contesting the

Scope of Coverage Required b. The total indemnity in respect of any

The purpose of CTPL is to give immediate 2. Third Party

Individual Life or Endowment

b. Where there is an acknowledgement in a. There is a valid and binding

Reinstatement of a Lapsed Policy Riders/Endorsements

licensed intermediaries, a ninety (90)-day payment of the insurance proceeds by the

Meaning of Insured Meaning of Beneficiary

Agreement Between Applicant and Agent

Insuring Mortgaged Property Who May Insure Mortgaged Property

Duty to Communicate Waiver of Disclosure of Material Facts

insured more material (Saturnino v. Phil. Form

Where the applicant concealed the fact that he When Made

Where the insured lacked sufficient medical Misrepresentation as Affirmative Defense

In cases of rescission In cases of Generally, Should be

clause (General Insurance and Surety Corp. v.

Renewal of Non-Life Insurance

Exception: The insurer at least forty-five (45)

II. TRANSPORTATION LAW Overview of Topics Under Transportation Law

Parties to the Contract of Transportation

Carrier 2. COMMON CARRIER VS. PRIVATE

Consignee Private carriers

Person, Partnership, Firm or Corporation as a The Common Carrier Is Not an Insurer of

B. OBLIGATIONS AND LIABILITIES Other Doctrinal Pronouncements

NOTE: Do not confuse perfection of the contract of 1. VIGILANCE OVER GOODS

Conditions to Avail of Defense e. Order or act of competent

Act of the public Inspection Duties

Three-Fold Character (Purposes) (Republic of the Philippines v. Lorenzo Shipping

Period of delivery No claims shall be admitted against the Common

Claim v. Suit General Categories or Kinds of Charter Party

All expenses arising from the change of b. Time charter

Four Requisites of General Average Arrival under stress not legal