LECTURE NOTES ON CREDIT TRANSACTIONS OTHER SPECIAL

COMMERCIAL LAWS
by: atty. jonathan a. cristobal, cpa

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS has quite an

expanded subject matter. One of the covering topics is CREDIT TRANSACTIONS
namely: PLEDGE, MORTGAGE (Real and Chattel). The better title should have been
LAW ON SECURED TRANSACTIONS.

While the LAW ON PLEDGE and MORTGAGE cover Articles 2085 to 2131 of the
CIVIL CODE, only the following topics were included in the CPA Syllabus.

“1.5 CREDIT TRANSACTIONS

1.5.1 PLEDGE, REAL MORTGAGE AND CHATTEL NORTGAGE
1.5.1.1 Similarities
1.5.1.2 Requisites
1.5.1.3 Indivisibility
1.5.1.4 Pactum Comissorium
1.5.1.5 Third Party Pledgors/Mortgagors
1.5.2 Requirements to bind third parties/third persons
1.5.3 Obligations and Rights of Pledgor and Pledgee
1.5.4 Obligations and Rights of Mortgagor and Mortgagee
1.5.5 Modes of Extinguishment”

Let us start.

PROVISIONS COMMON TO PLEDGE AND MORTGAGE

“Art. 2085 of the Civil Code provides: “The following requisites are essential to
the contract of pledge and mortgage:

a. That they be constituted to secure the fulfillment of a principal obligation;

b. That the pledgor and mortgagor be the absolute owner of the thing pledged
or mortgaged;

c. That the persons constituting the pledge or mortgage have the free disposal
of their property, and in the absence thereof, that they be legally authorized
for the purpose.

Third persons who are not parties to the principal obligation may secure the
latter by pledging or mortgaging their own property.”

DISCUSSION:

(A)KINDS OF PRINCIPAL OBLIGATION that may be secured by a pledge or

mortgage. The principal obligation MUST BE A VALID OBLIGATION, as a
rule, because being an accessory contracts, pledge and mortgage OWE their
existence upon the principal obligation. Thus, a pledge or mortgage may
secure all kinds of obligation whether pure or subject to suspensive condition

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 or resolutory condition (Art. 2091) or even VOIDABLE, UNENCFORCEABLE
AND NATURAL OBLIGATIONS.

(B) That the PLEDGOR OR MORTGAGOR be the ABSOLUTE OWNER of the

THING pledged or mortgaged.

GENERAL RULE, OWNERSHIP at the time pledged or mortgaged is

constituted. Thus, a pledge/mortgage executed by an IMPOSTOR is void.
Also, a pledge or mortgage constituted on FUTURE PROPERTY IS VOID.

But note: Where the pledge/mortgage is NOT VALID or it is VOID, as where

it is executed by one who is NOT THE OWNER, the PRINCIPAL
OBLIGATION which is guarantees still subsists, it is NOT thereby rendered
null and void. The PRINCIPAL OBLIGATION shall mature and becomes
demandable in accordance with the stipulations embodied in the said
contract. The voidness of the SECONDARY CONTRACT DOES NOT VOID
THE PRINCIPAL CONTRACT.

EXCEPTION: Third persons may pledge and mortgaged their property. Thus,
it is not required for the validity of a pledge or mortgage that the debtor be
the owner of the thing pledged or mortgaged. Third persons may pledge or
mortgage their property to secure ANOTHER PERSON’S DEBT (see Art. 2085
above). However, they can be held liable to the EXTENT OF THE VALUE OF
THE PROEPRTY. With respect to mortgage, they may be held liable for any
DEFICIENCY in case of foreclosure IF THEY EXPRESSLY AGREED TO
ASSUME the principal obligation.

(C) That the persons constituting the pledge or mortgage have the free disposal
of the property, and in the absence thereof, THAT THEY LE LEGALLY
AUTHORIZED FOR THE PURPOSE. (Art. 2085).

Meaning of free disposal- Free disposal means that the property being given
in pledge or mortgage is free from claims and encumbrances.

For example, if the pledge or mortgage was constituted on the property of a

corporation under receivership, the pledge or mortgage is not valid, because
the corporation does not have the FREE DISPOSAL OF THE THING.

DEFINITION OF TERMS:

WHAT IS A PLEDGE? A pledge is an accessory contract by virtue of which the

DEBTOR or a third person DELIVERS to the CREDITOR or to a third person
MOVABLE PROPERTY as a security for the PERFORMANCE of the principal
obligation, upon fulfillment of which the thing pledged, with all its accessions and
accessories, shall be return to the debtor or to the third person.

REMEMBER this, IN PLEDGE, THAT THE THING PLEDGED BE PLACED IN

POSSESSION OF THE CREDITOR OF PLEDGEE.

WHAT IS A REAL ESTATE MORTGAGE? A real estate mortgage is a contract

embodied in a public instrument recorded in the Registry of Property, by which the

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OWNER of an IMMOVABLE (or an alienable real right imposed upon immovable)
directly and immediately subjects it, whoever the possessor may be, to the fulfillment of
the obligation for whose security it was constituted.

It is a contract in which the debtor guarantees to the creditor the fulfillment of a

PRINCIPAL OBLIGATION, subjecting for the faithful compliance therewith a REAL
PROPERTY in case of non-fulfillment of said obligation at the time stipulated.

A mortgage is regarded as nothing more than a lien, encumbrance, or security

for a debt, and passes no title or estate to the MORTGAGEE an gives him no right or
claim to the possession of the property

REMEMBER this, IN MORTGAGE, THE MORTGAGOR CONTINUES TO BE

IN POSSESSION OF THE PROPERTY.

TWO CONTRACTUAL MODES BY WHICH PERSONAL PROPERTY CAN BE USED

TO SECURE A PRINCIPAL OBLIGATION:

There are at least two contractual modes under the Civil Code by which
PERSONAL PROPERTY can be used to secure a PRINCIPAL OBLIGATION. The first is
through a CONTRACT OF PLEDGE, while the second is through a chattel mortgage.

PERSONAL PROPERTY:
(1) Contract of PLEDGE.
(2) Contract of CHATTEL MORTGAGE.

A PLEDGE would require the PLEDGOR to surrender possession of the thing

pledged, e.g. car, membership share, or any personal property to the PLEDGEE in order
that the contract of pledge may be constituted.

A CHATTEL MORTGAGE, the mortgagor WILL NOT SURRENDER

POSSESSION of the thing mortgaged, e.g. car, laptop or any personal property the
MORTGAGEE in order that the contract of chattel mortgage may be constituted.

Art. 2086: The provisions of Article 2052 are applicable to a PLEDGE OR MORTGAGEE.

In turn, Art. 2052 states: “A guaranty cannot exist without a VALID

OBLIGATION. Nevertheless, a guaranty may be constituted to guarantee the
performance of a VOIDABLE OR AN UNENFORCEBALE CONTRACT. It may also
guarantee a natural obligation.

Read case law of Central Bank of the Philippines vs. Court of Appeals and
Suplico M. Tolentino, G. R No. L-45710, October 3, 1985, pp. 379-380 of your book.

Facts: T obtained a loan from a bank in the amount of 80,000.00 A real estate
mortgage was constituted on his 100-hectare property. The bank made only a partial
release of Php 17,000.00, and did not release the remaining Php 63,000.00. However, T
was unable to re-pay his loan for the Php 17,000.00.

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 Issue: Can the Bank foreclose the 100-hectare property where T executed a real
estate mortgage?

Ruling: The Court said: “In the accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the mortgage is the existence of a VALID,
VOIDABLE OR UNENFORCEABLE DEBT. (Art. 2086 in relation to 2052)

Since the bank failed to release the Php 63,000.00 balance of the Php 80,000.00
loan, the real estate mortgage became UNENFORCEBALE to such extent. Php 63,000.00
is 78.75% of Php 80,000.00, hence the real estate mortgage covering 100 hectares is
UNENFORCEABLE to the extent of 78.75%. But the mortgage covering the remainder
of 21.25 hectares subsists as a security for the Php 17,000.00 debt, 21.25 hectares is more
than sufficient to secure a Php 17,000.00 debt.

“Art. 2087. It is also the essence of these contracts that when the PRINCIPAL
OBLIGATION becomes DUE, the THINGS in which the PLEDGE OR MORTGAGE
consists may be alienated for the PAYMENT TO THE CREDITOR.”

When the PRINCIPAL OBLIGATION becomes DUE and the DEBTOR fails to
perform his obligation, the creditor may foreclose on the pledge or mortgage of the
purpose of alienating the property to satisfy his CREDIT.

WHEN THE THING PLEDGED OR MORTGAGED MAY BE SOLD OR ALIENATED

TO PAY THE DEBT:

A. BEFORE MATURITY OF THE PRINCIPAL DEBT-the thing pledged or

mortgaged CANNOT BE SOLD OR ALIENATED since payment cannot yet
be compelled. The principal debt has not yet matured.

EXCEPTION: If the PLEDGOR OR MORTGAGOR fails to fulfill certain

conditions stated in the PRINCIPAL CONTRACT, the violation of which will
make the DEBT DUE and entitle the pledgee or mortgagee to have the thing
sold through the formalities required by law.

B. AT MATURITY OF THE PRINCIPAL DEBT- Upon default of the debtor to

pay the obligation at maturity, the thing pledged or mortgaged may be sold
or otherwise alienated to pay the creditor as provided in Art. 2087.

“Art. 2088. The creditor CANNOT APPROPRIATE THE THING GIVEN by of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is NULL AND VOID.”

The appropriation of the mortgaged/pledged properties by the

mortgagee/pledgee even if stipulated by the parties would be null and void for
being what is known as PACTUM COMMISSORIUM.

CONCEPT OF PACTUM COMMISSORIUM-is a contractual stipulation that is deemed

contrary to law. It is defined as “a stipulation empowering the creditor to appropriate
the thing given as guaranty for the fulfillment of the obligation in the event the obligor
fails to live up to his undertakings, without further formality, such as foreclosure
proceedings, and a public sale.

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 This is a stipulation in a pledge or mortgage which provides for
AUTOMATIC FORFEITURE, i.e., that ownership of the thing pledged or
mortgaged shall pass to the creditor by the mere default of the debtor.

Under the law, the creditor is allowed only to move FOR THE SALE OF
THE THING PLEDGED OR MORTGAGED after the principal obligation
becomes due, in order to collect the amount of his claims from the proceeds. The
stipulation however, that the pledgee or mortgagee may purchase the thing
pledged or mortgaged at their current price if the debt is not paid on time is
valid. The pledgee or mortgagee may also bid at the public auction of the things
pledged or mortgaged.

APPROPRIATION IN PLEDGE AND APPROPRIATION IN MORTGAGE:

1. Appropriation in pledge- is allowed only if the thing pledged is not

sold at TWO PUBLIC AUCTIONS. The pledgee is required in this case
to give an acquittance for his entire claim, as provided in Art. 2112.
2. Appropriation in mortgage- in no case is appropriation of the property
mortgaged allowed.

INTENTION OF PACTO COMMISSORIO- The prohibition against a pacto

commissorio is intended to protect the obligor, pledger or mortgagor against being
overreached by his creditor who holds a pledge or mortgage over property whose value
is much more than the debt.

Read case law of Victoria Yau Chu vs. Court of Appeals, G. R No. L-
785519, pp. 381-382 of your book.

Facts: V purchased on credit bags of cement from C CORPORATION, to secure or

guarantee the payment, she executed DEEDS OF ASSIGNMENT of her TIME
DEPOSITS maintained with BANK.
She failed to pay her debt thus C CORPORATION asked the bank to encashed the time
deposit which had been assigned by V.

Issue: Is this a PACTO COMISSORIO stipulation?

Ruling: NO. This is not a pacto commissorio stipulation. In this case the
SECURITY FOR THE DEBT IS ALSO MONEY deposited in a bank, the amount of
which is even less than the debt, it was not illegal for the creditor to encash the time
deposit certificates to pay the debtor’s overdue obligation, with the latter’s consent.

ELEMENTS OF PACTUM COMMISSORIUM: There are two (2) elements for pactum
commissorium to exists:

1. That there should be a pledge or mortgage wherein a PROPERTY is pledged

or mortgaged by way of a security for the payment of the principal obligation
and;
2. That there should be a stipulation for an AUTOMATIC APPROPRIATION by
the creditor of the thing pledged or mortgaged in the event of nonpayment of
the principal obligation within the stipulated period.

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ESSENCE OF PACTUM COMMISSORIUM- the essence of this rule is that
OWNERSHIP OF THE SECURITY WILL PASS TO THE CREDITOR by the mere default
of the debtor. This has been repeatedly declared by the Supreme Court as CONTRARY
TO MORALS AND PUBLIC POLICY.

Example: H and W obtained a loan from Spouses G and L for Php 100,000. To secure the
debt, H and W executed a DEED OF SALE of their residential house and lot covered by
TCT No. 12345. H and W failed to pay the loan at maturity causing Spouses G and L to
register the sale and obtain ownership of the house and lot. This is pactum
commissorium. The ownership of the security was transferred to the creditor upon
mere default, without the proper foreclosure proceedings.

“Article 2089. A pledge or mortgage is indivisible, even though the debt may be
divided among the successors in interest of the debtor or of the creditor.

Therefore, the debtor's heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.

Neither can the creditor's heir who received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given in
mortgage or pledge, each one of them guarantees only a determinate portion of the
credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable is
satisfied.”

INDIVISIBILITY OF PLEDGE AND MORTGAGE:

General Rule: A pledge or mortgage is INDIVISIBLE, even though the debt may
be divided among the successors in interest of the debtor or of the creditor. This rule
applies even if the debtors are jointly liable (Art. 2090).

1. INDIVISIBILITY AMONG HEIRS OF THE DEBTOR- the debtor’s heir who

has paid a part of the debt cannot ask for the proportionate extinguishment of
the pledge or mortgage as long as the debt is not completely satisfied (Art.
2089).

2. INDIVISIBILITY AMONG HEIRS OF THE CREDITOR- the creditor’s heir

who received his share of the debt cannot return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid (Art.
2089)

3. EXCEPTION: The pledge or mortgage is divisible if SEVERAL THINGS are

given in pledge or mortgage and each one of them guarantees only a
determinate portion of the credit.

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 The debtor in this case, shall have the right to the extinguishment of the
pledge or mortgage as the portion of the debt for which each thing is
answerable is satisfied.

CLASS EXERCISES: pp. 386 of your book.

“Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that
the debtors are not solidarily liable.”

Example: A and B jointly borrowed Php 50,000.00 from C. To secure the debt, A
pledged his necklace and B his ring. If A pays C Php 25,000.00, he cannot ask for the
extinguishment of the of the pledge of his necklace. Although the debtors are jointly
liable, the pledge constituted on the necklace and the ring is indivisible.

“Article 2091. The contract of pledge or mortgage may secure all kinds of obligations,
be they pure or subject to a suspensive or resolutory condition.”

PURE OBLIGATION- An obligation whose performance does not depend upon a

future or uncertain even or upon a past event unknown to the parties and which is
demandable at once, (Art. 1179). There is nothing to exempt the obligor from
compliance therewith.

CONDITIONAL OBLIGATION- An obligation where the acquisition of rights, as well

as the extinguishment of loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition, (Art. 1181).

SUSPENSIVE CONDITION-the fulfillment of the condition results in the acquisition of

rights arising out of the condition.

When the contract is subject to a suspensive condition, the birth or effectivity can
take place only if and when the event which constitutes the condition happens or is
fulfilled, and if the suspensive condition does not take place, the parties would stand as
of the conditional obligation has never existed.

RESOLUTORY CONDITION-the fulfillment of the condition results in the

extinguishment of rights out of the obligation.

“Article 2092. A promise to constitute a pledge or mortgage gives rise only to a

personal action between the contracting parties, without prejudice to the criminal
responsibility incurred by him who defrauds another, by offering in pledge or mortgage
as unencumbered, things which he knew were subject to some burden, or by
misrepresenting himself to be the owner of the same.”

A promise to constitute a pledge or mortgage gives rise only to a PERSONAL

ACTION between the contracting parties. Thus, a right of action exists to compel the
fulfillment of the promise to create or constitute the agreed pledge or mortgage.

The debtor then can be compelled by the creditor to fulfill his promise by
executing the pledge or mortgage. Until the mortgage has been executed, no real right
on the property is created. In the case of pledge, the same shall not be perfected until
the delivery of the object of the pledge.

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 Should the debtor fail to comply with his promise to constitute the pledge or
mortgage, he loses the benefit of the period. Accordingly, the creditor may demand
immediate payment, (Art. 1198)

E.g. DEBTOR borrowed Php 50,000.00 from CREDITOR. The loan is payable in
12 months. DEBTOR promise to execute a mortgage on his land within one (1) month to
secure the debt. CREDITOR accepted the promise. In this case, no mortgage has been
constituted. Thus, CREDITOR has a PERSONAL RIGHT to demand the constitution of
the mortgage. Once the mortgage has been constituted, the mortgage created a real
right in favor of CREDITOR over the land as security. But if DEBTOR does not
constitute the mortgage as agreed within one-month period, the CREDITOR may
demand immediate payment of the debt.

PLEDGE

Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary,

in order to constitute the contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common agreement.

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 In a contract of pledge, the creditor is given the right to retain his debtor’s
movable property in his possession, or in that of a third person to whom it has been
delivered, until the debt is paid.

KINDS OF PLEDGE:
1. Conventional Pledge or Voluntary- that which is constituted by the mutual
consent of the pledger and the pledgee.
2. Legal- that which is created by operation of law. Example. Articles 546, 1731
and 1994 of the Civil Code

REQUISITES OF PLEDGE:

a. That they be constituted to secure the fulfillment of a principal obligation;

b. That the pledgor be the absolute owner of the thing pledged;

c. That the person constituting the pledge have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the
purpose.

d. That the thing pledge be placed in the possession of the creditor or of a third
person by common agreement.

NECESSITY OF ACTUAL PHYSICAL DELIVERY: A pledge, being a real

contract, requires for its perfection the DELIVERY OF THE THING to the
creditor or to a third person by common agreement. The delivery required
here is ACTUAL DELIVERY.

CASE LAW: TAMBUNTING PAWNSHOP VS. COMMISSIONER OF

INTERNAL REVENUE, G.R. NO. 171138, April 7, 2009 at pp. 391 and 392 of
your book.

FACTS: A pre-assessment then later an assessment letter with the

corresponding demand letter to pay was issued by the CIR against
TAMBUNTING PAWNSHOP for the payment of DOCUMENTARY STAMP
TAX.

TAMBUNTING filed its WRITTEN PROTEST to the ASSESSMENT

contending that DST applies only to CONTRACTS OF PLEDGE under the tax
law and NOT TO PAWNSHOP TRANSACTIONS. In short, TAMBUNTING
argues that PAWNSHOP TRANSACTION are NOT PLEDGE CONTRACTS.

RULING: A pawn ticket is required to contain the same ESSENTIAL

INFORMATION that would be found in a pledge agreement. Only the
nomenclature of the requirements in the pawn ticket is changed to refer to
specific kind of pledge transactions undertaken by pawnshops. The property or
thing pledged is referred to as the PAWN, the creditor pledgee is referred to as
the PAWNEE and the debtor pledger is referred to as the PAWNEE.

A pledge is a real contract, hence, it is necessary in order to constitute the

contract of pledge, that the thing pledged BE PLACED IN THE POSSESSION OF
THE CREDITOR, or of a third person by common agreement. Thus, the issuance

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of a pawn ticket by the pawnshop means that the thing pledged has already been
placed in the possession and that the pledge has been constituted.

TAMBUNTING is liable is to pay DST.

OBJECTS OF PLEDGE

Art. 2094. All movables which are within the commerce may be pledged,
provided they are susceptible of possession.

IMMOVABLE PROPERTIES cannot be placed.

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of

lading, shares of stock, bonds, warehouse receipts and similar instruments may
also be pledged. The instrument proving the right pledged shall be delivered to
the creditor and if negotiable, must be indorse.

PLEDGE OF INCORPOREAL RIGHTS:

1. The instrument proving the right pledged shall be delivered to the
creditor.
2. If the instrument is negotiable, it must be indorsed.

FORM OF PLEDGE

Art. 2096. A pledge shall not take effect against third persons if a description of
the thing pledged and the date of the pledge do not appear in a public
instrument.

1. BETWEEN THE PARTIES- the pledge may be in any form as in fact the
mere delivery of the object is sufficient to bind the parties.

2. AS REGARDS THIRD PERSONS- to take effect against third persons,

the pledge must be in a public instrument SHOWING A
DESCRIPTION OF THE THING PLEDGED AND THE DATE OF THE
PLEDGE.

Art. 2097. With the consent of the pledgee, the thing pledge may be alienated by
the pledgor or owner, subject to the pledge. The ownership of the thing pledged
is transmitted to the vendee or transferee as soon as the pledgee consents to the
alienation, but THE LATTER SHALL CONTINUE IN POSSESSION.

The pledger retains ownership of the thing pledged. Thus, the pledgor
retains the right to alienate the thing pledged WITH THE CONSENT OF THE
PLEDGEE

E.g. D pledged his watch in favor of C in the amount of 15K. To secure his
obligation, the watch was delivered to perfect the pledge. So, if D wants to sell
the watch, it should be with the consent of C. If D sold the watch to E with the
consent of C, the sale is valid. However, the ownership of the thig pledged is
transmitted to E but C SHALL CONTINUE IN POSSESSION.

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Art. 2098. The contract of pledge gives a right to the creditor to RETAIN THE
THING IN HIS POSSESSION or in that of a third person to whom it has been
delivered, UNTIL THE DEBT IS PAID.

This article provides the right of the creditor to retain possession of the
pledged items UNTIL THE DEBT IS PAID.

Article 2099. The creditor shall take care of the thing pledged with the diligence
of a good father of a family, he has the right to the reimbursement of the
expenses made for its preservation, and is liable for its loss or deterioration, in
conformity with the provisions of this Code.

DEGREE OF CARE REQUIRED: It is ordinary diligence, the diligence of a good

father of a family. BONOS PATER FAMILIA!

Article 2100. The pledgee cannot deposit the thing pledged with a third person,
unless there is stipulation authorizing him to do so. The pledgee is responsible
for the acts of his agents or employees with respect to the thing pledged.

GENERAL RULE: The pledgee cannot deposit the thing pledged with a third
person.

EXCEPTION: There is a stipulation authorizing the pledgee to do so.

Article 2101. The pledgor has the same responsibility as a bailor in commodatum
in the case under Article 1951.

Article 2102. If the pledge earns FRUITS, INCOME, DIVIDENDS, OR

INTERESTS, the creditor shall compensate what he receives with those which are
owing him; but if none are owing him, or insofar as the amount may exceed that
which is due, he shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and earnings of the right
pledged.

In case of pledged of animals, their offspring shall pertain to the pledgor

or owner of animals pledged, but shall be subject to the pledgee, if there is no
stipulation to the contrary

E.g. D owns C Php 50,000.00 with 1% monthly interest. To secure the debt,
he delivered his XEROX MACHINE. The machine earns income. For this, C shall
compensate what he receives with those which are owing to him. If he amount
exceeds that which is due, C shall apply it to the principal of Php 50,000.00.

In case of pledged of animals, their offspring shall be included in the

pledge, except if there is a contrary stipulation.

Article 2103. Unless the thing pledged is expropriated, the debtor continues to be
the owner thereof.

Nevertheless, the creditor may bring the actions which pertain to the
owner of the thigs pledged in order to recover it from or defend it against a third
person

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Article 2104. The creditor cannot use the thing pledged, without the authority of
the owner, and if he should do so, or should misuse the thing in any other way,
the owner may ask that it be judicially or extrajudicially deposited. When the
preservation of the thing pledged requires its use, it must be used by the creditor
but only for that purpose.

RIGHTS OF THE PLEDGOR TO ASK THAT THE THING BE DEPOSITED:

1. If the creditor uses the thing without authority.
2. If the creditor should misuse the thing in any other way.

Article 2105. The debtor cannot ask for the return of the thing pledged against
the will of the creditor, unless and until he has paid the debt and its interest, with
expenses in a proper case.

The debtor cannot ask for the return of the thing pledged against the will
of the creditor unless and until he has paid the debt and its interest

Article 2106. If through negligence or willful act of the pledgee, the thing
pledged is in danger of being lost or impaired, the pledgor may require that it be
deposited with a third person.

If there is willful or neglectful act of the pledgee while in possession, the

pledgor can require the pledged items be DEPOSITED with a third person.

Article 2107. If there is reasonable grounds to fear the destruction or impairment

of the thing pledged, without the fault of the pledgee, the pledgor may demand
the return of the thing, upon offering another thing in pledge, provided the latter
is of the same kind as the former and not of inferior quality and without
prejudice to the right of the pledgee under the provisions of the following article.

The pledgee is bound to advise the pledgor, without delay, of any danger
to the thing pledged.

Article 2108. If, without the fault of the pledgee, there is danger of destruction,
impairment or diminution in value of the thing pledged, he may cause the same
to be sold at public sale. The proceeds of the same auction shall be a security for
the principal obligation in the same manner as the thing originally pledged.

REMEDY OF THE PLEDGOR- he may demand the return of the thing, upon
offering another in pledge.

REMEDY OF THE PLEDGEE- he may cause the same to be sold at public

auction.

In both cases, the pledgee is without fault.

Article 2109. If the creditor is deceived on the substance or quality of the thing
pledged, he may either claim another thing in its stead or demand immediate
payment of the principal obligation.

IN CASES OF DECEPTION ON THE SUBSTANCE OR QUALITY:

1. The pledgee may claim another thing in its stead.
2. The pledgee may demand immediate payment of the principal
obligation.

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Article 2110. If the thing pledged is returned by the pledgee to the pledgor or
owner, the pledge is extinguished. Any stipulation to the contrary shall be void.

If subsequent to the perfection of the pledge, the thing is in the possession of the
pledgor or owner, there is a prima facie presumption that the same has been
returned by the pledgee. This same presumption exists if the thing pledged is in
the possession of a third person who has received it from the pledgor or owner
after the constitution of the pledge.

E.g. D pledged his watch as security for a loan of Php 50,000.00. The loan and
pledge is for ONE MONTH. After two weeks and upon the request of D, C
returned the laptop with the agreement that the pledge will not be extinguish.

In such a case, the PLEDGE IS EXTINGUISHED. Any contrary stipulation

is void.

BUT NOTE: The extinguishment of the pledge does not mean the
extinguishment of the principal obligation.

Article 2111. A statement in writing by the pledge that he renounces or abandons

the pledge is sufficient to extinguish the pledge. For this purpose, neither the
acceptance by the pledgor or owner, nor the return of the thing pledged is
necessary, the pledgee becoming a depositary.

E.g. D pleged his mobile phone to C for the loan of Php 10,000.00. C
renounces the pledge in writing thru a letter. In this case, the pledge is
extinguish. There is no need for acceptance even the return of the thing pledged.
While the thing pledged has not been returned, C becomes the depositary.

Article 2112 The creditor to whom the credit has not been satisfied in due time,
may proceed before a Notary Public to the sale of the thing pledged. This sale
shall be made at public auction and with notification to the debtor and the owner
of the thing pledged in a proper case, stating the amount for which the public
sale is to be held. If at the first auction, the thing is not sold, a second one with
the same formalities shall be held; and if the second auction, there is no sale
either, the creditor may appropriate the thing pledged. In this case, he shall be
obliged to give an acquittance for his entire claim.

When the PRINIPAL OBLIGATION had not been paid at maturity, the
creditor may proceed with the sale by public auction by engaging the services of
a NOTARY PUBLIC.

The creditor pledgee CANNOT APPROPRIATE WITHOUT

FORECLOSURE the things given by way of pledge. Any stipulation shall be
considered pactum commissorium. The law requires foreclosure in order to
allow the transfer of title of the goods given by way of security rom its pledgor
and before any such foreclosure, the pledgor (not the pledgee) IS STILL THE
OWNER OF THE GOODS.

“Article 2113. At the public auction, the pledgor or owner may bid. He shall,
moreover, have a better right if he should offer the same terms as the highest
bidder.

13
 The pledgee may also bid, but his offer shall not be valid if he is the only
bidder.”

Under this article, the pledgor and the pledgee may bid at the public
auction. But the pledgor has a better right if he should offer the same terms as
the highest bidder. The pledgee’s offer shall not be valid if he is the only bidder.

“Article 2114. All bids at the public auction shall offer to pay the purchase price
at once. If any other bid is accepted, the pledgee is deemed to have received the
purchase price, as far as the pledgor or owner is concerned.”

“Article 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount of the
principal obligation, interest and expense in a proper case. If the price of the sale
is more than said amount, the debtor shall NOT be entitled to the excess, unless
it is otherwise agreed. If the price of the sale is less, neither shall the creditor be
entitled to recover the deficiency, notwithstanding any stipulation to the
contrary.”

The foreclosure of the thing pledged results in FULL SATISFACTION of

the LOAN LIABILITIES to the pledgee of the pledgor.

The rule is ONCE A PLEDGED ITEM IS SOLD, neither the pledgee nor
the pledgor can recover whatever deficiency or excess there may be between the
purchase price and the amount of the principal obligation.

RULES AS TO THE PROCEEDS OF THE SALE:

1. If the price of the sale is MORE THAN the amount of obligation, the
debtor shall not be entitled to the excess, unless it is otherwise agreed.
2. If the price of the sale is LESS, neither shall the creditor be entitled to
recover the deficiency, notwithstanding any stipulation to the contrary.

DIFFERENCE IN DEFICIENCY CLAIM IN MORTGAGE VS. PLEDGE:

If the proceeds of the sale are insufficient to cover the debt in an

extrajudicial foreclosure of the MORTGAGE, the MORTGAGEE is entitled to
claim the deficiency from the debtor.

When the Legislature intends to DENY the right of the creditor to sue for
any deficiency resulting from foreclosure of security given to guaramtee an
obligation, it expressly provides as in the case of PLEDGES, in Article 2115 and
in CHATTEL MORTGAGES of a thing SOLD ON INSTALLMENT BASIS, see
Article 1484 (3).

ACT NO. 3135 which governs extrajudicial foreclosure of REAL ESTATE

MORTGAGE, while silent as to the mortgagee’s right to recover, does not, on the
other hand, prohibit recovery of deficiency. Accordingly, it had been held that a
deficiency judgment arising from the extrajudicial foreclosure is allowed.

DEFICIENCY CLAIM IN CHATTEL MORTGAGE VS. PLEDGE:

The effects of foreclosure under the Chattel Mortgage law run inconsistent
with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing

14
pledged extinguishes the entire principal obligation, such that the pledgor may
no longer recover proceeds of the sale in excess of the amount of principal
obligation. Section 14 of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction of the principal
obligation and costs.

“Article 2116. After the public auction, the pledgee shall promptly advise the
pledgor or owner of the result thereof.”

“Article 2117. Any third person who has any right in or to the thing pledged may
satisfy the principal obligation as soon as the latter becomes due and
demandable.”

Article 2118. If a credit which had been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount due. He shall apply
the same to the payment of his claim, and deliver the surplus, should there be
any, to the pledgor.

E,g. X owes D the amount of Php 50,000.00 covered by a promissory note.

In turn, D pledge this credit to C to secure his own loan in the amount of Php
35,000.00. On maturity, C may collect the Php 50,000.00 from X and deliver Php
15,000.00 to D.

“Article 2119. If two or more thing are pledged, the pledgee may choose which
he will cause to be sold, unless there is a stipulation to the contrary. He may
demand the sale of only as many things as are necessary for the payment of the
debt.”

Under the law, it is the pledgee and not the pledgor who is given the
RIGHT TO CHOOSE which items should be sold if two or more things are
pledged.

“Article 2120. If a third party secures an obligation by pledging his own movable
property under the provisions of Article 2085 he shall have the same rights as a
GUARANTOR under Articles 2066 to 2070, and Articles 2077 to 2081. He is not
prejudiced by any waiver of defense by the principal obligor.”

“Article 2121. Pledges created by operation of law, such as those referred to in

Articles 546, 1731, and 1994, are governed by the foregoing articles on the
possession, care and sale of the things as well as on the termination of the pledge.
However, after payment of the debt and expenses, the remainder of the price of
the sale shall be delivered to the obligor.

Pledges created by operation of law refers to the RIGHT OF RETENTION.

“Article 2122. A thing under a pledge by operation of law may be sold only after
demand of the amount for which the thing is retained. The public auction shall
take place within one month after such demand. If, without just grounds, the
creditor does not cause the public sale to be held within such period, the debtor
may require the return of the thing.”

15
 There is only one public auction which shall take place within one month
after such demand.

“Article 2123. With regard to pawnshops and other establishments which are
engaged in making loans secured BY PLEDGES, the special laws and regulations
concerning them shall be observed, and subsidiarily, the provisions of this Title.

With regards to PAWNSHOPS and other establishments which are

engaged in making loans secured by pledges, it the special law that shall govern,
which is PD NO. 114, the PAWNSHOP REGULATION ACT, and only
subsidiarily by the provisions of the Civil Code on PLEDGE.

The property or thing pledge is referred to as the PAWN, the creditor

(PLEDGEE) is referred to as the PAWNEE, and the debtor (pledgor) is referred to
as the PAWNER.

SUMMARY:

RIGHTS OF THE DEBTOR/PLEDGOR:

1. To alienate, with the consent of the pledgee, the thing pledged. The
ownership of the thing pledged is transmitted to the vendee or
transferee as soon as the pledgee consents to the alienation, but the
pledge shall continue in possession. (Art. 2097)
2. To ask that the thing pledged be judicially or extra-judicially
deposited, if it is used without authority or for a purpose other than
for its preservation. (Art. 2104).
3. To continue to be the owner of the thing pledged unless it is
expropriated. (Art. 2103).

16
 4. To ask for the return of the thing pledged after he has paid the debt
and its interest, with its interest, with expenses in a proper case. (Art.
2105)
5. To require that the thing pledged be deposited with a third person of it
is in danger of being lost or impaired through the negligence or willful
act of the pledgee. (Art. 2106)
6. To demand the return of the thing pledged, upon offering another
thing in pledge, provided the latter is of the same kind and quality, if
there are reasonable grounds to far the destruction or impairment of
the thing pledged without the fault of the pledgee. (Art. 2107)

This right however, is without prejudice to the right of the pledgee to

have the thing sold at a public sale. The proceeds of the auction shall
be security for the principal obligation in the same manner as the thing
originally pledged. (Art. 2107, 2108)

OBLIGATIONS OF THE DEBTOR/PLEDGOR:

1. To pay the debt and its interest, with expenses in a proper case, when
they are due (Art. 2105)
2. To pay damages that the pledgee may suffer by reason of the flaws of
the thing pledged, if he was aware of such flaws but did not advise the
pledgee of the same. (Art. 1951, 1201)

RIGHTS OF THE CREDITOR/PLEDGEE:

1. To retain in his possession the thing pledged until the debt is paid.
(Art. 2098)
2. To demand reimbursement of the expenses made for the preservation
of the thing pledged. (Art. 2099)
3. To bring actions which pertain to the owner of the thing pledged in
order to recover it from, or defend it against, third persons. (Art. 2103)
4. To use the thing pledged if he is authorized to do so, or when its use is
necessary for the preservation of the thing. (Art. 2104)
5. If he is deceived of the substance of the thing pledged, he may:
a. Claim that another thing be given to him in place of the thing
pledged, or
b. Demand immediate payment of the principal obligation. (Art.
2109)
6. To cause the sale of the thing pledged at a public sale, if there is a
danger of destruction, impairment or diminution in value of the thing
pledged without his fault.

The proceeds of the auction shall be security for the principal

obligation in the same manner as the thing originally pledged. (Art.
2108)

7. To collect and receive the amount due if the thing pledged is a credit
which has become due before it is redeemed, and to apply the same to
the payment of his claim. He shall apply what he has collected to the
payment of his claim, and deliver the surplus, should there be any, to
the pledgor. (Art. 2118)
8. To sell he thing pledged upon default of the debtor. (Art. 2087)

17
OBLIGATIONS OF THE CREDITOR/PLEDGEE:

1. To take care of the thing pledged with the diligence of a good father of
a family. (Art. 2099)
2. To be liable for the loss or deterioration of the thing pledged unless it
is due to fortuitous event. (Art. 2099)
3. Not to deposit the thing pledged with a third person, unless
authorized. (Art. 2100)
4. To be responsible for the acts of his agents or employees with respect
to the thing pledged. (Art. 2100)
5. Not to use the thing pledged, except:
a. When he is authorized by the owner.
b. When the use of the thing is necessary for its preservation.
6. To deliver to the debtor the surplus after paying his claim from what
he has collected on a credit that was pledged and which has become
due before it is redeemed.

RIGHTS OF A THIRD PERSON WHO PLEDGES HIS OWN MOVABLE

PROPERTY TO SECURE DEBT OF ANOTHER:

1. To be indemnified by the debtor if he pays the creditor. The indemnity

consist of the following:

a. The total amount of the debt.

b. The legal interest thereon from the time payment was made known
to the debtor, even though it did not earn interest for the creditor.
c. The expenses incurred by the debtor after having been notified the
debtor that payment had been demanded of him.
d. Damages, if they are due. (Art. 2066, 2120)

2. To be subrogated to all the rights of the creditor against the debtor if

he pays the creditor. (Art. 2067, 2120)

The pledgor is considered a third person interested in the

fulfillment of the obligation, hence, he is entitiled to be subrogated
to the creditor’s rights upon payment. (Art. 1236 and 1302).

E.g. D obtained a loan pf Php 10,000.00 from C. The debt is secured

by the guarantee of G and the pledge by T of his ring.

If T pays C, T steps into the place of C. Thus, T can demand the

indemnification mentioned in No. 1 above from D. If D cannot pay,
T can go after G.

3. To be released from liability in the following cases:

a. If the creditor voluntarily accepts the immovable or other

property in payment of the debt even if the creditor thereafter
loses the same by eviction (Art. 2077, 2120)

E.g. D borrowed Php 50,000.00 from C. The debt is secured by a

pledge of T’s ring. On due date, C accepted a parcel of land
from D in payment of the debt. T can demand that he be

18
 released from the pledge. T shall be released even if later, C
should lose the lot by eviction in case there is a rightful owner.

NOTE: The acceptance by the creditor of a property in payment

of the debt is in the nature of a dacion en pago.

b. If an extension of time is granted to the debtor by the creditor

without his (pledgor’s) consent. (Art. 2079, 2080).

c. If through some act of the creditor, the pledge cannot be

subrogated to the rights, mortgages and preferences of the
creditor. (Art. 2080, 2120)

Thus, if in the example No. 2, C cancels G’s guarantee, T is

released from liability because if T pays C, T can no longer go
after G if D cannot pay the indemnification due to him (T).

EXTINGUISHMENT OF PLEDGE:

PLEDGE may be extinguished directly or indirectly:

1. INDIRECT CAUSE- When the principal obligation secured by the

pledge is extinguish, the pledge, being merely an accessory contract is
likewise extinguished.

Any third person who has any right in or to the thing pledged may
satisfy the principal obligation as soon as the latter becomes due and
demandable.

Example: D owes C Php 50,000.00. The debt is secured by a pledge of

D’s wristwatch. If D pays C Php 50,000.00, the debt is extinguished
together with the pledge.

2. DIRECT CAUSES- Pledge may be extinguished directly as follows:

a. RETURN by the pledgee of the thing pledged to the pledgot or
owner.
1. Any stipulation that the pledge is not extinguished by the
return of the thing is void.
2. Prima facie presumption that the pledgee returned the thing
pledged:
a. If the thing pledged is found in the possession of the
pledgor or owner.
b. If the thing pledged is in the possession of a third person
who has received it from the pledgor or owner. (Art. 2110)

b. RENUNCIATION OR ABANDONMENT in writing by the pledgee

of the pledge:
a. The acceptance by the pledgor or owner of the renunciation,
or return of the thing pledged, is not necessary for such mode of
extinguishing pledge.
b. The pledgee becomes a depositary upon renunciation (Art.
2111) if in the meantime, the thing pledged is not yet returned
to the owner.

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 c. SALE OF THE THING PLEDGED:

1. FORMALITIES OF THE SALE- The sale shall be:

a. By public auction,
b. Through a Notary Public,
c. With notice to the debtor and the owner of the thing
pledged, stating the amount for which the public sale is
to be held (Art. 2112)

2. WHO MAY BID AT THE PUBLIC AUCTION-

a. The pledgor or owner- he shall be preferred if he should
offer the same terms as the highest bidder.
b. The pledgee- however, his offer shall not be valid if he is
the only bidder (Art. 2113)
c. Third persons.

3. REQUIRED AMOUNT OF BIDS- All bids shall offer to pay the

PURCHASE PRICE AT ONCE. If any other bid is accepted, the
pledgee is deemed to have received the purchase price, as far as
the pledgor or owner is concerned. (Art. 2114)

4. EFFECTS OF SALE- The principal obligation shall be

extinguished whether or not the proceeds of the sale are equal
to the amount of the principal obligation, interest and expenses
in a proper case. (Art. 2115)

a. If the price or more than the amount of the obligation, the

debtor shall not be entitled to the excess, UNLESS THERE IS
AN AGREEMENT TO THAT EFFECT.
b. If the price is less, the creditor cannot recover EVEN IF
STIPULATED.

5. RULE WHEN TWO OR MORE THINGS ARE PLEDGED- the

pledgee may choose which he will cause to be sold, unless there
is a contrary stipulation. He may demand the sale of only as
many of the things as are necessary for the payment of the debt.
(Art. 2119)

d. APPROPRIATION OF THE THING PLEDGED- If the thing pledged is

NOT sold in the first and second public auctions, the creditor may
appropriate the thing pledged. In this case, he shall be obliged to give an
ACQUITTANCE for his entire claim. (Art. 2112)

LEGAL PLEDGE

CONCEPT: Legal Pledge or pledge by operation of law refers to the

RIGHT OF A PERSON TO RETAIN A THING until he receives the
payment of his claim.

EXAMPLES:
1. POSSESSORY LIEN BY A POSSESSOR IN GOOD FAITH- a
possessory lien in good faith may retain the movable upon which he

20
 has incurred necessary and useful expenses until he has been
reimbursed therefor. (Art. 546)
2. Possessory lien of worker- He who has executed a work upon a
movable has a right to retain it by way of pledge until he is paid )Art.
1731)
3. Depositary’ right of retention- the depositary may retain the thing
deposited until the full payment of what may have been due him by
reason of the deposit (Art. 1994).

RULES APPLICABLE TO LEGAL PLEDGES: The provisions on

conventional pledge on the possession, care and SALE of the thing as well
as on the TERMINATION of pledge shall be applicable to legal pledge
except to the sale of the thing pledged as follows:

1. The thing may be sold only after demand of the amount for
which the thing is retained.
2. The public auction shall take place within one month after such
demand.
3. If without just grounds, the creditor does not cause the public
sale TO BE HELD WITHIN SUCH PERIOD, the debtor may
require the return of the thing. (Art. 2122)
4. After the payment of debt and expenses, the remainder of the
price of sale shall be delivered to the OBLIGOR.

SPECIAL LAWS ON PAWNSHOPS AND SIMILAR ESTABLISHMENT-

PAWNSHOPS and other establishments engaged in making loans secured
by pledges shall be governed primarily by the SPECIAL LAWS AND
REGULATONS concerning them, and subsidiarily by the provisions of
pledge in the Civil Code. (Art. 2123).

MORTGAGE:

CONCEPT OF MORTGAGE: It is a contract in which the debtor guarantees to

the creditor the fulfillment of a PRINCIPAL OBLIGATION, subjecting for the
faithful compliance therewith a REAL PROPERTY in case of non-fulfillment of
the said obligation at the time stipulated.

The essence of a mortgage contract is that a property has been set apart
from the mass of property of the debtor mortgagor as a security for the fulfilment
in case of default of payment.

REQUISITES OF REAL ESTATE MORTGAGE:

1. That it be constituted to secure the fulfillment of a principal obligation;

2. That the mortgagor be the absolute owner of the thing pledged or

mortgaged;

3. That the person constituting the mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for
the purpose.

21
 4. That the document in which the mortgage appears be recorded in the
Registry of Property. (Art. 2125)

This requirement is necessary to BIND THIRD PERSONS but NOT for

validity of the real mortgage which may be entered into in any form.

CHARACTERISTICS OF REAL MORTGAGE:

1. ACCESSORY- because it cannot exist without a principal obligation.

2. INDIVISIBLE- because it creates a lien on the whole or all of the
properties mortgaged, which lien continues until the obligation it
secures has been fully paid.
3. INSEPARABLE- because it SUBJECTS THE PROPERTY UPON
WHICH IT IS IMPOSED, whoever the possessor may be, to the
fulfillment for whose security is was constituted. (Art. 2126)

E.g. D obtained a loan from C amounting to Php 1M. To secure the

debt, D constituted a mortgage on his lot which C registered with the
Register of Deeds. Before the due date of the loan, D sold the lot to X
who knew nothing of the mortgage. If D later defaults in the payment
of his loan, C can foreclose the mortgage although X was not a party
thereto and even if he was not aware of the existence of the mortgage
at the time he purchased the lot.

4. REAL RIGHT- because it creates a lien on the property mortgaged

whereby the mortgagee has a right to have the mortgaged property
sold to satisfy his claim.
5. REAL PROPERTY- because it is a real right over immovable property.

KINDS OF REAL MORTGAGE:

1. Voluntary or Conventional- it is created by the agreement of the

parties.
2. Legal- it is required by law.

3. Equitable Mortgage- one which reveals an intent to make the property

as security, even if the contract lacks the proper formalities of a real
estate mortgage.

“Article 2124. Only the following property may be the object of a contract of

mortgage:

(1) Immovables;

(2) Alienable real rights in accordance with the laws, imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage.”

OBJECT OF MORTGAGE:

22
 1. Immovables, see Art. 415 of the Civil Code for the enumeration of
what is an immovable.

“Article 415. The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the
soil;

(2) Trees, plants, and growing fruits, while they are attached to the
land or form an integral part of an immovable;

(3) Everything attached to an immovable in a fixed manner, in such a

way that it cannot be separated therefrom without breaking the
material or deterioration of the object;

(4) Statues, reliefs, paintings or other objects for use or ornamentation,

placed in buildings or on lands by the owner of the immovable in such
a manner that it reveals the intention to attach them permanently to
the tenements;

(5) Machinery, receptacles, instruments or implements intended by the

owner of the tenement for an industry or works which may be carried
on in a building or on a piece of land, and which tend directly to meet
the needs of the said industry or works;

(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding

places of similar nature, in case their owner has placed them or
preserves them with the intention to have them permanently attached
to the land, and forming a permanent part of it; the animals in these
places are included;

(7) Fertilizer actually used on a piece of land;

(8) Mines, quarries, and slag dumps, while the matter thereof forms
part of the bed, and waters either running or stagnant;

(9) Docks and structures which, though floating, are intended by their
nature and object to remain at a fixed place on a river, lake, or coast;

(10) Contracts for public works, and servitudes and other real rights
over immovable property.”

2. Alienable real rights in accordance with laws, imposed on immovable.

“Article 2125. In addition to the requisites stated in article 2085, it is

indispensable, in order that a mortgage may be validly constituted, that the
document in which it appears be recorded in the Registry of Property. If the
instrument is not recorded, the mortgage is nevertheless binding between the
parties.

The persons in whose favor the law establishes a mortgage have no other right
than to demand the execution and the recording of the document in which the
mortgage is formalized.”

23
 Under this Article, if the mortgage is not recorded in the Registry of
Deeds, it is not effective against third parties. However, the mortgage is
nevertheless binding between the parties.

REGISTRATION only operates as a NOTICE TO THE WHOLE WORLD

on the existence of the mortgage to others, but neither adds to its validity nor
convert an invalid mortgage into a valid one between the parties.

FORM OF REAL MORTGAGE:

1. BETWEEN THE PARTIES- the real estate mortgage may be in any

form since it is a consensual contract. The contract is binding between
the parties even if not registered in the Registry of Property.

However, since a real mortgage creates a real right, the same must be
in a public instrument for the convenience of the parties (Art. 1358).
The person in whose favor the law establishes a mortgage have no
other recourse other than to demand the execution and the recording
of the document in which the mortgages is formalized. (Art. 2125)

2. AS REGARDS THIRD PERSONS- the real mortgage must be recorded

in the Registry of Property. (Art. 2125). However, the real mortgage is
nevertheless binding against third persons who have knowledge of the
same.

DIFFERENCE BETWEEN PLEDGE AND MORTGAGE:

1. In RM, it is constituted on IMMOVABLES, in PLEDGE, it is constituted on

MOVABLES.
2. In RM, DELIVERY is not required. In PLEDGE, property is delivered to the
pledgee or by common agreement, to a third person.

3. In RM, it is not valid against third persons, unless it is registered. In PLEDGE,

it is also NOT VALID as to third persons unless a description of the thing
pledged and the date of pledge appear in a public instrument.

“Article 2126. The mortgage directly and immediately subjects the property

upon which it is imposed, whoever the possessor may be, to the fulfillment of
the obligation for whose security it was constituted.”

EFFECTS OF MORTGAGE:

1. It creates a REAL RIGHT. The mortgage directly and immediately

subjects the property upon which it is imposed, whoever the possessor
may be, to the fulfilment of the PRINCIPAL OBLIGATION whose
security it was constituted.

Thus, even if the mortgagor sells the mortgaged property, the property
REMAINS subject to the fulfillment of the obligation secured by it.

24
 2. It creates an ENCUMBRANCE. A mortgage is merely a security for a
debt and an encumbrance upon the property. It does not extinguish
the title of the debtor who remains an owner.

The only right of the MORTGAGEE in case of non-payment of a debt

secured by a mortgage would be to FORECLOSE THE MORTGAGE
and have the encumbered property sold to satisfy outstanding
obligation.

These two (2) effects is applicable even if the mortgagor is NOT THE
PRINCIPAL DEBTOR.

“Article 2127. The mortgage extends to the natural accessions, to the

improvements, growing fruits, and the rents or income not yet received when the
obligation becomes due, and to the amount of the indemnity granted or owing to
the proprietor from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person.”

EXTENT OF MORTGAGE:

1. Natural accessions.
2. Improvements.

3. Growing fruits.

4. Rents or income not yet received when the obligation.

5. Amount of indemnity granted or owing to the proprietor from:

a. The insurers of the property mortgaged.

b. Expropriation for public use.

The ownership of such ACCESSIONS AND IMPROVEMENTS

subsequently introduced BELONGS TO THE MORTGAGOR, who is still
the owner of the property.

“Article 2128. The mortgage credit may be alienated or assigned to a third

person, in whole or in part, with the formalities required by law.”

The mortgage credit, being a REAL RIGHT, may be alienated (SOLD) OR

ASSIGNED to a third person. The assignment even if it is not registered is valid
between the parties, however, registration is needed to affect third persons.

“Article 2129. The creditor may claim from a third person in possession of the
mortgaged property, the payment of the part of the credit secured by the
property which said third person possesses, in the terms and with the formalities
which the law establishes.”

25
 E.g. D mortgaged his LAND to C, to secure his loan of Php 1M.
Thereafter, D sold the LAND to X. On maturity date of the loan, C will demand
payment from D, so that if D cannot pay, the remedy of C is to FORECLOSE THE
MORTGAGE.

In the alternative, C may claim from X the payment of the credit secured
by the property.

“Article 2130. A stipulation forbidding the owner from alienating the immovable
mortgaged shall be void.”

E.g. D mortgaged his land to C. They agreed that D is prohibited from

selling the land during the mortgage period. What is the status of the stipulation?
It is VOID, being contrary to Art. 2130.

“Article 2131. The form, extent and consequences of a mortgage, both as to its

constitution, modification and extinguishment, and as to other matters not
included in this Chapter, shall be governed by the provisions of the Mortgage
Law and of the Land Registration Law”.

FORECLOSURE: It is the remedy available to the mortgagee by which he

subjects the mortgaged property to the satisfaction of the obligation to secure
that for which the mortgage was given.

WHEN TO FORECLOSE:

1. When the principal obligation is not paid when due; and

2. When the debtor has violated the terms and conditions of the
mortgage contract.

WHO CAN FORECLOSE: The mortagee or his assigns.

KINDS OF FORECLOSURE:

1. JUDICIAL- it is the ordinary action for foreclosure under Rule 68 of the

Rules of Court. It is based on a personal claim against a specific
property of the mortgagor.

a. If the defendant fails to pay the amount due within the time
directed by the Court, the property shall be sold.

b. The proceeds of sale shall be distributed as follows:

b.1 The cost/expenses of sale.

b.2 Claim of the person foreclosing the mortgage.

b.3 Claims of junior encumbrancers in the order of priority.

b.4 BALANCE, after the above are paid, shall be given to the
MORTGAGOR.

c. The mortgagee is specifically given the right to claim for

DEFICIENCY, if the proceeds of sale is insufficient.

26
 2. EXTRA-JUDICIAL- It is when a mortgagee is given a special power of
attorney to sell the mortgaged property by public auction under Act
3135:

a. Where there is a stipulation in the mortgage contract that the

mortgage may be foreclosed extra-judicially.

b. Where such extra-judicial foreclosure sale is made under a special

power of attorney inserted in the contract

DISTRIBUTION OF PROCEEDS OF SALE:

a. Same as in judicial foreclosure as above enumerated.

RECOVERY OF DEFICIENCT:

Aa. A deficiency claim is also allowed by filing a court action.

EFFECT OF INADEQUACY OF PRICE IN FORECLOSURE SALE:

General Rule: When there is RIGHT TO REDEEM, inadequacy of price is

immaterial, because the judgment debtor may RE-ACQUIRE THE PROPERTY
easier at a low price or sell his right to redeem.

Exception: When the price is SO INADEQUATE as to shock the

conscience of the Court taking into the consideration the peculiar circumstance
attending the sale.

REDEMPTION:

CONCEPT: A transaction through which the mortgagor or one claiming in his

right, by means of payment or the performance of the condition, reacquires or
BUYS BACK THE VALUE OF THE TITLE which may have passed under the
mortgage, or divests the mortgaged premises of the lien which the mortgaged
may have created.

KINDS OF REDEMPTION:

1. EQUITY OF REDEMPTION- this refers to the right of the mortgagor to

redeem the mortgaged property after his default in the performance of
the obligation BUT BEFORE THE PROEPRTY IS SOLD.

a. In JUDICIAL FORECLOSURE- the mortgagor is given not less than

90 days to pay the mortgage debt before the property is sold.

b. In EXTRA-JUDICIAL FORECLOSURE- the mortgagor may avail

himself of this right after his default but before the sale of the
property.

2. RIGHT OF REDEMPTION- this refers to the right of the mortgagor to

REPURCHASE the property within a certain period after it was sold
for the payment of the mortgaged debt.

27
 a. In JUDICIAL FORECLOSURE- the mortgagor may redeem the
property after the sale and before the confirmation by the court of
the sale.

b. In EXTRA-JUDICIAL SALE- the mortgagor has one year from the

date of sale to redeem the property.

CHATTEL MORTGAGE

WHAT IS A CONTRACT OF CHATTEL MORTGAGE: A contract where

personal property is recorded in the Chattel Mortgage Register, as a SECURITY
FOR THE PERFORMANCE OF A PRINCIPAL OBLIGATION.

REQUISITES OF CHATTEL MORTGAGE:

1. That it be constituted to secure the fulfillment of a principal obligation;

2. That the mortgagor be the absolute owner of the thing pledged or

mortgaged;

3. That the person constituting the mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for
the purpose.

28
 4. That the document in which the mortgage appears be recorded in the
Chattel Mortgage Register (Art. 2140)

This requirement is necessary FOR THE VALIDITY OF THE CHATTEL

MORTGAGE SINCE REGISTRATION is part of the definition of the
contract.

“Article 2140. By a chattel mortgage, personal property is recorded in the Chattel

Mortgage Register as a security for the performance of an obligation. If the
movable, instead of being recorded, is delivered to the creditor or a third person,
the contract is a pledge and not a chattel mortgage.”

“Article 2141. The provisions of this Code on pledge, insofar as they are not in
conflict with the Chattel Mortgage Law shall be applicable to chattel mortgages.”

OBJECT OF CHATTEL MORTGAGE: Only personal property may be the

object of a chattel mortgage. The following things are deemed personal property.

1. Those movables susceptible of appropriation which are not included in the

list of immovable in Art. 415.
2. Real property which by any provision of law is considered personalty. E.g.
Sec. 6 of the Chattel Mortgage Law, a chattel mortgage can be executed on
GROWING CROPS which under Art. 415 of the Civil Code are real property.

3. Forces of nature which are brought under the control of science.

4. In general, all things which can be transported from place to place without
impairment of the real property to which they are fixed. (Art. 416 Civil Code)

5. Obligations and actions which have for their objects movables or demandable
sums.

6. Shares of stock of agricultural, commercial and industrial entities, although

they may have real estate.

FORM OF CHATTEL MORTGAGE:

1. BETWEEN THE PARTIES: The mortgage MUST be RECORDED in the

Chattel Mortgage Register of the province where the mortgagor resides
and also of the province where the property is located, if it is different
from the residence of the mortgagor.

If the mortgagor is domiciled OUTSIDE THE PHILIPPINES, the

mortgage must be registered in the Chattel Mortgage Register of the
province where the property is located (ACT 1508, CHATTEL
MORTGAGE LAW)

The above REGISTRATION IS REQUIRED FOR THE VALIDITY OF THE

CHATTEL MORTGAGE between the parties. (STANDARD OIL VS.
JARAMILLO, 44 PHIL 530).

29
 PLACE OF REGISTRATION:

A. Motor Vehicles- Chatel Mortgage Register and LTO.

B. Shares of Stock- Chattel Mortgage Register in the place where the
corporation has its principal office and in the domicile of the
mortgagor, unless their domicile is the same, in which case a single
transaction is sufficient.

C. Vessels- Office of the Collector of Customs as the port of entry.

2. AS REGARDS THIRD PERSONS: An affidavit of good faith must be

appended in the DEED OF CHATTEL MORTGAGE and
RECORDED/REGISTERED IN THE CHATTEL MORTGAGE REGISTER.

AFFIDAVIT OF GOOD FAITH: It is an oath in case of contract of chattel

mortgage wherein the parties “SEVERALLY SWEAR that the mortgage contract
is made for the purpose of securing the obligation specified in the conditions
thereof and for no other purposes and that the same is a JUST AND VALID
OBLIGATION and one not entered into for the purpose of FRAUD.

The absence of an AFFIDAVIT OF GOOD FAITH makes the chattel

mortgage VALID ONLY AS BETWEEN THE PARTIES.

EFFFECT OF REGISTRATION: The registration of the chattel mortgage is an

EFFECTIVE AND BINDING NOTICE to the other creditors of its existence and
creates a real right or a lien which, being recorded, follows the chattel mortgage
wherever it goes. The registration gives the chattel mortgagee SYMBOLIC
POSSESSION.

CHATTEL MORTGAGE VS. REAL ESTATE MORTGAGE:

1. In CM, it is constituted on MOVABLES. In REM, it is constituted on

IMMOVABLES.
2. CM cannot guarantee FUTURE OBLIGATIONS. In REM, it may guarantee
future obligations.

CHATTEL MORTGAGE VS. PLEDGE

1. In CM, delivery is not essential element of the contract. In PL, delivery is an

essential element of the contract.
2. In case of foreclosure of CM, the excess of the amount due goes to the debtor.
In case of foreclosure in PL. the debtor is NOT entitled to the excess unless it
is otherwise agreed.
3. In case of foreclosure of CM, the creditor is entitled to recover the deficiency
from the debtor, except if the chattel mortgage is a security for the purchase
of personal property in installments. In case of foreclosure of PL, the creditor
is NOT entitled to recover deficiency notwithstanding any stipulation to the
contrary.

FORECLOSURE OF CHATTEL MORTGAGE: If the mortgagor defaults in the

payment of the PRINCIPAL OBLIGATION OR OTHERWISE FAILS TO
COMPLY WITH THE CONDITIONS OF THE MORTGAGE, the creditor has no

30
right to appropriate to himself the personal property because he is permitted
only to RECOVER HIS CREDIT FROM THE PROCEEDS OF THE SALE OF THE
PROPERTY AT A PUBLIC AUCTION.

a. GROUNDS FOR FORECLOSURE:

1. When the principal obligation is not paid when due.
2. When there is any violation of any condition, stipulation or
warranty by the mortgagor.

b. KINDS OF FORECLOSURE:
1. JUDICIAL FORECLOSURE- this is foreclosure made by instituting
a court action, following the provisions of the CHATTEL
MORTGAGE LAW as far as practicable.
2. EXTRA-JUDICIAL FORECLOSURE- this is foreclosure following
the provisions of the CHATTEL MORTGAGE LAW. Instituting a
court action is necessary only to secure possession of the thing
PREPARATORY TO EXTRAJUDICIAL FORECLOSURE if the
debtor refuses to deliver the thing.

c. FORECLOSURE SALE- the proceeds of the sale shall be distributed as

follows:

1. Costs and expenses of keeping the property and its sale.

2. Payment of the obligation secured by the mortgage.
3. Claims of persons holding subsequent mortgages in their order
and;
4. The balance if any, shall be paid to the mortgagor or person
holding under him

d. RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY:

General rule: The creditor mortgagee may maintain an action for

deficiency as the chattel mortgage is only given as a security and not as
payment for the debt in case of failure of payment.

Exception: Where the chattel mortgage is constituted as security for

the purchase of property payable in installments (see Art. 1484). In this
case, there is no deficiency judgment and any contrary stipulation is
void.

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 SPECIAL LAWS INCLUDED IN THE CPA SYLLABUS STARTING
OCTOBER 2022 LICENSURE EXAMINATION:

“2.0 BOUNCING CHECKS 2%

2.1 Discuss and apply the requisites to be liable under BP 22
2.1.1 Checks with insufficient funds
2.1.2 Evidence of Knowledge of insufficient funds
2.1.3 Duty of the Drawer
2.1.4 Credit Construes
2.2 Compare Bouncing Checks with Estafa (Art. 315 (2) (c)”

“BATAS PAMBANSA BLG. 22

AN ACT PENALIZING THE MAKING OR DRAWING AND ISSUANCE OF A

CHECK WITHOUT SUFFICIENT FUNDS OR CREDIT AND FOR OTHER
PURPOSES.

32
Section 1. Checks without sufficient funds. - Any person who makes or draws and issues
any check to apply on account or for value, knowing at the time of issue that he does
not have sufficient funds in or credit with the drawee bank for the payment of such
check in full upon its presentment, which check is subsequently dishonored by the
drawee bank for insufficiency of funds or credit or would have been dishonored for
the same reason had not the drawer, without any valid reason, ordered the bank to
stop payment, shall be punished by imprisonment of not less than thirty days but not
more than one (1) year or by a fine of not less than but not more than double the
amount of the check which fine shall in no case exceed Two Hundred Thousand Pesos,
or both such fine and imprisonment at the discretion of the court.

The same penalty shall be imposed upon any person who, having sufficient funds in
or credit with the drawee bank when he makes or draws and issues a check , shall fail
to keep sufficient funds or to maintain a credit to cover the full amount of the check
if presented within a period of ninety (90) days from the date appearing thereon, for
which reason it is dishonored by the drawee bank.

Where the check is drawn by a corporation, company or entity, the person or persons
who actually signed the check in behalf of such drawer shall be liable under this Act.

Section 2. Evidence of knowledge of insufficient funds. - The making, drawing and issuance
of a check payment of which is refused by the drawee because of insufficient funds in or
credit with such bank, when presented within ninety (90) days from the date of the
check, shall be prima facie evidence of knowledge of such insufficiency of funds or
credit unless such maker or drawer pays the holder thereof the amount due thereon, or
makes arrangements for payment in full by the drawee of such check within (5)
banking days after receiving notice that such check has not been paid by the drawee.

Section 3. Duty of drawee; rules of evidence. - It shall be the duty of the drawee of any
check, when refusing to pay the same to the holder thereof upon presentment, to cause
to be written, printed, or stamped in plain language thereon, or attached thereto, the
reason for drawee's dishonor or refusal to pay the same: Provided, That where there
are no sufficient funds in or credit with such drawee bank, such fact shall always be
explicitly stated in the notice of dishonor or refusal. In all prosecutions under this Act,
the introduction in evidence of any unpaid and dishonored check, having the drawee's
refusal to pay stamped or written thereon or attached thereto, with the reason therefor
as aforesaid, shall be prima facie evidence of the making or issuance of said check,
and the due presentment to the drawee for payment and the dishonor thereof, and
that the same was properly dishonored for the reason written, stamped or attached by
the drawee on such dishonored check.

Not with standing receipt of an order to stop payment, the drawee shall state in the
notice that there were no sufficient funds in or credit with such bank for the payment
in full of such check, if such be the fact.

Section 4. Credit construed. - The word "credit" as used herein shall be construed to
mean an arrangement or understanding with the bank for the payment of such check.

Section 5. Liability under the Revised Penal Code. - Prosecution under this Act shall be
without prejudice to any liability for violation of any provision of the Revised Penal
Code.

Section 6. Separability clause. - If any separable provision of this Act be declared

unconstitutional, the remaining provisions shall continue to be in force.

33
Section 7. Effectivity. - This Act shall take effect fifteen days after publication in the
Official Gazette.1âwphi1

Approved: April 3, 1979.”

COVERAGE: From its title and entire context of the law, BP. 22 covers and applies
ONLY TO CHECKS. A “check” is defined as a bill of exchange DRAWN ON A BANK
AND PAYABLE ON DEMAND (see, Sec. 185 of the NEGOTIABLE INSTRUMENTS
LAW).

The language of BP 22 is broad enough to cover ALL KINDS OF CHECKS,

whether present dated or post-dated, or whether issued in payment of pre-existing
obligation, or given in mutual or simultaneous exchange for something of value.

CROSSED CHECKS OR RESTRICTED CHECKS are within the coverage of BP

22. The law also applied to a check drawn in a FOREIGN CURRENCY.

TWO ACTS OR CRIMES PUNISHABLE UNDER BP 22:

1. Under the first paragraph, the crime is committed by a person who issues a
check knowing at a time of ISSUE that he does not have sufficient funds. This
is referred to as the crime of commission.
2. Under the second paragraph, the crime is committed by a person who,
having sufficient funds in or credit with the drawee bank when he draws and
issues a check shall fail to keep sufficient funds to cover the check within a
period of ninety (90) days from the date appearing thereon. This is referred to
as the crime of omission.

To “MAKE” a check means to prepare a check by FILLING UP the details on THE

FACE OF THE CHECK like date, amount, and the name of the PAYEE.

To “DRAW” a check means to sign the check and the person signing it is called a
DRAWER.

To “ISSUE” a check means the FIRST DELIVERY of the check complete in form to a
person to takes it as a HOLDER. “HOLDER” means the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof

“ACCOUNT” means any claim, demand or obligation or credit.

“VALUE” is any consideration sufficient to support a simple contract. Any antecedent

or pre-existing debt constitute value.

“FUND” means any MONEY OR DEPOSIT in the custody of the drawee bank available
for use by the drawer to cover a check issued.

“CREDIT” means an arrangement between the DRAWER AND DRAWEE BANK for
the latter to make available money to fund a check issued by the drawer. This
arrangement could be in the form of a loan, credit line or other credit accommodation.

34
ELEMENTS OF BP 22 UNDER THE FIRST PARAGRAPH:

1. The offender makes the check by completing the face of the check, draws the
check by signing as DRAWER AND ISSUES the check by delivering the check
in favor of the PAYEE to apply for account of for value.

2. The maker, drawer or issuer KNOWS AT THE TIME OF ISSUE that he does
not have sufficient funds or credit with the drawee bank to cover the check

But since “knowledge” of the sufficiency is something only the issuer knows
by himself internally, the law established a prima facie or disputable
presumption that the making, drawing, or issuance of a check payment which is
refused by the drawee because of insufficiency of funds or credit with such bank,
when presented within NINETY (90) days from date of the check, shall be prima
facie evidence of knowledge of insufficiency of fund or credit

However, this presumption arises only AFTER THE ISSUER OR DRAWER

RECEIVED A WRITTEN NOTICE OF DISHONOR AND THAT, within FIVE (5)
DAYS from receipt, he failed to pay the amount of the check or to make
arrangements for its payment.

3. The check is subsequently dishonored by the drawee bank for insufficiency of

funds or credit or dishonor for the same reason had not the drawer, without
any valid cause, ordered the bank to stop payment.

For this purpose, “it shall be the duty of the drawee of any check, when
refusing to pay the same to the holder thereof upon presentment, to cause to
be written, printed or stamped in plain language thereon, or attached thereto,
THE REASON FOR THE DRAWEE’S DISHONOR OR REFUSAL TO PAY
THE SAME.

Moreover, “where there are no SUFFICIENT FUNDS IN OR CREDIT with

such drawee bank, such fact shall always be explicitly stated in the notice of
dishonor or refusal.

And where the reason for the return or dishonor is a STOP PAYMENT
ORDER, the drawee bank shall state in the notice that there was NO
SUFFICIENT FUNDS IN OR CREDIT which such bank for the payment in
full or such check, if such was the fact. This is required because it is also a
crime under BP 22 to issue a check which would have been dishonored for
insufficiency of funds had not the drawer, without any valid reason, ordered
the bank to stop payment.

ELEMENTS OF BP 22 UNDER THE SECOND PARAGRAPH: The second paragraph of

Sec.1 makes it also a crime for “any person, who having who, having sufficient funds in
or credit with the drawee bank when he makes or draws and issues a check, shall fail to
keep sufficient funds or to maintain a credit to cover the full amount of the check if
presented within a period of ninety (90) days from the date appearing thereon, for
which reason it is dishonored by the drawee bank.

The elements are:

1. The drawer had sufficient funds in or credit with the drawee bank when he
drew the check.

35
 2. The drawer shall fail to keep sufficient funds or to maintain a credit to cover
the check for a period of ninety (90) days from the date of the check.
3. The check is presented to the bank within ninety (90) days from the date of
check and dishonored for insufficiency of funds.

In this crime of omission, the drawer had sufficient funds at the time of drawing
and issuance of the check but fails to maintain sufficient balance for a period of ninety
(90) days from the date appearing on the check, so much so that the check when
presented after its issuance, there remains no or insufficient balance for which reason
the check is dishonored or bounces.

In this case, the check must be presented within ninety (90) days from date of the
check, not from the date of issuance.

TO DISTINGUISH THE TWO CRIMES:

1. In the former, the drawer had no sufficient funds at the time he drew the
check and is presumed to know that he had insufficient balance. In the latter,
the drawer had sufficient balance at the time he drew the check but fails to
maintain sufficient balance for ninety (90) days from the date of the check.
2. In the former, the holder must present the check within a reasonable time, in
the latter, “reasonable time” has been defined and limited to ninety (90 days
from the DATE OF THE CHECK.

PERSONS LIABLE: The law holds liable the “person who MAKES OR DRAWS AND
ISSUES” the bouncing check. Where the check is drawn by a corporation, company or
entity, the PERSON WHO ACTUALLY SIGNED THE CHECK IN BEHALF OF SUCH
DRAWER SHALL BE LIABLE.
PENALTY: The penalty for violation of BP 22 or issuing a bouncing check is
imprisonment of not less than thirty days but not more than one (1) year or by a fine of
not less than but not more than double the amount of the check which fine shall in no
case exceed Two Hundred Thousand Pesos, or both such fine and imprisonment at the
discretion of the court.

LIABILITY UNDER THER REVISED PENAL CODE: The SAME ACT of issuing a
bouncing may also constitute ESTAFA under Article 315 (2) (d) of the Revised Penal
Code which penalizes the act of POSTDATING A CEHCK OR ISSUING A CHECK in
payment of an obligation when the offender had no funds in the bank or his funds
deposited therein were not sufficient to cover the amount of the check. The law states:
“Prosecution under this Act shall be without prejudice to any liability for violation of
any provision of the Revised Penal Code”.

ESTAFA UNDER ARTICLE 315 2 (d), OF THE REVISED PENAL CODE:

“Article 315. SWINDLING (ESTAFA). Any person who shall DEFRAUD another by any
of the means mentioned herein below x x x

36
 3. By means of any of the following FALSE PRETENSES OR FRAUDELENT
ACTS executed prior to or simultaneously with the commission of the
FRAUD:

Xxx

(d) By postdating a check, or issuing a check in payment of an obligation

when the offender had not funds in the bank, or his funds deposited therein
were not sufficient to cover the amount of the check. The failure of the drawer
of the check to deposit the amount necessary to cover his check within three
(3) days from receipt of the notice from the bank and/ or the payee or holder
that said check has been dishonored for lack or insufficiency of funds shall be
prima facie of DECEIT constituting FALSE PRETENSE OR FRAUDULENT
ACT.

ELEMENTS OF THIS CRIME ARE:

(1) Postdating or issuing a check in payment of an obligation contracted

AT THE TIME THE CHECK WAS ISSUED.
(2) Lack of sufficient funds to cover the check.

(3) Knowledge on the part of the offender of such circumstances.

(4) DAMAGE to the complainant.

This crime is committed by an offender WHO DECEIVES the offended party into
parting with MONEY OR GOODS OR RENDERING SERVICES in favor of the offender.
The DECEPTION CONSIST IN THE ISSUANCE OF A WORTHLESS CHECK because
of insufficiency of funds. There is FRAUD OR DECEIT because the offended party
would not have parted with money, goods or services were it not for the worthless
check.

Example:

Mr. A bought cartons of cigarettes from a Chinese store, deceiving the

Chinese that he had money in the bank and thus he issued a check. Later the
check bounced. Mr. A is liable for ESTAFA. He used deceit by assuring he has
funds in the bank but bounced. The Chinese would not have sold to him
cigarettes if not for his DECEIT. The delivery of the check was executed PRIOR
TO OR SIMULTANEOUSLY WITH THE FRAUD made by Mr. A.

Mr. X induced Ms. Y that he would buy her DIAMONG WATCH and
saying he is very rich. Ms. Y delivered the DIAMONG WATCH AND Mr. X
delivered a check in the amount of Php 10M. Later, the check issued by X
bounced. X is guilty of estafa. The delivery of the check was executed PRIOR TO
OR SIMULTANEOUSLY WITH THE FRAUD perpetrated by X.

It is to be NOTED that there are two very IMPORTANT ELEMENTS OF

THIS CRIME. First, there is FRAUD OR DECEIT and second, DAMAGE. These
two (2) elements are not required for prosecution under BP 22.

Hence, where the drawer issued a postdated check believing in good faith that he
could fund the check when presented for payment, but was unable to do so, and he

37
informed the payee accordingly, no estafa is committed because there is NO DECEIT.
But the same act would make him liable for BP 22, where fraud or deceit is NOT AN
ELEMENT.

PENALTY FOR ESTAFA UNDER Art. 315 (2) (d)- the penalty for estafa under Article
315 (2) (d) had been increased by Presidential Decree No. 818 effective on October 22,
1995 as follows:

1st. The penalty of reclusion temporal if the amount of the fraud is over 12,000 but
does not exceed 22,000 pesos and if such amount exceeds the latter sum, the penalty
provided in this paragraph shall be imposed in its maximum period, adding one year
for each additional 10,000 but the total penalty which may be imposed shall in no case
exceed thirty years. In such cases, and in connection with the accessory penalties which
may be imposed under the Revised Penal Code, the penalty shall be termed reclusion
perpetua.

2nd. The penalty is prision mayor in its maximum period, if the amount of the
fraud is over 6,000.0 pesos but does not exceed 12,000.00 pesos.

3rd The penalty of prision mayor in its medium period, if the amount of the fraud
is over 200 pesos.

4th. By prision mayor in its maximum period, if such amount does not exceed 200
pesos (Effective October 22, 1975)

DURATION OF PENALTIES:

1. RECLUSION TEMPORAL- 12 YEARS AND ONE DAY TO 20 YEARS.

2. PRISION MAYOR- SIX YEARS AND ONE DAY TO TWELVE YEARS.

8.0 LAW ON OTHER BUSINESS TRANSACTIONS

8.1 PDIC LAW 2%

8.1.1 Describe the insurable deposits
8.1.2 Compute the maximum liability
8.1.3 Identify the requirement for claims

BANGKO SENTRAL NG PILIPINAS------- ALL BANKS------------PDIC

(RA 7653) (RA 8791) (ACT 3591, June 22,
June 14, 1993 April 12, 2000 1963, as amended
By RA 9302, August
12, 2004 and
RA 9576, April 29,
2009

First, a group of individuals who wants to organize a BANK shall

organize a CORPORATION under RA 11232 (the NEW CORPORATION CODE.
After the SEC grants is CERTIFICATE OF INCORPORATION (referred to as the
PRIMARY FRANCHISE), it has to obtain CERTIFICATE OF AUTHORITY from
the BSP (referred to as the SECONDARY FRANCHISE OR LICENSE) in order to
OPERATE. Two (2) things: ORGANIZE OR INCORPORATE, then OPERATE.

38
 By way of analogy, SFC incorporates as a CORPORATION with the SEC,
but BEFORE it could operate as a SCHOOL, it has to obtain a LICENSE from the
DEPED and CHED. So, ORGANIZE then OPERATE.

Going back to BANKS, it is the BSP who grants CERTIFICATES OF

AUTHORITY before a BANK could operate. ALL BANKS- entities engaged in
the lending of FUNDS OBATINED IN THE FORM OF DEPOSITS (universal
banks, commercial banks, thrift banks, rural banks, cooperative banks, Islamic
banks and other classification of banks), are ALL under the control and
supervision of the BSP.

To safeguard the DEPOSITING PUBLIC, ACT 3591 dated June 22, 1963
provides for the creation of the PHILIPPINE DEPOSIT INSURANCE
CORPORATION (PDIC) a government corporation financed completely by the
CENTRAL BANK (now Bangko Sentral ng Pilipinas). It is now OBLIGATORY
for banks to insure their deposits and pay INSURANCE PREMIUM to the PDIC.

“SECTION 1. There is hereby created a Philippine Deposit Insurance

Corporation hereinafter referred to as the "Corporation" which shall insure, as
herein provided, the deposits of all banks which are entitled to the benefits of
insurance under this Act, and which shall have the powers hereinafter granted.

As added by RA 9302, the Corporation, as a BASIC POLICY, promote and

safeguard the interest of the depositing public by way of providing
PERMANENT AND CONTINUING INSURANCE coverage on ALL INSURED
DEPOSITS.”

Likewise, the law (RA 9302) increased the PERMANENT INSURANCE

FUND OF THE CORPORATION TO THREE BILLION PESOS (Php
3,000,00,000.00)

With this back drop (and I want you to see and observe the inter-relation
of different laws on the matter).

What are the DEPOSITS that are insurable under the new PDIC LAW Sec. 3 (f) of
RA 9302:

(f) The term "deposit" means the unpaid balance of money or its equivalent
received by a bank in the usual course of business and for which it has
given or is obliged to give credit to a commercial, checking, savings,
time or thrift account, or issued in accordance with Bangko Sentral Rules
and Regulations and other applicable laws, together with such other
obligations of a bank, which, consistent with banking usage and practices,
the Board of Directors shall determine to be DEPOSIT LIABILITIES OF
THE BANK: Provided, That any obligation of a bank which is payable at
the office of the bank located outside of the Philippines shall not be a
deposit for any of the Purposes of this Act or included as part of the total
deposits or of insured deposit: Provided, further, That SUBJECT to the
approval of the Board of Directors, any insured bank which is
incorporated under the laws of the Philippines which maintains a branch

39
 outside the Philippines may elect to include for insurance its deposit
obligation payable only at such branch.

The Corporation shall NOT PAY DEPOSIT INSURANCE for the

following accounts or transactions, WHETHER denominated,
documented, recorded or booked as DEPSOSIT BY THE BANK

"(1) Investment products such as bonds and securities, trust accounts, and
other similar instruments;

"(2) Deposit accounts or transactions which are unfunded, or that are

fictitious or fraudulent;

"(3) Deposits accounts or transactions constituting, and/or emanating

from, unsafe and unsound banking practice/s, as determined by the
Corporation, in consultation with the BSP, after due notice and hearing,
and publication of a cease and desist order issued by the Corporation
against such deposit accounts or transactions; and

"(4) Deposits that are determined to be the proceeds of an unlawful

activity as defined under republic act 9160, as amended.

"The actions of the Corporation taken under this section shall be final and
executory, and may not be restrained or set aside by the court, except on
appropriate petition for certiorari on the ground that the action was taken
in excess of jurisdiction or with such grave abuse of discretion as to
amount to a lack or excess of jurisdiction. The petition for certiorari may
only be filed within thirty (30) days from notice of denial of claim fare or
deposit insurance."

PROBLEM: Mr. Z maintains Php 100,000.00 savings account, Php 200,000.00

checking account, Php 300,000.00 money market placement and Php 400,000.00
trust fund with METRO BANK. Which of the four accounts are insured by the
PDIC?

ANSWER: Only the Php 100,000.00 savings account and the Php 200,000.00
checking account are deemed insured by the PDIC, as they are embraced by the
word “DEPOSIT”. Deposit as defined in Section 3 (f) may be constituted only if
MONEY OR THE EQUIVALENT OF MONEY IS RECEIVED by the bank.

DEPOSIT INSURANCE COVERAGE: Sec. 5 of the law states “The deposit

liabilities of any bank or banking institutions, which is engaged in the business of
receiving deposits as herein defined in the effective date of this ACT, or which
thereafter may engage in the business of receiving deposits shall be INSURED WITH
THE CORPORATION. (As amended by RA 6037, August 4, 1969, renumbered from
Sec. 4 by RA 9302).

What is “INSURED DEPOSIT”? Sec. 3 (g) of the law states:

40
 "(g) The term "insured deposit" means the amount due to any bona fide depositor
for legitimate deposits in an insured bank net of any obligation of the depositor
to the insured bank as of date of closure, but not to exceed Five hundred
thousand pesos (P500,000.00). Such net amount shall be determined according to
such regulations as the Board of Directors may prescribe, In determining such
amount due to any depositor, there shall be added together all deposits in the
bank maintained in the same right and capacity for his benefits either in his
own name or in the name of others. A joint account regardless of whether the
conjunction 'and,' 'or,' 'and/or' is used, shall be insured separately from any
individually-owned deposit account: Provided, That (1) If the account is held
jointly by two or more natural persons, or by two or more juridical persons or
entities, the maximum insured deposit shall be divided into as many equal
shares as there are individuals, juridical persons or entities, unless a different
sharing is stipulated in the document of deposit, and (2) If the account is held by
a juridical person or entity jointly with one or more natural persons, the
maximum insured deposits shall be presumed to belong entirely to such juridical
person or entity: Provided, further, That the aggregate of the interest of each co-
owner over several joint accounts, whether owned by the same or different
combinations of individuals, juridical persons or entities, shall likewise be subject
to the maximum insured deposit of Five hundred thousand pesos
(P500,000.00): Provided, Furthermore, The provisions of any law to the contrary
notwithstanding, no owner/holder of any negotiable certificate of deposit shall
be recognized as a depositor entitled to the rights provided in this Act unless his
name is registered as owner/holder thereof in the books of the issuing
bank: Provided, Finally, That, in case of a condition that threatens the monetary
and financial stability of the banking system that may have systemic
consequences, as defined in section 17 hereof, as determined by the monetary
board, the maximum deposit insurance cover may be adjusted in such amount,
for such a period, and/or for such deposit products, as may be determined by a
unanimous vote of the Board of Directors in a meeting called for the purpose and
chaired by the Secretary of Finance, subject to the approval of the President of
the Philippines."

PROBLEM: X has three separate deposits in LBP namely: 1.5 SAVINGS

DEPOSIT, 1.5 TIME DEPOSITS AND 1.5M CURRENT DEPOSITS (Checking
account). Later on the bank ran into financial trouble and was ordered by the BSP
to close and liquidate. How much X may recover from the PDIC.

ANSWER: X may recover up to Php 500,000.00. For purposes of recovery from

the PDIC, all deposit accounts of a depositor opened by him in the same capacity
(personal capacity in the problem above) shall be lumped together and his
recovery from all said deposits is limited to Php 500,000.00

ASSESSMENT OF MEMBER BANKS: Section 6 (a) provides:

SEC. 6. (a) The assessment rate shall be determined by the Board of Directors:
Provided, That the assessment rate shall not exceed one-fifth (1/5) of one per centum
(1%) per annum. The semi-annual assessment for each insured bank shall be in the
amount of the product of one-half (1/2) the assessment rate multiplied by the
assessment base but in no case shall it be less than Five thousand pesos (P5,000.00). The

41
assessment base shall be the amount of the liability of the bank for deposits as defined
under subsection (f) of Section 4 without any deduction for indebtedness of depositors.

"The semi-annual assessment base for one semi-annual period shall be the
average of the assessment base of the bank as of the close of business on March thirty-
one and June thirty and the semi-annual assessment base for the other semi-annual
period shall be the average of the assessment base of the bank as of the close of business
on September thirty and December thirty-one: Provided, That when any of said days is
a non-business day or legal holiday, either national or provincial, the preceding
business day shall be used. The certified statements required to be filed with the
Corporation under subsections (b) and (c) of this Section shall be in such form and set
forth such supporting information as the Board of Directors shall prescribe. The
assessment payments required from the insured banks under subsections (b) and (c) of
this Section shall be made in such manner and at such time or times as the Board of
Directors shall prescribe, provided the time or times so prescribed shall not be later than
sixty (60) days after filing the certified statement setting forth the amount of
assessment."

"(d) All assessment collections and income from operations after expenses and
charges shall be added to the Deposit Insurance Fund under Section 13 hereof. Such
expenses and charges are: (1) the operating costs and expenses of the Corporation for
the calendar year; (2) additions to reserve to provide for insurance and financial
assistance losses, net of recoverable amounts from applicable assets and collaterals,
during the calendar year; and (3) the net insurance and financial assistance losses
sustained in said calendar year."

"(h) The Corporation shall not terminate the insured status of any bank which
continues to operate or receive deposits. Should any insured bank fail or refuse to pay
any assessment required to be paid by such bank under any provision of this Act, and
should the bank not correct such failure or refusal within thirty (30) days after written
notice has been given by the Corporation to an officer of the bank citing this subsection,
and stating that the bank has failed or refused to pay as required by the law, the
Corporation may, at its discretion, file a case for collection before the appropriate
court without prejudice to the imposition of administrative sanctions allowed under
the provisions of this Law on the bank officials responsible for the non-payment of
assessment fees."

PAYMENT OF INSURED DEPOSITS- Section 14 to 16 of the law provides for the

payment of INSURED DEPOSITS:

SEC. 14. Whenever an insured bank shall have been closed by the Monetary Board
pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such closed
bank shall be made by the Corporation as soon as possible either (1) by cash or (2) by
making available to each depositor a transferred deposit in another insured bank in
an amount equal to insured deposit of such depositor: Provided, however, That the
Corporation, in its discretion, may require proof of claims to be filed before paying the
insured deposits, and that in any case where the Corporation is not satisfied as to the
viability of a claim for an insured deposit, it may require final determination of a court
of competent jurisdiction before paying such claim: Provided, further, That failure to
settle the claim, within six (6) months from the date of filing of claim for insured
deposit, where such failure was due to grave abuse of discretion, gross negligence, bad
faith, or malice, shall, upon conviction, subject the directors, officers or employees of the
Corporation responsible for the delay, to imprisonment from six (6) months to one (1)

42
year: Provided, furthermore, That the period shall not apply if the validity of the claim
requires the resolution of issues of facts and or law by another office, body or agency
including the case mentioned in the first proviso or by Corporation together with such
other office, body or agency."

Section 15. The Corporation, upon payment of any depositor as provided for in
subsection (c) of this Section, shall be subrogated to all rights of the depositor against
the closed bank to the extent of such payment. Such subrogation shall include the right
on the part of the Corporation to receive the same dividends and payments from the
proceeds of the assets of such closed bank and recoveries on account of stockholders’
liability as would have been payable to the depositor on a claim for the insured deposits
but, such depositor shall retain his claim for any uninsured portion of his deposit. All
payments by the Corporation of insured deposits in closed banks partake of the nature
of public funds, and as such, must be considered a preferred credit similar to taxes due
to the National Government in the order of preference under Article 2244 of the New
Civil Code: Provided, further, That this preference shall be likewise effective upon
liquidation proceedings already commenced and pending as of the approval of this Act,
where no distribution of assets has been made.

SEC. 16 (a) The Corporation shall commence the determination of insured deposits due
the depositors of a closed bank upon its actual takeover of the closed bank. The
Corporation shall give notice to the depositors of the closed bank of the insured
deposits due them by whatever means deemed appropriate by the Board of Directors:
Provided, That the Corporation shall publish the notice once a week for at least three
(3) consecutive weeks in a newspaper of general circulation or, when appropriate, in a
newspaper circulated in the community or communities where the closed bank or its
branches are located.

"(b) Payment of an insured deposit to any person by the Corporation shall discharge
the Corporation, and payment of a transferred deposit to any person by the new bank
or by an insured bank in which a transferred deposit has been made available shall
discharge the Corporation and such new bank or other insured bank, to the same extent
that payment to such person by the closed bank would have discharged it from liability
for the insured deposit.

"(c) Except as otherwise prescribed by the Board of Directors, neither the Corporation or
such other insured bank shall be required to recognize as the owner of any portion of a
deposit appearing on the records of the closed bank under a name other than that of the
claimant, any person whose name or interest as such owner is not disclosed on the
records of such closed bank as part owner of said deposit, if such recognition would
increase the aggregate amount of the insured deposits in such closed bank.

"(d) The Corporation may withhold payment of such portion of the insured deposit of
any depositor in a closed bank as may be required to provide for the payment of any
liability of such depositor as a stockholder of the closed bank, or of any liability of such
depositor to the closed bank or its receiver, which is not offset against a claim due from
such bank, pending the determination and payment of such liability by such depositor
or any other liable therefor.

"(e) Unless otherwise waived by the Corporation, if the depositor in the closed bank
shall fail to claim his insured deposits with the Corporation within two (2) years
from actual takeover of the closed bank by the receiver, or does not enforce his claim
filed with the corporation within two (2) years after the two-year period to file a

43
claim as mentioned hereinabove, all rights of the depositor against the Corporation
with respect to the insured deposit shall be barred; however, all rights of the depositor
against the closed bank and its shareholders or the receivership estate to which the
Corporation may have become subrogated, shall thereupon revert to the depositor.
Thereafter, the Corporation shall be discharged from any liability on the insured
deposit."

Payment by the PDIC or by a bank designated by the PDIC starts from the date
the BSP declares the insured bank as INSOLVENT. Payment by the PDIC subrogates it
to claims of the insured bank against other persons. CLAIMS by the depositors of the
insured bank should be made within TWO years from the actual takeover of the closed
bank by the RECEIVER.

Under the law, the PDIC is now given the priority to be appointed as the
RECEIVER of any banking institution.

8.2 SECRECY OF BANK DEPOSITS 2%

8.2.1 Explain the purpose
8.2.2 Illustrate the prohibited acts
8.2.3 Discuss the types of deposit covered
8.2.4 Apply the exceptions
8.2.5 Explain garnishment of deposits including foreign
Deposits

REPUBLIC ACT No. 1405

AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO, DEPOSITS WITH

ANY BANKING INSTITUTION AND PROVIDING PENALTY THEREFOR.

Section 1. It is hereby declared to be the policy of the Government to give

encouragement to the people to deposit their money in banking institutions and to
discourage private hoarding so that the same may be properly utilized by banks in
authorized loans to assist in the economic development of the country.

Section 2.  All deposits of whatever nature with banks or banking institutions in the
Philippines including investments in bonds issued by the Government of the
Philippines, its political subdivisions and its instrumentalities, are hereby considered as
of an absolutely confidential nature and may not be examined, inquired or looked into
by any person, government official, bureau or office, except upon written permission
of the depositor, or in cases of impeachment, or upon order of a competent court in
cases of bribery or dereliction of duty of public officials, or in cases where the money
deposited or invested is the subject matter of the litigation.

Section 3. It shall be unlawful for any official or employee of a banking institution to
disclose to any person other than those mentioned in Section two hereof any
information concerning said deposits.

44
Section 4. All Acts or parts of Acts, Special Charters, Executive Orders, Rules and
Regulations which are inconsistent with the provisions of this Act are hereby repealed.

Section 5. Any violation of this law will subject offender upon conviction, to an
imprisonment of not more than five years or a fine of not more than twenty thousand
pesos or both, in the discretion of the court.

Section 6. This Act shall take effect upon its approval.

Approved: September 9, 1955

PURPOSE OF THE LAW:

1. To encourage people to deposit money in banks.
2. Discourage private hoarding of money, so that the MONEY may be properly
utilized by BANKS by way of LOANS to assist in the economic development
of the country.

COVERAGE OF THE LAW:  All deposits of whatever nature with banks or banking
institutions in the Philippines including investments in bonds issued by the
Government of the Philippines, its political subdivisions and its instrumentalities, are
hereby considered as of an absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office.

It is also unlawful for any official or employee of a banking institution TO

DISCLOSE TO ANY PERSON except in the cases set forth below, ANY
INFORMATION CONCERNING DEPOSITS.

EXCEPTIONS TO THE CONFIDENTIALITY RULE: The DEPOSITS including

investment in BONDS can be examined, inquired and looked into by a person,
government official, bureau or office in the following instances:

1. Upon written permission of the depositor;

2. In cases of impeachment;
3. Upon order of a competent court in cases of bribery or dereliction of duty of
public officials;
4. In cases where the money deposited or invested is the subject matter of the
litigation.
5. In graft cases. (see PNB vs. Gancayco, 16 SCRA 92)

45
 8.3 TRUTH IN LENDING ACT 2%
8.3.1 Describe the purpose
8.3.2 Illustrate the obligation of creditors to persons to whom
Credit is extended
8.3.3 Compare covered and excluded transactions
8.3.4 Describe the consequences of non-compliance with
obligation

“REPUBLIC ACT No. 3765

AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH

EXTENSIONS OF CREDIT.

Section 1. This Act shall be known as the "Truth in Lending Act."

Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens
lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a
preventing the uninformed use of credit to the detriment of the national economy.

Section 3. As used in this Act, the term

(1) "Board" means the Monetary Board of the Central Bank of the Philippines.

(2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any conditional sales con
contract to sell, or sale or contract of sale of property or services, either for present or future delivery
which part or all of the price is payable subsequent to the making of such sale or contract; any renta
contract; any contract or arrangement for the hire, bailment, or leasing of property; any option, deman
pledge, or other claim against, or for the delivery of, property or money; any purchase, or other acquis
any credit upon the security of, any obligation of claim arising out of any of the foregoing; and any tra
series of transactions having a similar purpose or effect.

(3) "Finance charge" includes interest, fees, service charges, discounts, and such other charges incide

46
extension of credit as the Board may be regulation prescribe.

(4) "Creditor" means any person engaged in the business of extending credit (including any person wh
regular business practice make loans or sells or rents property or services on a time, credit, or installme
either as principal or as agent) who requires as an incident to the extension of credit, the payment of a
charge.

(5) "Person" means any individual, corporation, partnership, association, or other organized group of p
the legal successor or representative of the foregoing, and includes the Philippine Government or any
thereof, or any other government, or of any of its political subdivisions, or any agency of the foregoing

Section 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consumm
the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance
rules and regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in connection with
transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annu
the outstanding unpaid balance of the obligation.

Section 5. The Board shall prescribe such rules and regulations as may be necessary or proper in carry
provisions of this Act. Any rule or regulation prescribed hereunder may contain such classifications an
differentiations as in the judgment of the Board are necessary or proper to effectuate the purposes of th
to prevent circumvention or evasion, or to facilitate the enforcement of this Act, or any rule or regulati
thereunder.

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any perso
information in violation of this Act or any regulation issued thereunder shall be liable to such perso
amount of P100 or in an amount equal to twice the finance charged required by such creditor in conne
such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any cred
transaction. Action to recover such penalty may be brought by such person within one year from the d
occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection
any person is entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and court
determined by the court.

(b) Except as specified in subsection (a) of this section, nothing contained in this Act or any regulation
in this Act or any regulation thereunder shall affect the validity or enforceability of any contract or
transactions.

(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder sh
by not less than P1,00 or more than P5,000 or imprisonment for not less than 6 months, nor more than
or both.

47
(d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any a
any political subdivision thereof.

(e) A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a d
has willfully violated this Act shall be prima facie evidence against such defendant in an action or proc
brought by any other party against such defendant under this Act as to all matters respecting which sa
judgment would be an estoppel as between the parties thereto.

Section 7. This Act shall become effective upon approval.

Approved: June 22, 1963.

PURPOSE OF THE LAW:

1. To protect the debtor from the effects of misrepresentation or concealment,

commonly known as HIDDEN CHARGES.
2. Permitting the debtor to fully appreciate and evaluate the REAL COST OF
BORROWING before consummating the transaction.

3. Avoid circumvention of the USURY LAW.

Case law: CONSOLIDATED BANK VS COURT OF APPEALS, 246 SCRA 193

(1995)

Banks and non-bank financial intermediaries AUTHORRIZED to engage

in quasi-banking ARE REQUIRED TO SRICTLY adhere to the provisions of the
TRUTH IN LENDING ACT, by making true and effective cost of borrowing, AN
INTEGRAL PART OF EVERY LOAN TRANSACTION. Consequently, when
the promissory note signed by the borrower contains NO PROVISION ON THE
PAYMENT OF HANDLING CHARGES, the bank has NO AUTHORITY to
collect the same.

REQUIREMENT UNDER SEC. 4- Any person extending CREDIT (loan, sale on

installments, lease with option to buy) MUST GIVE THE DEBTOR in writing, prior to
the consummation of the transactions, a RECITAL OF THE FOLLOWING:

(A) Cash price;

(B) Amount credited if on installment;

(C) Difference between cash and installment price;

(D) Recital of FINANCE CHARGES AND WHAT THESE CHARGES BEAR to

the amount to be financed in PERCENTAGE.

SAMPLE OF DISCLOSURE STATEMENT: (Insert pic)

48
CONSEQUENCES: Non-compliance would authorize the debtor to recover any
interest/charges/fees payments made to the creditor.

PENAL CLAUSE: Failure to comply with the law makes the creditor liable for double
finance charges plus attorney’s fees.

PRESCRIPTIVE PERIOD: One (1) year from the occurrence of the violation.

49
ANTI-MONEY LAUNDERING ACT (RA 9160 as amended):

8.4 AMLA LAW 6%

8.4.1 Discuss the purpose, policies and principles

8.4.2 Discuss the definition of terms
8.4.3 Illustrate unlawful activities
8.4.4 Determine who are covered persons
8.4.5 Describe money laundering, terrorism, and financing
And asset forfeiture
8.4.6 Apply and illustrate preventive measures and obligations
Of covered persons
8.4.6.1 Prohibited accounts
8.4.6.2 Customer due diligence
8.4.7 Explain and apply beneficial ownership
8.4.8 Identify record keeping requirements
8.4.9 Discuss safe harbor

The original law RA 9160 was approved last September 22, 2001. The changes in
the law had been so rapid that the law undergone fast amendments: RA 9194 last March
7, 2003; RA 10167 last June 6, 2013.

In relation to this law, RA 10168 was legislated, AN ACT DEFINING THE

CRIME OF FINANCING TERRORISM, PROVIDING PENALTIES THEREFOR
AND FOR OTHER PURPOSES last July 25, 2011.

Amendments thereafter was made to the organic law by RA 10365, AN ACT

FURTHER STRENGTHENING THE ANTI-MONEY LAUNDERING LAW,
AMENDING FOR THE PURPOSE REPUBLIC ACT NO. 9160, OTHERWISE KNOWN
AS THE “ANTI-MONEY LAUNDERING ACT OF 2001”, AS AMENDED, was made
last July 23, 2012; RA 10927 made further amendments last July 25, 2016.

50
 RA 11479 was enacted, “AN ACT TO PREVENT, PROHIBIT AND PENALIZE
TERRORISM, THEREBY REPEALING REPUBLIC ACT NO. 9372, OTHERWISE
KNOWN AS THE "HUMAN SECURITY ACT OF 2007", last July 3, 2020.

Finally, the latest amendment to the organic law, RA 11521 was made last
January 29, 2021, AN ACT FURTHER STRENGTHENING THE ANTI-MONEY
LAUNDERING LAW, AMENDING FOR THE PURPOSE REPUBLIC ACT NO. 9160,
OTHERWISE KNOWN AS THE "ANTI-MONEY LAUNDERING ACT OF 2001", AS
AMENDED.

POLICY: To protect and preserve the integrity and confidentiality of bank

accounts and to ensure that the Philippines shall not be used as a money laundering site
for the proceeds of any unlawful activity. Consistent with such foreign policy, the State
shall extend cooperation in transnational investigations and prosecutions of persons
involved in money laundering activities whenever committed.

MONEY LAUNDERING: a CRIME whereby the proceeds of an unlawful activity

are transacted, thereby making them appear to have originated from LEGITIMATE
SOURCES.

MONETARY INSTRUMENT- refers to:

a. Coins and currency of legal tender of the Philippines or of any other

country.
b. Drafts, checks and notes.

c. Securities or negotiable instruments, bonds, commercial papers,

deposit certificates, trust certificates, custodial receipts or deposit
substitute instruments, trading orders, transaction tickets, and
confirmations of sale or investments and money market instruments;
and

d. Other similar instruments where title thereto passes to another by

endorsement, assignment or delivery.

HOW COMMITTED:

1. Any person knowing that any monetary instrument or property represents,

involved or related to, the proceeds of any unlawful activity:

a. Transacts said money instrument or property;

b. Converts, transfers, disposes of, moves, acquires, possesses or uses

said monetary instrument or property.

c. Conceals or disguises the true nature, source, location, disposition,

movement or ownership of or rights with respect to said monetary
instrument or property;

d. Attempts or conspires to commit money laundering offenses referred

to in (a), (b), or (c);

51
 e. Aids, abets, assist in or counsels the commission of the money
laundering offenses referred in (a), (b) or (c).

f. Performs or fails to perform any act as a result of which he facilitates

the offense of money laundering referred to in (a), (b) or (c).

2. Any person who knowing that a covered or suspicious is required to be

reported to the AMLC, fails to do so.

PROSECUTION: Any person may be charged with and convicted of BOTH the
offense of money laundering and the unlawful activity. The prosecution of any
offense under AMLA shall proceed independently of any proceeding relating to
the unlawful activity.

COVERED TRANSACTION: a transaction in cash or other equivalent monetary

instrument involving a total amount IN EXCESS OF PHP 500,000.00 within ONE
BANKING DAY; for covered persons like CASINOS, a single casino cash
transaction (involving the receipt of cash by a casino paid by or behalf of a
customer or payout of cash by a casino to a customer or to any person in his/her
behalf) involving an amount in EXCESS OF PHP 5,000,000.00 or its equivalent in
any other currency.

COVERED PERSONS-natural and juridical, refer to:

1. banks, non-banks, quasi-banks, trust entities, foreign exchange

dealers, pawnshops, money changers, remittance and transfer
companies and other similar entities and all other persons and their
subsidiaries and affiliates supervised or regulated by the Bangko
Sentral ng Pilipinas (BSP);
2. insurance companies, pre-need companies and all other persons
supervised or regulated by the Insurance Commission (IC);

3. securities dealers, brokers, salesmen, investment houses and other

similar persons managing securities or rendering services as
investment agent, advisor, or consultant, (ii) mutual funds, close-end
investment companies, common trust funds, and other similar persons,
and (iii) other entities administering or otherwise dealing in currency,
commodities or financial derivatives based thereon, valuable objects,
cash substitutes and other similar monetary instruments or property
supervised or regulated by the Securities and Exchange Commission
(SEC);

4. jewelry dealers in precious metals, who, as a business, trade in

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

5. jewelry dealers in precious stones, who, as a business, trade in

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

52
 6. company service providers which, as a business, provide any of the
following services to third parties: (i) acting as a formation agent of
juridical persons; (ii) acting as (or arranging for another person to act
as) a director or corporate secretary of a company, a partner of a
partnership, or a similar position in relation to other juridical persons;
(iii) providing a registered office, business address or accommodation,
correspondence or administrative address for a company, a
partnership or any other legal person or arrangement; and (iv) acting
as (or arranging for another person to act as) a nominee shareholder
for another person; and

7. persons who provide any of the following services:

(i) managing of client money, securities or other assets;

(ii) management of bank, savings or securities accounts;

(iii) organization of contributions for the creation, operation or

management of companies; and

(iv) creation, operation or management of juridical persons or

arrangements, and buying and selling business entities.

8. Casinos, including internet and ship based casinos, with respect to

their casino cash transactions related to their gaming operations.
(added by RA 10927)

EXCLUDED PERSONS: Lawyers and accountants acting as independent legal

professionals in relation to information concerning their clients or where
disclosure of information would compromise client confidences or attorney-
client relationship.

OBLIGATIONS OF COVERED PERSONS:

1. CUSTOMER INDENTIFICATION- Sec. 8 states: “Covered persons

shall establish and record the TRUE IDENTITY of its clients based on
official documents. They shall maintain a system of VERIFYING THE
TRUE IDENTITY OF THER CLIENTS and in cases of CORPORATE
CLIENTS, require a system of VERIFYING THER LEGAL EXISTENCE
AND ORGANIZATIONAL STRUCTURE, as well as authority and
identification of all persons purporting to act on their behalf.

This is known as the KYC POLICY- know your client policy by

establish their identity through official documents.

Under the same section, it is now explicit: “The provisions of existing

laws to the contrary notwithstanding, ANONYMOUS ACCOUNTS,
ACCOUNTS UNDER FICTITIUS NAMES AND ALL OTHER
SIMILAR ACCOUNTS SHALL BE ABSOLUTE PROHIBITED. Pesos
and foreign non-checking numbered accounts shall be allowed. The
BSP may conduct ANNUAL TESTING solely limited to the

53
 determination of the existence and true identity of the owners of the
such accounts.

2. RECORD KEEPING- all records of all transactions of covered

institutions shall be maintained and safely stored for 5 YEARS from
the DATE OF TRANSACTION.

With respect to closed accounts, the records of CUSTOMER

IDENTIFICATION, ACCOUNT FILES AND BUSINESS
CORRESPONDENCE, shall be preserved and safely stored for at least
five (5) years from the date they were closed.

3. REPORT OF COVERED AND SUSPICIOUS TRANSACTIONS-

covered persons shall REPORT to the AMLC all covered and
suspicious transactions within 5 working days from occurrence
thereof, unless the AMLC concerned prescribes a different working
period not exceeding 15 WORKING DAYS.

4. Should a transaction be determined to be both a covered and a

suspicious transaction, it shall be reported as a suspicious transaction.

5. WHEN REPORTING, it shall not be considered a violation of bank

secrecy laws and similar laws. It shall be prohibited from
communicating, directly or indirectly, in any manner or by any means,
to any person the fact that a covered or suspicious transaction report
was made, the content thereof, or any other information in relation
thereto.

6. SAFE HARBOR- No administrative, criminal or civil proceeding, shall

lie against any person for having a transaction report in the regular
performance of his duties and in good faith, whether or not such
results in any criminal prosecution under Philippine laws.

SUSPICIOUS TRANSACTIONS: transactions with covered institutions,

regardless of the amount involved, where any of the following circumstances
exist:

1. There is no underlying legal or trade obligation, purpose or

justification.
2. The client is not properly identified.

3. The amount involved is not commensurate with the business or

financial capacity of the client.

54
 4. Taking into account all known circumstances, it may be perceived that
the client’s transaction is structured in order to avoid being the subject
of reporting requirements under the ACT.

5. Any circumstance relating to the transaction which is observed to

deviate from the profile of the client and or the client’s past transaction
with the covered institution.

6. The transaction is in any way related to an unlawful activity or offense

under this ACT that is about to be, is being or has been committed.

7. Any transaction that is similar or analogous to any of the foregoing.

UNLAWFUL ACTIVITIES: Any act or omission or series or combination thereof

involving or having relation to the following:

1. Kidnapping for ransom under Article 267 of Act No. 3815, otherwise
known as the Revised Penal Code, as amended;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No.
9165, otherwise known as the Comprehensive Dangerous Drugs Act of
2002;

3. Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as

amended, otherwise known as the Anti-Graft and Corrupt Practices
Act;

4. Plunder under Republic Act No. 7080, as amended;

5. Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and
302 of the Revised Penal Code, as amended;

6. Jueteng and Masiao punished as illegal gambling under Presidential

Decree No. 1602;

7. Piracy on the high seas under the Revised Penal Code, as amended
and Presidential Decree No. 532;

8. Qualified theft under Article 310 of the Revised Penal Code, as

amended;

9. Swindling under Article 315 and Other Forms of Swindling under

Article 316 of the Revised Penal Code, as amended;

10. Smuggling under Republic Act Nos. 455 and 1937;

11. Violations of Republic Act No. 8792, otherwise known as the Electronic
Commerce Act of 2000;

12. Hijacking and other violations under Republic Act No. 6235;
destructive arson and murder, as defined under the Revised Penal
Code, as amended;

55
13. Terrorism and conspiracy to commit terrorism as defined and
penalized under Sections 3 and 4 of Republic Act No. 9372;

14. Financing of terrorism under Section 4 and offenses punishable under

Sections 5, 6, 7 and 8 of Republic Act No. 10168, otherwise known as
the Terrorism Financing Prevention and Suppression Act of 2012:

15. Bribery under Articles 210, 211 and 211-A of the Revised Penal Code,
as amended, and Corruption of Public Officers under Article 212 of the
Revised Penal Code, as amended;

16. Frauds and Illegal Exactions and Transactions under Articles 213, 214,
215 and 216 of the Revised Penal Code, as amended;

17. Malversation of Public Funds and Property under Articles 217 and 222
of the Revised Penal Code, as amended;

18. Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and
176 of the Revised Penal Code, as amended;

19. Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise

known as the Anti-Trafficking in Persons Act of 2003;

20. Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No.

705, otherwise known as the Revised Forestry Code of the Philippines,
as amended;

21. Violations of Sections 86 to 106 of Chapter VI, of Republic Act No.

8550, otherwise known as the Philippine Fisheries Code of 1998;

22. Violations of Sections 101 to 107, and 110 of Republic Act No. 7942,
otherwise known as the Philippine Mining Act of 1995;

23. Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147,
otherwise known as the Wildlife Resources Conservation and
Protection Act;

24. Violation of Section 7(b) of Republic Act No. 9072, otherwise known as
the National Caves and Cave Resources Management Protection Act;

25. Violation of Republic Act No. 6539, otherwise known as the Anti-
Carnapping Act of 2002, as amended;

26. Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as

amended, otherwise known as the decree Codifying the Laws on
Illegal/Unlawful Possession, Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or Explosives;

27. Violation of Presidential Decree No. 1612, otherwise known as the

Anti-Fencing Law;

28. Violation of Section 6 of Republic Act No. 8042, otherwise known as

the Migrant Workers and Overseas Filipinos Act of 1995, as amended
by Republic Act No. 10022;

56
 29. Violation of Republic Act No. 8293, otherwise known as the
Intellectual Property Code of the Philippines;

30. Violation of Section 4 of Republic Act No. 9995, otherwise known as

the Anti-Photo and Video Voyeurism Act of 2009;

31. Violation of Section 4 of Republic Act No. 9775, otherwise known as

the Anti-Child Pornography Act of 2009;

32. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of

Republic Act No. 7610, otherwise known as the Special Protection of
Children Against Abuse, Exploitation and Discrimination;

33. Fraudulent practices and other violations under Republic Act No.
8799, otherwise known as the Securities Regulation Code of 2000; and

34. Felonies or offenses of a similar nature that are punishable under the
penal laws of other countries.”

JURISDICTION: it the authority to HEAR AND DECIDE A CASE, AND TO

EXECUTE THE DECISION.

1. Regional Trial Court- all cases of money laundering.

2. SANDIGANBAYAN- if committed by public officers and private
persons who are in conspiracy with such public officers.

ANTI-MONEY LAUNDERING COUNCIL (AMLC)- composed by:

1. Chairman- BSP GOVERNOR.

2. Members: (a) Commissioner of Insurance Commission; (b) Chairman
of the Securities and Exchange Commission (SEC)

Note: It shall act unanimously in discharging its functions.

FUNCTIONS OF THE AMLC:

1. to require and receive covered transaction reports from covered

institutions;

(2) to issue orders addressed to the appropriate Supervising Authority or

the covered institution to determine the true identity of the owner of any
monetary instrument or property subject of a covered transaction report or
request for assistance from a foreign State, or believed by the Council, on the
basis of substantial evidence, to be, in whole or in part, wherever located,
representing, involving, or related to, directly or indirectly, in any manner or by
any means, the proceeds of an unlawful activity;

(3) to institute civil forfeiture proceedings and all other remedial

proceedings through the Office of the Solicitor General;

57
 (4) to cause the filing of complaints with the Department of Justice or the
Ombudsman for the prosecution of money laundering offenses;

(5) to initiate investigations of covered transactions, money laundering

activities and other violations of this Act;

(6) to freeze any monetary instrument or property alleged to be proceeds

of any unlawful activity;

(7) to implement such measures as may be necessary and justified under

this Act to counteract money laundering;

(8) to receive and take action in respect of, any request from foreign states
for assistance in their own anti-money laundering operations provided in this
Act;

(9) to develop educational programs on the pernicious effects of money

laundering, the methods and techniques used in money laundering, the viable
means of preventing money laundering and the effective ways of prosecuting
and punishing offenders; and

(10) to enlist the assistance of any branch, department, bureau, office,

agency or instrumentality of the government, including government-owned and
-controlled corporations, in undertaking any and all anti-money laundering
operations, which may include the use of its personnel, facilities and resources
for the more resolute prevention, detection and investigation of money
laundering offenses and prosecution of offenders.

(11) To imposed administrative sanctions for the violation of laws, rules,

regulations, orders, and resolutions issued pursuant to law.

FREEZING: The COURT OF APPEALS, upon application ex-parte by the AMLC

and after determination that probable cause exists that any monetary instrument
or property is in any law related to an unlawful activity, may issue a FREEZE
ORDER which shall be effective immediately (for a period of twenty 20 days
unless extended by the Court upon application by the AMLC; total period shall
not exceed 6 months).

NOTE: Considering the INTRICATE AND DIVERSE WEB OF RELATED AND

INTERLOCKING ACCOUNTS pertaining to the monetary instrument or
properties that any person may create in the different covered institutions, their
branches and/or units, the AMLC may apply to freeze monetary instruments or
properties in the names of the reported owners/holders, and monetary
instruments or properties named in the application of the AMLC, including all
other related web of accounts pertaining to other monetary instruments and
properties, the funds and sources of which originated from or are related to other
monetary instruments or properties subject of the FREEZE ORDERS.

RELATED WEB OF ACCOUNTS: those accounts, the funds and sources of which
originate from and/or are materially linked to the monetary instruments or
properties subject of the freeze orders.

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AUTHORITY TO INQUIRE INTO BANK DEPOSITS: the AMLC may inquire
into OR EXAMINE any particular deposit or investment, with ANY BANKING
INSTITUTION OR NON-BANK FINANCIAL INSTITUTION upon order of the
Court when there is probable cause that the deposits OR INVESTMENTS,
including related accounts involved are related to an unlawful activities
defined in Section 3 (i) or a money laundering offense under Section 4.

However, a court order is NOT even necessary when the offense or

unlawful activity involved is any of the following:

1. Kidnapping for ransom under Article 267 of the Revised Penal Code.
2. Sections 4, 5, 7, 8, 9, 10, 12, 13, 14, 14 and 16 of the Comprehensive
Dangerous Drugs Act (RA 9165).

3. Hijacking and other violations under RA 6235.

4. Destructive arson and murders as defined in the RPC.

5. Felonies or offenses of a nature similar to 1, 2, 3, and 4 which are

punishable under the penal laws of other countries.

6. Terrorism and conspiracy to commit terrorism under RA 9372

7. Financing Terrorism under Section 4 and offenses punishable under

Section 5, 6, 7 and 8 of RA 10168.

The Court of Appeals shall act on the application to inquire into or

examine any deposit or investment with any with ANY BANKING
INSTITUTION OR NON-BANK FINANCIAL INSTITUTION WITHIN TWENTY
(24) HOURS from the filing of the application.

As to INQUIRY AND EXAMINATION OF RELATED ACCOUNTS, a

court order must first be obtained before the AMLC can inquire into these
RELATED ACCOUNTS. The procedure for the ex-parte court order for the
PRINCIPAL ACCOUNT shall be the same with that of the related accounts.

AUTHORITY TO INSTITUTE FORFEITURE PROCEEDINGS: (a) Civil

Forfeiture- Upon determination by the AMLC that probable cause exists that any
monetary instrument or property is in any way related to an unlawful activity
(defined in Section 3 (i) OR a MONEY LAUNDERING OFFENSE (defined in
Sec. 4), the AMLC is authorized to institute civil forfeiture proceedings and all
other remedial proceedings through the Office of the Solicitor General, a verified
ex-parte PETITION FOR FORFEITURE, and the Rules of court on Civil Forfeiture
shall apply.

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 FINANCIAL REHABILITATION AND INSOLVENCY ACT (RA10142)

“4.0 Financial Rehabilitation and Insolvency 5%

4.1Discuss the definition of terms
4.2 Elaborate suspension of payments
4.3 Discuss and apply REHABILITATION PLAN
4.3.1 Types
4.3.2 Commencement Order
4.3.3 Stay or Suspension Order
4.3.4 Rehabilitation Receiver
4.3.5 Management Committee
4.3.6 Rehabilitation Plan
4.3.7 CRAM DOWN EFFECT
4.4 Discuss and apply liquidation
4.4.1 Types
4.4.2 Conversion of Rehabilitation into liquidation
proceedings
4.4.3 Liquidation Order
4.4.4 Rights of Secured Creditors
4.4.5 Liquidator
4.4.6 Liquidation of Claims
4.4.7 Liquidation Plan”

DECLARATION OF POLICY: It is the policy of the State to encourage

DEBTORS, both juridical and natural persons, and their CREDITORS to collectively and
realistically RESOLVE AND ADJUST competing claims and property rights.

In furtherance thereof, the State shall ensure a timely, fair, transparent, effective
and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation
shall be made with a view to ensure or maintain certainty and predictability in
commercial affairs, preserve and maximize the value of the assets of these debtors,
recognize creditor rights and respect priority of claims, and ensure equitable treatment
of creditors who are similarly situated.

When rehabilitation is not feasible, it is in the interest of the STATE to facilitate a

speedy and orderly liquidation of these DEBTOR’S ASSETS AND THE SETTLEMENT
of their obligations (Sec. 2).

NATURE OF PROCEEDINGS:
1. In rem, meaning, it is a proceeding which binds the whole world.
2. Jurisdiction over all persons affected shall be acquired upon publication of
the notice of commencement in a newspaper of general circulation in the
Philippines.
3. Proceedings shall be summary and non-adversarial (Sec. 3)

60
PURPOSE:
1. To encourage debtors and creditors to collectively and realistically resolve
and adjust competing claims and property rights through
REHABILITATION.
2. If not feasible, to facilitate speedy and orderly LIQUIDATION of debtor’s
assets and the settlement of their obligations.
WHO THE “DEBTORS”? As stated in the law are INSOLVENT:
A. Sole proprietorship registered with the DTI.
B. Partnership registered with the SEC.
C. Corporations organized and existing under the laws of the Philippines;
D. INDIVIDUAL DEBTORS which are natural persons who are residents
and citizens of the Philippines.

GROUP OF DEBTORS, shall refer to:

1. Financially related CORPORATIONS- parent, subsidiary or affiliates.
2. PARTNERSHIPS- more than fifty (50%) percent of which is owned by
the same person.
3. Single proprietorships- OWNED BY THE SAME INDIVIDUAL.

EXCLUDED PERSONS: BANKS, PRE-NEED COMPANIES, INSURANCE

COMPANIES, AND GOVERNMENT AGENCIES OR UNITS- governed by their
respective laws.

INSOLVENT: refer to the financial condition of a DEBTOR that is generally:

1. Unable to pay its or his liabilities as they fall due; OR
2. Has LIABILITIES GREATER than its or his ASSETS

CREDITORS: Include natural or juridical persons who has a CLAIM against the
debtor that arose ON OR BEFORE commencement date, which either be secured
or unsecured:

1. UNSECURED CREDITORS- are those whose claim or a portion thereof

is neither secured, preferred nor subordinated.
2. SECURED CREDITORS- are those whose claims are SECURED by a
lien (either by law, agreement or by judicial judgment) which legally
entitles a creditor to resort the property subject of a lien for payment of
his claim.

e.g. LOAN SECURED BY A MORTGAGE/ LIEN OF WORKERS AND

SUPPLIERS ON INVENTORY/ATTACHMENT ISSUED BY A
COURT

WHAT IS A CLAIM? A CLAIM shall refer to all claims or demands of whatever

nature or character against the debtor or its property, whether money or
otherwise, liquidated or unliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, including, but not limited to:

1. All claims of the government, whether national or local, including

taxes, tariffs and custom duties; and
2. Claims against directors and officers of the debtor arising from acts
done in the discharge of their functions falling within the scope of their
authority.

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 This inclusion does NOT however, prohibit the creditors or third parties
from filing cases against the DIRECTORS AND OFFICERS acting in their
PERSONAL CAPACITIES.

PROCEEDINGS COVERED BY THE FRIA:

1. REHABILITATION- voluntary or involuntary.
2. PRE-NEGOTIATED REHABILITATION
3. LIQUIDATION- voluntary or involuntary.
4. SUSPENSION OF PAYMENTS

I-SUSPENSION OF PAYMENTS-this involves the CALLING THE CREDITORS

to a meeting to propose and agree on a SCHEDULE OF PAYMENTS and to
prevent the DEBTOR from making any payment outside the necessary or
legitimate expenses of the business, and the issuance of a SUSPENSION ORDER
to prevent pending execution against the debtor.

COVERAGE: Only individual debtors (no partnerships and corporations)

FEATURES:
1. The debtor has sufficient properties to cover all his debts but foresees
the impossibility of meeting his debts when they respectively fall due.
2. The purpose is to suspend or delay the payment of debts.
3. The amount of indebtedness is not affected (not reduced or
discharged).
4. The number of creditors is immaterial.

DISTINCTION WITH REHABILITATION

SUSPENSION OF PAYMENTS REHABILITATION

1. Applies only to individual debtors. 1. Applies to business organizations
2. Debtor has sufficient assets to cover 2. Debtor is insolvent
Liabilities
3. Secured debtors are not affected 3. Secured debtors are affected by the

4. Filed by the debtor.
5. No minimum requirement for the
Of claims.
STAY ORDER.
4. May be filed by the creditor.
5. When creditors file, the claims must
Be: 1. At least 1M or 2. At least 25% of
The subscribed capital stock of partner’s
contribution, whichever is higher

SUSPENSION ORDER: Upon motion filed by the individual debtor, the Court
may issue ORDER, suspending any pending execution against the individual
debtor.

As a rule, no creditor shall sue or institute to collect his claim from the debtor
from the time of filing of the petition for suspension of payments and as long as
the proceedings remain pending EXCEPT:

1. Those creditors having CLAIMS for:

a. Personal Labor

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 b. Maintenance
c. Expenses of last illness and funeral of the wife and children of
the debtor.

If incurred in the 60 days immediately prior to the filing of the

petition.
2. SECURED CREDITORS- the suspension order shall lapse when 3
months shall have passed without the proposed agreement being
accepted by the creditors or as soon as such agreement is denied.

PROHIBITED ACTS OF THE DEBTOR: After filing and during the pendency of
the PETITION, the debtor cannot:
1. Sell, transfer, encumber or dispose in any manner his property
EXCEPT those used in the ordinary operations of commerce or
industry in which the petitioning individual in ENGAGED.
2. Making any payment outside of the necessary or legitimate expenses
of his business or industry.

CREDITORS’ MEETING: The debtor shall attach to his petition a proposed

agreement with creditors, which shall be approved in a CREDITOR’S MEETING.

1. QUORUM: Presence of creditors holding at least 3/5 of the liabilities

of the debtor.
2. APPROVAL: DOUBLE MAJORITY is required.
a. 2/3 of the creditor’s voting and
b. Claims of the majority vote amount to at least 3/5 of the total
liabilities.

A creditor whose claim is incurred within 90 days prior to the filing of the
PETITION FOR SUSPENSION is NOT entitled to vote.

Creditors not affected by the suspension order may refrain from attending
the meeting and voting therein and he shall not be bound by any
agreement determined in the meeting. However, if they should join in the
voting they shall be bound in the same manner as are other creditors.

3. DISAPPROVAL- the proceedings shall be terminated and the creditors

shall be at liberty to enforce their rights.

II-REHABILITATION- is the restoration of the DEBTOR to a condition of

successful operation and solvency. If it shown that its continuance of OPERATION is
economically feasible; and its creditors can recover by way of the present value of
payments PROJECTED IN THE REHABILITATION, MORE if the DEBTOR continues
as a GOING CONCERN than it is immediately liquidated.

TYPES OF REHABILITATION

1. VOLUNTARY- initiated by the debtor, upon showing that:

a. The DEBTOR is insolvent.
b. The viability of rehabilitation.

WHO MAY FILE?

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 SOLE PROPRIETORSHIP- the OWNER/PROPRIETOR.
PARTNERSHIP- MAJORITY OF THE PARTNERS
CORPORATIONS- Majority of the directors or trustee; AND
Stockholders representing 2/3 of the outstanding
capital/members of non-stock corporaton.
2. INVOLUNTARY- initiated by the creditors or group of creditors, if:

a. There is no genuine issue of fact or law on the claim/s of the

petitioner/s.
b. No payments on the due and demandable debts have been made for at
least 60 days.
c. That the debtor has failed generally to meet its liabilities as they fall
due.
d. A creditor, other than the petitioner/s has initiated foreclosure
proceedings against the debtor that will prevent the debtor from
paying its debts as they become due or will render it insolvent.

WHO WILL FILE? Creditors with claims or aggregate of whose claim

is at least 1M or 25% of the subscribed capital stock or partner’s
contribution, whichever is higher.

COMMENCEMENT/STAY ORDER: The Court shall issue a COMMENCMENT

ORDER which shall INCLUDE A STAY/SUSPENSION ORDER, which shall:

1. Suspend all actions or proceedings, in court or otherwise for the

enforcement of claims against the debtor.
2. Suspend all actions to enforce any judgment, attachment, or other
provisional remedies against the debtor.
3. Prohibit the debtor from selling, encumbering, transferring, or
disposing in any manner any of its properties except in the ordinary
course of business.
4. Prohibit the debtor from making any payment of its liabilities
outstanding as of commencement date except as may be provided for
by law.

COMMECEMENT DATE: the date when the Court issues the Commencement
Order retroactive to the date of FILING OF THE PETITION FOR VOLUNTARY
OR INVOLUNTARY PROCEEDINGS.

The Commencement Order is issued within five (5) days from the filing of
the PETITION.

DURATION: The entire duration of the rehabilitation proceedings but may be

lifted if there is NO SUBSTANTIAL LIKELIHOOD for the debtor to be
successfully rehabilitated.

CLAIMS: refer shall refer to all claims or demands of whatever nature or

character against the debtor or its property, whether money or otherwise,
liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed
or undisputed, including, but not limited to:

64
 1. All claims of the government, whether national or local, including
taxes, tariffs and custom duties; and
2. Claims against directors and officers of the debtor arising from acts
done in the discharge of their functions falling within the scope of their
authority.

CREDITORS/THIRD PARTIES ARE NOT prohibited from filing cases

against the DIRECTORS AND OFFICERS acting in their PERSONAL
CAPACITIES.

EFFECTS OF STAY ORDER ON SECURED CREDITS- the preference of creditors

is creditors IS RETAINED, but the enforcement of such preference is
SUSPENDED.

EXCEPTIONS TO THE STAY ORDER:

1. Cases already pending appeal in the SC as of commencement date.

2. Cases pending or filed at a specialized court or quasi-judicial agency.
3. Enforcement of claims against sureties and other persons solidarily
liable with the debtor, and third party or accommodation mortgagors
as well as issuers of letters of credit, unless the property subject of the
third party or accommodation mortgagors is necessary for the
rehabilitation of the debtors.
4. Any form of action of customers or clients of a securities market
participant to recover or otherwise claim moneys and securities
entrusted to the latter in the ordinary course of the latter’s business as
well as any action of such securities market participant or the
appropriate regulatory agency or self-regulatory organization to pay
or settle such claims or liabilities.
5. Actions of a licensed broker or dealer to sell pledged securities of a
debtor pursuant to a securities pledge or margin agreement for the
settlement of securities transactions.
6. The clearing and settlement of financial transactions or entities to
reimburse themselves for nay transactions settled for the debtor.
7. Any criminal action against individual debtor or owner, partner,
director, or officer of a debtor shall not be affected by any proceeding
commenced under the FRIA.

COURT ACTION-Upon filing of the PETITION FOR REHABILITATION, the

court may:

1. Give due course to the PETITION if:

a. The debtor is insolvent; and
b. There is substantial likelihood for the debtor to be successfully
rehabilitated.

2. DENY the PETITION if any of the following are present:

a. When the debtor is not INSOLVENT.
b. The petition is a sham filing intended only to delay the
enforcement of rights of the creditors.
c. The petition/rehabilitation plan and the attachments are
materially FALSE OR MISLEADING STATEMENTS, or

65
 d. The debtor has committed acts of MISREPRESENTATION in
fraud of creditors.

3. CONVERT the proceedings INTO LIQUIDATION- there is no

substantial likelihood for the debtor to be successfully rehabilitated.
WHO WILL MANAGE THE BUSINESS OF THE DEBTOR: During the
rehabilitation proceeding, the management shall be done by the:

a. Existing Board of Directors and/or management; or

b. Upon motion, the Court may appoint:
1. The rehabilitation receiver.
2. Management Committee.

GROUNDS FOR THE APPOINTMENT OF A REHABILITATION

RECIVER/MANAGEMENT COMMITTEE:

1. Actual or imminent danger or dissipation, loss, wastage, or destruction

of the debtor’s assets or properties.
2. Paralyzation of the business operations of the debtor; or
3. (a) Gross mismanagement of the debtor; (b) FRAUD; (c) Other
wrongful conduct on the part of, or gross or willful violation of the
FRIA by the existing management of the debtor, owner, partner,
director, officer, or representative/s in the management of the debtor.

REHABILITATION RECEIVER: is the person appointed by the Court with the

principal duty of:

1. Preserving the value of the assets of the debtor during the

rehabilitation proceedings.
2. Determining the viability of the rehabilitation of the debtor.
3. Preparing and recommending a Rehabilitation Plan to the Court;
4. Implementing the rehabilitation Plan.

QUALIFICATIONS:
1. Citizen of the Philippines.
2. Resident of the Philippines in the 6 months preceding the
nomination.
3. Has the requisite knowledge or insolvency and commercial laws.
4. No conflict of interest.

MANAGEMENT COMMITTEE: when appointed by the Court, shall take the

place of the management and the governing body of the debtor and assume their
rights and responsibilities.

CREDITORS COMMITTEE: Creditors belonging to a class may formally

organize a committee, or as a body create a committee composed of each CLASS
OF CREDITORS, such as:

1. Secured Creditors.
2. Unsecured Creditors.
3. Trade creditors and suppliers.
4. Employees of the debtor.

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 The ROLE of the CREDITORS COMMITTEE is to assist the
rehabilitation receiver in communicating with the creditors and shall
be the primary liaison between the rehabilitation receiver and the
creditors.

They cannot exercise or waive any right or give any consent on behalf
of nay creditor unless specifically authorized in writing by such
creditor.

ACTS OF DEBTORS/OWNERSS/PARTNERS/DIRECTORS/OFFICERS which

may SUBJECT HIM/THEM TO LIABILITY:

1. Dispose or cause to be dispose of any property of the debtor other than

in the ordinary course of business or authorize or approve any
transaction in fraud of creditors or in any manner grossly
disadvantageous to the debtor and/or creditor.
2. Conceal or authorize or approve concealment, from the creditors, or
embezzle or misappropriates any property of the debtor.

EXTENT OF LIABILITY: Whichever is higher between

1. Double the value of the property sold, embezzled or disposed, or
2. Double the value of the transaction involved.

REHABILITATION PLAN- a PLAN by which the financial well-being and

viability of an insolvent debtor can be restored using VARIOUS MEANS,
including, but not limited to:

1. DEBT FORGIVENESS.
2. DENT RE-SCHEDULING.
3. REORGANIZATION OR QUASI-REORGANIZATION.
4. DACION EN PAGO
5. DEBT-EQUITY CONVERSION AND
6. SALE OF THE BUSINESS (or parts thereof) as a GOING CONCERN
7. Setting up of new business entity.
8. Other similar arrangements, as may be approved by the Court or
creditors.

APPROVAL REQUIRED:

1. Creditors representing 50% of the total claims and the confirmation of

the Court; or
2. The Court even without approval of the creditors or even over the
objections of the creditors, in the following cases:
a. The Rehabilitation Plan complies with the requirements of the
FRIA.

67
 b. The rehabilitation receiver recommends the confirmation of the
Rehabilitation Plan.

c. The shareholders, owners, partners of the juridical debtor lose at

least their controlling interest as a result of the rehabilitation
Plan.

d. The Rehabilitation Plan would likely provide the objecting class

of creditors with compensation which has a net present value
greater than that which they would have received if the debtor
were under liquidation.

SUBMISSION OF THE REHABILITATION PLAN: If the rehabilitation plan is

approved, the rehabilitation receiver shall submit the same to the Court for
confirmation. Within 5 days from receipt of the REHABILITATION PLAN, the
Court shall notify the creditors that the rehabilitation plan has been submitted
for CONFIRMATION, that any creditor may obtain copies of the Rehabilitation
Plan and that any creditor may file an OBJECTION THERETO.

OBJECTIONS OF CREDITORS: may be filed within 20 days from receipt of

notice from the Court that the Rehabilitation Plan has been submitted for
confirmation, on the following grounds:

1. That the creditors’ support was induced by fraud.

2. Documents or date relied upon in the plan are materially false or
misleading.
3. That the plan is in fact not supported by the voting creditors.

CONFIRMATION OF THE REHABILIATION PLAN: The Court shall issue an

order confirming the rehabilitation Plan if:

1. No objections are filed within the relevant period;

2. If objections are filed, the Court finds them lacking in merit;
3. The Court determines that the basis for the objection has been cured.
4. The Court determines that the debtor has complied with an order to
cure the objection.

The Court may confirm the REHABILITATION PLAN notwithstanding

unresolved disputed over claims of the Rehabilitation Plan have made
adequate provisions for paying such claims.

For avoidance of doubt, the provision of other laws to the contrary

notwithstanding, the Court shall have the power to approve or implement
the rehabilitation plan despite the lack of approval or objections from the
owners, partners, or stockholders of the insolvent debtor; Provided, That
the terms thereof are necessary to restore the financial well-being and
viability of the insolvent debtor.

PERIOD OF CONFIRMATION: must be within one (1) year from the date of
filing of the PETITION.

If no plan is confirmed within the said period, the proceedings may upon
motion, or motu propio, be converted into one for the liquidation of the debtor.

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CRAM DOWN EFFECT: The rehabilitation plan approved by the Court shall be
binding upon the:

1. DEBTOR and
2. All persons who may be affected by it, including creditors, whether or
not such persons:
a. Have participated in the proceedings;
b. Opposed the plan;
c. Whether or not the claims have been scheduled.

III- PRE-NEGOTIATED (OUT OF COURT) REHABILITATION

REQUIREMENTS:

1. The debtor must agree to the out-of–court or informal re-

structuring/workout agreement or rehabilitation plan;
2. Approved by the creditors:
a. Representing at least 67% of the secured obligation;
b. Representing at least 75% of the unsecured obligations and
c. Holding at least 85% of the total liabilities, secured and
unsecured.

STANDSTILL PERIOD: A standstill period that may be agreed upon by the

parties pending negotiation and finalization of the out-of-court or informal re-
structuring/workout agreement or rehabilitation Plan and it shall be effective
and enforceable not only against the contracting parties but also against the other
creditors, if:

1. Such agreement is approved by creditors representing more than 50%

of the total liabilities of the debtor.
2. Notice thereof is published in a newspaper of general circulation in the
Philippines once a week for two (2) consecutive weeks.
3. The standstill period does not exceed 120 days from the date of
effectivity.

The notice must invite creditors to participate in the negotiation for

out0of-court rehabilitation or re-structuring agreement and notify
them that said agreement will be binding on all creditors if the
required majority votes are met.

CRAM DOWN EFFECT: a re-structuring/workout agreement or

REHABILITATION PLAN that is approved pursuant to an informal workout
framework shall have the SAME LEGAL EFFECT AS CONFIRMATION of a Plan
as earlier discussed.

PUBLICATION REQUIREMENT: The notice of the rehabilitation or re-

structuring agreement or plan shall be published once a week of at least three (3)
consecutive weeks in a newspaper of general circulation in the Philippijes.

EFFECTIVITY: The rehabilitation plan or re-structuring agreement shall take

effect upon the lapse of 15 days from the date of the last publication of the notice
thereof.

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IV- LIQUIDATION:

Liquidation- is the proceeding where:

1. Claims are filed; and
2. The assets of the insolvent debtor are disposed; and the
3. Proceeds are divided among the creditors.

LIQUIDATOR: is one appointed by the Court who will facilitate the liquidation
proceedings. He may likewise be appointed by the creditors who filed their
claims within the period set by the Court.

SUSPENSION OF PAYMENTS VS. LIQUIDATION

1. Debtor has sufficient assets to cover 1. Debtor is already insolvent.
Liabilities.
2. Payment of obligations is stayed. 2. Obligations are discharged.
3. Applies only to individual debtors. 3. Also applies to business org.
4. Filed by the debtor. 4. May be initiated by the creditor.
5. No minimum amount of liabilities. 5. Debt of the individual must be
At least Php 500,000.00
6. Rules on concurrence and preference 5. Applicable.
DO NOT APPLY.

SIMILARITIES BETWEEN VOLUNTARY AND INVOLUNTARY

LIQUIDATION:

1. Debtor is insolvent.
2. Debts must at least be Php 500,000.00

DIFFERENCE BETWEEN VOLUNTARY AND INVOLUNTARY

LIQUIDATION:

VOLUNTARY INVOLUNTARY
1. Acts of insolvency need not be alleged 1. Creditors must prove acts
And proved. Of insolvency.

2. The individual debtor files the petition. 2. A creditor or group of

3. The debtor is not absent as he is the one
Who files the petition.
4. Posting of bond by creditors not
Required.
Creditors files the petition.
3. Applies even in the case of an
An absent debtor (one who
resides or has departed from the
Phils., cannot be found or
conceals himself).
4. Posting of bond by creditors
Is required.

5. Liquidation order is issued without 5. Liquidation order issued only

Trial. Only after trial.

6. Number of creditors immaterial. 6. Muse be 3 or more whose

Claim is at least 1M or at least

70
 25% of the subscribed capital
stock or partner’s contribution,
Whichever is higher. (same with
Rehabilitation)

ACTS OF INSOLVENCY:

1. That such person is about to depart or has departed from the Republic of the
Philippines, with intent to defraud his creditors;
2. That being absent from the Republic of the Philippines, with intent to defraud
his creditors, he remains absent.
3. That he conceals himself to avoid the service of legal process for the purpose
of hindering or delaying the liquidation of or defrauding his creditors.
4. That he conceals, or is removing, any of his property to avoid its being
attached or taken on legal process.
5. That he has suffered his property to remain under attachment or legal process
for three (3) days for the purpose of hindering or delaying the liquidation or
of defrauding his creditors.
6. That he has confessed or offered to allow judgment in favor of any creditor or
claimant for the purpose of hindering or delaying the liquidation or of
defrauding any creditors or claimant.
7. That he has willfully suffered judgment to be taken against him by default for
the purpose of hindering or delaying the liquidation or of defrauding his
creditors.
8. That he has suffered or procured his property to be taken on legal process
with intent to give a preference to one or more of his creditors and thereby
hinder or delay the liquidation or defraud any one of his creditors;
9. That he has made any assignment, gift, sale, conveyance, or transfer of his
estate, property, rights or credits with intent to hinder or delay the
liquidation or defraud his creditors.
10. That he has in contemplation of insolvency, made any payment, gift, sale,
conveyance, or transfer of his estate, property, rights or credits.
11. That being a merchant or tradesman, he has generally defaulted in the
payment of his current obligations for a period of 30 days.
12. That for a period of 30 days he has failed, after demand to pay any money
deposited with him or receive by him in a fiduciary; and
13. That an execution had been issued against him on a final judgment for
money, he shall have been found to be without sufficient property subject to
execution to satisfy judgment.

CONVERSION BY THE COURT INTO LIQUIDATION PROCEEDINGS: During

the pendency of court supervised or pre-negotiated rehabilitation proceedings,
the court may order the conversion of rehabilitation proceedings to liquidation
proceedings, in the following cases:

1. When a petition for rehabilitation is filed and it is established that the

debtor indeed is insolvent but there is NO LIKELIHOOD FOR THE
DEBTOR TO BE SUCCESSFULLY REHABILITATED.
2. If no rehabilitation plan is confirmed within a period of 1 year from the
filing of the petition for rehabilitation.
3. Failure of rehabilitation or dismissal of the petition for rehabilitation
on technical grounds.

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 4. Upon filing of the verified motion of the debtor during pendency of
the court-supervised or pre-negotiated rehabilitation proceedings.

Thereupon, the Court shall issue the LIQUIDATION ORDER

mentioned in Section 112.

LIQUIDATION ORDER: The said ORDER includes, among others:

1. Declare the debtor insolvent.

2. Order the liquidation of the debtor and in the case of a juridical debtor,
declare it as DISSOLVED.
3. Order the sheriff to take possession and control of all the property of
the debtor, except those that may be exempt for execution.
4. Order the publication of the petition or motion in a newspaper of
general circulation one a week for two (2) consecutive weeks.
5. Direct payments of any claims and conveyance of any property due to
the debtor TO THE LIQUIDATOR.
6. Prohibit payments by the debtor and the transfer of any property by
the debtor.
7. Direct all creditors to file their claims with the liquidator within the
period set by the rules of procedure.
8. Authorize payment of administrative expenses as they become due.
9. State that the debtor and creditors who are not petitioner/s may
submit the names of their nominees to the position of liquidator.
10. Set the case for hearing for the election and appointment of the
liquidator, which date shall not be less than thirty (30) days nor more
than 4 days from the date of the last publication.

RIGHTS OF SECURED CREDITORS- the liquidation order will NOT affect the
right of a SECURED CREDITOR to enforce the lien in accordance with the
applicable contract or law. He may:

1. Waive his right under the security or lien, prove his claim in the
liquidation proceedings and share in the distribution of assets of the
debtor; or
2. Maintain his rights under the security or lien. In which case:

a. The value of the property may be fixed in a manner agreed

upon by the creditor and liquidator.

i. Value is less than the claim-the liquidator may convey

the property to the creditor and the latter will be
admitted in the liquidation proceedings as a creditor for
the balance.
ii. Value exceeds the claim- the liquidator may convey the
property to the creditor and waive the debtor’s right of
redemption upon receiving the excess from the creditor.

b. The liquidator may sell the property and satisfy the secured
creditor’s entire claim from the proceeds of the sale.
c. The secured creditor may enforce the lien and foreclose on the
property pursuant to applicable laws.

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LIQUIDATOR:

Election of liquidator- Only the creditors who have filed their claims within the
period set by the Court, and whose claims are not barred by the statute of
limitations, will be allowed to vote in the election of the liquidator.

A secured creditor will not be allowed to vote, unless:

a. He waives his security or lien, or

b. Has the value of the property subject of his security o lien fixed by
agreement with the liquidator, and is admitted for the balance of his
claim.

The creditors entitled to vote will elect the LIQUIDATOR IN OPEN COURT. The
nominee receiving the highest number of votes cast in terms of amount of claims
and who is qualified shall be appointed as the liquidator.

COURT APPOINTED LIQUIDATOR: The Court may appoint the liquidator if:

1. On the date set for the election of the liquidator, the creditors do not
attend.
2. The creditors who attend fail or refuse to elect a liquidator.
3. After being elected, the liquidator fails to qualify, or
4. A vacancy occurs for any reason whatsoever, in any of the cases
provided herein, the Court may instead set another hearing of the
election of the liquidator.

A rehabilitation receiver, who was administering the debtor prior to the

commencement of the liquidation, may also be appointed as a liquidator.

QUALIFICATONS OF THE LIQUIDATOR: The liquidator shall have the

qualifications enumerated above for REHABILITATION RECEIVERS.

REMOVAL: He may be removed at any time by the Court of cause, either motu
propio or upon motion of any creditor entitled to vote for the election of the
liquidator.

DETERMINATION OF CLAIMS:

REGISTRY OF CLAIMS- Within twenty (20) days from his assumption into
office, the liquidator shall prepare a PRELIMINARY REGISTRY OF CLAIMS OF
SECURED AND UNSECURED CREDITORS.

A property subject of their security or lien by agreement with the liquidator and
is admitted as a creditor for the balance, shall be considered as unsecured
creditors.
The liquidator shall make the registry available for public inspection and provide
publication, notice to creditors, individual debtors, owner/s of the sole
proprietorship-debtor, the partners of the partnership-debtor and shareholders
or members of the corporation debtor, on where and when they may inspect it.
All claims must be duly proven before being paid.

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RIGHT OF SET-OFF: If the debtor and creditor are mutually debtor and creditor
of each other, one debt shall be set off against the other, and only the balance
shall be allowed in the liquidation proceedings.

OPPOSITION OR CHALLENGE TO CLAIMS- Within thirty (30) days from the

expiration of the period for filing of application for recognition of claims,
creditors, individual debtors, owner/s of the sole proprietorship-debtor, the
partners of the partnership-debtor and shareholders or members of the
corporation debtor and other interested parties may SUBMIT A CHALLENGE
TO CLAIM OR CLAIMS TO THE COURT, serving a certified copy on the
liquidator and the creditor holding the challenged claim. Upon the expiration of
the 30-day period, the rehabilitation receiver shall submit to the Court the
registry of claims containing the undisputed claims that have not been subject to
challenge. Such claims shall become final upon the filing of the register and may
be subsequently set aside only on grounds of FRAUD, ACCIDENT, MISTAKE
OR INEXCUSABLE NEGLECT.

SUBMISSION OF DISPUTED CLAIM TO THE COURT: The liquidator shall

resolve disputed claims and submit his findings thereon to the Court for final
approval. The liquidator may disallow claims.

THE LIQUIDATION PLAN- within three (3) months from assumption into
office, the Liquidator shall submit a LIQUIDATION PLAN to the Court. The
Liquidation Plan shall, as a minimum enumerate:

1. All assets of the debtor;

2. A schedule of the liquidation of the assets; and
3. Payment of the claims.

EXEMPT PROPERTY TO BE SET APART-it shall be the duty of the Court, upon
petition and hearing, to exempt and set apart, for the use and benefit of the said
insolvent, such REAL AND PERSONAL PROPERTY AS IS BY LAW EXEMPT
FROM EXECUTION, and also a homestead; but no such petition shall be heard
as aforesaid until it is first proved that notice of the hearing of the application
therefor has been duly given by the clerk, by causing such notice to be posted at
least three (3) public places in the province or city at least ten (10) days prior to
the time of such hearing, which notice shall set forth the name of the said
insolvent debtor, and the time and place appointed for the hearing of such
application and shall briefly indicate the homestead sought to be exempted or
property sought to be set aside; and the decree must show that such proof was
made to the satisfaction of the court, and shall be conclusive evidence of that fact.

SALE OF ASSETS IN LIQUIDATION- The liquidator may SELL the

unencumbered assets of the debtor and convert the same into money.

GENERAL RULE: The sale shall be made at public auction.

EXCEPTIONS: a PRVATE SALE may be allowed with the approval of the Court
if:

(a) The goods to be sold are of a perishable nature or are liable to quickly
deteriorate in value or are disproportionately expensive to keep or
maintain.
(b) The private sale is for the best interest of the debtor and his creditors.

74
 With the approval of the Court, unencumbered property of the debtor
may also be conveyed to a creditor in satisfaction of his claim or part
thereof.

ORDER REMOVING THE DEBTOR FROM THE LIST OF REGISTERED

ENTITIES AT THE SECURITIES AND EXCHANGE COMMISSION: Upon
determining that the liquidation has been completed, the Court shall issue an
ORDER approving the report and ordering the SEC to remove the debtor from
the registry of legal entities.

TERMINATION PROCEEDINGS: Upon receipt of evidence showing that the

debtor has been removed from the registry of legal entities at the SEC. The Court
shall issue an ORDER terminating the proceedings.

PHILIPPINE COMPETITION ACT (RA 10667)

DECLARATION OF STATE POLICY: The efficiency of market competition as a

mechanism for allocating goods and services is a generally accepted precept. The
State recognizes that past measures undertaken to liberalize key sectors in the
economy need to be reinforced be measures that safeguard competitive
conditions. The State also recognizes that the provision of equal opportunities to
all promotes entrepreneurial spirit, encourages private investments, facilitates

75
technology development and transfer and enhances resource productivity.
Unencumbered market COMPETITION also serves the INTEREST OF
CONSUMERS by allowing them to exercise their right of choice over goods and
services offered in the market.

Pursuant to such constitutional goals for the national economy to attain a

more equitable distribution of OPPORTUNTIES, INCOME, AND WEALTH; a
sustained increased in the amount of goods and services produced by the nation
for the benefit of the people; and an expanding productivity as the key to raising
the quality of life for all, especially the underprivileged and the constitutional
mandate that the State shall REFULATE OR PROHIBIT MONOPOLIES when the
public interest so requires and that NO COMBINATIONS in restraint of trade or
unfair competition shall be allowed, the STATE shall:

(a) Enhance economic efficiency and promote FREE AND FAIR

COMPETITION in trade, industry and all commercial economic
activities, as well as establish a NATIONAL COMPETITION POLICY
to be implemented by the Government of the Republic of the
Philippines and all of its political agencies as a whole;
(b) PREVENT ECONOMIC CONCENTRATION which will control
production, distribution, trade, or industry that will unduly stifle
competition, lessen, manipulate or constrict the discipline of free
markets; and
(c) PENALIZE all forms of anti-competitive agreements, abuse of
dominant position and anti-competitive mergers and acquisitions,
with the objective of protecting consumer welfare and advancing
domestic and international trade and economic development.

APPLICABILITY: The LAW shall be enforceable AGAINST ANY PERSON OR

ENTITY engaged in any trade, industry and commerce in the Republic of the
Philippines. It shall likewise be applicable to INTERNATIONAL TRADE having
direct, substantial, and reasonable forseeable effects in trade, industry or
commerce in the Republic of the Philippines, including those that result from
acts done outside the Republic of the Philippines.

EXCLUSION: The LAW shall NOT APPLY to the COMBINATIONS OR

ACTIVITIES OF WORKERS OR EMPLOYEES NOR TO AGREEMENTS OR
ARRANGEMENTS WITH THEIR EMPLOYERS when such combination,
activities, agreements or arrangements are designed SOLELY TO FACILITTAE
COLLECIVE BARGAINING in respect to conditions of employment.

PROHIBITED ACTS: The PROHIBITED ACTS under the Philippine Competition

Act includes:

1. Anti-competitive agreements
2. Abuse of Dominant Position
3. Prohibited Mergers

ANTI-COMPETITIVE AGREEMENTS:

(A)The following agreements, between or among competitors, are PER SE

PROHIBITED:

76
 1. Restricting competition as to price, or components thereof or
other terms of trade.
2. Fixing a price at an auction or in any form of bidding including
bidding, bidding suppression, bid rotation and market
allocation and other analogous practices or bid manipulation.

(B) The following agreements, between or among competitors which have

the object or effect of substantially PREVENTING, RESTRICTING, OR
LESSENING COMPETITION shall be PROHITED:

1. Setting, (limiting), or controlling production, markets, technical

development, or investment.
2. Dividing or sharing the market, whether by volumes of sales or
purchases, territory, types of goods or services, buyers or sellers
or any other means;

(C) AGREEMENTS other than those specified in (a) and (b) of this section
which have the object or effect of substantially preventing, restricting,
or lessening competition shall also be prohibited.

DEFENSE: An agreement may not necessarily be deemed a violation of this ACT,

if the TRANSACTION contributes to IMPROVING THE PRODUCTION OR
DISTRIBUTION OF GOODS AND SERVICES or to promoting technical or
economic progress, while allowing consumers a fair share of the resulting
benefits.

EXCLUDED FROM “COMPETITORS”- An entity that controls, is controlled by,

or is under the common control with another entity or entities, have common
economic interests, and are not otherwise able to decide or act independently of
each other, shall NOT be considered competitors for purposes of this section.

ABUSE OF DOMINANT POSITION:

It shall be prohibited for one or more entities to ABUSE THEIR

DOMINANT POSITION by engaging in conduct that would substantially
PREVENT, RESTRICT OR LESSEN COMPETITION:

(A)SELLING goods or services BELOW COST with the object of driving

competition OUT of the relevant market; Provided, THAT in the
Commission’s evaluation of this fact, it shall be considered whether the
entity or entities have no such object and the price established was in
good faith to meet or compete with the lower price of a competitor in
the same market selling the same or comparable product or service of
like quality.
(B) IMPOSING BARRIERS TO ENTRY or committing acts that prevent
competitors from growing within the market in an anti-competitive
manner except those that develop in the market as a result or arising
from a superior product or process, business acumen, or legal rights or
laws.

(C) Making a TRANSACTION subject to acceptance by the other parties of

obligations which, by their nature or according to commercial usage,
have no connection with the transaction.

77
(D)SETTING PRICES OR OTHER TERMS OF CONDITIONS that
discriminate unreasonably between customers or sellers of the same
goods or services, where such customers or sellers are
contemporaneously trading on similar terms and conditions, where the
effect may be to lessen competition substantially; Provided, That the
following shall be considered PERMISSIBLE PRICE DIFFERENTIALS:

(1) Socialize pricing for the less fortunate sector of the economy.
(2) Price differential which reasonably or approximately reflect
differences in the cost of manufacture, sale, or delivery resulting
from differing methods, technical conditions, or quantities in
which the goods or services are sold or delivered to the buyers
or sellers.
(3) Price differential or terms of sale offered in response to the
competitive price of payments, services or change in the
facilities furnished by a competitor; and
(4) Price changes in response to changing market conditions,
marketability of goods or services, or volume.

(E) IMPOSING RESTRICTIONS on the lease or contract for sale or trade of

goods or services concerning where, to whom, or in what form goods
or services may be sold or traded, such as fixing prices, giving
preferential discounts or rebate upon such price or imposing
conditions not to deal with competing entities, where the object or
effect of the restriction is to PREVENT, RESTRICT OR LESSEN
COMPETITION substantially: Provided, that nothing contained in this
Act shall prohibit or render unlawful:

(1) Permissible franchising, licensing, exclusive merchandizing or

exclusive distributorship agreements such as those which give
each party the right to unilaterally terminate the agreement; or
(2) Agreements protecting intellectual property rights, confidential
information, or trade secrets;

(F) Making supply of particular goods or services DEPENDENT UPON

THE PURCHASE OF THER GOODS OR SERVICES FROM THE
SUPPLIER which have no direct connection with the main goods or
services to be supplied;

(G)Directly or indirectly imposing UNFAIRLY LOW PURCHASE PRICES

for the goods of services of, among others, marginalized agricultural
producers, fisherfolk, micro-small, medium scale enterprises, and
other marginalized service providers and producers;

(H) Directly or indirectly imposing unfair purchase or selling price on

their competitors, customers, suppliers or consumers, provided that
priced that develop in the market as a result of or due to a superior
product or process, business acumen or legal rights or laws shall not be
considered unfair prices; and

(I) LIMIING PRODUCTION , markets or technical development to the

prejudice of consumers, provided that limitations that develop in the

78
 market as a result of or due to a superior product or process, business
acumen or legal rights or laws shall not be a violation of this ACT.

SUBJECT TO THE FOLLOWING:

(1) NOTHING in this ACT shall be construed as a prohibition on having a

dominant position in a relevant market or on acquiring, maintaining,
and increasing market share through legitimate means that do not
substantially prevent, restrict or lessen competition.

(2) Any conduct which contributes to improving production or

distribution of goods or services within the relevant market, or
promoting technical and economic progress while allowing consumers
a fair share of the resulting benefit may not necessarily be considered
an abuse of dominant position.

(3) That the foregoing shall not constrain the Commission or the relevant
regulator from pursuing measures that would promote fair
competition or more competition as provided in this Act.

MERGERS AND ACQUISITIONS:

REVIEW OF MERGERS AND ACQUISITIONS: The Commission shall have the

power to REVIEW mergers and acquisitions based on FACTORS deemed
relevant by the Commission.

PROHIBITED MERGERS AND ACQUISITIONS: Merger or acquisition

agreements that SUBSTANTIALLY PREVENT, RESTRICT, OR LESSEN
COMPETITION in the relevant market or in the market of goods or services as
may be determined by the Commission shall BE PROHIBITED:

EXCEPTIONS:

(1) Mergers or acquisition agreement may nonetheless, be exempted from

prohibition by the Commission when the parties establish either of the
following:

(a) The concentration has brought about or is likely to bring about

gains in efficiencies that are greater than the effect of any limitation
on competition that result or likely to result from the merger or
acquisition agreement; or
(b) A party to the merger or acquisition agreement is faced with actual
or imminent financial failure and the agreement represents the least
anti-competitive agreement among the known alternative uses for
the failing entity’s assets.

(2) An entity shall not be prohibited from continuing to own and hold the
stock or other share capital assets of another corporation which it
acquired PRIOR TO THE APPROVAL OF THIS ACT, or acquiring or
maintaining its market share in a relevant market through such means
without violating the provisions of this Act.

79
 (3) The acquisition of the stock or other share capital of one or more
corporation solely for investment and not used for voting or exercising
control and not to otherwise bring about, or attempt to bring about the
prevention, restriction, or lessening of competition in the relevant
market shall not be prohibited.

BURDEN OF PROOF: The burden of proof for exemption above lies with the
parties seeking the exemption. A party seeking to rely on the exemption
specified in 1 (a) above must demonstrate that if the agreement were not
implemented, significant efficiency gains would not be realized.

FINALITY OF RULINGS ON MERGERS AND ACQUISITIONS: Mergers or

acquisitions agreements that have received favorable RULING from the
COMMISSION except when such ruling was obtained on the basis of fraud or
false material information, may NOT BE CHALLENGED under this Act.

COMPULSORY NOTIFICATION: Parties to the merger or acquisition agreement

wherein the value of the transaction EXCEEDS ONE BILLION PESOS (Php
1,000,000,000.00) are prohibited from consummating their agreement until thirty
(30) days after providing notification to the COMMISSION in the form and
containing the information specified in the regulations issued by the
Commission.

The Commission shall promulgate OTHER CRITERIA, such as increased

market share in the relevant market in excess of minimum thresholds, that
maybe applied specifically to a sector, or across some or all sectors, in
determining whether parties to a merger or acquisition shall notify the
COMMISSION.

EFFECT OF NO NOTICE:
(1) An agreement consummated in violation of this requirement to notify
the Commission shall be considered VOID and
(2) Subject the parties to an ADMINISTRATIVE FINE of 1% to 5% of the
value of the transaction.

REQUEST FOR FURTHER INFORMATION, EFFECT: Should the Commission

deem it necessary, it may request further information that are reasonably
necessary and directly relevant to the prohibition under Section 20 (Prohibited
Mergers and Acquisitions) from the parties to the agreement before the expiry of
the thirty (30) day period.
The issuance of such a request has the effect of extending the period
which the agreement may not be consummated for an additional sixty (60) days
beginning on the day after the request for information is received by the parties.
In no case shall the total period for review by the Commission of the subject
agreement exceed ninety (90) days from the initial notification by the parties.

EXPIRATION OF THE PERIOD OF REVIEW: When the period has expired and
no decision has been promulgated for whatever reason, the MERGER OR

80
ACQUISITION SHALL BE DEEMED APPROVED and the parties may proceed
to implement or consummate it.

CONFIDENTIALTITY: All notices, documents, and information provided to or

emanating from the Commission shall be subject to CONFIDENTIALITY RULE
except when the release of information contained therein is with the consent of
the notifying entity or is mandatory required to be disclosed by law or by a valid
order of a court of competent jurisdiction, or of a government or regulatory
agency, including an exchange.

EFFECT ON THE REQUIREMENT OF FAVORABLE RECOMMENDATION: In

case the merger or acquisition of banks, banking institutions, building and loan
associations, trust companies, insurance companies, public utilities, educational
institutions, and other special corporations governed by special laws, a favorable
or no objection ruling by the Commission shall NOT BE CONSTRUED as
DISPENSING OF THE REQUIREMENT FOR A FAVORABLE
RECOMMENDATION by the appropriate government agency under Section 79
of the Corporation Code of the Philippines.

A FAVORBALE RECOMMENDATION by a government agency with a

competition mandate shall give rise to a DISPUTABLE PRESUMPTION that the
proposed merger or acquisition is NOT VIOLATIVE of this ACT.

EFFECTS OF NOTIFICATION: If within the relevant periods mentioned above,

the Commission determines that such agreement is prohibited and does not
qualify for exemption, the Commission may:

1. Prohibit the implementation of the Agreement.

2. Prohibit the implementation of the Agreement unless and until it is
modified by changes specified by the Commission.
3. Prohibit the implementation of the agreement unless and until the
pertinent party or parties enter into legally enforceable agreements
specified by the Commission.

NOTIFICATION THRESHOLD: The Commission shall, from time to time, adopt

and publish regulations stipulating:

1. The transaction value threshold and such other criteria subject to the
notification requirement of Section 17 of this Act;
2. The information that must be supplied for notified merger or
acquisition;
3. Exceptions or exemptions from the notification requirement; and’

Other rules relating to the notification procedures.

FINES AND PENALTIES:

ADMINISTRATIVE FINES: The Commission may impose administrative fines of

up to 100 M for the first offense and Php 100M to Php 200M for the second
offense for the investigation relative to the following:

1. Anti-Competitive Agreements

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 2. Abuse of Dominant Position
3. Compulsory Notification on Mergers and Acquisitions
4. Prohibited Mergers and Acquisitions

In fixing the amount of fine, the Commission shall have regard to both the
gravity and the duration of the violation.

FAILURE TO COMPLY WITH AN ORDER OF THE COMMISISON: An entity

which fails o refuses to comply with a ruling, order or decision issued by the
Commission shall pay a penalty of Php 50,000.00 to Php 2,00,00.00 for each
violation and a similar amount of penalty for EACH DAY thereafter until the
said entity fully complies. Provided, that these files shall only accrue daily
beginning forty-five (45) days from the time that the said decision, order or
ruling was received.

SUPPLY OF INCORRECT OR MISLEADING INFORMATION: The Commission

may likewise impose upon any entity filed up to Php 1,000,000.00, where
intentionally or negligently, they supply incorrect or misleading information in
any document, application or other paper filed with or submitted to the
Commission or supply incorrect or misleading information in an application for
a binding ruling, a proposal for a consent judgment, proceedings relating to a
show cause order, or application for modification of the Commission’s ruling,
order, or approval, as the case may be.

OTHER VIOLATIONS: Any other violations not specifically penalized under the
relevant provisions of this Act shall be penalized by a fine P 50,000.00 tp P
2,000,000.00.

CRIMINAL PENALTIES: An entity that enters into any anti-competitive

agreement shall, for each and every violation, be penalized by imprisonment
from two )2) to seven (7) years; and a fine of not less than Php 50,000,000.00 but
not more than Php 250,000,000.00. The penalty shall be imposed upon the
RESPONSIBLE OFFICERS, AND DIRECTORS OF THE ENTITY.

When the entities involved are juridical persons, the penalty of

imprisonment shall be imposed on its officers, directors, or employees holding
managerial positions, who knowingly and willfully responsible for such
violation.

GOVERNMENT PROCUREMENT LAWN (RA 9184)

6.1 Explain the general principles 2%

6.2 Discuss the scope and application
6.3 Discuss the definition of terms
6.4 Discuss and apply the procurement procedures
6.4.1 Preparation of bidding documents
6.4.2 Invitation to bid
6.4.3 Receipt of opening of bids
6.4.4 Bid evaluation
6.4.5 Post-qualification

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 6.4.6 Award, implementation and termination of the contract
6.5 Explain the Disclosure of Information
6.6 Demonstrate the alternative methods of procurement

GENERAL PRINCIPLES, SCOPE AND APPLICATION

DECLARATION OF POLICY: It is the declared policy of the State to promote the ideals
of GOOD GOVERNANCE in all its branches, departments, subdivision, and
instrumentality, including government owned and/or controlled corporations and local
government units.

GOVERNING PRINCIPLES: All procurement of the national government, its

departments, bureaus, offices and agencies, including state universities and colleges,
government owned and/or controlled corporations, government financial institutions
and local government units, shall IN ALL CASES, be governed by these principles:

A. TRANSPARENCY- in the procurement process and in the

implementation of procurement contracts.

B. COMPETITIVENESS- by extending equal opportunity to enable

private contracting parties who are ELIGIBLE and QUALIFIED to
participate in public bidding.

C. STREAMLINED PROCUREMENT PROCESS- that will uniformly

apply to all government procurement. The procurement process shall
be simple and made adaptable to advances in modern technology I
order to ensure an effective and efficient method.

D. SYSTEM OF ACCOUNTABILITY where both the public officials

directly or indirectly involved in the procurement process as well as in
the implementation of procurement contracts and the private parties
that deal with government are, when WARRANTED by circumstances,
INVESTIGATED AND HELD LIABLE for their ACTIONS relative
thereto.

E. PUBLIC MONITORING- of the procurement process and the

implementation of AWARDED CONTRACTS with the end in view of
guaranteeing that these contracts are awarded pursuant to the
provisions of the LAW and its implementing rules and regulations,
and that, these contracts are performed strictly according to
specifications.

SCOPE AND APPLICATION: The law shall apply to the:

A. PROCUREMENT OF INFRASTRUCTURE PROJECTS;

B. GOODS AND CONSULTING SERVICES.

Regardless of source of funds, whether local or foreign, by all branches

and instrumentalities of government, its departments, offices, and agencies,
including government owned and/or controlled corporations and local
government units, subject to the provisions of Commonwealth Act 138.

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 Any treaty or international or executive agreement affecting the subject
matter of this Act to which the Philippines is signatory shall be observed.

PREPARATION OF BIDDING DOCUMENTS

FORM AND CONTENTS OF BUDDING DOCUMENTS- The bidding

documents shall be prepared by the Procuring Entity following the standard
forms and manuals prescribed by the GPPB. The bidding documents shall
include the following:

a. Approved Budget for the Contract;

b. Instruction to bidders, criteria for eligibility, bid evaluation, and
post-qualification, as well as the date, time and place of the
PRE-BID CONFERENCE (where applicable), submission of bids
and opening of bids;
c. Terms of Reference;
d. Eligibility Requirements;
e. Plans and Technical Specifications;
f. Form of Bid, Price Form, and List of Goods or Bill of Quantities;
g. Delivery Time or Completion Schedule;
h. Form and Amount of Bid Security;
i. Form and Amount of Performance Security and Warranty; and
j. Form of Contract, and General and Special Conditions of
Contract.

The Procuring Entity may require additional document

requirement or specifications necessary to complete the
information required for bidders to prepare and submit their
respective bids.

REFERENCE TO BRAND NAMES- Specifications for the procurement of goods

shall be based on relevant characteristics and/or performance. Reference to
brand names SHALL NOT BE ALLOWED.

ACCESS TO INFORMATION- In all stages of the preparation of the Bidding

Documents, the procuring entity shall ensure equal access to information. Prior
to their official release, no aspect of the Bidding Documents shall be divulged or
released to any prospective bidder or having direct or indirect interest in the
project to be procured.

INVITATION TO BID

PRE-PROCUREMENT CONFERENCE- Prior to the issuance of the INVITATION

TO BID, the BAC is mandated to hold a pre-procurement conference on EACH
AND EVERY PROCUREMENT, except those contracts below a certain level or
amount specified in the IRR, in which case, the holding of the same is
OPTIONAL.

The pre-procurement conference shall assess the readiness of the procurement in

terms of confirming the certification of availability of funds as well as reviewing

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all relevant documents and the draft INVITATION TO BID, as well as
consultants hired by the agency concerned and the representatives of the end-
user.

ADVERTISING AND CONTENTS OF THE INVITATION TO BID- In line with

the principle of transparency and competitiveness, all Invitations to Bid
Contracts under competitive bidding shall be advertised by the Procuring Entity
in such manner and for such length of time as may be necessary under the
circumstances, in order to ensure the widest possible dissemination thereof, such
as, but not limited to, posting in the procuring entity’s premises, in newspapers
of general circulation, the G-EPS and the website of the procuring entity, if
available. The details and mechanics of implementation shall be provided in the
IRR to be promulgated under this ACT.

CONTENTS: The INVITATION TO BID shall contain, among others:

a. A brief description of the subject matter of the Procurement;

b. A general statement on the criteria to be used by the Procuring entity
for the eligibility check, the shortlisting of prospective bidders, in case
of the Procurement of Consulting Services the examination and
evaluation of bids and post-qualification.
c. The date, time and place of deadlines for the submission and receipt of
eligibility requirements, the pre-bid conference, if any, the submission
and receipt of bids, and the opening of bids;
d. The Approved budget for the Contract to be bid;
e. The Source of Funds;
f. The period of availability of the bidding documents, and the place
where these may be secured and;
g. The contract duration; and
h. Such other necessary information deemed relevant by the procuring
entity.

PRE-BID CONFERENCE-At least one (1) pre-bid conference shall be conducted

for each procurement, unless otherwise provided in the IRR. Subject to the
approval of the BAC, a pre-bid conference may also be conducted upon written
request of any prospective bidder.

The Pre-Bid Conference(s) shall be held within a reasonable period before the
deadline for the receipt of bids to allow prospective bidders to adequately
prepare their bids, which shall be specified in the IRR.

RECEIPT AND OPENING OF BIDS

ELIGIBILITY REQURIEMENTS FOR THE PROCUREMENT OF GOODS AND

INFRASTRUCTURE PROJECTS- the BAC or under special circumstances
specified in the IRR, its duly designated organic office shall determine the
eligibility of prospective bidders for the procurement of goods and infrastructure
projects, based on the bidder’s COMPLIANCE with eligibility requirements
within the period set forth in the Invitation to Bid. The eligibility requirements
shall provide for fair and equal access to all prospective bidders. The documents
submitted in satisfaction of the eligibility requirements shall be made UNDER
OATH by the prospective bidder or by his duly authorized representative

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certifying the correctness of the statements made and the completeness and
authenticity of the document submitted.

A prospective bidder may be allowed to submit his eligibility requirements

electronically. However, said bidder shall later on certify under oath as to
correctness of the statements made and the completeness and authenticity of the
document submitted.

ELIGIBILITY REQUIREMENT AND SHORT-LISTING FOR CONSULTING

SERVICES- The eligibility of prospective bidders for the procurement of
Consulting Services shall be determined by their compliance with the eligibility
requirements prescribed for the competitive Bidding concerned, within the
period stated in the Invitation to Bid. The eligibility requirements shall provide
for fair and equal access to all prospective bidders. The prospective bidder shall
certify under oath as to the correctness or the statements made and the
completeness and authenticity of the documents submitted.

A prospective bidder may be allowed to submit his eligibility requirements

electronically. However, said bidder shall later on certify under oath as to
correctness of the statements made and the completeness and authenticity of the
document submitted.

The eligible prospective bidders shall then be EVALUATED USING

NUMERICAL RATING on the bases of the short listing requirements prescribed
for the Competitive Bidding concerned, within the period stated in the Invitation
to Bid to determine the short list of bidders who shall be allowed to submit their
respective bids.

SUBMISSION AND RECEIPT OF BIDS

SUBMISSION AND RECEIPT OF BIDS- a bid shall have two (2) components,
namely:

1. The technical component; and

2. The financial component.
Subject to the following rules:

1. The bids’ component shall be in SEPARATE SEALED ENVELOPES,

and which shall be submitted simultaneously.
2. The bids shall be received by the BAC on such date, time and place
specified in the invitation to bid.
3. The deadline for the receipt of bids shall be fixed by the BAC, giving
the prospective bidders sufficient time to study and prepare their bids.

The deadline shall also consider the urgency of the procurement

involved. Bids submitted after the deadline shall NOT BE ACCEPTED.

The GPPB may prescribe innovative procedure for the submission,

receipt and opening of bids through G-EPS.

MODIFICATION OF BIDS- A bidder may modify his bid, provided that this is
done BEFORE the deadline for the receipt of bids. The modification shall be

86
submitted in a sealed envelope duly identified as a modification for the original
bid and stamped received by the BAC.

WITHDRAWAL OF BIDS- A bidder may through a letter, withdraw his bid or

express his intention not to participate in the bidding BEFORE THE DEADLINE
FOR THE RECEIPT OF BIDS. In such case, he shall no longer be allowed to
submit another Bid for the same contract either directly or indirectly.

BID SECURITY- All bids shall be accompanied by a Bid Security, which shall
serve as a guarantee that, after receipt of the Notice of Award, the winning
bidder shall enter into a contract with the Procuring entity within the stipulated
time and furnish the required performance security. The specific amounts and
allowable forms of the Bid Security shall be prescribed in the IRR.

BID VALIDITY- Bids and Bid securities shall be valid for such reasonable period
of time indicated in the Bidding Documents. The duration for each undertaking
shall take into account the time involved in the process of Bid evaluation and
award of contract.

BID OPENING- The BAC shall publicly OPEN ALL BIDS at the time, date, and
place specified in the bidding documents. The minutes of the bid opening shall
be made available to the public upon written request and payment of a specified
fee.

BID EVALUATION

PRELIMINARY EXAMINATION OF BIDS- Prior to BID EVALUATION, the

BAC shall examine FIRST THE TECHNICAL COMPONENT of the bids USING
THE “PASS/FAIL” CRITERIA to determine whether all required document are
present.

Only bids that are determined to contain all the bid requirements of the technical
component shall be considered for opening and evaluation of the financial
component.

CEILING FOR BID PROCES- The ABC shall be the UPPER LIMIT OR CEILING
FOR THE BID PROCESS.

Bid prices that exceed this ceiling shall be DISQUALIFIED outright from further
participating in the bidding. There shall be no lower limit to the amount of the
award.

BID FOR THE PROCUREMENT OF GOODS AND INFRASTRCUTURE

PROJECTS- For the procurement of GOODS AND INFRASTRCUTURE
PROJECTS, the BAC shall evaluate the financial component of the bids.

The bids that passed the preliminary examination shall be RANKED FROM
LOWEST TO HIGHEST in terms of their corresponding calculated price shall be
referred as the “Lowest Calculated Bid”.

BID EVALUATION OF SHORT-LISTED BIDDERS FOR CONSULTING

SERVICES- For the procurement of Consulting Services, Bids of the short-listed
bidders shall be evaluated and ranked USING NUMERICAL RATINGS in

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accordance with the evaluation criteria stated in the Bidding Documents, which
include factors such as, but not limited to:

1. Experience
2. Performance
3. Quality or Personnel
4. Price and
5. Methodology

The bids shall be RANKED FROM HIGHEST TO LOWEST in terms of their

corresponding calculated RATINGS. The Bid with the highest calculated rating
shall be the “Highest Rated Bid”.

After approved by the Head of the Procuring Entity of the Highest Rated Bid, the
BAC shall invite the bidder concerned for NEGOTIATION AND/OR
CLARIFICATION on the following item:

1. Financial Proposal submitted by the bidder.

2. Terms of Reference.
3. Scope of Services.
4. Methodology and work program
5. Personnel to be assigned to the job
6. Services/Facilities/data to be provided by the Procuring Entity
concerned, and
7. Provisions of the contract

When negotiations with first-in-rank bidder fails, the financial proposal of

the second rank bidder shall be opened for negotiations. Provided, that
the amount indicated in the financial envelope shall be made as the basis
for negotiations and the TOTAL CONTRACT AMOUNT shall not exceed
the amount indicated in the envelope and the ABC.

Whenever necessary, the same process shall be repeated until the bid
awarded to the winning bidder.

POST QUALIFICATION

OBJECTIVE AND PROCESS OF POST-QUALUIFICATION: Post qualification is

the stage where the bidder with the LOWEST CALCULATED BID, in the case of
GOODS AND INFRASTRUCTURE PROJECTS or the HIGHEST RATED BID, in
the case of CONSULTING SERVICES, undergoes VERIFICATION AND
VALIDATION whether he has passed all the requirements and conditions as
specified in the BIDDING DOCUMENTS.

If the bidder with the lowest calculated bid or highest rated bid PASSES ALL
THE CRITERIA for post-qualification, his bid shall be considered:

1. The LOWEST CALCULATED RESPONSIVE BID, in the case of

GOODS AND INFRASTRUCTURE PROJECTS.
2. The HIGHEST RATED RESPONSIVE BID, in the case of Consulting
Services.

However, if a bidder fails to meet any of the requirements or conditions, he shall

be “POST-DISQUALIFIED” and the BAC shall conduct the post qualification on

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the bidder with the second LOWEST CALCULATED BID OR HIGHEST RATED
BID.

If the with the second Lowest Calculated Bid or Highest Rated Bid is also post
disqualified, the same procedure shall be repeated until the Lowest Calculated
Responsive Bod is finally determined.

In all cases, the contract shall be awarded ONLY TO THE BIDDER with the
LOWEST CALCULATED RESPONSIVE BID OR HIGHEST RATED
RESPONSIVE BID.

FAILURE OF BIDDING- there shall be a failure of bidding if:

a. No bids are received;

b. No bid qualifies as the Lowest Calculated Responsive Bid; or
c. Whenever the bidder with the highest rated/lowest calculated
responsive bid refuses, without justifiable cause to accept the award of
contract, as the case may be.

Under any of the above instances, the contract shall be RE-ADVERTISED

AND RE-BID. The BAC shall observe the same process and set the new
periods according to the same rules followed during the first bidding.

After the SECOND FAILED BIDDING, however, the BAC may resort to
NEGOTIATED PROCUREMENT, as provided by law.

SINGLE CALCULATED/RATED AND RESPONSIVE BID SUBMISSION- a

single calculated/rated and responsive bid shall considered for award it if falls
under any of the following circumstances:

a. If after advertisement, only one prospective bidder submits a Letter of

Intent and/or applies for eligibility check, and meets the eligibility
requirements or criteria, after which it submits a bid, which is found to
be responsive to the bidding requirements.
b. If after the advertisement, more than one prospective bidder applied
for eligibility check but only one bidder meets the eligibility
requirements or criteria, after which it submits a bid which is found to
be responsive to the bidding requirements; or
c. If after the eligibility check, more than one bidder meets the eligibility
requirements, but only one bidder submits a bid, and its bid is found
to be responsive to the bidding requirements.

In all instances, the Procuring entity shall ensure that the ABC reflects
the most advantageous prevailing price for the government.

AWARD, IMPLEMENTATION AND TERMINATION OF THE CONTRACT

NOTICE AND EXECUTION OF AWARD- Within a period NOT EXCEEDING

FIFTEEN (15) calendar days from the determination and declaration by the BAC
of the Lowest Calculated Responsive Bid or Highest Rated Responsive Bid, and
the recommendation of the award, the Head of the Procuring Entity or his duly

89
authorized representative shall APPROVE OR DISAPPROVE the said
recommendation.

NOTICE OF AWARD: In case of approval, he Head of the Procuring Entity or his

duly authorized representative shall immediately issue the NOTICE OF AWARD
to the bidder with the Lowest Calculated Responsive Bid or Highest Rated
Responsive Bid.

ENTERING INTO THE CONTRACT:

1. Within ten (10) calendar days from receipt of the Notice of Award, the
winning bidder shall formally enter into contract with the Procuring
Entity.
2. When further approval or higher authority is required, the approving
authority for the contracts shall be given a maximum of twenty (20)
calendar days to approve or disapprove it.
3. In case of government owned and/or controlled corporation, the
concerned board shall take action on the said recommendation within
thirty (30) calendar days from receipt thereof.

NOTICE TO PROCEED- The Procuring entity shall issue a NOTICE TO

PROCEED to the winning bidder not later than seven (7) calendar days from the
date of approval of the contract by the appropriate authority. All notices called
for by the terms of the contract shall be effective only at the time of receipt
thereof by the contractor.

PERIOD OF ACTION ON PROCUREMENT ACTIVITIES- the procurement

process from the opening of bids up to award of contract SHALL NOT EXCEED
THREE (3) MONTHS or a shorter period to be determined by the procuring
entity concerned. The different procurement activities shall be completed within
reasonable periods to be specified in the BIR.

If no action on the contract is taken by the head of the procuring entity or by his
duly authorized representative or by the concerned board, in the case of GOCC’s
within the periods specified above, the CONTACT SHALL BE DEEMED
APPROVED.

PERFORMANCE SECURITY- Prior to the signing of the contract, the winning

bidder shall, as a measure of guarantee for the faithful performance with his
obligation under the contract prepared in accordance with the Bidding
Documents, be REQUIREED TO POST A PERFORMANCE SECURITY, in such
form and amount as specified in the Bidding Documents.

FAILURE TO ENTER INTO CONTRACT AND POST PERFORANCE

SECURITY: If for justifiable causes, the bidder with the Lowest Calculated
Responsive Bid or Highest Rated Responsive Bid fails or refuses or is otherwise
unable to enter into contract with the Procuring Entity or if the bidder fails to
post the required security within the period stipulated in the Bidding
Documents, the BAC shall disqualify the said bidder and shall undertake post-
qualification for the next ranked Lowest Calculated Bid or the Highest Rated Bid.
This procedure shall be repeated until an award is made. However, if no award
is possible, the contract shall be subjected to new bidding.

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In the case of a failure to post the required performance security, the BID
SECURITY shall be forfeited without prejudice to the imposition of sanctions
prescribed under this ACT.

RESERVTION CLAUSE: The Head of the Agency reserves the right to (1)
REJECT ANY AND ALL BIDS; (2) DECLARE A FAILURE OF BIDDING; OR (3)
NOT AWARD THE CONTRACT in the following situations:

a. If there is prima facie evidence of collusion between appropriate

public officers or employees of the Procuring Entity or between the
BAC and any of the bidders, or if the collusion is between or among
the bidders themselves, or between a bidder and a third party,
including ANY ACT WHICH RESTRICTS, SUPPRESSES, OR
NULLIFIES or tends to restrict, suppress or nullify competition.

b. If the BAC is found to have failed in following the prescribed bidding

procedures; or

c. For any justifiable and reasonable ground where the award of the
contract will not redound to the benefit of the government as defined
in the IRR.

CONTRACT IMPLEMENTATION AND TERMINATION: The rules and

guidelines for the implementation and termination of contracts awarded
pursuant to the provisions of this Act shall be prescribed in the IRR. The rules
and guidelines shall include standard general and special conditions for
contracts.

SPLITTING OF GOVERNMENT CONTRACTS: Splitting of government

contracts is NOT ALLOWED. Splitting of government contracts means the
division of breaking up of government of the Philippine contracts into smaller
quantities and amounts or dividing contract implementation into artificial phases
or sub-contracts for the purpose of evading or circumventing the requirements of
the law and its IRR, particularly the necessity of competitive bidding and the
requirements for alternative methods of procurement.

INFRASTRUCTURE PROJECTS- for Infrastructure Projects to be implemented

by phases, the Procuring Entity shall ensure that there is a clear delineation of
work for each phase, which must be usable and structurally sound.

GROUNDS FOR TERMINATION

A. TERMINATION FOR DEFAULT

1. In contracts for GOODS. The following are grounds for termination of

contract for default:

a. The procuring entity may terminate the contract when OUTSIDE OF

FORCE MAJEURE, the supplier fails to DELIVER OR PERFORM any
or all of the GOODS within the period (s) specified in the contract or
within any extension thereof granted by the procuring entity pursuant
to a request made by the supplier prior to the delay, and such failure
amounts to at least ten percent (10%) of the contract price.

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 b. The procuring entity may terminate the contract when, as a result of
FORCE MAJEURE , the supplier is unable to deliver or perform any or
all of the goods, amounting to at least ten percent (10%) of the contract
price, for a period of not less than sixty (60) calendar days from receipt
of the notice from the procuring entity stating that the circumstance of
force majeure is deemed to have ceased; or

c. The procuring entity, shall terminate the contract when the supplier
fails to perform any other obligation under the contract.

2. In contracts for INFRASTRUTURE PROJECTS: the procuring entity shall

terminate a contract for default when any of the following conditions
attend its implementation:

a. Due to the contractor’s fault and while the project is ON-GOING, it has
incurred negative slippage of 15% or more in accordance with PD
1870.
b. Due to the Contractor’s fault and after the contract time has expired, it
has incurred a negative slippage of 10% or more in the completion of
the work; or
c. The Contractor:

i. Abandons the contract works, refuses or fails to comply with a valid

instruction of the procuring entity or fails to expeditiously proceed and
without delay despite a written notice by the procuring entity;
ii. Does not actually have on the project site the minimum essential
equipment listed on the Bid necessary to prosecute the works in
accordance with the approved work plan and equipment deployment
schedule as required for the project;

iii. Does not execute the works in accordance with the contract or
persistently or flagrantly neglects to carry out its obligations under the
contract;

iv. Neglects or refuses to remove materials or to perform a new work that

has been rejected as defective or unsuitable;

v. sub-lets any part of the contract works without the approval by the
procuring entity.

3. In contracts for CONSULTING SERVICES: the procuring entity shall

terminate a contract for default when any of the following condition
attend its implementation:

a. Outside of force majeure, the Consultant fails to deliver or perform the

Outputs and Deliverables within the period(s) specified in the contract,
or within any extension thereof granted by the procuring entity
pursuant to a request made by the Consultant prior to the delay;

b. As a result of force majeure, the Consultant is unable to deliver or

perform a material portion of the outputs and deliverables for a period
of not less than sixty (60) calendar days after the Consultant’s receipt

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 of the notice from the procuring entity stating that the circumstance of
force majeure is deemed to have ceased; or

c. The Consultant fails to perform any other obligations under the

contract.

B. TERMINATION FOR CONVENIENCE: the procuring entity may terminate

the contract, in whole or in part, at any time for its convenience. The head of
the procuring entity may terminate a contract for the convenience of the
government, if he has determined the existence of conditions that make the
project implementation economically, financially or technically impractical
and/or unnecessary, such as but not limited to fortuitous events or changes
in the law and national government policies.

C. TERMINATION FOR INSOLVENCY: the procuring entity shall terminate the

contract if the supplier/contractor/consultant is declared bankrupt or
insolvent as determined with finality by a court of competent jurisdiction. In
this event, termination will be without compensation to the
supplier/contractor/consultant, provided such termination will not prejudice
or affect any right of action or remedy which has accrued or will accrue
thereafter to the procuring entity and/or the supplier/contractor/consultant.

D. TERMINATION FOR UNLAWFUL ACTS: the procuring entity may

terminate the contract in case it is determined prima facie that the
supplier/contractor/consultant has engaged, before or during the
implementation of the contract, in unlawful deeds and behaviors relative to
contract acquisition and implementation. Unlawful acts include, but are not
limited to, the following:

a. Corrupt, fraudulent, collusive and coercive practices;

b. Drawing up or using forged documents;
c. Using adulterated materials, means or methods, or engaging in
production contrary to rules of science or the trade;
d. Any other act analogous to the foregoing.

E. TERMINATION OF CONTRACT BY CONTRATOR/CONSULTANT:

1. In contracts for Infrastructure Projects: the contractor may terminate its

contract with the procuring entity if the works are completely stopped
for a continuous period of at least sixty (60) calendar days through no
fault of its own due to any of the following reasons:

a. Failure of the procuring entity to deliver, within a reasonable time,

supplies, materials, right of way, or other items it is obligated to
furnish under the terms of the Contract; or
b. The prosecution of the works is disrupted by the adverse peace and
order situation, as certified by the AFP Provincial Commander and
approved by the Secretary of National Defense.

2. In contracts for Consulting Services: the consultant may terminate its

agreement with the procuring entity if the latter is in material breach of
its obligations pursuant to the contact and has not remedied the same
within sixty (60) calendar days following its receipt of the Consultant’s
notice specifying such breach.

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DISCLOSURE OF RELATIONS

DISCLOSURE OF RELATIONS: In addition to the proposed contents of the

Invitation to Bid as mentioned above, all bidding documents shall be
accompanied by a SWORN AFFIDAVOT of the bidder that he or she or any
officer of their corporation is NOT RELATED to the head of the procuring entity
by consanguinity or affinity up to the third civil degree.

Failure to comply with the aforementioned provision shall be a ground for the
automatic DISQUALIFICATION OF THE BID and shall therefore not be
considered for OPENING AND EVALUATION OF FINANCIAL COMPONENT.

ALTERNATIVE METHODS OF PROCUREMENT

ALTERNATIVE METHODS: Subject to the PRIOR APPROVAL of the head of

the procuring entity or his duly authorized representative and WHENEVER
JUSTIFED BY THE CONDITIONS provided in this Act, the procuring entity may
in order to promote economy and efficiency, RESORT TO ANY OF THE
FOLLOWING ALTERNATIVE METHODS OF PROCURMENT:

A. LIMITED SOURCE BIDDING, otherwise known as SELECTIVE

BIDDING: a method of procurement that involves direct invitation to
bid by the procuring entity from a set of pre-selected suppliers or
consultants with known experience and proven capability relative to
the requirements of a particular contract.
Limited Source Bidding may be resorted to only in any of the
following conditions:

a. Procurement of highly specialized types of goods and consulting

services obtainable only from a limited number of sources; or
b. Procurement of major plant components where it is deemed
advantageous to limit the bidding to known eligible bidders in
order to maintain an optimum and uniform level of quality and
performance of the plant as a whole.

B. DIRECT CONTRACTING- otherwise known as SINGLE SOURCE

PROCUREMENT: a method of procurement that does not require
elaborate bidding requirement because the supplier or simply asked to
submit a price quotation or a pro-forma invoice together with the
conditions of sale, which offer may be accepted immediately or after
some negotiations.

Direct Contracting may be resorted to only in any of the following

conditions:

a. Procurement of goods of PROPRIETY NATURE which can only be

obtained from the propriety source, i.e., when patents, trade secrets
and copyrights prohibit others from manufacturing the same items.

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 b. When the procurement of critical components from a specific
manufacturer, supplier, or distributor is a condition precedent to
hold a contractor to guarantee its project performance, in
accordance with the provisions of his contract;

c. Those sold by an exclusive dealer or manufacturer, which does not

have sub0dealers, selling at lower prices and for which no suitable
substitute can be obtained at more advantageous terms to the
government.

C. REPEAT ORDER- a method of procurement that involves a direct

procurement of goods from the PREVIOUS WINNING BIDDER,
whenever there is a need to replenish goods procured under a contract
previously awarded through competitive bidding.

When provided for in the Annual Procurement Plan, repeat order may
be allowed wherein the procuring entity directly procures goods from
the previous winning bidder WHENEVER THERE ARISES A NEED
TO REPLENISH goods procured under a contract previously awarded
through competitive bidding, subject to post-qualification process
prescribed in the Bidding Documents and provided ALL THE
FOLLOWING CONDITIONS are present:

a. The unit price must be equal to or lower than that provided in the
original contract.
b. The repeat order does not result not splitting of requisitions or
purchase orders;
c. Except in special circumstances defined in the IRR, the repeat order
shall be availed of only within SIX (6) MONTHS from the date of
the Notice to Proceed arising from the original contract price; and
d. The repeat order shall not exceed 25% of the quantity of each item
of the original contract.

D. SHOPPING- a method of procurement whereby the procuring entity

simply requests for the submission of price quotations of readily
apparent off the shelf goods or ordinary/regular equipment to be
procured directly from suppliers of known qualification.

Shopping may be resorted to under any of the following instances:

a. When there is unforeseen contingency requiring immediate

purchase, the amount shall not exceed the following:

i. For NGA’s, GOCC’s, SUC’s and Autonomous Regional

Government, Php 200,000.00

ii. For LGU’s, in accordance with the following schedules:

DOF Maximum Amount in Php

Classification Province City Municipality
of LGU

1st Class 200k 200k 100k

2nd Class 200k 200k 100k

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 3rd Class 200k 160k 100k
4th Class 160k 120k 100k
5th Class 120k 100k 100k
6th Class 100k 100k 100k

b. Procurement of ordinary or regular office supplies and equipment

not available in the DBM-PS in the amount not to exceed the
following:

i. For NGA’s, GOCC’s, SUC’s and Autonomous Regional

Government, Php 1,000,000.00

ii. For LGU’s, in accordance with the following schedules:

DOF Maximum Amount in Php

Classification Province City Municipality
of LGU

1st Class 1M 1M 200k

2nd Class 1M 1M 200k
3rd Class 1M 800k 200k
4th Class 800k 600k 100k
5th Class 600k 400k 100k
6th Class 400k 200k 100k

In case of barangays, FIFTY THOUSAND PESOS (Php

50,000.00)

The phrase “ordinary or regular office supplies” shall be

understood to include those supplies, commodities, or materials
which are necessary in the transaction of official business, and
consumed in the day to day operations. However, office supplies
shall not include services such as repair and maintenance of
equipment and furniture, as well as trucking, hailing, janitorial, and
related analogous services.

E. NEGOTIATED PROCUREMENT- a method of procurement that may

be resorted under the extraordinary circumstances provided for in
Section 53 of the Law and other instances that shall be specified in the
IRR, whereby the procuring entity directly negotiates a contract with a
technically, legally and financially capable supplier, contractor or
consultant.

Negotiated Procurement shall be allowed only in the following

instances:

a. In case of two (2) failed biddings;

b. In case of imminent danger to life or property during a state of
calamity or when time is of the essence arising from natural or
man- made calamities or other causes where immediate action is
necessary to prevent damage to or loss of life or property, or to
restore vital public services, infrastructure facilities or other public
utilities.

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c. Take-over of contracts, which have been rescinded or terminated
to causes provided for in the contract and existing laws, where
immediate action is necessary to prevent damage or loss to life or
property, or to restore vital public services, infrastructure facilities
and other public utilities;
d. When the subject contract is adjacent or contiguous to an on-
going infrastructure project, as defined in the IRR, subject to the
following:

i. The original contract is the result of a competitive bidding;

ii. The subject contract to be negotiated has similar or related
scopes of work;
iii. That it is within the contracting capacity of the contractor;
iv. The contractor uses the same price or lower unit prices as in the
original contract less mobilization cost;
v. The amount involved does not exceed the amount of the on-
going project; and
vi. The contractor has no negative slippage.

Provided, that negotiation for the procurement are commenced

before the expiry of the original contract. Wherever applicable, the
principle shall also govern consultancy contract, where the
consultants have unique experience and expertise to deliver the
required service.

e. Subject to the guidelines specified in the IRR, purchase of goods

from another agency of the government, such as procurement
Service of the DBM, which is tasked with a centralized
procurement of commonly used goods for the government in
accordance with Letters of Instruction No. 755 and Executive Order
No. 359, series of 1989;

f. Scientific, Scholarly or Artistic Work, Exclusive of Technology

and Media Services. Where goods, Infrastructure Projects and
Consulting Services can be contracted to a particular supplier,
contractor, or consultant and as determined by the HoPE, for any of
the following:

1. The requirement is for:

a. Work of art, commissioned work or services of an artist for a

specific artist skill (e.g. singer, poet, writer, painter, sculptor
etc.)
b. Scientific, academic, scholarly work or research, or legal
services;
c. Highly-specialized life-saving medical equipment, as certified
by the DOH;
d. Scientific, technical, economic, business, trade or legal journal,
magazine, paper, subscription, or other exclusive statistical
publications and references; or
e. Media documentation, advertisement, or announcement
through television, radio, newspaper, internet and other
communication media.

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 Due to the nature of the information to be disseminated,
alongside principles of transparency, efficiency and economy,
award to more than (1) supplier may be made by the procuring
entity:

2. The construction or installation of an infrastructure facility

where the material, equipment, or technology under a
proprietary right can only be obtained from the same contractor.

g. Highly Technical Consultants. In case of individual consultants hired

to do work that is (i) highly technical or proprietary; or (ii) primarily
confidential or policy determining, where trust and confidence are the
primary consideration for the hiring of the consultant; Provided, however,
that the term of the individual consultant shall, at the most be on a six (6)
month basis; renewable at the option of the HoPE, but in no case shall it
exceed the term of the latter;

h. Defense Cooperation Agreement: Defense Inventory based items- The

DND may directly negotiate with an agency or instrumentality of another
country with which the Philippines has entered into a defense cooperation
agreement or otherwise maintain diplomatic relations when the
procurement involves major defense equipment or material and/or
defense-related consultancy services.

i. Small Value Procurement- Procurement of (a) goods not covered by

shopping under (b) Infrastructure Projects and (c) Consulting Services,
where the amount involved does not exceed the following threshold:

i. For NGA’s, GOCC’s, SUC’s and Autonomous Regional

Government, Php 1,000,000.00

ii. For LGU’s, in accordance with the following schedules:

DOF Maximum Amount in Php

Classification Province City Municipality
of LGU

1st Class 1M 1M 200k

2nd Class 1M 1M 200k
3rd Class 1M 800k 200k
4th Class 800k 600k 100k
5th Class 600k 400k 100k
6th Class 400k 200k 100k

In case of barangays, FIFTY THOUSAND PESOS (Php

50,000.00)

j. Lease of real Property and Venue for Official Use.

k. NGO Participation: When an appropriation law or ordinance

earmarks an amount to be specifically contracted out to NGO, the
procuring entity may enter into a Memorandum of Agreement with an
NGO.

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 l. Community Participation: Where, in the interest of project
sustainability or to achieve specific social objectives, it is desirable in
selected projects, or its components, to call for participation fo local
communities in the delivery of goods, including non-consulting
services, and simple infrastructure projects, subject to the Community
Participation Procurement Manual (CPPM) issued by the GPPB.

m. United Nations Agencies, International Organizations or

International Financing Institutions- Procurement from specialized
agencies of the United Nations, International Organizations or
International Financing Institutions.

n. Direct Retail Purchase of Petroleum fuel, oil and lubricants (POL)

from products and airline tickets.

TERMS AND CONDITIONS for the use of ALTERNATIVE

METHODS: the specific terms and conditions, including the
limitations and restrictions, for the application of each of the
alternative methods mentioned above shall be specified in the IRR.

LAW ON INSURANCE, RA 10607

“7.3 INSURANCE 3%
7.3.1 Explain the concept of insurance
7.3.2 Explain the elements of an insurance contract
7.3.3 Discuss the characteristics and nature of insurance contracts
7.3.4 Discuss the classes of insurance
7.3.5 Describe variable contracts
7.3.6 Define and apply insurable interest
7.3.7 Illustrate the perfection of the contract of insurance
7.3.8 Apply rescission of insurance contracts
7.3.9 Discuss claims settlement and subrogation

CONCEPT OF INSURANCE- a contract of insurance is an agreement whereby

one person who undertakes, for a consideration, to indemnify another against loss,
damage or liability arising from an unknown or contingent event. The risk incurred
against may be any contingency or unknown event, the happening of which will
damnify a person having an insurable interest or will create a liability against him. Even
fortuitous event may be insured against.

As a rule, only future events may be covered by an insurance contract. An

exception would be a marine insurance where a past event may be insured if the loss of
the vessel in the past could not have been known by ordinary means of communication.

PARTIES TO A CONTRACT OF INSURANCE-:

1. INSURED- the person whose loss is the occasion for the payment of the
insurance proceeds by the insurer. He must have the capacity to enter into a
contract and he must not be a public enemy.

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2. INSURER- the person who assumes the risk of loss and undertakes for a
consideration to indemnify the insured upon the happening of the designated
peril. Any person may be an insurer provided he obtains a CERTIFICATE OF
AUTHORITY to transact insurance business from the Insurance Commission.

3. ASSURED- the insured is also the assured when the proceeds are payable to
him.

4. BENEFICIARY- the third person designated by the insured to receive the

proceeds.

CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS:

1. Uberrimae Fides Contract- the contract of insurance is one of perfect good

faith, not for the insured alone, but equally so for the insurer. In fact, it is
more for the latter since the insurer’s dominant bargaining position carries
with it stricter responsibility.

2. Contract of Indemnity- the insured is entitled to recover only the amount of

total loss sustained, and the burden is upon him to prove the amount of such
loss.

3. Risk Distributing Device- the risk of economic loss is distributed among a

large group of people bearing the same risk.

4. Aleatory-the obligation of the insurer to pay the proceeds of the insurance

arises only upon the happening of an event which is uncertain. It does not
depend upon some contingent event.

5. Contract of Adhesion- An insurance contract is a ready-made form of

contract, which the other party may accept or reject, but which the later
cannot modufy.

6. Personal- the law presumes that the insurer considered the personal
qualification of the insured in approving the insurance application. The
insured cannot assign, before the happening of the loss, his right under a
property policy without the consent of the insurer.

7. Voluntary- a contract of insurance is not compulsory, and the parties may

incorporate such terms and conditions as they may deem convenient. This is
allowed provided that they do not contravene any provision of law and are
not against public policy.

8. Synallagmatic- Both the insured and insurer have reciprocal obligations of

equal value to each other.

CLASSES/TYPES OF INSURANCE:

1. LIFE INSURANCE CONTRACTS

a. Individual Life
b. Group Life

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 c. Industrial Life

2. NON-LIFE INSURANCE CONTRACTS

a. Marine
b. Fire
c. Casualty

3. CONTRACTS OF SURETYSHIP

VARIABLE CONTRACTS- the term variable contract shall mean any policy or
contract on either a group or on an individual basis issued by an insurance
company providing for benefits or other contractual payments or values
thereunder to vary so as to reflect investment results of any segregated portfolio
or investments or of a designated separate account in which amounts received in
connection with such contract shall have been placed and accounted for
separately and apart from other investments and accounts. This contract may
also provide benefits or values incidental thereto payable in fixed or variable
amounts, or both.
Variable contracts or investment-linked insurance products is regulated
by Section 238 to 246 of the Amended Insurance Code. In the US, it is known as
variable life or variable universal life. In the UK, it is known as unit-linked. In
Asia, it is known as investment-linked or insurance that is linked to investments.
Others call it equity-linked insurance.

INSURABLE INTEREST- it is that interest which the law requires the

owner of an insurance policy to have in the person or thing insured. A person is
deemed to have an insurable interest in the subject matter insured where HE
HAS A RELATION OR CONNECTION WITH OR CONCERN IN IT that he will
DERIVE PECUNIARY BENEFIT OR ADVANTAGE from ITS PRESERVATION
AND WILL SUFFER PECUNIARY LOSS OR DAMAGE from its destruction,
termination or injury BY THE HAPPENING OF THE EVENT insured against.

PERFCTION OF THE CONTRACT OF INSURANCE- As a consensual

contract, the contract of insurance is perfection from the moment there is a
meeting of the minds with respect to the object and the cause or consideration.
Under the COGNITION THEORY, an insurance contract is perfected only when
the applicant-insured has knowledge of the acceptance and approval by the
insurer of his application.

PREMIUM- it is a consideration paid to an insurer for undertaking to

indemnify the insured against a specified peril. As a rule, no policy or contract of
insurance is valid and binding unless and until the premium thereof has been
paid. This is the “cash and carry rule” under the Insurance Code. The payment of
the premium is IMPERATIVE FOR THE VALIDITY OF THE POLICY.

RESCISSION/CANCELLATION OF INSURANCE CONTRACTS:

The following are the grounds for the cancellation of a non-life policy insurance:

1. Non-payment of premium.
2. Fraud or material misrepresentation.

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3. Physical changes in the property insured which result in the property
becoming uninsurable.
4. Conviction of a crime arising out of acts increasing the risk insured against.
5. Willful or reckless acts or omission increasing the risk insured against.
6. Determination by the Insurance Commission that the policy would violate the
Insurance Code.

The following are the REQUISITES FOR A VALID CANCELLATION of an

insurance policy:

1. Prior notice of cancellation, in writing, is given to the insured.

2. Notice must be based on any of the grounds mentioned in Section 64 of the
Insurance Code.
3. Upon request of the insured, the insurer must furnish FACTS on which
cancellation is based.

CLAIMS SETTLEMENT AND SUBROGATION:

In Life Insurance, the proceeds shall be paid immediately upon the

maturity of the policy if there is such a maturity date. If the policy natures by the
death of the insured, the proceeds shall be paid within 60 days from the filing of
the claim and upon the proof of the DEATH OF THE INSURED.

In property insurance, the proceeds must be paid within 30 days after

proof of loss is received by the insurer and ascertainment of the loss or damage is
made. If no such ascertainment is made within 60 days after receipt by the
insurer of the proof of loss, the proceeds shall be paid within 90 days from such
receipt.

SUBROGATION is the substitution of one person in the place of another

with reference to a lawful claim or right, so that he who is substituted
SUCCEEDS TO THE RIGHTS OF THE OTHER in relation to a debt or claim,
including its remedies or securities. This right attaches upon payment by the
insurer of the insurance claims of the assured. As a subrogee, the insurer STEPS
INTO THE SHOES OF THE ASSURED and may exercise only those rights that
assured may have against the wrongdoer who caused the damage. Payment of
the insurer to the assured operates as an equitable assignment of all remedies the
assured may have against the third party who caused the damage.

PRESCRIPTIV PERIOD- Actions arising from the insurance contracts prescribe in

10 years. However, the parties may validly stipulate on a shorter period
provided that it is not less than one (1) year from the time the cause of action
accrues. The prescriptive period commences from the final rejection of the claim.

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 LAW ON COOPERATIVES, RA 6938 AS AMENDED BY RA 9520

7.4 COOP ERATIVES

5%

7.4.1 Describe the organization and registration of cooperatives

7.4.2 Describe the administration of cooperatives
7.4.3 Determine the responsibilities, rights, assurance and
privileges of cooperatives
7.4.4 Describe and identify the membership
7.4.5 Determine the capital, property of funds
7.4.6 Apply the audit, inquiry and member’s right to examine
7.4.7 Apply and compute the allocation and distribution of funds
7.4.8 Distinguish the types and categories of cooperatives
7.4.9 Explain the merger and consolidation of cooperatives
7.4.10 Explain the dissolution of cooperatives

The COOPERATIVE CODE (RA 9520) was signed into law last February 17,
2009. It was published last March 7, 2009. It became effective March 22, 2009.

ORGANIZING A PRIMARY COOPERATIVE- 15 or more natural persons who

are:
a. Filipino citizens;
b. Of legal age;
c. Having a common bond of interest; and
d. Are actually residing or working in the intended area of operation,
may organize a primary cooperative, provided that a prospective
member of a PRMARY COOPERATIVE must have a complete PRE-
MEMBERSHIP EDUCATION SEMINAR (PMES).

A newly organized primary cooperative may be registered as a MULTI-

PURPOSE COOPERATIVE only after compliance with the minimum
requirements for multi-purpose cooperative set by the CDA.

A single-purpose cooperative may transform into a multi-purpose cooperative or

create subsidiaries only after at least 2 years of operations. Under Art. VI of

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CDA MC 2015-07, except for agricultural cooperatives and agrarian reform
cooperatives, only those cooperatives with a minimum paid-up capital of Php
10,000.00 or as required in the feasibility study, whichever is higher, may be
allowed to transform INTO A MULTI-PURPOSE COOPERATIVE.

ECONOMIC SURVEY- Every group of individuals or cooperatives intending to

form a cooperative shall submit to the CDA a general statement describing
among other the structure and purposes of the proposed cooperative; provided
that, the structure and actual staffing pattern of the cooperative shall include a
BOOKKEEPER; provided further, that they shall not be allowed to operate
without the necessary personnel and shall also submit an economic survey,
indicating therein:

A. Area of OPERATIONS;
B. Size of MEMBERSHIP;
C. Other pertinent data in a format provided by the CDA.

A cooperative duly registered shall have LIMITED LIABILITY. A cooperative

can be likened with a personality separate and distinct from its owner-members.

TERM: for a period not exceeding 50 years from the date of registration, but may
be extended for periods not exceeding 50 years, but no extension can be made
earlier than 5 years prior to the original or subsequent expiry date/dates unless
there are justifiable reasons.

MINIMUM SUBSCRIPTION: 25% OF AUTHORIZED SHARE CAPITAL

Example: If the authorized share capital is Php 1,000,000.00, the
subscription must at least be Php 250,000.00.

Under CDA MC 2011-05, this requirement shall apply to common share

capital only. Should preferred share capital be provided in the by-laws, it shall
not exceed 25% of the total authorized share capital of the cooperative. No
fractional shares shall be issued for both common and preferred share capital.

MINIMUM PAID-UP SHARE CAPITAL: 25% of the total subscription but not
less than Php 15,000.00, except for multi-purpose cooperatives which should
have at least Php 100,000.00 or as required by the feasibility study whichever is
higher (Art. VIII, Sec. 2.2 of CDA MC 2015-01.

Example: If the authorized share capital is Php 1,000,000.00 and the

subscription is Php 250,000.00, the paid up must at least be Php 62,500.00.
However, if the authorized capital is Php 15,000.00, it must be fully (0r 100%)
subscribed and the paid up must be Php 15,000.00. CDA shall periodically assess
the required paid-up share capital and may increase it every 5 years when
necessary upon consultation with the cooperative sector and the NEDA.

REGISTRATION: A cooperative formed and organized under this Code acquires

juridical personality from the date the Authority issues a CERTIFICATE OF
REGISTRATION under its official seal. All application for registration shall be
finally disposed of by the Authority within a period of 60 days from the filing
thereof. Otherwise, the application is deemed approved, unless the cause of the
delay is attributable to the applicant. Provided, that in case of denial of the
application for registration, an APPEAL shall lie with the Office of the President,
within 90 days from receipt of notice of such denial. Provided further, that

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failure of the Office of the President to act on the appeal within ninety (90) days
from the filing thereof shall mean APPROVAL of said application.

RULES ON COOPERATIVE NAME (ART. VIII, Sec. 3 of CDA MC 2015-01):

1. The word “Cooperative”, “Kooperatibe” or “Cooperative” shall be

included in the name of the cooperative, when name shall likewise
specify the type of cooperative.
2. No cooperative name shall be allowed by the CDA if the proposed
name is identical or deceptively or confusingly similar to that of any
existing cooperative, contrary to public policy, morals and existing
laws.
3. The use of the words “development’ and “integrated” shall be
discouraged.
4. The use of “incorporated”, “corporation”, ”company”,
“incorporation”, “partnership” or other similar connotation and
abbreviation shall not be allowed.
5. The use of the “federation” and “union” in the name of primary
cooperative is prohibited except if it is part of the registered name of
association or institution where the members of the proposed
cooperative come from.
6. Name shall NOT BE WRITTEN IN ALL CAPITAL LETTERS except it
if is an acronym. Acronym shall be written after the full name of the
cooperative.

CATEGORIES OF COOPERATIVE:

1. In terms of MEMBERSHIP:
a. Primary- the members of which are natural persons.
b. Secondary- the members of which are the primaries.
c. Tertiary-the members of which are secondary cooperatives.

2. In terms of TERRITORY, cooperatives shall be categorized according

to areas of OPERATION which may or may not coincide with the
political subdivisions of the country.

REGISTRATION OF SECONDARY AND TERTIARY COOPERATIVES (Section

IX of CDA MC 2015-01:

1. The minimum number of members are as follows:

a. Secondary
i. FEDERATION: 10 primary cooperatives
iii. Union : 15 primary cooperatives

b. Tertiary
i. FEDERATION: 10 secondary cooperatives
ii. UNION: 15 secondary cooperatives

2. The minimum paid-up share capital shall be:

a. Secondary
i. FEDERATION: Php 500,000.00
ii. UNION : Not applicable

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 b. Tertiary
i. FEDERATION: Php 5,000,000.00 or feasibility study
requirement whichever is higher
ii. UNION Not applicable

3. The registration fee to be paid by the proposed federation shall 1/10

(or 10%) of the 1% of the authorized share capital or the amount
prescribed in the CDA schedule of fees, whichever is higher.

FUNCTIONS OF A FEDERATION OF COOPERATIVES: A federation of

cooperatives shall undertake the following functions:

(a) To carry on any cooperative enterprise authorized under Article 6 that

complements augments, or supplements but does not conflict, complete with,
nor supplant the business or economic activities of its members;

(b) To carry on, encourage, and assist educational and advisory work relating to
its member cooperatives;

(c) To render services designed to encourage simplicity, efficiency, and economy

in the conduct of the business of its member cooperatives and to facilitate the
implementation of their bookkeeping, accounting, and other systems and
procedures;

(d) To print, publish, and circulate any newspaper or other publication in the
interest of its member cooperatives and enterprises;

(e) To coordinate and facilitate the activities of its member cooperatives;

(f) To enter into joint ventures with national or international cooperatives of

other countries in the manufacture and sale of products and/or services in the
Philippines and abroad; and

"(g) To perform such other functions as may be necessary to attain its objectives.

-Cooperative unions may assist the national and local governments

in the latter’s development activities in their respective
jurisdictions.

CERTIFICATE OF REGISTRATION: A certificate of registration issued by the

CDA under its official seal shall be conclusive evidence that the cooperative
therein mentioned is duly registered unless it is proved that the registration
thereof has been cancelled.

AMENDMENT OF ARTICLE OF COOPERATIVE AND BY-LAWS- only by 2/3

vote of all members with voting rights without prejudice to the right of the
dissenting members to exercise their right to withdraw their membership.

CONTRACTS EXECUTED PRIOR TO REGISTRATION: Contracts executed

between private persons and cooperatives prior to the registration of the
cooperative shall remain valid and binding between the parties and upon

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 registration of the cooperative. A formal written contract shall be adopted and
made in the cooperative’s name or on its behalf prior to its registration.

DIVISION OF COOPERATIVES: Any registered cooperative may, by a

resolution approved by a vote of ¾ of all members with voting rights, present
and constituting a quorum, resolve to divide itself into two or more cooperatives.
The procedure for such division shall be prescribed in the regulations of the
CDA: Provided, that all requirements have been complied with by the new
cooperatives; provided further, that no division of a cooperative in fraud of
creditors shall be valid.
MERGER AND CONSOLIDATION:

1. Two or more cooperatives may merge into a single cooperative which

shall either be one of the constituent cooperatives or the consolidated
cooperative.
2. No merger or consolidation shall be valid UNLESS APPROVED BY A
¾ VOTE OF ALL THE MEMBERS WITH VOTING RIGHTS, present
and constituting a quorum of each of the constituent cooperatives at
separate general assembly meetings. The dissenting members shall
have the right to exercise their right to withdraw their membership.
3. In any case, the merger or consolidation of cooperatives shall be
effective upon the issuance of the certificate of merger or consolidation
by the CDA.

TYPES OF COOPERATIVES: Cooperatives may fall under any of the following types:

(a) Credit Cooperative is one that promotes and undertakes savings and lending
services among its members. It generates a common pool of funds in order to
provide financial assistance to its members for productive and provident
purposes;

(b) Consumers Cooperative is one of the primary purpose of which is to procure

and distribute commodities to members and non-members;

(c) Producers Cooperative is one that undertakes joint production whether

agricultural or industrial. It is formed and operated by its members to undertake
the production and processing of raw materials or goods produced by its
members into finished or processed products for sale by the cooperative to its
members and non-members. Any end product or its derivative arising from the
raw materials produced by its members, sold in the name and for the account of
the cooperative, shall be deemed a product of the cooperative and its members;

(d) Marketing Cooperative is one which engages in the supply of production inputs

to members and markets their products;

(e) Service Cooperative is one which engages in medical and dental care,

hospitalization, transportation, insurance, housing, labor, electric light and
power, communication, professional and other services;

(f) Multipurpose Cooperative is one which combines two (2) or more of the

business activities of these different types of cooperatives;

(g) Advocacy Cooperative is a primary cooperative which promotes and advocates

cooperativism among its members and the public through socially-oriented

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projects, education and training, research and communication, and other similar
activities to reach out to its intended beneficiaries;

(h) Agrarian Reform Cooperative is one organized by marginal farmers majority of

which are agrarian reform beneficiaries for the purpose of developing an
appropriate system of land tenure, land development, land consolidation or land
management in areas covered by agrarian reform;

(i) Cooperative Bank is one organized for the primary purpose of providing a wide
range of financial services to cooperatives and their members;

(j) Dairy Cooperative is one whose members are engaged in the production of

fresh milk which may be processed and/or marketed as dairy products;

(k) Education Cooperative is one organized for the primary purpose of owning and
operating licensed educational institutions notwithstanding the provisions of
Republic Act No. 9155, otherwise known as the Governance of Basic Education
Act of 2001;

(l) Electric Cooperative is one organized for the primary purposed of undertaking

power generations, utilizing renewable energy sources, including hybrid
systems, acquisition and operation of subtransmission or distribution to its
household members;

(m) Financial Service Cooperative is one organized for the primary purpose of

engaging in savings and credit services and other financial services;

(n) Fishermen Cooperative is one organized by marginalized fishermen in localities

whose products are marketed either as fresh or processed products;

(o) Health Services Cooperative is one organized for the primary purpose of

providing medical, dental and other health services;

(p) Housing Cooperative is one organized to assist or provide access to housing for

the benefit of its regular members who actively participate in the savings
program for housing. It is co-owned and controlled by its members;

(q) Insurance Cooperative is one engaged in the business of insuring life and

poverty of cooperatives and their members;

(r) Transport Cooperative is one which includes land and sea transportation,

limited to small vessels, as defined or classified under the Philippine maritime
laws, organized under the provisions of this Code;

(s) Water Service Cooperative is one organized to own, operate and manage waters
systems for the provision and distribution of potable water for its members and
their households;

(t) Workers Cooperative is one organized by workers, including the self-employed,

who are at same time the members and owners of the enterprise. Its principal
purpose is to provide employment and business opportunities to its members
and manage it in accordance with cooperative principles; and

(u) Other types of cooperative as may be determined by the Authority.

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KINDS OF MEMBERSHIP-A cooperative may have two (2) kinds of members, to wit:

(1) regular members and (2) associate members.

A regular member is one who has complied with all the membership
requirements and entitled to all the rights and privileges of membership. An associate
member is one who has no right to vote nor be voted upon and shall be entitled only to
such rights and privileges as the bylaws may provide: Provided, That an associate who
meets the minimum requirements of regular membership, continues to patronize the
cooperative for two (2) years, and signifies his/her intention to remain a member shall
be considered a regular member.

A cooperative organized by minors shall be considered a laboratory cooperative

and must be affiliated with a registered cooperative.

PURPOSES (Sec. 7 of CDA MC 2015-03):

1. To serve as a training ground for its members to prepare them for

membership in regular cooperatives.
2. To teach the values of thrift and saving mobilization among its
members.

3. To instill cooperative values, principles, financial discipline, business

skills, and leadership skills among its members.

4. To promote and advocate Filipino social and cultural values, financial

education, ecological awareness and sustainable development.

AFFILIATION (Sec. 8 of CDA MC 2015-03):

1. A laboratory shall be affiliated with a duly registered cooperative, to be

known as the GUARDIAN COOPERATIVE.
2. A laboratory cooperative primarily composed of students from a particular
school may affiliate with the school’s cooperative if any or select a
cooperative of its choice within its area of operation.

3. If the laboratory cooperative is composed of out-of-school minors, it shall be

affiliated with a cooperative of its own choice within or nearest its area of
operation.

NAME, Section 11 of CDA MC 2015-03: It shall include in its name the

word “Laboratory Cooperative of (Name of Guardian Cooperative)”.

Under Sec. 12 of CDA MC 2015-03, only a Certificate of Recognition is

issued to a laboratory cooperative which serves as a conclusive evidence
that it is duly recognized by the CDA as affiliate of the GUARDIAN
COOPERATIVE which shall be valid unless earlier revoked or cancelled.
Such certificate does not bestow upon a laboratory cooperative a juridical
personality. Under Sec. 19, the dissolution of the guardian cooperative
shall result in the revocation of the Certificate of Recognition. Under Sec.
15, it is the guardian cooperative that shall be liable for any violations
committed in the operation of the laboratory cooperative. Under Sec. 17,
any member who reaches the age of majority has the option to join the
guardian cooperative by signifying his/her intention to become a member
upon compliance with all the requirements for membership. Under Sec.

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 18, a guardian cooperative may supervise more than one laboratory
cooperative.

CAUSES OF TERMINATION OF MEMBERSHIP (Sec. 16 of CDA MC 2015-03):

1. Upon reaching the age of majority (18 years of age); and

2. Such other causes as may be provided for in the by-laws of the
guardian cooperative and in the Manual of Operations for the
Laboratory Cooperative.

RULES OF GOVERNMENT OFFICERS AND EMPLOYEES:

(1) Any officer or employee of the Authority shall be disqualified to be

elected or appointed to any position in a cooperative: Provided, That the
disqualification does not extend to a cooperative organized by the officers or
employees of the Authority.

"(2) All elective officials of the Government shall be ineligible to become

officers and directors of cooperatives: Provided, That the disqualification does not
extend to a party list representative being an officer of a cooperative he or she
represents; and

"(3) Any government employee or official may, in the discharge of is

duties as a member in the cooperative, be allowed by the end of office concerned
to use official time for attendance at the general assembly, board and committee
meetings of cooperatives as well as cooperative seminars, conferences,
workshops, technical meetings, and training courses locally or abroad: Provided,
That the operations of the office concerned are not adversely affected .

COMPOSITION OF GENERAL ASSEMBLY: The general assembly shall be

composed of such members who are entitled to vote under the articles of
cooperation and bylaws of the cooperative.

NON DELEGABLE EXCLUSIVE POWERS OF THE GA: The general assembly

shall have the following exclusive powers which cannot be delegate:

(1) To determine and approve amendments to the articles of cooperation

and bylaws.

(2) To elect or appoint the members of the board of directors, and to

remove them for cause. However, in the case of the electric cooperatives
registered under this Code, election of the members of the board shall be held in
accordance with its bylaws or election guideline of such electric cooperative; and

(3) To approve developmental plans of the cooperative.

REGULAR MEETING:

A. Annually held by the GA.

B. On a date fixed in the By-laws;

C. If not so fixed, any date within 90 days after the close of each fiscal
year.

NOTICE OF REGULAR MEETINGS TO ALL MEMBERS:

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 A. In writing;
B. By posting or publication; or

C. Through electronic means.

SPECIAL MEETINGS OF THE GA:

1. A special meeting of the general assembly may be called at any time by

a majority vote of the board of directors or as provided for in the
bylaws: 
2. That a notice in writing shall be sent one (1) week prior to the meeting
to all members who are entitled to vote.

3. A special meeting shall be called by the board of directors after

compliance with the required notice within from at least ten per
centum (10%) of the total members who are entitled to vote to transact
specific business covered by the call.

4. In the case of a newly approved cooperative, a special general

assembly shall be called, as far as practicable, within ninety (90) days
from such approval.

If the board fails to call a regular or a special meeting within the given
period, the CDA, upon petition of ten per centum (10%) of all the
members of the cooperative who are entitled to vote, and for good
cause shown, shall issue an order to the petitioners directing them to
call a meeting of the general assembly by giving proper notice as
required. The CDA may call a special meeting of the cooperative for
the purpose of reporting to the members the result of any examination
or other investigation of the cooperative affairs. Notice of any meeting
may be waived, expressly or impliedly, by any member.

QUORUM: at least 25% of all members entitled to vote.

Exceptions: 1. Cooperative banks: ½ plus 1

2. Electric Cooperatives: 5% of all members entitled to vote,

unless the by-laws provides otherwise.

VOTING SYSTEM:

1. Each member of a primary cooperative shall have only one vote.

2. In case of members of secondary or tertiary cooperatives, they shall
have one basic vote and as many incentive vote as provided for in the
by-laws but not to exceed 5 votes.

3. Voting by proxy may be allowed by the by-laws of a cooperative other

than a primary cooperative.

BOARD OF DIRECTORS: where the direction and management of the affairs of

the cooperative shall be vested.

COMPOSITON: not less than 5 but not more than 15 selected by the GA

TERM: 2 years (maximum term allowed as per CDA MC 2012-20

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 POWERS:

1. Strategic Planning;
2. Direction-setting and

3. Policy Formulation

An officer’s dismissal is a matter that comes with the conduct and

management of the affairs of a cooperative and/or an intra-
cooperative controversy and that nature is not altered by reason or
wisdom that the Board of Directors may have in taking such action.
Accordingly, the case a quo is not a labor dispute requiring the
expertise of the Labor Arbiter of the National Labor Relations
Commission. It is an intra-cooperative dispute that is within the
jurisdiction of the Regional Trial Court. Pascual vs. NDCC, G.R No.
172980, July 22, 2015.

RULES ON DIRECTORS:

(1) Any member of a cooperative who under the bylaws of the

cooperative, has the right to vote and who possesses all the
qualifications and none of the disqualifications provided in the laws or
bylaws shall be eligible for election as director.

(2) The cooperative may, by resolution of its board of directors, admit

as directors, or committee member one appointed by any financing
institution from which the cooperative received financial assistance
solely to provide technical knowledge not available within its
membership. Such director or committee member not be a member of
the cooperative and shall have no powers, rights, nor responsibilities
except to provided technical assistance as required by the cooperative.

(3) The members of the board of directors shall not hold any other
position directly involved in the day to day operation and
management of the cooperative.

(4) Any person engaged in a business similar to that of the cooperative

or who in any way has a conflict of interest with it, is disqualified from
election as a director of said cooperative.

MEETING OF THE BOARD AND QUORUM REQUIREMENT:

(1) In the case of primary cooperatives, regular meetings of the board

of directors shall be held at least once a month.

(2) Special meetings of the board of directors may be held at any time
upon the call of the chairperson or a majority of the members of the
board: Provided, That written notices of the meeting specifying the
agenda of the special meeting shall be given to all members of the
board at least one (1) week before the said meeting.

(3) A majority of the members of the Board shall constitute a quorum

or the conduct of business, unless the bylaws proved otherwise.

(4) Directors cannot attend or vote by proxy at board meetings.

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VACANCY: Any vacancy in the board of directors, other than by expiration of
term, may be filled by the vote of at least a majority of the remaining directors, if
still constituting a quorum; otherwise, the vacancy must be filled by the general
assembly in a regular or special meeting called for the purpose. A director so
elected to fill a vacancy shall serve only the unexpired term of his predecessor in
office.

RULES OF OFFICERS:

1. The board of directors shall elect from among themselves the

chairperson and vice-chairperson, and elect or appoint other officers of
the cooperative from outside of the board in accordance with their
bylaws.
2. All officers shall serve during good behavior and shall not be removed
except for cause after due hearing.

3. Loss of confidence shall not be a valid ground for removal unless

evidenced by acts or omission causing loss of confidence in the
honesty and integrity of such officer.

4. No two (2) or more persons with relationships up to the third civil

degree of consanguinity or affinity nor shall any person engaged in a
business similar to that of the cooperative nor who in any other
manner has interests in conflict with the cooperative shall serve as an
appointive officer.

EXECUTIVE COMMITTEE: May be created under the by-laws and appointed by

the board of directors with such powers and duties as may be delegated to it in
the by-laws or by a majority vote of all the members of the board of directors.

COMMITTEES REQUIRED TO BE PROVIDED UNDER THE BY-LAWS:

1. Audit
2. Election

3. Mediation and Conciliation

4. Ethics

5. Such other committees as may be necessary

COMMITTEES whose members are elected by the GA:

1. Audit
2. Election

Committees whose members are appointed by the board of directors:

all other committees.

LIABILITY OF DIRECTORS, OFFICERS AND COMMITTEE MEMBERS:

1. Directors, officers and committee members, who are willfully and

knowingly vote for or assent to patently unlawful acts or who are
guilty of gross negligence or bad faith in directing the affairs of the
cooperative or acquire any personal or pecuniary interest in conflict

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 with their duty as such directors, officers or committee members shall
be liable jointly and severally for all damages or profits resulting
therefrom to the cooperative, members, and other persons.
2. When a director, officer or committee member attempts to acquire or
acquires, in violation of his duty, any interest or equity adverse to the
cooperative in respect to any matter which has been reposed in him in
confidence, he shall, as a trustee for the cooperative, be liable for
damages and shall be accountable for double the profits which
otherwise would have accrued to the cooperative.

RULES ON COMPENSATION:

(1) In the absence of any provisions in the bylaws fixing their

compensation, the directors shall not receive any compensation except
for reasonable per diems: Provided however, That the directors and
officers shall not be entitled to any per diem when, in the preceding
calendar year, the cooperative reported a net loss or had a dividend
rate less than the official inflation rate for the same year. Any
compensation other than per diems may be granted to directors by a
majority vote of the members with voting rights at a regular or special
general assembly meeting specifically called for the purpose: Provided,
That no additional compensation other than per diems shall be paid
during the first year of existence of any cooperative.

(2) The compensation of officers of the cooperative as well as the

members of the committee as well as the members of the committees
created pursuant to this Code or its bylaws may be fixed in the bylaws.

(3) Unless already fixed in the bylaws, the compensation of all other
employee shall be determined by the board of directors.

(4) Under Section 5 of CDA MC 2013-17, the grant of compensation

other then per diem to the directors shall be made only after the
adoption of a General Assembly Resolution approving such
compensation.

(5) Under Section 6, resumption of grant of per diem after a period of

suspension shall not be compounded. No recovery of per diem during
the period of suspension shall be allowed.

COMPENSATION shall include all forms of remuneration given for

services rendered, like salary which is a compensation paid regularly,
as by month. Per diem refers to allowance given as a reimbursement
for extra expense incurred by one in the performance of his duties.
Honorarium refers as a gesture of appreciation for the service of one
with expertise of professional standing in recognition of his broad and
superior knowledge in specific fields. It is likewise given to an
employee not as a matter of obligation but in appreciation for services
which admits of no compensation in money.

DEALINGS OF DIRECTORS, OFFICERS OR COMMITTEE MEMEBRS: A

contract entered into by the cooperative with one (1) or more of its directors, officers,
and committee members is voidable, at the option of the cooperative, unless all the
following conditions are present.

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 (1) That the presence of such director in the board meeting wherein contract was
approved was not necessary to constitute a quorum for such meeting;

(2) That the vote of such director was not necessary for the approval of the
contract;

(3) That the contract is fair and reasonable under the circumstances; and

(4) That in the case of an officer or committee member, the contract with the
officer or committee member has been previously authorized by the general assembly
or by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director, such contract may be ratified by a three-
fourths (3/4) vote of all the members with voting rights, present and constituting a
quorum in a meeting called for the purpose: Provided, That full disclosure of the adverse
interest of the directors involved is made at such meeting, and that the contract is fair
and reasonable under the circumstances.

DISLOYALTY OF A DIRECTOR: A director who, by virtue of his office, acquires for

himself an opportunity which should belong to the cooperative shall be liable for
damages and must account for double the profits that otherwise would have accrued to
the cooperative by refunding the same, unless his act has been ratified by a three-
fourths (3/4) vote of all the members with voting rights, present and constituting a
quorum. This provision shall be applicable, notwithstanding the fact that the director
used his own funds in the venture.

ILLEGAL USE OF CONFIDENTIAL INFORMATION: (1) A director or officer, or an

associate of a director or officer, who, for his benefit or advantage or that of an
associate, makes use of confidential information that, if generally known, might
reasonably be expected to adversely affect the operation and viability of the
cooperative, shall be held:

(a) Liable to compensate the cooperative for the direct losses suffered by the
cooperative as a result of the illegal use of information; and

(b) Accountable to the cooperative for any direct benefit or advantage received or
yet to be received by him or his associate, as a result of the transaction.

RULES ON REMOVAL:

1. All complaints for the removal of any elected officer shall be filed with the
board of directors.
2. Such officer shall be given the opportunity to be heard.

3. Majority of the board of directors may place the officer concerned under
preventive suspension pending the resolution of the investigation.

4. Upon finding of a prima facie evidence of guilt, the board shall present its
recommendation for removal to the general assembly.

5. An elective officer may be removed by three fourths (3/4) votes of the regular
members present and constituting a quorum, in a regular or special general
assembly meeting called for the purpose.

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 6. The officer concerned shall be given an opportunity to be heard at said
assembly.

ADDRESS: Every cooperative shall have an official postal address to which all notices
and communications shall be sent. Such address and every change thereof shall be
registered with the CDA.

BOOKS TO KEPT OPEN: Every cooperative shall have the following documents ready
and accessible to its members and representatives of the Authority for inspection
during reasonable office hours at its official address:

(a) A copy of this Code and all other laws pertaining to cooperatives;

(b) A copy of the regulations of the Authority;

(c) A copy of the articles of cooperation and bylaws of the cooperative;

(d) A register of members;

(e) The books of the minutes of the meetings of the general assembly, board of
directors and committee;

(f) Share books, where applicable;

(g) Financial statement; and

(h) Such other documents as may be prescribed by laws or the bylaws.

OTHER RESPONSIBILITIES OF THE COOPERATIVE:

1. The accountant or the bookkeeper of the cooperative shall be responsible for

the maintenance of the cooperative in accordance with generally accepted
accounting practices. He shall also be responsible for the production of the
same at the time of audit or inspection.
2. The audit committee shall be responsible for the continuous and periodic
review of the books and records of account to ensure that these are in
accordance with generally accepted accounting practices. He shall also be
responsible for the production of the same at the time of audit or inspection.

3. Each cooperative shall maintain records of accounts such that the true and
correct condition and the results of the operation of the cooperative may be
ascertained therefrom at any time. The financial statements, audited
according to generally accepted auditing standards, principles and practices,
shall be published annually and shall be kept posted in a conspicuous place
in the principal office of the cooperative.

(4) Subject to the pertinent provisions of the National Internal Revenue Code and
other laws, a cooperative may dispose by way of burning or other method of
complete destruction any document, record or book pertaining to its financial
and nonfinancial operations which are already more than five (5) years old
except those relating to transactions which are the subject of civil, criminal and
administrative proceedings. An inventory of the audited documents, records and
books to be disposed of shall be drawn up and certified to by the board secretary
and the chairman of the audit committee and presented to the board of directors
which may thereupon approve the disposition of said records.

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RULES ON REPORTS:

1. Every cooperative shall draw up regular reports of its program of activities,

including those in pursuance of their socio-civic undertakings, showing their
progress and achievements at the end of every fiscal year.
2. The reports shall be made accessible to its members, and copies thereof shall
be furnished to all its members or record.

3. These reports shall be filed with the Authority within one hundred twenty
(120) days from the end of the calendar year. The form and contents of the
reports shall be as prescribed by the rules of the Authority.

4. Failure to file the required reports shall subject the accountable officer/s to
fines and penalties as may be prescribed by the Authority, and shall be a
ground for the revocation of authority of the cooperative to operate as such.

5. The fiscal year of every cooperative shall be the calendar year except as may
be otherwise provided in the bylaws.

6. If a cooperative fails to make, publish and file the reports required herein, or
fails to include therein any matter required by the Code, the Authority shall,
within fifteen (15) days from the expiration of the prescribed period, send
such cooperative a written notice, stating its non-compliance and the
commensurate fines and penalties that will be imposed until such time that
the cooperative has complied with the requirements.

REGISTER OF MEMBERS AS PRIMA FACIE EVIDENCE: Any register or list of

members shares kept by any registered cooperative shall be prima facie evidence of the
following particulars entered therein:

(1) The date on which the name of any person was entered in such register or list
of member; and

(2) The date on which any such person ceased to be a member.

PROBATIVE VALUE OF CERTIFED COPIES OF ENTRIES:

1. A copy of any entry in any book, register or list regularly kept in the course of
business in the possession of a cooperative shall, if duly certified in
accordance with the rules of evidence, be admissible as evidence of the
existence of entry and prima facie evidence of the matters and transactions
therein recorded.
2. No person or a cooperative is possession of the books of such cooperative
shall, in any legal proceedings to which the cooperative is not a party, be
compelled to produce any of the books of the cooperative, the contents of
which can be proved and the matters, transactions and accounts therein
recorded, unless by order of a competent court.

RULES ON BONDING OF ACCOUNTABLE OFFICERS:

1. Every director, officer, and employee handling funds, securities or

property on behalf of any cooperative shall be covered by a surety
bond to be issued for a duly registered insurance or bonding company
for the faithful performance of their respective duties and obligations.
2. The board of directors shall determine the adequacy of such bonds.

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 3. Upon the filing of the application for registration of a cooperative, the
bonds of the accountable officers shall be required by the Authority.

4. Such bonds shall be renewed manually and the Authority shall

accordingly be informed of such renewal.

PREFERENCE OF CLAIMS:

1. Notwithstanding the provisions of existing laws, rules and regulations

to the contrary, but subject to the prior claim of the Authority, any debt
due to the cooperative from the member shall constitute a first lien
upon any raw materials, production, inputs, and products produced;
or any land, building, facilities, equipment, goods or services acquired
and held, by such member through the proceeds of the loan or credit
granted by the cooperative to him for as long as the same is not fully
paid.
2. No property or interest on property which is subject to a lien under
paragraph (1) shall be sold nor conveyed to third parties without the
prior permission of the cooperative. The lien upon the property or
interest shall continue to exit even after the sale or conveyance thereof
until such lien has been duly extinguished.

3. Notwithstanding the provisions of any law to the contrary, any sale or

conveyance made in contravention of paragraph (2) hereof shall be
void.

INSTRUMENT FOR SALARY OR WAGE DEDUCTION:

(1) A member of a cooperative may, notwithstanding the provisions of

existing laws to the contrary, execute an instrument in favor of the cooperative
authorizing his employer to deduct from his/her salary or wages, commutation
of leave credits and any other monetary benefits payable to him by the employer
and remit such amount as maybe specified in satisfaction of a debt or other
demand due from the member to the cooperative.

(2) Upon the execution of such instrument and as may be required by the
cooperative contained in a written request, the employer shall make the
deduction in accordance with the agreement and deduction in accordance with
the agreement and remit forthwith the amount so deducted within ten (10) days
after the end of the payroll month to the cooperative. The employer shall make
the deduction for as long as such debt or other demand remains unpaid by the
employee.

(3) The term "employer" as used in this article shall include all private
firms and the national and local governments and government-owned or
controlled corporations who have under their employer a member of a
cooperative and have agreed to carry out the terms of the instrument mentioned
in paragraphs (1) and (2) of this article.

(4) The provisions of this article shall apply to all similar agreements
referred to in paragraph (1) and were enforced prior to the approval of this Code.

(5) Notwithstanding the provisions of existing laws to the contrary, the

responsibilities of the employer as stated in paragraphs (1) and (2) of this articles

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 shall be mandatory: Provided, That in the case of private employer, the actual
and reasonable cost deducting and remitting maybe collected.

PRIMARY LIEN: Notwithstanding the provision of any law with the contrary, a
cooperative shall have primary lien upon the capital, deposits or interest of a member
for any debt due to the cooperative from such a member.

TAX TREATMENT OF COOPERATIVE: Duly registered cooperatives under this Code

which do not transact any business with non-members or the general public shall not be
subject to any taxes and fees imposed under the internal revenue laws and other tax
laws. Cooperatives not falling under this

TAX AND OTHER EXEMPTIONS: Cooperatives transacting business with both

members and non-members shall not be subjected to tax on their transactions with
members. In relation to this, the transactions of members with the cooperative shall not
be subject to any taxes and fees, including not limited to final taxes on members’
deposits and documentary tax. Notwithstanding the provisions of any law or regulation
to the contrary, such cooperatives dealing with nonmembers shall enjoy the following
tax exemptions:

(1) Cooperatives with accumulated reserves and undivided net savings of not
more than Ten million pesos (P10,000,000.00) shall be exempt from all national, city,
provincial, municipal or barangay taxes of whatever name and nature. Such
cooperatives shall be exempt from customs duties, advance sales or compensating taxes
on their importation of machineries, equipment and spare parts used by them and
which are not available locally a certified by the department of trade and industry
(DTI). All tax free importations shall not be sold nor the beneficial ownership thereof be
transferred to any person until after five (5) years, otherwise, the cooperative and the
transferee or assignee shall be solidarily liable to pay twice the amount of the imposed
tax and / or duties.

(2) Cooperatives with accumulated reserves and divided net savings of more
than Ten million pesos (P10,000,000.00) shall fee the following taxes at the full rate:

(a) Income Tax - On the amount allocated for interest on capitals: Provided, That
the same tax is not consequently imposed on interest individually received by
members: Provided, further, That cooperatives regardless of classification, are
exempt income tax from the date of registration with the Authority;

(b) Value-Added Tax – On transactions with non-members: Provided, however,

That cooperatives duly registered with the Authority; are exempt from the
payment of value-added tax; subject to Section 109, sub-sections L, M and N of
Republic Act No. 9337, the National Internal Revenue Code, as
amended: Provided, That the exempt transaction under Section 109 (L) shall
include sales made by cooperatives duly registered with the Authority organized
and operated by its member to undertake the production and processing of raw
materials or of goods produced by its members into finished or process products
for sale by the cooperative to its members and non-members: Provided, further,
That any processed product or its derivative arising from the raw materials
produced by its members, sold in then name and for the account of the
cooperative: Provided , finally, That at least twenty-five per centum (25%) of the net
income of the cooperatives is returned to the members in the form of interest
and/or patronage refunds;

(c) All other taxes unless otherwise provided herein; and

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 (d) Donations to charitable, research and educational institutions and
reinvestment to socioeconomic projects within the area of operation of the
cooperative may be tax deductible.

(3) All cooperatives, regardless of the amount of accumulated reserves and

undivided net savings shall be exempt from payment of local taxes and taxes on
transactions with banks and insurance companies: Provided, That all sales or services
rendered for non-members shall be subject to the applicable percentage taxes sales
made by producers, marketing or service cooperatives: Provided further, That nothing in
this article shall preclude the examination of the books of accounts or other accounting
records of the cooperative by duly authorized internal revenue officers for internal
revenue tax purposes only, after previous authorization by the Authority.

(4) In areas where there are no available notaries public, the judge, exercising
his ex officio capacity as notary public, shall render service, free of charge, to any person
or group of persons requiring the administration of oath or the acknowledgment of
articles of cooperation and instruments of loan from cooperatives not exceeding Five
Hundred Thousand Pesos (P500,000.00).

(5) Any register of deeds shall accept for registration, free of charge, any
instrument relative to a loan made under this Code which does not exceed Two
Hundred Fifty Thousand Pesos (P250,000.00) or the deeds of title of any property
acquired by the cooperative or any paper or document drawn in connection with any
action brought by the cooperative or with any court judgment rendered in its favor or
any instrument relative to a bond of any accountable officer of a cooperative for the
faithful performance of his duties and obligations.

(6) Cooperatives shall be exempt from the payment of all court and sheriff’s fees
payable to the Philippine Government for and in connection with all actions brought
under this Code, or where such actions is brought by the Authority before the court, to
enforce the payment of obligations contracted in favor of the cooperative.

(7) All cooperatives shall be exempt from putting up a bond for bringing an
appeal against the decision of an inferior court or for seeking to set aside any third
party claim: Provided, That a certification of the Authority showing that the net assets of
the cooperative are in excess of the amount of the bond required by the court in similar
cases shall be accepted by the court as a sufficient bond.

(8) Any security issued by cooperatives shall be exempt from the provisions of
the Securities Act provided such security shall not be speculative.

PRIVILEGES OF COOPERATIVES: Cooperatives registered under this Code,

notwithstanding the provisions of any law to the contrary, be also accorded the
following privileges:

(1) Cooperatives shall enjoy the privilege of depositing their sealed cash boxes or
containers, documents or any valuable papers in the safes of the municipal or
city treasurers and other government offices free of charge, and the custodian of
such articles shall issue a receipt acknowledging the articles received duly
witnessed by another person;

(2) Cooperatives organized among government employees, notwithstanding any

law or regulation to the contrary, shall enjoy the free use of any available space
in their agency, whether owned or rented by the Government;

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(3) Cooperatives rendering special types of services and facilities such as cold
storage, ice plant, electricity, transportation, and similar services and facilities
shall secure a franchise therefore, and such cooperatives shall open their
membership to all persons qualified in their areas of operation;

(4) In areas where appropriate cooperatives exist, the preferential right to supply
government institutions and agencies rice, corn and other grains, fish and other
marine products, meat, eggs, milk, vegetables, tobacco and other agricultural
commodities produced by their members shall be granted to the cooperatives
concerned;

(5) Preferential treatment in the allocation of fertilizers, including seeds and other
agricultural inputs and implements, and in rice distribution shall be granted to
cooperatives by the appropriate government agencies;

(6) Preferential and equitable treatment in the allocation or control of bottomries

of commercial shipping vessels in connection with the shipment of goods and
products of cooperatives;

(7) Cooperatives and their federations, such as farm and fishery producers and
suppliers, market vendors and such other cooperatives, which have for their
primary purpose the production and/or the marketing of products from
agriculture, fisheries and small entrepreneurial industries and federations
thereof, shall have preferential rights in the management of public markets
and/or lease of public market facilities, stalls or spaces: Provided, That these
rights shall only be utilized exclusively by cooperatives: Provided, further, That no
cooperative forming a joint venture, partnership or any other similar
arrangement with a non-cooperative entity can utilize these rights;

(8) Cooperatives engaged in credit services and/or federations shall be entitled

to loans credit lines, rediscounting of their loan notes, and other eligible papers
with the Development Bank of the Philippines, the Land Bank of the Philippines
and other financial institutions except the Bangko Sentral ng Pilipinas (BSP);

(9) The Philippine Deposit Insurance Corporation (PDIC) and other government
agencies, government-owned and controlled corporations and government
financial institutions shall provide technical assistance to registered national
federations and unions of cooperatives which have significant engagement in
savings and credit operations in order for these federations and unions to
establish and/or strengthen their own autonomous cooperative deposit
insurance systems;

(10) A public transport service cooperative may be entitled to financing support

for the acquisition and/or maintenance of land and sea transport equipment,
facilities and parts through the program of the government financial institutions.
It shall have the preferential right to the management and operation of public
terminals and ports whether land or sea transport where the cooperative
operates and on securing a franchise for active or potential routes for the public
transport;

(11) Cooperatives transacting business with the Government of the Philippines

or any of its political subdivisions or any of its agencies or instrumentalities,
including government-owned and controlled corporations shall be exempt from
prequalification bidding requirements notwithstanding the provisions of
Republic Act No.9184, otherwise known as, the Government Procurement Act;

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 (12) Cooperative shall enjoy the privilege of being represented by the provincial
or city fiscal or the Office of the Solicitor General, free of charge, except when the
adverse party is the Republic of the Philippines;

(13) Cooperatives organized by faculty members and employees of educational

institutions shall have the preferential right in the management of the canteen
and other services related to the operation of the educational institution where
they are employed: Provided, That such services are operated within the
premises of the said educational institution; and

(14) The appropriate housing agencies and government financial institutions

shall create a special window for financing housing projects undertaken by
cooperatives, with interest rates and terms equal to, or better than those given for
socialized housing projects. This financing shall be in the form of blanket loans or
long-term wholesale loans to qualified cooperatives, without need for individual
processing.

CAPITAL SOURCES: Cooperatives registered under this Code may derive their capital
from any or all of the following sources:

"(1) Member’s share capital;

"(2) Loans and barrowings including deposits;

"(3) Revolving capital which consists of the deferred payment of patronage

refunds, or interest on share capital; and

"(4) Subsidies, donations, legacies, grants, aids and such other assistance from
any local or foreign institution whether public or private: Provided, That capital
coming from such subsides, donations, legacies, grants, aids and other assistance
shall not be divided into individual share capital holdings at any time but shall
instead form part of the donated capital or fund of the cooperative. Upon
dissolution, such donated capital shall be subject to escheat.

LIMITATION ON SHARE CAPITAL HOLDINGS:

1. No member of primary cooperative other than cooperative itself shall own or

hold more than ten per centum (10%) of the share capital of the cooperative.
2. Where a member of cooperative dies, his heir shall be entitled to the shares of
the decedent: Provided,

a. That the total share holding of the heir does not exceed ten per
centum (10%) of the share capital of the cooperative; 

b. That the heir qualify and is admitted as members of the cooperative;

c. That where the heir fails to qualify as a member or where his total share
holding exceeds ten per centum (10%) of the share capital, the share or
shares excess will revert to the cooperative upon payment to the heir of
the value of such shares.

ASSIGNMENT OF SHARE CAPITAL CONTRIBUTON OR INTEREST: No

member shall transfer his shares or interest in the cooperative or any part thereof
unless.

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 "(1) He has held such share capital contribution or interest for not less
than one (1) year.

"(2) The assignment is made to the cooperative or to a member of the

cooperative or to a person who falls within the field of the membership of
the cooperative; and

"(3) The board of directors has approved such assignment.

CAPITAL BUILD-UP: The bylaws of every cooperative shall be provided for a

reasonable and realistic member capital build-up program to allow the
continuing growth of the members’ investment in their cooperative as their
economic conditions continue to improve.

Under CDA MC 2013-04, all cooperatives are required to adopt a policy of

continuing subscription on share capital upon full payment of the initial
subscription. It is likewise required the cooperative to execute subscription
agreement upon admission of members and whenever additional subscription
shall be made by members upon full payment of their initial subscription. Unless
otherwise provided for in their by-laws, cooperatives shall issue Share
Certificates at least every end of the calendar year based on the number of shares
fully paid for the said period. Cooperatives are prohibited from issuing multiple
types of common shares and different par value per share. It is likewise
prohibited for any cooperative to increase/decrease the par value of the share
capital by way of amending their Articles of Cooperation.

SHARE: refers to a unit of capital in a primary cooperative the par value of

which may be fixed to any figure not more than One thousand pesos (P1,000.00).
The share of capital of a cooperative is the money paid or required to be paid for
the operations of the cooperative. The method for the issuance of share
certificates shall prescribed in its bylaws.

FINES: The bylaws of a cooperative may prescribe a fine on unpaid subscribed

share capital. Provided, that such fine is fair and reasonable under the
circumstances.

INVESTMENT OF CAPITAL: A cooperative may invest its capital in any of the

following:

(a) In shares or debentures or securities of any other cooperative;

(b) In any reputable bank in the locality, or any cooperative;

(c) In securities issued or guaranteed by the Government;

(d) In real state primarily for the use of the cooperative or its members; or

(e) In any other manner authorized in the bylaws.

REVOLVNG CAPITAL: The general assembly of any cooperative may authorize

the board of directors to raise a revolving capital to strengthen its capital
structure by deferring the payment of patronage refunds and interest on share
capital or by the authorized deduction of a percentage from the proceeds of
products sold or services rendered, or per unit of product or services handled.
The board of directors shall issue revolving capital certificates with serial

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number, name, amount, and rate of interest to be paid and shall distinctly set
forth the time of retirement of such certificates and the amounts to be returned."

ANNUAL AUDIT: Cooperatives registered under this Code shall be subject to an

annual financial, performance and social audit. The financial audit shall be
conducted by an external auditor who satisfies all the following qualifications:

(1) He is independent of the cooperative or any of its subsidiary that he is

auditing; and

(2) He is a member in good standing of the Philippine Institute of Certified

Public Accountants (PICPA) and is accredited by both the Board and
Accountancy and the Authority.

The social audit shall be conducted by an independent social auditor accredited

by the Authority.

Performance and social audit reports which contain the findings and
recommendations of the auditor shall be submitted to the board of directors.

The CDA in consultation with the cooperative sector, shall promulgate the rules
and standards for the social audit of cooperatives.

RULES ON AUDIT REPORT:

1. The auditor shall submit to the board of directors and to the audit
committee the financial audit report which shall be in accordance with
the generally accepted auditing standards for cooperatives as jointly
promulgated by the Philippine Institute of Certified Public
Accountants (PICPA) and the Authority.
2. Thereafter, the board of directors shall present the complete audit
report to the general assembly in its next meeting.

NON-LIABILITY FOR DEFAMATION: The auditor is not liable to any person in

an action for defamation based on any act, done, or any statement made by him
in good faith in connection with any matter he is authorized or required to do
pursuant to RA 9520.

MEMBER’S RIGHT TO EXAMINE:

1. A member shall have the right to examine the records required to be

kept by the cooperative under Article 52 of this Code during
reasonable hours on business days and he may demand, in writing, for
a copy of excerpts from said records without charge except the cost of
production.
2. Any officer of the cooperative who shall refuse to allow any member of
the cooperative to examine and copy excerpts from its records shall be
liable to such member for damages and shall be guilty of an offense
which shall be punishable under Article 140 of this Code: Provided,

a. That if such refusal is pursuant to a resolution or order of the

board of directors, the liability under this article shall be
imposed upon the directors who voted for such refusal and

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 b. That it shall be a defense to any action under this article that the
member demanding to examine and copy excerpts from the
cooperative records has improperly used any information
secured through any prior examination of the records of such
cooperative or was not acting in good faith or for a legitimate
purpose in making his demand.

SAFETY OF RECORDS: Every cooperative shall, at its principal office, keep and
carefully preserve the records required by this Code to be prepared and
maintained. It shall take all necessary precaution to prevent its loss, destruction
or falsification."

RULES ON NET SURPLUS:

1. It hall be determined in accordance with its bylaws.

2. Every cooperative shall determine its net surplus at the close of every
fiscal year and at such other times as may be prescribed by the bylaws.

3. The net surplus shall not be construed as profit but as an excess of

payments made by the members for the loans borrowed, or the goods
and services availed by them from the cooperative or the difference of
the rightful amount due to the members for their products sold or
services rendered to the cooperative including other inflows of assets
resulting from its other operating activities and which shall be deemed
to have been returned to them if the same is distributed as prescribed
therein.

ORDER OF DISTRIBUTION: The net surplus of every cooperative shall be

distributed as follows:

(1) An amount for the reserve fund which shall be at least ten per
centum (10%) of net surplus: Provided, That, in the first five (5) years of
operation after registration, this amount shall not be less than fifty per
centum (50%) of the net surplus:

(a) The reserve fund shall be used for the stability of the
cooperative and to meet net losses in its operations. The general
assembly may decrease the amount allocated to the reserve fund
when the reserve fund already exceeds the share capital.

Any sum recovered on items previously charged to the reserve

fund shall be credited to such fund.

(b) The reserve fund shall not be utilized for investment, other than
those allowed in this Code. Such sum of the reserve fund in excess
of the share capital may be used at anytime for any project that
would expand the operations of the cooperative upon the
resolution of the general assembly.

(c) Upon the dissolution of the cooperative, the reserve fund shall
not be distributed among the members. The general assembly may
resolves:

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 (i) To establish a usufructuary trust fund for the benefit of
any federation or union to which the cooperative is
affiliated; and

(ii) To donate, contribute, or otherwise dispose of the

amount for the benefit of the community where the
cooperative operates. If the members cannot decide upon the
disposal of the reserve fund, the same shall go to the
federation or union to which the cooperative is affiliated.

(2) An amount for the education and training fund, shall not be more than
ten per centum (10%) of the net surplus. The bylaws may provide that
certain fees or a portion thereof be credited to such fund. The fund shall
provide for the training, development and similar other cooperative
activities geared towards the growth of the cooperative movement:

(a) Half of the amounts transferred to the education and training

fund annually under this subsection shall be spent by the
cooperative for education and training purposes; while the other
half may be remitted to a union or federation chosen by the
cooperative or of which it is a member. The said union or
federation shall submit to the Authority and to its contributing
cooperatives the following schedules:

(i) List of cooperatives which have remitted their respective

Cooperative Education and Training Funds (CETF);

(ii) Business consultancy assistance to include the nature and

cost; and

(iii) Other training activities undertaken specifying therein

the nature, participants and cost of each activity.

(b) Upon the dissolution of the cooperative, the unexpended

balance of the education and training fund appertaining to the
cooperative shall be credited to the cooperative education and
training fund of the chosen union or federation.

(3) An amount for the community development fund, which shall not be
less than three per centum (3%) of the net surplus. The community
development fund shall be used for projects or activities that will benefit
the community where the cooperative operates.

(4) An optional fund, a land and building, and any other necessary fund
the total of which shall not exceed seven per centum (7%).

(5) The remaining net surplus shall be made available to the members in
the form of interest on share capital not to exceed the normal rate of return
our investments and patronage refunds: Provided, That any amount
remaining after the allowable interest and the patronage refund have been
deducted shall be credited to the reserve fund.

(6) The sum allocated for patronage refunds shall be made available at the
same rate to all patrons of the cooperative in proportion to their
individual patronage: Provided, That:

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 (a) In the case of a member patron with paid-up share capital
contribution, his proportionate amount of patronage refund shall be paid
to him unless he agrees to credit the amount to his account as additional
share capital contribution;

(b) In the case of a member patron with unpaid share capital

contribution, his proportionate amount of patronage refund shall be
credited to his account until his account until his share capital
contribution has been fully paid;

(c) In the case of a non-member patron, his proportionate amount

of patronage refund shall be set aside in a general fund for such patrons
and shall be allocated to individual non-member patrons only upon
request and presentation of evidence of the amount of his patronage. The
amount so allocated shall be credited to such patron toward payment of
the minimum capital contribution for membership. When a sum equal to
this amount has accumulated at any time within a period specified in the
bylaws, such patron shall be deemed and become a member of the
cooperative if he so agrees or requests and complies with the provisions of
the bylaws for admission to membership; and

(d) If within any period of time specified in the bylaws, any

subscriber who has not fully paid his subscribed share capital or any non-
member patron who has accumulated the sum necessary for membership
but who does not request nor agree to become a member or fails to
comply with the provisions of the bylaws for admission to membership,
the amount so accumulated or credited to their account together with any
part of the general fund for nonmember patrons shall be credited to the
reserve fund or to the education and training fund of the cooperative, at
the option of the cooperative.

DISSOLUTION: it is the termination of juridical personality of the cooperative

through appropriate judicial proceedings, or by an order of the CDA, or through
its own initiative.

MODES:

1. Voluntary- if initiated through the voluntary decision of the members

of the cooperative.
2. Involuntary-if ordered by the CDA or a competent court having
jurisdiction over the cooperative on grounds as specified by law, and
after due process.

EFFECT: terminates the right of the cooperative to continue the business or

purposes for which it was established and is bound to wind up its affairs within
the period specified by law.

VOLUNTARY DISSOLUTION WHERE NO CREDITORS ARE AFFECTED:

1. By a majority vote of the board of directors, and by a resolution duly adopted by

the affirmative vote of at least three-fourths (3/4) of all the members with voting
rights, present and constituting a quorum at a meeting to be held upon call of the
directors
2. That the notice of time, place and object of the meeting shall be published for
three (3) consecutive weeks in a newspaper published in the place where the

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 principal office of said cooperative is located, or if no newspaper is published in
such place, in a newspaper of general circulation in the Philippines;

3. That the notice of such meeting is sent to each member of record either by
registered mail or by personal delivery at least thirty (30) days prior to said
meeting.

4. A copy of the resolution authorizing the dissolution shall be certified to by a

majority of the board of directors and countersigned by the board secretary.

5. The Authority shall thereupon issue the certificate of dissolution.

VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED:

1. The petition for dissolution shall be filed with the Authority.

2. The petition shall be signed by a majority of its board or directors or other
officers managing its affairs, verified by its chairperson or board secretary or
one of its directors and shall set forth all claims and demands against it and
that its dissolution was resolved upon by the affirmative vote of at least three-
fourths (3/4) of all the members with voting rights, present and constituting a
quorum at a meeting called for that purpose.

3. If the petition is sufficient in form and substance, the Authority shall issue an
order reciting the purpose of the petition and shall fix a date which shall not
be less than thirty (30) nor more than sixty (60) days after the entry of the
order.

4. Before such date, a copy of the order shall be published at least once a week
for three (3) consecutive weeks in a newspaper of general circulation
published in the municipality or city where the principal office of the
cooperative is situated or in the absence of such local newspaper, in a
newspaper of general circulation in the Philippines, and a copy shall likewise
be posted for three (3) consecutive weeks in three (3) public places in the
municipality or city where the cooperative’s office is located.

5. Upon expiry of the five (5) day notice to file objections, the Authority shall
proceed to hear the petition and try any issue raised in the objection filed; and
if the objection is sufficient and the material allegations of the petition are
proven, it shall issue an order to dissolve the cooperative and direct the
disposition of its assets in accordance with existing rules and regulations.

6. The order of dissolution shall set forth therein:

"(1) The assets and liabilities of the cooperative;

"(2) The claim of any creditor;

"(3) The number of members; and

"(4) The nature and extent of the interests of the members of the
cooperative.

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 INVOLUNTARY DISSOLUTON BY THE COURT: A cooperative may be
dissolved by order of a competent court after due hearing on the grounds of:

"(1) Violation of any law, regulation or provisions of its bylaws; or

"(2) Insolvency.

Upon receipt of final and executory decision of the Court, the CDA shall
issue an order to proceed with the winding up of the affairs of the
Cooperative. (Sec. 7(A) (2) of CDA MC 2012-21).

INVOLUNTARY DISSOLUTION BY ORDER OF THE CDA: The CDA may

suspend or revoke, after due notice and hearing, the certificate of registration of a
cooperative on any of the following grounds:

(1) Having obtained its registration by fraud;

(2) Existing for an illegal purpose;

(3) Willful violation, despite notice by the Authority, of the provisions of

this Code or its bylaws;

(4) Willful failure to operate on a cooperative basis; and

(5) Failure to meet the required minimum number of members in the

cooperative.

DISSOLUTION BY FAILURE TO ORGANIZE AND OPERATE: If a cooperative

has not commenced business and its operation within two (2) years after the issuance of
its certificate of registration or has not carried on its business for two (2) consecutive
years, the Authority shall send a formal notice to the said cooperative to show cause as
to its failure to operate. Failure of the cooperative to promptly provide justifiable cause
for its failure to operate shall warrant the Authority to delete its name from the roster of
registered cooperatives and shall be deemed dissolved.

PROCEDURAL GUIDELINES:

1. Complaint. Receipt of verified complaint or reports of cooperatives

recommended for dissolution.
2. Summons or Show-Cause Order. Within fifteen (15) days from receipt of the
complaint or report, the Authority shall issue a Summons or Show Cause
Order addressed to the cooperative, through the Board of Directors, stating
the grounds for involuntary dissolution, and requiring the cooperative to
comment why the cooperative should not be dissolved and its certificate of
registration be cancelled.

3. Sending of Notice. The Summons or Show Cause Order shall be sent to the
principal office of the cooperative or its last known address as located in the
records of the Authority by registered mail with return card. Personal
delivery may also be employed through a duly authorized employee of the
Authority and only in cases specifically ordered by the Authority. If the
summons or show cause order remains un-served in spite of service by
registered mail or personal delivery, the Authority shall serve the notice to
the members of the Board of Directors on the last known address or as stated
in the Articles of Cooperation.

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4. Answer to the Complaint. The cooperative shall, within fifteen (15) days from
receipt of the Summons, file to the Authority its Answer to the complaint
stating therein the justifications why it should not be dissolved. Any motion
to dismiss shall be treated as an answer, and shall preclude the cooperative
from asserting facts or issues not included in such motion to dismiss.

5. Notice of Hearing. Upon the receipt of the answer from the cooperative or if
the cooperative failed to file its answer, the Authority shall issue a Notice of
Hearing stating the date, time and place of the hearing. No motion for
postponement shall be entertained by the Authority unless found to be
meritorious.

6. Presentation of Evidence. During such hearing/s, the parties shall be given

the opportunity to present their respective evidence for or against the
dissolution of the cooperative. The parties may or may not be represented by
counsel during such hearings. Failure of the cooperative to attend the hearing
shall warrant the Authority to issue the Order of Dissolution.

7. Order of Dissolution/Dismissal. After the hearing and as warranted by the

evidence presented, the Authority may issue an Order of Dissolution or
dismissal of the complaint. The resolution shall become final and executory
fifteen (15) days after receipt of such Order by the parties unless a motion for
reconsideration or appeal has been perfected.

8. Appeal. The parties who are not satisfied with the decision of the Authority
may file their appeal to the CDA Central Office, Department of Finance or the
Office of the President, whichever is applicable, within fifteen (15) days from
the receipt of the decision.

9. Execution. The order of the Authority shall be final and executory after the
lapse of fifteen (15) days period to appeal or file a motion for reconsideration.

10. Appointment of Liquidator. The Authority shall appoint a liquidator through

issuance of an Appointment of the Liquidator. The appointment shall also
empower the appointed person to transact business with the cooperative’s
depository banks for and in behalf of the cooperative. The appointed
liquidator shall then proceed with winding up of affairs of the cooperative
commencing from the date specified in the appointment and in the manner
prescribed in the manual on liquidation.

RULES ON LIQUIDATION OF COOPERATIVE:

1. Every cooperative whose charter expires by its own limitation or whose

existence is terminated by voluntary dissolution or through an appropriate
judicial proceeding shall nevertheless continue to exist for three (3) years after
the time it is dissolved; not to continue the business for which it was
established but for the purpose of prosecuting and defending suits by or
against it; settlement and closure of its affairs; disposition, conveyance and
distribution of its properties and assets.
2. At any time during the said three (3) years, the cooperative is authorized and
empowered to convey all of its properties to trustees for the benefit of its
members, creditors and other persons in interest.

3. From and after any such conveyance, all interests which the cooperative had
in the properties are terminated.

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4. Upon the winding up of the cooperative affairs, any asset distributable to any
creditor, shareholder or member who is unknown or cannot be found shall be
given to the federation or union to which the cooperative is affiliated with.

5. A cooperative shall only distribute its assets or properties upon lawful

dissolution and after payment of all its debts and liabilities, except in the case
of decrease of share capital of the cooperative and as otherwise allowed by
this Code.

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