Divina

DIVINA
on
COMMERCIAL LAW
A Comprehensive Guide
VOLUME I
NILO T. DIVINA
i.u
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Tel. Nos.: 8736-0567/8733-6746 H
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FOREWORD
Among the different fields of law, commercial law has perhaps the most practical
and utilitarian application in this day and age of incessant innovation,
interconnectedness, and technological breakthroughs. Indeed, we engage in a myriad
of commercial transactions on a daily basis, ranging from the more mundane activities
of booking public transport and having our basic commodities delivered through third-
party couriers, to the more complex pursuits such as business mergers and
consolidations, and even corporate rehabilitation or liquidation. These matters and a
whole lot more are given stability and structure through the different facets of
commercial law, which, for its extensiveness and breadth, has become an indispensable
aspect of today’s society and its ever-evolving future. In a sense, commerce is the
lifeblood of a nation. As such, it is vital that our aptitude and understanding of
commercial law be continuously honed.
Emblematic of the subject, the commercial law qualities of practicality and utility
are likewise reflected in this new undertaking of Dean Nilo T. Divina, whose expertise
and experience in the field are insightfully showcased in this compendium of questions.
In particular, Dean Divina craftily weaves various topics and issues in the realm of
insurance, pre-need plans, transportation (including air transportation), partnerships,
and corporate law, into useful hypotheticals that are intelligibly answered in order to
convey the underlying essentials of each subject matter. In the same vein, fundamental
definitions and enumerations for each subject are included, providing the reader an
effective memory aid that is easy to follow. Truly, this book, with its clear, concise, and
simple presentation, but comprehensive scope, will surely serve as an important tool
not only for law practitioners and law students alike, but also to the layman who has a
legitimate desire to familiarize himself with the basic concepts as well as seemingly
intricate workings of commercial law.
I would like to congratulate Dean Divina for this momentous effort well done.
This comprehensive guide should be considered as an important resource in the field of
commercial law that is definitely worthy of praise and commendation.
16 April 2021
ESTELA M^R1*ASÊRNABE
Senior Associate Justice

Supreme Court of the Philippines
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FOREWORD
The motivational writer Paul J. Meyer once said:
"Productivity is never an accident. It is always the result of

commitment to excellence, intelligent planning and focused
effort."
Never has this observation been as valid as when applied to the

intellectual fecundity of UST Law Dean Nilo T. Divina, noted law
practitioner and professor, a much sought after lecturer, respected
academician, and best-selling author of law books. Nary has a year
passed since the launch, against all pandemic odds, of his treatise on
Philippine Corporation Law, when again today he astounds the legal
community with a 2-volume 1,286 - page compendium on Philippine
commercial law.
The author examines, analyzes and deconstructs into understandable

concepts our laws on insurance, pre-need companies, transportation,
securities, banking, intellectual property, anti-money laundering,
investments, data privacy and competition. Most remarkable is that he
has conjoined all these separate pieces of legislation into just one
instrument for easy and convenient research and reference.
Generously spread all over it are annotations of provisions of
commercial law, pertinent jurisprudence, and insightful commentaries
reflective of the knowledge, wisdom and experience acquired by the
writer as a staunch disciple of the law. Without question, this work is
the result of the Dean's continuous pursuit of excellence most
especially in that ratified discipline of legal scholarship and pedagogy.
Commercial law has never been the cup of tea of a lot of law students,
which most probably accounts for their comparably low ratings on the
subject in bar examinations. In their law course, they plod through
what they perceive, rightly or wrongly, as endless arid landscapes of
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negotiable instruments, insurance, banking, securities, business
organizations, investments ... laws seemingly divested of the human
dimension, all too often absent the flesh and blood facets of, for
example, family law or criminal law.
But, as in all Divina law books this work upends this perception. The
dissection of commercial laws is done through a different perspective
and methodology. Aimed at demystifying and decluttering the law, the
treatise is underpinned by an undefinable sense of reaching out to and
connecting with the humaneness of the reader. For the work in its
entirety is understandable: its language intelligent but simple and
clear, not at all opaque nor obsfuscatory which is oftentimes the
hallmark of the intellectually pretentious. In other words, it is shorn of
aoristicism and prolixity, as it adopts a style that is an honest-to-
goodness down-to-earth Q and A, all of which make for readability,
easier comprehension as well as sufficiently good, if not total, recall.
Entitled Divina on Commercial Law: A Comprehensive Guide and

described as an opus ex caritate, the book is a welcome offering to the
law academe and studentry, law practitioners, members of the bench,
and even to non-lawyers as well. It is for this reason that the Legal
Education Board is deeply indebted and grateful to Dean Nilo for his
continuing efforts in contributing to the enhancement of the quality of
legal education in the country.
Thus, we say: Mabuhay, DeanI
/ ZENAIDA Nu ELEPANO
Commissioner and Officer-in-Charge
Legal Education Board
Manila, Philippines
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FOREWORD
Divina on Commercial Law: A Comprehensive Guide
Knowledge production is the lifeblood of any field or discipline. It nurtures academic

engagements by introducing new ideas and concepts as well as encourages a paradigm shift that
may be rendered trail-blazing and cutting edge. It is integral for every field of study to challenge
existing norms and codes in order for it to become up-to-date and relevant. The work done by
scholars and academics is never-ending. They constantly review current literature to see the gaps
that require filling and in the process change the way people think and make them subscribe to a
novel idea. Commercial Law is a vast field that benefits further study and explication since it
covers various areas such as Insurance, Securities, Banking, Business Establishments, among
others. Years of excellent law practice, dynamic leadership, a voluminous contribution to law
literature that comes in the form of scholarly work and academic treatises, and a solid reputation
that extends beyond Philippine shores, Atty. Nilo Divina is a stalwart in the field of law, capable
of discoursing on this particular branch of law. Despite the growing number of business
organizations in the country, there are still many things that professionals can learn about the
dynamics and dimensions of Commercial Law. This is precisely the reason why there is a need
to gain an understanding of the many complexities of Commercial Law from an expert like Atty.
Nilo Divina.
Atty. Nilo Divina, one of the country's top lawyers, once again publishes an important volume
on commercial law. Divina's opus examines the subject point by point, which is counterpoised
with popular myths and misconceptions regarding commercial law, and analyzes it by providing
important cases as examples which highlight in his discussion binding agreements, standard
rules and rights, interpretations and misinterpretations, exceptions, exemptions and entitlements,
special interests and potential risks, benefits and liabilities, subtleties and severities. The book
"Divina on Commercial Law" provides an in-depth look into the many facets of commercial law
which will surely be the go-to reference book by students of law and law practitioners. The book
is organized in such a way that it facilitates easy reading. The flow of the author's language is
smooth; his grasp of the legal jargon, clear and precise. "Divina on Commercial Law" is a must-
have for every law firm, law school, insurance company, and for anyone who wishes to further
understand the many intricacies of the laws governing business and commerce, as the author
immediately goes into the heart of the matter in a style that is akin to some of the best author
barristers in the world. Indeed, Divina's new book is a major contribution to the field of law.
REV, HGRICHARD GMNG, O.P.

Recto r
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FOREWORD
Let me start by proudly saying that among the law deans in various law schools, only Dean Nilo T. Divina
of the UST Faculty of Civil Law has produced bar topnotchers. In 2017, UST regained its past glory as the
best law school in the country.
Dean Divina is not only an academician, but also a scholar, a bar topnotcher, a distinguished law
practitioner, a prolific writer, and an ideal family man. Above all, he is a benefactor. His reasons for writing
this book is not only to lead his readers to the intricate realm of commercial law, but also to grant
scholarships, derived from its proceeds, to academically deserving students and to enable law students to
acquire it at a very reasonable price. When I asked him how he could write this two-volume work despite
the pandemic, Dean Divina laughingly answered, "Because I love students." This statement is a window
to his soul.
Unquestionably, this book is a treasury of knowledge influenced not only by Dean Divina's brilliance of
mind, but also by his close to 30 years of law practice and extensive work in the academe. It is said that
genuine knowledge originates directly from a wide range of experience.
Being a dear showcase of the author’s ability to capture what is basic and vital in commercial law, the
book in its entirety is thoroughly interesting and instructive. Thus, through a Socratic Q and A style, it
presents a wonderful compact survey of the laws on Insurance, Pre-need Company, Transportation,
Business Organizations, Securities, General Banking, and many other fields of commercial law. It contains
annotations of cited laws usually intertwined with relevant Supreme Court Decisions. Not only that. Dean
Divina's discourse thereon gives the readers a glimpse of his mindset and a chance to appredate and
assimilate its wisdom. Significantly, he evokes a web of legal and judicial Issues, enough to send any
assiduous reader to his or her study.
As the title indicates, this book is an excellent comprehensive guide to aspiring law students,
academicians, bar reviewers, practitioners, members of the judiciary, and even lay persons as they journey
on the winding road of commercial law. It is the answer to the continuing quest for knowledge of men
and women of law.
What makes this book impressive is its mode of educating its readers.
Preeminent for his legal craftsmanship. Dean Divina's Q and A are well written, indeed "as clear and lucid
as the fabled skies of Greece." Anyone who reads this book will readily grasp and remember what It
Imparts. Truly, a must read.
The "Dlvlna on Commercial Law" Is a crowning masterpiece and a legacy of a great mind.
u/t'/T7^1
_■nvf/nna/
Justice Angelina Sandoval-Gutierrez (Ret.)

Vice Chairperson - Judicial Integrity Board, Supreme Court
Former Chair - MCLE Governing Board
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FOREWORD
“The field of commercial law serves as the backbone of a vibrant

economic environment. Practitioners in commercial law have to
be constantly abreast with the latest regulatory frameworks and
jurisprudence. Dean Nilo Divina’s book weaves basic principles,
hypothetical cases, and constructive views in a seamless narrative
of the vast area of commercial law. The set of materials discussed by
the author is useful for different readers, such as, law students, bar
reviewees and practitioners. Legal researchers would definitely find
more than enough leads in preparing pleadings and authoritative
opinions. There is an enticing incentive to exhaust the entire text
of this guidebook on account of the innovative pedagogical style
employed by the author to clarify concepts and apply these to
case facts. The author’s years of commercial law practice become
evident in his occasional comments on difficult questions of law.
This commendable piece of contribution to legal scholarship in
this country ranks among the invaluable roster of commercial law
materials to this date. I personally encourage Dean Nilo Divina to
further pursue his goal of selflessly sharing his knowledge in this
fast developing field of law. He has truly demonstrated his untiring
commitment to the bar.”
(Sgd.)
DEAN SEDFREY M. CANDELARIA
Officer-in-Charge, Mandatory Continuing Legal Education Board
Chief of Office, Research, Pubheation and Linkages,
Philippine Judicial Academy
Former President of Philippine Association of Law School
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FOREWORD
It has not even been a year, but I find myself with yet another Divina
manuscript on a subject matter he can talk about in his sleep. Divina on
Commercial Law - A Comprehensive Guide will hit the stands in the wake of
the bestselling Questions 8s Answers on the Revised Corporation Code.
Similar to its predecessor, this 2-volume compendium is responsive as

it is instructive. No other commercial law reviewer would include laws such
as Transportation Law, Personal Property Securities, Financial Rehabilitation
and Insolvency, Data Privacy and Philippine Competition, among others, all
in one line-up. The rationalized compilation of laws that are commercial in
nature and application will definitely facilitate cohesion in learning and
appreciation. With the limited text out there on the new laws, this
comprehensive guide will serve well as a beacon for the uninitiated and eager
to learn. It would be of note to point out that these are the only volumes
available that would provide a faithful compilation of all the laws covered by
the mercantile law scope of the current bar examinations.
But more than the novelty of the collection and the content is the
benevolence characteristic of the author that accompanies this latest addition
to our legal archives. This book is another testament to Dean Nilo’s
commitment to make legal education accessible to as many who wish to
embrace it. Making this book affordable is an exercise in compassion that
finds its very core in the heart of a healing world.
The legal academe is once again grateful to Dean Divina for this
outstanding effort to endow students and practitioners alike with this
excellent presentation of existing laws and recent initiatives that enriches our
commercial law framework.
Congratulations!
7LDLANENIAS
Chqii son and President
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FOREWORD
Commercial Law as a study and practice has always been marked by

dynamism. The transformation our mercantile laws has undergone
over the years reflects the volatility of the relations they govern.
For no other field is as rapidly evolving and changing as commerce,
trade, and business.
Rightfully so, the universal clamor for a compact material that would
capture the nucleus of the expanding commercial law subjects has
long been overdue.
For good measure, Dean Nilo Divina’s treatise, DIVINA ON
COMMERCIAL LAW: A Comprehensive Guide, becomes a most
welcome addition to the growing literature of Commercial Law in
the Philippines. While reference materials on the subject have been
plenty, no other opus has better presented the course in a very
reader-friendly, question-and-answer format.
As Commercial Law has often been viewed by many to be very
“mechanical” and “off-putting” owing to its highly specialized nature,
the book departs from the verbose “legalese” that has intimidated
many law students in their study of the subject. Dean Nilo has found
a way to weather the technical tangles by presenting key doctrinal
pronouncements in a straight-forward and conversational manner.
This he does with uncompromising depth and thoroughness. This
book, thus, acutely accomplishes its aim to infuse readers with
synthesized doctrinal pronouncements and core knowledge that they
can easily connect with practical applications and scenarios.
I take special admiration of the book’s ability to weave the codal
provisions and jurisprudence with the author’s annotations and
commentaries. This addresses the common challenge students
face in approaching the subject—the ability to make the necessary
connections and formulate sound conclusions. Moreover, the
inclusion of recent BAR exam questions, with sections devoted
to defining key terms, rules, and concepts, makes this manual a
complete guide for the bar reviewee.
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Dean Divina has painted for us a detailed anatomy of the laws
governing our mercantile system. Comprehensive in scope, versatile
in form, and uncompromising in content, Divina on Commercial Law:
A Comprehensive Guide is an astute companion for law students,
bar examinees, and legal practitioners alike.
(Sgd.)
DEAN JOAN S. LARGO
Former President of Philippine Association of Law Schools
Assistant Vice President for Academic Affairs,
University of San Carlos
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FOREWORD
Divina on Commercial Law is an all-encompassing guide to the subject matter that will
prove to be useful to undergraduates, bar reviewees and practitioners alike. The text covers
a wide variety of subtopics covering the whole gamut of commercial law. The language is
straight to the point and coherent, allowing for a logical transition from one topic to the
next. Situational examples are used to illustrate the principles for a concretized
understanding of the concepts discussed in the text. In this light, the reviewer goes beyond
presenting mere facts.
However, what sets this reviewer apart from the others is its unique writing style: the
question-and-answer format simulates the essence of the test-taking experience, making
the book an excellent supplementary' material for bar reviewees. In the decades I have
spent conducting bar reviews, most of the materials I have come across relied solely on the
reviewees' ability to question their own understanding of the information they’ absorb.
Divina on Commercial Law attends to that concern— the need to repeatedly question
oneself for the purpose of refining one's understanding of the subject. All in all, this brilliant
work is a thorough and well-constructed educational material that I would highly
recommend to anyone interested in developing their knowledge of commercial law.
ATTY. ALDEN FRANCGONZALES

President, Magnificus jtfris Reviews and Seminars Inc.
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The review center believes that the use of scientifically written books
will help bar candidates in their pursuit to successfully hurdle the
bar examinations.
Dean Divina’s latest published works - the two-volume Compendium
on Commercial Law — are epitomes of scientific learning. It contains
annotations of laws and decisions of the Supreme Court, which
are organized in accordance with the 2020/2021 Bar Examinations
Syllabus on Commercial Law. Engagingly, it is written in Q-and-A
format, for easy understanding and retention.
This Compendium on Commercial Law is a must-read for every bar
candidate. One can never go wrong with the 30 years of academic
and law practice of our legal luminary, Dean Nilo T. Divina.
(Sgd.)
ATTY. ARGEL JOSEPH T. CABATBAT
Review Director, Legal Edge Experts Review Center, Inc.
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CONTENTS
Forewords
Estela M. Perlas—Bernabe.................. iii
Zenaida N. Elepano............................... v
Rev. Fr. Richard G. Ang, O.P............. vii
Justice Angelina Sandoval-Gutierrez ix
Dean Sedfrey M. Candelaria.............. xi
Marisol DL Anenias.............................. xiii
Dean Joan S. Largo ............................. xv
Alden Francis C. Gonzales.................. xvii
Argel Joseph T. Cabatbat.................... xix
I. INSURANCE
Concept of Insurance.................................................................. 1
Elements of an Insurance Contract....................................... 5
Characteristics and Nature of Insurance Contracts.......... 7
Insurable Interest....................................................................... 11
In life/health...................................................................... 11
In Property ........................................................................ 20
Double Insurance.............................................................. 35
Multiple or several interests on same property......... 39
Perfection of the Contract of Insurance................................ 41
Offer and acceptance/consensuality.............................. 41
Premium Payment............................................................ 44
Non-default options in life insurance........................... 57
Reinstatement of a Lapsed Policy of Life Insurance. 57
Refund of Premium.......................................................... 58
Rescission of Insurance Contracts......................................... 60
Concealment...................................................................... 60
Misrepresentations/Omissions...................................... 67
Breach of Warranties....................................................... 80
Claims Settlement and Subrogation..................................... 87
Notice and Proof of Loss................................................. 87
Guidelines on Claims Settlement................................ 95
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Unfair Claims Settlement; Sanctions.................... 95
Prescription of Action............................................... 96
Subrogation................................................................. 98
Classes.................................................................................. 108
Marine.......................................................................... 108
Coverage...............................
108
Fire............................................................................... 127
Casualty Insurance................................................... . 134
Suretyship.................................................................... 138
Life............................................................................... 143
Microinsurance............................................................ 149
Compulsory motor vehicle liability insurance...... 150
No Fault Indemnity Clause....................................... 153
Authorized Driver Clause.......................................... 158
Theft Clause................................................................ 161
Compulsory insurance coverage for agency-hired
workers....................................................... 164
Variable Contracts............................................................... 164
Business of Insurance; Requirements.............................. 164
Insurance Commissioner and Its Power.......................... 165
Insurance Agent.......................................................... 169
Reinsurance................................................................. 171
II. PRE-NEED CODE OF THE PHILIPPINES

(REPUBLIC ACT NO. 9829)
Definition...................................................................... 174
Registration of Pre-need Plans................................... 176
Licensing of Sales Counselors and General Agents ■F- 180
Default and Termination............................................. . 184
Claims settlement.......................................................... 185
III. TRANSPORTATION LAWS

COMMON CARRIERS............................................................ 188
Diligence required of common carriers........................ 199
Liabilities of common carriers....................................... 204
Classification of transport network vehicle services
and transport network companies............. 206
VIGILANCE OVER GOODS.................................................. 207
Exempting causes............................
207
Requirement of absence of negligence............... 213
Absence of delay..................................................... 213
Due diligence to prevent or lessen the loss....... 214
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Contributory negligence............................................................ 214
Duration of liability.................................................................. 214
Delivery of goods to common carrier............................ 214
Actual or constructive delivery...................................... 214
Temporary loading or storage....................................... 217
Stipulation for limitation of liability..............................219
Void stipulations............................................................... 219
Limitation of liability to fixed amount........................ 220
Limitation of liability in the absence of
declaration of greater value........................ 221
Liability for baggage of passengers.............................. 225
Checked-in baggage.......................................................... 225
Baggage in possession of strangers.............................. 225
SAFETY OF PASSENGERS.............................................................. 227
Void stipulations........................................................................ 228
Duration of liability................................................ ................... 229
Waiting for carrier or boarding a carrier................... 231
Arrival at destination...................................................... 231
234
Liability for acts of others..............................
Employees.......................................................................... 234
Other passengers and strangers................................... 237
Liability for delay in the commencement of the voyage... 240
Liability for defects in the equipment and facilities......... 240
Extent of liability for damages............................................... 241
BILL OF LADING................................................................................ 242
Three-Fold Character................................................................. 242
Delivery of Goods....................................................................... 244
Period for delivery............................................................ 244
Delivery without surrender of the bill of lading....... 246
Refusal of consignee to take delivery........................... 248
Period for Filing Claims........................................................... 248
Period for Filing Actions........................................................... 252
Coastwise (within Philippines)...................................... 252
International (Foreign ports to Philippine ports)..... 252
Effects of Stipulations................................................................ 253
MARITIME COMMERCE.................................................................. , 253
Charter Parties............................................................................ 253
Bareboat/Demise Charter............................................... 255
Time Charter..................................................................... 257
Voyage/Trip Charter ....................................................... 257
Liability of Ship Owners and Shipping Agents.................. 258
Liability for Acts of Captain.......................................... 262
Limited Liability Rule..................................................... 264
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Exceptions to the Limited Liability Rule 268
Accidents and Damages in Maritime Commerce... 271
General and Particular Averages 271
Collisions 275
Carriage of Goods by Sea Act (COGSA) 281
Application 281
Notice of Loss or Damage 286
Period of Prescription 287
PUBLIC SERVICE ACT (Commonwealth Act No. 146) 295
Definition of public utility 295
Necessity for Certificate of Public Convenience.... 299
Requisites 304
Citizenship . 304
Promotion of public interests . 306
Financial capability . 307
Prior Operator Rule............................................ 307
Meaning...................................................... 307
Exceptions 309
Ruinous competition 310
Fixing of rate...................................................... 310
Rate of return 313
Exclusion of income tax as expense 314
Unlawful arrangements 314
Boundary system 314
Kabit system 316
Approval of sale, encumbrance, or lease
of property 318
AIR TRANSPORTATION 320
The Warsaw Convention 320
Death or injury to passengers 326
Destruction, loss damage or delay in
carrying baggage 327
IV. BUSINESS ORGANIZATIONS

PARTNERSHIP 335
General provisions 335
Definition . 335
Elements . 339
Characteristics . 340
Rules to determine existence 343
Partnership term 349
Partnership by estoppel 351
Partnership as distinguished from joint venture. 351
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Professional partnership............................................ 353
Management................................................................. 353
Rights and obligations of the partnership
and partners ...................................................... 355
Rights and obligations of the partnership............. 355
Obligations of the partners among themselves..... 356
Obligations of the partnership/partners to
third persons............................................. 370
Dissolution and Winding Up.............................................. 379
Limited Partnership............................................................. 394
CORPORATIONS.......................................................................... 405
Definition of corporation..................................................... 405
Classes of corporations ...................................................... 409
Nationality of corporations............................................... 418
Control test.................................................................. 419
Grandfather rule........................................................ 421
425
Corporate juridical personality...................................
Doctrine of separate juridical personality............ 425
Doctrine of piercing the corporate veil.................. 425
Grounds for application of doctrine............... 425
Test in determining applicability................... 427
432
Capital structure...................................
Number and qualifications of incorporators......... 432
Subscription requirements........................................ 435
Corporate term............................................................ 438
Classification of shares............................................. 442
Preferred shares versus common shares..... 442
Scope of voting rights subject
to classification.............................. 445
Founder’s shares................................................ 446
Redeemable shares........................................... 447
Treasury shares................................................. 448
449
Incorporation and organization...................................
Promoter ..................................................................... 450
Subscription contract ............................................... 451
Pre-incorporation subscription agreements ....... 453
Consideration for stocks ......................................... 454
Articles of Incorporation ......................................... 456
Contents............................................................. 457
Non-amendable items ..................................... 460
Corporate name; limitations on use of
corporate name........................................ 462
Registration, incorporation and commencement
of corporate existence............................ 465
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Election of directors or trustees . 466
Adoption of bylaws............................................. 470
Contents of bylaws 471
Binding effects 473
Amendments 474
Effects of non-use of corporate charter . 475
Corporate powers ....................................................... 477
General powers; theory of general capacity ... 478
Specific powers; theory of specific capacity .... 482
Power to extend or shorten corporate term ... 486
Power to increase or decrease capital stock
or incur, create, increase bonded
indebtedness 488
Power to deny pre-emptive rights 496
Power to sell or dispose corporate assets 499
Power to acquire own shares 502
Power to invest corporate funds in another
corporation or business 505
Power to declare dividends .'......... 507
Power to enter into management contract 515
Limitations .................. 516
Ultra vires acts 516
Applicability of ultra vires doctrine 518
Consequences of ultra vires acts . 521
Doctrine of individuality of subscription.......... 522
Doctrine of equality of shares.................. k 522
Trust fund doctrine 523
How exercised 525
Stockholders and members 530
Fundamental rights of a stockholder 530
Participation in management 530
Proxy 530
Voting trust 532
Cases when stockholders’ action is required ... 536
Manner of voting 538
Proprietary rights 538
Right to dividends 538
Appraisal right 538
When available 538
Manner of exercise of right 542
Right to inspect 545
Pre-emptive right 555
Right to vote 555
Right to dividends 555
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Remedial rights............................................................ 555
Individual Suit..................................................... 555
Representative Suit............................................. 556
Derivative Suit..................................................... 556
Obligations of a stockholder....................................... 562
Meetings......................................................................... 563
Regular or special................................................ 563
Notice of meetings............................................... 564
Place and time of meetings............................... 566
Quorum................................................................. 567
Minutes and agenda of meetings.................... . 568
Board of directors and trustees.......................................... 572
Repository of corporate powers................................ 572
Tenure, qualifications, and disqualifications
of directors.................................................. 573
Requirement of independent directors.................... 579
Elections......................................................................... 581
Cumulative voting............................................... 582
Quorum................................................................. 582
Removal.......................................................................... 584
Filling of vacancies...................................................... 586
Compensation............................................................... 589
Disloyalty....................................................................... 591
Business judgment rule............................................. 592
Solidary liabilities for damages................................ 593
Personal liabilities....................................................... 593
Knowingly Voting or Assenting to
Patent Unlawful Acts of the
Corporation...................................... 594
Gross Negligence or Bad Faith in Directing
the Affairs of the Corporation.... . 595
Acquiring any personal or pecuniary
( interest in conflict with their duty as
directors or trustees...................... 596
Consenting to the issuance of watered stocks.. 596
Contractual liability................................................ 596
Statutory liability for corporate act
or omission............................... 596
Responsibility for crimes........................... 597
Special fact doctrine.................................... 598
Inside information....................................... 598
Contracts....................................................... 599
Executive and other special committees 602
Creation......................................................... 602
Limitations on its powers.................................. 604
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Meetings 604
Regular or special . 605
Who presides............................... ;........................ 606
Quorum .............. 607
Rule on abstention 609
Capital affairs............................................................... 611
Certificate of stock 611
Nature of the certificate 612
Uncertificated shares ..... 612
Negotiability; requirements for valid transfer
of stocks............................................. 613
Issuance 616
Full payment 617
Payment pro-rata 617
Stock and transfer book 618
Contents 618
Who may make valid entries 618
Stock transfer agent 620
Lost or destroyed certificates 620
Situs of the shares of stock 623
Watered stocks 623
Definition 623
Liability of directors for watered stocks 624
Trust fund doctrine for liability for
watered stocks 624
Payment of balance of subscription . 624
Call by board of directors..................................... 624
Notice requirement 624
Sale of delinquent shares 626
Effect of delinquency 626
Call by resolution of the board of directors 626
Notice of sale 626
Auction sale 626
Alienation of shares 633
Allowable restrictions on the sale of shares 634
Sale of partially paid shares 636
Sale of a portion of shares not fully paid... 636
Sale of all of shares not fully paid 637
Sale of fully paid shares 637
Requisites of a valid transfer 637
Involuntary dealings 639
Corporate books and records 639
Records to be kept at principal office 640
Right to inspect corporate records 641
xxviii
J9JC9B0M
Dissolution and liquidation..................................................... 641
Modes of dissolution.................................................................. 641
644
Voluntary dissolution..............................
Where no creditors are affected.......................... 645
Where creditors are affected................................ 646
By shortening of corporate term......................... 649
Withdrawal of dissolution..................................... 651
Involuntary dissolution.......................................... 652
655
Methods of liquidation..............................
By the corporation itself........................................ 656
Conveyance to a trustee within a three-year
period..................................................... 656
By management committee or
rehabilitation receiver....................... 656
Liquidation after three (3) years......................... 660
Other corporations.................................................................... 663
663
Close corporations..............................
Characteristics of a close corporation................. 665
Validity of restrictions on transfer of shares.... 667
Issuance or transfer of stock in breach of
qualifying conditions.......................... 669
When board meeting is unnecessary or
improperly held................................... 670
Preemptive right..................................................... 671
Amendment of articles of incorporation............ 672
Deadlocks.................................................................. 673
674
Nonstock corporations.............................
674
. Definition.............................
Purposes..................................................................... 675
Treatment of profits................................................ 676
Plan and distribution of assets upon
3 dissolution............................................ 676
3 Educational corporations............................................... 678
Religious corporations..................................................... 679
Corporation sole; nationality................................ 679
Religious societies................................................... 681
682
One person corporations.............................
Excepted corporations........................................... 683
Capital stock requirement.................................... 684
Articles of incorporation and bylaws................. 684
Corporate name...................................................... 684
Corporate structure and officers......................... 685
Nominee.................................................................... 686
Minutes and records.............................................. 687
xxix
J9JC9B0M
Liability.................... 688
Conversion of corporation to one person
corporations and vice-versa.......... 688
689
Foreign corporations...................
Bases of authority over foreign corporations 690
Consent.............................................................. 690
Doctrine of “doing business”........................... 690
Necessity of a license to do business............. 696
Requisites for issuance of a license................ 696
Resident agent................................................... 699
Amendment of license...................................... 699
Personality to sue.............................................. , 700
Suability of foreign corporations..................... 701
Instances when unlicensed foreign
corporations may be allowed to sue
(isolated transactions).................... 702
705
Grounds for revocation of license...................
Merger and Consolidation.................................................. 706
Definition and concept............................................... 706
Distinguish: constituent and consolidated
corporation.................................................. 707
Plan of merger or consolidation............................... 708
Articles of merger or consolidation.......................... 708
Procedure...................................... 708
Effectivity...................................... 710
Limitations.................................... 711
Effects........................................... 712
Investigations, offenses, and penalties, 3 716
Authority of Commissioner.. 716
Investigation and prosecution of offenses 716
Administration of oath and issuance
of subpoena................................ 716
Cease and desist power.............................. 716
Contempt...................................................... 720
Sanctions for violations............................... 720
Administrative sanctions................... 720
Prohibited Acts................................... 721
Penalties............................................. . 721
Who are liable..................................... 726
Authority of the Securities and
Exchange Commission............... 727
Case index 729
XXX
J9JC9B0M
I. INSURANCE
A. Concept of Insurance
i. What is an insurance contract?

A contract of insurance is an agreement whereby one
undertakes, for a consideration, to indemnify another against loss,
damage, or liability arising from an unknown or contingent event.1
2. Is a surety agreement signed by a person undertaking to

guarantee the performance of another party, called the
principal debtor, considered an insurance contract?
A contract of suretyship shall be deemed an insurance contract
only if made by a surety who or which, as such is doing an insurance
business as defined by the Insurance Code.2
A guaranty agreement signed by a person not engaged in the
business of insurance is, therefore, not an insurance contract. There
is no premium required for such undertaking. The assumption of risk
made by the surety in case the principal debtor does not perform his
obligation is not part of a general scheme to distribute actual losses
among a large group or substantial number of persons bearing a
similar risk.
3
-3. In return for the 20 years of faithful service of X as a househelper
to Y, the latter promised to pay P100,000.00 to X's heirs if he
(X) dies in an accident by fire. X agreed. Is this an insurance
contract?
No, all the elements of insurance contract are not present. It is
a conditional donation of Y in X’s favor.
‘Section 2, Insurance Code.

“Section 2(a) of R.A. No. 10607.
J9JC9B0M
2 DIVINA ON COMMERCIAL LAW:
A COMPREHENSIVE GUIDE VOLUME I
4. Philippine Health Care Providers, Inc. is a domestic corporation

whose primary purpose is "to establish, maintain, conduct
and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care
of the sick and disabled persons enrolled in the health care
plan and to provide for the administrative, legal, and financial
responsibilities of the organization." Individuals enrolled in its
health care programs pay an annual membership fee and are
entitled to various preventive, diagnostic, and curative medical
services provided by its duly licensed physicians, specialists,
and other professional technical staff participating in the group
practice health delivery system at a hospital or clinic owned,
operated, or accredited by it.
The Commissioner of Internal Revenue ordered Philippine
Health Care Providers to pay documentary stamp tax (DST)
on its health care agreements. It moved for reconsideration
arguing that DST is imposed only on a company engaged
in the business of fidelity bonds and insurance policies.
Philippine Health Care Providers, Inc., as a health maintenance
organization (HMO), is a service provider and not an insurance
company.
Is Philippine Health Care Providers, Inc. (now Maxicare)
engaged in the business of insurance?
■ <i ,i J •
No, Maxicare, as an HMO, is not engaged in insurance business.

The basic distinction between medical service corporations and
ordinary health and accident insurers is that the former undertake
to provide prepaid medical and health services through participating
physicians and accredited establishments, thus relieving subscribers
of any further financial burden, while the latter only undertake to
indemnify an insured for medical expenses up to, but not beyond,
the schedule of rates contained in the policy. The mere presence of
risk would be insufficient to override the primary purpose of the
business to provide medical services as needed, with payment made
directly to the provider of these services. Even if Maxicare assumes
the risk of paying the cost of these services, it nevertheless cannot be
considered as being engaged in the insurance business. Assumption
of the expense by Maxicare is not confined to the happening of a
contingency but includes incidents even in the absence of illness or
injury.
J9JC9B0M
I. INSURANCE 3
Since indemnity of the insured was not the focal point of the
agreement but the extension of medical services to the members at
an affordable cost, it did not partake of the nature of a contract of
insurance.
Even if a contract contains all the elements of an insurance
contract, if its primary purpose is the rendering of service, it is not
a contract of insurance. Under the principal purpose test, the test
applied is whether the assumption of risk and indemnification of
loss (which are elements of an insurance business) are the principal
object and purpose of the organization or whether they are merely
incidental to its business. If these are the principal objectives, the
business is that of insurance. But if they are merely incidental, and
service is the principal purpose, then the business is not insurance.
Therefore, since Maxicare substantially provides health care
services rather than insurance services, it cannot be considered as
being in the insurance business.3
5. Is the health care agreement an insurance contract for the

purpose of assessing DST?
No, it will not qualify as in insurance contract as discussed
above. Also, there is no loss, damage or liability on the part of
the member that should be indemnified by Maxicare as an HMO.
Under the agreement, the member pays Maxicare a predetermined
consideration in exchange for the hospital, medical, and professional
services rendered by affiliated physicians. In case of availment by
a member of the benefits under the agreement, Maxicare does not
reimburse or indemnify the member as the latter does not pay any
third party. Instead, it is Maxicare who pays the participating
physicians and other health care providers for the services rendered
at pre-agreed rates.4
It should be noted, however, that in another case, it was
held that for purposes of determining the liability of a health care
provider to its members, a health care agreement is in the nature of
non-life insurance, which is primarily a contract of indemnity. Once
the member incurs hospital, medical, or any other expense arising
Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,

G.R. No. 167330, September 18, 2009.
■•Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,
ibid.
J9JC9B0M
I

from sickness, injury, or other stipulated contingent, the health care

provider must pay for the same to the extent agreed upon under
the contract. Limitations as to liability must be distinctly specified
and clearly reflected in the extent of coverage which the company
voluntarily assume, otherwise, any ambiguity arising therein shall
be construed in favor of the member.5
6. Who are the parties to a contract of insurance?

a. Insurer. It assumes the risk of loss and undertakes
for a consideration to indemnify the insured upon the
happening of the designated peril.
Every corporation, partnership, or association,
duly authorized to transact insurance business by the
Insurance Commission may be an insurer.6 A natural
person is not allowed to be an insurer.
b. Insured. He is the person whose loss is the occasion for
the payment of the insurance proceeds by the insurer.
Anyone except a public enemy may be insured.7 A public
enemy is a nation, including its citizens or subjects, with
whom the Philippines is at war.
7, May a member of the MILF or its breakaway group, the Abu

Sayyaf, be insured with a company licensed to do business
under the Insurance Code of the Philippines? Explain.
A member of the MILF or the Abu Sayyaf may be insured with
a company licensed to do business under the Insurance Code of the
Philippines. What is prohibited to be insured is ,a public enemy. A
public enemy is a citizen or national of a country with which the
Philippines is at war. Such member of the MILF or the Abu Sayyaf
is not a citizen or national of another country, but of the Philippines.8
c. Assured. The insured is also the assured when the proceeds
are payable to him. In property insurance, the assured
must have insurable interest over the property and such
insurable interest is covered by the insurance policy. In
6Fortune Medicare, Inc. v. David Robert Amorin, G.R. No. 195872, March 12,
2014.
6Section 6, Insurance Code.
’Section 7, Insurance Code.
’BAR 2000.
J9JC9B0M
I. INSURANCE 5
life insurance, the insured may insure someone else’s life,

and designate himself as the beneficiary provided that he
has insurable interest over the life of the person whom he
insures.
d. Beneficiary. He is the third person designated by the
insured to receive the proceeds. In case of failure to
designate a beneficiary in a life insurance or the beneficiary
designated is disqualified, the proceeds should accrue to
the estate of the insured.
B. Elements of an insurance Contract

8. What are the elements of an insurance contract?
a. The insured has an insurable interest capable of pecuniary
estimation;
b. The insured is subject to a risk of loss by the happening of
the designated peril;
c. The insurer assumes the risk of loss;
d. Such assumption of risk is part of a general scheme to
distribute actual losses among a large group of persons
bearing a similar risk; and
e. In consideration of the insurer’s promise, the insured
pays a premium.9
9. What is insurable interest?

Insurable interest is that interest which a person is deemed to
have in the subject matter of the insurance where he has a relation
or connection to it such that the person will derive pecuniary benefit
or advantage from the preservation of the subject matter or will
suffer pecuniary loss or damage from its destruction, termination,
or injury by the happening of the event insured against it.10
’Philippine Health Care Providers v. Commissioner of Internal Revenue, G.R.

No. 167330, September 18, 2009.
*°44 C.J. S. 870.
J9JC9B0M
If person procuring interest has no insurable interest in the

subject matter of the insurance, the insurance is void. He will not
stand to suffer any loss or damage by the happening of the event
insured against.
10. What may be insured against?

Any contingent or unknown event, whether past or future,
which may damnify a person having an insurable interest, or create
a liability against him, may be insured against, subject to the
relevant provisions of the Insurance Code.11
11. Cite examples of perils which may result in risk of loss.

a. Fire, including the risks allied to it, like lightning,
windstorm, tornado, earthquake and other similar risks
(Section 169, Insurance Code);
b. Loss or damage in marine insurance (Section 101,
Insurance Code);
c. Death or injury;
d. Casualty or liability in case of accident or mishap (Section
176, Insurance Code); and,
e. Non-performance by the principal debtor of his obligation
to the creditor. (Section 177, Insurance Code)
12. What is an actuarial risk?

It refers to the possibility that the assumptions made by
the actuaries, in pricing specific insurance policies, may prove to
be inaccurate or wrong. Possible assumptions include frequency
of losses, severity of losses and the correlation of losses between
contracts. For example, if an actuary is using a statistical model and
determines that a policy holder is likely to live for 35 more years,
there is an actuarial risk that the policyholder will die tomorrow.
This will then result in large losses for the insurer.
The insurer incurs losses when the cost of insurance claims is
more than the premiums paid. The amount of premium is calculated
on the basis of the assumptions made relative to the insured.
“Section 3, Insurance Code.
J9JC9B0M
I. INSURANCE 7
13. Is actuarial risk the same an investment risk?

It is not the same. As held in the previously cited Philippine
Health Care Provider case, investment risk is a risk that the company
might fail to earn a reasonable return on its investment but it is not
the kind of risk associated with insurance called actuarial risk. For
instance, HMO, undertakes a business risk when it offers to provide
health services. But it is not the risk of the type peculiar only to
insurance companies. Insurance risk, also known as actuarial risk,
is the risk that the cost of insurance claims might be higher than the
premiums paid.
14. What is an insurance premium?

It is the amount of money a person pays for an insurance policy,
in consideration for the assumption by the insurance of the risk of
loss as a result of the happening of the designated peril.
C. Characteristics and Nature of Insurance Contracts
15. What are the characteristics of an insurance contract?

a. It is a risk-distributing device in the sense that the risk
of economic loss is distributed among a large group or
substantial number of persons bearing the same or
similar risk;
b. It is Uberrimae Fides Contract, or one of perfect good
faith;12
c. It is a contract of indemnity in the sense that the insured
is entitled to recover only the amount of total loss actually
sustained. This rule applies only to property insurance. In
life insurance, one cannot assign a price tag on the value
of human life. The measure of liability of the insurer is the
face value of the insurance policy. By way of exception, a
creditor may insure the life of a debtor but only up to the
amount of the debt - which is the extent of the creditor’s
insurable interest;
d. It is a contract of adhesion, considering that it is a ready
made contract, the other party generally adheres to the
terms and conditions thereof;
12Fieldman’s Insurance Co., Inc. v. Vda. de Songco, G.R. No. L- 24833,

September 23, 1968.
J9JC9B0M
e. It is a voluntary contract, as the parties may incorporate

such terms and conditions which they may deem
convenient.
f. It is personal in the sense that in agreeing to be bound
by the contract of insurance, each party has in mind the
character, qualifications, and conduct of the other. Thus,
the insurer is only liable to pay the person for whose
benefit the insurance policy was obtained.
16. Spouses Cha and CKS Development Corporation entered into

a one (1) year lease contract with a stipulation not to insure
against fire the chattels, merchandise, textiles, goods, and
effects placed at any stall or store or space in the leased
premises without first obtaining the written consent and
approval of the lessor. However, Spouses Cha insured against
loss by fire their merchandise inside the leased premises with
the United Insurance Co., Inc. without the written consent of
CKS.
On the day the lease contract was to expire, fire broke out
inside the leased premises and CKS, learning that the spouses
procured an insurance, wrote to United Insurance to have the
proceeds be paid directly to it.
Who is entitled to receive the proceeds of the insurance
policy?
Spouses Cha, not CKS, are entitled to receive the proceeds of
the insurance policy. A contract of insurance is personal in nature.
In agreeing to be bound by the insurance contract, each party has in
mind the character, credit, and conduct of the other. CKS is not privy
to the contract signed by Spouses Cha and United. United approved
the insurance contract bearing in mind the personal qualifications
of Spouses Cha. The stipulation that the policy is deemed assigned
and transferred to CKS does not bind United.
Moreover, Section 18 of Insurance Code provides that no
contract or policy of insurance on property shall be enforceable
except for the benefit of some person having an insurable interest
in the property insured. A non-life insurance policy such as the fire
insurance policy taken by Spouses Cha over their merchandise is
primarily a contract of indemnity. Insurable interest in the property
must exist at the time the insurance takes effect and at the time the
loss occurs. CKS has no insurable interest on the property owned by
Spouses Cha.
J9JC9B0M
I. INSURANCE 9
The automatic assignment of the policy to CKS under the

provision of the lease contract previously quoted is void for being
contrary to law and/or public policy. The liability to CKS for violating
their lease contract in obtaining the policy without the consent of
CKS, is a separate and distinct issue.13
17. State the rules on interpretation of insurance contract.

a. An insurance contract is a contract of adhesion, which
means that in resolving ambiguities in the provision of
the insurance contract, the same are to be construed
liberally in favor of the insured and strictly against the
insurer who drafted the insurance policy. The ambiguity
does not, however, invalidate the contract.14
In one case, the insured entered into a comprehensive motor
vehicle insurance contract. Thereafter, the car was stolen and was
reported lost by the police report. Allegedly, it was the driver of the
insured who took the said car, thus prompting the latter to file a
claim with the insurer. The claim was denied on the ground that
pursuant to the insurance contract, an excluding circumstance
which would excuse the insurer from paying proceeds would be, “Any
malicious damage caused by the Insured, any member of his family
or by ‘A PERSON IN THE INSURED’S SERVICE.’ ” In other words,
the insurer argued that the term “damage” would also be applicable
to the stolen and lost car of the insured. It was held that loss of the
insured’s car is not excluded under the insurance policy. The words
“loss” and “damage” mean different things in common ordinary
usage. The word “loss” refers to the act or fact of losing, or failure
to keep possession, while the word “damage” means deterioration
or injury to property. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance
contract, ambiguity must be strictly interpreted against the insurer
and liberally in favor of the insured, especially to avoid forfeiture.16
13Spouses Nilo Cha and Stella Uy Cha, et al. v. Court of Appeals and CKS
Development Corporation, G.R. No. 124520, August 18, 1997; 2009 BAR.
‘‘BAR 2012.
16Alpha Insurance and Surety Co. v. Arsenia Sonia Castor, G.R. No. 198174,
September 2, 2013.
J9JC9B0M
In another case, when a Health Care Contract stipulates that

the provider shall reimburse the total hospitalization cost including
the professional fee (based on the total approved charges) to a
member who receives emergency care in a non-accredited hospital.
The above coverage applies only to Emergency confinement within
Philippine Territory. However, if the emergency confinement occurs
in a foreign territory, Fortune Care will be obligated to reimburse
or pay 80% of the approved standard charges which shall cover the
hospitalization costs and professional fees.
The member underwent surgery in the Hawaii, USA while
on vacation. The American standard charge, not the Philippine
standard charge, should be applied considering that the operation
took place in the USA.
Being a contract of adhesion, the terms of an insurance contract
are to be construed strictly against the party which prepared the
contract - the insurer.16
b. While it is a cardinal principle of insurance law that a
policy or contract of insurance is to be construed liberally
in favor of the insured and strictly as against the insurer
company, yet, contracts of insurance, like other contracts,
are to be construed according to the sense and meaning
of the terms, which the parties themselves have used.
If such terms are clear and unambiguous, they must be
taken and understood in their plain, ordinary, and popular
sense. Thus, it was held that the life insurance policy was
not considered reinstated despite issuance of the receipt
for payment by the spouse of the insurance agent if the
application for reinstatement provided that the policy
would only be considered reinstated upon approval of the
application by the insurer during the applicant’s “lifetime
and good health” and the insured died before the insurer
could process the application. The amount the applicant
paid in connection thereto was only to be considered as a
deposit.17
l6Fortune Medicare, Inc. v. David Robert U. Amorin, G.R. No. 195872, March
12, 2014.
’'Violeta R. Lalican v. The Insular Life Assurance Company Limited, as
represented by the President Vicente R. Avilon, G.R. No. 183526, August 25, 2009.
J9JC9B0M
I. INSURANCE 11
Similarly, if loss of hand is defined in the policy

as amputation of the hand, the insurer is not liable
if the insured had an accident which only resulted in
temporary disability of his left hand but the hand was not
amputated.18
D. Insurable Interest
1. In life/health
18. Upon whose life or health does a person have insurable interest
in?
Every person has an insurable interest in the life and health:
“(a) Of himself, of his spouse, and of his children;
“(b) Of any person on whom he depends wholly or in
part for education or support, or in whom he has a pecuniary
interest;
“(c) Of any person under a legal obligation to him for the
payment of money, or respecting property or services, of which
death or illness might delay or prevent the performance; and
“(d) Of any person upon whose life any estate or interest
vested in him depends.19
a) Insurable interest on his own life, his spouse,

or children.
19. If a person procures insurance on his own life, who may be his
beneficiary?
A person can take insurance on his own life and designate
anyone as beneficiary except those disqualified to receive donation
under Article 739 of the Civil Code. The beneficiary in this case can
be anyone, such as a distant relative or a friend, who need not have
any insurable interest in the life of the insured.
18Ty v. First National Surety, No. L-16138, April 29,1961.

19Section 10.
J9JC9B0M
20. Who are the persons specified in Article 739 and as such,
cannot be designated beneficiary of the insured?
The persons specified in Article 739 of the Civil Code are:
a. persons in illicit relations — adultery or concubinage (no
need for conviction);20
b. persons found guilty of adultery or concubinage;
c. public officer or his wife, descendants, or ascendants.
21. If any person, other than those disqualified to receive donation

under Article 739 of the Civil Code, is designated beneficiary
can the lawful spouse and legitimate children of the insured
complain of denial of their legitime?
The lawful spouse and legitimate children cannot complain of
denial of their legitime because the proceeds of the life insurance
policy do not form part of the estate of the insured. Neither can
the}' claim the insurance proceeds because they are not privy to the
contract.
Moreover, under Section 53 of the Insurance Code, the
insurance proceeds shall be applied exclusively to the proper interest
of the person in whose name or for whose benefit it is made unless
otherwise specified in the policy.
22. Heirs of Loreto Maramag, his legal wife and his legitimate
children filed a case for revocation and/or reduction of
insurance proceeds alleging that Eva de Guzman Maramag
(Eva) was a concubine of Loreto and a suspect in the killing of
the latter, thus, she is disqualified to receive any proceeds from
his insurance policies and that illegitimate children of Loreto
were entitled only to one-half of the legitime of the legitimate
children.
Who are entitled to the proceeds of the insurance policy?
The illegitimate children, designated as beneficiaries, are
entitled to the insurance proceeds, to the exclusion of the legitimate
children. Section 53 of the Insurance Code states that the insurance
proceeds shall be applied exclusively to the proper interest of
“Insular Life Assn. Co., Ltd. v. Ebrado, G.R. No. L-44059, October 28, 1977;
BAR 1981.
J9JC9B0M
I. INSURANCE 13
the person in whose name or for whose benefit it is made unless

otherwise specified in the policy. Pursuant thereto, it is obvious that
the only persons entitled to claim the insurance proceeds are either
the insured, if still alive; or the beneficiary, if the insured is already
deceased, upon the maturation of the policy.
The legitimate heirs of Loreto who were not designated as
beneficiaries in the life insurance policy are considered third parties
to the insurance contract, and thus not entitled to the proceeds
thereof. The insurers have no legal obligation to turn over the
proceeds to them. The revocation of the common law spouse of Loreto
as beneficiary is of no moment considering that the designation of
the illegitimate children as beneficiaries remains valid. Because no
legal proscription exists in naming as beneficiaries the children of
illicit relationships by the insured, the shares of Eva in the insurance
proceeds, whether forfeited by the court in view of the prohibition
on donations under Article 739 of the Civil Code or by the insurers
themselves for reasons based on the insurance contracts, must be
awarded to the said illegitimate children.21
The ruling in Insular Life Assn. Co., Ltd. v. Ebrado that the
proceeds should be paid to the legal spouse in case of a common law
spouse is designated beneficiary is not entirely correct. The proceeds
should be payable to the estate which includes not only the spouse
but the children as well.
23. What is the rationale for the rule prohibiting the donees
specified in Article 739 of the Civil Code from being designated
as beneficiaries in life insurance policy?
Life insurance policy is no different from donation insofar
as the beneficiary is concerned. Both are founded on liberality. A
beneficiary is like a donee because from the premiums of the policy
which the insured pays out of liberality, the beneficiary will receive
the proceeds of the insurance. As a consequence, the proscription in
Article 739 of the Civil Code should equally operate in life insurance
contracts.22
21Heirs of Loreto Maramag v. Eva Verna De Guzman Maramag, et al., G.R. No.
181132, June 5, 2009; 1998 and 2019 Bar exams.
22The Insular Life Assurance Co. v. Ebrado, 80 SCRA 181, October 28,1977.
J9JC9B0M
24. Does a person have insurable interest on the life of his parents?
By express exclusion under par-, (a), a person has no insurable
interest on the life of his parents and other ascendants unless he
depends upon them for education and/or support. (Par. b.) The
rationale for their exclusion in par. (a) is that the parents are
logically expected to predecease their children.
25. Do the parents have insurable interest on the life and health of
their illegitimate children?
Yes, as such, thej' can take insurance on the life of their
children, whether legitimate or illegitimate, because the law makes
no distinction as to the kind of children and there being no statutory
prohibition against it.
26. Can a person take insurance on the life of another person and
designate himself as the beneficiary?
A person can take an insurance on the life of another person
nd designate himself as the beneficiary provided that he has
pecuniary interest in the person he is insuring. In other words, the
insured must be any of the persons under Section 10 (b to d).
27. Blanco took out a P1M life insurance policy naming his friend
and creditor, Montenegro, as his beneficiary. When Blanco
died, his outstanding loan obligation to Montenegro was only
P50,000.00. Blanco’s executor contended that only P50,000.00
out of the insurance proceeds should be paid to Montenegro
and the balance of P950,000.00 should be paid to Blanco's
estate.
Is the executor's contention correct? Reason out your
answer.
The contention of the executor is incorrect. The beneficiary
of a life insurance need not have any insurable interest in the life
of the insured. Any person can take insurance on his own life like
what Blanco did and designate anyone as his beneficiary except
those disqualified to be donees under Article 739 of the Civil Code.
Blanco’s friend and creditor does not fall within the disqualification.
J9JC9B0M
I. INSURANCE 15
It would have been different if it was Montenegro, as creditor,

who took out an insurance policy on the life of Blanco, as a debtor.
In that case, Montenegro’s insurable interest in the life of Blanco
would be only to the extent of P50,000.00, which is the amount of
his credit.23
28. On July 14, 1985, X, a homosexual, took an insurance policy

on the life of his boyfriend, Y. In the insurance application, X
misrepresented that Y was in perfect health although he knew
all the time that Y was afflicted with AIDS. On October 18,
1987, Y died in a motor accident. Shortly thereafter, X filed his
insurance claim.
Should the insurer pay? Reasons.
The insurer is not obliged to pay. X has no insurable interest
on the life of his boyfriend, Y. Friendship alone is not the insurable
interest contemplated in life insurance. Insurable interest in the life
of others (other than one’s own life, spouses, or children) is merely
to the extent of the pecuniary interest in that life.
b) Of any person on whom he depends wholly or

in part for education or support, or in whom
he has a pecuniary interest;
29. Carlo and Bianca met in the La Boracay festivities. Immediately,

they fell in love with each other and got married soon after.
They have been cohabiting blissfully as husband and wife,
but they did not have any offspring. As the years passed by.
Carlo decided to take out an insurance on Bianca's life for
PI,000,000.00 with him (Carlo) as sole beneficiary, given
that he did not have a steady source of income and he always
depended on Bianca both emotionally and financially. During
the term of the insurance, Bianca died of what appeared to be
a mysterious cause so that Carlo immediately requested for an
autopsy to be conducted. It was established that Bianca died
of a natural cause. More than that, it was also established that
Bianca was a transgender all along - a fact unknown to Carlo.
Can Carlo claim the insurance benefit?
23BAR 1987.
J9JC9B0M
Yes. Carlo can claim the insurance benefit. If a person insures

the life or health of another person with himself as beneficiary,
all his rights, title, and interests in the policy shall automatically
vest in the person insured. Carlo, as the husband of Bianca, has
an insurable interest in the life of the latter because he depended
upon Bianca wholly or in part for support. The fact that Bianca is a
transgender is irrelevant. It is Carlo’s reliance on Bianca for support
which establishes Carlo’s insurable interest in the life of Bianca.24
c) Of any person under a legal obligation to

him for the payment of money, or respecting
property or services, of which death or illness
might delay or prevent the performance.
30. Give examples.

a. A mortgagee may insure the life of the mortgagor up to
the extent of the mortgage debt to the mortgagee.
b. A seller may insure the life of the buyer if the latter
has the obligation to deliver a specified property under
a contract to sell. The seller’s insurable interest is the
contracted value of the property for delivery.
c. A law firm may procure a keyman insurance policy on its
Managing Partner.
d. An employer corporation has an insurable interest on
its manager where the death of the manager will be
detrimental to the corporation’s operations.26
d) Of any person upon whose life any estate or

interest vested in him depends.
Thus, the usufructuary may insure the life of the owner of the
naked title if his right to the usufruct will be extinguished upon
death of the latter.
24BAR2014.
“El Oriente Fabrica de Tabacos, Inc. Juan Posadas, G.R. No. 34774,
September 21,1931.
J9JC9B0M
I. INSURANCE 17
31. Can the insured change his beneficiary?

The insured shall have the right to change the beneficiary he
designated in the policy, unless he has expressly waived this right in
said policy. Notwithstanding the foregoing, in the event the insured
does not change the beneficiary during his lifetime, the designation
shall be deemed irrevocable.26
32. What are the effects of the irrevocable designation of the

beneficiary in a life insurance policy?
In case of irrevocable designation, the beneficiary has acquired
a vested right on the life insurance policy including its incident such
as the policy loan and cash surrender value. As such, any act on the
part of the insured which may impair the interest of the irrevocably
designated beneficiary is null and void. Thus, the beneficiary cannot
be changed, no additional beneficiary can be designated and the
insured cannot take a cash surrender value on the policy unless the
beneficiary consents to any of the foregoing acts.27
33. What are the effects of the revocable designation of the

beneficiary?
The insured may change the beneficiary during his lifetime,
add a beneficiary or exclude a beneficiary in case of joint designation
of beneficiaries.28
The same rule applies in case the policy is silent on the nature
of the designation, for in such case, the designation is deemed to be
revocable.29
34. Shortly after Yin and Yang were wed, they each took out
separate life insurance policies on their lives, and mutually
designated one another as sole beneficiary. Both life insurance
policies provided for a double indemnity clause, the cost for
which was added to the premium rate. During the last 10
years of their marriage, the spouses had faithfully paid for the
annual premiums over the life policies from both their salaries.
Unfortunately, Yin fell in love with his officemate, Vessel, and
“Section 11.
272005 Bar.
281978 and 1988 Bar.
“Section 11.
J9JC9B0M
they carried on an affair. After two years, their relationship

bore them a daughter named Vinsel. Without the knowledge
of Yang, Yin changed the designation of the beneficiary to an
"irrevocable designation" of Vinsel and Vessel jointly. When
Yang learned of the affair, she was so despondent that, having
chanced upon Yin and Vessel on a date, she rammed them
down with the car she was driving, resulting in Vin's death
and Vessel's complete loss of mobilization. Yang was sued for
parricide, and while the case was pending, she filed a claim
on the proceeds of the life insurance of Yin as irrevocable
beneficiary, or at least his legal heir, and opposed the claims
on behalf of Vessel and her daughter Vinsel. Yang claimed that
her designation as beneficiary in Vin's life insurance policy
was irrevocable, in the nature of one "coupled with interest,"
since it was made in accordance with their mutual agreement
to designate one another as sole beneficiary in their respective
life policies. She also claimed that the beneficiary designation
of Vessel and the illegitimate minor child Vinsel was void being
the product of an illicit relationship, and therefore without
"insurable interest."
a. Is Yang correct in saying that her designation as
beneficiary was irrevocable?
b. Do Vessel and Vinsel have "insurable interest" on the life
of Yin?
Answer:
a. Yang is not correct. The insured shall have the right to
change the beneficiary he designated in the policy unless
he has expressly waived this right in the policy. There is
nothing in the life insurance policy taken by Yang which
indicated that the designation of Ying is irrevocable. As
such, it is deemed to be revocable.
b. Yessel has no insurable interest on the life of Yin because
she cannot be lawfully designated as beneficiary. Yinsel,
however, has insurable interest on the life of Yin. There
is no proscription in naming an illegitimate child as a
beneficiary.30
“Heirs of Loreta Maramag v. Maramag, G.R. No. 181132, June 5, 2009; BAB
J9JC9B0M
I. INSURANCE 19
35. To whom will the proceeds of the life insurance policy be

payable?
The proceeds of the life insurance policy are payable as follows:
a. In case a beneficiary is unlawfully designated, the
proceeds shall payable to the estate of the insured (not
only to the lawful spouse of the insured although she has
a share in the estate of the insured). It is because the
policy remains valid. Only the designation is void.31
b. In case of joint designation of beneficiaries, the share
of the unlawfully designated beneficiary shall form
additional part of the share of the lawfully designated
beneficiary. Thus, the share of the common law spouse
shall be forfeited in favor of the designated illegitimate
children.32
c. In case of joint designation of lawfully designated
beneficiaries, proceeds shall be divided based on terms of
policy. If the policy is silent, the proceeds shall be divided
equally between or among the beneficiaries.
d. In case a beneficiary is lawfully designated and the
insured dies ahead of the beneficiary, the proceeds are
payable to the beneficiary unless he is the principal,
accessory or accomplice in willfully bringing about the
death of the insured.
e. In such a case, interest of the beneficiary shall be
forfeited and the share forfeited shall pass on to the
other beneficiaries, unless otherwise disqualified. In
the absence of other beneficiaries, the proceeds shall be
paid in accordance with the policy contract. If the policy
contract is silent, the proceeds shall be paid to the estate
of the insured.33 Note that the insurer is still liable.31
f. In case the beneficiary predeceases the insured, make a
distinction between irrevocable and revocable beneficiary.
If irrevocable, the proceeds shall inure to the benefit of
the legal representatives of the beneficiary. If revocable,
the proceeds shall inure to the estate of the insured. If the
3'2012 Bar.
32Maramag v. Maramag, supra.
33Section 12.
312008 Bar.
J9JC9B0M
policy is silent as to whether designation is irrevocable

or revocable, the proceeds shall inure to the estate of
the insured because the designation is revocable unless
g- The beneficiary’s interest in a life insurance endowment
policy will only accrue if the insured dies before the end
of the endowment period. If the insured survives, the
proceeds are payable to him.
2. In Property
36. What does insurable interest in property consist of?
Every interest in property, whether real or personal, or any
relation thereto, or liability in respect thereof, of such nature that
a contemplated peril might directly damnify the insured, is an
insurable interest.35
An insurable interest in property may consist in:
“(a) An existing interest;
“(b) An inchoate interest founded on an existing interest;
or
“(c) An expectancy, coupled with an existing interest in
that out of which the expectancy arises.36
A mere contingent or expectant interest in anything, not
founded on an actual right to the thing, nor upon any valid contract
for it, is not insurable.3’
The measure of an insurable interest in property is the extent
to which the insured might be damnified by loss or injury thereof.38
37. Give examples of existing interest.

a. A carrier or depository of any kind has an insurable
interest in a thing held by him as such, to the extent of
his liability but not to exceed the value thereof.39
“Section 13.
“Section 14; 2019 Bai
’’Section 16.
“Section 17.
“Section 18.
J9JC9B0M
I. INSURANCE 21
b. Both the mortgagor and mortgagee may insure the

mortgaged property against fire. The mortgagor may
insure it up to the extent of the value while the mortgagee
up to the extent of the mortgage debt.
C. A depositor may insure his deposits in excess of the PDIC
insurance coverage.
38. JQ, owner of a condominium unit, insured the same against

fire with XYZ Insurance Co., and made the loss payable to his
brother, MLQ. In case of loss by fire of the said condominium
unit, who may recover on the fire insurance policy? State the
reason/s for your answer.
JQ can recover on the fire insurance policy for the loss of the
said condominium unit. He has the insurable interest as owner
insured. His act of designating his brother as beneficiary is not
similar to assignment of his right to the policy which will result in
loss of insurable interest. MLQ cannot recover on the fire insurance
policy despite his designation as beneficiary, for lack of insurable
interest on the condominium unit. For the beneficiary to recover on
the fire or property insurance policy, it is required that he must have
insurable interest in the property insured.40
39. The newly restored Ford Mustang muscle car was just
released from the car restoration shop to its owner, Seth, an
avid sportsman. Given his passion for sailing, he needed to go
to a round-the-world voyage with his crew on his brand-new
180-meter yacht. Hearing about his coming voyage, Sean, his
bosom friend, asked Seth if he could borrow the car for his
next roadshow. Sean, who had been in the business of holding
motor shows and promotions, proposed to display the restored
car of Seth in major cities of the country. Seth agreed and lent
the Ford Mustang to Sean. Seth further expressly allowed Sean
to use the car even for his own purposes on special occasions
during his absence from the country. Seth and Sean then went
together to Bayad Agad Insurance Co. (BAIC) to get separate
policies for the car in their respective names.
40BAR 2001.
J9JC9B0M
BAIC consults you as its lawyer on whether separate

policies could be issued to Seth and Sean in respect of the
same car.
Do Seth and Sean have separate insurable interests?
Explain briefly your answer.
Seth and Sean have separate insurable interests. Seth’s
insurable interest is his legal and and/or equitable interest over
the vehicle as an owner while Sean’s insurable interest is the
preservation of the vehicle which may become the basis of liability
in case of loss or damage thereto.'11
40. Give examples of inchoate interest founded on existing interest.

a. A stockholder may insure corporate property to the
extent of and in proportion to the value of his shares in
the corporation. A stockholder has inchoate right to the
corporate assets which will ripen into full ownership upon
dissolution and liquidation of the corporation.
b. A property under contract to sell. The buyer may insure
the property to the extent of the amount of payment he
has made or the entire value of the property depending
on how the stipulation in the agreement will damnify him
in case of loss of such property. The seller may also insure
the property to the extent of the unpaid purchase price or
even the full value if there is stipulation that he is liable
to return the payment in case of non-delivery.42
c. The judgment creditor, after levy of the judgment debtor’s
property, may insure it because the debtor may not
exercise his right of redemption. He has inchoate interest
because he may acquire ownership of the levied property
in case of failure of the debtor to redeem. The judgment
creditor and the judgment debtor both have insurable
interest on the property which can be separately covered
by fire insurance. In case of loss before expiration of the
redemption period, the owner and the judgment creditor
may recover on their separate insurance. If the loss
occurs after expiration of the redemption period, only the
judgment creditor may claim on the insurance.
“Malayan Insurance v. Philippine First Insurance Co., 676SCRA268; BAR 2017.

“2015,1991 Bar.
J9JC9B0M
I. INSURANCE 23
d. A general creditor, however, has no insurable interest on

the debtor’s property. This is because prior to the levy,
the general creditor’s interest on the debtor’s property is
a mere contingent or expectant interest not founded on an
actual right to the thing, nor upon any valid contract for it.
41. Give examples of expectancy coupled with existing interest

out of which the expectancy arises.
1. Growing crops.
2. Expected freightage of the common carrier.
3. Profits of a partnership for a partner.
42. Does a son have insurable interest on the property of his

father?
No, as his interest in such property is a mere expectancy not
founded on actual right.
43. On February 3, 1987, while Jose Palacio was in the hospital

preparatory to a heart surgery, he called his only son, Boy
Palacio, and showed the latter a will naming the son as sole heir
to all the father's estate including the family mansion in Forbes
Park. The following day, Boy Palacio took out a fire insurance
policy on the Forbes Park mansion. One week later, the father
died. After his father’s death, Boy Palacio moved his wife and
children to the family mansion which he inherited. On March
30,1987, a fire occurred razing the mansion to the ground. Boy
Palacio then proceeded to collect on the fire insurance he took
earlier on the house.
’ • Should the insurance company pay? Reasons.
In property insurance, insurable interest must exist both at the
time of the taking of the insurance and at the time of the loss. The
insurable interest must be an existing interest. The fact alone that
Boy Palacio was the potential sole heir of his father’s estate does not
give him any existing interest prior to the death of the decedent.43
"Section 18, Insurance Code; BAR 1987.
J9JC9B0M
44. When should insurable interest exist in property and in life and
health?
An interest in property insured must exist when the insurance
takes effect, and when the loss occurs, but need not exist in the
meantime: and interest in the life or health of a person insured must
exist when the insurance takes effect, but need not exist thereafter
or when the loss occurs.41
45. Distinguish insurable interest in property insurance from

insurable interest in life insurance.
a. In property insurance, the actual value of the interest
therein is the limit of the insurance that can validly be
placed thereon. In life insurance, there is no limit to the
amount of insurance that may be taken upon life except
in case of a creditor securing the life of the debtor in which
case the insurance should be limited to the amount of the
debt.
b. In property insurance, an interest insured must exist
when the insurance takes effect and when the loss occurs
but need not exist in the meantime. In life insurance, it
is enough that insurable interest exists at the time when
the contract is made but it need not exist at the time of
loss.
c. The beneficiary in property insurance must have insurable
interest over the property insured and such insurable
interest must be covered by the insurance policy. In life
insurance, if the insured procured insurance on his own
life, he can designate anyone as beneficiary (except those
disqualified to receive donation) even though the latter
has no insurable interest in the life of the insured.46
46. IS, is an elderly bachelor with no known relatives, obtained life

insurance coverage for P250,000.00 from Starbrite Insurance
Corporation, an entity licensed to engage in the insurable
business under the Insurance Code of the Philippines. He also
insured his residential house for twice that amount with the
same corporation. He immediately assigned all his rights to the
“Section 19.
16BAR 2002.
J9JC9B0M
I. INSURANCE 25
insurance proceeds to BX, a friend, companion living with him.

Three (3) years later, IS died in a fire that gutted his insured
house two (2) days after he had sold it. There is no evidence
of suicide or arson or involvement of BX in these events. BX
demanded payment of the insurance proceeds from the two (2)
policies, the premiums for which IS had been faithfully paying
during all the time he was alive. Starbrite, refused payment,
contending that BX had no insurable interest and therefore
was not entitled to receive the proceeds from IS' insurance
coverage on his life and also on his property. Is Starbrite's
contention valid? Explain.
Starbrite is correct with respect to the insurance coverage on
the property of IS. BX has no insurable interest in the property
covered by the fire insurance. The policy was assigned to him prior
to the loss. Insurable interest on the property must exist both at the
time of the issuance of the policy and at the time of the loss. BX had
no insurable interest in both cases.
As to the insurance coverage on the life of IS, BX is entitled to
receive the proceeds assuming that he was designated as beneficiary
in the policy. There is no requirement that BX should have insurable
interest in the life of IS. It was IS himself who took the insurance on
his own life and BX is not disqualified to be his beneficiary.''6
47. In a civil suit, the Court ordered Benjie to pay Nat P5,000,000.00.
To execute the judgment, the sheriff levied upon Benjie's
registered property (a parcel of land and the building thereon),
and sold the same at public auction to Nat, the highest bidder.
The latter, on April 18, 2019 registered with the Register of
Deeds the certificate of sale issued to him by the sheriff.
’ Meanwhile, on January 27, 2020, Benjie insured with Garapal
Insurance for P5,000,000.00 the same building that was sold at
public auction to Nat. Benjie failed to redeem the property by
April 19,2020.
On May 2, 2020, a fire razed the building to the ground.
Garapal Insurance refused to make good its obligation to
Benjie under the insurance contract.
“BAR 2000.
J9JC9B0M
a. Is Garapal Insurance legally justified in refusing payment

to Benjie?
b. Is Nat entitled to collect on the insurance policy?
Answer:
a. Yes. At the time of the loss, Benjie was no longer the
owner of the property insured as he failed to redeem the
property. The law requires in property insurance that a
person can recover the proceeds of the policy if he has
insurable interest at the time of the issuance of the policy
and also at the time when the loss occurs. When the fire
occurred, Benjie no longer had insurable interest in the
property insured.
b. No. While at the time of the loss he has insurable interest
in the building, as he was the owner thereof, Nat did not
have any interest in the policy. There was no automatic
transfer clause in the policy that would give him such
interest in the policy."
48. On January 4, 2019, Mr. P joined Alpha Corporation (ALPHA)

as President of the company. ALPHA took out a life insurance
policy on the life of Mr. P with Mutual Insurance Company,
designating ALPHA as the beneficiary. ALPHA also carried
fire insurance with Beta Insurance Co. on a house owned by
it, but temporarily occupied by Mr. P again with ALPHA as
beneficiary.
On September 1, 2019, Mr. P resigned from ALPHA and
purchased the company house he had been occupying. A few
days later, a fire occurred resulting in the death of Mr. P and the
destruction of the house.
What are the rights of ALPHA (a) against Mutual Life
Insurance Company on the life insurance policy?
ALPHA can recover against Mutual Life Insurance Co. in
the life insurance policy as its insurable interest in the life of the
person insured, Mr. P, existed when the insurance took effect. In life
insurance, insurable interest need not exist thereafter or when the
loss occurred.48
"Section 19, Insurance Code; BAR 1994.

48BAR 1984.
J9JC9B0M
I. INSURANCE 27
Alpha, however, cannot recover on the fire insurance because

at the time of the loss, it had no more insurable interest having sold
the property to Mr. P. In property insurance, it is not enough that
the insured must have insurable interest at the time of the issuance
of the policy but also at the time of loss.
49. Discuss the insurable interest of the mortgagor and mortgagee

on the mortgaged property and the right to recover under
insurance policies.
a. The mortgagor has insurable interest on the property
up to the extent of the value of the mortgaged property
while the mortgagee has insurable interest on the same
property but only up to the extent of the amount of the
debt secured by the mortgage.49
b. Consequently, they can separately procure fire insurance
policy on the same property to the extent of their respective
insurable interest. This will not result in double insurance
or over-insurance in the context of the Insurance Code.
i If the mortgagor obtained an open policy, then he could claim
an amount corresponding to the extent of the damage, but not to
exceed the face value of the insurance policy; however, if he obtained
a valued policy then he could claim an amount based on the agreed
upon valuation of the property.
a. Unless the policy otherwise provides, where a mortgagor
of property effects insurance in his own name providing
that the loss shall be payable to the mortgagee, or assigns
a policy of insurance to a mortgagee, the insurance is
deemed to be upon the interest of the mortgagor, who
does not cease to be a party to the original contract, and
any act of his, prior to the loss, which would otherwise
avoid the insurance, will have the same effect, although
the property is in the hands of the mortgagee, but any act
which, under the contract of insurance, is to be performed
by the mortgagor, may be performed by the mortgagee
therein named, with the same effect as if it had been
performed by the mortgagor.60
1<JGeagonia v. Court of Appeals, 241 SCRA 152 (1995).

J9JC9B0M
b. If an insurer assents to the transfer of an insurance from

a mortgagor to a mortgagee, and, at the time of his assent,
imposes further obligations on the assignee, making a
new contract with him, the acts of the mortgagor cannot
affect the rights of said assignee.51
c. If the mortgagor procures fire insurance policy without
designating the mortgagee as beneficiary, the mortgagor
shall obtain the proceeds of insurance in case of loss.
The mortgagee is not entitled to the insurance proceeds
because he is not the beneficiary and/or the insurance
policy was not assigned to him. But, as a mortgagee, he
has a hen on the insurance proceeds.
d. If the mortgagor procures fire insurance policy and
designated the mortgagee as the beneficiary, in case of
loss, the mortgagee shall be entitled to the proceeds of the
insurance. The loan shall be extinguished to the extent
of the amount of the insurance. The insurer shall be
subrogated to the rights of the mortgagor if any.
e. If the mortgagor procures fire insurance and designated
the mortgagee as beneficiary up to the extent of the
mortgage debt, the insurer is not liable if the mortgagor
deliberately set the insured property on fire. The
mortgagee is bound by the acts of the mortgagor and
cannot recover.52
f. If the mortgagor and the mortgagee separately obtained
fire insurance and the mortgagor designated the
mortgagee as the beneficiary in the fire insurance, any
act done by the mortgagor that will avoid the insurance is
binding on the mortgagee but he can still recover on the
fire insurance he separately procured.
g- If the mortgagor obtained fire insurance but the loss
occurs after the redemption period, the mortgagor can no
longer recover on the insurance because he has no more
insurable interest at the time of loss.
‘’Section 9.
“Section 8.
J9JC9B0M 1
I. INSURANCE 29
h. Assume that the mortgagor procured fire insurance

after his default and the mortgagee thereafter obtained
his own fire insurance. If the mortgagor obtained a loan
from a general creditor to pay the redemption price
then assigned the policy to the general creditor and the
loss occurs, the mortgagor cannot recover on his fire
insurance because he has no more insurable interest on
the property at the time of loss, having assigned his policy
to the creditor. The general creditor cannot recover on
the fire insurance policy assigned to him because he has
no insurable interest at the time of the issuance of the
policy. The mortgagee can obtain the proceeds of the fire
insurance he obtained separately.
50. To secure a loan of P10M, O mortgaged his building to C. in

accordance with the loan arrangements, O had the property
insured with Acme Insurance Company for P10M with C as the
beneficiary. C also took an insurance on the building upon his
own interest with Beta Insurance Co. for P5M.
) The building was totally destroyed by fire, a peril insured
against in both insurance policies. It was subsequently
determined that the fire had been intentionally started by O
and that, in violation of the loan agreement, O had been storing
inflammable materials in the building.
How much can C recover from either or both insurance
companies? What happens to the P10M debt of O to C?
C cannot recover from Acme Insurance Co. unless the policy
otherwise provides, where a mortgagor of property effects insurance
in his own name providing that the loss shall be payable to the
mortgagee, the insurance is deemed to be upon the interest of the
mortgagor. Any act of the mortgagor prior to the loss which would
otherwise avoid the insurance will have the same effect. Apart
from the storing of the inflammable materials, the act of the owner
mortgagor, 0, caused the peril insured against.
With respect to the Beta Insurance Co., C can recover the full
amount of P5M since the act of 0 in intentionally starting the fire
that caused the loss cannot be attributable to the mortgagee, C. The
act of 0 in storing inflammable in the building contrary to the loan
agreement does not affect the insurance policy, unless the insurance
policy itself prohibited any storing of inflammable materials.
J9JC9B0M
The P10M debt of 0 to C will be affected by the amount which

C is able to collect from the insurance companies. If C is unable to
recover any amount, the full amount of the debt remains. If C is able
to recover P5M from Beta insurance Co., C, the mortgagee is not
allowed to retain his claim against 0, the mortgagor, but it passes
by subrogation to the insurer to the extent of the money paid.53 In
this case, Beta Ins. Co. will become entitled to collect P5M from O,
and 0 will continue to remain liable to C for the balance of P5M.54
51. What are the effects if the mortgagee procures separate

insurance coverage without reference to the right of the
mortgagor?
The effects are as follows:
a. The mortgagee may collect from the insurer to the extent
of his credit.
b. The insurer, after payment to the mortgagee, is subrogated
to the rights of the latter against the mortgagor and may
collect the debt of the latter to the extent of the amount
paid to the mortgagee. This principle applies only where
the policy obtained by the mortgagee covers his interest
alone.
c. The mortgagee-insured can no longer collect the
mortgagor’s indebtedness after receiving full payment
of the credit from the insurer since the latter acquires
the right to collect from the mortgagor by virtue of the
subrogation. However, if the mortgagee is not able to
collect the whole amount of the credit, he may still collect
the deficiency from the mortgagor.
52. "A" owns a house valued at P5,000,000.00 which he had

insured against fire for P7,500,000.00. He obtained a loan from
"B" in the amount of P3,500,000.00, and to secure payment
thereof, he executed a deed of mortgage on the house, but
without assigning the insurance policy to the latter. For "A's"
failure to pay the loan upon maturity, *'B" initiated foreclosure
proceedings and in the ensuing public sale, the house was
sold by the sheriff to "B" as highest bidder. Immediately upon
“Palileo v. Cosio, G.R. No. L-7667, November 28,1955.

w1984,2010 BAR.
J9JC9B0M
I. INSURANCE 31
issuance of the sheriff's certificate of sale in his favor, "B"

insured the house against fire for P3,500,000.00 with another
insurance company. In orderto redeem the house, "A" borrowed
P3,500,000.00 from "C" and, as security device, he assigned
the insurance policy of P7,500,000.00 to "C" However, before
“A" could pay "B" his obligation, the house was accidentally
and totally burned.
Do "A" "B", and "C" have any insurance interest in the
house? May "A" “B" and "C" recover under the policies? If so,
how much?
As to A: He has insurable interest in his house, an existing
interest, but only for P5,000,000.00, the value of the said house.
But, when he assigned it to C, said A had no more interest in his
insurance policy, and A cannot anymore recover on said insurance
policy.
As to B: He has insurable interest on A’s house, having an
interest founded upon an existing interest, for P3,500,000.00, the
amount of mortgage debt.
As to C: He has no insurable interest on A’s house when
the insurance took effect and his interest is a mere contingent or
expectant interest not founded on an actual right or valid contract
to A’s house. Hence, C cannot recover.“
53. A businessman in the grocery business obtained from First

Insurance an insurance policy for P5M to fully cover his stocks-
in-trade from the risk of fire.
Three months later, a fire of accidental origin broke out
and completely destroyed the grocery including his stocks-
in-trade. This prompted the businessman to file with First
Insurance a claim for P5M representing the full value of his
goods.
First Insurance denied the claim because it discovered
that at the time of the loss, the stock-in-trade were mortgaged
to a creditor who likewise obtained from Second Insurance
Company for insurance coverage for the stocks at their full
value of P5M.
“1982 modified BAR exam question.
J9JC9B0M
1

a. May the businessman and the creditor obtain separate

insurance coverage over the same stocks-in-trade?
Explain.
b. Suppose you are the Judge, how much would you allow
the businessman and the creditor to recover from their
respective insurers. Explain.
Answer;
a. Yes. The businessman, as owner, and the creditor, as
mortgagee, have separate insurable interests in the same
stocks-in-trade. Each may insure such interest to protect
his own separate interest.
b. As judge, I would allow the businessman to recover his
total loss of P5M pesos representing the full value of his
goods which were lost through fire. As td the creditor,
I would allow him to recover the amount to the extent
of or equivalent to the value of the credit he extended
to the businessman for the stocks-in-trade which were
mortgaged by the businessman.66
54. What is the effect of a change of interest in any part of a thing

insured unaccompanied by a corresponding change of interest
in the insurance?
Achangeofinterestin any partofa thinginsured unaccompanied
by a corresponding change of interest in the insurance suspends the
insurance to an equivalent extent, until the interest in the thing and
the interest in the insurance are vested in the same person.67
55. "N" owns a condominium unit presently insured with Holy

Insurance Co. for PIO Million. "N" later sells the condominium
unit to ”0." Somehow "0" fails to obtain the transfer of the
insurance policy to his name from "N." Subsequently, fire of
unknown origin destroys completely the condominium unit.
Who may collect the insurance proceeds?
Neither N nor 0 may collect. As to N, an interest in property
insured must exist when the insurance takes effect and when the
“Section 18, Insurance Code; BAR 1999.

‘’Section 20.
J9JC9B0M
I. INSURANCE 33
loss occurs. Although N had insurable interest when the insurance

takes effect, yet he had no more interest when the loss happened.
Also, a change of interest in any part of a thing insured
unaccompanied by a corresponding change of interest in the
insurance, suspends the insurance to an equivalent extent, until the
interest in the thing insured and the interest in the insurance are
vested in the same person.
As to O: He cannot recover, because he had no insurance
contract on the said condominium unit which he bought from N.58
Note that the change of interest contemplated is absolute
transfer of the insured’s entire interest in the property insured to
one not previously interested or insured.
Thus, the insured retains insurable interest in the property
insured in the following cases:
a. Execution of mortgage by the insured since interest in
the property did not pass to the mortgagee by the mere
) execution of the mortgage;
b. Lease of the insured property;
c. If the insured is a judgment debtor whose property was
sold on execution until the right to redeem has expired;
and
d. If the insured is the mortgagor whose property has been
foreclosed until expiration of the redemption period.
56. What are the exceptions to the rule that a change of interest in
any part of a thing insured unaccompanied by a corresponding
change of interest in the insurance suspends the insurance
to an equivalent extent, until the interest in the thing and the
interest in the insurance are vested in the same person and the
reasons therefor?
The exceptions are:
a. In life, health, and accident insurance.69
Because for these types of insurance, it is enough that insurable
interest exists at the time of the issuance of the policy.
“Section 19, Insurance Code; BAR 1980.

"Section 20.
J9JC9B0M
b. A change of interest in a thing insured, after the

occurrence of an injury which results in a loss, does not
affect the right of the insured to indemnity for the loss.00
This is because the right is already vested and the benefit has
accrued.
c. A change of interest in one or more of several distinct
things, separately insured by one policy, does not avoid
the insurance as to the others.61
This is because there is no change of interest and in insurance
with respect to the remaining properties. Thus, if the insured
obtains insurance for two separate houses but covered by one policy
and then sold one but both were destroyed by fire. The insured can
claim on the insurance with respect to the unsold property.
d. A change of interest, by will or succession, on the death of
the insured, does not avoid an insurance; and his interest
in the insurance passes to the person taking his interest
in the thing insured.02
This is because the ownership is effectively transferred to the
heirs.
e. A transfer of interest by one of several partners, joint
owners, or owners in common, who are jointly insured,
to the others, does not avoid an insurance even though it
has been agreed that the insurance shall cease upon an
alienation of the thing insured.03
This is because the transfer is not made in favor of any third
party.
f. When a policy is so framed that it will inure to the benefit
of whomsoever, during the continuance of the risk, may
become the owner of the interest insured.04
This is because this situation allows for change of interest in
the property but without corresponding loss of insurance coverage.
“Section 21.
01Section 22.
“Section 23.
“Section 24.
“Section 57, IC.
J9JC9B0M
I. INSURANCE 35
Thus, if a fire insurance policy provides that the loss was

payable to the mortgagee, as its interest may appear, the remainder
to whomsoever during the continuance of the risk may become
owner of the interest insured, the buyer may recover because it was
so framed for the benefit of whomsoever during the continuance of
the risk may become the owner of the interest insured.
3. Double Insurance
57. What is double insurance?
A double insurance exists where the same person is insured
by several insurers separately in respect to the same subject and
interest.66
58. True or False. The law on life insurance prohibits double

insurance.
False, double insurance only applies to property insurance.66
59. A businessman in the grocery business obtained from First

Insurance an insurance policy for P5M to fully cover his stocks-
in-trade from the risk of fire.
Three (3) months later, a fire of accidental origin broke
out and completely destroyed the grocery including his
stocks-in-trade. This prompted the businessman to file with
First Insurance a claim for P5M representing the full value of
his goods.
First Insurance denied the claim because it discovered
that at the time of the loss, the stock-in-trade were mortgaged
to a creditor who likewise obtained from Second Insurance
Company for insurance coverage for the stocks at their full
value of P5M.
First Insurance refused to pay claiming that double
insurance is contrary to law. Is this contention tenable?
The contention of First Insurance that double insurance is
contrary to law is untenable. There is no law prohibiting double
insurance. Moreover, in the problem at hand, there is no double
insurance because the insured with the First Insurance is different
“Section 95; 2008 Bar.

“BAR 2017.
J9JC9B0M
1

from the insured with the Second Insurance Company. There is

likewise no identity of insurable interests. For the mortgagor,
his interest is the ownership of the mortgaged property. For the
mortgagee, it is the loan secured by the mortgage.67
60. Reputable is the forwarder of Wyeth's goods. Pursuant to their

contract of carriage, Reputable insured Wyeth's goods with
Malayan. Wyeth also has its own insurance policy from the
Philippines First Insurance Co., Inc. (Phil First). During the life
of these insurance policies, the truck carrying Wyeth's goods
was hijacked. Thus, Phil First paid Wyeth on its policy and sued
Reputable and Malayan for reimbursement. Seeking to avoid
liability, Malayan invoked Section 5 of the SR Policy and argued
that in as much as there was already a marine policy issued by
Phil First securing the same subject matter against loss and
that since the monetary coverage/value of the marine policy is
more than enough to indemnify the hijacked cargo, Phil First
alone must bear the loss.
Is there double insurance? <
None. Double insurance exists where the same person is
insured by several insurers separately in respect to the same subject
and interest. The requisites in order for double insurance to arise
are as follows: 1) The person insured is the same; 2) Two or more
insurers insuring separately; 3) There is identity of subject matter;
4) There is identity of interest insured; and 5) There is identity of
the risk or peril insured against.
In the present case, while it is true that the Marine Policy and
the SR Policy were both issued over the same subject matter, i.e.
goods belonging to Wyeth, and both covered the same peril insured
against, it is, however, beyond cavil that the said policies were
issued to two different persons or entities. Wyeth is the recognized
insured of Phil First under its Marine Policy, while Reputable is the
recognized insured of Malayan under the SR Policy. The interest of
Wyeth over the property subject matter of both insurance contracts
is also different and distinct from that of Reputable. The policy
issued by Phil First was in consideration of the legal and/or equitable
interest of Wyeth over its own goods. On the other hand, what was
issued by Malayan to Reputable was over the latter’s insurable
67BAR 1999.
J9JC9B0M
I. INSURANCE 37
interest over the safety of the goods, which may become the basis of
the latter’s liability in case of loss or damage to the property.68
61. Armando Geagonia, as the owner of Norman's Mart, obtained

insurance from Country Bankers Insurance Corporation. The
insurance policy contained the condition that the insured shall
give notice to Country Bankers of any insurance or insurances
already effected, or which may subsequently be effected,
covering any of the property or properties insured, and unless
such notice be given and the particulars of such insurance or
insurances be stated therein or endorsed in this policy before
the occurrence of any loss or damage, all benefits under this
policy shall be deemed forfeited.
The building subject of fire insurance was razed by fire.
Country Bankers refused to pay alleging that Geagonia did
not inform it of a previous insurance obtained by its creditor
Cebu Tesing Textiles over the same property and in violation of
Condition 3.
Is the policy avoided by the failure of Geagonia to inform
Country Bankers of other insurance policies over the property?
No. Condition 3 or the Other Insurance Clause of the policy
is a condition which is not proscribed by law. Such a condition is a
provision which invariably appears in fire insurance policies and is
intended to prevent an increase in the moral hazard. However, in
order to constitute a violation, the other insurance must be upon the
same subject matter, the same interest therein, and the same risk.
A double insurance exists where the same person is insured
by several insurers separately in respect of the same subject and
interest. The insurable interest on the mortgaged property of a
mortgagor which covers the full value of the property and the
interests of a mortgagee which extends only to value of debt are
distinct and separate. Since the two policies of the PFIC do not
cover the same interest as that covered by the policy of the private
respondent, no double insurance exists. The non-disclosure then of
the former policies was not fatal to the Geagonia’s right to recover
on the Country Banker’s policy.69
"Malayan Insurance v. Philippine First Insurance Co., G.R. No. 184300, July
11, 2012.
"Armando Geagonia v. Court of Appeals and Country Bankers Insurance
Corporation, G.R. No. 114437, February 6, 1995.
J9JC9B0M
1

62. If an insurance policy prohibits on the property insured

without the insurer's consent, such provision being valid and
reasonable, a violation by the insured70 —
a. reduces the value of the policy.
b. avoids the policy.
c. offsets the value of the policy with the additional
insurances’ value.
d. forfeits premiums already paid.71
63. To what extent may the insured recover in a policy, other than
life, if the insured is over insured by double insurance?
The insured shall be governed by the following rules if he is
over insured by double insurance.
“(a) The insured, unless the policy otherwise provides,
may claim payment from the insurers in such order as he may
select, up to the amount for which the insurers are severally
liable under their respective contracts;
“(b) Where the policy under which the insured claims
is a valued policy, any sum received by him under any other
policy shall be deducted from the value of the policy without
regard to the actual value of the subject matter insured;
“(c) Where the policy under which the insured claims is
an unvalued policy, any sum received by him under any policy
shall be deducted against the full insurable value, for any sum
received by him under any policy;
“(d) Where the insured receives any sum in excess of
the valuation in the case of valued policies, or of the insurable
value in the case of unvalued policies, he must hold such sum
in trust for the insurers, according to their right of contribution
among themselves;
“(e) Each insurer is bound, as between himself and the
other insurers, to contribute ratably to the loss in proportion to
the amount for which he is liable under his contract.72
’°BAR2011.
’■Bar 2012.
72Section 96.
J9JC9B0M
I. INSURANCE 39
4. Multiple or several interests on same property

64. What is the nature of the liability of the several insurers in
double insurance? Explain.
In double insurance, the insurers are considered as co-insurers.
Each one is bound to contribute ratably to the loss in proportion to
the amount for which he is liable under his contract.”
65. Terrazas de Pation Verde, a condominium building, has a value

of P50M. The owner insured the building against fire with three
(3) insurance companies for the following amounts:
1. Northern Insurance Corp. — P20M
2. Southern Insurance Corp. — P30M
3. Eastern Insurance Corp. — P50M
a. Is the owner's taking of insurance for the building with
three (3) insurers valid? Discuss.
b. The building was totally razed by fire. If the owner decides
to claim from Eastern Insurance Corp, only P50M, will the
claim prosper? Explain.
c. Can the owner claim from Northern Insurance and
Southern Insurance Corporation?
Answer:
a. The taking of insurance from the three (3) insurers
is valid, there being no stipulation against obtaining
additional insurance. It is a case of “double insurance.”
Double insurance is valid. What is prohibited is for
the insured to recover more than his interest or value of
the property as this will violate the indemnity principle of
an insurance contract.
b. Yes, the owner may legally claim the entire P50M from
Eastern Insurance Corp. The Insurance Code provides
that where the insured is over-insured by double
insurance, the insured, unless the policy otherwise
provides, may claim payment from the insurers in such
order as he may select, up to the amount for which the
”BAR 2005.
J9JC9B0M
insurers are severally liable under their respective

contracts. Each insurer is bound, as between himself and
the other insurers, to contribute ratably to the loss in
proportion to the amount for which he is liable under his
contract.’1
C. If the owner has been paid in full by Eastern Insurance,
he can no longer recover from any of Northern and
Southern Insurance Corporations. Otherwise, the owner
can recover P20M and P30M, respectively.
The owner can choose who he wants to claim against
to recover the full indemnity provided that the claim
will not exceed the face value of the insurer’s respective
insurance policies.75
66. A contract of group life insurance was executed between

Great Pacific Lie (Grepalife) and Development Bank (DBP).
Great Pacific agreed to insure the lives of eligible housing
loan mortgagors of DBP. Wilfredo Leuterio, a physician and a
housing debtor of DBP, applied for membership in the group
life insurance plan.
Grepalife issued a coverage to the value of P86,200. Dr.
Leuterio died due to massive cerebral hemorrhage. The widow
of the late Dr. Leuterio filed a complaint against Grepalife.
Grepalife alleged that the complaint was instituted by the
widow who is not the real party in interest.
Is Grepalife liable? What is the concept of mortgage
redemption insurance?
Yes. The rationale of a group insurance policy of mortgagors,
otherwise known as the “mortgage redemption insurance,” is a device
for the protection of both the mortgagee and the mortgagor. On the
part of the mortgagee, it has to enter into such form of contract so
that in the event of the unexpected demise of the mortgagor during
the subsistence of the mortgage contract, the proceeds from such
insurance will be applied to the payment of the mortgage debt, thereby
relieving the heirs of the mortgagor from paying the obligation. In
a similar vein, ample protection is given to the mortgagor under
such a concept so that in the event of death; the mortgage obligation
,1BAR2008.
7SBAR 2012.
J9JC9B0M
I. INSURANCE 41
will be extinguished by the application of the insurance proceeds

to the mortgage indebtedness. Consequently, where the mortgagor
pays the insurance premium under the group insurance policy,
making the loss payable to the mortgagee, the insurance is on the
mortgagor’s interest, and the mortgagor continues to be a party to
the contract. In this type of policy insurance, the mortgagee is simply
an appointee of the insurance fund, such loss-payable clause does
not make the mortgagee a party to the contract. Thus, Grepalife is
liable to pay the widow of Dr. Leuterio upon presentation of proof of
prior settlement of mortgagor’s indebtedness to DBP.76
E. Perfection of the Contract of Insurance
1. Offer and acceptance/consensuality

67. The Civil Code adopts the theory of cognition, while the Code
of Commerce generally recognizes the theory of manifestation,
in the perfection of contracts. How do these two (2) theories
differ?
Under the theory of cognition, the acceptance is considered
to effectively bind the offeror only from the time it came to his
knowledge. Under the theory of manifestation, the contract is
perfected at the moment when the acceptance is declared or
made by the offeree.77
68. When is a contract of insurance perfected?

Pursuant to the cognition theory, an insurance contract
is perfected when the applicant-insured has knowledge of the
acceptance and approval by the insurer of his application.
The cognition theory should be construed in relation to the
provisions of the Insurance Code on premium payment. Save for
the exceptions, there is no valid and perfected insurance contract
without payment of premium.
70Great Pacific Life Assurance Corporation v. Court of Appeals and Medarda

Leuterio, G.R. No. 113899, October 13, 1999.
’’BAR 1997.
J9JC9B0M
69. Jason is the proud owner of a newly-built house worth P5

million. As a protection against any possible loss or damage
to his house, Jason applied for a fire insurance policy thereon
with Shure Insurance Corporation (Shure) on October 11, 2016
and paid the premium in cash. It took the company a week to
approve Jason's application. On October 18,2016, Shure mailed
the approved policy to Jason which the latter received five (5)
days later. However, Jason's house had been razed by fire which
transpired a day before his receipt of the approved policy.
Jason filed a written claim with Shure under the insurance
policy. Shure prays for the denial of the claim on the ground
that the theory of cognition applies to contracts of insurance.
Decide Jason's claim with reasons.
No. What governs insurance contract is the cognition theory
whereby’ the insurance contract is perfected only from the time the
applicant came to know of the acceptance of the offer by the insurer.
In this case, the loss occurred a day prior to Jason’s knowledge of
the acceptance by Shure of Jason’s application. There being not
perfected insurance contract, Jason is not entitled to recover from
Shure.™
70. Ming and Lam Po Chun came to Manila on vacation. Hardly a

day passed when Chun was brutally beaten up and strangled
to death in their hotel room. On the day of the killing, Ming was
touring Manila with Filipino welcomers while Chun was left in
the hotel room allegedly because she had a headache and was
not feeling well enough to do the sights. A witness and evidence
were presented which pointed out to Ming as the guilty party,
sentencing him to imprisonment by the RTC. Prosecution also
alleged that there was a motive to kill the victim as she was
insured and the accused was the beneficiary. The Prosecution
presented the "Proposal for Life Insurance" as proof, but the
same was a mere photocopy and does not bear the victim's
signature which would indicate that the victim herself applied
or the insurance. Although there appears a signature of "Apple
am, the same is not the name of the victim and nobody insures
himself under a nickname.
Is there a valid and perfected insurance contract?
7bBAB 2016,2011.
J9JC9B0M 1
I. INSURANCE 43
None, an application form does not prove that insurance was

secured. Anybody can get an application form for insurance, fill it
up at home before filing it with the insurance company. There was
no contract yet. Furthermore, there is no proof that the insurance
company approved the proposal, no proof that any premium
payments were made, and no proof from the record of exhibits as to
the date it was accomplished.79
a. Delay in acceptance
b. Delivery of policy
71. Valenzuela Hardwood and Industrial Supply, Inc. insured

with South Sea Surety and Insurance Company, Inc. the logs
to be shipped to Manila on board the vessel owned by Seven
Brothers. Marine Cargo Insurance Policy No. 84/24229 was
issued by South Sea. Hardwood gave the check in payment
of the premium on the insurance policy to Mr. Victorio Chua,
an agent of Columbia Insurance Brokers, Ltd. The said vessel
sank resulting in the loss of the insured logs. Payment of the
proceeds of the policy was demanded from South Sea but
the latter denied liability under the policy. Does Mr. Chua
in receiving the check for the South Sea Surety acted as its
agent?
Yes. Section 306 of the Insurance Code (now Section 315)
provides that any insurance company which delivers to an insurance
agent or insurance broker a policy or contract of insurance shall
be deemed to have authorized such agent or broker to receive on
its behalf payment of any premium which is due on such policy of
contract of insurance at the time of its issuance or delivery or which
becomes due thereon. When the South Sea Surety and Insurance
Co., Inc. delivered to Mr. Chua the marine cargo insurance policy for
the logs of Hardwood, he is deemed to have been authorized by the
South Sea Surety and Insurance Co., Inc. to receive the premium
which is due on its behalf. When therefore the insured logs were
lost, the insured had already paid the premium to an agent of the
South Sea Surety and Insurance Co., Inc., which is consequently
liable to pay the insurance proceeds under the policy it issued to the
insured.80
79People of the Philippines v. Yip Wai Ming, G.R. No. 120959, November 14,1996.
“South Sea Surety and Insurance Co., Inc. v. Court of Appeals, G.R. No.
102253, June 2, 1995.
J9JC9B0M
44 P1VINA ON COMMERCIAL LAW:
2, Premium Payment
72. What is the cash and carry rule under the Insurance Code?
Under the cash and carry rule, an insurance policy is generally
not binding unless the premium thereof has not been paid. This is
based on Section 77 of the Insurance Code which provides that an
insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding
any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and
until the premium thereof has been paid.
73. Upon Woodwork's application, Phil. Phoenix issued in its favor

a fire insurance policy whereby it insured Woodwork's building,
machinery and equipment for a term of one year from against
loss by fire. Woodwork did not pay the premium stipulated
in the Policy when it was issued nor at any time thereafter.
Before the expiration of the one-year term, Phil Phoenix
notified Woodwork of the cancellation of the Policy allegedly
upon request of Woodwork. Phil Phoenix Woodworks with
the amount of P3,110.25 for the unexpired period of 94 days,
and claimed the balance of P7,483.11 representing, earned
premium. Woodwork disclaimed any liability contending, in
essence, that it need not pay premium because Phil Phoenix
did not stand liable for any indemnity during the period the
premiums were not paid.
Can Phil Phoenix collect the earned premiums?
No, since the premium had not been paid, the policy must be
deemed to have lapsed. It is explicit in the policy the Phil. Phoenix
agreement to indemnify Woodwork for loss by fire only arises after
payment of premium. The non-payment of premiums does not
merely suspend but put an end to an insurance contract since the
time of the payment is peculiarly of the essence of the contract.81
74. Maxilite Technologies, Inc. is a domestic corporation engaged in

the importation and trading of equipment for energy-efficiency
systems. Jose N. Marques is the President and controlling
stockholder of Maxilite. Far East Bank and Trust Co. (FEBTC)
“'Philippine Phoenix Surety & Insurance Company v. Woodwork, Inc., G.R.

No. L-25317, August 6,1979.
J9JC9B0M
I. INSURANCE 45
handled the financing and related requirements of Marques

and Maxilite. Marques and Maxilite maintained accounts with
FEBTC. Far East Bank Insurance Brokers, Inc. (FEBIBI) is a
local insurance brokerage corporation while Makati Insurance
Company is a local insurance company. Both companies were
subsidiaries of FEBTC.
FEBIBI, upon the advice of FEBTC, facilitated the
procurement and processing from Makati Insurance Company
of four separate and independent fire insurance policies over
the trust receipted merchandise of Maxilite. Maxilite paid the
premiums for these policies through debit arrangement.
Finding that Maxilite failed to pay the insurance premium,
FEBIBI sent written reminders to FEBTC to debit Maxilite's
account. On 24 and 26 October 1994, Maxilite fully settled its
trust receipt account. On 9 March 1995, a fire gutted the Aboitiz
Sea Transport Building, where Maxilite's office and warehouse
were located. As a result, Maxilite claimed against the fire
insurance policy with Makati insurance Company. Makati
Insurance Company denied the fire loss claim on the ground of
non-payment of premium. FEBTC and FEBIBI disclaimed any
responsibility for the denial of the claim.
Is there payment of premium?
There is none insofar as Makati Insurance Company is concerned
because it did not receive any premium payment. However, FEBTC
is estopped from claiming that the insurance premium was not paid.
FEBTC induced Maxilite and Marques to believe that the insurance
premium has in fact been debited from Maxilite’s account. However,
FEBTC failed to debit and instead disregarded the written reminder
from FEBIBI to debit Maxilite’s account. FEBTC’s conduct clearly
constitutes negligence in handling Maxilite’s and Marques’ accounts
and must be held liable for damages pursuant to Article 2176 of the
Civil Code.82
75. On September 27, 1996, Development Insurance and Surety

Corporation (insurance company) issued a comprehensive
commercial vehicle policy to Jaime Gaisano. His company,
Noah's Ark, immediately processed the payments and issued
82Jose Marques and Maxilite Technologies, Inc. v. Far East Bank and Trust
Company, et al., G.R. No. 171379, January 10, 2011.
J9JC9B0M
a check, representing the payment of premium and other

charges, dated September 27,1996 payable to the insurance
company's agent, Trans-Pacific, on the same day. However,
nobody from Trans-Pacific picked up the check that day. Trans
pacific informed Noah's Ark that its messenger would get the
check the next day, September 28.
In the evening of September 27,1996, while under the
official custody of Noah’s Ark, the vehicle was stolen. Oblivious
of the incident, Trans-Pacific picked up the check on September
28 and issued an official receipt dated September 28,1996.
Is there a binding insurance contract?
No, there is no dispute that the check was delivered to and
was accepted by insurance company’s agent, Trans-Pacific, only on
September 28,1996. No payment of premium had thus been made
at the time of the loss of the vehicle on September 27, 1996. While
aime Gaisano claims that Trans-Pacific was informed that the
heck was ready for pick-up on September 27, 1996, the notice of
the availability of the check, by itself, does not produce the effect of
payment of the premium. At the time of loss, there was no payment of
premium yet to make the insurance policy effective. Jaime Gaisano
also failed to establish the fact of a grant by respondent of a credit
term in his favor, or that the grant has been consistent.83
76. Can an insurance policy be binding even if the premium is

unpaid?
Premium is the consideration for the undertaking of the
insurer to indemnify the insured against a specified peril. Thus, as
a general rule, the insurance policy is not valid and binding unless
the premium thereof has been paid.
The rule, however, admits of exceptions. They are as follows.
a. Whenever the grace period applies in the case of a life or
an industrial fife policy.81
“Jaime T. Gaisano v. Development Insurance and Surety Corporation, G.R.

No. 190702, February 27,2017.
“Section 77.
J9JC9B0M
I. INSURANCE 47
b. Whenever under the broker and agency agreements with

duly licensed intermediaries, a 90-day credit extension is
given. No credit extension to a duly licensed intermediary
should exceed 90 days from date of issuance of the policy.86
c. An acknowledgment in a policy or contract of insurance
or the receipt of premium is conclusive evidence of
its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not
be binding until the premium is actually paid.86
d. In a contract of suretyship, the suretyship or bond shall
not be valid and binding unless and until the premium
therefor has been paid, except where the obligee has
accepted the bond, in which case the bond becomes
valid and enforceable irrespective of whether or not the
premium has been paid by the obligor to the surety.87
e. When there is an agreement allowing the insured to pay
the premium in instalments and partial payment has
been made at the time of the loss.88
f. In case of estoppel as when there is a long-standing
business practice of allowing the insured to pay the
premiums after issuance of the policy and was relied upon
in good faith by the insured.89
g- If a cover note issued is issued to temporarily bind the

insurance pending issuance of the policy.96
Grace period in life or industrial life policy9'

Credit extension
“Section 77, IC.

“Section 79.
“Section 179, IC.
“Makati Tuscany Condominium Corporation v. Court of Appeals, G.R. No.
95546, November 6, 1992; BAR 2015.
89UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc., G.R. No.
137172, April 4, 2001; BAR 2013.
“Section 52, IC.
“See discussion on life insurance.
J9JC9B0M
48 niVINA ON COMMERCIAL LAW:
77. Capital Insurance & Surety Co., Inc. (Capital Insurance)

delivered to Plastic Era Manufacturing Co., Inc., (Plastic Era)
its open Fire Policy No. 22760 wherein the former undertook
to insure the latter's building, equipment, raw materials,
products and accessories. The policy expressly provides that
if the property insured would be destroyed or damaged by fire
after the payment of the premiums, at any time between the
15th day of December 1960 and one o'clock in the afternoon of
the 15th day of December 1961, the insurance company shall
make good all such loss or damage in an amount not exceeding
P100,000.00. When the policy was delivered, Plastic Era failed
to pay the corresponding insurance premium. However,
through its duly authorized representative, it executed
acknowledgment receipt of Plastic Era's promissory note.
The property insured by Plastic Era was destroyed by fire.
In due time, the latter notified Capital Insurance of the loss of
the insured property by fire and accordingly filed its claim for
indemnity, but was denied.
Is therea contract of insurance between Capital Insurance
and Plastic Era?
Yes, by accepting the promise of Plastic Era to pay the insurance
premium within 30 days from the effective date of policy, Capital
Insurance has implicitly agreed to modify the tenor of the insurance
policy and in effect, waived the provision therein that it would only
pay for the loss or damage in case the same occurs after the payment
of premium. Considering that the insurance policy is silent as to
the mode of payment, Capital Insurance is deemed to have accepted
the promissory note in payment of the premium. This rendered the
policy immediately operative on the day it was delivered. In effect,
Capital Insurance extended credit to Plastic Era.92
It should be noted that in the Capital Insurance case, the check
which was issued in payment of the premium was dishonored due
to insufficiency of funds and yet insurer was made liable because
it clearly granted a credit extension to the insured and the loss
occurred during the extension period.
“Capital Insurance & Surety Co., Inc. v. Plastic Era Co., Inc., et al., G.R. No.
L-22375, July 28,1975.
J9JC9B0M
I. INSURANCE 49
78. Is the insurer liable if the loss occurred while the check it
received from the insured representing premium payment
remained unencashed?
Yes, the insurer is liable because the acceptance of the check is
tantamount to extension of credit.
79. Will your answer be the same if the loss occurred before the
maturity date of the post-dated check?
My answer will be the same. The insurer remains liable.
80. What if the check was dishonored due to insufficiency of funds,

is the insurer still liable?
If the check was dishonored before or after the loss, the insurer
is not liable because the dishonor of the check is tantamount to non
payment of premium which prevented the effectivity of the insurance
contract, unless the insurer granted a credit extension and the loss
occurred during such period.93
The overriding consideration is whether the insurer granted a
credit extension to the insured by accepting a promissory note or a
check as a mode of premium payment and the loss occurred during
the credit extension period.
Acknowledgement of premium payment

81. Antonio Chua obtained from American Home a fire insurance
covering the stock-in-trade of his business. The insurance was
due to expire on March 25,1990. On April 5,1990, Chua issued
a check for P2,983.50 to American Home's agent, James Uy, as
payment for the renewal of the policy. The official receipt was
issued on April 10. In turn, the latter a renewal certificate. A
new insurance policy was issued where petitioner undertook
to indemnify respondent for any damage or loss arising from
fire up to P200,000.00 March 20,1990 to March 25,1991. The
business was completely razed by fire. Antonio Chua filed
an insurance claim with American Home and four other co
insurers. American Home refused to honor the claim alleging
that there was no existing contract because Antonio Chua did
not pay the premium.
93Capital Insurance and Surety Co. ibid.; BAR 2014.
J9JC9B0M
Is American Home liable to Antonio Chua?

Yes, Section 78 of the Insurance Code explicitly provides that
an acknowledgment in a policy or contract of insurance of the receipt
of premium is conclusive evidence of its payment, so far as to make
the policy binding, notwithstanding any stipulation therein that it
shall not be binding until the premium is actually paid. This section
establishes a legal fiction of payment and should be interpreted as
an exception to Section 77.”
Acknowledgement of premium payment when none was
received is also a form of estoppel.
Acceptance by the obligee of the bond issued by the surety

In one case, the check issued to the surety company for
premium payment bounced for insufficiency of funds and yet the
Supreme Court ruled that the surety is liable to the oblige under its
issued bond because the same had been delivered to and accepted by
the obligee.95
Agreement for partial premium payment

82. Does payment by installment of premiums invalidate the
insurance contract?
Premium may be paid on installments, if allowed by the
insurance policy. It was ruled that where there is an agreemen
allowing the insured to pay the premium in installments an pa ia
payment has been made at the time of the loss, the transac ion is
exempted from the cash and carry rule.96 In that case, the insurer
accepted all installment payments for three years. Such accep a nee
of payments speaks loudly of the insurer’s intention to honor e
policies it issued to the insured. Certainly, basic principles of equi y
and fairness would not allow the insurer to continue collec ing
and accepting the premiums, although paid on installments, an
later deny liability on the lame excuse that the premiums were no
prepaid in full."
’’American Home Assurance v. Antonio Chua, G.R. No. 130421, une •

^Philippine Pryce Assurance Corporation v. Court of Appea s,
107062, February 21,1994. rp N
^Makati Tuscany Condominium Corporation v. Court of Appea s,
95546, November 6,1992.
Supra.
J9JC9B0M
I. INSURANCE 51
Thus, if the premium is payable on four installments, the

insured may recover the full amount if the loss occurred after the
first installment payment even pending full payment of the balance
without prejudice to the insured’s obligation to pay the remaining
amount of the premium.
However, if the policy indicates that failure to pay in full any
of the scheduled installments on or before the due date shall render
the insurance policy void and ineffective as of such date, then the
failure to make premium payment on the first due date resulted
in a void and ineffective policy. Hence, there is no credit extension
to consider as the provision itself expressly cuts off the inception of
the insurance policy in case of default.98
It was also held that the insurer is not liable for the payment of
the insurance proceeds if the policy provides for payment of premium
in full. Accordingly, where the premium has only been partially
paid and the balance paid only after the peril insured against has
occurred, the insurance contract did not take effect and the insured
cannot collect at all on the policy.99
Estoppel
83. Masagana Telemart obtained from UCPB five (5) insurance
policies on its Manila properties. The policies were effective
from May 22,1991 to May 22,1992. On June 13,1992, Masagana's
properties were razed by fire. On July 13, 1992, Masagana
Telemart tendered five checks as renewal premium payments.
A receipt was issued. On July 14, 1992, Masagana Telemart
made its formal demand for indemnification for the burned
insured properties. UCPB then rejected Masagana's claims
under the argument that the fire took place before the tender
of payment and that it did not result in the renewal of the
policies. Thus, Masagana Telemart filed a complaint against
UCPB. On trial, it was found that Masagana Teiemart, which
had procured insurance coverage from UCPB for a number
of years, had been granted a 60 to 90-day credit term for the
"Philam Insurance Inc. Now Chartis Philippines Insurance Inc. v. Parc

Chateau Condominium Unit Owners Association and/or Eduardo Colet, G.R. No.
201116, March 4, 2019.
"Sps. Antonio and Violeta Tibay, et al. v. Court of Appeals and Fortune
Life and General Insurance Inc., Co., G.R. No. 119655, May 24, 1996; Section 77,
Insurance Code.
3
J9JC9B0M
I
L

renewal of the policies. Such a practice had existed up to the

time the claims were filed. Most of the premiums have been
paid for more than 60 days after the issuance.
Must Section 77 of the Insurance Code be strictly applied
despite practice of granting 60 to 90 day credit for payment
of premium?
Ves, Section 77 of the Insurance Code admits of exception and
the first is provided in the section itself that is in case of life or
industrial life policy whenever the grace period provision applies.
The second is that covered by Section 78 which provides that any
acknowledgment in a policy of the receipt of premium is conclusive
evidence of its payment so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding
until premium is actually paid. Third exception was laid in Makati
Tuscany Condominium Corporation, u. Court of Appeals, wherein
the Court ruled that Section 77 may not apply if parties have agreed
to the payment in installments and partial payment has been made
at the time of loss. The said case also provided the fourth exception,
that is the insurer may grant credit extension for payment of
premium. This means that if the insurer has granted the insured a
credit term for the payment of the premium and loss occurs before
the expiration of the term, recovery on the policy should be allowed
even the premium is paid after the loss but within the credit term.
As fifth exception, estoppel bars it from taking refuge under Section
77 since Masagana Telemart relied in good faith on such practice.100
Facts similar to the Masagana ruling should be decided on a
case-by-case basis. It is submitted that just because the insurer, in
certain cases, accommodated late payments from the insured does
not conclusively bind the insurer to the same kind of arrangement all
through out, particularly, if there is a clear and categorical rejection
of the application for renewal because there was no corresponding
timely premium payment.
It would have been different if the insured issued a check
or a promissory note, duly accepted by the insurer to indicate its
conformity to the credit extension. The validity, if not fairness, of
a credit extension based on supposed previous arrangements is
debatable, to say the least.
GCPB General Insurance Co., Inc. v. Masagana Telemart, Inc., G.R. No.
137172, April 4,2001; BAR 2013.
J9JC9B0M
I. INSURANCE 53
Issuance of cover notes

84. What are cover notes?
Cover notes are issued to bind insurance temporarily pending
the issuance of the policy. Within 60 days after issue of a cover note,
a policy shall be issued in lieu thereof, including within its terms the
identical insurance bound under the cover note and the premium
therefor.
Cover notes may be extended or renewed beyond such 60 days
with the written approval of the Commissioner if he determines
that such extension is not contrary to and is not for the purpose of
violating any provisions of the Insurance Code.101
85. Because it sustained damages, Pacific Timber Export sent a

demand letter to the insurance company to seek payment
under a Cover Note previously executed between the parties
but was denied on the ground that the Cover Note under which
Pacific Timber Export bases its claim is null and void for lack of
valuable consideration. Can the insurer be held liable under a
Cover Note despite non-payment of premium?
Yes. The non-payment of premium on the cover note is no cause
for Pacific Timber to lose what is due it as if there had been payment
of premium, for non-payment by it was not chargeable against its
fault. Had all the logs been lost during the loading operations, but
after the issuance of the cover note, liability on the note would
have already arisen even before payment of premium. This is how
the cover note as a binder should legally operate, otherwise, it
would serve no practical purpose in the realm of commerce, and is
supported by the doctrine that where a policy is delivered without
requiring payment of the premium, the presumption is that a credit
was intended and policy is valid.102
86. Distinguish between a cover note and binding receipt.

A cover note is a temporary insurance coverage pending
issuance of the policy and the insurer is liable if the loss occurred
during such provisional period.
'“'Section 52, IC.

'““Pacific Timber Export Corporation v. Court of Appeals, et al., G.R. No.
L-38613, February 25, 1982.
J9JC9B0M
A binding receipt or binding deposit receipt is a conditional

insurance coverage but does not become effective unless eventually
approved by the insurer.
87. "P" filed an application with an insurance company for a 20-

year endowment policy on the life of his one-year-old daughter,
supplying all the essential data in the application form, but
without disclosing that his daughter was a mongoloid child.
Upon “P's" payment of the annual premium, a binding deposit
receipt was issued to "P" by the insurance agent, subject
to processing by the company. The insurance company
disapproved the insurance application stating that the plan
applied for was not available for minors below seven years old,
and offered another plan. The insurance agent did not inform
"P" of the disapproval nor of the alternative plan offered, and
instead, strongly recommended that the company reconsider
and approve the insurance application.
As fate would have it, "P’s” daughter died. "P" sought
payment of the proceeds of the insurance but the company
refused on the grounds that there was concealment of a
material fact in the insurance application form and that it had
rejected the application. "P" contended, on the other hand, that
the binding deposit receipt constituted a temporary contract
of life insurance.
How would you resolve the issue?
The insurance company is not liable. The binding deposit
receipt is merely conditional and does not insure outright. Where
an agreement is made between the applicant and the agent, no
liability shall attach until the principal (insurance company)
approves the risk. Unlike a cover note, the binding deposit receipt
is subordinated to the act of the insurance company in approving or
rejecting the application; thus, in life insurance, a “binding slip” or
“binding receipt” does not insure by itself; and, when as in this case
the application was disapproved, before the death of the insured,
there was no perfected contract of insurance in order to make the
company liable.103
‘“Great Pacific Life Ass. Co. V. C.A., G.R. No. 1,31845, April 30, 1979; BAR
1980.
J9JC9B0M
I. INSURANCE 55
88. May an insurance policy be cancelled? If yes, under what

grounds and conditions?
No policy of insurance other than life shall be cancelled by the
insurer except upon prior notice thereof to the insured, and no notice
of cancellation shall be effective unless it is based on the occurrence,
after the effective date of the policy, of one or more of the following:
“(a) Nonpayment of premium;
“(b) Conviction of a crime arising out of acts increasing
the hazard insured against;
“(c) Discovery of fraud or material misrepresentation;
“(d) Discovery of willful or reckless acts or omissions
increasing the hazard insured against;
“(e) Physical changes in the property insured which
result in the property becoming uninsurable;
“(f) Discovery of other insurance coverage that makes
the total insurance in excess of the value of the property
insured; or
“(g) A determination by the Commissioner that the
continuation of the policy would violate or would place the
insurer in violation of the Insurance Code.104
All notices of cancellation mentioned in the preceding section
shall be in writing, mailed or delivered to the named insured at the
address shown in the policy, or to his broker provided the broker
is authorized in writing by the policy owner to receive the notice of
cancellation on his behalf, and shall state:
“(a) Which of the grounds set forth in Section 64 is relied
upon; and
“(b) That, upon written request of the named insured,
the insurer will furnish the facts on which the cancellation is
based.105
1<MSection 64, IC.

'“Section 65, IC.
J9JC9B0M
89. On June 7, 1981, Malayan Insurance petitioner issued to

Coronacion Pinca, Fire Insurance Policy on her property. On
October 15, 1981, MICO allegedly cancelled the policy for
nonpayment of the premium and sent the corresponding notice
to Pinca. On December 24, 1981, payment of the premium
for Pinca was received by Domingo Adora, agent of Malayan
Insurance. On January 15,1982, Adora remitted this payment,
together with other payments. On January 18, 1982, Pinca's
property was completely burned. On February 5,1982, Pinca's
payment was returned by Malayan Insurance to Adora on the
ground that her policy had been cancelled earlier. But Adora
refused to accept it. In due time, Pinca made the requisite
demands for payment, but was rejected.
Was the policy validly cancelled?
No, Section 64 of the Insurance Code provides that no policy
of insurance other than life shall be cancelled by the insurer
except upon prior notice thereof to the insured, and no notice of
cancellation shall be effective unless it is based on the occurrence,
after the effective date of the policy, of one or more of the following:
(a) non-payment of premium; (b) conviction of a crime arising out of
acts increasing the hazard insured against; (c) discovery of fraud or
material misrepresentation; (d) discovery of willful, or reckless acts
or commissions increasing the hazard insured against; (e) physical
changes in the property insured which result in the property
becoming uninsurable; or (f) a determination by the Commissioner
that the continuation of the policy would violate or would place the
insurer in violation of this Code.
Also, for a valid cancellation, concurrence of the following
is required: (1) There must be prior notice of cancellation to the
insured; (2) The notice must be based on the occurrence, after the
effective date of the policy, of one or more of the grounds mentioned;
(3) The notice must be (a) in writing, (b) mailed, or delivered to the
named insured, (c) at the address shown in the policy; (4) It must
state (a) which of the grounds mentioned in Section 64 is relied upon
and (b) that upon written request of the insured, the insurer will
furnish the facts on which the cancellation is based. Here, there
was no proof that the notice was actually mailed to and received by
Pinca.™
‘“Malayan Insurance Co., Inc, v. Gregoria Cruz Arnaldo and Coronacion

Pinca, G.R. No. L-67835, October 12,1987.
J9JC9B0M
I. INSURANCE 57
3. Non-default options in life insurance

90. What are the types or kinds of life insurance?
The types or kinds of life insurance are as follows:
a. Term insurance, where the insurer is liable to pay only if
the insured dies during the term of the insurance;
b. Whole life or permanent, where the insurer pays benefits
whenever the insured dies;
c. Endowment policy contract which is designed to pay a
lump sum after a specific term or on its maturity. If the
insured survives the term, the lump sum benefit shall
be payable to him, otherwise, it shall be payable to the
insured;
d. Industrial life; and,
e. Annuity
91. What are the non-default or forfeiture options in whole life

insurance?
a. Extended term insurance, where the policy’s available
cash value will be used as single premium to purchase a
term insurance.
b. Reduced paid up cash value, where the policy’s available
cash value will be used to purchase a paid up insurance
providing a coverage with term equivalent to the original
policy but lower amount.
c. Cash surrender value, where the cash value of the policy is
paid to the insured upon surrender of the policy. However,
once policy is surrendered, it can’t be reinstated.
Refund of premium is not recoverable in life insurance but the
insured has non-default or forfeiture options.
4. Reinstatement of a Lapsed Policy of Life Insurance

92. Does a stipulation in a life insurance policy giving the insured
the privilege to reinstate it upon written application within
three years from the date it give lapses give the insured
absolute right to such reinstatement by the mere filing of an
application therefor?
J9JC9B0M
No. The stipulation in a life insurance policy giving the insured

the privilege to reinstate it upon written application within three
years from the date it lapses and upon of evidence of insurability
satisfactory to the insurance company and the payment of all overdue
premiums and any other indebtedness to the company, does not give
the insured absolute right to such reinstatement by the mere filing
of an application therefor. The insurer has the right to deny the
reinstatement if it is not satisfied as to the insurability of the insured
and of the latter does not pay all overdue premiums and all other
indebtedness to the company. It was held that after the death of the
insured, the insurer cannot be compelled to entertain an application
for reinstatement of the policy because the conditions precedent to
reinstatement can no longer be determined and satisfied.107
Also, the payment of premiums on a fife insurance policy is not
uspended by war.108
It was also held that where a life insurance policy lapsed, and
Is compliance with the conditions for reinstatement of the policy,
the insured paid only part of the overdue premium, the failure to pay
the balance of the overdue premium prevented the reinstatement of
said policy as well recovery therefrom.109
5. Refund of Premium
93. Name at least 3 instances when an insured is entitled to a
return of the premium paid.
Three instances when an insured is entitled to a return of
premium paid are:
a. To the whole premium, if no part of his interest in the
thing insured be exposed to any of the perils insured
against.
b. Where the insurance is made for a definite period of time
and the insured surrenders his policy, to such portion
of the premium as corresponds with the unexpired time
at a pro rata rate, unless a short period rate has been
agreed upon and appears on the face of the policy, after
I07James McGuire v. Manufacturers Life Insurance Co., G.R. No. L-3581,

September 21,1950.
mIbid.
109Rufino Andres v. Crown Insurance Life, Co., G.R. No. L-10875, January 28,
1958.
J9JC9B0M
I. INSURANCE 59
deducting from the whole premium any claim for loss or

■|i
damage under the policy which has previously accrued.
C. When the contract is voidable on account of the fraud
or misrepresentation of the insurer or of his agent or on
account of facts the existence of which the insured was
ignorant without his fault; or when, by any default of
the insured other than actual fraud, the insurer never
incurred any liability under the policy.110
94, TC, upon the solicitation of MS, an underwriter for an

insurance company, applied for a 20-year endowment policy.
His application, with the requisite medical examination, was
accepted and approved by the company and in due course.
Endowment Policy No. 221944 was issued in his name. It was
released for delivery on January 24, 2020 and was actually
delivered to him by the underwriter, on January 25, 2020. The
effective date indicated on the face of the policy in question
was December 25,2019. MS assured him that the first premium
may be paid within the grace period of 30 days from date of
delivery of the policy. The first premium was paid by him in
three (3) installments.
In a letter dated June 1, 2020, the insurer advised TC that
Policy No. 221944 was not in force. To make it enforceable and
operative, TC was asked to remit the balance to complete his
initial annual premium due December 15, 2019, and to see a
physician for another full medical examination at his own
expense. The insured immediately informed the insurer that
he was cancelling the policy and he demanded the return of his
premium plus damages.
Is TC entitled to refund of his premium?
Yes, the insurance company should have informed TC of
the deadline for paying the first premium before or at least upon
delivery of the policy to him, so he could have complied with what
was needful and would not have been misled into believing that
his life and his family were protected by the policy, when actually
they were not. And, if the premium paid by TC was unacceptable
for being late, it was the company’s duty to return it. By accepting
his premiums without giving him the corresponding protection, the
110BAR 2000.
J9JC9B0M
company acted in bad faith. Since the policy of TC was inoperative

from the beginning, the insurance company was never at risk, thus,
it is not entitled to keep the premium."1 u
F. Rescission of Insurance Contracts
1. Concealment
95. What is concealment?
The neglect to communicate that which a party knows and
ought to communicate is called a concealment."2
96. What is the effect of concealment?

A concealment, whether intentional or unintentional, entitles
the injured party to rescind a contract of insurance."3
The basis of the rule vitiating the contract in cases of
concealment is that it misleads or deceives the insurer into accepting
the risk, or accepting it at the rate of premium agreed upon; The
insurer, relying upon the belief that the assured will disclose every
material fact within his actual or presumed knowledge, is misled
into a belief that the circumstance withheld does not exist, and
he is thereby induced to estimate the risk upon a false basis that
it does not exist. The principal question, therefore, must be, Was
the assurer misled or deceived into entering a contract obligation
or in fixing the premium of insurance by a withholding of material
information or facts within the assured’s knowledge or presumed
knowledge?"4
97. Ignacio Saturnino and his children filed an action to recover

the face value of an insurance policy issued by Phil-Am Life
on the life of Estefania A. Saturnino. The policy sued upon
is one for 20-year endowment non-medical insurance. This
kind of policy dispenses with the medical examination of the
applicant usually required in ordinary life policies. However,
"'Great Pacific Life Insurance Corporation v. Court of Appeals, et al., G.R. No.
1,57308, April 23, 1990.
""Section 26, IC.
""Section 27, IC.
'"Insular Life Assurance Co., Ltd. v. Heirs of Alvarez, G.R. Nos. 207526 and
210156.
J9JC9B0M
I. INSURANCE 61
detailed information is called for in the application concerning

the applicant's health and medical history. Saturnino died
of pneumonia, secondary to Influenza. Ignacio demanded
payment of the face value of the policy, but was rejected. It
appears that two months prior to the issuance of the policy,
Saturnino was operated on for cancer, involving complete
removal of the right breast. Notwithstanding the fact of her
operation, Estefania A. Saturnino did not make a disclosure
thereof in her application for insurance. Ignacio contend that
there was no fraudulent concealment of the truth inasmuch as
the insured herself did not know, since her doctor never told
her, that the disease for which she had been operated on was
cancer. Ignacio Saturnino and his children filed an action to
recoverthe face value of an insurance policy issued by Phil-Am
Life on the life of Estefania A. Saturnino. Is there concealment?
Yes, in the first place, concealment of the fact of the operation
itself was fraudulent, as there could not have been any mistake
about it, no matter what the ailment. Secondly, in order to avoid
a policy, it is not necessary to show actual fraud on the part of the
insured. In this jurisdiction, concealment, whether intentional
or unintentional entitled the insurer to rescind the contract of
insurance, concealment being defined as “negligence to communicate
that which a party knows and ought to communicate.” The basis
of the rule vitiating the contract in cases of concealment is that it
misleads or deceives the insurer into accepting the risk, or accepting
it at a rate of premium agreed upon. The insurer, relying upon
the belief that the insured will disclose every material fact within
his actual or presumed knowledge, is misled into a belief that the
circumstances withheld does not exist, and he is thereby induced to
estimate the risk upon a false basis that it does not exist.115
98. X applied for life insurance with Metropolitan Life Insurance
Company. The application contained this question: "Have
you ever had any ailment or disease of x x x (b) the stomach
or intestines, liver, kidney, or genitourinary organ?" X, a
laundrywoman who has no medical knowledge answered "No"
the application was approved, premium was paid and six (6)
months later, X died from cancer of the stomach. The post
medical examination of X shows that she had the cancer at the
116Ignacio Saturnino v. Philippine American Life Insurance Company, G.R.

No. L-16163, February 28, 1963.
J9JC9B0M
1

time she applied for a policy. Can the beneficiary of X collect

on the policy? Reasons. . i ,
The beneficiary of X cannot collect on the pohcy. Concealment,
as a defense against liability by the insurer, may either be intentional
or unintentional. Lack of knowledge on the part of the insured
about her ailment will not preclude the insurer from raising the
defense. The insurer may be held in estoppel only if, having known
of the concealed or misrepresented fact, still accepts the payment of
premium which is not the situation in this case.116
99. Julian Sy, one of the partners, insured the stocks in trade of
New Life Enterprises with Western Guaranty Corporation,
Reliance Surety and Insurance Co., Inc., and Equitable
Insurance Corporation.
When the building occupied by the New Life Enterprises
was gutted by fire, the stocks in the trade inside said building
were insured against fire in the total amount of P1,550,000.00.
After the fire, Julian Sy went to the three insurance companies.
Ultimately, the three insurance companies denied plaintiffs'
claim for payment for not giving notice of any insurances already
effected covering the stocks in trade. Julian Sy contended that
the insurer's agents knew about the other insurances. Was
there concealment?
Yes, where Julian Sy is specifically required to disclose to the
insurers any other insurance and its particulars which he may have
effected on the same subject matter, the knowledge of such insurance
by the insurers’ agents, even assuming the acquisition thereof by
the insurers, is not the notice that would estop the insurers from
denying the claim.11’
100. What facts should be disclosed to each party in a contract of

insurance?
Each party to a contract of insurance must communicate to
the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and
which the other has not the means of ascertaining.118
116BAR1989.
"’New Life Enterprises and Julian Sy v. Court of Appeals, et al., G.R. No.
94071, March 31,1992.
'■“Section 28, IC.
J9JC9B0M
I. INSURANCE 63
An insured, who gains knowledge of a material fact already

after the effectivity of the insurance policy, is not obliged to divulge
it. The reasomfor this is that the test of concealment of material fact
is determined at any time before the policy becomes effective.119
101. What is the test of materiality?

* Materiality is to be determined not by the event, but solely by
the probable and reasonable influence of the facts upon the party
to whom the communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making his inquiries.120
102. Should the fact/s concealed be the proximate cause of the loss
in order to constitute concealment?
No, the facts concealed need not be the proximate cause of the
loss in order to constitute concealment. Materiality is to be determined
not by the event, but solely by the probable and reasonable influence
of the facts upon the party to whom the communication is due, in
forming his estimate of the disadvantages of the proposed contract,
or in making his inquiries. The test is whether the matters concealed
would have definitely affected the insurer’s action on the application
of the insured, either by approving it with the corresponding
adjustment for a higher premium or rejecting the same.121
103. Cite cases/instances constituting concealment even though

the facts concealed were not the proximate cause of the loss.
a. “A” applied for a non-medical life insurance. The insured
did not inform the insurer that one week prior to his
application for insurance, he was examined and confined
at St. Luke’s Hospital where he was diagnosed for lung
cancer. The insured soon thereafter died in a plane
crash.122
““BAR 2011.
““Section 31, IC.
121Sunlife Assurance Company of Canada v. Court of Appeals, G.R. No. 105135,
June 22, 1995.
122BAR 2001.
J9JC9B0M
f

b. The insured did not disclose that his daughter was a

mongoloid child even though the cause of her death was
influenza.’23
C. When the insured answered that he consulted a doctor
for cough and flu complications but the insurer discovered
that two weeks prior to his application for insurance, he
was examined and confined at the Lung Center of the
Philippines, where he was diagnosed for renal failure,
even though the insured died in a plane crash.124
d. When the insured consulted a doctor and was diagnosed
as suffering from “sinus tachycardia”; then consulted
the same doctor again and this time was found to have
“acute bronchitis”, even though the cause of the death
was “congestive heart failure,” “anemia,” and “chronic
anemia.”126
e. When the insured did not disclose in this fire insurance
application that his house had been insured with another
insurance company. The fact of the existence of the
other insurance is material because had he answered
truthfully, the insurer would probably have charged him
higher premium, or would have made further inquiries,
or would have imposed some other conditions in the policy
to protect its interest. The existence of a large amount of
insurance increases the moral hazard or the temptation
to commit arson.
f. When the insured did not mention in his application for
life insurance that he had suffered from viral hepatitis
the previous year even though he had fully recovered
from the disease, the medical examination performed by
the insurance company’s physician did not reveal such
previous illness, and showed that he was healthy and was
an insurable risk, even though he died of an automobile
accident.127
‘“Great Pacific Life Assurance Company V. Court of Appeals, G.R. No. L-31845,
April 30,1979.
‘“Sunlife Assurance Company of Canada v. Court of Appeals, G.R. No. 105135,
June 22,1995; Bar 1996..
‘“Thelma Vda. de Canilang v. Court of Appeals and Great Pacific Life
Assurance Corporation, G.R. No. 92492, June 17,1993.
‘“BAR 1976.
'“’BAR 1983.
J9JC9B0M
I. INSURANCE 65
104. What facts need not be communicated to each other in a

contract of insurance?
Neither party to a contract of insurance is bound to
communicate information of the matters following, except in answer
to the inquiries of the other:
>1
“(a) Those which the other knows;
“(b) Those which, in the exercise of ordinary care, the
other ought to know, and of which the former has no reason to
suppose him ignorant;
“(c) Those of which the other waives communication;
“(d) Those which prove or tend to prove the existence of
a risk excluded by a warranty, and which are not otherwise
material; and
“(e) Those which relate to a risk excepted from the policy
and which are not otherwise material.128
Information of the nature or amount of the interest of one
insured need not be communicated unless in answer to an inquiry,
except as prescribed by Section 51.129
Neither party to a contract of insurance is bound to
communicate, even upon inquiry, information of his own judgment
upon the matters in question.130
105. A fire insurance policy in favor of the insured contained a

stipulation that the insured shall give notice to the company of
any insurances already effected or which may subsequently be
effected, covering the property insured and that unless such
notice be given before the occurrence of any loss, all benefits
shall be forfeited. The face of the policy bore the annotation
"Co-insurance declared." The things insured were burned. It
turned out that several insurances were obtained on the same
goods for the same term. The insurer refused to pay on the
ground of concealment. May the insured recover? Reason.
Yes, the insured may recover since there is no concealment.
The face of the policy bore already the annotation, “Co-insurance
'“Section 30, IC.

'“Section 34, IC.
'“Section 35, IC.
J9JC9B0M
declared" which is a notice to the insurer as to the existence of other

insurance contracts on the property insured.131
106. Kwong Nam applied for a 20-year endowment insurance on

his life with his wife, Ng Gan Zee as beneficiary. On the same
date, Asian Crusader, upon receipt of the required premium
from the insured, approved the application and issued the
corresponding policy. Kwong Nam died of cancer of the liver
with metastasis. All premiums had been paid at the time of his
death.
Ng Gan Zee presented a claim for payment of the face

value of the policy. Asian Crusader Life Assurance denied the
claim on the ground that the answers given by the insured to
the questions in his application for life insurance were untrue,
claiming Kwong Nam's misrepresentation when he answered
"No" to the question appearing in the application for life
insurance. Also, it was alleged that Kwong Nam was examined
in connection with his application for life insurance, but he
gave the medical examiner false and misleading information
as to his ailment and previous operation by saying that it
was associated with ulcer of the stomach. Asian Crusader
contended that he was operated on for peptic ulcer 2 years
before the policy was applied for and that he never disclosed
such an operation.
Was there concealment?
No, concealment exists where the assured has knowledge of
fact material to the risk, and honesty, good faith, and fair dealing
require that he should communicate it to the assurer, but he
designedly and intentionally withholds the same. In the absence of
evidence that the insured had sufficient medical knowledge as to
enable him to distinguish peptic ulcer and a tumor, his statement
that said tumor was associated with ulcer of the stomach, should be
construed as an expression made in good faith of his belief as to the
nature of his ailment and operation.132
131Gen. Insurance & Surety Corporation v. Ng Hua, G.R. No. L-14373, January
30, I960; BAR 1979.
132Ng Gan Zee v. Asian Crusader Life Assurance Corporation, G.R. No.
L-30685, May 30,1983.
J9JC9B0M
I. INSURANCE 67
107. When is the right to material facts waived?

The right to information of material facts may be waived,
either by the terms of insurance or by neglect to make inquiry as to
such facts, where they are distinctly implied in other facts of which
information is communicated.133
Thus, when in an application for fire insurance, the insured
indicated that there is an existing insurance on the same property
but did not answer the blank portion corresponding to the name of
the insurer and amount of insurance coverage, the failure to make
follow-up inquiry should amount to a waiver to make inquiry as to
such facts.
2. Misrepresentations/Omissions
108. What is representation in the context of insurance laws?
Representation is a statement of fact or condition relating
to the risk which induced the insurer to enter into a contract.
Representation is the statement made in compliance with the duty
to disclose.
109. When is a representation deemed false?

A representation is to be deemed false when the facts fail to
correspond with its assertions or stipulations.134
110. What is the effect of false representation?

If a representation is false in a material point, whether
affirmative or promissory, the injured party is entitled to rescind
the contract from the time when the representation becomes false.135
A representation as to the future is to be deemed a promise,
unless it appears that it was merely a statement of belief or
expectation.
111. Manuel Florendo filed an application for comprehensive

pension plan with Philam Plans, Inc. Ma. Lourdes S. Florendo,
his wife, was stated as beneficiary. Philam Plans issued
Pension Plan Agreement. Eleven months later, Manuel died of
blood poisoning.
■“Section 33, IC.

'“Section 44, IC.
’“Section 45, IC.
J9JC9B0M
1

Subsequently, Lourdes filed a claim with Philam Plans

but it declined the claim and found that Manuel was on
maintenance medicine for his heart and had an implanted
pacemaker. Further, he suffered from diabetes mellitus and was
taking insulin. Lourdes contends that Manuel had concealed
nothing since Perla, the soliciting agent, knew that Manuel
had a pacemaker implanted on his chest in the 70s or about 20
years before he signed up for the pension plan and that it is the
soliciting agent who filled up the form.
Is there misrepresentation?
Yes, when the insured sign the pension plan application, he
adopted as his own the written representations and declarations
embodied in it. It is clear from these representations that he
concealed his chronic heart ailment and diabetes. Philam Plans has
every right to act on the faith of that certification. Assuming that it
was the insurance agent Perla who filled up the application form,
Manuel is still bound by what it contains since he certified that he
uthorized her action.136
112. What is the theory of imputed knowledge?

This means that if the insured furnished the agent the needed
information and delegated to him/her the filling up of the insurance
application, then, he/she acted on the insured’s, instruction, not that
of the insurer. If the agent answered the application differently, the
insured is bound by the statements and information contained in
the application, unless there is connivance between the insurer and
the agent.137
This theory, however, was not applied in property insurance. In
one case, it was held that the insurer is not liable despite the claim
of the insured that the insurance agent knew about other insurance
covering the same property against fire and knowledge of the agent
is not tantamount to knowledge of the insurer.138
l36Ma. Lourdes Florendo v. Philam Plans, Inc., el al., G.R. No. 186983, February
22, 2012.
137Florendo v. Philam, ibid.
,38New Life Enterprises v. Court of Appeals, G.R. No. 94071, March 31, 1992.
J9JC9B0M
I. INSURANCE 69
113. What is the test to determine the materiality of the

representation?
The materiality of representation is determined by the same
rules as the materiality of the concealment.139
114. Is proof of fraudulent intent on the part of the insured necessary

in order to entitle the insurer to rescind the policy?
The Insurance Code dispensed with proof of fraudulent intent
in case of rescission due to concealment but not so in case of rescission
due to false representation.140
This is neither because intent to defraud is intrinsically
irrelevant in concealment, nor because concealment has nothing to
do with fraud. To the contrary, it is because in insurance contracts,
concealing material facts is inherently fraudulent: “if a material fact
is actually known to the [insured], its concealment must of itself
necessarily be a fraud. When one knows a material fact and conceals
it, “it is difficult to see how the inference of a fraudulent intent or
intentional concealment can be avoided.” Thus, a concealment,
regardless of actual intent to defraud, “is equivalent to a false
representation.” 141
115. On the basis of the entries in the death certificate of the insured,
Manulife conducted an investigation into the circumstances
leading to the insured's death. It relied on the medical records
of the hospital where the insured was confined, and that
Manulife thereafter concluded that the insured misrepresented
or concealed material facts at the time the insurance policies
were applied for; and accordingly, Manulife denied the death
claims.
Should the policy be rescinded?
No, in order for the insurer to rescind the policy, there should
be intent to defraud on the part of the insured to rescind the policy.
The medical records that might have established the insured’s
purported misrepresentation/s or concealment/s is inadmissible
for being hearsay, given the fact that Manulife failed to present
the physician or any responsible official of the hospital who could
l39Section 46, IC.

l40Insular Life Assurance Co., Ltd. v. Heirs of Alvarez, G.R. Nos. 207526 and
210156, October 3, 2018; Manulife v. Ibanez, November 28, 2016.
14insular Life, ibid.
J9JC9B0M
1

confirm or attest to the due execution and authenticity of the alleged

medical records. Manulife had utterly failed to prove by convincing
evidence that it had been beguiled, inveigled, or cajoled into selling
the insurance to the insured who purportedly with malice and deceit
passed himself off as thoroughly sound and healthy, and thus a fit
and proper applicant for life insurance. Manulife’s sole witness
gave no evidence at all relative to the particulars of the purported
concealment or misrepresentation allegedly perpetrated by the
insured.1"
It should be noted that when the Supreme Court ruled that
there should be proof of fraudulent intent to defraud, it should be
construed to refer to misrepresentation and not concealment. That
such proof is required in misrepresentation is made clear in Insular
Life u. Alvarez. ‘"
116. Jose Alvarez applied for and was granted a housing loan by
UnionBank. This loan was secured by a promissory note, a real
estate mortgage over the property of Alvarez and a mortgage
redemption insurance taken on the life of Alvarez with
UnionBank as beneficiary. Alvarez was among the mortgagors
included in the list of qualified debtors covered by the Group
Mortgage Redemption Insurance that UnionBank had with
Insular Life.
Alvarez died and subsequently, UnionBank filed with
Insular Life a death claim under Alvarez's name pursuant to the
Group Mortgage Redemption Insurance. Insular Life denied
the claim after determining that Alvarez was not eligible for
coverage of Group Mortgage Redemption Insurance as he was
supposedly more than 60 years old at the time of his loan's
approval. With the claim's denial, the monthly amortizations
of the loan stood unpaid. Subsequently, the lot was foreclosed
and sold at a public auction with UnionBank as the highest
bidder.
The Heirs of Alvarez filed a complaint for specific
performance to demand against Insular Life to fulfill its
obligation as an insurer under the Group Mortgage Redemption
Insurance, and for nullification of foreclosure against
UnionBank. Was there concealment?
'"Manulife v. Ibanez, November 28, 2016.

‘"Supra.
J9JC9B0M
I. INSURANCE 71
None. Section 26 defines concealment as a neglect to

communicate that which a party knows and ought to communicate.
However, Alvarez did not withhold information on or neglect to state
his age. He made an actual declaration and assertion about it. What
this case involves, instead, is an allegedly false representation. If
indeed Alvarez misdeclared his age such that his assertion fails to
correspond with his factual age, he made a false representation, not
a concealment. As' such, fraudulent intent on the part of the insured
must be established to entitle the insurer to rescind the contract. The
Insurance Code dispenses with proof of fraudulent intent in cases
of rescission due to concealment, but not in cases of rescission due
to false representation. When abundance of documentary evidence
can be referenced to demonstrate a design to defraud, presenting
singular document with erroneous entry does not qualify as clear
and convincing proof of fraudulent intent. Insular Life basically
relied on the Health Statement form personally accomplished
by Alvarez wherein he wrote that his birth year was 1942. The
Court, however, posited that Alvarez must have accomplished and
submitted many other documents when he applied for the housing
loan and executed supporting instruments like the promissory note,
real estate mortgage, and Group Mortgage Redemption Insurance.
A design to defraud would have demanded his consistency. He
needed to maintain appearances across all documents. However,
the best that Insular Life could come up with before the Regional
Trial Court and the Court of Appeals was a single document. The
Court of Appeals was straightforward, i.e., the most basic document
that Alvarez accomplished in relation to Insular Life must have
been an insurance application form. Strangely, Insular Life failed
to adduce even this document — a piece of evidence that was not
only commonsensical, but also one which has always been in its
possession and disposal.144
Incidentally, the Supreme Court also ruled that the foreclosure
of the mortgage was void. UnionBank approved Alvarez’s loan
and real estate mortgage, and endorsed the mortgage redemption
insurance to Insular Life. Fully aware of considerations that could
have disqualified Alvarez, it nevertheless acted as though nothing
was irregular. It itself acted as if, and therefore represented that,
Alvarez was qualified. Yet, when confronted with Insular Life’s
‘■' ‘Insular Life Assurance Co., Ltd. v. Heirs of Alvarez, G.R. Nos. 207526 and
210156, October 3, 2018.
J9JC9B0M
challenge, it readily abandoned the stance that it had earlier

maintained and capitulated to Insular Life’s assertion of fraud.
117. When should the insurer rescind the policy on account of

concealment or misrepresentation?
Whenever a right to rescind a contract of insurance is given to
the insurer on account of concealment or misrepresentation, such
right must be exercised previous to the commencement of an action
on the contract.115
118. Distinguish misrepresentation from concealment.

a. There is concealment with the insured withholds
information of material fact from the insurer, while there
is misrepresentation when the insured makes erroneous
statements with the intent of inducing the insurer to
enter into the insurance contract;
b. A concealment is a negative act, meaning, the neglect to
communicate information as to material facts known to
the insured, while misrepresentation is a positive act as
the insured volunteers such fact;
c. Concealment usually occurs prior to the making of the
insurance contract, while misrepresentation may be made
at the time of, or prior, to the issuance of the insurance
policy; and
d. Proof of fraudulent intent is not necessary in case of
rescission due to concealment but not so in case of
rescission due to misrepresentation.
While there are distinctions between the two, concealment
has the same effect as misrepresentation in terms of entitling the
insurer to rescind the insurance policy.
119. Explain the Incontestability Clause.

The incontestability clause in life insurance policy is based on
Section 48 of the Insurance Code:
H5Section 48, IC.
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I. INSURANCE 73
“Whenever a right to rescind a contract of insurance is

given to the insurer by any provision of this chapter, such
right must be exercised previous to the commencement of an
action on the contract.
After a policy of life insurance made payable on the
death of the insured shall have been in force during the
lifetime of the insured for a period of two years from the date
of its issue or of its last reinstatement, the insurer cannot
prove that the policy is void ab initio or is rescindable by
reason of the fraudulent concealment or misrepresentation
of the insured or his agent.”
It means that after two years from date of issuance of the
policy or its last reinstatement, the insurer must make good on the
policy, even though the policy was obtained by fraud, concealment,
or misrepresentation.146 It basically precludes the insurer from
rescinding the policy on account of concealment or misrepresentation.
120. What are the requisites of the incontestability clause?

The requisites are:
a. The insurance is a life insurance payable on the death of
the insured.
The clause is therefore not applicable to annuity because the
annuitant pays lump sum to the insurer and gets a certain amount
from the insurer every year until the annuitant/insured dies.
b. The policy is in force for at least 2 years from its date of
issue as appearing in the policy or of its last reinstatement.
The two-year period is not reckoned from date of receipt but
from issuance of the policy or last reinstatement.
121. On March 6,1997, Felipe N. Khu, Sr. (Felipe) applied for a life
insurance policy with Insular Life. This took effect on June
22,1997. On June 23,1999, Felipe's policy lapsed due to non
payment of the premium covering the period from June 22,
1999 to June 23,2000. On September 7,1999, Felipe applied for
the reinstatement of his policy and paid the premium.
146Sunlife of Canada (Philippines), Inc. v. Sibya, et al., G.R. No. 211212, June
8, 2016; BAR 2012.
J9JC9B0M
1

On October 12,1999, Insular Life advised Felipe that his

application for reinstatement may only be considered if he
agreed to certain conditions such as payment of additional
premium and the cancellation of the riders pertaining to
premium waiver and accidental death benefits. Felipe agreed
to these conditions and on December 27,1999 paid the agreed
additional premium.
On January 7,2000, Insular Life issued the Endorsement

corresponding to the policy. On September 22, 2001, Felipe
died. On October 5, 2001, Felipe's beneficiaries filed with
Insular Life a claim for benefit under the reinstated policy.
This claim was denied. Instead, Insular Life advised Felipe's
beneficiaries that it had decided to rescind the reinstated
policy on the grounds of concealment and misrepresentation.
Hence, the beneficiaries instituted a complaint for specific
performance with damages and prayed that the reinstated life
insurance policy be declared valid, enforceable and binding on
Insular Life; and that the latter be ordered to pay unto Felipe's
beneficiaries the proceeds of the policy.
In its Answer, Insular Life countered that Felipe did not

disclose certain ailments that he already had prior to his
application for reinstatement of his insurance policy; and that
it would not have reinstated the insurance policy had Felipe
isclosed the material information on his adverse health
condition. It further contended that when Felipe died, the
policy was still contestable.
Was the insurance policy still contestable?

« No. The Letter of Acceptance of Insular Life indicates that it
accepts the imposition of extra/additional premium of Php 5.00 a
year per thousand of insurance; effective June 22, 1999.”
The Endorsement, in turn, “certifies that as agreed to by the
nsure , the reinstatement of this policy has been approved by the
ompany °n the understanding that the following changes are made
on the policy effective June 22, 1999:”
1 aqq” nOt ent*re'y dear whether the phrase “effective June 22,
„ , . re ®rs to th® subject of the sentence, namely “the reinstatement
° ls lcy> or to the subsequent phrase “changes are made on the
policy.
J9JC9B0M
I. INSURANCE 75
The date of last reinstatement mentioned in Section 48 of the

Insurance Code pertains to the date that the insurer approved’ the
application for reinstatement. However, in light of the ambiguity
in the insurance documents in this case, the Court adopted the
interpretation favorable to the insured in determining the date
when the reinstatement was approved. The subject policy was
deemed reinstated as of June 22, 1999, not December 27, 1999, and
thus, the period of contestability had lapsed when the insured died
on September 22, 2001.147
122. What is the rationale of the incontestability clause?

The incontestability clause regulates both the actions of the
insurers and prospective takers of life insurance. It gives insurers
enough time to inquire whether the policy was obtained by fraud,
concealment, or misrepresentation; on the other hand, it forewarns
scheming individuals that their attempts at insurance fraud would
be timely uncovered — thus deterring them from venturing into
such nefarious enterprise. At the same time, legitimate policy
holders are absolutely protected from unwarranted denial of their
claims or delay in the collection of insurance proceeds occasioned by
allegations of fraud, concealment, or misrepresentation by insurers,
claims which may no longer be set up after the two-year period
expires as ordained under the law.148
123. Renato was issued a life insurance policy on January 2,1990.

He concealed the fact that three (3) years prior to the issuance
of his life insurance policy, he had been seeing a doctor about
his heart ailment.
On March 1, 1992, Renato died of heart failure. May the
heirs file a claim on the proceeds of the life insurance policy of
Renato?
Yes. The life insurance policy in question was issued on
January 2,1990. More than two (2) years had elapsed when Renato,
the insured, died on March 1, 1992. The incontestability clause
applies.149
14’Insular v. Felipe Khu, G.R. No. 195176, April 18, 2016.

148Insular Life v. Felipe Khu, ibid, citing Manila Bankers v. Aban, supra.
149BAR 1998.
J9JC9B0M
<6 DIVINA ON COMMERCIAL LAW:
124. In January 2016, Mr. H was issued a life insurance policy by XYZ
Insurance Co., wherein his wife, Mrs. W, was designated as the
sole beneficiary. Unbeknownst to XYZ Insurance Co., however,
Mr. H had been previously diagnosed with colon cancer, the
fact of which Mr. H had concealed during the entire time his
insurance policy was being processed. In January 2019, Mr. H
unfortunately committed suicide. Due to her husband’s death,
Mrs. W, as beneficiary, filed a claim with XYZ Insurance Co. to
recover the proceeds of the late Mr. H's life insurance policy.
However, XYZ Insurance Co. resisted the claim, contending
that; (1) The policy is void ab initio because Mr. H fraudulently
concealed or misrepresented his medical condition, i.e., his
colon cancer; and (2) As an insurer in a life insurance policy,
it cannot be held liable in case of suicide. Rule each of XYZ
Insurance Co.'s contentions.
Rule each of XYZ Insurance Co.'s contentions.
The first contention is not tenable. Under the incontestability
clause, after a policy of life insurance made payable upon the death
of the insured shall have been in force during the lifetime of the
insured for a period of two (2) years from the issuance of the policy
or last reinstatement, the insurer must make good on the policy
even though the policy was obtained through fraud, concealment, or
misrepresentation.™ Even if Mr. H had concealed or misrepresented
that he was previously diagnosed with colon cancer, XYZ can no
longer rescind the policy since it had been in force already for three
(3) years.
On the second contention, XYZ Insurance is liable despite the
suicide ofMr. H. Under the Insurance Code, the insurer is liable when
suicide is committed after the policy has been in force for a period
of two (2) years from the date of issue or its last reinstatement.161 In
this case, Mr. H committed suicide three (3) years after issuance of
the policy. Thus, XYZ should be liable to the beneficiary of Mr. H.162
'“Section 48 Insurance Code; Manila Bankers v. Aban, G.R. No. 175666, July
29, 2013; Sun Life of Canada v. Sibya, G.R. No. 211212, June 8, 2016.
’“Section 180-A, IC.
162BAR 2019; 2013.
J9JC9B0M
I. INSURANCE 77
125. Can the incontestability clause be invoked after the death of

the insured if the death occurred before two (2) years from
issuance of the policy or last reinstatement?
In Tan v. Court of Appeals, the Supreme Court ruled that the
so-called “incontestability clause” precludes the insurer from raising
the defenses of false representations or concealment of material
facts insofar as health and previous diseases are concerned if the
insurance has been in force for at least two (2) years during the
insured’s lifetime. The phrase “during the lifetime” found in Section
48 of the Insurance Law simply means that the policy is no longer
considered in force after the insured has died. The key phrase in
the second paragraph of Section 48 is “for a period of two years”.
The policy was issued on November 6, 1973 and the insured died
on April 26, 1975. The policy was thus in force for a period of only
one year and five months. Considering that the insured died before
the two-year period has lapsed, Philippine American Life Insurance
Company is not, therefore, barred from proving that the policy is
void ab initio by reason of the insured’s fraudulent concealment or
misrepresentation.163
In other words, the clause can be invoked even after the death
of the insured and not just during his lifetime. The rescission
need not be always done during the lifetime of the insured. The
incontestability clause will only set in after two (2) years from
issuance of the policy or last reinstatement.
However, in the case of Manila Bankers Life Insurance
Corporation v. Aban,lM it was held that after the two-year period
lapsed, or when the insured dies within the period, the insurer must
make good on the policy, even though the policy was obtained by
fraud, concealment, or misrepresentation.
In Aban, more than two years had lapsed from the issuance of
the policy, thus, the incontestability clause had lapsed. However,
the Supreme Court also said that if the insured died within the
two-year period from the issuance of the policy (not after two [2]
years), the insurer can no longer rescind the policy on account of
misrepresentation and/or concealment. It may be said that this part
of the decision is only an obiter dictum because two (2) years had
lapsed anyway, and the incontestability clause already applied.
l63Emilio Tan, Juanito Tan, Alberto Tan, and Arturo Tan v. Court of Appeals
and Philippine American Life Insurance Company, G.R. No. 48049, June 29, 1989.
16,G.R. No. 175666.
J9JC9B0M
However, that principle was reiterated in Sun Life of Canada

v. Si&va.'“ In this case, the insured applied for life insurance. He
disclosed in his application that he sought advice for kidney problem
but failed to disclose that he was confined for renal failure. Three
months from issuance of the policy, he died of gunshot wounds.
The Supreme Court held that there was no concealment given the
information that he disclosed and that he further authorized the
insurer to conduct investigation on his medical background. And
even assuming that there was concealment, the insurer must make
good on the policy because the insured died within the two-year
period, citing Manila Bankers v. Aban.
Based on Aban and Sibya cases, there are now two (2)
incontestability clauses.
1. Two (2) years had lapsed from issuance of the policy or
last reinstatement.
2. The insured died within two (2) years from issuance of the
policy.
The second application, however, goes against the rationale
of the incontestability clause. It precludes the insurer from
conducting investigation if the insured committed concealment and/
or misrepresentation, particularly if the insured died shortly after
the issuance of the policy. It is submitted that this ruling should be
re-assessed.
126. On July 3,1993, Delia Sotero (Sotero) took out a life insurance
policy from llocos Bankers Life Insurance Corporation (llocos
Life) designating Cresencia Aban (Aban), her niece, as her
beneficiary.
On April 10,1996, Sotero died. Aban filed a claim for the
insurance proceeds on July 9,1996. llocos Life conducted an
investigation into the claim and came out with the following
findings:
1. Sotero did not personally apply for insurance coverage,
as she was illiterate.
2. Sotero was sickly since 1990.
155G.R. No. 211212, June 8,2016.
J9JC9B0M 1
I. INSURANCE 79
3. Sotero did not have the financial capability to pay the

premium on the policy.
4. Sotero did not sign the application for insurance.
5. Aban was the one who filed the insurance application
and designated herself as the beneficiary.
For the above reasons and claiming fraud, llocos Life
denied Aban's claim on April 16,1997, but refunded the premium
paid on the policy.
a. May Sotero validly designate her niece as beneficiary?
b. May the incontestability period set even in cases of fraud
as alleged in this case?
c. Is Aban entitled to claim the proceeds under the policy?
a. Yes. Sotero may validly designate her niece, Aban, as
beneficiary. When the insured takes insurance on his own
life, he can designate anyone as beneficiary except those
disqualified to receive donation under Article 739 of the
Civil Code. Aban does not fall within the disqualification.
b. Yes. The “incontestability clause” is a provision in
Insurance Code which provides that after a policy of life
insurance made payable on the death of the insured shall
have been in force during the lifetime of the insured for a
period of two (2) years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is
void ab initio or is rescindable by reason of fraudulent
concealment or misrepresentation of the insured or his
agent.
In this case, the policy was issued on August
30, 1993, and the insured died on April 10, 1996. The
insurance policy was thus in force for a period of three
(3) years, seven (7) months and 24 days. Considering
that the insured died after the two-year period, llocos is,
therefore, barred from proving that the policy is void ab
initio by reason of the insured’s fraudulent concealment
or misrepresentation.
J9JC9B0M
C. Yes, Aban is entitled to claim the proceeds. After the two-

year period lapsed, or when the insured dies within the
period, the insurer must make good on the policy, even
though the policy was obtained by fraud, concealment, or
misrepresentation, as in this case, when the insured did
not personally apply for the policy as she was illiterate
and that it was the beneficiary who filled up the insurance
application designating herself as beneficiary.166
127. What are the defenses not barred by the incontestability

clause?
These defenses are not barred by the incontestability clause:
a. Lack of Insurable interest;
b. Premium was not paid;
c. The death was due to excepted risk, (like suicide);
d. The insured employed vicious fraud (as in another person
took the physical exams for the insured);
e. Failure to comply with conditions imposed by the insurer;
and
f. Time specified in the contract to make claims is not
complied with.
3. Breach of Warranties
128. What is a warranty in the context of insurance laws?
Warranty is a statement or promise made by the insured set
forth in the policy itself or incorporated in it by proper reference,
the untruth or non-fulfillment of which in any respect, and without
reference to whether the insurer was in fact prejudiced by such
untruth or non-fulfillment renders the policy voidable by the
insurer.1"
‘“Manila Bankers Life Insurance Corporation v. Aban, G.R. No. 175666; BAR
2014.
16,Dimaampao: Bar Essentials in Commercial Law, p. 337, 2020 edition.
0
J9JC9B0M 1
I. INSURANCE 81
129. Pabaya paid for a fire insurance policy on his multi-storey

building. At the time he applied for the insurance, he told the
representative of the insurance company that he planned to
assign a security guard on every floor of the building right away.
Except for the ground floor, no security guards were assigned.
Eleven months after the policy was issued, the building was
gutted by fire which started on the third floor. Unknown to
Pabaya, the insurance company h;-sd incorporated his planned
undertaking in the policy.
Can Pabaya recover on the fire insurance policy?
Pabaya can recover under the insurance policy. The statement
of Pabaya that he planned to assign a security guard on every floor
of the insured building, whether incorporated in the policy or not,
did not amount to firm commitment so as to constitute an express
warranty or representation. The facts indicate that it was simply
planned, not obligatory, or promissory, undertaking.168
130. What are the kinds of warranty?

a. A warranty may be expressed or implied.169
A statement in a policy, of a matter relating to the person or
thing insured, or to the risk, as fact, is an express warranty thereof.160
Every express warranty, made at or before the execution
of a policy, must be contained in the policy itself, or in another
instrument signed by the insured and referred to in the policy as
making a part of it.161
Implied warranty is one that is deemed incorporated in the
contract although not expressly mentioned therein. An example
of implied warranty is the warranty of seaworthiness in marine
insurance policy.
b. Affirmative — it affirms the existence of a fact or condition
at the time it is made.
c. Promissory — the insured warrants that certain facts or
conditions exist.
168BAR 1986.
'“Section 67. Insurance Code, as amended.
'“Section 71. ibid.
161Section 70, ibid.
V.
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A statement in a policy, which imparts that it is intended to do

or not to do a thing which materially affects the risk, is a warranty
that such act or omission shall take place.162
131. What is the legal effect when before the time arrives for the
performance of a warranty, the loss insured against happens?
When, before the time arrives for the performance of a
warranty relating to the future, a loss insured against happens,
or performance becomes unlawful at the place of the contract, or
impossible, the omission to fulfill the warranty does not avoid the
policy.163
132. When may the insurer rescind for violation of warranty?

The insurer may rescind the policy in case of violation of a
material warranty, or other material provision of a policy, on the
.art of either party thereto, entitles the other to rescind.164
A policy may declare that a violation of specified provisions
lereof shall avoid it, otherwise the breach of an immaterial
provision does not avoid the policy.165
A breach of warranty without fraud merely exonerates an
insurer from the time that it occurs, or where it is broken in its
inception, prevents the policy from attaching to the risk.166
133. To secure a loan of P10M, Mario mortgaged his building to

Armando. In accordance with the loan arrangements, Mario
had the building insured with First Insurance Company for
P10M, designating Armando as the beneficiary.
Armando also took an insurance on the building upon his
own interest with Second Insurance Company for P5M.
The building was totally destroyed by fire, a peril insured
against under both insurance policies. It was subsequently
determined that the fire had been intentionally started by
Mario and that in violation of the loan agreement, he had been
storing inflammable materials in the building.
'“Section 72, ibid.

J9JC9B0M 1
I. INSURANCE 83
How much, if any, can Armando recover from either or

both insurance companies?
Armando can receive P5M from Second Insurance Company.
As mortgagee, he had an insurable interest in the building. Armando
cannot collect anything from First Insurance Company. First
Insurance Company is not liable for the loss of the building. First,
it was due to a willful act of Mario, who committed arson. Second,
fire insurance policies contain a warranty that the insured will not
store hazardous materials within the insured’s premises. Mario
breached this warranty when he stored inflammable materials in
the building. These two factors exonerate First Insurance Company
from liability to Armando as mortgagee even though it was Mario
who committed them.167
134. On May 13, 1996, PAM, Inc. obtained a P15,000,000.00

fire insurance policy from llocano Insurance covering its
machineries and equipment effective for one (1) year or until
May 14, 1997. The policy expressly stated that the insured
properties were located at "Sanyo Precision Phils. Building,
Phase 111, Lots 4 and 6, Block 15, PEZA, Rosario, Cavite." Before
its expiration, the policy was renewed on "as is" basis for
another year or until May 13,1998. The subject properties were
later transferred to Pace Factory also in PEZA. On October
12, 1997, during the effectivity of the renewed policy, a fire
broke out at the Pace Factory which totally burned the insured
properties.
The policy forbade the removal of the insured properties
unless sanctioned by llocano. Condition 9 (c) of the policy
provides that "the insurance ceases to attach as regards the
property affected unless the insured, before the occurrence
of any loss or damage, obtains the sanction of the company
signified by endorsement upon the policy xxx(c) if the property
insured is removed to any building or place other than in that
which is herein stated to be insured." PAM claims that it has
substantially complied with notifying llocano through its sister
company, the RBC, which, in fact, referred PAM to llocano for
the insurance coverage.
Is llocano liable under the policy?
167BAR 2010.
J9JC9B0M
Ilocano is not liable under the policy. With the transfer of

the location of the subject properties, without notice and without
insurer's consent, after the renewal of the policy, the insured clearly
committed concealment, misrepresentation, and a breach of material
warranty. Moreover, under Section 168 of the Insurance Code, the
insurer is entitled to rescind the insurance contract in case of an
alteration in the use or condition of the thing insured. An alteration
in the use or condition of a thing insured from that to which it is
limited by the policy made without the consent of the insurer, by
means within the control of the insured, and increasing the risks,
entitles the insurer to rescind the contract of fire insurance.168
135. Qua Chee Gan obtained fire insurance policies from Law
Union and Rock Insurance for his four warehouses used for
storing copra and hemp. Under the policies, Qua Chee Gan
should install fire hydrants every 150 feet or 11 hydrants in
the warehouse premises, however, he installed only two (2)
hydrants.
Nevertheless, Law Union proceeded with the insurance
and collected premiums from Qua Chee Gan. In the 1940s,
three (3) of the warehouses were razed by fire prompting Qua
Chee Gan to demand insurance payment from Law Union. The
insurance company refused, alleging that the policies should
have been avoided for breach of warranties.
May Law Union and Rock Insurance avoid the policy?
No, it is barred by waiver (or rather estoppel) to claim violation
of warranties for the reason that knowing fully all that the number of
hydrants demanded therein never existed from the very beginning,
respondent nevertheless issued the policies in question subject to
such warranty, and received the corresponding premiums. It is a
well-settled rule of law that an insurer which with knowledge of
facts entitling it to treat a policy as no longer in force, receives, and
accepts a premium on the policy, estopped to take advantage of the
forfeiture.169
‘“Malayan Insurance Company v. PAP Co, G.R. No. 200784, August 7, 2013;
BAR 2014.
169Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., G.R. No. L-4611,
December 17,1955.
J9JC9B0M
I. INSURANCE 85
136. K.S. Young has a business of a candy and fruit store in Escolta
and occupied a building as a residence and bodega. Young
entered into a contract of insurance with Midland Textile
Insurance in case said residence and bodega and its contents
should be destroyed by fire. One of the conditions of said
contract of insurance is found in "warranty B” which provides
that no hazardous goods should be stored or kept for sale, and
no hazardous trade or process be carried on, in the building
to which this insurance applies, or in any building connected
therewith. However, Young placed in said residence and
bodega three (3) boxes filled with fireworks intended to be
used in the celebration of Chinese New Year. A few days after,
the insured building got partially destroyed by fire. The said
fireworks, however, were found in the part of the building not
destroyed by the fire and that they in no way contributed to the
fire or to the loss occasioned thereby.
Is placing of fireworks a violation of the terms of the
policy?
Yes, it is a breach of warranty. Contracts of insurance are
contracts of indemnity upon the terms and conditions specified
in the policy. The parties have a right to impose such reasonable
conditions at the time of the making of the contract as they may deem
wise and necessary. If the insured cannot bring himself within the
conditions of the policy, he is not entitled to recover for the loss. The
terms of the policy constitute the measure of the insurer’s liability,
and in order to recover the insured must show himself within those
terms; and if it appears that the contract has been terminated by a
violation, on the part of the insured, of its conditions, then there can
be no right of recovery.
The argument that the storing of the fireworks on the premises
did not contribute in any way to the damage occasioned by the fire is
untenable. The violation of the terms of the contract, by virtue of the
provisions of the policy itself, terminated, at the election of either
party, the contractual relations.170
170K.S. Young v. Midland Textile Insurance Company, G.R. No. 9370, March
31,1915.
J9JC9B0M
1

137. Bachrach commenced an action against British American

Assurance Company to recover a certain sum of money based
on the fire insurance policy. British American Assurance
Company alleged that the Bachrach maintained a paint and
varnish shop in the said building where the goods which were
insured were stored immediately preceding the outbreak
of the alleged fire. Bachrach willfully placed a gasoline can
containing 10 gallons of gasoline in the upper story of said
building in close proximity to a portion of said goods, which
can be so placed as to permit the gasoline to run on the floor of
said second story, and after so placing said gasoline.
Is the use of the building as painting and varnish shop
avoid the policy?
No. The keeping of inflammable oils in the insured premises,
though prohibited by the policy, does not void it if such keeping
is incidental to the business. Moreover, there was no provision in
vhe policy prohibiting the keeping of paints and varnishes upon
he premises where the insured property was stored. If British
.merican Assurance Company intended to rely upon a condition
if that character, it ought to have been plainly expressed in the
policy.171
The principles enunciated in the foregoing cases may be
summarized as follows:
The insurer may rescind the policy in case of:
a. Breach of warranty whether or not it is the cause of the
loss;
b. Violation of a material provision of the policy;
c. Violation of a non-material provision of the policy, if so
stipulated,
Breach of warranty, however, may be waived expressly, or
impliedly.
171E.M. Bachrach v. British American Assurance Company, G.R. No. L-5715,

December 20,1910.
J9JC9B0M
I. INSURANCE 87
G. Claims Settlement and Subrogation

£
I Insurance Transaction Flow
| Application [-►l Perfection -I A Rejection [ | Suit |

notice proof claims
of I OKS of loss settlement
Payment j Subrogation |
Above is the diagram illustrating the transaction flow of an

insurance contract.
In case of loss, the insured must submit the notice and proof
of loss. Any of two things may happen, the insurer may reject the
insurance claim, in which case, the insured should take legal action
or the insurance claim will be processed and paid, in which case, the
next phase is subrogation.
1. Notice and Proof of Loss

138. What does loss in insurance mean?
A loss is the injury or damage sustained by the insured as a
consequence of the happening of the risk/s insured against which
the insurer, in consideration of the premium, has undertaken to
indemnify or pay the insured.
139. When is an insurer liable for a loss?

An insurer is liable for a loss in the following cases:
a. If the proximate cause of the loss is the risk or peril
insured against.172
b. If the immediate cause of the loss is the risk or peril
insured against unless the proximate cause is an excepted
peril.173
Thus, if an explosion occurs in Building A and as a
result, fire coming therefrom spreads to Building B where
the property insured against fire is located, the insured
may recover unless explosion is an excepted peril.
172Section 86, Insurance Code, as amended.

J9JC9B0M
■

C. Where the thing insured is rescued from a peril insured

against that would otherwise have caused a loss, if, in the
course of such rescue, the thing is exposed to a peril not
insured against, which permanently deprives the insured
of its possession, in whole or in part; or where a loss is
caused by efforts to rescue the thing insured from a peril
insured against.’” L
Thus, if in the course of the efforts to save personal
effects from fire, the risk insured against, the insured
temporarily stored the property in a secluded area, but
stolen by looters, as the insured returns to the fire scene
to try to save more properties, the insured may recover for
the loss of the stolen property, even though robbery is not
a peril insured against.
d. Loss caused by the negligence of the insured, or of the
insurance agents or others.175
140. When is the insurer not liable despite the occurrence of a loss?
An insurer is not liable for a loss caused by the willful act or
through the connivance of the insured;”6 for a loss of which the peril
insured against was only a remote cause,”7 or if the loss is caused by
an excepted risk.”8
141. Alfredo took out a policy to insure his commercial building

against fire. The broker for the insurance company agreed
to give a 15-day credit to pay the insurance premium. Upon
delivery of the policy on May 15, 2020, Alfredo issued a
postdated check payable on May 30,2006. On May 28,2020, a
fire broke out and destroyed the building owned by Alfredo.
a. May Alfredo recover on the insurance policy?
b. Would your answer in a) be the same if it as found that the
proximate cause of the fire was an explosion and that fire
was but the immediate cause of the loss and there is no
excepted peril under the policy?
’’’Section 87, ibid.

’’“Section 89, ibid.
■’’Section 86, ibid.
J9JC9B0M
I. INSURANCE 89
C. If the fire was found to have been caused by Alfredo's own

negligence, can he still recover on the policy?
Reason briefly in a, b, and c.
Answer:
a. Yes, Alfredo may recover on the policy. It is valid to
stipulate that the insured will be granted credit term for
the payment of premium and the risk insured against
occurred during the credit extension period.
b. Yes, recovery under the insurance contract is allowed if
the proximate or immediate cause of the loss is the risk
insured against except where the proximate cause was an
excepted peril.
c. Yes, mere negligence on the part of the insured will not
prevent recovery under the insurance policy. The law
merely prevents recovery when the cause of loss is the
willful act of the insured, alone, or in connivance with
others.179
142. What should the insured do after the loss in order to recover
from the insurer?
After the loss, the insured must submit the notice and proof of
loss within the period stipulated in the policy.
When a preliminary proof of loss is required by a policy, the
insured is not bound to give such proof as would be necessary in a
court of justice; but it is sufficient for him to give the best evidence
which he has in his power at the time.190
If the policy requires, by way of preliminary proof of loss, the
certificate or testimony of a person other than the insured, it is
sufficient for the insured to use reasonable diligence to procure it,
and in case of the refusal of such person to give it, then to furnish
reasonable evidence to the insurer that such refusal was not induced
by any just grounds of disbelief in the facts necessary to be certified
or testified.181
179BAR 2007.
‘“Section 91, Insurance Code, as amended.
"“Section 94, ibid.
J9JC9B0M
I

143. What happens in case of non-submission or delay in the

submission of the notice and/or proof of loss?
i,
The insurer shall be relieved of liability in case of non
submission or delay in the submission of the notice and/or proof of
loss, unless the delay in the presentation to an insurer of notice or
proof of loss is waived by the insurer or it omits to take objection
promptly and specifically upon that ground.182 ,
All defects in a notice of loss, or in preliminary proof thereof,
which the insured might remedy, and which the insurer omits to
specify to him, without unnecessary delay, as grounds of objection,
are waived.183
144. Anco Enterprises Company owned the M/T ANCO tugboat and
the D/B Lucio barge which were operated as common carriers.
San Miguel Corporation (SMC) entered into agreement with
ANCO wherein the latter will ship its cargoes on board the D/B
Lucio, for towage by M/T ANCO. They further agreed that SMC
will insure the cargoes in order to recover indemnity in case
of loss, hence the cargoes were insured with FGU Insurance
Corporation. ANCO failed to deliver to SMC’s consignee
the cargoes. As a consequence of the incident, SMC filed a
complaint for Breach of Contract of Carriage and Damages
against ANCO.
Subsequently, ANCO filed a Third-Party Complaint
against FGU on the ground that the loss of said cargoes
occurred as a result of risks insured against in the insurance
policy and during the existence and lifetime of said insurance
policy.
Is FGU liable under the insurance policy?
No. It is a basic rule in insurance that the carelessness and
negligence of the insured or his agents constitute no defense on the
part of the insurer. This rule, however, presupposes that the loss
has occurred due to causes which could not have been prevented by
the insured, despite the exercise of due diligence. However, when
evidence show that the insured’s negligence or recklessness is so
gross as to be sufficient to constitute a willful act, the insurer must
be exonerated. In the case at bar, ANCO’s representatives had failed

J9JC9B0M
I. INSURANCE 91
to exercise extraordinary diligence required of common carriers

in the shipment of SMC’s cargoes. Such blatant negligence being
the proximate cause of the loss of the cargoes and is of such gross
character that it amounts to a wrongful act which must exonerate
FGU from liability under the insurance contract.184
145. Does discrepancy between the actual loss and that claimed in
the proof of loss void the policy and adversely affect the right
of the insured to recover?
The Insurance Code provides that a policy may declare that
a violation of specified provisions thereof shall avoid it. Thus, in
fire insurance policies, if so stipulated, a fraudulent discrepancy
between the actual loss and that claimed in the proof of loss voids
the insurance policy. Mere filing of such a claim will exonerate the
insurer. In one case, the claim is twenty-five times the actual claim
proved. As a consequence, the policy was voided. The Supreme Court
stated that the most liberal human judgment cannot attribute such
difference to mere innocent error in estimating or counting but to a
deliberate intent to demand from insurance companies payment for
indemnity of goods not existing at the time of the fire.'86
It was also ruled that a false and material statement made
with an intent to decide or defraud avoids an insurance policy.186 In
this case, the insured’s verified claim totaled P31,860.85, of which,
in accordance with the terms of the policy, three-fourths was asked,
or P23,895.64 but the insurer’s inventory of the goods found after
the fire came to P13.113. The difference between the two claim’s
estimate of the loss, which was confirmed in the trial court, was
P18,747.85. In connection with these figures, the insured suggested
too low a valuation by the representatives of the insurer but even
when computed at the insured’s valuation, the goods inventoried
by the insurer’s committee would amount to P19,346.30. There
would, however, still remain a considerable void between the two (2)
amounts, of P12.514.55.187
184FGU Insurance Corporation v. Court of Appeals, et al., G.R. No. 137775,

March 21, 2005.
’“United Merchants Corporation v. Country Bankers Insurance Corporation,
G.R. No. 198588, July 11, 2012.
186Tan It v. Sun Insurance, G.R. No. L-27847, December 12, 1927.
,S7Ibid. ,
J9JC9B0M
E

146. Pursuant to the fire insurance policy, Usiphil Incorporated filed

with Finman General Assurance an insurance claim for the loss
of the insured properties due to fire. Usiphil also submitted its
Sworn Statement of Loss and Formal Claim together with Proof
of Loss as compliance with the requirements of H.H. Bayned,
the adjuster appointed by Finman General. However, Finman
General refused to pay the insurance claim on the ground that
Usiphil Incorporated failed to comply with Policy Condition
No. 13 which provides that within 60 days after the loss, unless
time is extended, the insured shall render a signed and sworn
statement of proof of loss.
Does Usiphil comply with the condition as regards
submission of documents to prove loss?
Yes. A perusal of the records shows that Usiphil, after the
occurrence of the fire, immediately notified Finman General
Insurance thereof. Thereafter, Usiphil submitted the following
locuments: (1) Sworn Statement of Loss and Formal Claim; and
(2) Proof of Loss. The submission of these documents constitutes
substantial compliance with the above provision. Indeed, as regards
the submission of documents to prove loss, substantial compliance
with the requirements will always be deemed sufficient.
In Industrial Personnel and Management Services, Inc. v.
Country Bankers Insurance Corporation,188 the Supreme Court
reiterated the rule that substantial compliance with the requirements
under the policy suffices.
The facts are as follows:
Industrial Personnel and Management Services, Inc. (IPAMS)
began recruiting registered nurses for work deployment in the
United States of America (U.S.). By reason of the advances made to
the nurse applicants, the latter were required to post surety bond.
The purpose of the bond is to guarantee the following during its
validity period: (a) that they will comply with the entire immigration
process, (b) that they will complete the documents required, and (c)
that they will pass all the qualifying examinations for the issuance
of immigration visa. The Country Bankers Insurance Corporation
(Country Bankers) and IPAMS agreed to provide bonds for the said
nurses. The surety bonds issued specifically state that the liability
188G.R. No. 194126, October 17,2018.
J9JC9B0M
I. INSURANCE 93
of the Country Bankers, shall be limited only to actual damages

arising from Breach of Contract by the applicant. A Memorandum
of Agreement (MOA) was executed by the said parties which
stipulated the various requirements for collecting claims from
Country Bankers. On the basis of the MOA, IPAMS submitted its
claims under the surety bonds issued by Country Bankers. For its
part, Country Bankers, upon receipt of the documents enumerated
under the MOA, paid the claims to IPAMS. According to IPAMS,
starting 2004, some of its claims were not anymore settled by
Country Bankers as it insisted on the production of official receipts
of IPAMS on the expenses it incurred for the application of nurses.
It was held that the statement of accounts, in lieu of official
receipts, sufficed to allow the insured to recover.189
147. Is the submission of the notice of loss to the agent deemed as

notice to the insurer?
Yes. In Bank of the Philippine Island v. Laingo,™ BPI offered
a bank product where a depositor is automatically covered by an
insurance policy against death and disability. The policy was issued
by its affiliate company, FGU Insurance, now known as BPI/MS
Insurance Corporation. When the depositor died, the beneficiary of
the life insurance policy notified BPI. However, the insurer denied
the insurance claim because the notice was given to it beyond the
period required by the policy. It was held that under the doctrine of
representation, BPI is deemed to be the agent of FGU. The timely
notice to BPI of the death of the depositor-insured was considered
notice to FGU.
148. When should the insurer make the insurance payment to the
insured?
Insurance payment should be made within the following
periods:
LIFE insurance - The proceeds of a life insurance policy
shall be paid immediately upon maturity of the policy, unless such
proceeds are made payable in installments or as an annuity, in which
case the installments, or annuities shall be paid as they become
189Industrial Personnel and Management Services, Inc. v. Country Bankers

Insurance Corporation, G.R. No. 194126, October 17, 2018.
,90G.R. No. 205206, March 2016.
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due: Provided, however, That in the case of a policy maturing by the

death of the insured, the proceeds thereof shall be paid within 60
days after presentation of the claim and filing of the proof of death
of the insured.'91
PROPERTY - The amount of any loss or damage for which
an insurer may be liable, under any policy other than life insurance
policy, shall be paid within 30 days after proof of loss is received by
the insurer and ascertainment of the loss or damage is made either
by agreement between the insured and the insurer or by arbitration;
but if such ascertainment is not had or made within 60 days after
such receipt by the insurer of the proof of loss, then the loss or
damage shall be paid within 90 days after such receipt.192
149. What happens in case of delay in the payment of insurance

claim?
Refusal or failure to pay the claim within the time prescribed
will entitle the beneficiary to collect interest on the proceeds of the
policy for the duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board, unless such failure or refusal to
pay is based on the ground that the claim is fraudulent.193
In case of any litigation for the enforcement of any policy or
contract of insurance, it shall be the duty of the Commissioner or
the Court, as the case may be, to make a finding as to whether the
payment of the claim of the insured has been unreasonably denied or
withheld; and in the affirmative case, the insurance company shall
be adjudged to pay damages which shall consist of attorney’s fees
and other expenses incurred by the insured person by reason of such
unreasonable denial or withholding of payment plus interest of twice
the ceiling prescribed by the Monetary Board of the amount of the
claim due the insured, from the date following the time prescribed
in Section 248 or in Section 249, as the case may be, until the claim
is fully satisfied. Provided, That failure to pay any such claim within
the time prescribed in said sections shall be considered prima facie
evidence of unreasonable delay in payment.191
‘“Section 248, Insurance Code.

‘“Section 249, Insurance Code.
‘“Sections 248 and 249, Insurance Code.
‘“Section 250, ibid.
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I. INSURANCE 95
In Stronghold Insurance v. Pamana Island Resort,it was

held that given the provisions of the Insurance Code, which is a
special law, the applicable rate of interest shall be that imposed in a
loan or forbearance of money as imposed by BSP even irrespective of
the nature of the insurer’s liability. In the past years, the rate was
at 12%. However, in light of Circular 799 issued by the BSP on June
21 2013 decreasing interest on loans or forbearance of money, the
declared rate of 12% per annum shall be reduced to 6% per annum
starting July 1, 2013, the effectivity of the circular.
The insurer then is liable to pay 12% per annum on the
insurance proceeds for the duration of the delay. Delay should be
construed after the lapse of the period to pay as set forth by law.
2. Guidelines on Claims Settlement
a. Unfair Claims Settlement; Sanctions

150. What constitute unfair claim settlement?
a. Knowingly misrepresenting to claimants pertinent facts

or policy provisions relating to coverage at issue;
b. Failing to acknowledge with reasonable promptness

pertinent communications with respect to claims arising
under its policies;
c. Failing to adopt and implement reasonable standards

for the prompt investigation of claims arising under its
policies;
d. Not attempting in good faith to effectuate prompt, fair
and equitable settlement of claims submitted in which
liability has become reasonably clear; or
‘ e. Compelling policyholders to institute suits to recover

amounts due under its policies by offering without
justifiable reason substantially less than the amounts
ultimately recovered in suits brought by them.136
‘“G.R. No. 174838, June 1, 2016.

'“Section 247, Insurance Code.
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1

b. Prescription of Action
151. What is the remedy available to the insured in case his
insurance claim is rejected by the insurer?
In case of denial of the insurance claim, the insured may file
an action for specific performance against the insurer within the
prescriptive period allowed by law.
The prescriptive period to file a legal action against the insurer,
for an action based on breach of an insurance policy, is ten years from
accrual of cause of action, unless the policy reduced such period, but
in no case, shorter than one (1) year from accrual of cause of action.
A condition, stipulation, or agreement in any policy of
insurance, limiting the time for commencing an action thereunder
to a period of less than one (1) year from the time when the cause of
action accrues, is void.197
52. When does the cause of action of the insured accrue?

The cause of action accrues from the rejection of the insurance
claim.
153. Jose Ledesma, Geronima Pulmano, and Amelia Generao were

insured with Summit Guaranty and Insurance Company for
purposes of Third Party Liability. They all filed, in separate
cases, notice of claim with Summit Guaranty. However,
the petitioner failed to act on their claim. Consequently,
Ledesma and Pulmano filed a complaint before the Insurance
Commission. Summit Guaranty contends that the two (2)
periods prescribed in the Section 384 of the Insurance Code,
that is, the six-month period for filing the notice of claim and the
one-year period for bringing an action or suit - are mandatory
and must always concur. Petitioner company argues that
under this law, even if the notice of claim was timely filed with
the insurance company within the six-month period, the action
or suit that follows, if filed beyond the one-year period should
necessarily be dismissed on the ground of prescription.
Has the cause of action already prescribed?
1B7Section 63, ibid. •i
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I. INSURANCE 97
No, there is absolutely nothing in the law which mandates that

the two (2) periods must always concur. On the contrary, it is very
clear that the one-year period is only required “in proper cases.” It
appears that the insurer disregarded this very significant phrase
when it made its own interpretation of the law. Had the lawmakers
intended it to be the way petitioner company assumes it to be, then
the phrase “in proper cases” would not have been inserted.
Also, the cause of action did not accrue until claim was finally
rejected by the insurance company. This is because before such final
rejection there is no real necessity for bringing suit. The one-year
period should be counted from the date of rejection by the insurer
as this is the time when the cause of action accrues. In the cases at
bar, no denial of the claims was ever made and hence there has yet
been no accrual of cause of action. Therefore, the prescription has
not yet set in.198
154. When does the prescriptive period for the insured's action for
indemnity be reckoned from?
The prescriptive period for the insured’s action for indemnity
should be reckoned from the “final rejection” of the claim. “Final
rejection” simply means denial by the insurer of the claims of
the insured and not the rejection or denial by the insurer of the
insured’s motion or request for reconsideration.199 The request for
reconsideration does not suspend the running of the prescriptive
period stipulated in the insurance policy. The reason for this rule
is to insure that claims against insurance companies are promptly
settled and that insurance suits are brought by the insured while
the evidence as to the origin and cause of the destruction has not yet
disappeared.200
However, where the delay in bringing the suit against the
insurance company was not caused by the insured or its subrogee but
by the insurance company itself, it is unfair to penalize the insured or
its subrogee by dismissing its action against the insurance company
on the ground of prescription. In one case, the insured sent a notice
‘"Summit Guaranty and Insurance Company Inc. v. Hon. Jose de Guzman, et

al., G.R. No. L-50997, June 30, 1987.
199H.H. Hollero Construction, Inc. v. Government Service Insurance System
and Pool of Machinery Insurers, G.R. No. 152334, September 24, 2014. Sun Life
Office, Ltd. v. Court of Appeals, G.R. No. 89741, March 13, 1991.
200BAR 1996.
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of claim to the insurance company two months after the accident.

However, it was only a year later that the insurer replied to the
insured’s letter informing it that they could not take appropriate
action on the insured’s claim because the attending adjuster was
still negotiating the case. It was held that prescription has not set
in.201
c. Subrogation
155. What is subrogation? What is the statutory basis of the right of
the insurer to subrogation?
The basis of subrogation is Article 2207 of the Civil Code of the
Philippines which provides that “if the plaintiffs property has been
insured and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the
rights of the insured against the wrongdoer or the person who has
delated the contract. If the amount paid by the insurance company
!oes not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss of
injury.”
156. Is the consent of the wrongdoer necessary to enable the

insurer to acquire the right of subrogation?
Subrogation does not require the consent of the wrongdoer. It
is an equitable assignment of right that accrues to the insurer after
valid payment is made to the insured as a result of the happening of
the risks insured against.202 Payment by the insurer to the assured
operates as an equitable assignment to the former of all remedies
which the latter may have against the third party whose negligence
or wrongful act caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues simply upon payment
of the insurance claim by the insurer.203
“‘Country Bankers Insurance Corporation v. Travellers Insurance and Surety

Corporation, G.R. No. 82509, August 16,1989.
“2BAR 2014.
203Pan Malayan Insurance Corporation v. Court of Appeals, el al., G.R. No.
81026, April 3, 1990. Aboitiz Shipping Corporation V. Insurance Company of North
America, G.R. No. 168402, August 6, 2008. Philippine American General Insurance
Company, Inc. v. Court of Appeals, el al., G.R. No. 116940, June 11, 1997; Equitable
Insurance Corporation v. Transmodal International, Inc., G.R. No. 223592, August
7, 2017.
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I. INSURANCE 99
The doctrine of subrogation has its roots in equity. It is

designed to promote and to accomplish justice; and is the mode that
equity adopts to compel the ultimate payment of a debt by one who,
in justice, equity, and good conscience, ought to pay.20'
In other words, where the insurer was made to pay the insured
for a loss covered by the insurance contract, such insurer can run
after the third person who caused the loss through subrogation. The
basis for conferring the right of subrogation to the insurer is the
equitable assignment that results from the insurer’s payment of the
insured.206
157. Is the consent of the insured necessary for the right of

subrogation to exist?
No, after payment to the insured, the insurer is entitled to
go after the person that violated its contractual commitment to
answer for the loss insured against. As previously stated, when the
insurance company pays for the loss, such payment operates as an
equitable assignment to the insurer of the property and all remedies
which the insured may have for the recovery thereof. That right is
not dependent upon, nor does it grow out of, any privity of contract,
or upon written assignment of claim, and payment to the insured
makes the insurer an assignee in equity.206
158. L" borrows P50,000.00 from "M" payable 360 days after date,
at 12% interest per annum. To secure the loan, "L" mortgages
his house and lot in favor of "M" To protect himself from certain
contingencies, "M" insures the house for the full amount of
the loan with Rock Insurance Company. A fire breaks out and
burns the house and "M” collects from the insurance company
the full value of the insurance.
Upon maturity of the loan, the insurance company
demands payment from "L" The latter refuses to pay on the
ground that the loan had been extinguished by the insurance
payment which "M" received from the insurance company.
He argues that he has not entered into any loan or contract
204Malayan Insurance Co., Inc. v. Rodelio Alberto, et al., G.R. No. 194320,
February 1, 2012.
205BAR 2011.
“Fireman’s Fund Insurance Company v. Jamila & Company, Inc., G.R. No.
L-27427, April 7, 1976.
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of whatever nature with the insurance company. He further

contends that it is bad enough to lose a house but it is worse
if one has to pay off a paid obligation to somebody who has
not extended any loan to him. Besides, he states, that the
insurance payment should inure to his benefit because he
owns the house.
Pass upon the merits of "L’s" contentions.
Neither the loan of L was extinguished by the insurance
payment which M received from the insurance company; nor the
insurance payment inures to L’s benefit; what was then insured was
the interest of M, the secured creditor, and not the interest of L, so
the proceeds shall be applied exclusively to the proper interest of M.
L’s argument that he has not entered into any loan or contract
of whatever nature with the insurance company is also untenable.
When the secured creditor’s interest in the mortgaged property of
the mortgagor, L, was insured and said property would be burned,
he insurance company had to pay the insured, M, and payment by
lie insurer to the insured creates legal subrogation and makes the
usurer an assignee on equity to run after the mortgagor, L. Said
right of the insurer is not dependent upon nor does it grow out of,
any privity of contract, or upon written assignment of claim, and
payment to insured makes the insurer an assignee in equity; thus,
L’s consent to said subrogation is not necessary.207
159. Honda Trading Phils. Ecozone Corporation (Honda Trading)

ordered 80 bundles of Aluminum Alloy Ingots. The goods were
loaded in two container vans which were, in turn, received in
Jakarta, Indonesia by Nippon Express Co., Ltd. for shipment
to Manila. Aside from insuring the entire shipment with Tokio
Marine & Nichido Fire Insurance Co., Inc. (TMNFIC), Honda
Trading also engaged the services of Keihin-Everett to clear
and withdraw the cargo from the pier and to transport and
deliver the same to its warehouse at Laguna. Meanwhile,
Keihin-Everett had an Accreditation Agreement with Sunfreight
Forwarders whereby the latter undertook to render common
carrier services for the former and to transport inland goods
within the Philippines.
207Article 2207, N.C.C.; Fireman’s Fund Insurance Co. v. Jamila & Co., G.R.
No. L-1976, April 7,1976; BAR 1980.
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I. INSURANCE 101
The shipment arrived in Manila and was caused to be

released from the pier by Keihin-Everett and turned over to
Sunfreight Forwarders for delivery to Honda Trading. En route
to the latter's warehouse, the truck carrying the containers was
hijacked and the container van was reportedly taken away.
Claiming to have paid Honda Trading's insurance claim
for the loss it suffered, Tokio Marine filed a complaint for
damages against Keihin-Everett. Tokio Marine maintained that
it had been subrogated to all the rights and causes of action
pertaining to Honda Trading. Keihin-Everett denied liability for
the lost shipment on the ground that the loss thereof occurred
while the same was in the possession of Sunfreight Forwarders.
Is subrogation proper?
Yes, the Insurance Policy itself expressly made Tokio Marine
as the party liable to pay the insurance claim of Honda Trading
pursuant to the Agency Agreement entered into by and between
Tokio Marine and TMNFIC. The Agency Agreement shows that
TMNFIC had subsequently changed its name to that of Tokio
Marine. By agreeing to this stipulation in the Insurance Policy,
Honda Trading binds itself to file its claim with Tokio Marine and
thereafter to accept payment from it. Since the insurance claim
for the loss sustained by the insured shipment was paid by Tokio
Marine as proven by the Subrogation Receipt — showing the amount
paid and the acceptance made by Honda Trading, it is inevitable
that it is entitled, as a matter of course, to exercise its legal right to
subrogation as provided under Article 2207 of the Civil Code.208
160. How much may the insurer recover from the wrongdoer as a
result of subrogation?
The insurer, after paying the claim of the insured under the
insurance policy, is subrogated merely to the rights of the assured.
As subrogee, it can recover only the amount that is recoverable by the
latter. In one case, a shipment was covered by a bill of lading which
stipulated, among others, that the carrier’s liability with respect to
lost or damaged shipments is expressly limited to the C.I.F. value of
the goods, upon arrival at the Port of Manila, several cartons were
received in bad order condition, hence the consignee filed a claim
208Keihin-Everett Forwarding v. Tokio Marine Malayan Insurance, et al., G.R.

No. 212107, October 28, 2019.
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with the carrier as well as the insurer but the carrier refused, so it
was the insurer that paid the value of the insured goods, including
other expenses in connection therewith. Thereafter, the insurer sued
the carrier, to collect what it paid the insured. It was held that after
paying the claim of the insured for damages under the insurance,
the insurer is subrogated merely to the rights of the insured. As
subrogee, it can recover only the amount that is recoverable by the
latter. Since the right of the assured is limited by the provisions in
the bill of lading, a suit by the insurer as a subrogee is necessarily
subject to like limitations.209
In another case, it was held that the failure of the insurer to
present sufficient proof that the subrogor sustained damages, which
would have entitled it to indemnity, precludes recovery on the part of
the insurer. The rights of a subrogee cannot be superior to the rights
possessed by a subrogor. Consequently, an insurer indemnifies the
insured based on the loss or injury the latter actually suffered from,
f there is no loss or injury, then there is no obligation on the part
f the insurer to indemnify the insured. Should the insurer pay the
.nsured and it turns out that indemnification is not due, or if due,
the amount paid is excessive, the insurer takes the risk of not being
able to seek recompense from the alleged wrongdoer.210
In this particular case, the Philippine Associated Smelting
and Refining Corporation (PASAR) had not established by an
iota of evidence the amount of loss or actual damage it suffered
by reason of seawater wettage of the 777.29 metric tons of copper
concentrates. In spite of no proof of loss, Malayan paid the claim of
PASAR in the amount of P33,934,948.75. The Supreme Court ruled
that Malayan cannot make the common carrier answerable for its
mistake in indemnifying PASAR. This is in line with the principle
that a subrogee steps into the shoes of the insured and can recover
only if the insured likewise could have recovered.211
■“St. Paul Fire & Marine Insurance Co. v. Macondray & Co., Inc., el al., G.R.
No. L-27796, March 25,1976.
2l0Loadatar Shipping Company v. Malayan Insurance, G.R. No. 185565,
November 26,2014.
21lLoadstar Shipping Company and Loadstar International Company v.
Malayan Insurance, ibid.
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I. INSURANCE 103
161. In what instances is the insurer not entitled to the right of

subrogation?
The insurer is not entitled to the right of subrogation in
the following cases:
i. In life insurance, because subrogation exists only when

insurance is contract of indemnity.
162. A helicopter of ABC Co. collided with XYZ's tramway steel

cables in its logging area in Surigao resulting in the destruction
of the helicopter and death of two pilots. ABC Co. insured
at its expense the helicopter for P8,000,000.00 and the two
pilots for P5,00,000.00 [sic] each, and as a result of the crash,
the insurer paid ABC Co. a total indemnity of P18.000,000.00.
Nevertheless, ABC Co. sustained additional damages of about
PI,000,000.00 which were not covered by insurance.
a. ABC Co. sued XYZ to recover not only the additional
damages, but also the amount which was already
compensated by the insurer. Decide. Give reasons.
b. What right/recourse, if any, has the insurer in order to
be reimbursed for the amount it paid to ABC Co.? Give
reasons.
Answer:
a. ABC Co. may bring the action against XYZ for its claim
for the additional damages not covered by insurance,
but not for the amount already paid by the insurer. If
a property is insured and the owner received indemnity
from the insurer, the latter is deemed subrogated to the
rights of the insured against the wrongdoer, and if the
amount paid by the insurer does not fully cover the loss,
then the aggrieved party is the one entitled to recover the
deficiency.
To allow ABC Co. to bring an action against XYZ
for the amount already paid by the insurer will result in
unjust enrichment and violate the indemnity principle of
an insurance contract.
b. The insurer is deemed subrogated to the rights of ABC Co.
against XYZ to the extent of P8,000,000 insurance paid
for the helicopter only, but not for the life insurance of the
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1
104 D1V1NA ON COMMERCIAL LAW:

two dead pilots, since subrogation in the New Civil Code

refers only to property, and not to the life insurance.212
ii. When the proximate cause of the loss was the
negligence of the insured himself. The insured can
recover because only gross negligence bars recovery
but there is no subrogation if there is no wrongdoer
or violator of the contract.
iii. When the insurer pays the insured for a loss due to
a risk not covered by the policy or payment should
not have been made at all because there is no loss,
thereby effecting voluntary payment.213
iv. Where the insurer pays the assured the value of the
lost goods without notifying the carrier who has in
good faith settled the assured’s claim for loss, the
settlement is binding on both the assured and the
insurer, and the latter cannot bring an action against
the carrier on his supposed right of subrogation.213
v. When the insured releases the wrongdoer, the
insurer is released from liability. If the release was
done after the insured received the payment from
the insurer, insurer can recover from insured.
If the insured received partial indemnity amount from the
wrongdoer but the latter was completely released by the insured,
the latter cannot recover the deficiency from the insurer.
163. Manila Mahogany Manufacturing Corporation insured its

Mercedes Benz car with Zenith Insurance Corporation. The car
was bumped and damaged by a truck owned by San Miguel
Corporation (SMC). For the damage caused, Zenith Insurance
paid Manila Mahogany. However, Zenith Insurance was not able
to collect from SMC, because it so happened that SMC already
paid Manila Mahogany for which it executed a release claim
212Philippine Air Lines, Inc. v. Herald Lumber Co., G.R. L-11497, August 16,
1957; for both 1 and 2 answers; BAR 1978.
213Pan Malayan Insurance Corporation v. Court of Appeals, et al., G.R. No.
81026, April 3,1990.
21<Pan Malayan Insurance Corporation v. Court of Appeals, et al., G.R. No.
81026, April 3,1990.
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I. INSURANCE 105
discharging SMC from all actions or claims. Hence, Zenith

Insurance demanded for the return of the money it paid Manila
Mahogany, but the latter refused prompting Zenith Insurance
to file a complaint against Manila Mahogany.
Is Zenith entitled to the return of the money?
Yes. The right of subrogation can only exist after the insurer
has paid the insured. If the insurance proceeds are not sufficient to
cover the damages suffered by the insured, then he may sue the party
responsible for the damage for the remainder. Since the insurer can
be subrogated to only such rights as the insured may have, should
the insured, after receiving payment from the insurer, release the
wrongdoer who caused the loss, the insurer loses his rights against
the latter. But in such a case, the insurer will be entitled to recover
from the insured whatever it has paid to the latter, unless the
release was made with the consent of the insurer.215
164. In marine insurance, is presentation of the insurance policy

necessary for subrogation?
No, in one case, it was held that presentation of the marine
insurance policy is not indispensable before the insurer may recover
from the common carrier the insured value of the lost cargo in the
exercise of its subrogatory rights. The subrogation receipt is sufficient
to establish not only the relationship of the insurer and the assured,
but also the amount paid to settle the insurance claim.216
But the Supreme Court ruled differently in a subsequent case.
165. Eastern Shipping Lines is being sued by Prudential Guarantee

and Assurance Inc. through its right of subrogation. This is on
account of the damage sustained by the policy holder, Nissan
Corp. It is the contention of Eastern Shipping that Prudential
cannot sue based on its right of subrogation because the
insurance policy was never presented by the respondent.
Is there subrogation?
215Manila Mahogany Manufacturing Corporation v. Court of Appeals, G.R. No.

L-52756, October 12, 1987; BAR 1994.
216Delsan Transport Lines v. Court of Appeals, G.R. No. 127897, November
15, 2001.
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1

No. Marine insurance policy needs to be presented in evidence

before the trial court or even belatedly’ before the appellate court. The
presentation of the marine insurance policy was necessary, as the
issues raised therein arose from the very existence of an insurance
contract between the insurer and the insured. Presentation or
attaching the insurance policy in a complaint filed by the insurance
company against another on account of its right of subrogation is
an indispensable requirement. Failure to present the pohcy would
warrant the dismissal of the complaint.2"
Nevertheless, the rule is not inflexible. By way of exception,
when the defendant fails to timely put in issue the need for
the presentation of the insurance policy to prove one’s right to
subrogation, it is deemed barred from pleading the absence of the
insurance pohcy on appeal.218
It is submitted that in marine insurance, while subrogation
akes effect by operation of law the moment the insurer vahdly
jays the insured, the document evidencing the right of subrogation
should, nevertheless, be presented to prove the right of subrogation,
unless the defendant fails to timely put it in issue.
166. Within what period should the right of subrogation be

exercised?
In Vector Shipping Corporation v. American Home Assurance
Company,2'3 the Supreme Court ruled that after payment by the
insurer to the insured, it is subrogated to the rights of the latter.
Its right of subrogation under Article 2207 of the Civil Code in
relation to Article 1144 gives rise to a cause of action created by
law. The prescriptive period for cause of action based on law (such
as subrogation) is 10 years. Thus, the insurer has 10 years from
the date it indemnified the insured to file the action against the
wrongdoer.
However, the Supreme Court abandoned the Vector ruling
in Vicente Henson, Jr. u. UCPB General Insurance,220 an en banc
decision, where it was held the insurer only steps into the shoes of the
21'Eastern Shipping Lines, Inc. v. Prudential Guarantee and Assurance, Inc.,

G.R. No. 174116, September 11, 2009.
218Asian Terminals, Inc. v. First Lepanto Taisho Insurance, G.R. No. 185964,
June 16, 2014,
219G.R. No. 159213, July 3,2013.
220G.R. No. 223134, August 14,2019.
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I. INSURANCE 107
insured. No new obligation was created between the insurer and the
wrongdoer. The rights of a subrogee cannot be superior to the rights
possessed by a subrogor. Therefore, for purposes of prescription, the
insurer inherits only the remaining period within which the insured
may file an action against the wrongdoer. The Supreme Court said,
however, that the Henson doctrine is prospective in application.
The facts of this case are as follows:
From 1989 to 1999, National Arts Studio and Color Lab
(NASCL) leased the front portion of a two-storey building owned
by Vicente Henson Jr. (Henson). In 1999, NASCL gave up its lease
and instead leased the right front portion and the entire second-
floor of the building. Meanwhile, Copylandia Office Systems Corp.
(Copylandia) moved in to the ground floor.
A water leak occurred in the building causing injury to the
various equipment of Copylandia. As the said equipment were
insured, Copylandia filed a claim with its insurer, UCPB General
Insurance Co., Inc. (UCPB). UCPB paid the claim and, as subrogee,
demanded from NASCL for the amount of the payment it made.
Since the demand proved to be futile, UCPB filed a complaint for
damages against NASCL.
Meanwhile, Henson transferred ownership of the building
to Citrinne Holdings, Inc. (CHI), where he was a stockholder and
President. UCPB amended its complaint impleading CHI as a
defendant. Thereafter, UCPB filed a motion praying Henson, instead
of CHI, be impleaded as a defendant. CHI opposed the complaint
on the ground of prescription, arguing that since UCPB’s cause of
action is based on quasi-delict, it must be brought within four (4)
years from its accrual on May 9, 2006.
On the issue of whether the claim of UPCB already prescribed,
the Supreme Court ruled that the claim has not yet prescribed
following the Vector ruling. Although in this case, the Court deemed
it necessary to abandon the ruling in Vector that an insurer may
file an action against the tortfeasor within 10 years from the time
the insurer indemnifies the insured, the abandonment of the
Vector doctrine should be prospective in application for the reason
that judicial decisions applying or interpreting the laws or the
Constitution, until reversed, shall form part of the legal system of
the Philippines.
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The rule now is, following the principles of subrogation, the

insurer only steps into the shoes of the insured. No new obligation
was created between the insurer and the wrongdoer. The rights of a
subrogee cannot be superior to the rights possessed by a subrogor.
Therefore, for purposes of prescription, the insurer inherits only
the remaining period within which the insured may file an action
against the wrongdoer. The indemnification of the insured by the
insurer only allows it to be subrogated to the former’s rights, and
does not create a new reckoning point for the cause of action that
the insured originally has against the wrongdoer. Thus, applying
prospectively, the prescription period to claim indemnification from
a tortfeasor is only four (4) years.221
This should mean that if tortious act was committed on
January 8, 2020, the insured party has up to January 8, 2024 to file
the complaint for against the tortfeasor. If the insurer pays the the
insured on June 8, 2020, the insurer does not have a fresh period of
four years from June 8, 2020 to enforce its right of subrogation but
mly the remaining period from June 8, 2020 to January 8, 2024.
H. Classes
1. Marine
a. Coverage
167. What is marine insurance?
Marine insurance is a type of insurance against loss or damage to:
“(1) Vessels, craft, aircraft, vehicles, goods, freights,
cargoes, merchandise, effects, disbursements, profits, moneys,
securities, choses in action, instruments of debts, valuable
papers, bottomry, and respondentia interests and all other kinds
of property and interests therein, in respect to, appertaining to
or in connection with any and all risks or perils of navigation,
transit or transportation, or while being assembled, packed,
crated, baled, compressed or similarly prepared for shipment
or while awaiting shipment, or during any delays, storage,
transshipment[sic], or reshipment incident thereto, including
war risks, marine builder’s risks, and all personal property
floater risks;
“'Vicente Henson, Jr. UCPB General Insurance Co., G.R. No. 223134,
August 14, 2019.
J9JC9B0M
I. INSURANCE 109
“(2) Person or property in connection with or appertaining

to a marine, inland marine, transit or transportation
insurance, including liability for loss of or damage arising out
of or in connection with the construction, repair, operation,
maintenance or use of the subject matter of such insurance
(but not including life insurance or surety bonds nor insurance
against loss by reason of bodily injury to any person arising out
of ownership, maintenance, or use of automobiles);
“(3) Precious stones, jewels, jewelry, precious metals,
whether in course of transportation or otherwise; and
“(4) Bridges, tunnels and other instrumentalities of
transportation and communication (excluding buildings, their
furniture and furnishings, fixed contents and supphes held
in storage); piers, wharves, docks and slips, and other aids to
navigation and transportation, including dry docks and marine
railways, dams and appurtenant facilities for the control of
waterways.
It also covers marine protection and indemnity insurance,
meaning insurance against, or against legal liability of the insured
for loss, damage, or expense incident to ownership, operation,
chartering, maintenance, use, repair, or construction of any vessel,
craft or instrumentality in use of ocean or inland waterways,
including liability of the insured for personal injury, illness or death
or for loss of or damage to the property of another person.
Tersely put, a marine insurance is an insurance against loss or
damage to any kind of property or loss of life or injury to person in
connection with any and all risks or peril of navigation, transit or
transportation.
168. Who has insurable interest in marine insurance?

a. The shipowner has in all cases an insurable interest in
the ship, even when it has been chartered by one who
covenants tp pay him its value in case of loss: Provided,
That in this case the insurer shall be Hable for only that
part of the loss which the insured cannot recover from the
charterer.222
‘■“Section 102, IC.
J9JC9B0M
If the ship is hypothecated by bottomry, the

insurable interest of the shipowner is only the excess of
its value over the amount secured by bottomry.223
The shipowner has insurable interest likewise in freightage.
Freightage, in the sense of a policy of marine insurance, signifies all
the benefits derived by the owner, either from the chartering of the
ship or its employment for the carriage of his own goods or those of
others.-*
The owner of a ship has an insurable interest in expected
freightage which according to the ordinary and probable course
of things he would have earned but for the intervention of a peril
insured against or other peril incident to the voyage.225
The shipowner also has insurable interest on the cargo or
goods loaded into the ship and subject by a contract of carriage. His
insurable interest is the extent he will be damnified if the goods are
damaged or lost.
b. The cargo owner has insurable interest over the cargo
subject of a contract of transportation.
c. The charterer of the ship has an insurable interest in it,
to the extent that he is liable to be damnified by its loss.226
Thus, he has insurable interest on the ship to
the extent that he will be damnified in case of loss or
destruction thereof.
He likewise has insurable interest on the cargo
loaded on the chartered vessel if it is covered by a contract
of carriage between the charterer and the cargo owner.
169. In marine insurance, what peril may be insured against?

As a rule, only perils of the sea may be insured against. To
recover under a marine insurance policy, the proximate cause of the
loss must be perils of the sea. The insurer is not liable if the loss is
due to ordinary, natural and inevitable action of the sea, ordinary
wear and tear and unseaworthiness.22’ Loss due to unseaworthiness
is tantamount to perils of the ship.

“'’Section 108, IC.
“’2011 Bar.
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I. INSURANCE 111
However, if the parties agreed on an all risk policy, all losses

connected with the voyage or transportation may be covered unless
expressly excepted.
170. Define perils of the sea.

Perils of the sea or perils of navigation pertain to casualties
arising from the unusual violence or extraordinary causes connected
with navigation. It includes such losses as are of extraordinary
nature which cannot be guarded against by the ordinary exertion of
human skill or prudence, as distinguished from the ordinary wear
and tear of the voyage and from injuries suffered by the vessel in
consequence of her not being unseaworthy.228
171. Is the rusting of steel pipes in the course of voyage a "peril of

the sea"?
Yes, rusting of steel pipes in the course of voyage a “peril of
the sea” in view of the toll on the cargo of wind, water, and salt
conditions.229
172. Define perils of the ship.

Perils of the ship refer to losses which in the ordinary course of
events result from the ordinary, natural and inevitable action of the
sea, or from ordinary wear and tear of the ship, or from the negligent
failure of the ship’s owner to provide the vessel with the adequate
crew complement and proper equipment to convey the cargo under
ordinary conditions.
173. Cite examples of Perils of the Ship.

•
a. Sinking of the vessel due to improper loading of the logs
on one side so that the barge was tilting on one side and
for that it did not navigate on even keel and developed a
leak.230
“8La Razon v. Union Insurance, G.R. No. 139983, September 1, 1919.

229Cathay Insurance Co. V. Hon. Court of Appeals and Remington Industrial
Sales Corporation, G.R. No. 76145, June 30, 1987.
230Roque v. IAC.
J9JC9B0M
b. The captain was inexperienced or with expired license or

in case of deep seated anger by the crew against the ship
captain, or when the crew unbolted the sea valve of the
vessel causing water to flood the ship hold.231
C. Roof deck cargo, reconfiguration of the roof deck
to accommodate more passengers, lack of weather
monitoring equipment, and not enough life jackets.
d. Seawater entered the compartment where the cargo was
stored because of defective drainpipe of the ship.
e. Engine pipes leaked and the oil seeped into the cargo
compartment and the leakage was caused by the extensive
mileage that the ship had accumulated.232
f. The porthole was not secured at the port of departure.233
g- Strong winds and waves are not automatically considered
perils of the sea if these conditions are not unusual for
that particular area at that specific time or if they could
have reasonably been anticipated. Under these conditions,
strong winds and waves are perils of the ship.234
174. What is an "all risks" policy?

An “all risks policy” should be read literally as meaning all
risks whatsoever and covering all losses by an accidental cause of
any kind. The terms have been taken to mean that which happens
by chance or fortuitously, without intention and design, and which
is unexpected, unusual and unforeseen. A marine insurance policy
providing that the insurance was to be “against all risks” must be
construed as creating a special insurance and extending to other
risks than are usually contemplated. The very nature of the term
“all risks” must be given a broad and comprehensive meaning as
covering any loss other than a willful and fraudulent act of the
insured.
Generally, the burden of proof is upon the insured to show
that a loss arose from a covered peril, but under an “all risks” policy
the burden is not on the insured to prove the precise cause of loss
“‘2010 Bar.
2322011 Bar.
“iSSS Bar.
“’Transimex v. Mafre Insurance Corporation, September 14, 2016.
J9JC9B0M J
I. INSURANCE 113
or damage for which it seeks compensation. The insured under an

“all risks insurance policy” has the initial burden of proving that
the cargo was in good condition when the policy attached and that
the cargo was damaged when unloaded from the vessel; thereafter,
the burden then shifts to the insurer to show the exception to the
coverage. In the present case, there being no showing that the loss
was caused by any of the excepted perils, the insurer is liable under
the policy.235
175. Hongkong Government Supplies Department (Hongkong)

contracted with Mayer Steel Pipe Corporation (Mayer) to
manufacture and supply various steel pipes and fittings.
Mayer shipped the pipes and fittings to Hongkong. Prior to
the shipping, Mayer insured the pipes and fittings against all
risks with South Sea Surety and Insurance Co, Inc. (South Sea)
and Charter Insurance Corp. (Charter). It was certified that
the pipes and fittings were in good condition before they were
loaded in the vessel.
When the goods reached Hongkong, it was discovered
that a substantial portion thereof was damaged. Mayer filed
a claim for indemnity under the insurance contract. South Sea
and Charter refused to pay because the insurance surveyor's
report allegedly showed that the damage is a factory defect.
RTC noted that the insurance contracts executed by
Mayer, South Sea and Charter are "all risks" policies which
insure against all causes of conceivable loss or damage. The
only exceptions are those excluded in the policy, or those
sustained due to fraud or intentional misconduct on the part
of the insured. CA set aside the complaint on the ground of
prescription. It held that the action is barred under Section 3(6)
of the Carriage of Goods by Sea Act since it was filed more
than two years from the time the goods were unloaded from
the vessel. It ruled that this provision applies not only to the
carrier but also to the insurer.
Are South Sea and Charter liable?
235Filipino Merchants Insurance Co., Inc. v. Court of Appeals, et al., G.R. No.
85141, November 28, 1989; Choa Tiek Seng, doing business under the name and style
of Seng’s Commercial Enterprises v. Court of Appeals, et al., G.R. No. 84507, March
15,1990.
J9JC9B0M
Yes. South Sea and Charter are liable under the all-risk marine
insurance policy which covers all kinds of loss other than those due
to willful and fraudulent act of the insured. Under the Carriage
of Goods by Sea Act, only the carrier’s liability is extinguished if
no suit is brought within one year. But the liability of the insurer
is not extinguished because the insurer’s liability is based not on
the contract of carriage but on the contract of insurance. A close
reading of the law reveals that the Carriage of Goods by Sea Act
governs the relationship between the carrier on the one hand and
the shipper, the consignee and/or the insurer on the other hand. It
defines the obligations of the carrier under the contract of carriage.
It does not, however, affect the relationship between the shipper and
the insurer. The latter case is governed by the Insurance Code. In
the case at bar, it was the shipper which filed a claim against the
insurer. The basis of the shipper’s claim is the “all risks” insurance
policies issued by South Sea and Charter to Mayer.236
As previously noted, the prescriptive period to file a suit against
the insurer is ten years from accrual of the insured’s cause of action,
unless the policy reduces the period to not less than one year from
accrual of cause of action.
176. Absolute Timber Co. (ATC) has been engaged in the logging
business in Isabela. To secure one of its shipments of logs
to be transported by Andok Shipping Co., ATC purchased a
marine policy with an "all risks" provision. Because of a strong
typhoon then hitting Northern Luzon, the vessel sank and
the shipment of logs was totally lost. ATC filed its claim, but
the insurer denied the claim on several grounds, namely: (1)
the vessel had not been seaworthy; (2) the vessel’s crew had
lacked sufficient training; (3) the improper loading of the logs
on only one side of the vessel had led to the tilting of the ship to
the other side during the stormy voyage; and (4) the extremely
bad weather had been a fortuitous event.
ATC now seeks your legal advice to know if its claim was
sustainable. What is your advice? Explain your answer.
ATC’s claim is sustainable. The all-risk policy that ATC
procured from the insurer insures against all causes of conceivable
■“Mayer Steel Pipe Corp. v. Court of Appeals and South Sea Surety, G.R. No.
124050, June 19,1997.
J9JC9B0M ■
I. INSURANCE 115
loss or damage except when the loss or damage was due to fraud or
intentional misconduct committed by ATC. The grounds of denial
that the insurer invoked are not due to the fraud or intentional
misconduct of the insurer.237
177. What is "barratry" in marine insurance?

Barratry is any willful misconduct on the part of the master
or the crew in pursuance of some unlawful or fraudulent purpose
without the consent of the owner and to the prejudice of the interest
of the owner.238
178. What are the implied warranties in marine insurance?

The following warranties are implied in marine insurance:
a. That the ship is seaworthy to make the voyage and/or to
take in certain cargoes;239
b. That the ship shall not deviate from the voyage insured;240
c. That the ship shall carry the necessary documents to
show nationality or neutrality and that it will not carry
document which will cast reasonable suspicion thereon;241
d. That the ship shall not carry contraband, especially if it is
making voyage through belligerent waters.242
179. When is a ship seaworthy?

A ship is seaworthy when it is reasonably fit to perform
the service and to encounter the ordinary perils of the voyage
contemplated by the parties to the policy.243 A warranty of
seaworthiness extends not only to the condition of the structure of
the ship itself, but requires that it be properly laden, and provided
with a competent master, a sufficient number of competent officers
and seamen, and the requisite appurtenances and equipment, such
237New World International Development v. NYK FilJapan Shipping

Corporation, 656 SCRA 129; BAR 2017.
“"BAR 2010.
“‘Section 122, IC.
“2BAR 2000.
“"Section 116, IC.
J9JC9B0M
as ballasts, cables and anchors, cordage and sails, food, water, fuel
and lights, and other necessary or proper stores and implements for
the voyage/"
Wien the ship becomes unseaworthy during the voyage to
which an insurance relates, an unreasonable delay in repairing the
defect exonerates the insurer on ship or shipowner’s interest from
liability from any loss arising therefrom.2'6
180. Manila Bay, a common carrier, entered into a contract with

Isabel Roque, doing business under the name and style of
Isabela Roque Timber (Isabel) whereby Manila Bay will load
and carry on board its barge wooden logs from Palawan to
Manila. Thereafter, Isabel insured the logs against loss with
Pioneer.
Thereafter, during the voyage for the delivery of the
aforementioned logs, the ship of Manila Bay sank, rendering
the delivery of the wooden logs to Manila impossible. This
prompted Isabel to demand from Manila Bay payment for the
loss of the shipment plus costs for unrealized profits. However,
Manila Bay ignored Isabel’s demand.
Thereafter, Isabel demanded from Pioneer payment for the
lost logs pursuant to the insurance policy but Pioneer refused
on the ground that there was a breach of implied warranty of
seaworthiness on the part of Isabel, hence not covered by the
marine insurance policy. Is Pioneer liable for payment under
the marine insurance policy?
No, Pioneer is not liable for payment under the marine
insurance policy. Section 113 of the Insurance Code provides: In
every marine insurance upon a ship or freight, or freightage, or upon
anything which is the subject of marine insurance, a< warranty is
implied that the ship is seaworthy.
Since the law provides for an implied warranty of seaworthiness
in every contract of ordinary marine insurance, it becomes the
obligation of a cargo owner to look for a reliable common earlier
which keeps its vessels in seaworthy condition. The shipper of cai go
may have no control over the vessel but he has full control in the
“''Section 118, IC.

J9JC9B0M
I. INSURANCE 117
choice of the common carrier that will transport his goods. Or the
cargo owner may enter into a contract of insurance which specifically
provides that the insurer answers not only for the perils of the sea
but also provides for coverage of perils of the ship.
Moreover, the fact that the unseaworthiness of the ship was
unknown to the insured is immaterial in ordinary marine insurance
and may not be used by him as a defense in order to recover on the
marine insurance policy.2,16
181. Paolo, the owner of an ocean-going vessel, offered to transport

the logs of Constantino from Manila to Nagoya. Constantino
accepted the offer, not knowing that the vessel was manned by
an irresponsible crew with deep-seated resentments against
Paolo, their employer.
Constantino insured the cargo of logs against both perils
of the sea and barratry. The logs were improperly loaded on
one side, thereby causing the vessel to tilt on one side. On the
way to Nagoya, the crew unbolted the sea valve of the vessel
causing water to flood the ship hold. The vessel sank.
Constantino tried to collect from the insurance company
which denied liability, given the unworthiness of both the
vessel and its crew.
Constantino countered that he was not the owner of the
vessel and he could therefore not be responsible for conditions
about which he was innocent.
Is the insurance company liable?
No. the insurance company is not liable because there is
an implied warranty in every marine insurance that the ship
is seaworthy whoever is insuring the cargo, whether it be the
shipowner or not. There was a breach of warranty, because the logs
were improperly loaded and the crew was irresponsible. It is the
obligation of the owner of the cargo to look for a reliable common
carrier which keeps its vessel in seaworthy condition.247
240Isabela Roque, doing business under the name and style of Isabela Roque
Timber Enterprises and Ong Chiong v. Hon. Intermediate Appellate Court and
Pioneer Insurance and Surety Corporation, G.R. No. L-66935, November 11, 1985.
247BAR 2010.
J9JC9B0M
1

182. On October 30, 2007, M/V Pacific, a Philippine registered

vessel owned by Cebu Shipping Company (CSC), sank on her
voyage from Hong Kong to Manila. Empire Assurance Company
(Empire) is the insurer of the lost cargoes loaded on board the
vessel which were consigned to Debenhams Company. After it
indemnified Debenhams, Empire as subrogee filed an action
for damages against CSC.
a. Assume the vessel was not seaworthy as in fact its hull
had leaked, causing flooding in the vessel. Will your
answer be the same? Explain.
b. Assume the facts in question b). Can the heirs of the
three (3) crew members who perished recover from CSC?
Explain fully.
Answer:
a. No, my answer will be different. Allowing the vessel to
depart on a voyage when it is not seaworthy is a violation
of the implied warranty of seaworthiness, and thus
constitutes negligence on the part of owner of the ship
and the ship captain.
b. Yes, the heirs of the three (3) crew members who perished
can recover from CSC. The hypothecary principle in
maritime commerce limiting the liability of the shipowner
to his interest in the vessel does not apply if the shipowner
is at fault for not making the vessel seaworthy and/or for
claims of crewmembers.248
183. What is deviation in the context of marine insurance?

Deviation is a departure from the course of the voyage
insured or an unreasonable delay in pursuing the voyage or the
commencement of an entirely different voyage.249
184. What is the voyage insured?

When the voyage contemplated by a marine insurance policy is
described by the places of beginning and ending, the voyage insured
is one which conforms to the course of sailing fixed by mercantile
usage between those places.™
24“BAR2008.
“Section 125, IC.
J9JC9B0M
I. INSURANCE 119
If the course of sailing is not fixed by mercantile usage, the

voyage insured by a marine insurance policy is that way between the
places specified, which to a master of ordinary skill and discretion,
would mean the most natural, direct, and advantageous.251
185. What is the legal effect of an improper deviation?

An insurer is not liable for any loss happening to the thing
insured subsequent to an improper deviation.252
Stated differently, the insurer is liable for any loss to the thing
insured if the deviation is proper.
186. Under what circumstances can a vessel properly proceed to a

port other than its port of destination? Explain.
A vessel can properly proceed to a port other than its port of
destination in the following cases:
a. When caused by circumstances over which neither the
master or the owner of the ship has any control;
b. When necessary to comply with a warranty, or to avoid a
peril, whether or not the peril is insured against;
c. When made in good faith, and upon reasonable grounds of
belief in the necessity to avoid peril;
d. When made in good faith for the purpose of saving human
life or relieving another vessel in distress.253
In the foregoing cases, the deviation is proper.
187. On a clear weather, MV Sundo, carrying insured cargo, left

the port of Manila bound for Cebu. While at sea, the vessel
encountered a strong typhoon forcing the captain to steer
the vessel to the nearest island where it stayed for seven
(7) days. The vessel ran out of provisions for its passengers.
Consequently, the vessel proceeded to Leyte to replenish its
supplies.
“'Section 124, IC.

“Section 128, IC.
“’BAR 2005; Section 126, IC.
J9JC9B0M
Assuming that the cargo was damaged because of such

deviation, who between the insurance company and the owner
of the cargo bears the loss? Explain.
The insurance company should bear the loss. The deviation
was due to a strong typhoon and therefore, caused by circumstances
beyond the control of the captain. The deviation was also needed,
to avoid a peril whether or not insured against. The deviation was
therefore proper.251
188. T, the captain of MV Don Alan, while asleep in his cabin, dreamt
of an Intensity 8 earthquake along the path of his ship. On
waking up, he immediately ordered the ship to return to port.
True enough, the earthquake and tsunami struck three (3) days
later and the ship was saved. Was the deviation proper?
No, because no reasonable ground for avoiding a peril existed
at the time of the deviation.255
189. What are the kinds of loss in marine insurance?

A loss may be either total or partial.256 Every loss which is not
total is partial.257 A total loss may be either actual or constructive.25*
190. When may the insured recover for an actual total loss under a
marine insurance?
The insured may recover for an actual total loss under a marine
insurance in the following cases:
If the actual total loss is caused by:
“(a) Total destruction of the thing insured;
“(b) The irretrievable loss of the thing by sinking, or by
being broken up;
“(c) Any damage to the thing which renders it valueless
to the owner for the purpose for which he held it; or
xxx”
2«2005; 2008 Bar.

“5BAR2011.
“’Section 130, IC.
J9JC9B0M
I. INSURANCE 121
191. RC Corporation purchased rice from Thailand, which it intended

to sell locally. Due to stormy weather, the ship carrying the rice
became submerged in sea water and with it the rice cargo.
When the cargo arrived in Manila, RC filed a claim for total loss
with the insurer, because the rice was no longer fit for human
consumption. Admittedly, the rice could still be used as animal
feed.
Is RC's claim for total loss justified? Explain.
Yes, RC’s claim for total loss is justified. The rice, which was
imported from Thailand for sale locally, is obviously intended for
consumption by the public. The complete physical destruction of the
rice is not essential to constitute an actual loss. Such a loss exists in
this case since the rice, having been soaked in sea water and thereby
rendered unfit for human consumption, has become totally useless
for the purpose for which it was imported.259
“(d) Any other event which effectively deprives the
owner of the possession, at the port of destination, of the thing
insured.260
An actual loss may be presumed from the continued absence of
a ship without being heard of. The length of time which is sufficient
to raise this presumption depends on the circumstances of the case.261
Upon an actual total loss, a person insured is entitled to
payment without notice of abandonment.262
There is also total loss in case of constructive total loss coupled
with abandonment on the part of the insured.263
192. What is abandonment?

Abandonment, in marine insurance, is the act of the insured by
which, after a constructive total loss, he declares the relinquishment
to the insurer of his interest in the thing insured.264
269BAR 1996.
““Sections 133 and 141, IC.
J9JC9B0M
193. When may a person insured by a contract of marine insurance

abandon the thing insured?
A person insured by a contract of marine insurance may
abandon the thing insured, or any particular portion thereof
separately valued by the policy, or otherwise separately insured,
and recover for a total loss thereof, when the cause of the loss is a
peril insured against:
“(a) If more than three-fourths (3/4) thereof in value is
actually lost, or would have to be expended to recover it from
the peril;
“(b) If it is injured to such an extent as to reduce its value
more than three-fourths (3/4);
“(c) If the thing insured is a ship, and the contemplated
voyage cannot be lawfully performed without incurring either
an expense to the insured of more than three-fourths (3/4) the
value of the thing abandoned or a risk which a prudent man
would not take under the circumstances; or
“(d) If the thing insured, being cargo or freightage, and
the voyage cannot be performed, nor another ship procured
by the master, within a reasonable time and with reasonable
diligence, to forward the cargo, without incurring the like
expense or risk mentioned in the preceding subparagraph. But
freightage cannot in any case be abandoned unless the ship is
also abandoned.265
194. WG & A Jebsens Shipmgmt, owner/operator of M/V

"SUPERFERRY 3" and Keppel Cebu Shipyard, Inc. (KCSI)
entered into an agreement for the Drydocking and Repair
of the above-named vessel. In the course of its repair, M/V
"Superferry 3" was gutted by fire. M/V "Superferry 3" suffered
widespread damage from the fire, a covered peril under the
marine insurance policies obtained by WG&A from Pioneer.
The estimates given by the three disinterested and qualified
shipyards show that the damage to the ship would exceed
P270,000,000.00, or 3/4 of the total value of the policies -
P360,000,000.00. Considering the extent of the damage,
WG&A opted to abandon the ship and claimed the value of its
policies.
“‘Section 141, IC,
J9JC9B0M
I. INSURANCE 123
Is there a constructive total loss?

Yes, in marine insurance, a constructive total loss occurs under
any of the conditions: a) If more than three-fourths thereof in value
is actually lost or would have to be expended to recover it from the
peril; or b) If it is injured to such an extent as to reduce its value
more than three-fourths.266
195. An insurance company issued a marine insurance policy

covering a shipment by sea from Mindoro to Batangas of 1,000
pieces of Mindoro garden stones against "total loss only" The
stones were loaded in two lighters, the first with 600 pieces and
the second with 400 pieces. Because of rough seas, damage
was caused the second lighter resulting in the loss of 325
out of the 400 pieces. The owner of the shipment filed claims
against the insurance company on the ground of constructive
total loss inasmuch as more than 3/4 of the value of the stones
had been lost in one of the lighter.
Is the insurance company liable under its policy? Why?
The insurance company is not liable under its policy covering
against “total loss only” the shipment of 1,000 pieces of Mindoro
garden stones. There is no constructive total loss that can be
claimed since the 3/4 rule is to be computed on the total 1,000 pieces
of Mindoro garden stones covered by the single policy coverage.267
196. What are the requisites of a valid abandonment?

The requisites of a valid abandonment are as follows:
1. It must be neither partial nor conditional.266
2. It must be made within a reasonable time after receipt of
reliable information of the loss, but where the information
is of a doubtful character, the insured is entitled to a
reasonable time to make inquiry.269
266Section 139, Insurance Code; Keppel Cebu Shipyard, Inc. v. Pioneer

Insurance and Surety Corporation, G.R. No. 180880-81, September 25, 2009.
26,BAR 1992.
J9JC9B0M
]

3. It is made by giving notice thereof to the insurer, which

may be done orally, or in writing: Provided, That if the
notice be done orally, a written notice of such abandonment
shall be submitted within seven (7) days from such oral
notice.2™
An agent who procured the insurance can also give
notice of abandonment for his principal
4. A notice of abandonment must be explicit, and must
specify the particular cause of the abandonment, but
need state only enough to show that there is probable
cause therefor, and need not be accompanied with proof
of interest or of loss."1
5. It can be sustained only upon the cause specified in the
notice thereof.272
6. It must be accepted by the insurer.
The acceptance of an abandonment may be either
express or imphed from the conduct of the insurer. The
mere silence of the insurer for an unreasonable length of
time after notice shall be construed as an acceptance."3
7. An abandonment once made and accepted is irrevocable,
unless the ground upon which it was made proves to be
unfounded."4
If an insurer refuses to accept a valid abandonment,
he is Hable as upon an actual total loss, deducting from
the amount any proceeds of the thing insured which may
have come to the hands of the insured."6
197. What is the effect of abandonment?

An abandonment which is made after a constructive total loss
entitles the insured to recover for a total loss.
"“Section 145, IC.

"'Section 146, IC.
""Section 147, IC.
"“Section 152, IC.
"'Section 154, IC.
"‘Section 158, IC.
J9JC9B0M
I. INSURANCE 125
On the part of the insurer, an abandonment is equivalent to

a transfer by the insured of his interest to the insurer, with all the
chances of recovery and indemnity.278 If a marine insurer pays for a
loss as if it were an actual total loss, he is entitled to whatever may
remain of the thing insured, or its proceeds or salvage, as if there
had been a formal abandonment.277
198. What is the effect of the omission of the insured to abandon?

He cannot recover for a total loss but he may nevertheless
recover his actual loss.278
199. An inter-island vessel, insured for P2M against "total and

constructive total loss," sank in 150 ft of water 1 mile off
Parahaque during a typhoon. After the typhoon, the ship owner
gave written notice of abandonment of his interest in the entire
sunken ship to the insurance company. Refusing to accept
the offer of abandonment, the insurer hired salvors to refloat
the vessel at a total cost of P40,000.00. Because the refloated
vessel needed repairs, the insurer issued invitations to bid for
repairs. Several firms submitted separate sealed bids ranging
from P1.2M to P1.3M for the complete refurbishing and/or
restoration of the vessel to its original condition. On the basis
of the following facts, the insurance company rejected the
claim of the ship owner for payment of total loss on the ground
that there was no constructive total loss.
a. Was the notice of abandonment given by the owner
properly made? Reason.
b. Is the position of the insurance company as to the absence
of constructive total loss well taken? Reason.
c. Assuming that the ship owner failed to give the proper
notice of abandonment, may he still recover from the
insurer? Why?
278Section 148, IC.

277Section 149, IC.
278Section 157, IC.
J9JC9B0M
1
126 DI VINA ON COMMERCIAL LAW:

Ansiccr: ,,
a. The notice of abandonment made in writing by the
insured to the insurer was sufficient, had the loss been
a constructive total loss, meaning more than 3/4 of the
value of the vessel.2’9
Jih f; ■■■ I !■ :: 'I ■'
b. Yes, the position of the insurance company as to the

absence of constructive total loss is well taken. The sum
total of the damage to the vessel was only Pl,340,000.00
(P40.000.00 for the salvors, and Pl,300.00 for the
restoration of the vessel to its original condition) which
amount is not more than 3/4 of the value of the vessel
(P2M).“»
c. Yes, the shipowner may still recover from the insurer,
his actual loss, the amount of Pl,340,000.00 which is now
only partial loss, being not total loss. But since the said
amount was already spent by the insurer on the vessel,
the insurer is no longer liable to the shipowner, except to
deliver the vessel.“‘
cargo ship of X Shipping Co. ran aground off the coast of

ebu during a storm and lost all its cargo amounting to P50M.
The ship itself suffered damages estimated at P80M. The
cargo owners filed a suit against X Shipping but it invoked the
doctrine of limited liability since its vessel suffered an P80M
amage, more than the collective value of all lost cargo. Is X
Shipping correct?
a. Yes, since under the doctrine, the value of the lost cargo
and the damage to the ship can be set-off.
b. No, since each cargo owner has a separate and individual
claim for damages.
c. Yes, since the extent of the ship’s damage was greater
than that of the value of the lost cargo.
d. No, since X Shipping neither incurred a total loss
nor abandoned its ship.282
"’"Section 139, Corporation Code.

“"Section 139, IC.
“'BAR 1982.
“"BAR 2011.
J9JC9B0M
I. INSURANCE 127
2. Fire
201. Enumerate the perils covered under a fire insurance.
Fire insurance is insurance against loss arising from fire,
lightning, windstorm, tornados, earthquakes and other allied risks,
when such risks are covered by extension to fire insurance policies
or under separate policies.283
While conceptually fire insurance includes allied risks as
enumerated above, the insured may recover only for the risk/s
insured against, as specified in the policy.
Extent of Liability
202. What are the different kinds of insurance policy?
A policy is either open, valued or running.281
An open policy is one in which the value of the thing insured is
not agreed upon, and the amount of the insurance merely represents
the insurer’s maximum liability. The value of such thing insured
shall be ascertained at the time of the loss.286
A valued policy is one which expresses on its face an agreement
that the thing insured shall be valued at a specific sum.286
A running policy is one which contemplates successive
insurances, and which provides that the object of the policy may be
from time to time defined, especially as to the subjects of insurance,
by additional statements or indorsements.287
203. A) Suppose that Fortune owns a house valued at P600.000.00

and insured the same against fire with three (3) insurance
companies as follows:
X------------ P400.000.00
Y P200.000.00
Z P600,000.00
““Section 169, Insurance Code.

“‘Section 59, ibid.
““Section 61, ibid.
“’Section 62, ibid.
J9JC9B0M
1

In the absence of any stipulation in the policies from

which insurance company or companies may Fortune recover
in case fire should destroy his house completely?
B) If each of the fire insurance policies obtained by
Fortune in problem (a) is a valued policy and the value of his
house was fixed in each of the policies at P1M, how much would
Fortune recover from X if he has already obtained full payment
on the insurance policies issued by Y and Z?
C) If each of the policies obtained by Fortune in problem
(a) above is an open policy and it was immediately determined
after the fire that the value of Fortune's house was P2.4M, how
much may he collect from X, Y, and Z?
D) In problem (a), what is the extent of the liability of
the insurance companies among themselves?
E) Supposing in problem (a) above, Fortune was able
to collect from both Y and Z, may he keep the entire amount he
was able to collect from the said two (2) insurance companies?
Explain your answer.
A. Fortune may recover from the insurers in such order as
he may select up to their concurrent liability.
B. Assuming that the real value of the property is P1M,
Fortune may recover only the balance of P200,000.00 from X
Insurance Company since the insured may only recover up to the
extent of his loss.
Assuming that the real value is P600,000.00, having obtained
full payment on the insurance policies issued by Y and Z, Fortune
may no longer recover from X Insurance Company.
C. In an open policy, the insured may recover his total loss
up to the amount of the insurance coverage. Thus, the extent of
recovery would be P400,000.00 from X; P200,000.00 from Y; and
P600,000.00 from Z.
D. In the problem (a), the insurance companies among
themselves would be liable, viz.:
X— 4/12 of P600,000.00 = P200,000.00
Y— 2/12 of P600,000.00 = P100,000.00
Z— 6/12 of P600,000.00 = P300,000.00
J9JC9B0M
I. INSURANCE 129
E. No, he can only be indemnified for his loss, not profit

thereby; hence, he must return P200,000.00 of the P800,000.00 he
was able to collect.288
204. Jose constructed a house worth P5,000,000.00, which he

insured against fire for the same amount. The insurance for
the same amount was renewed every year. After a few years,
when the house was already worth P15,000,000.00 on account
of inflationary prices (in case of a rebuilding), one-fifth (1/5)
of the house was destroyed by fire. As there is nothing illegal
about the contract, how much, if any, can Jose successfully
recover from the Insurance Company? Reason.
If the fire policy is a valued one, then Jose can recover 1/5 of
P5,000,000.00, i.e., Pl,000,000.00. Under the Insurance Code, the
valuation in a valued policy is conclusive between the parties in
the absence of fraud. So Jose cannot claim that since his house was
worth P15,000,000.00 at the time of the loss, he should be able to
recover P3,000,000.00 (actual value of loss—1/5 of P15,000,000.00)
If the policy is an open policy then under the law, appraisal of
loss is made after the fire. Since the house was worth P15,000,000.00
at such time, then the loss of Jose is P3M and he can recover this
amount under such an open policy.289
205. A fire occurred in the building of the Philippine Union Realty

Development Corporation. It sued for recovery of damages
from Development Insurance Corporation on the basis of an
insurance contract between them. Development Insurance
Corporation argues that the insurance covers only the building
and not the elevators, and that the elevators were insured only
after the fire.
Is the Development Insurance Corporation liable for the
amount of the building?
Yes, the Development Insurance Corporation’s claim that the
insurance covered only the building and not the elevators is absurd,
to say the least. The only remaining question to be settled is the
amount of the indemnity due under the insurance contract. The
policy is an open policy — one which the value of the thing insured
288BAR 1990.
289Modified 1975 Bar.
J9JC9B0M
is not agreed upon but is left to be ascertained in case of loss.290

This means that the actual loss, as determined, will represent the
total indemnity due the insured from the insurer except only that
the total indemnity shall not exceed the face value of the policy.
The actual loss has been ascertained in this case and the Court will
respect such factual determination in the absence of proof that it
was arrived at arbitrarily.291 •
206. Paramount Shirt Manufacturing Co. (insured) was issued a Fire

Policy by which Oriental Assurance Corporation bound itself
to indemnify the former for any loss or damage caused by fire
to its property. While the aforesaid policy was in full force and
effect, a fire broke out on the subject premises destroying
the goods contained in its ground and second floors. It was
thereafter learned that the insured did not reveal undeclared
co-insurances and that the insured failed to file the required
proof of loss prior to the court action as required under the
policy.
Is Oriental Assurance Corporation liable?
No, the insurance policy against fire expressly required that
notice should be given by the insured of other insurance upon the
same property, the total absence of such notice nullifies the policy.
By reason of said unrevealed insurances, the insured had been
guilty of false declaration; a clear misrepresentation and a vital one
because where the insured had been asked to reveal but did not,
that was deception.282
207. What is the effect of alteration in the use or condition of the

thing insured?
An alteration in the use or condition of a thing insured from
that to which it is limited by the policy made without the consent
of the insurer, by means within the control of the insured, and
increasing the risks, entitles an insurer to rescind a contract of fire
insurance.233
“"Section 60, Insurance Code.

“’Development Insurance Corporation v. Intermediate Appellate Court, et al.,
G.R. No. L-71360, July 16,1986.
“"Pacific Banking Corporaticion v. Court of Appeals and Oriental Assurance
Corporation, G.R. No. L-41014, November 28,1988.
J9JC9B0M
I. INSURANCE 131
An alteration in the use or condition of a thing insured from

that to which it is limited by the policy, which does not increase the
risk, does not affect a contract of fire insurance.291
The following are the requisites of the alteration in the use
or condition of the thing insured in order to entitle the insurer to
rescind.
1. The use or condition of the thing insured must be stated
in the policy.
2. The use or condition of the thing insured was altered.
3. The alteration was made without the consent of the
insurer.
4. The alteration in the use or condition of the thing insured
increased the risk insured against.
In other words, increase in risk alone will not entitle the insured
to rescind a contract of insurance. There must be a corresponding
violation of the provision of the policy otherwise there is no right to
rescind the policy. Thus, a contract of fire insurance is not affected
by any act of the insured subsequent to the execution of the policy
which does not violate its provisions, even though it increases the
risk and is the cause of loss.
Example: After effectivity of the policy, the insured stored
gasoline, paints and varnishes within the premises insured. The
insurer is liable if there is no provision in the policy prohibiting the
keeping of gasoline, paints and varnishes upon the premises of the
insured.
Another, a fire insurance policy was issued describing the
building insured as unoccupied at the first floor. The said floor was
later on occupied. There is no alteration if the policy did not clearly
require that the first floor of the house should remain unoccupied for
the duration of the policy.
To summarize, Increase in the risk of loss as a rule is necessary
for alteration of the use or condition of thing insured as a ground
to rescind the policy. However, when the policy provides that a
violation of the policy shall avoid it, increase in the risk of loss is not
necessary to enable the insurer to escape liability.
291Section 171, IC.
J9JC9B0M
1

208, PAM, Inc. obtained a P15M fire insurance policy from llocano
Insurance covering its machineries and equipment effective for
1 year. The policy expressly stated that the insured properties
were located at "Sanyo Precision Phils. Building, Phase III, Lots
4 and 6, Block 15, PEZA, Rosario Cavite." Before its expiration,
the policy was renewed on "as is" basis for another year. The
subject properties were later transferred to Pace Factory also
in PEZA. During the effectivity of the renewed policy, a fire
broke out at the Pace Factory which totally burned the insured
properties.
The policy forbade the removal of the insured properties
unless sanctioned by llocano. Condition 9(c) of the policy
provides that "the insurance ceases to attach as regards the
property affected unless the insured, before the occurrence
of any loss or damage, obtains the sanction of the company
signified by endorsement upon the policy xx x (c) if the property
insured is removed to any building or place other than in that
which is herein stated to be insured." PAM claims that it has
substantially complied with notifying llocano for the insurance
coverage. Is llocano liable under the policy?
llocano is not liable under the policy. With the transfer of
the location of the subject properties, without notice and without
insurer’s consent, after the renewal of the policy, the insured
clearly committed concealment, misrepresentation, and a breach
of material warranty. A concealment entitles the injured party to
rescind a contract of insurance in case of an alteration in the use or
condition of the thing insured. An alteration in the use or condition
of a thing insured from that to which it is limited by the policy made
without the consent of the insurer, by means within the control of
the insured, and increasing the risks, entitles the insurer to rescind
the contract of fire insurance.295
209. Distinguish friendly fire from hostile fire.

Friendly fire is one which is deliberate and remains within the
limits for it. Hostile fire is a fire that goes out of control and beyond
the limits intended for it. To be covered by fire insurance, the fire
must be hostile.
235 BAR 2014.
J9JC9B0M
I. INSURANCE 133
210. Cite examples of damage caused by friendly fire for which the
insurer is not liable.
a. Damage caused on the insured curtains in a condominium
unit by smoke from a lamp when no ignition occurred
outside of the lamp.
b, Damage done to sugar by the heat of the usual fires
employed for refining, being accumulated by the
mismanagement of the insured, who inadvertently kept
the top of their chimney closed.
c. Smoke emitted by cooking stove.
211. Cite examples of damage caused by hostile fire.

a. Faulty wiring that caused fired.
b. Christmas lights that caught fire and exploded.
212. Queens Insurance Company insured X, a resident of Baguio

City, "against all direct loss and damage by fire." X lived in
a house heated by a furnace. His servant built a fire in the
furnace using material that was highly flammable. The furnace
fire caused intense heat and great volumes of smoke and
soot that damaged the furnishings in the rooms of X. When
X tried to collect on the policy, Queens Insurance refused to
pay contending that the damage is not covered by the policy,
where the fire is confined within the furnace. Decide.
The refusal of Queens to pay is justified. The damage is not
covered by the policy which only insures “against all direct loss and
damage by fire.” The damage being claimed by X was caused by
intense heat and great volumes of smoke and soot and not directly by
fire. The stipulation in the policy is paramount, not being contrary
to law.2™
213. What is the measure of indemnity in fire insurance policy?

If there is no valuation in the policy, the measure of indemnity
in an insurance against fire is the expense it would be to the insured
at the time of the commencement of the fire to replace the thing lost
or injured in the condition in which it was at the time of the injury;
but if there is a valuation in a policy of fire insurance, the effect shall
296BAR 1989.
J9JC9B0M
1

be the same as in a policy of marine insurance.297 This means that

the measure of indemnity is the value of the property indicated in
the policy.
Whenever the insured desires to have a valuation named in
his policy, insuring any building or structure against fire, he may
require such building or structure to be examined by an independent
appraiser and the value of the insured’s interest therein may then
be fixed as between the insurer and the insured. The cost of such
examination shall be paid for by the insured. A clause shall be
inserted in such policy stating substantially that the value of the
insured’s interest in such building or structure has been thus fixed.
In the absence of any change increasing the risk without the consent
of the insurer or of fraud on the part of the insured, then in case of
a total loss under such policy, the whole amount so insured upon
the insured’s interest in such building or structure, as stated in
the policy upon which the insurers have received a premium, shall
be paid, and in case of a partial loss the full amount of the partial
'oss shall be so paid, and in case there are two (2) or more policies
:overing the insured’s interest therein, each policy shall contribute
pro rata to the payment of such whole or partial loss. But in no case
shall the insurer be required to pay more than the amount thus
stated in such policy. This section shall not prevent the parties from
stipulating in such policies concerning the repairing, rebuilding, or
replacing of buildings or structures wholly or partially damaged or
destroyed.298
3. Casualty Insurance
214. What is casualty insurance?
Casualty insurance is insurance covering loss or liability
arising from accident or mishap, excluding certain types of loss
which by law or custom are considered as falling exclusively within
the scope of other types of insurance such as fire or marine. It
includes, but is not limited to, employer’s liability insurance, motor
vehicle liability insurance, plate glass insurance, burglary and theft
insurance, personal accident and health insurance as written by
non-life insurance companies, and other substantially similar kinds
of insurance.289

J9JC9B0M
I. INSURANCE 135
215. Luis was the holder of an accident insurance policy effective

November 1,1983 to October 31,1989. At a boxing contest held
an January 1,1989 and sponsored by his employer, he slipped
and was hit on the face by his opponent so he fell and his
head hit one of the posts of the boxing ring. He was rendered
unconscious and was dead on arrival at the hospital due to
"intracranial hemorrhage."
Can his father who is a beneficiary under said insurance
policy successfully claim indemnity from the insurance
company? Explain your answer.
Yes, the father who is a beneficiary under the accident
insurance can successfully claim indemnity for the death of the
insured. Clearly, the proximate cause of the death was the boxing
contest. Death is sustained in a boxing contest is an accident. The
insurer is Hable because the death in this case was an accident
within the meaning of the policy. It was an accident because the
insured did not expect to die by entering such contest.300
216. Sun-Moon Insurance issued a Personal Accident Policy to

Henry Dy with a face value of P500,000.00. A provision in the
policy states that "the company shall not be liable in respect of
bodily injury consequent upon the insured person attempting
to commit suicide or willfully exposing himself to needless
peril except in an attempt to save human life" Six (6) months
later, Henry died of a bullet wound in his head. Investigation
showed that one evening Henry was in a happy mood although
he was not drunk. He was playing with his handgun from which
he had previously removed its magazine. He pointed the gun at
his sister who got scared. He assured her it was not loaded. He
then pointed the gun at his temple and pulled the trigger. The
gun fires and Henry slumped dead on the floor.
Henry's wife, Beverly, as the designated beneficiary,
sought to collect under the policy. Sun-Moon rejected her
claim on the ground that the death of Henry was not accidental.
Beverly sued the insurer.
Decide. Discuss fully.
Beverly can recover the proceeds of the policy from the insurer.
The death of the insured was not due to suicide or willful exposure
to needless peril which are the excepted risks. The insured’s act was
300BAR 1990.
J9JC9B0M
1

purely on act of negligence which is covered by the policy and for

which the insured got the insurance for his protection. In fact, he
removed the magazine from the gun and when he pointed the gun to
his temple he did so because he thought that it was safe for him to do
so. He did so to assure his sister that the gun was harmless. There
is none in the policy’ that would relieve the insurer of liability for the
death of the insured since the death was an accident.301
217. Fortune Insurance and Surety Co., Inc. (Fortune) issued a

policy to Producers Bank wherein it stipulated under the
General Exceptions Clause that "the company shall not be
liable under this policy in respect of x x x (b) any loss caused
by any dishonest, fraudulent or criminal act of the insured or
any officer, employee, partner, director, trustee or authorized
representative of the Insured whether acting alone or in
conjunction with others, x x x"
An armored car of the bank was robbed while transferring
cash from its head office to another branch. The robbery was
committed by the driver of the armored car and the security
guard assigned by contractors engaged by Producers Bank.
Producers Bank demanded payment from Fortune but the
latter refused to pay as the loss is excluded from the coverage
of insurance policy under the General Exception Clause.
Is the Fortune liable under the theft or robbery insurance
policy?
No, Fortune is exempt from liability. It should be noted that
theft or robbery insurance policy is a form of casualty insurance. It has
been aptly observed that in burglary, robbery, and theft insurance,
the opportunity to defraud the insurer is so great that insurers have
found it necessary to fill up their policies with countless restrictions,
many designed to reduce this hazard. The purpose of the exception
is to guard against liability should the theft be committed by one
having unrestricted access to the property.
It is clear that insofar as Fortune is concerned, it was its
intention to exclude and exempt from protection and coverage losses
arising from dishonest, fraudulent, or criminal acts of persons
granted or having unrestricted access to Producers’ money or
payroll. When it used then the term “employee,” it must have had in
“'BAR 1995, 1993.
J9JC9B0M
I. INSURANCE 137
mind any person who qualifies as such as generally and universally

understood, or as statutorily declared even in a limited sense as in
the case of Article 106 of the Labor Code. Even granting that the
contracts with the employers of the driver and the security guard
were not labor-only contracts, such driver and security guard acted
as agents of Producers Bank for the particular tasks and may fall
under the definition “authorized representatives of the insured.”302
218. Fieldmen's Insurance Co. issued in favor of the Manila Yellow

Taxicab a common carrier insurance policy with a stipulation
that the company shall indemnify the insured of the sums
which the latter may be held liable for with respect to "death
or bodily injury to any fare-paying passenger including the
driver and conductor." The policy also stated that in "the event
of the death of the driver, the Company shall indemnify his
personal representatives and at the Company's option may
make indemnity payable directly to the claimants or heirs of
the claimants.”
During the policy's lifetime, a taxicab of the insured driven
by Coquia met an accident and Coquia died. When Fieldmen's
Insurance Co. refused to pay the parents of Coquia, they
instituted a complaint. Fieldmen's Insurance Co. argued that
Coquia's parents have no cause of action since the Coquias
have no contractual relationship with it.
Can the parents of Coquia collect on the policy?
Yes, pursuant to the stipulations in the policy, Fieldmen’s
Insurance Co. will indemnify any authorized Driver who is driving
the Motor Vehicle of the Manila Yellow Taxicab and, in the event of
death of said driver, the Fieldmen’s Insurance Co. shall, likewise,
indemnify his personal representatives. In fact, Fieldmen’s
Insurance Co. may, at its option, make indemnity payable directly
to the claimants or heirs of claimants. Thus, the policy under
consideration is typical of contracts pour autrui. It is clear that the
Coquias, who are the sole heirs of the deceased, have a direct cause
of action against the Fieldmen’s Insurance Co. and may collect on
the policy.303
302Fortune Insurance and Surety Co., Inc. V. Court of Appeals and Producers
Bank of the Philippines, G.R. No. 115278, May 23, 1995.
“'Melecio Coquia, et al. v. Fieldmen’s Insurance Co., Inc., G.R. No. L-23276,
November 29, 1968.
J9JC9B0M
219. Carlie Surposa was insured with Finman General Assurance

Corporation (Finman). While said policy was in full force and
effect, the insured died as a result of a stab wound without
provocation and warning on the part of the insured as he and
his cousin were waiting fora ride on their way home. Thereafter,
Julia Surposa and the other beneficiaries of said personal
accident insurance policy filed a written notice of claim with
the Finman which denied said claim contending that murder
and assault are not within the scope of the coverage of the
insurance policy as the cause of death was not accidental but
a deliberate act of the assailant in killing Carlie.
Is Finman liable under the insurance policy?
Yes, Finman is liable where the death or injury is not the
natural or probable result of the insured’s voluntary act, or if
something unforeseen occurs in the doing of the act which produces
the injury, the resulting death is within the protection of the policies
insuring against death or injury from accident.304
4. Suretyship
220. What is a contract of suretyship?
“SECTION 177. A contract of suretyship is an agreement
whereby a party called the surety guarantees the performance by
another party called the principal or obligor of an obligation or
undertaking in favor of a third party called the obligee. It includes
official recognizances, stipulations, bonds or undertakings issued by
any company by virtue of and under the provisions of Act No. 536,
as amended by Act No. 22O6.”305
Examples: Contractor bond, attachment bond, injunction bond
221. What is the liability of a surety company?

“Section 178. The liability of the surety or sureties shall be
joint and several with the obligor and shall be limited to the amount
of the bond. It is determined strictly by the terms of the contract of
suretyship in relation to the principal contract between the obligor
and the obligee.”306
304Finman General Assurance Corporation v. Honorable Court of Appeals and

Julia Surposa, G.R. No. 100970, September 2,1992.
305Section 177, IC.
“Section 178, IC.
J9JC9B0M J
I. INSURANCE 139
A surety’s liability is joint and several with the principal.

Although the surety’s obligation is merely secondary or collateral to
the obligation contracted by the principal, the Supreme Court has
nevertheless characterized the surety’s liability to the creditor of
the principal as “direct, primary, and absolute. In other words, the
surety is directly and equally bound with the principal. Moreover,
Article 1216, in relation to Article 2047 of the Civil Code provides:
The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one
of them shall not be an obstacle to those which may subsequently
be directed against the others, so long as the debt has not been fully
collected. A surety may be sued by the creditor separately or together
the principal debtor, in view of the solidary nature of its liability.
Liability under a surety bond is “limited to the amount of the
bond” and is determined strictly in accordance with the particular
terms and conditions set out in this bond.
A suretyship agreement is a contract of adhesion ordinarily
prepared by the surety or insurance company. Therefore, its
provisions are interpreted liberally in favor of the insured and
strictly against the insurer who, as the drafter of the bond, had the
opportunity to state plainly the terms of its obligation.307
Parenthetically, it was held that a performance bond is a
kind of suretyship agreement. It is designed to afford the project
owner security that the contractor, will faithfully comply with the
requirements of the contract and make good [on the] damages
sustained by the project owner in case of the contractor’s failure to
so perform.308
222. William B. Murphy filed a case for collection of a sum of

money, accounting and damages against Pedro Mejorada.
Murphy likewise prayed for a Writ of Preliminary Attachment,
which the Trial Court granted upon a bond of P250,000.00
issued by Zenith Insurance Corporation in favor of Murphy. A
judgment was rendered against Murphy. Thereafter, Mejorada
proceeded against the balance of Zenith's attachment bond
coverage. An Alias Writ was issued on the basis of Mejorado's
contention that Zenith's liability not being limited to the
307 FGU Insurance Corporation v. Roxas, G.R. No. 189526, G.R. No. 189526,
August 9, 2017.
308 FGU Insurance Corporation v. Roxas, ibid.
J9JC9B0M
amount of the bond it has put up but includes all the actual
and consequential damages suffered by private respondent,
there having intervened malice and bad faith on Zenith's part.
Is Zenith liable for more than the amount of bond?
No. when a surety executes a bond, it does not guarantee
that the plaintiffs cause of action is meritorious, and that it will
be responsible for all the costs that may be adjudicated against
principal in case the action fails. The extent of a surety’s liability is
determined only by the clause of the contract suretyship. It cannot
be extended by implication, beyond the terms of the contract.309
223. Chevron Philippines sued First Lepanto-Taisho Insurance

Corp, for payment of unpaid oil and petroleum purchases made
by its distributor, Fumitechniks Corp.
Fumitechniks applied for and was issued a Surety Bond
by First Lepanto. As stated in the attached rider, the bond was
in compliance with the requirement for the grant of a credit
line with Chevron to guarantee payment/remittance of the
cost of fuel products withdrawn within the stipulated time in
accordance with the terms and conditions of the agreement.
Fumitechniks defaulted on its obligation to Chevron. As
such, Chevron notified First Lepanto of Fumitechniks’ unpaid
purchases.
First Lepanto then demanded from Fumitechniks the
delivery of documents including, among others, a copy of the
agreement secured by the Surety Bond and information such
as terms and conditions of any arrangement that Fumitechniks
might have made or ongoing negotiations with Chevron in
connection with the settlement of its obligations. Fumitechniks
responded by saying that no such agreement was executed
with Chevron. First Lepanto then advised Chevron the
non-existence of the principal agreement as confirmed by
Fumitechniks. Chevron formally demanded from First Lepanto
the payment of its claim under the surety bond. First Lepanto
reiterated its position that without the basic contract subject
of the bond, it cannot act on Chevron's claim.
Is First Lepanto liable to Chevron, the creditor, in the
absence of the principal contract:
30sZenith Insurance Corporation V. Court of Appeals, G.R. No. L-57957,

December 29,1982.
J9JC9B0M J
I. INSURANCE 141
No, Section 175 of the Insurance Code defines suretyship as a

contract or agreement whereby a party, called the surety, guarantees
the performance by another party, called the principal or obligor, of
an obligation or undertaking in favor of a third party, called the
obligee. Such undertaking makes a surety agreement an ancillary
contract as it presupposes the existence of a principal contract.
Although the contract of a surety is in essence secondary only to a
valid principal obligation, the surety becomes liable for the debt or
duty of another although it possesses no direct or personal interest
over the obligations nor does it receive any benefit therefrom. And
notwithstanding the fact that the surety contract is secondary to the
principal obligation, the surety assumes liability as a regular party
to the undertaking. A surety contract should be read and interpreted
together with the contract entered into between the creditor and the
principal.
A reading of the bond shows that it secures the payment of
purchases on credit by Fumitechniks in accordance with the terms
and conditions of the “agreement” it entered into with Chevron. The
word “agreement” has reference to the distributorship agreement,
the principal contract and by implication included the credit
agreement in the rider. In this case, Chevron has executed written
agreements only with its direct customers but not to distributors like
Fumitechniks and it also never relayed the terms and conditions of
its distributorship agreement to First Lepanto after the delivery of
the bond.310
The ruling in First Lepanto was compared with the recent case
of Cellpage International Corporation v. The Solid Guaranty.311
The Supreme Court stated that the ruling in First Lepanto was
anchored on Section 176 of the Insurance Code which emphasizes the
strict application of the terms of the surety contract in relation to the
principal contract between the obligor and obligee. First Lepanto's
pronouncement that a written principal agreement is required in
order for the creditor to demand performance was arrived at by
applying strictly the terms of the surety bond which required the
submission and attachment of the principal agreement to the surety
contract.
310First Lepanto-Taisho Insurance Corporation v. Chevron Philippines, Inc.,

G.R. No. 177839, January 18, 2012.
311G.R. No. 226731, June 17, 2020.
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1

It cannot be made to apply when the surety bonds do not

expressly require the submission of a written principal agreement
but the principal obligation was nevertheless established. The
surety was made liable because it bound itself solidarity with the
principal debtor for the payment of the amount stated in the surety
bonds in case of the latter’s failure to perform its obligations to the
oblige.
224. Pan Pacific Overseas is a recruitment agency which offers

jobs abroad duly registered with the POEA. Finman General
is acting as Pan Pacific's surety. Pan Pacific was sued by
William Inocencio and three (3) others for alleged violation of
Articles 32 and 34 of the Labor Code. Inocencio alleged that
Pan Pacific charged and collected fees but failed to provide
employment abroad. POEA ruled in favor of Inocencio et al and
had impleaded Finman in the complaint. The Labor Secretary
affirmed POEA’s ruling. Finman General asserts that it should
not be impleaded in the case because it is not a party to the
contract between Pan Pacific and Inocencio etal.
Is Finman General liable to Inocencio and others so as to
implead it in the complaint?
Yes, Finman General is solidarity liable. Under Section 176 of
the Insurance Code, as amended, the liability of a surety in a surety
bond is joint and several with the principal obligor. Finman’s bond
was posted by Pan Pacific in compliance with the requirements of
Article 31, Labor Code in order to guarantee recruitment procedures.
Thus, Finman General is solidarity liable with Pan Pacific.312
!■
225. When is a surety entitled to premium payment?

The surety is entitled to payment of the premium as soon as
the contract of suretyship or bond is perfected and delivered to the
obligor.313
226. When does the bond issued by the surety company become
valid and binding?
No contract of suretyship or bonding shall be valid and binding
unless and until the premium therefor has been paid, except where
312Finman General Assurance Corporation v. William Inocencio, et al., G.R.

No. 90273-75, November 15,1989.
313Section 179, IC.
J9JC9B0M j
I. INSURANCE 143
the obligee has accepted the bond, in which case the bond becomes
valid and enforceable irrespective of whether or not the premium has
been paid by the obligor to the surety: Provided, That if the contract
of suretyship or bond is not accepted by, or filed with the obligee, the
surety shall collect only a reasonable amount, not exceeding fifty
percent (50%) of the premium due thereon as service fee plus the
cost of stamps or other taxes imposed for the issuance of the contract
or bond: Provided, however, That if the nonacceptance of the bond
be due to the fault or negligence of the surety, no such service fee,
stamps or taxes shall be collected.
“In the case of a continuing bond, the obligor shall pay the
subsequent annual premium as it falls due until the contract of
suretyship is cancelled by the obligee or by the Commissioner or by
a court of competent jurisdiction, as the case may be.
227. Are the provisions of the Civil Code on guaranty applicable to a

contract of suretyship?
Pertinent provisions of the Civil Code of the Philippines
shall be applied in a suppletory character whenever necessary in
interpreting the provisions of a contract of suretyship.314
5. Life
228. What is a life insurance?
Life insurance is insurance on human lives and insurance
appertaining thereto or connected therewith.
Every contract or undertaking for the payment of annuities
including contracts for the payment of lump sums under a
retirement program where a life insurance company manages or
acts as a trustee for such retirement program shall be considered a
life insurance contract for purposes of the Insurance Code.”5
229. To whom will the proceeds of the life insurance policy be

payable?
As previously discussed, the proceeds of the life insurance
policy are payable as follows:
a. In case a beneficiary is unlawfully designated, the
proceeds shall payable to the estate of the insured (not
’■ 'Section 180, IC.

’’“Section 181, IC.
J9JC9B0M
only to the lawful spouse of the insured although she has

a share in the estate of the insured). It is because the
policy remains valid. Only the designation is void.316
b. In case of joint designation of beneficiaries, the share
of the unlawfully designated beneficiary shall form
additional part of the share of the lawfully designated
beneficiary. Thus, the share of the common law spouse
shall be forfeited in favor of the designated illegitimate
children.3”
C. In case of joint designation of lawfully designated
beneficiaries, proceeds shall be divided based on terms of
policy. If the policy is silent, the proceeds shall be divided
equally between or among the beneficiaries.
d. In case a beneficiary is lawfully designated and the
insured dies ahead of the beneficiary, the proceeds are
payable to the beneficiary unless he is the principal,
accessory or accomplice in willfully bringing about the
death of the insured.
In such a case, interest of the beneficiary shall
be forfeited and the share forfeited shall pass on to the
other beneficiaries, unless otherwise disqualified. In
the absence of other beneficiaries, the proceeds shall be
paid in accordance with the policy contract. If the policy
contract is silent, the proceeds shall be paid to the estate
of the insured.318
i
Note that the insurer is still liable.319
e. In case the beneficiary predeceases the insured, make a
distinction between irrevocable and revocable beneficiary.
If irrevocable, the proceeds shall inure to the benefit of
the legal representatives of the beneficiary. If revocable,
the proceeds shall inure to the estate of the insured. If the
policy is silent as to whether designation is irrevocable
or revocable, the proceeds shall inure to the estate of
the insured because the designation is revocable unless
31G2012 Bar.
’"Maramag v. Maramag, ibid.
’’“Section 12.
3192008 Bar.
J9JC9B0M
I. INSURANCE 145
f. The beneficiary’s interest in a life insurance endowment

policy will only accrue if the insured dies before the end
of the endowment period. If the insured survives, the
proceeds are payable to him.
230. Who will get proceeds of life insurance policy in case insured
failed to designate beneficiaries?
Where a GSIS member failed to state his beneficiary in his
application for membership, the proceeds of the retirement benefits
shall accrue to his estate and will be distributed among his legal
heirs in accordance with the law on intestate succession.320
231. What are the principal types of life insurance?

The principal types of life insurance are as follows:
a, Term Insurance — this is the simplest form of life
insurance. It pays only if the death occurs the term of the
policy.
b. Whole life or permanent insurance - it pays a death
benefit whenever the insured dies.
c. Annuity - a contract with the insurer where individuals
agree to pay the company a certain amount of money,
either in a lump sum or through installments, which
entitles them to receive payment annually from the
insurer, but which obligation ends upon death of the
annuitant.
.1
d. Endowment is a life insurance that doubles as an
investment or a savings account. It pays a lump sum to
the insured after a specified number of years but if he dies
before the agreed period, the beneficiary gets the proceeds
of the policy.
e. Industrial life — The form of life insurance under which
premiums are payable weekly or monthly or oftener, if the
face amount of the insurance is not more than 500 times
that of the current statutory daily wage in manila and if
the words “industrial policy are printed on the policy.”
320Re: Claims for Benefits of the Heirs of the Late Mario V. Chanliongco, Adm.
Matter No. I90-RET, October 18, 1977.
J9JC9B0M
232. What is the non-default or forfeiture options in whole life

insurance?
The non-default options in whole life insurance are
restated as follows:
a. Extended term insurance the policy’s available cash
value will be used as single premium to purchase a term
insurance.
b. Reduced paid up cash value will be used to purchase
a paid-up insurance providing a coverage with term
equivalent to the original policy but lower amount.
c. Cash surrender once policy is surrendered it cannot be
reinstated.
The insured cannot get a refund of premium in life insurance,
but he has non-default options.
233. When is life insurance payable?

An insurance upon life may be made payable on the death
of the person, or on his surviving a specified period, or otherwise
contingently on the continuance or cessation of life.
Every contract or pledge for the payment of endowments or
annuities shall be considered a life insurance contract for purposes
of the Insurance Code.321
234. Within what period should the claim be paid?

a. The proceeds of a life insurance policy shall be paid
immediately upon maturity of the policy, unless such
proceeds are made payable in installments or as an
annuity, in which case the installments, or annuities
shall be paid as they become due.
b. In the case of a policy maturing by the death of the
insured, the proceeds thereof shall be paid within 60
days after presentation of the claim and filing of the
proof of death of the insured. Refusal or failure to pay the
claim within the time prescribed herein will entitle the
beneficiary to collect interest on the proceeds of the policy
for the duration of the delay at the rate of twice the ceiling
J9JC9B0M
I. INSURANCE 147
prescribed by the Monetary Board, unless such failure or

refusal to pay is based on the ground that the claim is
fraudulent.322
235. Is the insurer in a life insurance liable in case of suicide by the

insured?
The insurer in a life insurance contract shall be liable in case
of suicide only when it is committed after the policy has been in
force for a period of two (2) years from the date of its issue or of
its last reinstatement, unless the policy provides a shorter period:
Provided, however, that suicide committed in the state of insanity
shall be compensable regardless of the date of commission.323
The insurer, however, is not liable if suicide in an excepted risk.
236. X, in January 30, 2009, or two (2) years before reaching the
age of 65, insured his life for P20M. For reason unknown to his
family, he took his own life two (2) days after his 65th birthday.
The policy contains no excepted risk. Which statement is most
accurate?
a. the insurer will be liable.
b. the insurer will not be liable.
C. the state of sanity of the insured is relevant in cases of
suicide in order to hold the insurer liable.
d. the state of sanity of the insured is irrelevant in cases of
suicide in order to hold the insurer liable.324
237. Sun Insurance issued a Personal Accident Policy to Felix Lim,

Jr. with a face value of P200,000.00 with his wife, Nerissa,
as beneficiary. On October 6, 1982, Lim "accidentally" shot
himself in the head and was killed on the spot. According to
his secretary, Lim pointed the gun at her as a joke and assured
her that it was not loaded, then he put the gun to his temple
and fired it.
Sun Insurance agreed that it was not suicide, but argued
that it was not an accident and is therefore not covered by
the insurance. Sun Insurance argued that one of the four
’“Section 248, Insurance Code.

’“Section 183, ibid.
’“BAR 2012.
J9JC9B0M
148 D1VIN.A ON COMMERCIAL LAW:
exceptions in the said insurance contract includes bodily

injury consequent upon the insured person attempting to
commit suicide or "willfully exposing himself to needless peril”
except in an attempt to save a human life, and that the mere
act of pointing the gun to his temple showed that Felix willfully
exposed himself to danger.
Is Lim's death covered by the insurance policy?
Yes, “Accident/Accidental” in insurance contracts are
construed and considered according to the ordinary understanding
and common usage and speech: That which happens by chance or
fortuitously, without intention or design, and which is unexpected,
unusual, and unforeseen. There is nothing in the policy that relieves
the insurer of the responsibility to pay the indemnity agreed upon if
the insured is shown to have contributed to his own accident. Indeed,
most accidents are caused by negligence. Lim was unquestionably
negligent and that negligence cost him his own life. But it should
not prevent his wife from recovering from the insurance policy he
obtained precisely against accident.325
238. May a life insurance policy be assigned?
A policy of insurance upon life or health may pass by transfer,

will or succession to any person, whether he has an insurable interest
or not, and such person may recover upon it whatever the insured
might have recovered.326 The assignee need not have insurable
interest in the life of the insured. This is because in life insurance,
insurable interest must exist only at the time of the issuance of the
policy. The only exception is to circumvent the rule on insurable
interest as when assignment is made in favor of a person who cannot
be designated beneficiary of the insured.
239. Is notice to the insurer of the assignment necessary for its

validity?
Notice to an insurer of a transfer or bequest thereof is not

necessary to preserve the validity of a policy of insurance upon life
or health, unless thereby expressly required.
335Sun Insurance Office, Ltd. v. Court of Appeals and Nerissa Lim, G.R. No.
92383, July 17, 1992.
’“Section 184, IC.
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I. INSURANCE 149
240. The policy of insurance upon his life, with a face value of
P100,000.00, was assigned by Jose, a married man with 2
legitimate children, to his nephew, Y as security for a loan of
P50,000.00. He did not give the insurer any written notice of
such assignment despite the explicit provision to that effect
in the policy. Jose died. Upon the claim on the policy by the
assignee, the insurer refused to pay on the ground that it was
not notified of the assignment. Upon the other hand, the heirs
of Jose contended that Y is not entitled to any amount under
the policy because the assignment without due notice to the
insurer was void. Resolve the issues.
A life insurance is assignable. A provision, however, in the
policy stating that written notice of such an assignment should be
given to the insurer is valid. The failure of the notice of assignment
would thus preclude the assignee from claiming rights under the
policy. The failure of notice did not, however, avoid the policy; hence,
upon the death of Jose, the proceeds would, in the absence of a
designated beneficiary, go to the estate of the insured. The estate, in
turn, would be liable for the loan of P50,000.00 owing in favor of Y.32’
241. Is consent of the beneficiary required for the validity of the

assignment?
Consent of the beneficiary is not necessary unless the
designation is irrevocable.
242. What is the measure of indemnity under a life insurance policy?

Unless the interest of a person insured is susceptible of exact
pecuniary measurement, the measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the policy.328
6. Microinsurance
243. What is Microinsurance?
Microinsurance is a financial product or service that meets the
risk protection needs of the poor where:
a. The amount of contributions, premiums, fees or charges,
computed on a daily basis, does not exceed seven and a
half percent (7.5%) of the current daily minimum wage
rate for nonagricultural workers in Metro Manila; and
327BAR 1991.
328Section 186, IC.
J9JC9B0M
b. The maximum sum of guaranteed benefits is not more

than 1,000 times of the current daily minimum wage rate
for nonagricultural workers in Metro Manila.329
7. Compulsory motor vehicle liability insurance

244. What is the basis for compulsory motor vehicle liability
insurance?
The basis of compulsory motor vehicle liability insurance is

Article 387 of the Insurance Code which provides that it shall be
unlawful for any land transportation operator or owner of a motor
vehicle to operate the same in the public highways unless there is
in force in relation thereto a policy of insurance or guaranty in cash
or surety bond issued to indemnify the death, bodily injury, and/or
damage to property of a third-party or passenger, as the case may
be, arising from the use thereof.
245. What is the extent of liability of the insurer under a motor

vehicle insurance policy?
The insurer’s liability is measured by the terms of the policy. It

is not solidarily liable with the tortfeasor.
246. Lope Maglana met an accident that resulted in his death while
driving his motorcycle on his way to workstation. He was
bumped by a PUJ jeep which was driven by Pepito Into and was
operated and owned by defendant Destrajo, when he overtook
another passenger jeep that was going towards the city.
Thereafter, the heirs of the deceased filed an action against
Destrajo and the Afisco Insurance Corporation (AFISCO) for
damages and attorney’s fees.
AFISCO was ordered to reimburse Destrajo whatever

amounts the latter shall have paid only up to the extent of its
insurance coverage, signifying only secondary liability. The
heirs, however, claimed that AFISCO should not merely be held
secondarily liable because the Insurance Code provides that
the insurer's liability is "direct and primary and/or jointly and
severally with the operator of the vehicle" although only up to
the extent of the insurance coverage.
J9JC9B0M
I. INSURANCE 151
Is AFISCO solidarily liable with Destrajo?

No, while it is true that where the insurance contract provides
for indemnity against liability to third persons, such third persons
can directly sue the insurer, however, the direct liability of the
insurer under indemnity contracts against third party liability does
not mean that the insurer can be held solidarily liable with the
insured and/or the other parties found at fault. The liability of the
insurer is based on contract, specifically, the terms of the insurance
policy; that of the insured is based on tort.
247. When does the right of the insured to recover under the policy
accrue?
AFISCO’s liability under Third Party Liability coverage
accrues immediately upon occurrence of injury or event upon
which the liability depends and does not depend on the recovery of
judgment by the injured party against the insured. Therefore, the
AFISCO can be sued and held directly liable by the injured party
to the extent of coverage but not solidary with that of Destrajo. As
such, the heirs have the option either to claim from AFISCO and
the balance from Destrajo or enforce the entire judgment from
Destrajo subject to reimbursement from AFISCO to the extent of
the insurance coverage.330
248. National Food Authority (NFA) was the owner of a Chevrolet

‘ truck which was insured against liabilities for death of and
injuries to third persons with the GSIS. Corbeta, at that time,
was the driver. Thereafter, the truck collided with a public utility
vehicle, a Toyota Tamaraw. Civil case for damages, was filed
by an injured passenger, Librado Taer, against Uy, the operator
of the public utility vehicle, and insurer, Mabuhay Insurance
and Guaranty Co. (MIGC). Trial court rendered its decision
holding that Corbeta's negligence was the proximate cause of
the accident, awarded Uy the total amount of for damages and
ordered MIGC, Corbeta and NFA to pay plaintiff Taer, jointly
and severally. GSIS denies solidary liability with the NFA or the
negligent operator of the cargo truck because it claims that
they are liable under different obligations and since neither
the provision of the contract nor the insurance law provides for
solidary liability. Is GSIS solidarily liable?
““Figuration Vda. de Maglana, et al. v. Hon. Francisco Consolacion and Afisco

Insurance Corporation, G.R. No. 60506, August 6, 1992.
J9JC9B0M
No. The insured or the heirs of a decease victim of a vehicular

accident may sue directly the insurer of vehicle for indemnity, but
the insurer’s liability is only up to the extent of the insurance policy.
GSIS’ liability based on the insurance contract is direct, but not
solidary with that of NFA.331
249. While driving his car along EDSA, Cesar sideswiped Roberto,
causing injuries to the latter. Roberto sued Cesar and the
third-party liability insurer for damages and/or insurance
proceeds. The insurance company moved to dismiss the
complaint, contending that the liability of Cesar has not yet
been determined with finality.
a. Is the contention of the insurer correct? Explain.
b. May the insurer be held liable with Cesar?
Answer:
a. No, the contention of the insurer is not correct. There is
no need to wait for the decision of the court determining
Cesar’s liability with finality before the third-party
liability insurer could be sued. The occurrence of the
injury to Roberto immediately gave rise to the liability
of the insurer under its policy. In other words, where
an insurance policy insures directly against liability,
the insurer’s liability accrues immediately upon the
occurrence of the injury or event upon which the liability
depends.
b. The insurer cannot be held solidarily liable with Cesar.
The liability of the insurer is based on contract while that
of Cesar is based on tort. If the insurer were solidarily
liable with Cesar, it could be made to pay more than the
amount stated in the policy. This would, however, be
contrary to the principles underlying insurance contracts.
On the other hand, if the insurer were solidarily liable
with Cesar and it is made to pay only up to the amount
stated in the insurance policy, the principles underlying
solidary obligations would be violated.332
“'Government Service Insurance System v. Court of Appeals, et al., G.R. No.

101439, June 21, 1999.
332BAR 1996.
J9JC9B0M
I. INSURANCE 153
250. Poe was run over by a truck which was insured with Malayan
Insurance. Heirs of Poe then filed a complaint against the
owner of the truck and Malayan Insurance. Malayan Insurance
while admitting that it is the insurer of the truck, it asserts that
its liability is limited, and it should not be held solidarily liable
with the owner for all the damages awarded to the aggrieved
parties.
Is Malayan Insurance solidarily liable with the truck
owner?
No, where the insurance contract provides for indemnity
against liability to third persons, the liability of the insurer is direct
and third persons can directly sue the insurer. The direct liability of
the insurer under indemnity contracts against third party liability
does not mean, however, that the insurer can be held solidarily
liable with the insured and/or the other parties found at fault, since
they are being held liable under different obligations. The liability of
the insured carrier or vehicle owner is based on tort, in accordance
with the provisions of the Civil Code; while that of the insurer arises
from contract, particularly, the insurance policy. The third-party
liability of the insurer is only up to the extent of the insurance policy
and that required by law; and it cannot be held solidarily Hable for
anything beyond that amount. Any award beyond the insurance
coverage would already be the sole liability of the insured and/or the
; other parties at fault. However, Malayan did not produce evidence to
prove its hmited liability so the Court concluded that it had agreed
to fully indemnify third-party liabilities.333
No Fault Indemnity Clause

251. What do you understand by the "no fault indemnity" provision
in the Insurance Code? What are the rules on claims under said
provision?
The “no fault indemnity” in the Insurance Code provides that
any claim for death or injury to a passenger or to a third party should
be paid without the necessity of proving fault or negligence of any
kind, subject to the following rules:
a. The total indemnity in respect of any person shall not be
less than P15,000;
“’Heirs of George Poe v. Malayan Insurance Company, G.R. No. 156302, April
7,2009.
J9JC9B0M
1

b. The following proofs of loss, when submitted under oath,

shall be sufficient evidence to substantiate the claim:
i. Police report of accident; and
ii. Death certificate and evidence sufficient to establish
the proper payee; or
iii. Medical report and evidence of medical or hospital
disbursement in respect of which refund is claimed.
c. Claim may be made against one motor vehicle only. In the
case of an occupant of a vehicle, claim, shall lie against
the insurer of the vehicle in which the occupant is riding,
mounting or dismounting from. In any other case, claim
shall lie against the insurer of the directly offending
vehicle. In all cases, the right of the party paying the claim
to recover against the owner of the vehicle responsible for
the accident shall be maintained.334
152. X is a passenger of a jeepney for hire being driven by Y. The

jeepney collided with another passenger jeepney being driven
by Z who was driving recklessly. As a result of the collision,
X suffered injuries. Both passenger jeepneys are covered by
Comprehensive Motor Vehicular Insurance Coverage. If X
wants to claim under the "no fault indemnity clause" against
whom will his claim lie?
The claim shall lie against the insurer of the passenger jeepney
driven by Y because X was his passenger.335
253. Jose, driving his own car together with his wife Maria, were
on their way home from their respective offices when a car
driven by Pedro hit them from behind which was in turn hit
by a gasoline tanker driven by Mario, causing the car of Jose
to turn-turtle, thus, resulting in the death of Maria. All motor
vehicles being insured, Jose filed his claim for the death of
Maria against the "NO FAULT" Insurance, Section 378 of the
Insurance Code.
Will Jose's claim for the death of Maria against insurers
of said three motor vehicles prosper and up to what amount?
Reasons.
“’Section 391, IC; BAR 1989.

’“BAR 2012.
J9JC9B0M
I. INSURANCE 155
Jose’s claim for the death of Maria against the insurer of said
three (3) motor vehicles will not prosper. According to Section 378 of
the Insurance Code:
“Any claim for death or injury to any passenger or
third-party pursuant to the provisions of this chapter shall
be paid without necessity of proving fault or negligence of
any kind; Provided, that for purposes of this section.
XXX
(iii) Claim may be made against one motor vehicle

only. In the case of an occupant of a vehicle, claim shall lie
against the insurer of the vehicle in which the occupant
is riding, mounting or dismounting from. Clearly, in the
instant case, the NO-FAULT claim against the vehicle in
which the deceased was riding is the one authorized, but
the claim against the other vehicle will not prosper.
Jose may claim only up to an amount not less than P15,000.00
pursuant to Section 391 of R.A. No. 10607.
254. If Jose includes in the claim damage for his car, will the claim
prosper? Why?
Jose’s claim for damages for his car will not prosper. As may
be clearly gleaned from Section 378 of the Insurance Code on NO
FAULT Insurance applies only to “any claim for death or injury to
any passenger or third party”.336
255. "X" owns and operates several passenger jeepneys in Metro

Manila. He entered into a contract with Gold Mine Insurance
& Surety Co., insuring the operation of his jeepneys against
accidents with third party-liability.
During the effectivity of the insurance, one of his jeepneys
bumped "B" who had just alighted from another passenger
jeepney whose driver unloaded passengers in the middle of
the street. "B" suffered bodily injury as a consequence and
filed a claim against the insurance company. The latter refused
to pay on the ground that the driver of the jeepney from which
passenger "B" alighted was guilty of negligence in unloading
in the middle of the street, and that the driver of the insured
operator was not at fault.
“BAR 1977.
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1
156 D1V1NA ON COMMERCIAL LAW:

Can passenger "B" recover from the insurance company?

Explain.
Yes, passenger “B” may recover from the insurance company.
The insurance covers the operation of “X’s” jeepneys against accidents
with third parties; therefore, the insurance covers the liability for
death or body injuries of third persons, like what happened to “B”,
and the claim shall be against the insurer of the directly offending
vehicle (X’s vehicle). Furthermore, any claim of this nature shall be
paid without necessity of proving fault or negligence of any kind,
provided that the total indemnity in respect of any person shall be
in accordance as provided under the law.337
256. Driving his car one night, A crossed an intersection as the

signal light turned green. Suddenly he saw an old woman
crossing the street just a few feet from his car. He applied his
brakes immediately, but just the same, he hit the woman who
turned out to be senile already. He brought her to the nearest
hospital where she was confined for three (3) days due to her
injuries. Upon her discharge, A had to pay the hospital bill
which amounted to P2,000.00 including X-rays, doctor's fees
and medicines. t
Being covered by the compulsory liability policy required
of all vehicle owners under the Insurance Code, A preferred the
matter to his insurance company, which refused to reimburse
him, claiming that since A was not at fault (it was admitted that
he was not speeding or in any way negligent), there was no
third-party liability for which the insurance company could
be liable under A's policy. Is the insurance company liable to
reimburse A for the hospital expenses? Explain.
Yes, the insurance company is liable provided A can present
the police report of the accident and the medical report as well
as the hospital receipts. The Insurance Code has the “no-fault”
provision imposing liability for any claim for death or injury to any
third party under the compulsory motor vehicle liability insurance.
Under the provision, the insurance company may be held liable for
the maximum amount of P15,000.00 without necessity of proving
fault or negligence of any kind, provided the aforementioned proofs
are submitted under oath.338
“’BAR 1981.
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I. INSURANCE 157
257. X was riding a suburban utility vehicle (SUV) covered by a

comprehensive motor vehicle liability insurance (CMVLI)
underwritten by FastPay Insurance Company when it collided
with a speeding bus owned by RM Travel, Inc. the collision
resulted in serious injuries to X; Y, a passenger of the bus; and
Z, a pedestrian waiting for a ride at the scene of the collision.
The police report established that the bus was the offending
vehicle. The bus had a CMVLI policy issued by Dragon
Insurance Corporation, X, Y and Z jointly sued RM Travel and
Dragon Insurance for indemnity under the Insurance Code
of the Philippines. The lower court applied the "no-fault"
indemnity policy of the statute, dismissed the suit against
RM Travel, and ordered Dragon insurance to pay indemnity to
all three plaintiffs. Do you agree with the court's judgment?
Explain.
No. The cause of action of Y is based on the contract of carriage,
while that of X and Z is based on torts. The court should not have
dismissed the suit against RM Travel. The court should have ordered
Dragon Insurance to pay each of X, Y, and Z to the extent of the
insurance coverage. The excess of the claims of X, Y, and Z, over and
above such insurance coverage, if any, should be answered or paid
by RM Travel.339
258. There was a collision between the IH Scout, where private

respondents were riding, and a Superlines bus. Private
respondents sustained injuries. A complaint for damages was
filed against Superlines, the bus driver and Perla Compania
de Seguros, Inc., the insurer of the bus. The vehicle in which
the private respondents were riding was insured with Malayan
Insurance Co. Even before summons could be served, the
judge issued an order for the Perla Compania de Seguros, Inc.,
to pay immediately within five (5) days the required amount
under the "no-fault clause" as provided for in Section 378 of the
Insurance Code. Perla Compania de Seguros, Inc., contends
that under Section 378 of the Insurance Code, the insurer liable
to pay the P5.000 is the insurer of the vehicle in which private
respondents were riding, not petitioner.
“BAR 2000.
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1

Is Perla Compania de Seguros, Inc., liable?

No, the essence of “no fault indemnity” clause is to
provide victims of vehicular accidents or their heir’s immediate
compensation pending final determination of who is responsible for
the accident. From a reading of Section 378, the following rules on
claims under the no fault indemnity provision, where the proof of
fault or negligence is not necessary for payment of any claim for
death or injury to passenger or third party, are: 1) claim may be
made against one motor vehicle only; 2) if the victim is occupant of
a vehicle, the claim shall be against the insurer of vehicle in which
he is riding, mounting, or dismounting from; 3) in any other case,
the claim shall he against the insurer of directly offending vehicle;
4) in ah cases, the right of other party paying the claim to recover
against the owner of the vehicle responsible for the accident shall be
maintained.3"
Thus, because the basis of the court order is the no-fault
indemnity clause, it should have been directed to the insurer of the
vehicle where private respondents were riding.
Authorized Driver Clause

259. Daniel Adolfson had a subsisting Malayan car insurance
policy with coverage against own damage as well as third
party liability when his car figured in a vehicular accident with
another car, resulting to damage to both vehicles. At the time
of the accident, Adolfson's car was being driven by James
Stokes, who was authorized to do so by Adolfson. Stokes, an
Irish tourist who had been in the Philippines for only 90 days,
had a valid and subsisting Irish driver's license but without a
Philippine driver's license.
Adolfson filed a claim with Malayan but the latter refused
to pay contending that Stokes was not an authorized driver
under the "Authorized Driver" clause of the insurance policy in
relation to Section 21 of the Land Transportation Office.
Is Malayan Insurance liable to pay Adolfson?
No. Under the authorized driver clause, an authorized driver
must not only be permitted to drive by the insured but it is also
3l“Perla Compania de Seguros Inc. v. Hon. Constante Ancheta, el al., G.R. No.
L-49699, August 8, 1988.
J9JC9B0M
I. INSURANCE 159
essential that he is permitted under the law and regulations to drive

the motor vehicle and is not disqualified from doing so under any
enactment or regulation. At the time of the accident, Stokes had been
in the Philippines for more than 90 days. Hence, under the law, he
could not drive a motor vehicle without a Philippine driver’s license.
He was therefore not an “authorized driver” under the terms of the
insurance policy in question, and Malayan was right in denying the
claim of the insured.311
260. Andrew Palermo, filed a complaint against Pyramid Insurance

Co., Inc., for payment of his claim under a Private Car
Comprehensive Policy MV-1251.
In its answer. Pyramid Insurance Co., Inc., alleged that it
disallowed the claim because at the time of the accident, the
insured was driving his car with an expired driver's license.
Does the authorized driver clause apply to the insured
himself so as to excuse Pyramid Insurance from liability?
No, the requirement that the driver be permitted in accordance
with the licensing or other laws or regulations to drive the Motor
Vehicle and is not disqualified from driving such motor vehicle by
order of a Court of Law or by reason of any enactment or regulation
in that behalf, applies only when the driver is driving on the
insured’s order or with his permission. It does not apply when the
person driving is the insured himself.3-12
261. Rudy Lao is the owner of a Fuso truck insured with Standard
Insurance Co., Inc. While the policy was in effect, the insured
truck bumped another truck, also owned by Lao.
Lao filed a claim with the insurance company for the
proceeds from his policy. However, the claim was denied by
the insurance company on the ground that it was found that
the driver of the insured truck, Leonardo Anit, did not possess
a proper driver's license at the time of the accident. The
Restriction 4 in Leonardo Anit's driver's license provided that
he can only drive four-wheeled vehicles weighing not more
3llJames Stokes, as Attorney-in-Fact of Daniel Stephen Adolfson v. Malayan

Insurance Co, Inc., G.R. No. L-34768, February 24, 1984.
312Andrew Palermo v. Pyramid Insurance Co., Inc., G.R. No. L-36480, May 31,
1988; 1991 Bar.
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1

than 4,500 kgs. Since the insured truck he was driving weighed
more than 4,500 kgs, he therefore violated the "authorized
driver" clause 5 of the insurance policy. Lao claims that at the
time of the accident, it was in fact another driver. Giddie Boy,
who was driving the insured truck. Giddie Boy possessed a
driver's license authorizing him to drive vehicles such as the
truck which weighed more than 4,500 kgs.
Is Standard Insurance liable to pay Lao?
No, if the license of the third party driving the private motor
vehicle prohibits him from driving a vehicle exceeding the weight of
4,500 kgs, the Standard Insurance is not liable if the weight exceeds
4,500 kgs. The license provides for the extent of authority.343
262. Capital Insurance & Surety Co., Inc. insured for one (1) year
the jeepney of Agapito Gutierrez against passenger and
third-party liability. The policy provides in Item 13 that the
authorized driver must be the holder of a valid and subsisting
professional driver's license. A driver with an expired Traffic
Violation Receipt or expired Temporary Operator's Permit is
not considered an authorized driver. ;
The insured jeepney figured in an accident. As a result,
a passenger fell off the vehicle and died. At the time of the
accident, Teofilo Ventura, the jeepney driver, did not have his
license but he had with him instead a carbon copy of a traffic
violation report (TVR) issued by a policeman. However, the
said TVR was already expired because it only served as a
temporary operator's permit for 15 days from receipt.
Does the insurance cover a jeepney whose driver's TVR
or temporary operator's permit had already expired?
No, where the driver’s temporary operator’s permit had expired,
and the insurance policy states that a driver with an expired TVR or
expired temporary operator’s permit is not considered an authorized
driver within the meaning of the policy, the expiration of the same
bars recovery under the policy. In liability insurance, the parties
are bound by the terms of the policy and the right of the insured to
recover is governed thereby.344
3riRudy Lao v. Standard Insurance Co., Inc., G.R. No. 140023, August 14,2003.
344Agapito Gutierrez v. Capital Insurance & Surety Co., Inc., G.R. No. L-26827,
June 29, 1984.
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I. INSURANCE 161
Based on the foregoing cases, the authorized driver clause

means that the insurer is liable for death or injuries caused by
the negligent operation of the insured vehicle if the driver is the
insured himself, whether or not he is in possession of a valid driver’s
license, or if the driver of the vehicle is a person authorized by the
registered owner; provided that the former has a valid driver’s
license, appropriate to the type of the driven vehicle.
Theft Clause
263. Villacorta had her Colt Lancer car insured with Empire
Insurance Company against own damage, theft and third-
party liability. While the car was in the repair shop, one of the
employees of the said repair shop took it out for a joyride after
which it figured in a vehicular accident. This resulted to the
death of the driver and some of the passengers as well as to
extensive damage to the car.
Villacorta filed a claim for total loss with the said insurance
company. However, it denied the claim on the ground that the
accident did not fall within the provisions of the policy either
for the Own Damage er Theft coverage, invoking the policy
provision on "Authorized Driver Clause"
Is Empire Insurance liable under the Authorized Driver
Clause?
No, Empire Insurance is not liable under the Authorized

Driver Clause, but under the Theft Clause. The main purpose of
the authorized driver clause is that a person other than the insured
owner, who drives the car on the insured’s order, such as his driver,
or with his permission, such as friend or member of the family
or employees of a car service shop must be duly licensed drivers
and have no disqualification to drive a motor vehicle. The mere
happenstance that the employee of the shop owner diverts the use of
his car to unauthorized purpose does not mean that the authorized
driver clause has been violated such as to bar recovery, provided
that the employee is qualified to drive under a valid license.345
345Jewel Villacorta v. Insurance Commissioner, et al., G.R. No. 54171, October

28,1980; 1981 Bar.
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I

264. HL insured his brand-new car with P Insurance Company for

comprehensive coverage wherein the insurance company
undertook to indemnify him against loss or damage to the car
(a) by accidental collision xxx (b) by fire, external explosion,
burglary, or theft, and (c) malicious act.
After a month, the car was carnapped while parked in the
parking space in front of the Intercontinental Hotel in Makati.
HL's wife who was driving the said car when it was carnapped
was in possession of an expired driver's license, a violation of
the "authorized driver" clause of the insurance company.
a. May the insurance company be held liable to indemnify

HL for the loss of the insured vehicle? Explain.
Yes. The car was lost due to theft. What applies in this case
is the theft clause, and not the “authorized driver” clause. It is
immaterial that HL’s wife was driving the car with an expired
driver s license at the time it was carnapped.
165. On May 26, 2014, Jess insured with Jack Insurance (Jack) his
2014 Toyota Corolla sedan under a comprehensive motor
vehicle insurance policy for one (1) year. On July 1,2014, Jess' car
was unlawfully taken. Hence, he immediately reported the theft
to the Traffic Management Command (TMC) of the Philippine
National Police (PNP), which made Jess accomplish a complaint
sheet as part of its procedure. In the complaint sheet, Jess
alleged that a certain Ric Silat (Silat) took possession of the
subject vehicle to add accessories and improvements thereon.
However, Silat failed to return the subject vehicle within the
agreed three-day period. As a result, Jess notified Jack of his
claim for reimbursement of the value of the lost vehicle under
the insurance policy. Jack refused to pay claiming that there is
no theft as Jess gave Silat lawful possession of the car.
Is Jack correct?
No. Jack is not correct. The “theft clause” of a comprehensive
motor vehicle insurance policy has been interpreted by the Court
m several cases to cover situations like (1) when one takes the
motor vehicle of another without the latter’s consent even if the
motor vehicle is later returned, there is theft—there being intent
to gain as the use of the thing unlawfully taken constitutes gain,
J9JC9B0M
I. INSURANCE 163
or (2) when there is taking of a vehicle by another person without

the permission or authority from the owner thereof.346
266. On February 21, 2013, Barrack entered into a contract of

insurance with Matino Insurance Company (Matino) involving
a motor vehicle. The policy obligates Matino to pay Barrack the
amount of Six Hundred Thousand Pesos (P600,000.00) in case
of loss or damage to said vehicle during the period covered,
which is from February 26,2013 to February 26,2014.
On April 16, 2013, at about 9:00 a.m., Barrack instructed
his driver, JJ, to bring the motor vehicle to a nearby auto
shop for tune-up. However, JJ no longer returned and despite
diligent efforts to locate the said vehicle, the efforts proved
futile. Resultantly, Barrack promptly notified Matino of the
said loss and demanded payment of the insurance proceeds
of P600,000.00. In a letter dated July 5, 2013. Matino denied
the claim, reasoning as stated in the contract that "the
company shall not be liable for any malicious damage caused
by the insured, any member of his family or by a person in the
insured's service.
Is Matino correct in denying the claim?
No. Matino is not correct in denying the claim. An insurance

company cannot deny a claim by the owner of a motor vehicle who
insured it against loss or damage because the driver he employed
stole it. Matino cannot invoke the provision excluding malicious
damages caused by a person in the service of the insured. Contracts
of insurance are to be construed according to the sense and meaning
of the terms which the parties themselves have used. If such terms
are clear and unambiguous, they must be taken and understood in
their plain, ordinary and popular sense. The word “loss” refers to
the act or fact of losing or failure to keep possession, while the word
“damage” means deterioration or injury to property. Also, a contract
of insurance is a contract of adhesion. So, when the terms of the
insurance contain limitations on Eability, courts should construe
them in such a way as to preclude the insurer from non-comphance
with his obligation.347
’“Paramount Insurance v. Spouses Remondeulaz, G.R. No. 173773, November

28, 2012; BAR 2014.
’’’Alpha Insurance and Surety Co. v. Castor, G.R. No. 198174, September 2,
2013; BAR 2014.
J9JC9B0M
8. Compulsory insurance coverage for agency-hired

workers
The agency hired OFW compulsory insurance or the compulsory
coverage for agency-hired migrant workers is an insurance
mechanism made available by law to provide insurance coverage for
the OFWs. It covers accidental death benefit, natural death benefit,
permanent total disablement benefit, repatriation cost benefit,
subsistence allowance, money claim benefit, compassionate visit
benefit, medical evacuation, and medical repatriation benefits.
OFW' and migrant workers mean the same thing.
I. Variable Contracts
267. What is a Variable Contract?
The term variable contract shall mean any policy or contract
n either a group or on an individual basis issued by an insurance
Irmpany providing for benefits or other contractual payments or
alues thereunder to vary so as to reflect investment results of
any segregated portfolio of investments or of a designated separate
account in which amounts received in connection with such
contracts 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. It shall not be deemed to be a security or
securities.34’
J. Business of Insurance; Requirements
Important rules:
1. Contract of insurance involves public interest, regulation
by the State is necessary.349 No insurer or insurance
company is allowed to engage in the insurance business
without a license or a certificate of authority from the
Insurance Commission.
3,8Section 238(b), Insurance Code.

349White Gold Marine Services v. Pioneer Insurance and Surety Corporation,
G.R. No. 154514, July 28, 2005.
J9JC9B0M
I. INSURANCE 165
2. Before a foreign corporation can transact business it must

first obtain a license to transact business and secure the
proper authorizations under existing law.350
3. The law makes no distinction whether the transaction is
one that is isolated or in the regular course of business,
for an insurance company to secure a license from the
Insurance Commission.
4. Engaging in insurance without license from the Insurance
Commission is a criminal offense361 without prejudice to
the imposition of administrative sanctions under [Section]
438 of the IC.362
5. No person shall act an insurance agent without first
procuring license from the Insurance Commission.353
6. Capital requirement (P900 million by end 2019 and 1.3
billion by 2022).
K. INSURANCE COMMISSIONER AND ITS POWER
268. What are the powers of Insurance Commissioner?

a. The Insurance Commissioner shall have the duty to see
that all laws relating to insurance, insurance companies
and other insurance matters, mutual benefit associations,
and trusts for charitable uses are faithfully executed and
to perform the duties imposed upon him by this Code,
and shall, notwithstanding any existing laws to the
contrary, have sole and exclusive authority to regulate
the issuance and sale of variable contracts as defined in
Section 232 and to provide for the licensing of persons
selling such contracts, and to issue such reasonable rules
and regulations governing the same;364
b. The Commissioner may issue such ruling, instructions,
circulars, orders and decision as he may deem necessary
to secure the enforcement of the provisions of this Code,
360Avon Insurance PLC v. Court of Appeals, G.R. No. 97642, August 29,1997.
““Insurance Commission Opinion LO-2018-03, January 30, 2018.
J9JC9B0M
1

subject to the approval of the Secretary of Finance.

Except as otherwise specified, decisions made by the
Commissioner shall be appealable to the Secretary of
Finance;555
C. In addition to the foregoing, the Commissioner shall have
the following powers and functions:
"(a) Formulate policies and recommendations on issues
concerning the insurance industry, advise Congress and other
government agencies on all aspects of the insurance industry
and propose legislation and amendments thereto;
“(b) Approve, reject, suspend or revoke licenses or
certificates of registration provided for by the Code;
“(c) Impose sanctions for the violation of laws and the
rules, regulations and orders issued pursuant thereto;
“(d) Prepare, approve, amend or repeal rules, regulations
and orders, and issue opinions and provide guidance on and
supervise compliance with such rules, regulations and orders;
“(e) Enlist the aid and support of, and/or deputize
any and all enforcement agencies of the government in the
implementation of its powers and functions under the Code;
“(f) Issue cease and desist orders to prevent fraud or
injury to the insuring public;
“(g) Punish for contempt of the Commissioner, both
e-
direct■ and indirect,
- in accordance with the pertinent provisions
of and penalties prescribed by the Rules of Court;
“(h) Compel the officers of any registered insurance
corporation or association to call meetings of stockholders or
members thereof under its supervision;
“(i) Issue subpoena duces tecum and summon witnesses
to appear in any proceeding of the Commission and, in
appropriate cases, order the examination, search and seizure
of all documents, papers, files and records, tax returns, and
books of accounts of any entity or person under investigation as
may be necessary for the proper disposition of the cases before
it, subject to the provisions of existing laws;
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I. INSURANCE 167
“(j) Suspend or revoke, after proper notice and hearing,

the license or certificate of authority of any entity or person
under its regulation, upon any of the grounds provided by law;
“(k) Conduct an examination to determine compliance
with laws and regulations if the circumstances so warrant as
determined by appropriate rules and regulations;
“(1) Investigate not oftener than once a year from the
last date of examination to determine whether an institution
is conducting its business on a safe and sound basis: Provided,
That, the deficiencies/irregularities found by or discovered by
an audit shall be immediately addressed;
“(m) Inquire into the solvency and liquidity of the
institutions under its supervision and enforce prompt corrective
action;
“(n) To retain and utilize, in addition to its annual
budget, all fees, charges and other income derived from the
regulation of insurance companies and other supervised
persons or entities;
“(o) To fix and assess fees, charges and penalties as the
Commissioner may find reasonable in the exercise of regulation;
and
“(p) Exercise such other powers as may be provided by
law as well as those which may be implied from, or which
are necessary or incidental to the express powers granted
the Commission to achieve the objectives and purposes of the
Code.356
d. In addition to the administrative sanctions provided
in the Code, the Commissioner is also authorized, at
his discretion, to impose upon insurance companies,
their directors and/or officers and/or agents, for any
willful failure or refusal to comply with, or violation
of any provision of the Code, or any order, instruction,
regulation, or ruling of the Commissioner, or any
commission or irregularities, and/or conducting business
in an unsafe or unsound manner as may be determined by
the Commissioner, the following:
Îbid.
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1

“(a) Fines not less than Five thousand pesos (P5,000.00)

and not more than Two hundred thousand pesos (P200,000.00);
and
"(b) Suspension, or after due hearing, removal of
directors and/or officers and/or agents.367
269. Does the Commissioner have the power to adjudicate claims

and complaints involving any loss, damage or liability for which
the insurer may be answerable under any insurance policy?
Yes, the Commissioner shall have the power to adjudicate
claims and complaints involving any loss, damage or liability for
which an insurer may be answerable under any kind of policy or
contract of insurance, or for which such insurer may be liable under
a contract of suretyship, or for which a reinsurer may be sued under
any contract of reinsurance it may have entered into; or for which a
mutual benefit association may be held Hable under the membership
certificates it has issued to its members, where the amount of any
such loss, damage or liability, excluding interest, cost and attorney’s
fees, being claimed or sued upon any kind of insurance, bond,
reinsurance contract, or membership certificate does not exceed in
any single claim Five million pesos (P5,000,000.00).368
The power of the Commissioner does not cover the relationship
between the insurance company and its agents/brokers but is limited
to adjudicating claims and complaints filed by the insured against
the insurance company.369
270. Is the authority of the Commissioner to adjudicate concurrent

with the courts?
Yes, the authority to adjudicate granted to the Commissioner
shall be concurrent with that of the civil courts, but the filing of
a complaint with the Commissioner shall preclude the civil courts
from taking cognizance of a suit involving the same subject matter.
Any decision, order or ruling rendered by the Commissioner
after a hearing shall have the force and effect of a judgment. Any
party may appeal from a final order, ruling or decision of the
Commissioner by filing with the Commissioner within thirty (30)

™Ibid.
J9JC9B0M
I. INSURANCE 169
days from receipt of copy of such order, ruling or decision a notice

of appeal to the Court of Appeals in the manner provided for in the
Rules of Court for appeals from the Regional Trial Court to the
Court of Appeals.300
271. Ramon Paterno filed a letter-complaint against Philippine

American Life Insurance Company (Philamlife) to the Insurance
Commissioner alleging certain problems encountered by
agents, supervisors, managers and public consumers as a
result of certain practices by said company. Manuel Ortega,
Philamlife's Senior Assistant Vice-President and Executive
Assistant to the President filed a motion to quash raising as
one of the grounds that the Insurance Commission has no
jurisdiction over the subject or nature of the action and over
the parties involved. The Insurance Commissioner denied
the motion to quash. Is the resolution of the legality of the
contract of agency falls within the jurisdiction of Insurance
Commissioner?
No. The general regulatory authority of the Insurance
Commissioner is described in Section 414 of the Insurance Code
which shows that the Insurance Commissioner has the authority
to regulate the business of insurance. Section 2 of the said law
defines the term “doing an insurance business” or “transacting
an insurance business.” Since the contract of agency entered
into between Philamlife and its agents is not included within the
meaning of an insurance business, Section 2 of the Insurance Code
cannot be invoked to give jurisdiction over the same to the Insurance
Commissioner.361
Insurance Agent
272. Petitioners, beneficiaries in the life insurance benefits under
a group policy, sought to recover these benefits from Insular
Life but the latter denied their claim on the ground that its
liability was already extinguished upon delivery to and receipt
by Prime Marine Services, Inc. of the checks issued in their
names. Capt. Roberto Nuval, President and General Manager
of PMSI, the employer of seamen who died, allegedly received
3mIbid.
“‘Philippine American Life Insurance Company, et al. v. Hon. Armando
Ansaldo, G.R. No. 76542, July 26, 1994.
J9JC9B0M
the checks through the special power of attorney issued by

petitioners and these checks were deposited in his account
On trial, CA ruled that the powers of attorney relied upon by
Insular Life were sufficient to authorize Capt. Nuval to receive
the insurance pertaining to the beneficiaries. Is Capt. Nuval
authorize to receive the proceeds?
Yes. in group insurance policies, the employer is the agent of the
insurer. Group insurance is essentially a single insurance contract
that provides coverage for many individuals. In its original and most
common form, group insurance provides life or health insurance
coverage for the employees of one employer. The coverage terms for
group insurance are usually stated in a master agreement or policy
that is issued by the insurer to a representative of the group or to
an administrator of the insurance program, such as an employer.
The employer acts as a functionary in the collection and payment of
premiums and in performing related duties.362
73. Joseph Bengzon Chua, doing business under the style of Tic
Hin Chiong, filed a case against Smith, Bell, and Co., Inc. and
the latter's principal, First Insurance Co. Ltd., to recover the
value of the losses sustained by him when his cargo arrived
in apparent bad order condition. Smith, Bell & Co. denied any
liability alleging that it is merely a settling or claim agent o
the insurance company and as such agent, it is not persona y
liable under the policy in which it has not even taken part of. Is
Smith, Bell & Co. solidarily liable with its principal?
No. A settling agent acting within the scope of its authority
cannot be held personally Hable and/or solidarily liable for the
obligations of the disclosed principal. A resident agent is taske
only to receive legal processes on behalf of its principal and not to
answer personally for any insurance claims. The scope and extent
of the functions of an adjustment and settlement agent do not
include personal liability. His functions are merely to settle and
adjust claims in behalf of his principal if those claims are proven
and undisputed, and if the claim is disputed or is disapproved by the
principal, like in the instant case, the agent does not assume any
personal liability. The recourse of the insured is to press his claim
against the principal.363
M2Luz Pineda, el al. v. Court of Appeals, G.R. No. 105562, September 27, 1993.
“’Smith, Bell & Co., Inc. v. Court of Appeals and Joseph Bengzon, G.R. No.
110668, February 6, 1997.
J9JC9B0M
I. INSURANCE 171
Reinsurance
274. CISC and SAPL entered into a Memorandum of Agreement
(MOA) whereby MSAPL appointed CISC as the exclusive agent
of MSAPL to PCSO during the lifetime of the recently concluded
MOA entered into between MSAPL, PCSO and other parties.
After initially complying with its obligation under the
MOA, MSAPL stopped remitting commissions to CISC. As a
result of MSAPL’s refusal to pay, CISC filed a complaint for
specific performance against MSAPL, MSPI, Atty. Ofelia
Cajigal, and PCSO. CISC prayed that private respondents be
ordered to comply with its obligations under the MOA.
CISC posted a bond through Plaridel Surety and Insurance
Company (Plaridel) in favor of MSAPL. Two days later, MSAPL
filed a motion to determine the sufficiency of the bond because
of questions regarding the financial capacity of Plaridel. But
before the RTC could act on this motion, MSAPL, apparently
getting hold of Plaridel’s latest financial statements, moved to
recall and set aside the approval of the attachment bond on the
ground that Plaridel had no capacity to underwrite the bond
pursuant to Section 215 of the old Insurance Code because
its net worth was only P214,820,566.00 and could therefore
only underwrite up to P42,964,113.20. RTC denied MSAPL’s
motion, finding that although Plaridel cannot underwrite the
bond by itself, the amount covered by the attachment bond
was likewise reinsured to sixteen other insurance companies.
Plaridel submitted proof of reinsurance. Is Plaridel’s bond
correctly approved?
Yes, reinsurance contracts were correctly issued in favor of

Plaridel. A contract of reinsurance is one by which an insurer (the
“direct insurer” or “cedant”) procures a third person (the “reinsurer”)
to insure him against loss or liability by reason of such original
insurance. It is a separate and distinct arrangement from the
original contract of insurance, whose contracted risk is insured in
the reinsurance agreement. The reinsurer’s contractual relationship
is with the direct insurer, not the original insured, and the latter has
no interest in and is generally not privy to the contract of reinsurance.
Put simply, reinsurance is the “insurance of an insurance.”364
“'Communication and Information Systems Corporation v. Mark Sensing

Australia Pty. Ltd., G.R. No. 192159, January 25, 2017.
J9JC9B0M
275. Lepanto Consolidated Mining Company filed a complaint with

a plea for preliminary mandatory injunction against Malayan
Insurance Company, Inc. founded on the Marine Open Policy
issued by the latter in favor of Lepanto. Ivor Robert Dayton
Gibson, one of re-insurers in the reinsurance contract obtained
abroad by Malayan through Sedgwick, Collins & Co., Limited,
filed a motion to intervene. He claimed that he has a legal
interest in the subject matter of litigation in that he stands
to be held liable to pay on its reinsurance contract should
judgment be rendered requiring the Malayan to pay the claim
of the Lepanto. Is reinsurer's intervention proper?
No. The rights, if any, of Ivor Robert Gibson are not prejudiced
by the present suit and will be fully protected in a separate action
against him and his co-insurers by Malayan. The general rule in the
law of reinsurance is that the re-insurer is entitled to avail itself
of every defense which the re-insured, Malayan, might urge in an
action by the person originally insured, Lepanto. The clause “to
iay as may be paid thereon” contained in Ivor Robert Gibson’s re-
nsurance contract does not preclude the reinsurer from insisting
upon proper proof that a loss strictly within the terms of the original
policy has taken place.365
276. Yupangco Cotton Mills engaged to secure with Worldwide

Security and Insurance Co., Inc., several of its properties under
Policy No. 20719 and Policy No. 25896. Both contracts were
covered by reinsurance treaties between Worldwide Surety
and Insurance and several foreign reinsurance companies,
including Avon Insurance. The reinsurance arrangements had
been made through international broker C.J. Boatwright and
Co. Ltd., acting as agent of Worldwide Surety and Insurance.
Within the respective effectivity periods of the 2 policies, the
properties therein insured were razed by fire. Partial payments
were made by Worldwide Surety and Insurance and some of
the reinsurance companies. Worldwide Surety and Insurance,
in a Deed of Assignment, acknowledged a remaining balance
of P19,444,447.75 still due Yupangco Cotton Mills, and assigned
to the latter all reinsurance proceeds still collectible from all
the foreign reinsurance companies. Avon Insurance submitted
that the Court has no jurisdiction over them, being all foreign
365Ivor Robert Dayton Gibson v. Hon. Pedro Revilla, et al., G.R. No. L-41432,
July 30, 1979.
J9JC9B0M J
I. INSURANCE 173
corporations not doing business in the Philippines with no

office, place of business or agents in the Philippines. Is Avon
Insurance subject to the Court's jurisdiction?
No. A corporation to qualify as duly engaged in reinsurance
business, it must comply with the requirements provided by
Philippine law. If a foreign corporation does not do business here,
there would be no reason for it to be subject to the State’s regulation.
Areinsurance company is not doing business in a certain state merely
because the property or lives which are insured by the original
insurer are located in such State. In so far as the State is concerned,
such foreign corporation has no legal existence. Therefore, to subject
such corporation to the courts’ jurisdiction would violate the essence
of sovereignty.366
366Avon Insurance PLC, et al. v. Court of Appeals, G.R. No. 97642, August 29,
1997.
J9JC9B0M
1
II. PRE-NEED CODE OF THE PHILIPPINES

(REPUBLIC ACT NO. 9829)
A. Definition
1. What law governs the establishment, operation, and regulation
of pre-need companies in the Philippines? Which regulatory
body oversees the pre-need companies in the Philippines?
The establishment, operation and regulation of pre-need
companies are governed by Republic Act (“R.A.”) No. 9829, otherwise
known as Pre-Need Code of the Philippines, which took effect on
December 3, 2009.
All pre-need companies shall be under the primary and
-■xclusive supervision and regulation of the Insurance Commission.1
2. Define pre-need plans.

“Pre-need plans” are contracts, agreements, deeds, or plans for
the benefit of the planholders which provide for the performance of
future service/s, payment of monetary considerations, or delivery o
other benefits at the time of actual need or agreed maturity date, as
specified therein, in exchange for cash or installment amounts wit
or without interest or insurance coverage and includes life, pension,
education, interment, and other plans, instruments, contracts,
or deeds as may in the future be determined by the Insurance
Commission.2
3. Define pre-need company.

“Pre-need company” refers to any corporation registered with
the Insurance Commission and authorized/licensed to sell or offer
to sell pre-need plans. The term “pre-need company” also refers to
'Section 5, R.A. No. 9829.

"Section 3(b), R.A. No. 9829.
174
J9JC9B0M
II. PRE-NEED CODE OF THE PHILIPPINES 175
(Republic Act No. 9829)
schools, memorial chapels, banks, nonbank financial institutions,

and other entities which have also been authorized/licensed to sell
or offer to sell pre-need plans insofar as their pre-need activities or
business are concerned?
4. Is a pre-need plan considered a security under the Securities

and Regulation Code ("SRC")?
Section 3.9 of the SRC specifically defines pre-need plans as:
“SECTION 3. Definition of Terms. —
xxx xxx xxx
3.9. “Pre-Need Plans” are contracts which provide
for the performance of future services or the payment
of future monetary considerations at the time of actual
need, for which planholders pay in cash or installment
at stated prices, with or without interest or insurance
coverage and includes life, pension, education, interments
and other plans which the Commission may from time to
time approve.”
The fact that pre-need plans are defined in Section 3.9 of the
SRC could only mean that it is treated as one of the securities being
regulated by the SRC. Otherwise, there is no reason for its inclusion
in the said law, which was primarily enacted for the purpose of
regulating a socially conscious free market that ensures full and fair
disclosure of securities.
However, even if there is no Section 3.9 of the SRC, a pre
need plan still satisfies all the elements of an investment contract
under the Howey Test and is, therefore, a security. In a pre-need
plan or contract, the planholder pays a pre-need company a certain
amount to answer for a determined future need (education, pension,
memorial, etc.), which is essentially a return or benefit, primarily
from the efforts of others, the amount of which is higher than the
amount earlier paid?
•’Section 3(c), R.A. No. 9829.

4Re: Pre-Need Products as Securities, SEC-OGC Opinion No. 54-19, November
25,2019.
J9JC9B0M
1
176 D1VINA ON COMMERCIAL LAW:

B. Registration of Pre-need Plans
5. Are pre-need plans required to be registered before they can

be offered to the public?
Before offering them for sale to the public, pre-need plans must
be registered with the Insurance Commission.
Within a period of 45 days after the grant of a license to do
business as a pre-need company, and for every pre-need plan which
the pre-need company intends to offer for sale to the public, the pre
need company shall, among other things, file with the Insurance
Commission the following:
a. Duly accomplished Registration Statements;
b. Board resolution authorizing the registration of
applicant’s pre-need plans;
c. Opinion of independent counsel on the legality of the
issue;
d. Audited financial statements;
e. Viability study with certification, under oath, of pre-need
actuary accredited by the Commission;
f. Copy of the proposed pre-need plan; and
g- Sample of sales materials.
Such registration statements and sales materials required
under this section shall contain the appropriate risk factors as may
be determined by the Insurance Commission.6
6. When can the Insurance Commission deny the registration of

pre-need plans?
The Insurance Commission shall deny the registration of a pre

need plan/s of a pre-need company if on the basis of its latest audited
financial statements, trust fund annual statements, and reserves
valuation report, it has solvency or trust fund deficiencies, or paid-
up capital impairment.6
‘Section 16, R.A. No. 9829.

‘Section 15, Implementing Rules and Regulations of R.A. No. 9829 (“IRR-RA
9829”).
J9JC9B0M J
“Trust fund” refers to a fund set up from the planholders’

payments to pay for the cost of benefits and services, termination
values payable to planholders and other costs necessary to ensure
the delivery of benefits or services to planholders as provided for in
the contracts.7
7. Aside from the registration of pre-need plans, what are the

other requirements that must be satisfied before the pre-need
plans can be sold to the public?
All forms, including amendments thereto, relating to the pre
need plans shall be approved by the Insurance Commission. No pre
need contracts or certificates shall be issued or delivered within the
Philippines unless in the form previously approved by the Insurance
Commission.8
No registered pre-need plan shall be sold to prospective
planholders unless an information brochure, which has been
filed with the Insurance Commission, has been provided to the
purchaser. The information brochure shall contain an explanation
of the principal features of the pre-need plan, a statement that the
planholder may avail of a default or reinstatement period within
which to reinstate his lapsed plan, and the conditions of the same
and the rates of return for scheduled benefit plans and illustrative
yields for contingent benefit plans, and such other information that
the Insurance Commission shall require by rule.9
8. What are the rules on pre-need advertising?

a. Pre-need plans shall be advertised and sold in an
appropriate non-misleading manner.
b. It shall be unlawful for any pre-need company to
advertise itself or its pre-need plans unless the Insurance
Commission has approved such advertising material.
The Insurance Commission shall have a period of 10
working days to approve or deny the advertising material
and failure to act within the said period shall cause the
advertising material to be deemed approved. For purposes
hereof, the Insurance Commission shall have the power to
’Section 3(j), R.A. No. 9829.

•Section 17, R.A. No. 9829.
eSection 19, R.A. No. 9829.
J9JC9B0M
define the scope of its advertising rules to appropriately

cover advertising or other communications to the public.
C. Any person who sells or offers to sell any pre-need plan or
contract by any means or instruments of communication
in violation of the foregoing rules on pre-need advertising
shall be liable to the person purchasing such pre-need
contract who may sue to recover the consideration paid
for such pre-need contract with interest thereon. In
addition hereto, the Insurance Commission shall have
the power to pursue the erring pre-need company in an
administrative or criminal proceeding.
d. A fine of PIOO.OOO.OO shall be imposed on any pre-need
company found to have violated the foregoing rules:
Provided, That a second violation shall, in addition to the
fine imposed, result in the suspension of the license of the
pre-need company.10
9. What are the groundsfor mandatory cancellation of registration

and permit to sell of pre-need plans?
The Insurance Commission shall cancel the registration of any
pre-need plan and the permit to sell such pre-need plan by issuing
an order to this effect, setting forth its findings in respect thereto, if,
after due notice and hearing, it shall appear that the issuer:
i. Is insolvent;
ii. Has violated any of the provisions of the Pre-Need Code,
or the rules promulgated pursuant thereto, or any order
of the Commission of which the issuer has notice;
iii. Has been or is engaged or is about to engage in fraudulent
transactions;
iv. Is in any other way dishonest or has made any fraudulent
representation in any circular or other literature that has
been distributed concerning the issuer or its pre-need
plans; and
v. Does not conduct its business in accordance with law.
“Section 20, IRR-RA 9829.
J9JC9B0M
The Insurance Commission shall compel the production of

all the books and records of the issuer, administer oaths to, and
examine the officers of such issuer or any other person connected
therewith as to its business or affairs, and may require a balance
sheet exhibiting the assets and liabilities of such issuer and/or its
income or profit statement, certified to by an independent certified
public accountant.
If the issuer shall refuse to permit an examination to be made
by the Commission, its refusal shall give ground for the cancellation
of registration.
Notice of issuance of an order of cancellation shall be given by
mail, personally, by telephone confirmed in writing, or by telegraph,
to the issuer and every dealer and broker who shall have notified the
Commission of an intention to sell such pre-need plan.
The power of the Insurance Commission to cancel the
registration and/or the permit to sell is without prejudice to its
power under the Pre-Need Code to enforce compliance therewith."
10. How can the issuer voluntarily cancel the registration and
permit to sell of its pre-need plans?
A registration of a pre-need plan may be cancelled or a permit
to sell may be suspended or cancelled by the Commission upon
petition for its suspension and/or cancellation, as the case may be,
by the issuer.
A petition for the cancellation of registration of a pre-need plan
or a petition for suspension and/or cancellation of a permit to sell
shall be accompanied by the following:
a. Petition for the cancellation of the registration or petition
for suspension and/or cancellation for the permit to sell
stating the reasons therefor;
b. Proof of the reasons for cancellation of registration or
suspension and/or cancellation of the permit to sell;
c. Proof of publication of a notice to stockholders/investors/
planholders of said petition for cancellation of registration
and/or petition for suspension and/or cancellation of a
permit to sell;
nSection 17, IRR-RA 9829.
J9JC9B0M
d. Board resolution certified under oath by the corporate

secretary of the issuer and attested to by the president or
one performing similar functions approving such petition
for cancellation and/or suspension as the case may be;
e. List of all planholders;
f. A certification under oath by the treasurer of the issuer
attested to by the President that the planholders’ claims
have been settled in accordance with the pre-need plan
contract;
g- A joint and several assumption of liability executed by the
treasurer and the president of the issuer for claims that
may arise as a result of said cancellation/suspension; and
h. Evidence of sufficiency of the trust fund to cover payment
of outstanding liabilities to planholders.
After the filing of the petition and supporting documents and
the payment of the filing fee, the petition shall be immediately
published by the issuer in two (2) newspapers of general circulation,
once a week for two (2) consecutive weeks reciting the contents of
the petition and notifying planholders to file their claims with the
ssuer.
If after the completion of the aforesaid publication, the
Commission finds that the petition together with all the other
papers and documents attached thereto is on its face complete and
that no party stands to suffer damage thereby, it shall issue an
order cancelling said registration or cancelling and/or suspending
the permit to sell. However, such order shall not preclude any
planholder from his available remedies under the law should the
cancellation and/or suspension cause him damage.12
C. Licensing of Sales Counselors and General Agents
11. Who is a sales counselor, and what are the requirements before
a sales counselor can sell pre-need plans?
“Sales counselors” refers to natural persons who are engaged
in the sale of, or offer to sell, or counsel of prospective planholders
12Section 18, IRR-RA 9829.
J9JC9B0M J
for the purpose of selling, whether or not on commission basis, pre

need plans upon the authority of the pre-need company.13
No sales counselor shall be allowed to solicit, sell, or offer to
sell pre-need plans without being licensed as such by the Insurance
Commission. No license shall be issued unless the following
qualifications have been complied with:
a. The applicant must be of good moral character and must
not have been convicted of any crime involving moral
turpitude;
b. The applicant has undergone a training program approved
by the Insurance Commission and such fact has been
certified under oath by a duly authorized representative
of a pre-need company; and
c. The applicant has passed a written examination
administered by the Insurance Commission: Provided,
that the administration of the examination may be
delegated to an independent organization under the
supervision of the Insurance Commission.
Such license shall automatically expire every thirtieth day of
June or such date of every year as may be fixed by the Insurance
Commission and may be accordingly renewed.14
12. What are the grounds for denial, suspension, and revocation of
a license to act as a sales counselor?
An application for the issuance or renewal of a license to act
as sales counselor may be denied, or such license, if already issued,
shall be suspended or revoked based on the following grounds:
a. Materially misrepresented statements in the application
requirements;
b. Obtained or attempted to obtain a license by fraud or
misrepresentation;
c. Materially misrepresented the terms and conditions of
pre-need plan which he sold or offered to sell;
’’Section 3(h), R.A. No. 9829.

“Section 20, R.A. No. 9829.
J9JC9B0M
d. Solicited, sold, or attempted to solicit or sell a pre-need

plan by means of false or misleading representation and
other fraudulent means;
e. Terminated for cause from another pre-need company;
f. Similar grounds found in Section 11 of this Pre-Need
Code, to wit:
i. Any person convicted of any crime involving any
pre-need plan, security, or financial product;
ii. Any person convicted of an offense involving moral
turpitude or involving fraud or embezzlement, theft,
estafa, or other fraudulent acts or transactions;
iii. Any person who, by reason of any misconduct, is
enjoined by order, judgment, or decree by any court,
quasi-judicial body, or administrative agency of
competent jurisdiction from acting as a director,
officer, employee, consultant, agent, or occupying
any fiduciary position;
iv. Any person found by the Insurance Commission to
have willfully violated or willfully aided, abetted,
counseled, commanded, induced, or procured the
violation of the Pre-Need Code, the Insurance Code,
the Securities Regulation Code or any related laws
and any rules or orders thereunder;
v. Any person judicially declared to be insolvent or
incapacitated to contract; and
vi. Any person found guilty by a foreign court, regulatory
authority, or government agency of the acts or
violations similar to any of the acts or misconduct
enumerated in the foregoing paragraphs: Provided,
That conviction in the first instance shall be
considered as sufficient ground for disqualification;
g- Willfully allowing the use of one’s license by a non-licensed
or barred individual; and
h. Analogous circumstances.15
‘“Section 21, R.A. No. 9829.
J9JC9B0M
13. Can the issuer contract the services of the general agent for
the sale of the pre-need plans? What are the requirements?
If the issuer should contract the services of a general agent to
undertake the sales of its plans, such general agent shall be required
to be licensed as such with the Insurance Commission, in accordance
with the requirements imposed by the Insurance Commission.
The following are the minimum requirements for the licensing
of general agents:
i. Copy of certificate of registration;
ii. Copy of articles of incorporation/partnership/cooperation
and by-laws;
iii. Minimum paid-up capital of Pl,000,000.00;
iv. Application form;
V. Endorsement of the applicant by the principal pre-need
company; and
vi. Copy of the general agency agreement.
The general agent must be a registered corporation or
partnership in the Philippines. Agents soliciting or selling pre
need plans in behalf of the general agent must possess the same
qualifications as the sales counselors.
The application of a general agent shall not be approved unless
a salesman is qualified and licensed by the Insurance Commission.
The general agent shall cease solicitation and selfing of pre-need
plans when no natural person holds a valid license representing the
general agent.
The general agent must be authorized in the general agency
agreement or by a written power of attorney to receive notices,
summons, and legal processes for and in behalf of the pre-need
company concerned in connection with actions or legal proceedings
against said pre-need company.
A license issued to a general agent shall authorize only
the individual or individuals named in the license. Exercise or
attempted exercise of such authority by an individual not so named
in the license, with the knowledge or consent of the licensee shall
constitute cause for the revocation, suspension, or non-renewal of
the license.16
J9JC9B0M
1

D. Default and Termination
14. What is a lapsed plan? Can a lapsed plan be reinstated?

“Lapsed plan” refers to a plan that is delinquent in payment of
installments provided for in the contract, the delinquency of which
extends beyond the grace period provided for in the plan or contract."
The pre-need company must provide in all contracts issued to
planholders a grace period of at least 60 days within which to pay
accrued installments, counted from the due date of the first unpaid
installment.
Nonpayment of a plan within the grace period shall render the
plan a lapsed plan. Any payment by the planholder after the grace
period shall be reimbursed forthwith, unless the planholder duly
reinstates the plan. The planholder shall be allowed a period of not
less than two (2) years from the lapse of the grace period or a longer
period as provided in the contract within which to reinstate his plan.
No cancellation of plans shall be made by the issuer during such
period when reinstatement may be effected.
Within 30 days from the expiration of the grace period and
30 days prior to the expiration of the reinstatement period, which
s two (2) years from the lapse of the grace period, the pre-need
company shall give written notice to the planholder that his plan
will be cancelled if not reinstated within two (2) years from the lapse
of the grace period or a longer period as provided in the contract.
Failure to give either of the required notices shall preclude the pre
need company from treating the plans as cancelled.'8
15. How can a planholder terminate his pre-need plan?

A planholder may terminate his pre-need plan at any time by
giving written notice to the issuer.
A pre-need plan shall contain a schedule of termination values
to which the planholder is entitled to upon termination. Such
schedule of termination value shall be required for all in-force pre
need plans and shall be fair, equitable, and in compliance with the
Insurance Commission issuances. The termination value of the pre
need plan shall be pre-determined by the actuary of the pre-need
"Section 3(o), R.A. No. 9829.

18Section 23, R.A. No. 9829.
J9JC9B0M J
company upon application for registration of the pre-need plans with

the Insurance Commission and shall be disclosed in the contract.
Any offer by the pre-need company to terminate the pre-need
plan for consideration exceeding the termination value provided in
the plan contract shall not require the prior approval of the Insurance
Commission, provided that (i) the consideration shall be below the
pre-need reserves for the specific plan, (ii) the offer is accepted by
the pre-need planholders, and (iii) the offer shall not prejudice the
claim of planholders who do not avail of such offer.19
E. Claims settlement
16. What can be considered as unfair claims settlement practices

of the issuer?
a. No pre-need company shall refuse, without just cause, to
pay or settle claims arising under coverages provided by
i its plans nor shall any such company engage in unfair
claim settlement practices. Any of the following acts by a
pre-need company, if committed without just cause, shall
constitute unfair claims settlement practices:
i. Knowingly misrepresenting to claimants pertinent
facts or plan provisions relating to coverages at
issue;
ii. Failing to acknowledge with reasonable promptness
pertinent communications with respect to claims
arising under its plan;
iii. Failing to adopt and implement reasonable standards
for the prompt investigation of claims arising under
its plan;
iv. Failing to provide prompt, fair, and equitable
settlement of claims submitted in which liability has
become reasonably clear; or
v. Compelling planholders to institute suits or recover
amounts due under its plan by offering, without
justifiable reason, substantially less than the
amounts ultimately recovered in suits brought by
them.
’’Section 26, IRR-RA 9829.
J9JC9B0M
b. Evidence as to the number and types of valid and

justifiable complaints to the Insurance Commission
against a pre-need company shall be deemed admissible
in an administrative or judicial proceeding for unfair
claims settlement practices.
c. Any violation of the foregoing shall be considered sufficient
cause for the suspension or revocation of the company’s
certificate of authority.20
17. When should the plan proceeds be paid to the planholders?

In the case of scheduled benefit plans, the proceeds of the plan
shall be paid immediately upon maturity of the contract, unless
such proceeds are made payable in installments or as an annuity,
in which case the installments or annuities shall be paid as they
become due. Refusal or failure to pay the claim within 15 days from
maturity or due date will entitle the beneficiary to collect interest on
the proceeds of the plan for the duration of the delay at the rate twice
the legal interest unless such failure or refusal to pay is based on the
ground that the claim is fraudulent: Provided, That the planholder
has duly complied with the documentary requirements of the pre-
need company.
In the case of contingent benefit plans, the benefits shall be paid
by the pre-need company 30 days upon submission of all necessary
documents.21
18. How can a planholder recover his/her investment in the event

of insolvency or bankruptcy of the pre-need company?
The planholder may institute the necessary legal action in
court to recover his/her investment in the pre-need company, in case
of insolvency or bankruptcy of the pre-need company.
However, in case the insolvency or bankruptcy is a mere cover
up for fraud or illegality, the planholder may institute the legal
action directly against the officers and/or controlling owners of the
said pre-need company.22

2,Section 26, R.A. No. 9829.
J9JC9B0M
19. When can a pre-need company declare dividends?

A pre-need company may declare dividends: Provided, that the
following shall remain unimpaired, as certified under oath by the
president and the treasurer with respect to items (a) and (b); and in
the case of item (c), by the trust officer:
a. One hundred percent (100%) of the capital stock;
b. An amount sufficient to pay all net losses reported, or in
the course of settlement, and all liabilities for expenses
and taxes; and
c. Trust fund.
Any dividend declared under the preceding paragraph shall be
reported to the Insurance Commission within 30 days after such
declaration.23
J9JC9B0M
I
III. TRANSPORTATION LAWS
A. COMMON CARRIERS
1. What is a common carrier?

A common carrier is a person, corporation, firm, or association
engaged in the business of carrying or transporting passengers or
goods or both, by land, water, or air for compensation, offering its
services to the public.1
2. What is the test to determine whether a person is a common

carrier?
The test to determine whether a person is a common carrier
is: Does the person hold out to the public that it is engaged in e
business of transporting or carrying passengers or goods, or bot as
a public employment and not a casual occupation? Is it open to t e
use and service of all members of the public who may require t e
service to the extent of its capacity? If it is open to the public, t e
carrier is a common carrier.2
It is not the quantity or extent of the business actually
transacted, or the number and character of the conveyances use
in the activity, but whether the undertaking is a part of the activity
engaged in by the carrier that he has held out to the general pu c as
his business or occupation. If the undertaking is a single transaction,
not a part of the general business or occupation engaged in, as
advertised and held out to the general public, the individual or the
entity rendering such service is a private, not a common, carrier.3
!BAR 1996; Article 1732 of the Civil Code.

Marshall v. Public Service Commission, 195 A. 475,129 Pa. Super. 272, cited
in Perez, Quizzer in Transportation Law, p. 9, 2009 Ed.
3Spouses Teodoro and Nanette Perena v. Spouses Teresita Philippine Nicolas
and L. Zarate, G.R. No. 157917, August 29, 2012.
188
J9JC9B0M
III. TRANSPORTATION LAWS 189
The law makes no distinction between one whose principal

business activity is the carrying of persons or goods or both, and one
who does such carrying only as an ancillary activity (in local idiom,
as “a sideline”). Article 1732 of the Civil Code also carefully avoids
making any distinction between a person or enterprise offering
transportation service on a regular or scheduled basis and one
offering such service on an occasional, episodic, or unscheduled basis.
Neither does Article 1732 distinguish between a carrier offering
its services to the “general public,” i.e., the general community or
population, and one who offers services or solicits business only from
a narrow segment of the general population.4
It is also necessary that the common carrier be the owner of
the vehicle/vessel who will carry out the carriage. The public is not
required to inquire as to the ownership of the vehicle/vessel.5
3. What are the requisites to be a common carrier?

a. He must be engaged in the business of transporting
passengers or goods generally as a business, not just as a
casual occupation;
b. He must undertake to carry passengers or goods over
established roads by the method by which the business
was conducted; and
c. The transportation must be for hire.6
4. LMN, Inc. operates a beach resort in a secluded island off

the coast of Puerto Princesa City, Palawan. It operates three
(3) motorized boats to ferry its guests from the city proper to
the island resort and vice versa. During one rainy morning,
the guests were informed that the ferry services for that day
1 were cancelled due to a storm forecast. In order to appease
the apparent dismay of most of the guests who will miss their
flight back to Manila, the boat captain of one of LMN, Inc.'s
motorized boats decided to push through with its trip back
to the city. Shortly after the boat sailed, the storm hit and the
winds and waves became stronger, causing engine trouble to
’Pedro De Guzman v. Court of Appeals, G.R. No. L-47822, December 22,1988.

“Cebu Salvage case and Torres Madrid Brokerage case.
“Spouses Perena, ibid.; First Philippine Industrial Pipeline v. Court of Appeals,
G.R. No. 125948, December 29, 1989.
J9JC9B0M
1

the boat. Unfortunately, the boat capsized and sank, resulting in

the death of one of the passengers, Mr. X.
This prompted Mr. X's heirs to file a complaint for damages
against LMN, Inc., which they alleged to be a common carrier.
In its defense, LMN, Inc. maintained that it is not a common
carrier because its boats are not available to the general public
but only ferry resort guests and employees.
May LMN, Inc. be considered a common carrier? Explain.

LMN is a common carrier. Common carriers are persons
engaged in the business of transporting or carrying passengers
or goods or both, by land, air, and water, offering their services to
t e public, for compensation. The test does not make a distinction
whether the carrying is done as the principal or as an auxiliary
activity or that the carriage was periodic, occasional, episodic or
unscheduled or has limited clientele. It is not necessary that the
transportation services be offered to the general public. Offering the
services even to a narrow segment of the public suffices.7 Thus, the
act that the transportation services are offered only to the guests of
t e beach resort is immaterial. Transportation is an integral part of
LMN’s business.
5. Are the following persons common carriers?
a) Freight forwarder; b) Shipowner; c) arrastre

operator; d) customs broker; and e) trucking company.
a. Freight forwarder - A freight forwarder is.not a common
carrier. It merely chooses or selects the common carrier.
A freight forwarder’s liability is limited to damages
arising from its own negligence in choosing the carrier;
however, where the forwarder contracts to deliver goods
to their destination instead of merely arranging for their
transportation, it becomes liable as a common carrier for
loss or damage to goods. A freight forwarder assumes the
responsibility of a carrier, which actually executes the
transport, even though the forwarder does not carry the
merchandise itself.8
’Spouses Cruz v. Sun Holidays, G.R. No. 186312, June 29, 2010.
“Unsworth Transport International (Phils.), Inc. v. Court of Appeals and
Pioneer Insurance and Surety Corporation, G.R. No. 166250, July 26, 2010.
J9JC9B0M
b. Shipowner - A shipowner is a common carrier, He

is engaged in the business of transporting goods for
compensation and offers his services to the public.
c. Arrastre operator — An arrastre operator is not a
common carrier. The functions of an arrastre operator
involve the handling of cargo deposited on the wharf or
between the establishment of the consignee or shipper
and the ship’s tackle. Being the custodian of the goods
discharged from a vessel, an arrastre operator’s duty is to
take good care of the goods and to turn them over to the
party entitled to their possession.9 The obligation of the
arrastre operator is akin to a warehouseman.
d. Customs Broker — Although its principal function is
to prepare the correct customs declaration and proper
shipping documents as required by law, the transportation
of goods is, nevertheless, an integral part of a customs
broker, thus, the customs broker is also a common carrier.
For to declare otherwise would be to deprive those with
whom it contracts the protection which the law affords
them notwithstanding the fact that the obligation to carry
goods for its customers, is part and parcel of its business.10
e. Trucking company - A person is a common carrier if he
is engaged in the business of transporting goods by land,
through his trucking service. In this case, a customs broker
contracted with a trucking company. The transportation
services are not exclusive to the customs broker. Even
though it has few clients, the trucking company was
considered a common carrier. If the trucking company
caters only to the customs broker, then, it is a private
carrier."
t
"Westwind Shipping Corporation v. UCPB General Insurance Co., G.R. No.

2002289, November 25, 2013; Asian Terminals v. Daehan Fire and Marine Insurance,
G.R. No. 171194, February 4, 2010.
■"Westwind Shipping Corporation v. UCPB General Insurance Co., G.R. No.
2002289, November 25, 2013; A.F Sanchez Brokerage v. Court of Appeals, G.R. No.
147079, December 21, 2004
■'Loadmasters Customs Services v. Glodel Brokerage Corporation, G.R. No.
179446, January 10, 2011.
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1

6. Cite other examples of common carriers.

a. Barge operator12 -
b. Passenger jeepney, bus company, or a taxi company13
C. Vessels engaged in inter-island shipping14
d. Cargo truck to transport anybody’s goods for a fee.16
7. Is a pipeline operator a common carrier?
Yes. It is engaged in the business of transporting or carrying
goods, i.e., petroleum products, for hire as a public employment,
employment.
t undertakes to carry for all persons indifferently, that is, to all
persons who choose to employ its services, and transports the goods
y and and for compensation. The fact that the pipeline operator
as a limited clientele does not exclude it from the definition of a
common carrier. Moreover, the definition of “common carriers” in
e ivil Code makes no distinction as to the means of transporting,
as ong as it is by land, water, or air. It does not provide that the
Vgj°SP°^tat’'on ^he passengers or goods should be by motor
8. Are school bus operators common carriers?

Yes. Persons engaged in the business of transporting students
from their respective residences to their school and ac ar
considered common carrier. Despite catering to a limited c en e e,
they operate as common carriers because they hold themse ves
out as a ready transportation indiscriminately to tlfe stu en s o
a particular school living within or near where they operate tne
service and for a fee.1’
That a school bus operator is considered a common carrief
should be viewed in the context by which the Supreme Court ma e
such ruling. The school bus operator indiscriminately offered their
12Asia Lighterage and Shipping, Inc. v. Court of Appeals, G.R. No. 147246,
August 9, 2003, 409 SCRA 340.
13Batangas Transportation v. Orlanes, 52 Phil 455, cited in Perez, p. 9.
14De Villola v. Stanley, 32 Phil. 541, cited in Perez, ibid.
16Benedicto v. IAC, 187 SCRA 547, cited in Perez, ibid.
‘“First Philippine Industrial Pipeline v. Court of Appeals, G.R. No. 125948,
December 29, 1989.
’’Spouses Perena V. Spouses Nicolas, G.R. No. 157917, August 29, 2012.
J9JC9B0M
transportation services even though to a narrow segment of the

public only (like students whose parents reside in one residential
subdivision only).
9. Is a travel agency a common carrier?

A travel agency is not a common carrier. It only arranges for
the transportation of its clients for air carriage. As such, it is not
bound to exercise extraordinary diligence in the performance of its
obligations.18
10. What laws govern transportation contracts?
Contract | Primary Law | Suppletory law

Land transportation
Common carrier New Civil Code Code of Commerce
Private carrier
Code of Commerce New Civil Code
(object commerce)
New Civil Code
Object non-commerce
(deposit if property/contract if passenger)
Air transportation
Phil, as destination New Civil Code Code of Commerce
Phil, as one of Treaties, Inti, New Civil Code
itineraries agreement, Montreal
Convention
Water transportation
Coastwise New Civil Code Code of Commerce
(interisland)
Foreign port to Phil. New Civil Code Code of Commerce/
_______Port_______ COGSA
Phil, port to foreign Law of country of destination
port
11. What is a private carrier?

A private carrier is one who, without making it his vocation or
holding himself out to the public as ready to act for all who desire
his services, undertakes, by special arrangement in a particular
18Crisostomo v. Court of Appeals, infra.
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instance only, to transport persons or property from one destination

to another, either gratuitously or for hire.19
12. Give examples of private carriers.

a. Bareboat charter
b. Funeral car
c. An exclusive contractor for hauling the products of one
particular company and no other entity
d. Company bus ferrying employees to and from place of
work.
13. May a common carrier be converted to private carrier by

stipulation?
Yes. A common carrier may be converted to a private carrier in
case of bareboat or demise charter, that is, the ship owner lets the
vessel and the crew insofar as that particular voyage is concerned. A
common carrier retains its status as such in case of voyage or time
charter, where the charter is limited to the ship.20
It was held in one case that carrier was converted into a private
carrier notwithstanding the existence of the Time Charter Party
agreement since the said agreement was not limited to the ship only
but extends even to the control of its crew. Despite the denomination
as Time Charter by the parties, their agreement undoubtedly
reflected that their intention was to enter into a Bareboat Charter
Agreement.21 <
14. Name two (2) characteristics which differentiate a common

carrier from a private carrier.
Two (2) characteristics which differentiate a common carrier
from a private carrier are:
a. A common carrier offers its service to the public; a private
carrier does not.
19Spouses Tedoro and Nanette Perena v. Spouses Teresita Philippine Nicolas

and L. Zarate, G.R. No. 157917, August 29, 2012.
20Caltex (Philippines), Inc. v. Sulpicio Lines, Inc., G.R. No. 131166, September
30,1999.
2lFederal Phoenix Assurance v. Fortune Sea Carrier, G.R. No. 188118,
November 23, 2015.
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b. A common carrier is required to observe extraordinary

diligence; a private carrier is only required to exercise
ordinary diligence.22
The other distinctions are as follows:

a. As to what governs the parties’ rights and obligations -
The rights and obligations of the parties to a contract of private
carriage are governed principally by their stipulations, whereas, in
a contract of public carriage, the rights and obligations of the parties
are governed by law and the terms of the contract of carriage.
b. As to whether or not it may refuse to enter into a contract
of carriage -
A common carrier is bound to carry for all who offer such goods
as he is accustomed to carry and tender reasonable compensation
for carrying them. A private carrier is not bound to carry for any
reason, unless bound by a contract.
c. As to exemption for negligence of employees -
A common carrier cannot stipulate that it is exempt from liability
on account of the negligence of its employees. Such stipulation is
void for being contrary to public policy. A private carrier may validly
enter into such stipulation because the public is not involved.23
Much of the distinction between a “common or public carrier”
and a “private or special carrier” lies in the character of the business,
such that if the undertaking is an isolated transaction, not a part of
the business or occupation, and the carrier does not hold itself out
to carry the goods for the general public or to a Emited clientele,
although involving the carriage of goods for a fee, the person or
corporation providing such service could very well be just a private
carrier.24
15. Mabuhay Lines, Inc., a common carrier, entered into a contract

with Company X, whereby it agreed to furnish Company
X, for a fixed amount, a bus for a company excursion on its
anniversary day. It was agreed that Company X would have the
use of the bus and its driver from 7:00 am to 7:00 pm on the
22BAR 2002; Spouses Perena, ibid.

“Loadstar Shipping v. Court of Appeals, G.R. No. 131621, September 28,1999.
“Philippine American General Insurance Company v. PKS Shipping Company,
G.R. No. 149038, April 9, 2003.
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stipulated date, and that the bus driver would be obliged to

follow the instructions of the company's general manager as
to the places to be visited. Company X agreed to bear the cost
of the gasoline consumed. The transportation contract signed
by Company X contained a stipulation that Mabuhay Lines, Inc.
would be exempt from liability on account of acts or omissions
of its employees. On the return trip from the excursion site,
the bus had an accident and several employees of Company X
were injured. State the liability, if any, of Mabuhay Lines, Inc.
Although a common carrier, Mabuhay Lines, Inc. was not acting
as such in the instant case but as a private carrier. Accordingly, the
provision applicable to a common carrier in respect of extraordinary
diligence cannot be imposed upon the bus company. The stipulation
limiting the liability of Mabuhay Lines, Inc. is valid and the bus
company cannot be held Hable for the injuries suffered by the
employees of Company X on the basis of the contract of carriage.
However, the employees who were injured may proceed against the
bus company on the basis of a quasi-delict (culpa aquiliana) but the
party charging negligence or wrong doing has the burden of proving
the same.
It was held that a common carrier is exempt from the application
of the strict pubhc policy governing common carriers where the
earner is not acting as such but as a private carrier. Such strict
pubhc policy has no force where the public at large is not involved,
as when the carrier charters its bus totally for the use of a single
party.25
Further, Article 1745 of the Civil Code declaring a stipulation
that the common carrier shall not be responsible for the acts or
omissions of his or its employees as unreasonable, unjust, and
contrary to public policy is not applicable here since Company X and
the bus company have entered into a contract for private carriage.
Likewise, the presumption created under Article 1756 of the Civil
Code, that in case of death or injuries to passengers, common carriers
are presumed to have been at fault or to have acted negligently,
unless they prove that they observed extraordinary diligence, finds
no application here.26
“Home Ins. Co. v. American Steamship Agencies, Inc. v. Luzon Stevedoring

Corp., G.R. No. L-25599, April 24,1968.
“BAR 1984.
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HI. TRANSPORTATION LAWS 197
16. During the elections last May, AB, a congressional candidate in

Marinduque, chartered the helicopter owned by Lode Mining
Corporation (LMC) for use in the election campaign. AB paid
LMC the same rate normally charged by companies regularly
engaged in the plane chartering business. In the charter
agreement between LMC and AB, LMC expressly disclaimed
any responsibility for the acts or omissions of its pilot or for the
defective condition of the helicopter’s engine. The helicopter
crashed killing AB. Investigations disclosed that pilot error
was the cause of the accident. LMC now consults you on its
possible liability for AB’s death in light of the above findings.
How would you reply to LMCs query?
I would reply to LMC’s query as follows:
LMC is not liable for the death of AB. LMC is not a common
carrier, but a private carrier, because it did not hold itself to the
public as being engaged in transportation business. A stipulation
with a private carrier that would exempt responsibility for simple
negligence of the carrier’s employees is a valid stipulation. Such
a stipulation, however, will not hold in cases of liability for gross
negligence or bad faith.27
17. Respondent Ernesto Cendana, a junk dealer, was engaged

in buying up used bottles and scrap metal in Pangasinan.
Upon gathering sufficient quantities of such scrap material,
respondent would bring such material to Manila for resale.
He utilized two (2) six(6)-wheeler trucks which he owned for
hauling the material to Manila. On the return trip to Pangasinan,
respondent would load his vehicles with cargo which various
merchants wanted delivered to differing establishments in
Pangasinan. for that service, respondent charged freight rates
which were commonly lower than regular commercial rates.
Cendana, has no certificate of public convenience.
Petitioner Pedro de Guzman a merchant and authorized
dealer of General Milk Company (Philippines), Inc. in Urdaneta,
Pangasinan, contracted with respondent for the hauling of 750
cartons of Liberty filled milk from a warehouse of General Milk
in Makati, Rizal, to petitioner's establishment in Urdaneta.
Accordingly, respondent loaded in Makati the merchandise
27BAR 1987.
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on to his trucks: 150 cartons were loaded on a truck driven

by respondent himself, while 600 cartons were placed on
board the other truck which was driven by Manuel Estrada,
respondent's driver and employee.
Only 150 boxes of Liberty filled milk were delivered to
petitioner. The other 600 boxes never reached petitioner, since
the truck which carried these boxes was hijacked somewhere
along the MacArthur Highway in Paniqui, Tarlac, by armed men
who took with them the truck, its driver, his helper, and the
cargo.
Petitioner commenced action against private respondent

demanding payment of the value of the lost merchandise.
Petitioner argued that private respondent, being a common
carrier, and having failed to exercise the extraordinary diligence
required of him by the law, should be held liable for the value of
the undelivered goods.
In his Answer, private respondent denied that he was
a common carrier and argued that he could not be held
responsible for the value of the lost goods, such loss having
been due to force majeure.
Is private respondent a common carrier?

Private respondent is properly characterized as a common
carrier even though he merely “back-hauled” goods for other
merchants from Manila to Pangasinan, although such back-hauling
was done on a periodic or occasional rather than regular or scheduled
manner, and even though private respondent’s principal occupation
was not the carriage of goods for others. There is no dispute that
private respondent charged his customers a fee for hauling their
goods; that the fee frequently fell below commercial freight rates is
not relevant here.
A certificate of public convenience is not a requisite for the
incurring of liability under the Civil Code provisions governing
common carriers. Such liability arises the moment a person or firm
acts as a common carrier, without regard to whether or not such
carrier has also complied with the requirements of the applicable
regulatory statute and implementing regulations and has been
granted a certificate of public convenience or other franchise. To
exempt private respondent from the liabilities of a common carrier
because he has not secured the necessary certificate of public
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convenience would be offensive to sound public policy; that would

be to reward private respondent precisely for failing to comply with
applicable statutory requirements.28
18. Is he liable for the loss of the goods?

Private respondent is not liable for the loss of the goods.
The occurrence of the loss must reasonably be regarded as quite
beyond the control of the common carrier and properly regarded as a
fortuitous event. It is necessary to recall that even common carriers
are not made absolute insurers against all risks of travel and of
transport of goods, and are not held liable for acts or events which
cannot be foreseen or are inevitable, provided that they shall have
complied with the rigorous standard of extraordinary diligence.29
1. Diligence required of common carriers

19. What is the diligence required of common carriers?
Under Article 1733 of the Civil Code, common carriers from the
nature of their business and for reasons of public policy are bound
to observe extraordinary diligence in the vigilance over the goods
and for the safety of passengers transported by them according to
all the circumstances of each case. Thus, under Article 1735 of the
same Code, in all cases other than those mentioned in Article 1734
thereof, the common carrier shall be presumed to have been at fault
or to have acted negligently, in case of death or injury to passengers
or loss or damage to goods, unless it proves that it has observed the
extraordinary diligence required by law.30
The notion of common carriers is synonymous with public
service under Commonwealth Act No. 146 or the Public Service
Act. Due to the public nature of their business, common carriers
are compelled to exercise extraordinary diligence since they will be
burdened with the externalities or the cost of the consequences of
their contract of carriage if they fail to take the precautions expected
of them.
2aPedro De Guzman v. Court of Appeals and Ernesto Cendana, G.R. No.

L-47822, December 22, 1988; BAR 1991 and 1996.
aIbid.
’“American Home Assurance Company v. Court of Appeals, G.R. No. 94149,
May 5,1992.
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Common carriers are mandated to internalize or shoulder the

costs under contracts of carriage. This is so because a contract of
carriage is structured in such a way that passengers or shippers
surrender total control over their persons or goods to common
carriers, fully trusting that the latter will safely and timely deliver
them to their destination. In light of this inherently inequitable
dynamics — and the potential harm that might befall passengers
or shippers if common carriers exercise less than extraordinary
diligence—the law is constrained to intervene and impose sanctions
on common carriers for the parties to achieve allocative efficiency.31
In a contract of carriage, it is presumed that the common carrier
is at fault or is negligent when a passenger dies or is injured. In fact,
there is even no need for the court to make an express finding of
fault or negligence on the part of the common carrier. This statutory
presumption may only be overcome by evidence that the carrier
exercised extraordinary diligence. The fact that the driver of the
vehicle was acquitted in the criminal action for reckless imprudence
has no bearing on the liability of the carrier arising from breach of
contract of carriage.32
The trial court is not required to make an express finding of the
common carrier’s fault or negligence. The presumption of negligence
applies so long as there is evidence showing that: (a) a contract exists
between the passenger and the common carrier; and (b) the injury or
death took place during the existence of such contract. In such event,
the burden shifts to the common carrier to prove its observance
of extraordinary diligence, and that an unforeseen event or force
majeure had caused the injury. However, for a common carrier to be
absolved from liability in case of force majeure, it is not enough that
the accident was caused by a fortuitous event. The common carrier
must still prove that it did not contribute to the occurrence of the
incident due to its own or its employees’ negligence.113
20. Peter So hailed a taxicab owned and operated by Jimmy Cheng

and driven by Hermie Cortez. Peter asked Cortez to take
him to his office in Malate. On the way to Malate, the taxicab
collided with a passenger jeepney, as a result of which Peter
31Annie Tan v. Great Harvest Enterprises, G.R. No. 220400, March 20, 2019.
32Heirs of Jose Marcia K. Ochoa v. G&S Transport Corporation, G.R. No.
170071, 170125, March 9, 2011.
“Sulpicio Lines, Inc. v. Napoleon Sesante, Now Substituted By Maribel
Atilano, et al., G.R. No. 172682, July 27, 2016.
J9JC9B0M
was injured, i.e., he fractured his left leg. Peter sued Jimmy for
damages, based upon a contract of carriage, and Peter won.
Jimmy wanted to challenge the decision before the Supreme
Court on the ground that the trial court erred in not making an
express finding as to whether or not Jimmy was responsible for
the collision and, hence, civilly liable to Peter. He went to see
you for advice. What will you tell him? Explain your answer.
I will counsel Jimmy to desist from challenging the decision.
The action of Peter being based on culpa contractual, the carrier’s
fault or negligence is presumed upon the breach of contract. The
burden of proof instead would lie on Jimmy to establish that, despite
an exercise of extraordinary diligence, the collision could not have
been avoided.34
21. Is extraordinary diligence required only in the transportation

of passengers and carriage of goods?
No. Common carriers are required to exercise extraordinary
diligence in the performance of their obligations under contracts of
carriage. This extraordinary diligence must be observed not only in
the transportation of goods and services but also in the issuance
of the contract of carriage, including its ticketing operations. The
common carrier’s obligation to exercise extraordinary diligence in the
issuance of the contract of carriage is fulfilled, however, by requiring
a full review of the flight schedules to be given to a prospective
passenger before payment. Thus, even assuming that the ticketing
agent encoded the incorrect flight information, it is incumbent upon
the purchaser of the tickets to at least check if all the information is
correct before making the purchase. Once the ticket is paid for and
printed, the purchaser is presumed to have agreed to all its terms
and conditions.36
22. Cite jurisprudence where the Supreme Court ruled that

the common carrier breached its obligation to exercise
extraordinary diligence.
a. When the common carrier could not present evidence that

it specifically installed a radar which could have allowed
the vessel to navigate safely for shelter during a storm
34BAR 1990.
35Allredo Manay, Jr. v. Cebu Air, Inc., G.R. No. 210621, April 4,2016, Leonen, J.
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coupled with the negligence of the captain as found by the

appellate court which were the proximate causes of the
sinking of the vessel.36
b. Common carriers are deemed to warrant impliedly the
seaworthiness of the ship. For a vessel to be seaworthy, it
must be adequately equipped for the voyage and manned
with a sufficient number of competent officers and crew.
The failure of a common carrier to maintain in seaworthy
condition the vessel involved in its contract of carriage is
a clear breach of its duty prescribed in Article 1755 of the
Civil Code.37
c. The testimonial evidence of respondent showed that
petitioner, through its bus driver, failed to observe
extraordinary diligence, and was, therefore, negligent
in transporting the passengers of the bus safely, since
the bus bumped a tree and a house, and caused physical
injuries to respondent.38
d. Petitioners failed to prove that they did exercise the
degree of diligence required by law over the goods they
transported. Aside from their persistent disavowal of
liability by conveniently posing an excuse that their
extraordinary responsibility is terminated upon release
of the goods to the Ports Authority, petitioners failed to
adduce sufficient evidence they exercised extraordinary
care to prevent unauthorized withdrawal of the
shipments.39
e. Mere proof of delivery of the goods in good order to a
common carrier and of their arrival in bad order at their
destination constitutes a prima facie case of fault or
negligence against the carrier. If no adequate explanation
36American Home Assurance Company v. Court of Appeals, G.R. No. 94149,

May 5, 1992.
37Vector Shipping Corporation v. Adelfo Macasa, G.R. No. 160219, July 21,
2008.
3“R. Transport Corporation v. Eduardo Pante, G.R. No. 162104, September 15,
2009.
"Nedlloyd Lijnen B.V. Rotterdam Glow Laks Enterprises, G.R. No. 156330,
November 19, 2014.
J9JC9B0M 1
is given as to how the deterioration, loss, or destruction

of the goods happened, the transporter shall be held
responsible.'10
f. The driver was clearly negligent when he was relatively
driving fast on a narrow highway and approaching a
similarly narrow bridge. A bus is a significantly large
vehicle which would be difficult to maneuver and stop if
it were travelling at a high speed. On top of this, the time
of the accident was on or about sunrise, when visibility
on the road was compromised. The driver should have
been more prudent and careful in his driving the bus,
especially considering that the transportation company is
a common carrier?1
g- Part of the extraordinary responsibility of common carriers
is the duty to ensure that shipments are received by none
but the person who has a right to receive them. Common
carriers must ascertain the identity of the recipient.
Failing to deliver the shipment to the designated recipient
amounts to a failure to deliver. The shipment shall then
be considered lost, and liability for this loss ensues?2
h. At the time the customs broker turned over the custody of
the cargoes to a common carrier for inland transportation,
it is still required to observe extraordinary diligence in the
vigilance of the goods. Failure to successfully establish
this carries with it the presumption of fault or negligence,
thus, rendering the customs broker liable to the shipper
it contracted with, subject to right of reimbursement
against the carrier in whose possession, the goods where
hijacked?3
i. When the loss of the goods was not attended by grave
or irresistible threat, violence, or force but was brought
about by the carrier’s failure to exercise extraordinary
“Eastern Shipping Lines v. BPI MS Insurance, G. R. No. 182864, January 12,

2015.
’’Linda Cacho v. Universal Robina Corporation, G.R. No. 203081, January 17,
2018.
“Federal Express Corporation v. Luwalhati Antonino, G.R. No. 199455, June
27,2018.
“Keihin-Everett Forwarding Co. v. Marine Malayan, el al., G.R. No. 212107,
January 28, 2019.
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1

diligence when she neglected vetting her driver (who

absconded with the goods) or providing security for the
cargo and failing to take out insurance on the shipment’s
value.44
j. Petitioner was extremely remiss before and during the
time of the vessel’s sinking. Petitioner did not endeavor
to dispute the Court of Appeals’ finding that the vessel’s
captain erroneously navigated the ship, and failed to
reduce its speed considering the ship’s size and the
weather conditions. The crew members were also negligent
when they did not make any stability calculations, and
prepare a detailed report of the vessel’s cargo stowage
plan. The radio officer failed to send an SOS message in
the internationally accepted communication network but
instead used the Single Side Band informing the company
about the emergency situation.45
2. Liabilities of common carriers

23. Who is liable in case of breach of contract of carriage? The
operator or the driver or both?
If the cause of action is based on a breach of a contract of
carriage, the liability of the owner/operator is direct as the contract
is between him and the passenger. The driver cannot be made liable
as he is not a party to the contract of carriage.46
The driver, however, may be sued based on quasi-delict and/or
criminally if his negligence can be established.
24. Are common carriers liable for injuries to passengers even if

they have observed ordinary diligence and care? Explain.
Yes, common carriers are liable to injuries to passengers even if
the they observed ordinary diligence and care because the obligation
imposed upon them by law is to exercise extraordinary diligence.
Common carriers are bound to carry passengers safely as far as
44Annie Tan v. Great Harvest, supra.

46Sulpicio Lines v. Major Victorio Karaan, G.R. No. 208590, October 3, 2018.
46Jose Sanico and Vicente Castro v. Werherlina P. Colipano, G.R. No. 209969,
September 27, 2017.
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human care and foresight can provide, using the utmost diligence of
very cautious persons with a due regard for all the circumstances.’*7
25. Is the presumption of fault or negligence applicable only in

case of death or injury to passengers or loss or damage to
goods?
No, it also applies in case of any breach in the contract of
carriage, such as when the passenger was not able to board despite
being given a boarding pass. Thus, when an airline issues a ticket
to a passenger confirmed on a particular flight, on a certain date,
a contract of carriage arises, and the passenger has every right
to expect that he would fly on that flight and on that date. If that
does not happen, then the carrier opens itself to a suit for breach
of contract of carriage. In an action based on a breach of contract
of carriage, the aggrieved party does not have to prove that the
common carrier was at fault or was negligent. All he has to prove is
the existence of the contract and the fact of its non-performance by
the carrier, through the latter’s failure to carry the passenger to its
destination.18
It was also held that if a passenger’s accommodation is
downgraded from first class to economy, the carrier is liable for
breach of contract of carriage.*9 In another case, the carrier was made
liable for insisting on the upgrade of the passenger from business
class to first class accommodation. The Supreme Court held that
priority upgrading is a privilege which, like all privileges, can be
waived. By insisting on the upgrade, despite the passengers’ waiver,
the carrier breached its contract of carriage.60
The common carrier may also be held liable in case of rude
or discourteous conduct on the part of its employees towards a
passenger.61
■•’Article 1755 of the Civil Code; Bar 2015.

•“Alfredo S. Ramos v. China Southern Airlines Co. Ltd., G.R. No. 213418,
September 21, 2016.
•’Cathay Pacific Airways, Ltd. v. Spouses Arnulfo and Evelyn Fuentebella,
G.R. No. 188283, July 20, 2016.
“Cathay Pacific Airways v. Spouses Daniel Vasquez and Maria Luisa Madrigal
Vazquez, G.R. No. 150843, March 14, 2003.
“'Fernando v. Northwest Airlines, Inc., G.R. No. 212038 and G.R. No. 212043,
February 8, 2017.
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1

26. X Company loaded six (6) metric tons of Soybean Meal on board
the vessel M/V "Sea Dream" at the Port of U.S.A., for delivery
to the Port of Manila to Simon Enterprises, Inc., as consignee.
When the vessel arrived in Manila, the shipment was discharged
to the receiving barges of the arrastre operator. Consignee
later received the shipment but claimed having received only
five (5) metric tons of Soybean Meal. Are the common carrier
and arrastre operator liable for the shortage?
No. Though it is true that common carriers are presumed to have
been at fault or to have acted negligently if the goods transported
by them are lost, destroyed, or deteriorated, and that the common
carrier must prove that it exercised extraordinary diligence in order
to overcome the presumption, the plaintiff must still, before the
burden is shifted to the defendant, prove that the subject shipment
suffered actual shortage. This can only be done if the weight of the
shipment at the port of origin and its subsequent weight at the port
of arrival are proven by a preponderance of evidence, and it can be
seen that the former weight is considerably greater than the latter
weight, taking into consideration the exceptions provided in Article
1734 of the Civil Code.62
3. Classification of transport network vehicle services

and transport network companies
27. What are transportation network companies (TNCs)?
These are companies which use online-enabled platforms
connect passengers with drivers using their personal and non
commercial vehicles. TNCs in the Philippines include Grab and
. er’, Compared to taxicabs, TNCs offer advantages to riders
inc uding the ability to request service via mobile map or website,
rac the location of driver, and get a receipt via email.6’
28. Are TNCs considered common carriers?

The legal andregulatory status ofTNCs is notyet clearly defined.
They are currently being regulated by the Land Transportation
Franchise Regulatory Board.
“Asian Terminals, Inc. v. Simon Enterprises, Inc., G.R. No. 177116, February
27, 2013.
“Grab subsequently acquired Uber operations in the Philippines.
MSee explanatory note to House Bill 1260 of the 18th Congress by Honorable
Luis Raymund Villafuerte.
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It is submitted though that they are not common carriers.

TNCs are technology companies that do not provide transportation
services and they are not transportation providers. They merely
link customers with third party drivers and are not parties to the
transportation contract.56
Also, TNC drivers can go “offline” if desired and can decide
to accept or reject a ride request according to their personal
travel itinerary as opposed to common carriers which engage in a
continuous offer.66
It is further submitted that they are akin to a freight forwarder.
They only arrange the vehicles/vessels for the passengers and as
such, should not be treated as common carriers. They should be
held liable for damage though if there is negligence in vetting and
choosing the vehicle owners whom the TNCs accredited as part of
their system.67
B. VIGILANCE OVER GOODS
1. Exempting causes
29. What are the defenses available to the common carrier in case
of loss, destruction, or deterioration of the goods?68
As a rule, the common carrier is liable for the loss, destruction,
or deterioration of the goods, except in the following cases:
a. Flood, storm, earthquake, lightning, or other natural
disaster or calamity;
b. Acts of public enemy in war, whether international or
civil;
c. Act or omission of the shipper or passenger;
i'Supra.
KIbid.
8,The House Bill, citing Crisostomo v. Court of Appeals (G.R. No. 138334,
August 25, 2003), applied by analogy TNC with a travel agency which merely
arranges the booking of a person but the actual act of transporting the customer is
done by an airline but the author believes that the appropriate comparison is that of
the freight forwarder.
“BAR 2001.
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1

d. Character of the goods or defects in the packing or

container;
e. Order or act of competent public authority;69
f. Exercise of extraordinary diligence.
Force majeure
30. What are the requisites for natural disaster to be considered an
exempting circumstance in case of loss or damage to goods?
a. The natural disaster is the proximate and only cause of
the loss;
b. The common carrier should have exercised due diligence
to prevent or minimize the loss before, during and after
the occurrence of the natural disaster;
c. The common carrier should not incur in delay.60
It should be noted that fire is not one of those enumerated under
the above provision which exempts a carrier from liability for loss or
destruction of the goods. Since the peril of fire is not comprehended
within the exceptions in Article 1734, then the common carrier shall
be presumed to have been at fault or to have acted negligently,
unless it proves that it has observed the extraordinary diligence
required by law.61
In one case, it was held that monsoons, during which strong
winds were not unusual, would not be sufficient to categorize the
weather condition as a storm. When the loss of the vessel was caused
not only by the southwestern monsoon but also by the shifting of
the logs in the hold due to improper stowage, the defense of force
- ■
majeure is unavailing.62
“Article 1734, Civil Code.

“Central Shipping Company v. Insurance Company of North America, G.R.
No. 150751, September 20, 2004; Articles 1739 and 1740, Civil Code.
61DSR-Senator Lines v. Federal Phoenix Assurance Co., G.R. No. 135377,
October 7, 2003; Eastern Shipping Lines v. Intermediate Appellate Court, G.R. Nos.
L-69044 and L-71478, May 29,1987.
“Ibid.
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Hijacking of goods is likewise not considered a force majeure.

Nevertheless, a common carrier may absolve itself of liability for a
resulting loss caused by robbery or hijacking if it is proven that the
robbery or hijacking was attended by grave or irresistible threat,
violence or force.63
31. Philip Mauricio shipped a box of cigarettes to a dealer in

Naga City through Bicol Bus Company (BBC). When the bus
reached Lucena City, the bus developed engine trouble. The
driver brought the bus to a repair shop in Lucena where he
was informed by the mechanic that an extensive repair was
necessary, which would take at least two (2) days. While the
bus was in the repair shop, Typhoon Coring lashed Quezon
Province. The cargoes inside the bus, including Mauricio's
cigarettes, got wet and were totally spoiled. Mauricio sued
BBC for damage to his cargoes. Decide.
The BBC is liable for damages to the cargoes lost by Mauricio.
Typhoon, as a natural disaster, would relieve the common carrier
from liability if it is the proximate and only cause of the damage.
The fact that the bus developed engine trouble and extensive repair
work was necessary affirm that the force majeure was not the
proximate and only cause of the damage.64
32. A shipment of electronic goods arrived at the Port of Manila for

Sony Philippines, Inc. (Sony). Previous to the arrival, Sony had
engaged the services of TMBI to facilitate, process, withdraw,
and deliverthe shipmentfrom the port to its warehouse in Bihan.
TMBI - who did not own any delivery trucks - subcontracted
the services of BMT Trucking Services (BMT), to transport the
shipment from the port to the Bihan warehouse. Four (4) BMT
trucks picked up the shipment from the port. However, only
three (3) trucks arrived at Sony's Bihan warehouse. The fourth
truck driven by Rufo Reynaldo Lapesura was found abandoned.
Mitsui, the insurer, paid the claims and ran after TMBI.
TMBI, however, denied being a common carrier because it does
not own a single truck to transport its shipment and it does
not offer transport services to the public for compensation
“Keihin-Everett Forwarding Co. v. Marine Malayan Insurance Corporation, et

al., G.R. No. 212107, January 28, 2019.
“BAR 1987.
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1

and hence, it is not bound to observe extraordinary diligence.

Furthermore, TMBI insists that the hijacking of the truck was a
fortuitous event which should exonerate its liability.
a. Is TMBI is a common carrier?
Yes, TMBI is a common carrier. The delivery of the goods is
an integral, albeit ancillary, part of its brokerage services. TMBI
admitted that it was contracted to facilitate, process, and clear
the shipments from the customs authorities, withdraw them from
the pier, then transport and deliver them to Sony’s warehouse in
Laguna. That TMBI does not own trucks and has to subcontract
the delivery of its clients’ goods, is immaterial. As long as an entity
holds itself to the public for the transport of goods as a business, it
is considered a common carrier regardless of whether it owns the
vehicle used or has to actually hire one. Lastly, TMBI’s customs
brokerage services - including the transport/delivery of the cargo -
are available to anyone willing to pay its fees.
b. Should TMBI be held liable for the hijacking of the

truck?
TMBI is liable for the hijacking of the truck. Theft or the robbery
of the goods is not considered a fortuitous event or a force majeure.
Nevertheless, a common carrier may absolve itself of liability for
a resulting loss: (1) if it proves that it exercised extraordinary
diligence in transporting and safekeeping the goods; or (2) if it
stipulated with the shipper/owner of the goods to Emit its liability
for the loss, destruction, or deterioration of the goods to a degree less
than extraordinary diligence.
Instead of showing that it had acted with extraordinary
diligence, TMBI simply argued that it was not a common carrier
bound to observe extraordinary diligence. Its failure to successfully
establish this premise carries with it the presumption of fault or
negligence, thus rendering it liable to Sony/Mitsui for breach of
contract.
c. Is BMT liable solidarity with TMBI to Mitsui?

No, BMT and TMBI are not solidarily liable to Mitsui. While the
responsibility of two or more persons who are liable for quasi-delict
is solidary under Article 2194 of the Civil Code, TMBI’s liability
to Mitsui does not stem from a quasi-delict but from its breach of
contract. The tie that binds TMBI with Mitsui is contractual, albeit
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one that passed on to Mitsui as a result of TMBI’s contract of carriage

with Sony to which Mitsui had been subrogated as an insurer who
had paid Sony’s insurance claim.
BMT is not directly liable to Sony/Mitsui for the loss of the
cargo. While it is undisputed that the cargo was lost under the
actual custody of BMT (whose employee is the primary suspect in
the hijacking or robbery of the shipment), no direct contractual
relationship existed between Sony/Mitsui and BMT. If at all, Sony/
Mitsui’s cause of action against BMT could only arise from quasi
delict, as a third party suffering damage from the action of another
due to the latter’s fault or negligence.
However, TMBI must not absorb the loss. By subcontracting
the cargo delivery to BMT, TMBI entered into its own contract of
carriage with a fellow common carrier. Since BMT failed to prove
that it observed extraordinary diligence in the performance of its
obligation to TMBI, it is liable to TMBI for breach of their contract
of carriage.65
In sum, TMBI is liable to Sony (subrogated by Mitsui) for
breaching the contract of carriage. In turn, TMBI is entitled to
reimbursement from BMT due to the latter’s own breach of its
contract of carriage with TMBI. The proverbial buck stops with
BMT who may either: (a) absorb the loss, or (b) proceed after its
missing driver, the suspected culprit.
It should be noted that in the case of Loadmasters Customs
Services v. Glodel Brokerage Corporation,66 the Supreme Court
ruled differently when it held that both the customs broker and the
trucking company it contracted with are jointly and severally liable
with the consignee in case of loss or damage to the goods.
It is submitted that the better view is that the trucking company
is not liable for breach of contract of carriage to the consignee if
the two persons had no contractual relationship with each other.
However, for pragmatic considerations and orderly administration
of justice, the customs broker and trucking company should be made
jointly and severally liable in case the consignee files an action
“Torres-Madrid Brokerage, Inc. v. Feb Mitsui Marine Insurance Co., Inc. and
Benjamin P. Manalastas, doing business under the Name of BMT Trucking Services,
GJl.No. 194121, July 11, 2016.
“G.R. No. 179446, January 10, 2011.
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1

against both of them for loss or damage to goods, whether the cause
of action against the trucking company is one for tort or breach of
contract of carriage.
In fact, there is authority to the effect that a tortfeasor can be
made jointly and severally Hable with a common carrier.67
Acte ofpublic enemy

33. Who is a public enemy?
A public enemy is a citizen of another country against which
the Philippine government is at war.
Acts or omission of shipper

Character of the goods or defect in packing
34. Because of spillage of the rice during the trip from Davao
to Manila due to the bad condition of the sacks, there was a
shortage in the rice delivered by the Provident Lines Inc. to
the consignee XYZ Import and Export Corporation. The carrier
accepted the shipment, knowing that the sacks had holes and
some had broken strings. When sued, Provident Lines, Inc.
alleged that the loss was caused by the spillage of the rice on
account of the defective condition of the sacks, at the time it
received the shipment, and therefore, it cannot be held liable.
Decide. Give reasons.
The maritime carrier is liable. Where the fact of improper
packing is known to the carrier or its servants, or apparent
upon ordinary observations, but the carrier accepts the goods
notwithstanding such conditions, it is not relieved of liability for loss
or injury resulting therefrom.68
The rule is that if the improper packing or, in this case, the
defect/s in the container, is/are known to the carrier or his employees
or apparent upon ordinary observation, but he nevertheless
accepts the same without protest or exception notwithstanding
such condition, he is not relieved of liability for damage resulting
therefrom. In this case Provident Lines, Inc. accepted the cargo
without exception despite the apparent defects in some of the
container vans. Hence, for a failure of Provident Lines, Inc. to prove
67Arriesgado v. Tiu, G.R. No. 138060, September 1, 2004.

“Southern Lines, Inc. v. Court of Appeals, 4 SCRA 259; BAR 1978 and 1984.
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that it exercised extraordinary diligence in the carriage of goods

in this case or that it is exempt from liability, the presumption of
negligence as provided under Article 1735 holds.69
Order of competent public authority

35. Y contracted the services of X to haul tons of scrap iron from
Bataan to the port of Manila on board the lighter "Batman." Z
sent his lighter to dock at Mariveles, where Y delivered the
scrap irons for loading which also began on the same day. The
Acting Mayor, together with three (3) policemen, ordered the
dumping of the scrap iron where the lighter was docked and the
rest to be brought to N ASSCO compound. Is the intervention of
the municipal officials considered a force majeure as to exempt
the carrier from any liability?
No. The intervention of municipal officials was not in any case,
of a character that would render impossible the fulfillment by the
carrier of its obligation. The carrier was not duty bound to obey the
illegal order to dump into the sea the scrap iron. Moreover, there
is absence of sufficient proof that the issuance of the same order
was attended with such force and intimidation as to completely
overpower the will of the carrier’s employees. The mere difficulty
in the fulfillment of the obligation is not considered force majeure.10
a. Requirement of absence of negligence

b. Absence of delay
36. A, in Manila, shipped on board a vessel of B, chairs to be used
in the restaurant of consignee C in Cebu. No date for delivery or
indemnity for delay was stipulated. The chairs, however, were
not claimed promptly by C and were shipped by mistake back
to Manila, where it was discovered and re-shipped to Cebu.
By the time the chairs arrived, the date of inauguration of the
movie house passed by and it had to be postponed. C brings
action for damages against B, claiming loss of profits during
the Christmas season when he expected the movie house to be
opened. Decide the case with reasons.
69Virgines Calvo UCPB General Insurance, G.R. No. 148496, March 19,
2002.
™Mauro Ganzon v. Court of Appeals, G.R. No. L-48757, May 30,1988.
J9JC9B0M
r

C, may bring action for damages against B for loss of profits.

The obligation of the carrier to carry cargo includes the duty not to
delay their transportation, so that if the carrier is guilty of delay in
the shipment of the cargo, causing damages to consignee, it will be
liable.71
However, in Maersk Line u. Court of Appeals?2 the Supreme
Court held that the oft-repeated rule regarding a carrier’s liability
for delay is that in the absence of a special contract, a carrier is not
an insurer against delay in transportation of goods. When a common
carrier undertakes to convey goods, the law implies a contract that
they shall be delivered at destination within a reasonable time, in
the absence, of any agreement as to the time of delivery.
The ruling in Maersk is the more accepted view. A similar
ruling was adopted in another case.73
C. Due diligence to prevent or lessen the loss

2. Contributory negligence
37. What is the effect of contributory negligence on the part of the
shipper in case of loss or damage to his goods?
If the shipper or owner merely contributed to the loss,
destruction, or deterioration of the goods, the proximate cause
thereof being the negligence of the common carrier, the latter shall
be liable in damages, which however, shall be equitably reduced.71
On the other hand, even if the loss, destruction, or deterioration
of the goods should be caused by the character of the goods, or thd
faulty nature of the packing or of the containers, the common carrier
must exercise due diligence to forestall or lessen the loss.7S
3. Duration of liability
a. Delivery of goods to common carrier
b. Actual or constructive delivery
71Tan Liao v. American President Lines, G.R. No. L-7280, January 20, 1956;
BAR 1979.
72G.R. No. 94761, May 17,1993.
73Saludo v. Court of Appeals, G.R. No. 95536, March 23, 1992.
"Article 1741, Civil Code.
76Article 1742, Civil Code.
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38. In a contract of carriage for goods, when does the obligation to

exercise extraordinary diligence commence and when does it
end?
The extraordinary responsibility of the common carrier lasts
from the time the goods are unconditionally placed in the possession
of, and received by the carrier for transportation until the same are
delivered, actually or constructively, by the carrier to the consignee,
or to the person who has a right to receive them.76
The carrier’s liability as a common carrier begins with the
actual delivery of the goods for transportation and not with the mere
formal execution of a receipt or bill of lading because the issuance
of such is not necessary to complete delivery and acceptance. Even
where it is provided by statute that liability commences with the
issuance of the bill of lading, actual delivery and acceptance are
sufficient to bind the carrier.77
The fact that part of the shipment had not been loaded on
board the Eghter does not impair the contract of transportation as
the goods remained in the custody and control of the carrier, albeit
still unloaded.78
In one case, it was held that the receipt of the goods by the
fighters (even if free of charge) is already deemed to be a receipt
by the vessel even though the goods are not yet actually shipped.
The receipt of goods by the carrier has been said to he at the
foundation of the contract to carry and deliver, and if actually no
goods are received there can be no such contract. The liability and
responsibility of the carrier under a contract for the carriage of goods
commence on their actual delivery to, or receipt by, the carrier or an
authorized agent. The delivery to a lighter in charge of a vessel for
shipment on the vessel, where it is the custom to deliver in that way,
is a good delivery and binds the vessel receiving the freight. The
liability commences at the time of delivery to the Eghter. Similarly,
where there is a contract to carry goods from one port to another,
and they cannot be loaded directly on the vessel and lighters are
sent by the vessel to bring the goods to it, the lighters are for the
time its substitutes, so that the bill of lading is applicable to the
goods as soon as they are placed on the lighters.

’’Compania Maritima v. Insurance Company of North America, G.R. No.
L18965, October 30, 1964.
,8Mauro Ganzon v. Court of Appeals, G.R. No. L-48757, May 30,1988.
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In another case, it was held that the liability of a common

carrier does not cease by mere transfer of custody of the cargo to the
arrastre operator. Like the duty of seaworthiness, the duty of care of
the cargo is non-delegable and the carrier is accordingly responsible
for the acts of the master, the crew, the stevedore, and his other
agents. The fact that a consignee is required to furnish persons to
assist in unloading a shipment may not relieve the carrier of its duty
as to such unloading. It is settled in maritime law jurisprudence that
cargoes while being unloaded generally remain under the custody of
the carrier. Since the damage to the cargo was incurred during the
discharge of the shipment and while under the supervision of the
carrier, the latter is Hable for the damage caused to the cargo.’3
The Supreme Court also ruled that when there is no dispute
that the custody of the goods was never turned over to the consignee
or his agents but was lost into the hands of unauthorized persons who
secured possession thereof on the strength of falsified documents,
the common carrier is Hable.80
39. Does the obligation of a common carrier to exercise

extraordinary diligence cease when the goods are turned over
to the customs authorities?
The delivery to the customs authorities is not the dehvery
contemplated by Article 1736 because the owner cannot exercise
dominion over them, it believes that the parties may agree to Hmit
the HabiHty of the carrier in connection therewith considering that
the goods have still to go through the inspection of the custom;
authorities. The carrier losses control of the goods because of a
custom regulation and it is unfair that it be made responsible for
what may happen during the interregnum.
In the corresponding bill of lading, both the carrier and the
consignee have stipulated to Hmit the responsibility of the former
for the loss or damage that may occur to the goods before they are
actually delivered. It appears that the carrier does not assume
HabiHty for any loss or damage once they have been taken into the
custody of customs or other authorities or when they have been
73Westwind Shipping Corporation v. UCPB General Insurance Co., G.R. No.

2002289, November 25, 2013.
“Nedlloyd Lijnen B.V. Rotterdam And The East Asiatic Co., Ltd. v. Glow Laks
Enterprises, Ltd., G.R. No. 156330, November 19, 2014.
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delivered at ship’s tackle. These stipulations have been adopted

precisely to mitigate the responsibility of the carrier considering
the present law on the matter and the Court found nothing therein
that is contrary to morals or public policy that may justify their
nullification.81
40. X took the Benguet Bus from Baguio going to Manila. He

deposited his maleta in the baggage compartment of the bus
common to all passengers. He did not declare his baggage nor
pay its charges contrary to the regulations of the bus company.
When X got off, he could not find his maleta which obviously
was taken by another passenger. Determine the liability of the
bus company.
The bus company is liable for the loss of the maleta. The duty
of extraordinary diligence in the vigilance over the goods is due on
such goods as are deposited or surrendered to the common carrier
for transportation. The fact that the maleta was not declared nor the
charges paid thereon would not be consequential so long as it was
received by the carrier for transportation.82
41. X delivered 10 boxes of goods in good order to the carrier. Y,

the consignee, however, received the same in bad condition.
No proof of negligence was offered by X or Y. Is the common
carrier liable for damages?
Yes, mere proof delivery of the goods in good order to a common
carrier and of their arrival in bad order at their destination constitutes
h prima facie case of fault or negligence against the carrier. If no
adequate explanation is given as to how the deterioration, loss, or
destruction of the goods happened, the transporter shall be held
responsible.88
C. Temporary loading or storage

The obligation of the carrier remains in full force and effect
even when the goods are temporarily unloaded or stored in transit
unless the shipper or owner has made use of the right of stoppage in
8lLu Do & Lu Ym Corporation v. L.V. Binamira, G.R. No. L-9840, April 22,
1957.
“BAR 1989.
“Eastern Shipping Lines, Inc. v. BPI/MS Insurance Corporation and Mitsui
Insurance Co., Ltd., G.R. No. 182864, January 12, 2015.
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transit. It continues to be operative even during the time the goods

are stored in a warehouse of the carrier at the place of destination
until the consignee has been advised of the arrival of the goods
and has had reasonable opportunity thereafter to remove them or
otherwise dispose of them.”
42. What is the effect of a stipulation regarding the exercise of

diligence to less than extraordinary?
In the carriage of goods, the carrier and shipper may agree
on the observance of diligence to a degree less than extraordinary
(but not total exemption nor diligence less than ordinary) provided
the stipulation is: (1) in writing; (2) supported by a valuable
consideration other than the service rendered by the carrier; and (3)
reasonable, just, and not contrary to public policy.86
43. When is the obligation of the common carrier to observe

extraordinary diligence in the carriage of goods reduced to
ordinary diligence?
The obligation of the common carrier to observe extraordinary
diligence in the carriage of goods is reduced to ordinary diligence in
a) When the seller exercised his right of stoppage in transit;"
b) If there is stipulation between the shipper and the carrier,
subject to the conditions stated above;
c) For hand-carried baggage.”
d) If the loss, destruction, or deterioration of the goods
should be caused by the character of the goods, or the
faulty nature of the packing or of the containers, the
common carrier is only required to exercise due diligence
to forestall or lessen the loss.88
“Articles 1736-1738, NCC.

“Articles 1744-1745[3], NCC.
“Article 1737, NCC.
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4. Stipulation for limitation of liability

a. Void stipulations
44. Cite stipulations in a contract of carriage which are considered
unreasonable, unjust, and contrary to public policy.
Any of the following or similar stipulations shall be considered
unreasonable, unjust, and contrary to public policy:
a. That the goods are transported at the risk of the owner or
shipper;
b. That the common carrier will not be liable for any loss,
destruction, or deterioration of the goods;
c. That the common carrier need not observe any diligence
in the custody of the goods;
d. That the common carrier shall exercise a degree of
diligence less than that of a good father of a family, or
of a man of ordinary prudence in the vigilance over the
movables transported;
e. That the common carrier shall not be responsible for the
acts or omission of his or its employees;
f. That the common carrier’s liability for acts committed
by thieves, or of robbers who do not act with grave or
irresistible threat, violence, or force, is dispensed with or
diminished;
g- That the common carrier is not responsible for the loss,
destruction, or deterioration of goods on account of the
defective condition of the car, vehicle, ship, airplane, or
other equipment used in the contract of carriage.89
45. A condition was printed at the back of the tickets which provides
that any and all actions arising out of the ticket, irrespective of
where it is issued, shall be filed before the courts of Cebu City.
Is this stipulation valid and enforceable? Were the passengers
deemed to have acceded to it when they purchased the tickets
and took the carrier's vessel for passage and thus amounted to
effective waiver of venue?
"’Article 1745, NCC.
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r

The condition is void and unenforceable for two (2) reasons:

First, it is not just and fail- to bind passengers to the conditions
printed in fine letter at the back of the tickets. It is hardly proper to
expect the passengers to examine then- tickets after they received
them from crowded counters. No reasonable opportunity is given to
them in order to carefully examine the said condition prior to the
purchase of the tickets. Moreover, it must be noted that shipping
companies are franchise holders of certificates of public convenience
and therefore possess a virtual monopoly of the business of
transporting passengers. As such, they may dictate the terms of
passage, leaving the passengers with no choice but to buy tickets
and avail of their vessels and facilities.
Second, it subverts the public policy on transfer of venue of
proceedings since the same will prejudice the rights and interests
of innumerable passengers. Although venue may be changed
by agreement, such an agreement will not be held valid where it
practically negates the action of the claimants. Considering the
expense and trouble a passenger residing outside of Ce'bu City would
incur to prosecute a claim in the said city, he would most probably
decide not to file the action at all.90
b. Limitation of liability to fixed amount (

46. May a common carrier limit its liability to a fixed amount in
case of loss or damage to goods?
A contract fixing the sum that may be recovered by the owner
or shipper for the loss, destruction, or deterioration of the goods is
valid, if it is reasonable and just under the circumstances, and has
been fairly and freely agreed upon.91
The fact that the common carrier has no competitor along the
line or route, or a part thereof, to which the contract refers shall
be taken into consideration on the question of whether or not a
stipulation limiting the common carrier’s liability is reasonable,
just, and in consonance with public policy.92
“Sweet Lines v. Hon. Bernardo Teves, G.R. No. L-37750, May 19,1978.
91 Article 1750, NCC.
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C. Limitation of liability in the absence of

declaration of greater value
47. May a common carrier limit its liability to the value of the
goods?
Yes, a stipulation that the common carrier’s liability is limited
to the value of the goods appearing in the bill of lading, unless the
shipper or owner declares a greater value, is binding.83
Pursuant to such provision, where the shipper is silent as to the
value of his goods, the carrier’s liability for loss or damage thereto
is limited to the amount specified in the contract of carriage and
where the shipper states the value of his goods, the carrier’s liability
for loss or damage thereto is limited to that amount. A stipulation
in a contract of carriage that the carrier will not be liable beyond
a specified amount unless the shipper declares the goods to have
a greater value is generally deemed to be valid and will operate to
limit the carrier's liability, even if the loss or damage results from
the carrier’s (negligence. It is the duty of the shipper to disclose,
rather than the carrier’s to demand the true value of the goods and
silence on the part of the shipper will be sufficient to limit recovery
in case of loss to the amount stated in the contract of carriage.84
48. If the insurer paid the insured based on the actual value of the
goods, how much can the insurer recover from the common
carrier?
As to the insurance company, it must be noted that after
paying the claim of the insured, the former is merely subrogated to
the rights of the latter. As subrogee, it can recover only the amount
that is recoverable by the insured. Since the right of the insured, in
case of loss or damage to the goods, is restricted by the provisions in
the bill of lading, a suit by the insurer necessarily is subject to like
limitations.86

“Eastern and Australian Steamship Co., Ltd. v. Great American Insurance
Co.,G.R. No. L-37604, October 23, 1981.
“St. Paul Fire & Marine Insurance Co. v. Macondray & Co., Inc., G.R. No.
L-27796, March 25, 1976.
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T

49. What are the usual stipulations often made in a bill of lading
regarding the liability of the common carrier?
Three (3) kinds of stipulations have often been made in a bill
of lading. The first is one exempting the carrier from any and all
liability for loss or damage occasioned by its own negligence. The
second is one providing for an unqualified limitation of such liability
to an agreed valuation. And the third is one limiting the liability
of the carrier to an agreed valuation unless the shipper declares
a higher value and pays a higher rate of freight. According to an
almost uniform weight of authority, the first and second kinds of
stipulations sire invalid as being contrary to public policy, but the
third is valid and enforceable.96
A stipulation limiting the sum that may be recovered by the
shipper or owner to 90% of the value of the goods in case of loss due
to theft is void. Such stipulation is considered unreasonable, unjust,
and contrary to public policy under Article 1745 of the Civil Code.97
50. Juan, a paying passenger, noted the stipulation at the back of

the bus ticket stating that the liability of the bus company is
limited to PI,000.00 in case of injuries to its passengers and
P500.00 in case of loss or damage to baggage caused by the
negligence or willful acts of its employees.
Upon arrival at his destination, Juan got into an altercation
with the ticket conductor, who pulled out a knife and inflicted
several wounds on Juan. The bus driver intervened, heaping
abusive language on Juan and completely destroying Juan's
baggage which contained expensive goods worth P3,000.00.
The hospital expenses for Juan would probably amount to at
least P6,000.00.
Give the extent of liability of the bus company, with

reasons.
The bus company’s liability for the injuries inflicted upon Juan
is at least P6,000.00, notwithstanding the stipulation limiting its
liability, and only P500.00, the amount stipulated in the bus ticket,
for the damage and destruction to Juan’s baggage.
1999 96Loadstar ShiPPinB Co- v. Court of Appeals, G.R. No. 131621, September 28,
97BAR 2002.
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With respect to the injuries inflicted upon Juan, common

carriers are liable for the death or injuries to passengers through
the negligence or willful acts of the former’s employees, although
such employees may have acted beyond the scope of their authority
or in violation of the orders of the common carriers. The common
carrier’s responsibility for these acts cannot be eliminated or limited
by stipulation by the posting of notices, by statements on the tickets
or otherwise.
The rule is different with respect to a stipulation limiting the
carrier’s liability for the loss, destruction, or deterioration of goods
shipped. Under Article 1750 of the Civil Code, a contract fixing the
sum that may be recovered by the owner or shipper for the loss,
destruction, or deterioration of the goods is valid, if it is reasonable
and just under the circumstances and has been fairly and freely
agreed upon.08
51. Martin Nove shipped an expensive video equipment to a friend

in Cebu. Martin had bought the equipment from Hong Kong
for U.S.'$5,000.00. The equipment was shipped through M/S
Lapu-Lapu under a bill of lading which contained the following
provision in big bold letters:
"The limit of the carrier's liability for any loss or damage
to cargo shall be P200 regardless of the actual value of such
cargo, whether declared by shipper or otherwise."
The cargo was totally damaged before reaching Cebu.
Martin Nove claimed for the value of his cargo ($5,000.00 or
about P100.000.00) instead of just P200.00 as per the limitation
on the bill of lading.
Is there any legal basis for Nove's claim?
There is legal basis for the claim of Martin Nove. The stipulation
limiting the carrier’s liability up to a certain amount “regardless of
the actual value of such cargo, whether declared by its shipper or
otherwise,” is violative of the requirement of the Civil Code that
such limiting stipulations should be fairly and freely agreed upon.”
A stipulation that denies to the shipper the right to declare the
actual value of his cargoes and to recover, in case of loss or damage,
on that basis would be invalid.100
"BAR 1984.
"Articles 1749-1750, Civil Code.
’"BAR 1987.
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52. Sylvex Purchasing Corporation delivered to Unsworth

Transport International (UTI) a shipment of 27 drums of various
raw materials for pharmaceutical manufacturing. UTI issued a
Bill of Lading covering the aforesaid shipment. The shipment
arrived at the port of Manila wherein it was later found to be
damaged.
The rejected UTI’s claim that its liability should be limited
to $500.00 per package pursuant to the Carriage of Goods by
Sea Act (COGSA) considering that the value of the shipment
was declared pursuant to the letter of credit and the pro forma
invoice.
Is UTI liable for the value of the goods not stated in the bill
of lading?
No, UTI is liable only for $500.00 per package. Sylvex did not
declare a higher valuation of the goods to be shipped. The insertion
of an invoice number in the bill of lading does not in itself sufficiently
and convincingly show that the common carrier had(knowledge of
the value of the cargo.’01
In a similar case, it was held that the insertion of the words
“L/C No. 90/02447,” cannot be the basis for the carriers’ liability.
First, a notation in the Bill of Lading which indicated the amount of
the Letter of Credit obtained by the shipper for the importation of
steel sheets did not effect a declaration of the value of the goods as
required by the bill.102
However, in another case, it was ruled that the declaration
requirement does not require that all the details must be written
down on the very bill of lading itself. Compliance can be attained
by incorporating the invoice, by way of reference, to the bill of
lading provided that the former containing the description of the
nature, value and/or payment of freight charges is duly admitted as
evidence.103
To summarize, the insertion of an invoice number or reference
to a letter of credit does not in itself sufficiently and convincingly
show that the common carrier had knowledge of the value of the
’“'Unsworth Transport International v. Court of Appeals, G.R. No. 166250,

July 26, 2010.
102Philam Insurance Company v. Heung Ah Shipping Corporation and Wallem
Shipping Inc., G.R. No. 18771 and G.R. No. 187812, July 23, 2014
’“Eastern Shipping Lines, Inc. v. BPI/MS Insurance Corp., & Mitsui Sumitomo
Insurance Co., Ltd., G.R. No. 182864, January 12, 2015.
J9JC9B0M J
cargo. As such, it does not amount to a higher declaration of the

value of the goods. However, the same interpretation does not apply
if the bill of lading incorporates the invoice value of the goods with
appropriate description thereof and payment of corresponding
freight charges.104
53, X took a plane from Manila bound for Davao via Cebu where
there was a change of planes. X arrived in Davao safely but to
his dismay, his two (2) suitcases were left behind in Cebu. The
airline company assured X that the suitcases would come in
the next flight, but they never did.
X claimed P2,000.00 for the loss of both suitcases, but
the airline was willing to pay only P500.00 because the airline
ticket stipulated that unless a higher value was declared,
any claim for the loss cannot exceed P250.00 for each piece
of luggage. X however reasoned out that he did not sign the
stipulation and in fact had not even read it.
X did not declare a greater value despite the fact that the
clerk had called his attention to the stipulation in the ticket.
Decide the case.
j Even if he did not sign the ticket, X is bound by the stipulation
that any claim for loss cannot exceed P250.00 for each luggage. He
did not declare a higher value. Thus, X is only entitled to P500.00 for
the two (2) luggage lost.106
5. Liability for baggage of passengers

a. Checked-in baggage
b. Baggage in possession of strangers
54. What is the liability of a common carrier for baggage of
passengers?
If the baggage is in the custody of the common carrier (checked-
in), the latter is obliged to observe extraordinary diligence. The
presumption of negligence applies against the common carrier.
Articles 1733 to 1753 of the Civil Code apply.106
‘“'Bar 1998.
105BAR 1998; 1985.
‘“Article 1754, NCC.
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7

But if the baggage is in the custody of the passenger (hand-

carried), the carrier is liable as a depositary provided that (a) notice
was given to him or his employees; and (b) the passenger took the
necessary precautions which the carrier had advised relative to
the care and vigilance of the baggage. The baggage in transit is
deemed as a necessary deposit. The diligence required of the carrier/
depositary is merely ordinary diligence. In case of loss owing to the
fault of the passenger, the carrier will not be held liable.107
55. Pasahero, a paying passenger, boarded a Victory Liner bus

bound for Olongapo. He chose a seat at the front near the bus
driver. Pasahero told the bus driver that he had valuable items
in his bag which was placed near his feet. Since he had not
slept 24 hours, he requested the driver to keep an eye on the
bag should he doze off during the trip.
a) While Pasahero was asleep, another passenger took the
bag away and alighted at Guagua, Pampanga. Is Victory
Liner liable to Pasahero? Explain.
b) Supposing two (2) armed men staged a hold-up while
the bus was speeding along the North Expressway. One
of them pointed a gun at Pasahero and stole not only his
bag but also his wallet as well. Is Victory Liner liable to
Pasahero? Explain.
Answer:
a) The responsibility of common carriers in the case of loss
or damage to hand-carried baggage is governed by the
rule on necessary deposits. The common carrier is thus
liable for the loss of the personal property caused by its
employees or by strangers.
b) The use of arms (in the staging of the holdup) is force
majeure under the rule on necessary deposits. Accordingly,
Pasahero may not hold Victory Liner liable.108
107Supra.
’“BAR 1986.
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C. SAFETY OF PASSENGERS
56. What is the diligence required for common carriers in the

carriage of its passengers?
A common carrier is bound to carry its passengers safely as far
as human care and foresight can provide, using the utmost diligence
of very cautious persons, with due regard to all the circumstances.
In a contract of carriage, it is presumed that the common carrier
was at fault or was negligent when a passenger dies or is injured.
Unless the presumption is rebutted, the court need not even make
an express finding of fault or negligence on the part of the common
carrier. This statutory presumption may only be overcome by
evidence that the carrier exercised extraordinary diligence.109
57. In a court case involving claims for damages arising from death
and injury of bus passengers, counsel for the bus operator filed
a demurrer to evidence arguing that the complaint should be
dismissed because the plaintiffs did not submit any evidence
that the operator or its employees were negligent. If you were
the judge, would you dismiss the complaint?
No. In the carriage of passengers, the failure of the common
carrier to bring the passengers safely to their destination immediately
raises the presumption that such failure is due to the carrier’s fault
or negligence. It is not the burden of the aggrieved passenger to
establish such fault or negligence. The carrier instead must rebut
such presumption. Otherwise, the conclusion can be properly made
that the carrier failed to exercise extraordinary diligence as required
by law.110
58. X is a passenger of RJT Bus Company who suffered injuries due

to the collision of the bus he was riding with a jeepney. X sued
RJT Bus Company for damages. RJT Bus Company invokes as a
defense that it was the jeepney that had the last clear chance
to avoid the injury. Hence, the bus company cannot be held
liable. Is the principle of last clear chance applicable?
109Victory Liner, Inc. v. Rosalito Gammad, G.R. No. 159636, November 25,
2004; Articles 1755 and 1756, NCC.
““BAR 1997.
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No. The principle of last clear chance applies only in a suit

between owners and drivers of two colliding vehicles. It does not
arise where a passenger demands responsibility from the carrier
to enforce its contractual obligations, for it would be inequitable to
exempt the negligent driver and its owner on the ground that the
other driver was likewise guilty of negligence.11'
Both the tortfeasor and the common carrier are jointly and
severally liable for damages of the injuries caused to X.112
a. Void stipulations
59. Cite stipulations that are considered void in a contract of
carriage for passengers.
a. Stipulation where the responsibility of the common
carrier for the safety of its passengers is dispensed with
or lessened by stipulation, by the posting of notices, by
statements on the ticket, or otherwise."3
b. Stipulation limiting the liability for willful acts or gross
negligence.1"
When a passenger is carried gratuitously, a stipulation limiting
the common carrier’s liability for negligence is valid, but not for
willful acts or gross negligence.116
The reduction of fare does not justify any limitation of the
common carrier’s liability.116
60. Suppose "A" was riding on an airplane of a common carrier
when the accident happened and "A" suffered serious injuries.
In an action by "A" against the common carrier, the latter
claimed that (1) there was a stipulation in the ticket issued
to "A" absolutely exempting the carrier from liability from the
passenger's death or injuries and notices were posted by the
common carrier dispensing with the extraordinary diligence
’“William Tiu v. Pedro Arriesgado, G.R. No. 138060, September 1, 2004.

"2Ibid.
‘"Article 1758, NCC.
"“Ibid.
"6Ibid.
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of the carrier, and (2) "A" was given a discount on his plane
fare thereby reducing the liability of the common carrier with
respect to "A" in particular.
Are those valid defenses?
No. These are not valid defenses because they are contrary to
law as they are in violation of the extraordinary diligence required
of common carriers.
In the carriage of passengers, the responsibility of common
carriers cannot be dispensed with or lessened by stipulation. This
rule applies notwithstanding the reduction of fare. But, when the
passenger is carried gratuitously, a stipulation limiting liability for
negligence is valid, except for willful acts or gross negligence.117
61. A and his classmates take a bus from UP to Quiapo. On the

way, another Quiapo-bound bus tries to overtake them. A and
his classmates dare the bus driver to run faster and race with
the other bus. The driver takes their dare, to the delight of A
and his friends who cheered him. On rounding the curve, the
bus driver fails to slow down and the bus turns turtle, resulting
in the death of A and injuries to the other passengers. The bus
carried the following sign: "Do not talk to driver while bus is
on motion, otherwise the company will not assume liability for
any accident." Explain briefly the extent of the liability, if any,
of the bus company, giving the legal provisions and principles
involved.
The bus company is liable for damages to A’s heirs and to all the
injured passengers. Under the Civil Code, a common carrier is duty
bound to exercise extraordinary diligence in carrying its passengers.
This liability cannot be eliminated or limited by stipulation or by
posting notices.118
b. Duration of liability
62. In the carriage of passengers, when does the obligation to
exercise extraordinary diligence commence and when does it
end?
■■’Articles 1757-1758, NCC.

■18BAR 1983.
k
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1

Utmost diligence starts once the passenger places himself to,

and is accepted by, and while he remains under the proper care and
charge of the carrier. It lasts until such time that the passenger
safely alights from and is given reasonable opportunity to leave the
premises of the common carrier, including such time that he looks
for and claims his luggage.
For the light rail transit system of transportation, it was
held that a contract of carriage was created from the moment the
passenger paid the fare at the LRT station and entered the premises
of the latter, entitling him/her to all the rights and protection under
a contractual relation.119
63. A and her child boarded the train of Manila Railroad Company.
Upon approaching Barrio Lagalag, the train slowed down and
the conductor shouted "Lusacan, Lusacan!” despite the fact
that the next stop was still three (3) minutes away. A walked
towards the train exit carrying her child with one hand and
holding her baggage with the other. When they were near
the door, the train suddenly picked up speed. A and her child
stumbled from the train causing them to fall down the tracks
and were hit by an oncoming train, causing their instant death.
Is Manila Railroad Company liable? £
Yes. It is a matter of common knowledge and experience about
common carriers like trains and buses that before reaching a station
or flagstop they slow down and the conductor announces the name
of the place. It is also a matter of common experience that as the
train or bus slackens its speed, some passengers usually stand
and proceed to the nearest exit, ready to disembark as the train or
bus comes to a full stop. This is especially true of a train because
passengers feel that if the train resumes its run before they are able
to disembark, there is no way to stop it as a bus may be stopped.
It was negligence on the conductor’s part to announce the next
flag stop when said stop was still a full three (3) minutes ahead. That
the announcement was premature and erroneous is shown by the
fact that immediately after the train slowed down, it unexpectedly
accelerated to full speed. Manila Railroad Company failed to show
any reason why the train suddenly resumed its regular speed. The
announcement was made while the train was still in Barrio Lagalag.
119Light Rail Transit Authority Marjorie Navidad, G.R. No. 145804,

February 6, 2003.
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This announcement prompted the victims to stand and proceed to

the nearest exit. Without said announcement, the victims would
have been safely seated in their respective seats when the train
jerked as it picked up speed.120
(a) Waiting for carrier or boarding a carrier

64. A bus of GL Transit on its way to Davao stopped to enable a
passenger to alight. At that moment, Santiago, who had been
waiting for a ride, boarded the bus. However, the bus driver
failed to notice Santiago who was still standing on the bus
platform, and stepped on the accelerator. Because of the
sudden motion, Santiago slipped and fell down, suffering
serious injuries.
May Santiago hold GL Transit liable for breach of contract
of carriage? Explain.
Santiago may hold GL liable for breach of contract of carriage.
It was the duty of the driver, when he stopped the bus, to do no
act that would have the effect of increasing the peril to a passenger
such as Santiago while he was attempting to board the same.
When a bus is not in motion there is no necessity for a person who
wants to ride the same to signal his intention to board. A public
utility bus, once it stops, is in effect making a continuous offer to
bus riders. It is the duty of common carriers of passengers to stop
their conveyances for a reasonable length of time in order to afford
passengers an opportunity to board and enter, and they are Hable for
injuries suffered by boarding passengers resulting from the sudden
starting up or jerking of their conveyances while they are doing so.
Santiago, by stepping and standing on the platform of the bus, was
already considered a passenger and was entitled to all the rights
and protection pertaining to a contract of carriage.121
(b) Arrival at destination

65. X, an 80-year old epileptic, boarded the S/S Tamaraw in Manila
going to Mindoro. To disembark, the passengers have to walk
through a gang plank. While negotiating the gang plank, X
slipped and fell into the waters. X was saved from drowning,
120Clemente Brinas v. People of the Philippines, G.R. No. L-30309, November

25,1983.
121BAR 1996.
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Y

brought to a hospital, but after a month died from pneumonia.

Except for X, all the passengers were able to walk through
the gang plank. What is the liability of the owner of the S/S
Tamaraw?
The owner of the S/S Tamaraw is liable for the death ofX in failing
to exercise utmost diligence in the safety of passengers. Evidently,
the carrier did not take the necessary precautions in ensuring the
safety of passengers in the boarding of and disembarking from the
vessel. Unless shown to the contrary, a common carrier is presumed
to have been negligent in cases of death or injury to its passengers.
Since X had not completely disembarked yet, the obligation of the
ship-owner to exercise utmost diligence still then subsisted and it
can still be held liable.122
66. The father returned to the bus to get one of his baggages which
was not unloaded when they alighted from the bus. Racque,
his child, followed him. However, although the father was sti
on the running board of the bus waiting for the conductor to
hand him the bag or bayong, the bus started to run. Raquel was
run over and killed. Is the bus operator still liable as a common
carrier?
Yes. The relation of carrier and passenger does not cease at the
moment the passenger alights from the carrier’s vehicle at a place
selected by the carrier at the point of destination, but continues unt
the passenger has had a reasonable time or a reasonable opportunity
to leave the carrier’s premises. And, what is a reasonable time or a
reasonable delay within this rule is to be determined from all the
circumstances. It cannot be claimed that the carrier’s agent had
exercised the “utmost diligence” of a “very cautious person require
by Article 1755 of the Civil Code to be observed by a common carrier
in the discharge of its obligation to transport safely its passengers.
The presence of said passengers near the bus was not unreasonable
and they are, therefore, to be considered still as passengers of the
carrier, entitled to the protection under their contract of carriage.123
l22BAR 1989.
123La Mallorca v. Court of Appeals, G.R. No. L-20761, July 27, 1966.
J9JC9B0M
67. An hour after the passengers and Viana had disembarked

the vessel, the crane operator began its unloading operation.
While the crane was being operated, Viana who had already
disembarked the vessel remembered that some of his cargoes
were still loaded there. He went back and while he was pointing
to the crew where his cargoes were, the crane hit him resulting
in his death. A complaint for damages was filed against Aboitiz
Shipping Lines (Aboitiz) for breach of contract of carriage.
Aboitiz contends that Viana ceased to be a passenger when
he disembarked the vessel and that consequently his presence
there was no longer reasonable. Is Aboitiz still liable as a
common carrier?
Yes. The rule is that the relation of carrier and passenger
continues until the passenger has been landed at the port of
destination and has left the vessel owner’s dock or premises. Once
created, the relationship will not ordinarily terminate until the
passenger has, after reaching his destination, safely alighted from
the carrier’s conveyance or had a reasonable opportunity to leave the
carrier’s premises. All persons who remain on the premises within
a reasonable time after leaving the conveyance are to be deemed
passengers, and what is a reasonable time or a reasonable delay
within this rule is to be determined from all the circumstances, and
includes a reasonable time to see after his baggage and prepare for
his departure. It is of common knowledge that, by the very nature
of the business of a shipper, the passengers of vessels are allotted a
longer period of time to disembark from the ship than the passengers
of other common carriers considering the bulk of cargoes and the
number of passengers it can load. Consequently, such passenger will
need at least an hour to disembark from the vessel and claim his
baggage. In the case at bar, when the accident occurred, the victim
was in the act of unloading his cargoes which he had every right to
do. As such, even if he had already disembarked an hour- earlier, his
presence in the carrier’s premises was not without cause.
While the victim was admittedly contributorily negligent, still
Aboitiz’s aforesaid failure to exercise extraordinary diligence was
the proximate and direct cause of, because it could definitely have
prevented, the former’s death.124
12,Aboitiz Shipping Corporation v. Court of Appeals, G.R. No. 84458, November

6,1989.
J9JC9B0M
1

C. Liability for acts of others

(a) Employees
68. Is a common carrier liable for the death of or injuries to
passengers through the acts of its employees?
Yes, common carriers are liable for the death of or injuries to
passengers through the negligence or willful acts of the former’s
employees, although such employees may have acted beyond the
scope of their authority or in violation of the orders of the common
carriers.125
69. What is the basis of liability of a common carrier for injuries of

passengers committed by its employees?
The basis of the carrier’s liability for assaults on passengers
committed by its employees rests either on (1) the doctrine of
respondeat superior or (2) the principle that it is the carrier s implied
duty to transport the passenger safely.
Under the first, which is the minority view, the carrier is liable
only when the act of the employee is within the scope of his authority
and duty. It is not sufficient that the act be within the course of
employment only.
Under the second view, upheld by the majority and also by the
later cases, it is enough that the assault happens within the course
of the employee’s duty. It is no defense for the carrier that the act
was done in excess of authority or in disobedience of the carrier s
orders. The carrier’s liability here is absolute in the sense that it
practically secures the passengers from assaults committed by its
own employees.
As can be gleaned from Article 1759, the Civil Code of the
Philippines evidently follows the rule based on the second view. At
least three (3) very cogent reasons underlie this rule: (1) the special
undertaking of the carrier requires that it furnish its passenger
that full measure of protection afforded by the exercise of the high
degree of care prescribed by the law, inter alia, from violence and
insults at the hands of strangers and other passengers, but above
all, from the acts of the carrier’s own servants charged with the
passenger’s safety; (2) said liability of the carrier for the servant’s
J9JC9B0M
violation of duty to passengers, is the result of the formers confiding

in the servant’s hands the performance of his contract to safely
transport the passenger, delegating therewith the duty of protecting
the passenger with the utmost care prescribed by law; and (3) as
between the carrier and the passenger, the former must bear the
risk of wrongful acts or negligence of the carrier’s employees against
passengers, since it, and not the passengers, has power to select and
remove them.
Accordingly, it is the carrier’s strict obligation to select its drivers
and similar employees with due regard not only to their technical
competence and physical ability, but also, no less important, to their
total personality, including their patterns of behavior, moral fibers,
and social attitude.126
The carrier was made liable in the foregoing case after his
driver stabbed and killed the passenger despite the assertion that
the driver acted in self-defense against the passenger who made the
assault first.
70. Marjorie, while waiting for the ZRT train to arrive, had a fistfight
with the guard on duty. For the injuries she suffered, she sued
ZRT Company for damages. ZRT Company denied liability and
argued that the guard on duty was not their employee but that
of an independent contractor. Is ZRT Company liable?
Yes. The foundation of ZRT’s liability is the contract of carriage
and its obligation to indemnify the victim arises from the breach of
that contract by reason of its failure to exercise the high diligence
required of a common carrier. In the discharge of its commitment
to ensure the safety of passengers, a carrier may choose to hire its
own employees or avail itself of the services of an outsider or an
independent firm to undertake the task. In either case, the common
carrier is not relieved of its responsibilities under the contract of
carriage.'27
71. City Railways, Inc. (CRI) provides train services, for a fee, to
commuters from Manila to Calamba, Laguna. Commuters are
required to purchase tickets and then proceed to designated
loading and unloading facilities to board the train. Ricardo
l26Maranan v. Perez, et al., G.R. No. L-22272, June 26, 1967; BAR 2011.
l27Light Rail Transit Authority and Rodolfo Roman v. Marjorie Navidad, G.R.
No. 145804, February 6, 2003.
J9JC9B0M
1
236 DIVI NA ON COMMERCIAL LAW:

Santos purchased a ticket for Calamba and entered the station.

While waiting, he had an altercation with the security guard of
CRI leading to a fistfight. Ricardo Santos fell on the railway just
as the train was entering the station. Ricardo Santos was run
over by the train. He died. In the action for damages filed by the
heirs of Ricardo Santos, CRI interposed lack of cause of action,
contending that the mishap occurred before Ricardo Santos
boarded the train and that it was not guilty of negligence.
Decide.
CRI is liable. A contract of carriage was created from the moment
Ricardo paid the fare at the train station and entered the premises of
the latter, entitling Ricardo to all the rights and protection under a
contractual relation. CRI is liable for the death of Ricardo in fading
to exercise extraordinary diligence imposed upon a common carrier.
The law requires common carriers to carry passengers safely using
the utmost diligence of very cautious persons with due regard for all
circumstances. Such duty of a common carrier to provide safety to
its passengers obligates it not only during the course of the trip but
for so long as the passengers are within its premises and where they
ought to be in pursuance to the contract of carriage. Furthermore,
a common carrier is liable for the death of or injuries to passengers
through the negligence or willful act of its employees or agents that
it contracted with.128
72. Tupang boarded a train as a paying passenger bound for

Manila. Unfortunately, upon passing lyam Bridge at Lucena,
Quezon, Tupang fell off the train resulting in his death. The train
did not stop despite the alarm raised by the other passengers
that somebody fell from the train. Instead, the train conductor
called the station agent and requested for verification of the
information. Police authorities of Lucena City were dispatched
to the lyam Bridge where they found the lifeless body of Tupang.
The train company denied liability and argued that it was the
passenger who opted to sit in the open platform which led to
his falling off from the train. Is the train company correct?
No. The train company has the obligation to transport its
passengers to their destinations and to observe extraordinary
diligence in doing so. Death or any injury suffered by any of its
128Light Rail Transit Authority and Rodolfo Roman v. Marjorie Navidad,

supra. BAR 2008.
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passengers gives rise to the presumption that it was negligent in the

performance of its obligation under the contract of carriage. Thus, it
failed to overthrow such presumption of negligence with clear and
convincing evidence.
But while the train company failed to exercise extraordinary
diligence as required by law, it appears that the deceased was
chargeable with contributory negligence. Since he opted to sit on the
open platform between the coaches of the train, he should have held
tightly and tenaciously on the upright metal bar found at the side
of said platform to avoid falling off from the speeding train. Such
contributory negligence, while not exempting the PNR from liability,
nevertheless justified the deletion of the amount adjudicated as
moral damages.129
(b) Other passengers and strangers

73. What is the liability of the common carrier for death or injuries
to passengers caused by other passengers and/or strangers?
A common carrier is responsible for injuries suffered by a
passenger on account of the willful acts or negligence of other
passengers or of strangers, if the common carrier’s employees
through the exercise of the diligence of a good father of a family
could have prevented or stopped the act or omission.130
The contributory negligence of the passenger does not bar
recovery of damages for his death or injuries, if the proximate cause
thereof is the negligence of the common carrier, but the amount of
damages shall be equitably reduced.131
74. Bathing boarded a bus in Isabela bound for Manila. He was

seated at the first row behind the driver and slept during the
ride. When the bus reached Nueva Ecija, the bus driver stopped
the bus and alighted to check the tires. At this point, a man
who was seated at the fourth row of the bus stood up, shot
Battung at his head resulting in his death. Should the common
carrier be liable for the death of the victim?
'“Philippine National Railways v. Court of Appeals, G.R. No. L-55347, October

4,1987.
'“Article 1763, NCC.
’’'Article 1762, NCC.
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No. The law requires the highest degree of diligence from

common carriers in the safe transport of their passengers and
creates a presumption of negligence against them.
It does not, however, make the carrier an insurer of the absolute
safety of its passengers. Further, during the ride, the driver and the
conductor observed nothing which would rouse their suspicion that
the men were armed or were about to carry out an unlawful activity.
With no such indication, there was no need for them to conduct a
more stringent search (i.e., bodily search) on the aforesaid men.
By all accounts, therefore, it cannot be concluded that the common
carrier or any of its employees failed to employ the diligence of a
good father of a family.132
75. Mariter, a paying bus passenger, was hit above her left eye by a
stone hurled at the bus by an unidentified bystander as the bus
was speeding through the National Highway. The bus owner's
personnel lost no time in bringing Mariter to the provincial
hospital where she was confined and treated.
Mariter wants to sue the bus company for damages

and seeks your advice whether she can legally hold the bus
company liable?
Mariter cannot legally hold the bus company liable. There is no
showing that any such incident previously happened so as to impose
an obligation on the part of the personnel of the bus company to
warn the passengers and to take the necessary precautions. Such
hurling of a stone constitutes a fortuitous event in this case. The bus
company is not an insurer of the absolute safety of its passengers.'33
Similarly, a tort committed by a stranger which causes injury
to a passenger does not accord the latter a cause of action against
the carrier. The negligence for which a common carrier is held
responsible is the negligent omission by the carrier’s employees to
prevent the tort from being committed when the same could have
been foreseen and prevented by them.134
132G.V. Florida Transport, Inc. v. Heirs of Romeo L. Battung, Jr., Represented

By Romeo Battung, Sr., G.R. No. 208802, October 14,2015.
'“BAR 1994.
'“Jose Pilapil v. Court of Appeals, G.R. No. 52159, December 22, 1989.
J9JC9B0M
In one case, the passenger argued that the carrier could have
prevented the injury if something like mesh-work grills had covered
the windows of its bus but the Court found the same untenable.
Although the suggested precaution could have prevented the injury,
the rule of ordinary care and prudence is not so exacting as to require
one charged with its exercise to take doubtful or unreasonable
precautions to guard against unlawful acts of strangers. Where the
carrier uses cars of the most approved type used generally by others
engaged in the same occupation, and exercises a high degree of care
in maintaining them in suitable condition, the carrier cannot be
charged with negligence in this respect.135
76. A bus of Fortune Express, Inc. (FEI) figured in an accident with

a jeepney which resulted in the death of several passengers
including two (2) Maranaos. It was found out that a Maranao
owns said jeepney and certain Maranaos planned to take
revenge by burning some of FEI’s buses. The operations
manager of FEI was advised by an agent of the Philippine
Constabulary to take precautionary measures, however, three
(3) armed Maranaos were able to seize a bus of FEI and set it
on fire, causing the death of its passenger. Is FEI exempt from
liability?
No. Despite the report of the Philippine Constabulary agent
that the Maranaos were going to attack its buses, FEI took no steps
to safeguard the lives and properties of its passengers. The seizure
of the bus of FEI was foreseeable and, therefore, was not a fortuitous
event which would exempt petitioner from liability.136
77. A passenger at the rear portion of the bus owned by Bachelor

Express, Inc. suddenly stabbed a Philippine Constabulary
soldier. Because of the commotion and panic inside the bus,
passengers Beter and Rautraut jumped off the bus causing
their death. Bachelor Express, Inc. denies liability arguing that
the death of the said passengers was caused by a third person
who was beyond its control and supervision. Is Bachelor
Express, Inc. correct?
™Ibid.
'“Fortune Express, Inc. v. Court of Appeals, G.R. No. 119756, March 18,1999.
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No. Considering that the bus driver did not immediately stop
the bus at the height of the commotion; the bus was speeding from
a full stop; the victims fell from the bus door when it was opened or
gave way while the bus was still running; the conductor panicked
and blew his whistle after people had already fallen off the bus;
and the bus was not properly equipped with doors in accordance
with law, it is clear that Bachelor Express, Inc. failed to overcome
the presumption of fault and negligence found in the law governing
common carriers. It failed to prove that the deaths of the two (2)
passengers were exclusively due to force majeure and not to the
failure to observe extraordinary diligence in transporting safely the
passengers to their destinations as warranted by law.137
1. Liability for delay in the commencement of the

voyage138
2. Liability for defects in the equipment and facilities
78. SpousesTumboy and their minor children boarded Yobido Liner
bus. While on the trip, the left front tire of the bus exploded.
The bus fell into a ravine and got stuck to a tree. The incident
resulted in the death of Spouses Tumboy and injuries to other
passengers. Yobido Liner argued that it was not liable for the
tire blow-out because the tire was new and was installed onto
the bus just five (5) days before the incident. Thus, its blow-out
was unforeseeable. Is the tire blow-out a fortuitous event?
No. A fortuitous event is possessed of the following
characteristics: *
a. The cause of the unforeseen and unexpected occurrence,
or the failure of the debtor to comply with his obligations,
must be independent of human will;
b. It must be impossible to foresee the event which
constitutes the caso fortuito, or if it can be foreseen, it
must be impossible to avoid;
c. The occurrence must be such as to render it impossible
for the debtor to fulfill his obligation in a normal manner;
and
I37Bachelor Express, Incorporated, and Cresencio Rivera v. Court of Appeals,

G.R. No. 85691, July 31, 1990.
‘“Supra.
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d. The obligor must be free from any participation in the

aggravation of the injury resulting to the obligee.
Under the circumstances of this case, the explosion of the new
tire may not be considered a fortuitous event. There are human
factors involved in the situation. The fact that the tire was new did
not imply that it was entirely free from manufacturing defects or that
it was properly mounted on the vehicle. Neither may the fact that
the tire bought and used in the vehicle is of a brand name noted for
quality, resulting in the conclusion that it could not explode within
five (5) days use. Be that as it may, it is settled that an accident
caused either by defects in the automobile or through the negligence
of its driver is not a caso fortuito that would exempt the carrier from
liability for damages.
Moreover, a common carrier may not be absolved from liability
in case of force majeure or fortuitous event alone. The common
carrier must still prove that it was not negligent in causing the death
or injury resulting from an accident. While it may be true that the
tire that blew-up was still good condition because the grooves of the
tire were still visible, this fact alone does not make the explosion of
the tire a fortuitous event. No evidence was presented to show that
the accident was due to adverse road conditions or that precautions
were taken by the jeepney driver to compensate for any conditions
liable to cause accidents.139
3. Extent of liability for damages

79. What is the extent of damages awarded in case of death or
injury among the passengers?
Article 1764 in relation to Article 2206 of the Civil Code, holds
the common carrier in breach of its contract of carriage for the death
of a passenger, and it is liable to pay the following: (1) indemnity
for death, (2) indemnity for loss of earning capacity, and (3) moral
damages,140
In determining the reasonableness of the damages awarded
under Article 1764 in conjunction with Article 2206 of the Civil Code,
the factors to be considered are: (1) life expectancy (considering
the health of the victim and the mortality table which is deemed
conclusive) and loss of earning capacity; (b) pecuniary loss, loss of
139Alberta Yobido v. Court of Appeals, G.R. No. 113003, October 17, 1997.
““Victory Liner, Inc. v. Rosalito Gammad, G.R. No. 159636, November 25,
2004.
J9JC9B0M
support and sendee; and (c) moral and mental sufferings. The loss of
earning capacity is based mainly on the number of years remaining
in the person's expected life span. In turn, this number is the basis
of the damages that shall be computed and the rate at which the loss
sustained by the heirs shall be fixed.
The formula for the computation of loss of earning capacity is
as follows:
Net earning capacity = Life expectancy x [Gross Annual
Income - Living Expenses (50% of gross annual income)], where life
expectancy = 2/3 (80 — the age of the deceased).141
Thus, if prior to his death at the age of 60 years old, he was
earning P10 million gross income, his loss of earning capacity is
computed as follows:
Life expectancy = 2/3 x 80 - 60 = 13.33 x (P10 million -
P5 million or P5 million) = P66,666,666.70 million.
D. BILL OF LADING
1. Three-Fold Character
80. What is a Bill of Lading?
A bill of lading may be defined as a written acknowledgment
of the receipt of goods and an agreement to transport and to deliver
them at a specified place to a person named therein or on his order.141
81. What are the three (3) main characteristics of a bill of lading?
a. A bill of lading is considered a receipt for the goods
shipped to the common carrier.
b. It also serves as the contract by which three (3) parties,
namely, the shipper, the carrier, and the consignee
undertake specific responsibilities and assumed stipulated
obligations.
c. It is the evidence of the existence of the contract of
carriage providing for the terms and conditions thereof.141
141Smith Bell Dodwell Shipping Agency Corp. v. Borja, G.R. No. 143008, June
10, 2002.
142BAR 1998.
143Keng Hua Paper Products v. Court of Appeals, 286 SCRA 257; BAR 2015.
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82. If the bill of lading is accepted without any objection, what

does this imply?
The holding in most jurisdictions has been that a shipper who
receives a bill of lading without objection after an opportunity to
inspect it, and permits the carrier to act on it by proceeding with
the shipment is presumed to have accepted it as correctly stating
the contract and to have assented to its terms. In other words, the
acceptance of the bill without dissent raises the presumption that
all the terms therein were brought to the knowledge of the shipper
and agreed to by him and, in the absence of fraud or mistake, he is
estopped from thereafter denying that he assented to such terms.
This rule applies with particular force where a shipper accepts a bill
of lading with full knowledge of its contents and acceptance under
such circumstances makes it a binding contract.144
83. JRT, Inc. entered into a contract with C. Co. of Japan to export
anahaw fans valued at $23,000.00. As payment thereof, a letter
of credit was issued to JRT, Inc. by the buyer. The letter of
credit required was issued to JRT, Inc. by the buyer. The letter
of credit required the issuance of an on-board bill of lading and
prohibited the transhipment. The President of JRT, Inc. then
contracted a shipping agent to ship the anahawfans through O
Containers Lines, specifying the requirements of the letter of
credit. However, the bill of lading issued by the shipping lines
bore the notation "received for shipment" and contained an
entry indicating transshipment in Hong Kong. The President of
JRT, Inc. personally received and signed the bill of lading and,
despite the entries, he delivered the corresponding check in
payment of the freight.
The shipment was delivered at the port of discharge but
the buyer refused to accept the anahaw fans because there was
no on-board bill of lading, and there was transshipment since
the goods were transferred in Hong Kong from MV Pacific,
the feeder vessel, to MV Oriental, a mother vessel. The same
cannot be considered transshipment because both vessels
belong to the same shipping company.
‘"Magellan Manufacturing Marketing Corporation v. Court of Appeals, G.R.

No. 95529, August 22, 1991.
J9JC9B0M
1

JRT, Inc. further argued that assuming there was

transshipment, it cannot be deemed to have agreed thereto
even if it signed the bill of lading containing such entry
because it has made known to the shipping lines from the start
that transshipment was prohibited under the letter of credit
and that, therefore, it had no intention to allow transshipment
of the subject cargo. Is the argument tenable? Reason.
No. JRT, Inc. was bound by the terms of the bill of lading when
it accepted the bill of lading with full knowledge of its contents
which included transshipment in Hong Kong. Acceptance under
such circumstances makes the bill of lading a binding contract.145
2. Delivery of Goods
a. Period for delivery
84. If a shipper, without changing the place of delivery changes
the consignment or consignee of the goods (after said goods
have been delivered to the carrier), under what condition will
the carrier be required to comply with the new orders of the
shipper?
If the shipper should change the consignee of the goods, without
changing their destination, the carrier shall comply with the new
order provided the shipper returns to the carrier the bill of lading,
and a new one is issued showing the novation of the contract. All
expenses for the change must be paid by the shipper.146
85. When should the shipment be delivered? I

The oft-repeated rule regarding a carrier’s liability for delay is
that in the absence of a special contract, a carrier is not an insurer
against delay in transportation of goods. When a common carrier
undertakes to convey goods, the law implies a contract that they
shall be delivered at destination within a reasonable time, in the
absence of any agreement as to the time of delivery. But where
a carrier has made an express contract to transport and deliver
properly within a specified time, it is bound to fulfill its contract
and is Hable for any delay, no matter from what cause it may have
arisen. This result logically follows from the well-settled rule that
where the law creates a duty or charge, and the default in himself,
145BAR 1993.
140BAR 1975.
J9JC9B0M
and has no remedy over, then his own contract creates a duty or
charge upon himself, he is bound to make it good notwithstanding
any accident or delay by inevitable necessity because he might have
provided against it by contract. It has been held that a delay in the
delivery of the goods spanning a period of two (2) months and seven
(7) days is beyond the realm of reasonableness.1'”
86. The Saludo brothers and sisters (Saludos) together with

Pomierski and Son Funeral Home of Chicago brought the
remains of Saludos’ mother to Continental Mortuary Air
Services (CMAS) which booked the shipment of the remains
from Chicago to San Francisco by Trans World Airways (TWA)
and from San Francisco to Manila with Philippine Airlines
(PAL).
The remains were taken to the Chicago Airport, but it
turned out that there were two (2) bodies in the said airport.
Somehow the two (2) bodies were switched, and the remains
of the Saludo* mother was shipped to Mexico instead.
The shipment was immediately loaded on another
PAL flight and it arrived the day after the expected arrival.
Petitioners filed a claim for damages in court
Is the carrier liable for the delay in the delivery of the
cargo?
No, common carriers are not obligated by law to carry and to
deliver merchandise, and persons are not vested with the right to
prompt delivery, unless such common carriers previously assume
such obligation. Said rights and obligations are created by a specific
contract entered into by the parties.1’8
87. Based on the same set of facts, were the airline companies
liable for damages for the switching of the two caskets?
No, the switching happened while the cargo was still with
CMAS, well before the same was place in the custody of the carrier.
Verily, no amount of inspection by the carrier could have guarded
against the switching that had already taken place. Or, granting
that they could have opened the casket to inspect its contents,
carriers had no means of ascertaining whether the body therein
’’’Maersk Line v. Court of Appeals, 222 SCRA 108 (1993).

’’’Saludo v. Court of Appeals, G.R. No. 95536, March 23,1992.
J9JC9B0M
contained was indeed that of Saludos’ mother except, possibly, if the

body was that of a male person and such fact was visually apparent
upon opening the casket. However, to repeat, the carriers had no
authority to unseal and open the same nor did they have any reason
or justification to resort thereto.
Nonetheless, the facts show (in this case) that the Saludos’
right to be treated with due courtesy in accordance with the degree
of diligence required by law to be exercised by every common carrier
was violated by TWA and this entitles them, at least, to nominal
damages from TWA alone. Articles 2221 and 2222 of the Civil
Code make it clear that nominal damages are not intended for
indemnification of loss suffered but for the vindication or recognition
of a right violated or invaded.
b. Delivery without surrender of the bill of lading

88. May a common carrier be held liable despite non-issuance of a
bill of lading?
Yes. There is a complete and consummated contract of carriage
once the cargo is delivered to the carrier and the latter takes
possession thereof. The delivery of a bill of lading is not a requisite
for the perfection of the contract of carriage. As such, the common
carrier is liable despite non-issuance of a bill of lading.149
89. Is the consignee bound by the contract of carriage between

the shipper and the carrier?
Even if the consignee was not a signatory to the contract of
carriage between the shipper and the carrier, the consignee can still
be bound by the contract. The right of a party here, to recover for
loss of a shipment consigned to him under a bill of lading drawn up
only by and between the shipper and the carrier, springs from either
a relation of agency that may exist between him and the shipper or
consignor, or his status as stranger in whose favor some stipulation
is made in said contract, and who becomes a party thereto when
he demands fulfillment of that stipulation. When the consignee
formally claims reimbursement for the missing goods from the
common carrier and subsequently files a case against the latter
based on the very same bill of lading, it accepts the provisions of the
contract and thereby makes itself a party thereto, or at least has
hsBAR 2012.
J9JC9B0M
come to court to enforce it. Thus, it cannot now reject or disregard

the carrier’s limited liability stipulation in the bill of lading. It is
now bound by the whole stipulations in the bill of lading and must
respect the same.160
90. May the consignee obtain delivery of the goods even without
the surrender of the bill of lading?
In case the consignee, upon receiving the goods, cannot return
the bill of lading subscribed by the carrier, because of its loss or
of any other cause, he must give the latter a receipt for the goods
delivered, this receipt producing the same effects as the return of
the bill of lading. The surrender of the original bill of lading is not
a condition precedent for a common carrier to be discharged of its
contractual obligation. If surrender of the original bill of lading is
not possible, acknowledgment of the delivery by signing the delivery
receipt suffices.161
91. The buyer could not produce the bill of lading covering the
shipment not because it was lost, but because the bill of lading
was retained by the seller pending the buyer's full payment of
the shipment. The buyer and the carrier then entered into an
Indemnity Agreement, wherein the former asked the latter to
release the shipment even without the surrender of the bill of
lading. May the goods be released even without the surrender
of the bill of lading?
Yes. The general rule is that upon receipt of the goods, the
lonsignee surrenders the bill of lading to the carrier and their
respective obligations are considered cancelled. Article 353 of the
Code of Commerce, however, provides two (2) exceptions where the
goods may be released without the surrender of the bill of lading
because the (Sansignee can no longer return it. These exceptions are
when the bill of lading gets lost or for other causes. In either case, the
consignee must issue a receipt to the carrier upon the release of the
goods. Such receipt shall produce the same effect as the surrender
of the bill of lading.
‘“Everett Steamship Corporation v. Court of Appeals, G.R. No. 122494,

October 8,1998.
‘‘‘National Trucking and Forwarding Corporation Lorenzo Shipping
Corporation, G.R. No. 153563, February 7, 2005.
J9JC9B0M
Here, the execution of the Indemnity Agreement, and the

undisputed fact that the shipment was released to the buyer
pursuant to it, operates as a receipt in substantial compliance with
the last paragraph of Article 353 of the Code of Commerce.162
It should be stressed, however, that while the common carrier
is justified in releasing the goods to the buyer/consignee, it does not
mean that it can not be sued by the seller/shipper. Should the latter
sue the common carrier for its release of the goods to the consignee/
buyer, the common carrier may seek indemnification from the
consignee on the basis of the indemnity agreement.
c. Refusal of consignee to take delivery

92. When may the consignee refuse to accept the goods?
According to the Code of Commerce, if the goods are delivered
but arrived at the destination in damaged condition, the remedies to
be pursued by the consignee depend on the extent of damage on the
goods. In case the damaged portion of the goods can be segregate
from those delivered in good condition, the consignee may reject
those in damaged condition and accept merely those which are m
good condition. If the effect of damage on the goods consisted mere y
of diminution in value, the carrier is bound to pay only the difference
between its price on that day and its depreciated value as provi e
under Article 364 of the Code of Commerce.163
However, ifthe goods are rendered useless for sale, consumption,
or for the intended purpose, the consignee may reject the goods an
demand the payment of such goods at their market price on that ay
pursuant to Article 365 of the Code of Commerce.164
3. Period for Filing Claims

93. What is the period to file claim in case of damage to goods?
a. For coastwise or inter-island commerce (or carriage of
goods within the Philippines):
’“Designer Baskets, Inc. v. Air Sea Transport, Inc. and Asia Cargo Container
Lines, Inc., G.R. No. 184513, March 9, 2016.
’“Loadstar Shipping Company v. Malayan Insurance Company, G.R. No.
185565, November 26, 2014.
'’•'Ibid.
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When the damage is apparent, the claim should be

filed immediately with the common carrier. If the damage
is not apparent, the notice must be filed within 24 hours
from delivery.165
b. For international carriage (Foreign ports to Philippine
ports):
If the damage is apparent, the notice must be filed
upon discharge of goods. If it is not apparent, the notice
must be given to the common carrier within three (3) days
from delivery.166
94. When does the 24-hour period for the filing of notice
commence?
The 24-hour period within which claims must be presented does
not begin to run until the consignee has received such possession of
the merchandise that he may exercise over it the ordinary control
pertinent to ownership. In other words, there must be delivery of the
cargo by the carrier to the consignee at the place of destination.167
The giving of notice of loss or injury is a condition precedent
to the action for loss or injury or the right to enforce the carrier’s
liability. This notice requirement protects the carrier by affording
it an opportunity to make an investigation of the claim while the
matter is still fresh and easily investigated. It is meant to safeguard
the carrier from false and fraudulent claims.168
’ It was also held that where the contract of shipment contains
a reasonable requirement of giving notice of loss of or injury to the
goods, (in this case, 30 days for filing a claim with the carrier for loss
or damage) the giving of such notice is a condition precedent to the
action for loss or injury or the right to enforce the carrier’s liability.
Such requirement is not an empty formalism. The fundamental
reason or purpose of such a stipulation is not to relieve the carrier
from just liability, but reasonably to inform it that the shipment
■“Article 366 of the Code of Commerce.

’“Section 3(6) of the COGSA.
“’Article 366 of the Code of Commerce; Lorenzo Shipping Corporation v.
Chubb and Sons Inc., G.R. No. 147724, June 8, 2004.
‘“Aboitiz Shipping Corporation v. Insurance Company of North America, G.R.
No. 168402, August 6, 2008; UCPB General Insurance Co., Inc. v. Aboitiz Shipping
Corp., G.R. No. 168433, February 10, 2009.
J9JC9B0M
Y

has been damaged and that it is charged with liability therefor, and
to give it an opportunity to examine the nature and extent of the
injury. This protects the carrier by affording it an opportunity to
make an investigation of a claim while the matter is fresh and easily
investigated so as to safeguard itself from false and fraudulent
claims. Notice is a condition precedent and the carrier is not liable if
notice is not given in accordance with the stipulation, as the failure
to comply with such a stipulation in a contract of carriage with
respect to notice of loss or claim for damage bars recovery for the
loss or damage suffered.169
95. Y shipped several boxes of goods from Mindoro to Batangas

on board a vessel owned by Montenegro Shipping Lines, Inc.
Upon opening of the goods, it was discovered that the goods
had been damaged. It was only after three (3) days that a
notice against the carrier was made by the consignee. Does
the shipper have a cause of action against the carrier?
No. The notice or claim that is required to be made against the
carrier under Article 366 of the Code of Commerce is a condition
precedent to the accrual of a right of action against the latter for loss
of, or damage to, the goods transported. Without such prior notice or
claim having been made within the time allowed, no right of action
against the carrier can rise in favor of the shipper or consignee.160
The aforementioned requirement is a reasonable condition
precedent; it does not constitute a limitation of action. The
requirement of giving notice of loss of or injury to the goods is not an
empty formalism. The fundamental reasons for such a stipulatiori
are: (1) to inform the carrier that the cargo has been damaged,
and that it is being charged with liability therefor; and (2) to give
it an opportunity to examine the nature and extent of the injury.
This protects the carrier by affording it an opportunity to make
an investigation of a claim while the matter is fresh and easily
investigated so as to safeguard itself from false and fraudulent
claims.161
'■'■'Philippine American General Insurance Co. Sweet Lines, Inc., G.R. No.
87434, August 5, 1992.
160UCPB General Insurance Co., Inc. v. Aboitiz Shipping Corporation, 578
SCRA 251 (2009).
""Federal Express Corporation v. American Home Assurance Company, G.R.
No. 150094, August 18, 2004.
J9JC9B0M
96. X shipped several boxes of goods from Manila to Cebu

onboard a vessel owned by Mabuhay Lines, Inc. Several boxes
externally appeared to have been damaged. The proprietor
of Y Dry Goods, Inc. paid the freight charges upon receipt of
the goods. However, when the boxes were opened two (2)
days later, it was discovered that the contents of all the boxes
had been damaged. The proprietor of Y Dry Goods, Inc. seeks
your advice on whether he may proceed against the carrier for
damages. State your answers with reasons.
No action for damages to the goods may be maintained
against the carrier. With respect to a claim arising from damages
caused to the goods contained in the boxes where the damage was
ascertainable from the outside part of the packages, Article 366 of
the Code of Commerce requires that the claim against the carrier
must be made at the time of the receipt.
With respect to the goods contained in the boxes where the
damage was not ascertainable from the outside part of the packages
and such damage was only ascertainable upon the opening of the
boxes, the claim against the carrier must be made within 24 hours
following receipt of the merchandise. It does not appear that the
proprietor of Y Dry Goods, Inc. made any claim for damages to the
goods within the periods set forth in Article 366.
Moreover, as he paid the freight charges upon his receipt of the
goods shipped, it is too late for the proprietor of Y Dry Goods, Inc. to
make a claim against the carrier for damages to the goods.162
97. Can there be substantial compliance with the notice

requirement?
Yes. In the case of Aboitiz Shipping Corporation v. Insurance
Company of North America,163 it was held that provisions specifying
a time to give notice of damage to common carriers are ordinarily
to be given a reasonable and practical, rather than a strict
construction. Understandably, when the goods were delivered, the
necessary clearance had to be made before the package was opened.
Upon opening and discovery of the damaged condition of the goods,
a report to this effect had to pass through the proper channels before
it could be finalized and endorsed by the institution to the claims
department of the shipping company.
162BAR 1984.
‘“G.R. No. 168402, August 6, 2008.
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In the Aboitiz Shipping Corporation case, the call to the carrier

was made two (2) days from delivery, a reasonable period considering
that the goods could not have corroded instantly overnight such that
it could only have sustained the damage during transit. Moreover,
petitioner was able to immediately inspect the damage while
the matter was still fresh. In so doing, the main objective of the
prescribed time period was fulfilled. Thus, there was substantial
compliance with the notice requirement in this case.
4. Period for Filing Actions

98. What is the prescriptive period for filing actions?
a. Coastwise (within Philippines)
The action should be filed within six (6) years from
delivery of the goods if no bill of lading was issued.
However, if a bill of lading was issued, the prescriptive
period is 10 years from the receipt of the goods. A cause of
action based on a written instrument prescribes In 10 years.
b. International (Foreign ports to Philippine ports)
In case of international carriage of goods by sea, notice of
damage is not a condition precedent for the accrual of the caus^
of action as long as the action is filed within one (1) year fronl
date of delivery (delivered but damaged goods) or the date the
goods should have been delivered (date the vessel left the port).
In one case, it was held that the provision in the Bill of
Lading providing that suits must be filed within 60 days from
accrual of the right of action violated the one (l)-year period
prescribed under the COGSA. Hence, it is void and cannot be
applied.161
99. Can the parties validly reduce the one (1)-year period for the
filing of the action?
No. A stipulation reducing one (l)-year period for filing the
action for recovery on lost or damaged cargo is null and void.106
‘“Loadstar Shipping Co. v. Court of Appeals, G.R. No. 131621, September 28,
1999.
‘“Loadstar Shipping Co., Inc. v. Court of Appeals, 315 SCRA 339 (1999).
J9JC9B0M
5. Effects of Stipulations160
E. MARITIME COMMERCE
100. What rules govern the legal relationship of the common carrier
and the passenger/shipper in maritime commerce?
The legal relationship of the common carrier and the passenger/
shipper is governed by the Civil Code provisions on common carriers,
the Code of Commerce and the terms and conditions of the bill of
lading.
1. Charter Parties
101. What is a charter party? What are the kinds of charter party?
A charter party is a contract by which an entire ship or some
principal part thereof is let by the owner to another person for a
specified time or use. It has two (2) types. First, it can be a contract
of affreightment whereby the use of shipping space on vessels is
leased in part or as a whole to carry good for others. The charter
party provides for the hire of the vessel only, either for a determinate
period of time (time charter) or for a single or consecutive voyage
(voyage charter). The shipowner supplies the ship’s stores, pay for
the wages of the master and the crew, and defray the expenses
for the maintenance of the ship. The voyage remains under the
responsibility of the common carrier and is answerable for the loss
of the goods received for transportation. The charterer is free from
liability to third persons in respect of the ship.167
Second, it can be a charter by demise or bareboat charter under
which the whole vessel is let to the charterer with a transfer to him
of its entire command and possession and consequent control over its
navigation, including the master and the crew, who are his servants.
The charterer mans the vessel with his own people and becomes, in
effect, the owner for the voyage or service stipulated, and hence,
liable for damages or loss sustained by the goods transported.168
'•’“'‘Infra.
l6’PhiIam Insurance Company (now Chartis Philippines Insurance) v. Heung-A
Shipping Corporation and Wallem Philippines Shipping, Inc., G.R. No. 187701, July
23, 20 1 4; Caltex Philippines, Inc. v. Sulpicio Lines, Inc., et al., G.R. No. 131166,
September 30, 1999; National Food Authority v. Court of Appeals, G.R. No. 96453,
August 4, 1999.
'“/bid.
J9JC9B0M
1

A bareboat charter effectively converts a common carrier to a

private carrier. The shipowner becomes a mere lessor and ceases
to be the owner of the vessel with respect to a specified navigation.
The shipowner has no liability to the passengers or cargo owners
who contracted with the charterer in case of death or injury to the
passengers or loss or damage to the goods.
102. Is the shipowner presumed to be at fault or negligent in case of

loss, damage, or deterioration of the goods on board its vessel
or in case of death or injury to passengers under a charter
party agreement?
Yes, in the case of voyage and/or time charter because in this
type of charter party agreement, the shipowner retains the status
of common carrier. On the other hand, in the case of bareboat of
demise charter, there is no presumption of fault on the part of the
shipowner because he is not a party to the contract for the shipment
of the goods or transportation of passengers.
103. A contract of carriage was entered into where the carrier and
shipowner are not the same person. In case an event arises
wherein the responsibilities of common carrier attach, who
will be made liable to the charterer/shipper, the carrier or the
shipowner?
The carrier. The carrier that enters into a contract of carriage
is liable to the charterer or shipper even if it does not own the vessel
it chooses. The fact that it did not own the vessel it decided to use to
consummate the contract of carriage does not negate its character
and duties as a common carrier. The shipper (and the insurer by
reason of subrogation) could not be reasonably expected to inquire
a out the ownership of the vessel which the charterer offered to
utilize. As a practical matter, it is very difficult and often impossible
or the general public to enforce its rights of action under a contract
o carriage if it should be required to know who the actual owner of
the vessel is.109
KT . ^9ebu Salvage Corporation v. Philippine Home Assurance Corporation G.R.

No. 150403, January 25, 2007.
J9JC9B0M
104. What is a "Jason clause" in a charter party?

The Jason clause derives its name from The Jason 225 US 32
(1912), a case decided by the US Supreme Court under the Harter
Act. By the Jason clause, a shipowner (provided he had exercised
due diligence to make the ship seaworthy and properly manned,
equipped, and supplied) could claim a general average contribution
from cargo, even where the damage was caused by faulty navigation
of the vessel, provided that the bill of lading excluded liability for
such faults.170
105. Are the rules of common carriers applicable to Bareboat/

Demise Charter?
No. When the charter includes both the vessel and its crew,
as in a bareboat or demise charter, a common carrier becomes
private, at least insofar as the particular voyage the charter-party
is concerned.171
a. Bareboat/Demise Charter
106. Tirso Molina charters a vessel owned and operated by Star
Shipping Co., a common carrier, for the purpose of transporting
) two (2) tractors to his logging concession. The crane operator
of the shipping company somehow negligently puts the
tractors in a place where they would tilt each other. During the
trip, a strong wind hits the vessel, causing severe damage to
the tractors.
Tirso Molina sues the shipping company for damages. The
latter cites a stipulation in the charter agreement exempting
the company from liability from loss or damage arising from
the negligence of its agents. Tirso Molina countered by stating
that the aforementioned stipulation is against public policy
and, therefore, null and void. Is the stipulation valid? Would
you hold the shipping company liable?
Yes. The stipulation in the charter party is valid, and Star
Shipping Co. is not liable. The Civil Code provision on common
carriers should not apply where the common carrier is not acting
as such but as a private carrier, as is the case in the above problem.
A common carrier undertaking to carry a special cargo or chartered
17°BAR 2015.
171Caltex v. Sulpicio Lines, G.R. No. 131166, September 30,1999.
J9JC9B0M
1

to a special person only, becomes a private carrier. As a private

carrier, a stipulation exempting the owner (Star Shipping Co.) from
liability for the negligence of its agent is valid, being not against
public policy.1”
107. "C" Company shipped 20,000 bags of soy beans through

the S/S Melon, owned and operated by "X" Shipping Lines,
consigned to the Toyo Factory and insured by the Surety
Insurance Co., against all risks. "C" Company hired the entire
vessel, with the option to go north or south, loading, stowing,
and discharging at its risk and expense. The owner and shipper
agreed on a stipulation exempting the owner from liability for
the negligence of its agents.
When the cargo was delivered to the consignee, there

were shortages amounting to P10,500.00. The insurance
company paid for the damage and sought reimbursement from
the "X" Shipping Lines as carrier. Is the carrier liable?
The carrier is not liable. A common carrier undertaking to
carry a special cargo or chartered to a special person only, becomes
a private carrier. The provisions of the New Civil Code on common
carriers should not be applied where the carrier is not acting as such
ut as a private carrier. As a private carrier, a stipulation exempting
the shipowner from liability for the negligence of its agents is not
against public policy and is deemed valid.173
108. X owns the ship M/V Aguinaldo. He bareboat chartered the

ship to Y who appointed all its crew members from the captain
down to its last official. Y then transported a shipment of 10,000
bags of sugar belonging to Z. Thru the negligence of the ship
captain, half of the sugar was damaged due to sea water. Since
Y is bankrupt, Z sued the captain and X. Will the suit prosper?
The action could prosper against the ship captain whose
negligence caused the damage but not against X who was merely a
essor of the vessel and who was neither a party to the contract for
t e shipment of the goods nor an employer of the ship captain.17*
’’"Home Insurance Co. v. American Steamship Agencies, April 4, 1968; 23

SCRA 24; BAR 1980.
173Home Insurance Co. v. American Steamship Agencies, Inc., ibid. BAR 1981.
’’’BAR 1989.
J9JC9B0M
109. Who is liable for the expenses of the voyage, including the
wages of the seamen, in a bareboat or demise charter?
It is well settled that in a demise or bareboat charter, the
charterer is treated as the owner pro hac vice of the vessel, the
charterer assuming in large measure the customary rights and
liabilities of the shipowner in relation to third persons who have
dealt with him or with the vessel. In such case, the master of the
vessel is the agent of the charterer and not of the shipowner. The
charterer or owner pro hac vice, and not the general owner of the
vessel, is held Hable for the expenses of the voyage, including the
wages of the seamen.176
b. Time Charter
110. X entered into a time charter with ABC Shipping Company.
Unfortunately, the vessel containing few cargoes sank during
its voyage. No insurance was taken by X over the cargoes. Who
should be held liable for the lost cargoes?
ABC Shipping Company. Where the agreement executed by the
parties was a time charter where the possession and control of the
vessel was retained by the owner, the latter is, therefore, a common
farrier legally charged with extraordinary diligence in the vigilance
over the goods transported by him. The sinking of the vessel created
a presumption of negligence and/or unseaworthiness which the
barge owner failed to overcome and gave rise to his liability for the
charterer’s lost cargo despite the latter’s failure to insure the same.176
C. Voyage/Trip Charter
111. Who controls the master and the crew in a Voyage/Trip
Charter?
A voyage charter is simply a contract of affreightment where

the master and crew remain in the employ of the shipowner. Under
a voyage charter, the shipowner retains the possession, command,
and navigation of the ship, the charterer or freighter merely having
use of the space in the vessel in return for his payment of freight. An
1,6Litonjua Shipping Company v. National Seamen Board, G.R. No. L-51910,

August 10,1989.
1™Oceaneering Contractrors (Phils), Inc. v. Nestor Barreto, doing business as
NNB Lighterage, G.R. No. 184215, February 9, 2011.
J9JC9B0M
258 DI VI NA ON COMMERCIAL LAW:
owner who retains possession of the ship remains liable as a carrier

and must answer for loss or non-delivery of the goods received for
transportation.177
In one case, it was held that a “slot charter arrangement”
where there is a reserved a space in the vessel is a contract of
affreightment. The arrangement did not divest the shipowner of its
character as a common carrier nor relieve it of any accountability for
the shipment.178
112. Is the charterer of a sea vessel liable for damages resulting

from a collision between the chartered vessel and a passenger
ship?
No. If the charter is a contract of affreightment, which leaves
the general owner in possession of the ship as owner for the voyage,
the rights and the responsibilities of ownership rest on the owner.
The charterer is free from liability to third persons in respect of the
ship.
On the other hand, under a demise or bareboat charter, the
charterer mans the vessel with his own people and becomes, in effect,
the owner for the voyage or service stipulated, subject to liability for
damages caused by negligence.179
2. Liability of Ship Owners and Shipping Agents

113. Who is a ship agent?
A “ship agent” is the person entrusted with provisioning or

representing the vessel in the port in which it may be found.'80
It was held that whether acting as agent of the owner of the
vessel or as agent of the charterer, a person will be considered as the
ship agent and may be held liable as such, as long as the latter is the
one that provisions or represents the vessel.181
177Cebu Salvage Corporation v. Philippine Home Assurance Corporation, G.R.

No. 150403, January 25, 2007.
178Philam Insurance v. Heung-A Shipping, supra.
179Caltex Philippines, Inc. v. Sulpicio Lines, Inc., G.R. No. 131166, September
30,1999.
""Section 1(a) of R.A. No. 9515.
181Macondray & Co., Inc. v. Provident Insurance Corporation, G.R. No. 154305,
December 9, 2004.
J9JC9B0M
R.A. No. 9515 provides for the distinctions between a general

agent and a tramp agent.
“General Agent” shall mean a ship agent appointed by the
shipowner or carrier in the liner service for all voyages and covered
by a General Agency Agreement whereby the agent assumes the
role and responsibility of its principal within the Philippine territory
including but not limited to solicitation of cargo and freight, payment
of discharging or loading expenses, collection of shipping charges,
and issuing/releasing bills of lading and cargo manifest.182
“Tramp Agent” shall mean a ship agent appointed by the
ship owner, charterer, or carrier to carry the tramp service for
one particular voyage whose authority is limited to the customary
and usual procedures and formalities required for the facilitation
of the vessel’s entry, stay, and departure in the port and does not
include the assumption of the ship owner’s, charterer’s, or carrier’s
obligations with the shipper or receiver for the goods carried by the
ship.183
‘Tramp Service” shall mean the operation of a contract carrier
which has no regular and fixed routes and schedules but accepts
cargo wherever and whenever the shipper desires, is hired on a
contractual basis, or chartered by any one or few shippers under
mutually agreed terms and usually carries bulk or break bulk
cargoes.184
114. What are the liabilities of the ship agent?
The Code of Commerce provides for the liabilities of the ship

agent, as follows:
Article 586. The shipowner and the ship agent shall
be civilly liable for the acts of the captain and for the
obligations contracted by the latter to repair, equip, and
provision the vessel, provided the creditor proves that the
amount claimed was invested for the benefit of the same.
Article 587. The ship agent shall also be civilly liable
for the indemnities in favor of third persons which may
arise from the conduct of the captain in the care of the
182Section 1(b), R.A. No. 9515.

‘“Section 1(c), ibid.
‘^Section 1(d), ibid.
J9JC9B0M
goods which he loaded on the vessel; but he may exempt

himself therefrom by abandoning the vessel with all her
equipments and the freight it may have earned during
the voyage.
R.A. No. 9515, in turn, provides that the responsibility or
liability, if any, of the ship agent, general agent, and tramp agent
shall continue to be governed by the pertinent provisions of the
Code of Commerce: Provided, that in the case of the tramp agent,
his liability shall not extend to the obligations assumed by the ship
owner, charterer or carrier with the shipper or receiver for the goods
carried by the ship: Provided, further, That it is the duty of the tramp
agent, however, to assist the shipper or receiver in making cargo
liability claims against the ship owner, charterer or carrier: Provided,
finally, That failure or inaction to perform the aforesaid duty shall
subject the tramp agent to applicable administrative sanctions based
on the Implementing Rules and Regulations (IRR) to be formulated
thereon by the Maritime Industry Authority (MARINA) under the
Department of Transportation and Communication (DOTC) and
by the Philippine Shippers Bureau (PSB) under the Department of
Trade and Industry (DTI).185
115. "S" shipped goods from Australia onboard a foreign vessel

owned and operated by "X," a shipping company based in
Australia and represented in the Philippines by "R." The goods
were consigned to "T" of Manila and insured by "U" against all
risks. Upon arrival in Manila Bay, the goods were discharged
from the vessel to a lighter owned by the Bay Brokerage Co.
When delivered to and received by "T," the goods were found
to have sustained losses or damages. Evidence disclosed that
the damage occurred while the goods were in the custody of
the carrier.
The insurance company paid the amount of the loss but
sought reimbursement from "X" and/or "R." "R" disclaimed
any liability alleging that he is a mere agent of "X," and having
acted as agent of a disclosed principal is, therefore, not liable.
a) Can the insurance company recover from "R"? Reasons.
b) What is the liability, if any, of Bay Brokerage Co.? Explain.
’“Section 2, R.A. No. 9515.
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Answer:
a) Yes, the insurance company can recover from “R.” A ship
agent (“R”) under the Code of Commerce is liable solidarily
with its principal (X), in an amount representing the
value of the good lost or damaged.186
b) The Bay Brokerage Co. is not liable. The evidence
disclosed that the damage occurred while the goods were
yet in the custody of the carrier, before the goods were
discharged from the vessel to a lighter owned by the Bay
Brokerage Co.187
116. X Mining Co. shipped a cargo of machineries on board the

S/S Good Ship which was chartered by the Able Shipping Co.,
a foreign corporation represented in the Philippines by its
agent. Best Lines, Inc. When the goods were delivered to the
consignee, Y Corporation, they were found to have sustained
losses. The insurer. Sunshine Insurance Co., paid for the losses,
thereby subrogating itself to the rights of X Mining Company or
Y Corporation vis-a-vis the shipping company and the shipping
agent.
Upon arrival of the S/S Good Ship in Manila, Best Lines,
Inc. took charge of the following: (a) unloading of the cargo
and issuing of cargo receipts in its own name for the purpose of
evidencing the condition and discharge of the cargo from the
vessel to the arrastre operator and/or unto the barge lighters;
(b) filing and processing of claims against the vessel S/S Good
Ship for damages/losses sustained by the cargo.
When Sunshine Insurance Co. sued both Able Shipping
Co. and Best Lines, Inc. the latter contended that it was a
disclosed agent and could not therefore be held liable, despite
the insolvency of Able Shipping Co. Rule on the contention of
Best Lines, Inc., with reasons.
On the basis of the activities performed by Best Lines, Inc. upon
the arrival of the S/S Good Ship in Manila, it is clear that Best Lines,
Inc. is the entity that represents the vessel in the port of Manila,
and hence, is a ship agent within the meaning and context of Article
■“Switzerland General Insurable Co., Ltd. v. Ramirez, 96 SCRA 297 (1980).

■"’BAR 1981.
J9JC9B0M
586 of the Code of Commerce: “the person who represents the vessel
in the port in which she happens to be.” Considering the peculiar
relationship of the parties, Best Lines, Inc. cannot be considered as
a “mere agent” of a disclosed principal under the civil law on agency
as distinguished from a ship agent within the context of the Code of
Commerce. Our Supreme Court has held that the doctrine having
reference to the relation between principal and agents cannot be
applied in the case of ship agents and ship owners.’88
The Code of Commerce provides that the ship agent shall be
liable for indemnities in favor of third persons which arise from
the conduct of the captain in the care of the goods which the vessel
carried. The insolvency of Able Shipping Co. has no bearing insofar
as the liability of Best Lines, Inc. is concerned. The law does not
make the liability of the ship agent dependent upon the solvency or
insolvency of the shipowner. Best Lines, Inc., as ship agent, is liable
solidarity with its principal, Able Shipping Co., for the amount of the
losses damages sustained by the goods.189
a. Liability for Acts of Captain

117. What is the liability of the shipowner and the ship agent for the
acts of and obligations contracted by the captain?
The shipowner and the ship agent shall be civilly liable for the
acts of the captain and for the obligations contracted by the latter to
repair, equip, and provision the vessel, provided the creditor proves
that the amount claimed was invested therein.100
118. Give instances when the shipowner and ship agent are liable
for culpa contractual arising from the acts of the captain.
a. The owner of the property which has been jettisoned or
cast overboard by order of the captain should have a right
of action against the shipowner for the breach of any duty
which the law may have imposed on the captain with
respect to such cargo.191
’“Yu Biao Suntua & Co. v. Ossorio, 43 Phil. 51; BAR 1984.
'“Switzerland General Insurance Co., Ltd. v. Ramirez, 96 SCRA 297 (1980).
190Article 586, par. 1, Code of Commerce.
’’’Standard Oil Co. v. Lopez Castelo, 42 Phil 256, cited in Perez, p. 135.
J9JC9B0M
b. In case the captain, without any valid cause or reason

and without any unforeseen accident or stress of weather,
willfully abandoned the lorcha under a contract of towage
resulting in the loss thereof, the shipowner and ship agent
are liable for the acts of the captain.192
c. The shipowner and ship agent are liable for the negligence
of the captain in unloading the cargo on the pier on
account of which the cargo accumulated thereon sank.193
119. Pablo Esparadon, a duly-licensed ship captain of the M/V

Don Jose, was drunk while he was on duty as such, and while
M/V Don Jose was sailing from Manila to the Visayas. As a
consequence thereof, the M/V Don Jose rammed another vessel
near Corregidor, causing both vessels to sink completely and
thus become total losses. The cargo owners of both sunken
vessels sued the owner of the M/V Don Jose for their losses. Is
the shipowner of M/V Don Jose liable? Explain your answer.
No. The shipowner of M/V Don Jose is not liable. The civil
liability of the shipowner of a vessel, in a maritime collision which is
caused by the fault of the captain, as in this problem (being drunk),
is merely co-existent with his interest in the vessel (M/V Don Jose),
such that the total loss thereof, results in the extinction of such
liability.1M
120. X chartered the ship of Y to transport his logs from Zamboanga

to Manila. In the course of their voyage, the ship met a storm
and had to dock in Cebu for three (3) days. Z, the captain of the
ship, borrowed P20,000.00 from X on the pretext that he would
need the money for the repair of the ship. Z misappropriated
the money and converted it to his own benefit. What is the
liability of Y, if any?
A ship-owner would only be liable for contracts made by the
captain (a) when duly authorized or (b) even when unauthorized, for
ship repairs, or for equipping or provisioning the vessel when the
proceeds are invested therein. Since the loan by the captain from X
■"Guzman v. Behn, Meyer & Co., 9 Phil. 112, cited in Perez, ibid.
1930hta Development Co. v. Steamship Pompey, 49 Phil. 117, cited in Perez, ibid.
,94Urrutia & Co. v. Baeo River Plantation Co., 26 Phil. 362; Guan v. Cia
Maritime (SC), 38 Off. Gaz. 2536; etc.; BAR 1978.
J9JC9B0M
T

does not fall under any of the foregoing cases, the amount borrowed
shall be considered a personal liability of Z, the captain, and Y, the
ship-owner, cannot thus be held liable.195
121. Under a charter party XXO Trading Company shipped sugar

to Coca-Cola Company through SS Negros Shipping Corp.,
insured by Capitol Insurance Company. The cargo arrived but
with shortages. Coca-Cola demanded from Capital Insurance
Co. P500,000.00 in settlement for XXO Trading. The MM RTC,
where the civil suit was filed, absolved the insurance company,
declaring that under the Code of Commerce, the shipping
agent is civilly liable for damages in favor of third persons due
to the conduct of the carrier's captain, and the stipulation in the
charter party exempting the owner from liability is not against
public policy. Coca-Cola appealed. Will its appeal prosper?
Reason briefly.
No. The appeal of Coca-Cola will not prosper. Under Article
587 of the Code of Commerce, the shipping agent is civilly liable for
lamages in favor of third persons due to the conduct of the carrier’s
captain, and the shipping agent can exempt himself therefrom
only by abandoning the vessel with all his equipment and the
freight he may have earned during the voyage. On the other hand,
assuming there is bareboat charter, the stipulation in the charter
party exempting the owner from liability is not against public policy
because the public at large is not involved.190
b. Limited Liability Rule

122. What is the doctrine of Limited Liability?197
The limited liability rule, also known as the real or hypothecary
nature of maritime law, simply means that the liability of the carrier
in connection with losses related to maritime contract is limited to
his interest in the vessel which is hypothecated for such obligations
or which stands as the guaranty for their settlement.198
195BAR 1989.
'“BAR 2004.
197BAR 1994, 1997.
'“Aboitiz Shipping Corporation General Accident Fire and Life Assurance
Corporation, 217 SCRA 359 (1993).
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Thus, the liability of the ship owner or ship agent, arising

from the operation of a ship, is limited to the vessel, equipment, and
freight during the voyage, so that if the ship owner or agent would
abandon the vessel, equipment, and freight, his liability would
be extinguished. However, if the vessel would sink and never be
recovered, that would also extinguish the liability of the ship owner
or agent, unless those would be insured, and in this case, it would
suffice to surrender the insurance to the creditors to extinguish his
liability.199
The doctrine is effectively an exception to the rule that in case
of loss, damage, or deterioration of the goods or death or injury to
passengers, the common carrier is presumed to be negligent and
liable.
123. What is the rationale for the Limited Liability Rule?

It was designed to offset the adverse conditions of maritime
trade and to encourage people to venture into maritime commerce
despite the risks and prohibitive cost of shipbuilding. Thus, the
liability of the vessel owner and agent arising from the operation of
such vessel are confined to the vessel itself, its equipment, freight,
and insurance, if any.200
For this reason, when the vessel, its appurtenances, freightage,
orinsurance proceeds, if any, are abandoned by the shipowner or ship
agent, their liability would be extinguished. In the same manner, if
the vessel totally sinks or is a total loss, their liability is likewise
extinguished. This rule may best be explained by the doctrine: “No
vessel, no liability.”201
124. Captain Hook, the ship captain of M.V. Peter Pan, overloaded
the M.V. Peter Pan, as a consequence of which the vessel sank
in the middle of the Sulu Sea, and nothing whatsoever was
recovered. The owners of the cargo and the heirs of the three
(3) passengers of the vessel filed an action for damages in the
amount of P500.000.D0 against Mr. Wendy, the owner. Will the
action prosper? Reasons.
199Abueg v. San Diego, 44 Off. Gaz. 80.

200Aboitiz Shipping Corporation General Accident Fire and Life Assurance
"'Chua Yek Hong v. Intermediate Appellate Court, G.R. No. 74811, September
30,1988; Dela Torre v. Court of Appeals, G.R. No. 160088, July 13, 2011.
J9JC9B0M
The total loss or the lawful abandonment of the vessel precludes

further liability on the part of the shipowner, except to the extent
of earned freightage or proceeds of insurance, if any, for the loss of
cargo arising from the “conduct of the captain in the care of goods.”
Under the limited liability rule, the loss of the vessel extinguishes
the liability of the shipowner for loss of the goods on board the
vessel even if the loss was due to the negligence of the ship captain;
provided that there is no negligence on the part of the shipowner, as
in this case.202
125. MV Mariposa, one of five (5) passenger ships owned by the

Marina Navigation Company, sank off the coast of Mindoro
while en route to Iloilo City. More than 200 passengers
perished in the disaster. Evidence showed that the ship captain
ignored typhoon bulletins issued by PAGASA during the 24-
hour period immediately prior to the vessel's departure from
Manila. The bulletins warned all types of sea crafts to avoid
the typhoon's expected path near Mindoro. To make matters
worse, he took more load than was allowed for the ship’s rated
capacity. Sued for damages by the victim's surviving relatives,
Marina Navigation Company contended: (1) that its liability, if
any, had been extinguished with the sinking of MV Mariposa;
and (2) that assuming it had not been so extinguished, such
liability should be limited to the loss of the cargo. Are these
contentions meritorious in the context of applicable provisions
of the Code of Commerce?
. Yes. The contentions of Marina Navigation Company are
meritorious. The captain of MV Mariposa is guilty of negligence in
ignoring the typhoon bulletins issued by PAGASA and in overloading
the vessel. But only the captain of the vessel MV Mariposa is guilty
of negligence. The shipowner is not. Therefore, the shipowner can
invoke the doctrine of limited liability.203
126. In a collision between M/T Manila, a tanker, and M/V Don

Claro, an inter-island vessel, M/V Don Claro sank and many
of its passengers drowned and died. All its cargoes were lost.
The collision occurred at nighttime but the sea was calm, the
weather fair, and visibility was good. Prior to the collision and
while still four (4) nautical miles apart, M/V Don Claro already
202BAR 1988.
203BAR 2000.
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sighted M/T Manila on its radar screen. M/T Manila had no

radar equipment. As for speed, M/V Don Claro was twice as
fast as M/T Manila.
At the time of the collision, M/T Manila failed to follow Rule
19 of the International Rules of the Road which required two (2)
vessels meeting head on to change their course by each vessel
steering to starboard (right) so that each vessel may pass on
the port side (left) of the other. M/T Manila signaled that it
would turn to port side and steered accordingly, thus resulting
in the collision. M/T Don Claro's captain was off-duty and was
having a drink at the ship's bar at the time of the collision. If
M/V Don Claro was at fault, may the heirs of the passengers
who died and the owners of the cargoes recover damages from
the owner of said vessel?
Yes, but subject to the doctrine of limited liability. The doctrine
is to the effect that the liability of the shipowners is confined to their
interest in the vessel and as such, would be to the extent of any
remaining value of the vessel, proceeds of insurance, if any, and
earned freightage. The doctrine applies given that based on the
factual settings, the shipowner himself was not guilty of negligence.201
127. A chartered vessel (bareboat or demise) sank due to improper

unloading of the cargo by the charterer. Can the charterer use
the Limited Liability Rule against the shipowner?
No, the only person who could avail of this is the shipowner.
He is the very person whom the Limited Liability Rule has been
conceived to protect and the one who is supposed to be supported
and encouraged to pursue maritime commerce. Thus, it would be
absurd to apply the Limited Liability Rule against him who, in the
first place, should be the one benefitting from the said rule.
The charterer does not completely and absolutely step into the
shoes of the shipowner or even the ship agent because there remain
conflicting rights between them as derived from their charter
agreement. The charterer’s possession is therefore, the uncertain
title of lease, not possession of the owner. Therefore, even if the
contract is for a bareboat or demise charter where possession, free
administration and even navigation are temporarily surrendered to
the charterer, dominion over the vessel remains with the shipowner.
I
“'BAR 1991.
J9JC9B0M
Ergo, the charterer or the sub-charterer, whose rights cannot rise

above that of the former, can never set up the Limited Liability Rule
against the very owner of the vessel.205
c. Exceptions to the Limited Liability Rule

128. In what cases is the Limited Liability Rule inapplicable?
The limited liability rule does not apply in any of the following
cases:
a. Expenses for repairs contracted before the vessel is lost;
In case of a lost vessel, the claimants may go after
the proceeds of the insurance covering the vessel.200
b. When the injury or death of the passenger is due to the
fault of the shipowner, or the negligence of the shipowner
and the captain;
Thus, the doctrine does not apply in these cases:
a. When the shipowner reconfigured the bulkhead
of the deck of the ship to load excessive amount of
cargo which made the vessel unseaworthy.207
b. When the shipowner himself was guilty of such
fault or negligence in not making certain that the
passenger vessel is not overloaded, as well as in
failing to provide sufficient life belts on board the
vessel.208
c. If the injury or damage is caused by the shipowner’s
fault as where he engages the services of an
inexperienced and unlicensed captain or engineer,
he cannot avail of the provisions of Article 837 of
the Code by abandoning the vessel. He is personally
liable for the damages arising thereby.200
2fljAugustin P. Dela Torre, el al. v. Court of Appeals, et al., G.R. No. 160565,
July 13, 2011.
200BAR 1999.
^'Philippine General Insurance Company Court of Appeals, G.R. No.
116940, June 11, 1997; BAR 2016.
20“BAR 1989.
209Luzon Stevedoring Corporation Court of Appeals, G.R. No. L-58897,
December 3, 1987.
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d. When the shipowner is at fault or negligent in

not maintaining a seaworthy vessel and in having
allowed its vessel to sail despite knowledge of an
approaching typhoon.210
C. Claims of the crew under the Workmen’s Compensation
Act;
The employees and laborers, or heirs or dependents
in cases of injury received by or inflicted upon them while
in the performance of their work or employment shall be
compensated.
Akin to the death benefits under the Labor Code,
death benefits under the Philippine Overseas Employment
Administration Standard Employment Contract (POEA-
SEC) are given when the employee dies due to a work-
related cause during the term of his contract. The liability
of the shipowner or agent under the POEA-SEC has
likewise nothing to do with the provisions of the Code
of Commerce regarding maritime commerce. But while
the nature of death benefits under the Labor Code and
the POEA-SEC are similar, the death benefits under
the POEA-SEC are intended to be separate and distinct
from, and in addition to, whatever benefits the seafarer is
entitled to under Philippine laws, including those benefits
which may be claimed from the State Insurance Fund.
Thus, the claim for death benefits under the POEA-
SEC is the same species as the workmen’s compensation
claims under the Labor Code — both of which belong to
a different realm from that of Maritime Law. Therefore,
the limited liability rule does not apply to liability under
the POEA-SEC. In other words, the limited liability
rule found in the Code of Commerce is inapplicable in a
liability created by statute to compensate employees and
laborers, or the heirs and dependents, in cases of injury
received by or inflicted upon them while engaged in the
performance of their work or employment.211
210Loadstar Shipping Co. v. Court of Appeals, G.R. No. 131621, September 28,
1999.
211Phil-Nippon Kyoei Corp. v. Gudelosao, G.R. No. 181375, July 13, 2016.
J9JC9B0M
d. IVTien the vessel is insured, in which case, the liability of

the shipowner or ship agent is limited to the extent of the
insurance proceeds;
This simply means that in case of a lost vessel, the
claimants may go after the proceeds of the insurance
covering the vessel.212
e. When the vessel is not abandoned;
Abandonment, however, is only necessary in case of
constructive total loss. There is no need to abandon if the
vessel has sunk.
f. In case the voyage is not maritime but only in river, bay, or
gulf;
g- In case the vessel is not a common carrier.
In all of these cases, the shipowner and/or ship agent shall
be liable in case of loss or damage to goods or death or injury to
passengers despite the loss of the vessel.
129. Judgement creditors of a vessel that sank wish to enforce their

claims. The shipowner asserts that the execution must be
stayed as not all the cases occasioned by the subject sinking
have been completed. Is the shipowner's claim tenable?
Yes. The rights of a vessel owner or agent under the limited
liability rule are akin to those of the rights of shareholders to limited
liability under our corporation law. More to thd point, the rights
may be compared to those creditors against an insolvent corporation
whose assets are not enough to satisfy the totality of claims as
against it. In both insolvency of a corporation and the sinking of
a vessel, the claimants or creditors are limited in their recovery to
the remaining value of accessible assets. In the case of insolvent
corporation, these are the residual assets of the corporation left
over from its operations. In the case of a lost vessel, these are
the insurance proceeds and pending freightage for the particular
voyage. There is therefore a need to collate all claims preparatory
to their satisfaction from the insurance proceeds on the vessel and
its pending freightage at the time of its loss. No claimant can be
212BAR 1999.
J9JC9B0M
given precedence over the others by the simple expedience of having

filed or completed its action earlier than the rest. Thus, execution of
judgment in earlier completed cases, even those already final and
executory, must be stayed pending completion of all cases occasioned
by the subject sinking.213
3. Accidents and Damages in Maritime Commerce

130. What are averages?
Averages are all extraordinary or accidental expenses which
may be incurred during the voyage for the preservation of the vessel
or cargo, or both, as well as damages or deterioration which the
vessel may suffer from the time she puts to the sea at the port of
departure until she casts anchor at the port of destination and those
suffered by the goods from the time they are loaded in the port of
shipment until they are unloaded in the port of their consignment.
The usual expenses of navigation shall be considered as
ordinary expenses and shall be defrayed by the shipowner unless
there is stipulation to the contrary.
a. General and Particular Averages

131. What is a Simple Average?
Simple or particular averages include all the expenses and

damage caused to the vessel or to her cargo which have not inured to
the common benefit and profit of all persons interested in the vessel
and her cargo. The owner of the things which give rise to expenses
or suffered damage shall bear the simple or particular averages.214
Example:
Damage suffered by the cargo from the time of embarkation
until it is loaded either on account of the inherent defect of the
goods or by reason of marine accident or force majeure and the
expenses incurred to avoid and repair the same.
213Aboitiz Shipping Corporation v. General Accident Fire and Life Assurance

’"Article 809, Code of Commerce.
J9JC9B0M
132. What is a General Average?

General or gross averages shall, as a general rule, include all
damages and expenses which are deliberately caused in order to save
the vessel, her cargo, or both at the same time, from a real known
risk. In order to satisfy the amount of the gross or general average,
all the persons having an interest in the vessel and cargo therein at
the time of the occurrence of the average shall contribute.216
Examples:
a. Effects jettisoned to lighten the vessel, whether they
belong to the cargo, to the vessel, or to the crew and the
damage suffered through said act by the effects which are
kept on board.
b. The expenses of removing or transferring a portion of
the cargo in order to lighten the vessel and place it in a
condition to enter a port or roadstead and the damage
resulting therefrom to the effects removed or transferred.
33. What are the requisites of a General Average?

a. There must be a common danger to the ship and cargo
after it has been loaded;
b. A portion of the vessel or some of the cargoes or both are
sacrificed deliberately for the common safety;
C. The vessel or cargo is successfully saved; and
d. The expenses are incurred after taking the formalities
provided for under Articles 813 and 814 of the Code of
Commerce, as follows:
i. Assembly to be called by captain of all the cargo
owners and other officers of the vessel;
ii. Deliberation with the sailing mate and the other
officers of the vessel and after hearing the persons
interested in the cargo who may be present;
iii. Resolution of the captain to cause damage which
constitutes general average;
215Article 811, Code of Commerce.
J9JC9B0M
iv. Entry of resolution in the logbook stating the motives

and reasons on which it is based, the votes against
it and the reason for the dissent should there be and
the irresistible and urgent causes which impelled
the captain, if he acted on his own accord;
V. Delivery of the minutes of the meeting to the
maritime judicial authority of the first port of arrival
within 24 hours from arrival;
vi. Ratification by captain under oath.
134. What are the distinctions between particular and general

average?
a. Particular averages have not inured to the common
benefit and profit of all persons interested in the vessel
and her cargo, while general averages sire caused for the
benefit of those interested in the vessel and her cargo.
b. General averages are deliberately caused in order to save
the vessel and/or her cargo, while particular averages
may be due to causes other than a deliberate act.
c. Particular averages are borne by the owner of the things
damaged, while in general or gross averages all persons
having an interest in the vessel and cargo therein at the
time of the occurrence of the average shall contribute.216
135. MV SuperFast, a passenger-cargo vessel owned by SF

Shipping Company plying the inter-island routes, was on
its way to Zamboanga City from the Manila port when it
accidentally, and without fault or negligence of anyone on the
ship, hit a huge floating object. The accident caused damage
to the vessel and loss of an accompanying crated cargo of
passenger PR. In order to lighten the vessel and save it from
sinking and in order to avoid risk of damage to or loss of the
rest of the shipped items (none of which was located on the
deck), some had to be jettisoned. SF Shipping had the vessel
repaired at its port of destination. SF Shipping thereafter filed
a complaint demanding all the other cargo owners to share in
the total repair costs incurred by the company and in the value
“BAR 2010.
J9JC9B0M
jettisoned cargoes. In answer to the complaint, the shippers’

sole contention was that, under the Code of Commerce, each
damaged party should bear its or his own damage and those
that did not suffer any loss or damage were not obligated to
make any contribution in favor of those who did. Is the shippers'
contention valid? Explain.
No. The shippers’ contention is not valid. The owners of the
cargo jettisoned, to save the vessel from sinking and to save the
rest of the cargoes, are entitled to contribution. The jettisoning of
said cargoes constitutes a general average loss which entitles the
owners thereof to contribution from the owner of the vessel and also
from the owners of the cargoes saved. SF Shipping is not entitled
to contribution/reimbursement for the cost of repairs on the vessel
from the shippers.217
136. Global Transport Services, Inc. (GTSI) operates a fleet of cargo

vessels plying interisland routes. One of its vessels, MV Donna
Juana, left the port of Manila for Cebu laden with, among other
goods, 10,000 television sets consigned to Romualdo, a TV
retailer in Cebu.
When the vessel was about 10 nautical miles away from
Manila, the ship captain heard on the radio that a typhoon
which, as announced by PAGASA, was on its way out of the
country, had suddenly veered back into Philippine territory.
The captain realized that MV Dona Juana would traverse the
storm's path, but decided to proceed with the voyage. True
enough, the vessel sailed into the storm. The captain ordered
the jettison of the 10,000 television sets, along with some other
cargo, in order to lighten the vessel and make it easier to steer
the vessel out of the path of the typhoon. Eventually, the vessel,
with its crew intact, arrived safely in Cebu.
Will you characterize the jettison of Romualdo's TV sets
as an average? If so, what kind of an average, and why? If
not, why not?
b. Against whom does Romualdo have a cause of action for
indemnity of his lost TV sets? Explain.
21,BAR 2000.
J9JC9B0M
Answer:
a. The jettison of Romualdo’s TV sets resulted in a general
average loss, which entitles him compensation or
indemnification from the shipowner and the owners of the
cargoes saved by the jettison.
b. Romualdo has a cause of action for his lost TV sets against
the shipowner and the owners of the cargoes saved by the
jettison. The jettison of the TV sets resulted in a general
average loss, entitling Romualdo to indemnity for the lost
TV sets.218
137. An importer of Christmas toys loaded 100 boxes of Santa Clause

talking dolls aboard a ship in Korea bound for Manila. With the
intention of smuggling one-half (1/2) of his cargo, he took a bill
of lading for only 50 boxes to save the more precious cargo. Is
the importer entitled to receive any indemnity for average?
No. The importer is not entitled to receive any indemnity
for average. In order that the goods jettisoned may be included in
the general average and the owner be entitled to indemnity, it is
necessary that their existence onboard be proven by means of the
bill of lading.219
b. Collisions
138. State the Rules on collision of vessels.
a. Collision refers to the contact of two (2) moving vessels. If
one vessel is moving while the other is stationary, this is
known as an allision.
b. But collision is used in a broad sense to include allision.
c. The vessel at fault shall indemnify the damages sustained
or losses incurred.220
d. If both vessels are at fault, each shall suffer its own
damages, and both shall be solidarity liable for losses or
damages to the cargoes.221
21BBAR 2009.
219BAR 2010.
220Article 826, Code of Commerce.
“'Articles 827-828, Code of Commerce.
J9JC9B0M
In this situation, the common carrier operating the vessel

is precluded from interposing the defense of due diligence in the
selection and supervision of its employees in an action against it by
a shipper of the other colliding vessel.
e. Similar rule under (d) applies if it is not clear which
vessel is at fault. It is as if both vessels are at fault. This
is known as the doctrine of inscrutable fault.
139. Is the charterer of a sea vessel liable for damages resulting

from a collision between the chartered vessel and a passenger
ship caused by the unseaworthiness of the chartered vessel?
In a time or voyage charter, the carrier, not the charterer,
warrants impliedly the seaworthiness of a ship.222 As such, the
charterer is not liable for damages resulting from a collision involving
the chartered vessel. However, in a bareboat or demise charter, it
is the charterer’s responsibility to ensure the seaworthiness of the
vessel and is therefore liable for damages in case of such collision.
140. Is protest necessary in an action for the recovery of damages

arising from collisions?
The action for the recovery of damages arising from collisions
cannot be admitted if a protest or declaration is not presented
within 24 hours before the competent authority of the port where
the collision took place, or that of the first port of arrival, if in
Philippine territory, and to the Filipino consul, if it occurred in a
foreign country. However, with respect to the damage caused to
persons to the cargo, the absence of a protest may not prejudice the
persons interested who were not onboard or were not in a condition
to make known their wishes.
141. What is the liability of the shipowners in case of collision?

The liability of the shipowners in case of collision is governed
by the doctrine of limited liability. It is limited to the value of
the vessel with all her appurtenances and freight earned during
the voyage. The loss of the vessel extinguishes the liability of the
shipowner or ship agent for the loss and damage to goods or death or
injuries to passengers caused by the collision. However, where such
222Caltex v. Sulpicio Lines, G.R. No. 131166, September 30, 1999.
J9JC9B0M
vessel is insured and the insurance is collected by the shipowner,

the insurance substitutes the vessel and the shipowner becomes
liable to the extent of the insurance collected, and if the vessel is not
insured, then the freights earned shall answer for the civil liability
of the shipowner.
The liability of the shipowner or ship agent for injury or death
to passengers arising from the negligence of the captain in cases of
collision or shipwreck is merely co-existent with his interest in the
vessel such that a total loss thereof results in total extinction.223
These are all based on the assumption that the there was no
actual or contributory negligence on the part of the shipowners.223
142. Vessels "U" and "V" collided with each other causing damage
to both vessels. Vessel "U" had the last clear chance to avoid
the collision but failed to do so.
Is the doctrine of last clear chance in tort applicable to
collisions of vessels at sea under the Code of Commerce?
Which vessel should shoulder liability for the damage
suffered by both vessels and by the cargo?
b. Assume that the negligence of the captain of vessel "U"

was the proximate cause of collision, while the negligence
of the captain of vessel "V" was merely contributory. To
which vessel should the collision be deemed imputable?
Answer:
a. The doctrine of last clear chance in tort is not applicable
to collision of vessels at sea under the Code of Commerce,
and the case is deemed as if the collision is imputable to
both vessels; thus, each one of the vessels shall suffer her
own damage, and both shall be solidarily liable for the
damages occasioned to their cargoes.225
223Chua Yek Hong v. Intermediate Appellate Court, G.R. No. L-74811,

September 30,1988.
2-'Supra.
M5C.B. Williams v. Yangco, 27 Phil. 68; Sarasola v. Sontua, 47 Phil. 365.
J9JC9B0M
1

b. The collision shall be deemed imputable t also to both

vessels, as in the preceding answer. Since the “doctrine
of contributory negligence” in tort is not also applicable to
collisions of vessels at sea under the Code of Commerce,
the case is deemed as if the collision is imputable to both
vessels.226
143. In a collision between M/T Manila, a tanker, and M/V Don

Claro, an inter-island vessel, M/V Don Claro sank and many
of its passengers drowned and died. All its cargoes were lost.
The collision occurred at nighttime but the sea was calm, the
weather fair, and visibility was good. Prior to the collision and
while still four (4) nautical miles apart, M/V Don Claro already
sighted M/T Manila on its radar screen. M/T Manila had no
radar equipment. As for speed, M/V Don Claro was twice as
fast as M/T Manila.
At the time of the collision, M/T Manila failed to follow Rule
19 of the International Rules of the Road which required two (2)
vessels meeting head on to change their course by each vessel
steering to starboard (right) so that each vessel may pass on
the port side (left) of the other. M/T Manila signaled that it
would turn to port side and steered accordingly, thus resulting
in the collision. M/T Don Claro’s captain was off-duty and was
having a drink at the ship's bar at the time of the collision. Who
would you hold liable for the collision?
I could hold both vessels liable. In the problem given, whether
on the basis of the factual settings or under the doctrine of inscrutable
fault, both vessels can be said to have been guilty of negligence. The
Lability of both carriers for the death or injury of passengers and
for the loss of or damage to the goods arising from the collision is
solidary. Neither carrier may invoke the doctrine of last clear chance
which can only be relevant, if at all, between the two vessels but not
on the claims made by passengers or shippers.227
22cGov't of the P.I. v. Phil. Steamship Co., Inc., 44 Phil. 359; BAR 1980.
22,BAR 1991.
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144. Which party should bear the damage to the vessels and the
cargoes if the cause of the collision was a fortuitous event?
Explain.
Each vessel must bear its own damage. Both of them are at
fault. No party shall be held liable since the cause of the collision is
fortuitous event. The carrier is not an insurer.229
145. TRUE or FALSE: There is a presumption of negligence against

a moving vehicle that strikes a stationary object.
TRUE. In American jurisprudence there is a presumption of
fault against a moving vessel that strikes a stationary object such
as a dock or navigational aid. In admiralty, this presumption does
more than merely require the ship to go forward and produce some
evidence on the presumptive matter. The moving vessel must show
that it was without fault or that the collision was occasioned by the
fault of the stationary object or was the result of inevitable accident.
It has been held that such vessel must exhaust every reasonable
possibility which the circumstances admit and show that in each,
they did all that reasonable care required. In the absence of
sufficient proof in rebuttal, the presumption of fault attaches to a
moving vessel which collides with a fixed object and makes a prime,
facie case of fault against the vessel.229
146. A severe typhoon was raging when the vessel SS Masdaam

collided with the M/V Princess. It is conceded that the typhoon
was the major cause of collision, although there was a very
strong possibility that it could have been avoided if the captain
of the SS Masdaam was not drunk and the captain of the M/V
Princess was not asleep at the time of the collision. Who should
bear the damages to the vessels and their cargoes?
The shipowners of the SS Masdaam and M/V Princess shall
each bear their respective loss of vessels. For the losses and damages
suffered by their cargoes, both shipowner are solidarity liable.230
“BAR 1995.
“Far Eastern Shipping Company v. Court of Appeals. G.R. No. 130068,
October 1,1998.
“BAR 1998,1987.
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147. in case of collision, is abandonment necessary! to claim the

limited liability rule?
Yes. abandonment is necessary to claim the limited liability.
However, if the injury was due to the ship owner’s fault, the ship
owner may not avail of his right to avail of limited liability by
abandoning the vessel.
The real nature of the liability of the ship owner or agent is
embodied in the Code of Commerce. Articles 587, 590, and 837 are
intended to limit the liability of the ship owner, provided that the
owner or agent abandons the vessel. Although Article 837 does
not specifically provide that in case of collision there should be
abandonment, to enjoy such limited liability, said article is a mere
amplification of the provisions of Articles 587 and 590 which makes
it a mere superfluity.
The exception to this rule in Article 837 is when the vessel
is totally lost in which case there is no vessel to abandon, thus
abandonment is not required. Because of such loss, the liability of
the shipowner or agent is extinguished.231
148. Two (2) vessels figured in a collision along the Straits of

Guimaras resulting in considerable loss of cargo. The damaged
vessels were safely conducted to the Port of Iloilo. Passenger
A failed to file a maritime protest. B, a non-passenger but a
shipper who suffered damage to his cargo, likewise did not file
a maritime protest at all.
a. What is a maritime protest?
b. Can A and B successfully maintain an action to recover
losses and damages arising from the collision? Reason
briefly.
Answer:
a. A maritime protest is a sworn statement made within 24
hours after a collision in which the circumstances thereof
are declared or made known before a competent authority
at the point of accident or the first port of arrival if in the
Philippines or the Philippine consul in a foreign country.
231Luzon Stevedoring Corporation Court of Appeals, G.R. No. L-58897,

December 3, 1987.
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b. B, the shipper, can successfully maintain an action to

recover losses and damages arising from the collision
notwithstanding his failure to file a maritime protest since
the filing thereof is required only on the part of A, who,
being a passenger of the vessel at the time of the collision,
was expected to know the circumstances of the collision.
A’s failure to file a maritime protest will therefore prevent
him from successfully maintaining an action to recover
his losses and damages.232
4. Carriage of Goods by Sea Act (COGSA)

a. Application
149. To what kinds of contracts of carriage does the COGSA apply?
The COGSA is applicable to all contracts of carriage of goods
by sea to and from Philippine ports in foreign trade. The COGSA is
likewise applicable up to the final port of destination and the fact
that transshipment was made on an interisland vessel does not
remove the contract of carriage of goods from the operation of the
said Act.233
The COGSA covers loss or damage to goods arising from
contracts of carriage by sea from a foreign port to a Philippine port.
It does not cover carriage of goods from a Philippine port to a foreign
port as such provision of COGSA has been superseded by the Civil
Code of the Philippines. In such a case, the laws of the country of
destination apply.
150. What are the legal consequences of the application of the

COGSA in case of loss or damage to goods?
a. If the contract of carriage is governed by COGSA, the

prescriptive period to file an action against the ship
owner or ship agent in case of loss or damage to goods is
not 10 years even though the contract of carriage may be
in writing. The prescriptive period is one (1) year from
delivery of the goods or the date the goods should have
been delivered.234
“BAR 2007, 1988, 1977.

“Sea-Land Service, Inc. v. Intermediate Appellate Court, G.R. No. 75118,
August 31,1987.
“Section 3(6), COGSA.
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The one (l)-year period of limitation is designed to

meet the exigencies of maritime hazards.236
b. The COGSA also provides under Section 4, Subsection
5 that an amount recoverable in case of loss or damage
shall not exceed US$500.00 per package or per customary
freight unless the nature and value of such goods have
been declared by the shipper before shipment and inserted
in the bill of lading.
151. What law will apply in case of loss of goods shipped from
foreign country to the Philippines?
The law of the country to which the goods are to be transported
governs the liability of the common carrier in case of their loss,
destruction or deterioration.236 Thus, the rule was specifically laid
down that for cargoes transported from Japan to the Philippines,
the liability of the carrier is governed primarily by the Civil Code
and in all matters not regulated by said Code, the rights and
obligations of common carrier shall be governed by the Code of
commerce and special laws.237 Hence, the COGSA, a special law, is
merely suppletory to the provision of the Civil Code.238
152. What is the meaning of loss under the COGSA?

The term “loss” under the COGSA contemplates merely a
situation where no delivery at all was made by the shipper of the
goods because the same had perished, gone out of commerce, or
disappeared in such a way that their existence is unknown or they
cannot be recovered.
It has been ruled that when the goods are not transhipped
immediately with the result that the shipment arrived beyond
the delivery date and the consignee paid only one half the value
of the goods on the ground that they did not arrive until the off
season in the country, the loss incurred by the shipper is not the loss
contemplated by the COGSA. Thus, the one (l)-year prescriptive
period for bringing the suit will not apply.239
z35Mitsui O.S.K. Lines Ltd., represented by Magsaysay Agencies, Inc. v. Court

of Appeals, G.R. No. 119571, March 11,1998.
“’Article 1766, Civil Code.
238National Development Company Court of Appeals, G.R. No. L-49469,
August 19, 1988; BAR 2013.
239Mitsui OSK Lines Ltd. v. Court of Appeals, G.R. No. 119571, March 11,1998.
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However, where the suit is predicated not upon loss or damage

but on alleged misdelivery (or conversion) of the goods, the applicable
rule on prescription is not the one (l)-year period provided for in
Section 3(6), paragraph 4 of the COGSA, which short period is
designed merely to meet the exigencies of maritime hazards, but
that found in the Civil Code, namely, either 10 years for breach of a
written contract or four (4) years for quasi-delict. (Articles 1144[1],
1146, Civil Code)240
In a case where the goods shipped were neither lost nor damaged
in transit but were, on the contrary, delivered in port to someone
who claimed to be entitled thereto, the situation is different, and
the special need for the short period of limitation in cases of loss or
damage caused by maritime perils does not obtain.241
153. AA entered into a contract with BB thru CC to transport ladies*

wear from Manila to France with transshipment at Taiwan.
Somehow the goods were not loaded at Taiwan on time. Hence,
when the goods arrived in France, they arrived "off-season"
and AA was paid only one-half (1/2) for value by the buyer. AA
claimed damages from the shipping company and its agent.
The defense of the respondents was prescription.
Considering that the ladies' wear suffered "loss value," as
claimed by AA, should the prescriptive period be one (1) year
under the COGSA, or 10 years under the Civil Code?
Explain briefly.
The applicable prescriptive period is 10 years under the Civil
Code. The one (l)-year prescriptive period under the COGSA applies
incases of loss or damage to the cargo. The term “loss” contemplates
a situation where no delivery at all was made by the carrier of the
goods because the same had perished or gone out of commerce,
deteriorated, or decayed while in transit. In the present case, the
shipment of ladies’ wear was actually delivered. The “loss of value”
is not the total loss contemplated by the COGSA.242
240Ang v. Compania Maritima, 133 SCRA 600 (1984); BAR 1975; Ang v.
American Steamship, G.R. No. L-22491, January 27, 1967.
241Mitsui O.S.K. Lines Ltd., represented by Magsaysay Agencies, Inc. v. Court
ofAppeals, G.R. No. 119571, March 11, 1998.
242BAR 2004.
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I

154. M/V Meryem Ana received a shipment of Prilled Urea Fertilizer

from Ukraine. The ship sailed on to Tabaco, Albay, to unload
the cargo. The fertilizer unloaded at Albay appeared to have
a gross weight of 7,700 metric tons. When the cargo was
subsequently weighed, it was discovered that only 7,350.35
metric tons of fertilizer had been delivered. Because of the
alleged shortage of 349.65 metric tons, Fertiphil filed a claim
with Mafre Asian Insurance Corporation for P1,617,527.37, which
was found compensable.
After paying the claim of Fertiphil, Mafre Asian Insurance
Corporation demanded reimbursement from Transimex Co.,
the ship agent of the common carrier, on the basis of the right
of subrogation. In support of its claim, Mafre Asian Insurance
Corporation presented a Report of Survey and a Certification
from David Cargo Survey Services to prove the shortage.
In the report, the adjuster also stated that the shortage was
attributable to the melting of the fertilizer while inside the
hatches, when the vessel took on water because of the bad
weather experienced at sea.
a. Is the transaction governed by the provisions of the Civil
Code on common carriers or by the provisions of COGSA?
The provisions of the Civil Code on common carriers are
applicable.
As expressly provided in Article 1753 of the Civil Code, “the
law of the country to which the goods are to be transported shall
govern the liability of the common carrier for their loss, destruction
or deterioration.” Since the cargo in this case was transported from
Odessa, Ukraine, to Tabaco, Albay, the liability of Transimex Co.
for the alleged shortage must be determined in accordance with the
provisions of the Civil Code on common carriers. In Eastern Shipping
Lines, Inc. v. BPI/MS Insurance Corp., the Court declared:
According to the New Civil Code, the law of the country to
which the goods are to be transported shall govern the liability
of the common carrier for their loss, destruction or deterioration.
The Code takes precedence as the primary law over the rights and
obligations of common carriers with the Code of Commerce and
COGSA applying suppletory.
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b. Is Transimex Co. liable for the loss or damage sustained

by the cargo because of bad weather?
Transimex Co. is liable for the shortage incurred by the
shipment.
It must be emphasized that not all instances of bad weather
may be categorized as “storms” or “perils of the sea” within the
meaning of the provisions of the Civil Code and the COGSA on
common carriers.
With respect to storms, the Court has explained the difference
between a storm and ordinary weather conditions in Central
Shipping Co., Inc. v. Insurance Company of North America-.
According to PAGASA, a storm has a wind force of
48 to 55 knots, equivalent to 55 to 63 miles per hour or
10 to 11 in the Beaufort Scale. The second mate of the
vessel stated that the wind was blowing around force
7 to 8 on the Beaufort Scale. Consequently, the strong
winds accompanying the southwestern monsoon could
not be classified as a “storm.” Such winds are the ordinary
vicissitudes of a sea voyage.
The phrase “perils of the sea” carries the same connotation.
Although the term has not been definitively defined in Philippine
jurisprudence, courts in the United States of America generally
limit the application of the phrase to weather that is “so unusual,
unexpected and catastrophic as to be beyond reasonable expectation.”
Accordingly, strong winds and waves are not automatically deemed
perils of the sea, if these conditions are not unusual for that
particular sea area at that specific time, or if they could have been
reasonably anticipated or foreseen.
Even assuming that the inclement weather encountered by
the vessel amounted to a “storm” under Article 1734(1) of the Civil
Code, Transimex Co. cannot be absolved from liability for loss or
damage to the cargo because there is no proof that the bad weather
encountered by M/V Meryem Ana was the proximate and only cause
of damage to the shipment and that Transimex Co. failed to establish
that it had exercised the diligence required from common carriers to
prevent loss or damage to the cargo.243
243Transimex Co. v. Mafre Asian Insurance Corp., G.R. No. 190271, September
14,2016.
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1

b. Notice of Loss or Damage

155. Under the provisions of Section 3 of the Carriage of Goods by
Sea Act, notice must be given of loss or damage to the goods.
Within what period must notice be given, if the loss or damage
is not apparent?
Notice of loss must be given within three (3) days from the
delivery of the goods, if the loss is not apparent.244
156. Is notice necessary to enable the consignee to be able to

recover from the carrier in case of loss or damage to the goods?
The COGSA provides for the procedure in case of loss or damage
of the cargo. To be able to recover from the carrier, a notice of loss or
damage should be given in writing to the carrier or his agent at the
port of discharge or at the time of the removal of the goods into the
custody of the person entitled to delivery thereof under the contract
of carriage. If the loss or damage is not apparent, the notice must be
given within three (3) days of delivery.
The notice in writing need not be given if the state of the goods
has at the time of their receipt been the subject of joint survey
inspection.
The action for loss or damage under the COGSA should be
brought within one (1) year after delivery of the goods or the date
when the goods should have been delivered, otherwise, the carrier
and ship shall be discharged from all liability for such loss or
damage. If the notice of loss is not given as provided for by law, the
fact shall not affect or prejudice the right of the shipper to bring suit
within one (1) year after delivery of the goods or the date when the
goods should have been delivered.
A request for, and the result of, a bad order examination
done within the reglementary period for furnishing notice of loss
or damage to the carrier or its agent serves the purpose of a claim.
Moreover, failure to comply with the notice requirement shall not
affect or prejudice the right of the shipper to bring suit within one
(1) year after delivery of the goods.246
24IBAR 1975.
246Asian Terminals v. Philam Insurance Co., G.R. No. 181262, July 24, 2013;
Section 3(6), COGSA.
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In other words, under the COGSA, while notice to the carrier

should be given in case of loss or damage to goods, the lack of notice
does not affect the cause of action of the shipper as long as the suit
is filed within one (1) year from delivery of the goods or the goods
should have been delivered.
c. Period of Prescription
157. When should the one (1)-year prescriptive period for bringing
an action for loss or damage of goods delivered commence?
The one (l)-year period within which the consignee should
sue the carrier is computed from “the delivery of the goods or the
date when the goods should have been delivered.” The sensible
and practical interpretation is that delivery within the meaning of
Section 3(6) of the Carriage of Goods by Sea Law means delivery
to the arrastre operator. That delivery is evidenced by tally sheets
which show whether the goods were landed in good order or in bad
order, a fact which the consignee or shipper can easily ascertain
through the customs broker.
To use as basis for computing the one (l)-year period the
delivery to the consignee would be unrealistic and might generate
confusion between the loss or damage sustained by the goods while
in the carrier’s custody and the loss or damage caused to the goods
while in the arrastre operator’s possession.240
On the other hand, if no delivery is made, then the period
should be computed from the date the goods should have been
delivered. Thus, if the carrier arrived on November 2, 1962 and left
on November 4, 1962 without delivering the cargo, it was on the
latter date that the carrier had the last opportunity to deliver the
goods. Hence, the one (l)-year period within which the carrier could
be sued commenced to run on November 2, 1962 and expired on
November 4, 1963.247
246Union Carbide Philippines, Inc. v. Manila Railroad Co., G.R. No. L-27798,
June 15,1977; BAR 2000 and 1975.
“’Rizal Surety & Insurance Co. v. Macondray & Co, 22 SCRA 902, cited in
Perez, p. 257.
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1
I

158. In what circumstances can the one (l)-year prescriptive period

to bring an action under the COGSA be interrupted?
The one (l)-year period is interrupted in the following cases:
a. One(l)-year period is interrupted in case an action has
already been filed in court;248
It has been held that upon dismissal of the suit, not
on the merits, the consignee may commence a new action
within one (1) year from dismissal 249
b. When there is an express agreement by the parties that
an extrajudicial claim for damages will suspend the
running of the prescriptive period for in such case, their
agreement becomes the law for them.260
Mere negotiations for settlement or extrajudicial demand,
however, do not interrupt or toll the one (l)-year period to file action
under the COGSA.261
159. Does the filing of an insurance claim by the consignee for loss
or damage to cargo interrupt the running of the one (l)-year
prescriptive period under the COGSA?
No. In fact, if the insurer finds the documents in support of
the insurance claim for loss or damage to cargo as unsubstantiated,
it should formally reject the claim so that the consignee can file a
suit against the carrier within the one (l)-year prescriptive period
under the COGSA. The delay in the rejection of the claim and the
consequent expiration of the one (l)-year prescriptive period makes
the insurer liable to pay the value stated in the policy.262
160. A local consignee sought to enforce judicially a claim against

the carrier for loss of a shipment of drums of lubricating oil
from Japan under the COGSA after the carrier had rejected
its demand. The carrier pleaded in its Answer the affirmative
*4BF.H. Stevens & Co v. Nordeutscher Lloyd, 6 SCRA 180, cited in Perez, p. 256.
uaIbid.
““Tan Liao v. American President Lines, Ltd., G.R. No. L-7280, January 20,
1956, cited in Perez, ibid.
“'Dole Philippines v. Maritime Company of the Philippines, G.R. No. L-61352,
February 27, 1987.
““New World International Development Corporation v. NYK-FilJapan
Shipping Corporation, G.R. No. 171468, August 24, 2011.
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defense of prescription under the provisions of the same Act

in as much as the suit was brought by the consignee after
one (1) year from delivery of the goods. In turn, the consignee
contended that the period of prescription was suspended
by the written extrajudicial demand it had made against the
carrier within the one (1)-year period, pursuant to Article 1155
of the Civil Code providing that the prescription of actions is
interrupted when there is a written extrajudicial demand by the
creditors.
Has the action, in fact, prescribed? Why?
The action taken by the local consignee has, in fact, prescribed.
The period of one (1) year under the COGSA is not interrupted by
a written extrajudicial demand. The provision of Article 1155 of the
Civil Code merely apply to the prescriptive periods provided for in
said Code and not the special laws except when otherwise provided.253
161. On December 1, 2010, Kore A Corporation shipped from South

Korea to LT Corporation in Manila some 300,000 sheets of
high-grade special steel. The shipment was insured against
all risk by NA Insurance (NA). The carrying vessel arrived at
the Port of Manila on January 10, 2011. When the shipment was
discharged, it was noted that 25,000 sheets were damaged
and in bad order. The entire shipment was turned over to
the custody of ATI, the arrastre operator, on January 21, 2011
for storage and safekeeping, pending its withdrawal by the
consignee's authorized customs broker, RVM.
On January 26 and 29, 2011, the subject shipment was
withdrawn by RVM from the custody of ATI. On January 29,2011,
prior to the withdrawal of the last batch of the shipment, a joint
inspection of the cargo was conducted per the Request for bad
Order Survey (RBO) dated January 28, 2011. The examination
report showed that 30,000 sheets of steel were damaged and
in bad order.
NA Insurance paid LT Corporation the amount of P30
Million for the 30,000 sheets that were damaged, as shown in
the Subrogation Receipt dated January 13, 2013. Thereafter,
NA Insurance demanded reparation against ATI for the goods
253BAR 1992; Dole Philippines Maritime Company of the Philippines, G.R.

No. L-61352, February 27, 1987.
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damaged in its custody, in the amount of P5 Million. ATI alleged

that the COGSA applies in this case since the goods were
shipped from a foreign port to the Philippines. NA Insurance
claims that the COGSA does not apply, since ATI is not a
shipper or carrier. Who is correct?
NA Insurance is correct. The term “carriage of goods” covers
the period from the time when the goods are loaded to the time when
they are discharged from the ship; thus, it can be inferred that the
period of time when the goods have been discharged from the ship
and given to the custody of the arrastre operator is not covered by
the COGSA. Under COGSA, the carrier and the ship may put up
the defense of prescription if the action for damages is not brought
within one year after the delivery of the goods or the date when
the goods should have been delivered. However, the COGSA does
not mention that an arrastre operator may invoke the prescriptive
period of one year; hence, it does not cover the arrastre operator.254
The arrastre operator’s responsibility and liability for losses
and damages and the periods to file a claim and enforce liability
are set forth in the Contract for Cargo Handling Services executed
between the Philippine Ports Authority and the arrastre operator.
The suit may be filed against the arrastre operator within four
(4) years from receipt of the goods by the arrastre operator.255
162. Is the one (1)-year period to file a suit against the carrier and
ship agent applicable also to the insurer of the goods?
No. The one (l)-year prescriptive period only applies in a suit
against the common carrier, shipowner, or charterer (and even the
ship agent). It applies to a suit by the insurer against the ship owner
or ship agent but not to a suit against the insurer.258
Under Section 3(6) of the COGSA, only the carrier’s liability is
extinguished if no suit is brought within one (1) year. The ruling in
Filipino Merchants Insurance Co., Inc. v. Alejandro267 should apply
“insurance Company of North America Asian Terminals, Inc., G.R. No.

180784, February 15, 2012.
255Insurance Company of North America v. Phil. Ports Terminal, Inc., G.R. No.
L-6420, July 18, 1955 cited in Perez, p. 258.
25cMayer Steel Pipe Corporation v. Court of Appeals, G.R. No. 124050, June
19, 1997.
257G.R. No. L-54140, L-62001.
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only to suits against the carrier filed by the shipper, the consignee,
or the insurer, not to suits by the insured against the insurer.
When the Court said in Filipino Merchants that Section 3(6) of the
COGSA applies to the insurer, it meant that the insurer, like the
shipper, may no longer file a claim against the carrier beyond the
one (l)-year period provided in the law. But it does not mean that
the shipper may no longer file claims against the insurer because
the basis of the insurer’s liability is the insurance contract. Such
daim prescribes in 10 years, in accordance with Article 114 of the
Civil Code.
Otherwise, what the Act intends to prohibit after the lapse of
the one (l)-year prescriptive period can be done indirectly by the
shipper or owner of the goods by simply filing a claim against the
insurer even after the lapse of one (1) year. This could not have been
the intention of the law which has also for its purpose the protection
of the carrier and the ship from fraudulent claims by having “matters
affecting transportation of goods by sea be decided in as short a time
as possible” and by avoiding incidents which would “unnecessarily
extend the period and permit delays in the settlement of questions
affecting the transportation.”268
However, where there is inordinate delay in the processing of
the insurance claim, as when the insurer made an unreasonable
demand for an itemized list of the damaged units, parts and
accessories with corresponding values when it appeared settled
that the loss was total and the insurance policy did not require the
production of such list in the event of a claim, and as a consequence,
the insured failed to file a suit against the carrier within the one (1)
year period, the ship owner is relieved from liability but the insurer
must make good the loss incurred by the insured.269
163. A cargo shipment for ABC, Inc., the consignee, was discharged
at the port of Manila on April 15,1992 on board a vessel owned
and operated by XYZ Ltd. Because of a cargo shortage, a suit
for damages was filed by ABC, Inc. against XYZ Ltd. on March
11,1993. An amended pleading was filed by ABC, Inc. on June 7,
1993 to implead Wallem Philippines Shipping Inc. ("Wallem”),
““Filipino Merchants Insurance Company, Inc. v. Hon. Jose Alejandro, G.R.

No. L-54140, October 14, 1986.
269New World International Development v. NYK-FilJapan Shipping Corp.,
G.R. Nos. 171468 and 174241, August 24, 2011.
L
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the ship agent of XYZ [Ltd.]. Can the action against Wallem
prosper considering the one (l)-year prescriptive period under
the COGSA?
No, the action against Wallem cannot prosper.
The filing of an amended pleading does not retroact to the date
of the filing of the original; hence, the statute of limitation runs until
the submission of the amendment. It is true that, as an exception,
the Court has held that an amendment which merely supplements
and amplifies facts originally alleged in the complaint relates back
to the date of the commencement of the action and is not barred
by the statute of limitations which expired after the service of the
original complaint. The exception, however, would not apply to the
party impleaded for the first time in the amended complaint. The
claim against Wallem, was therefore filed out of time under the
COGSA.2"
164. On Jan. 13,2012, Chillies Export House Ltd., turned over to APL
Co. Pte. Ltd. (APL) 250 bags of chili pepper for transport from
the port of India to Manila. The shipment, with a total declared
value of $12,272.50, was loaded on board M/V Wan Hai 262. In
turn, BSFIL Technologies, Inc. (BSFIL), as consignee, insured
the cargo with petitioner Pioneer Insurance and Surety
Corporation (Pioneer Insurance). On Feb. 2,2012, the shipment
arrived at the port of Manila and was temporarily stored at
North Harbor, Manila. On Feb. 6, 2012, the bags of chili were
withdrawn and delivered to BSFIL. Upon receipt thereof,
it discovered that 76 bags were wet and heavily infested
with molds. The shipment was declared unfit for human
consumption and was eventually declared as a total loss. As
a result, BSFIL made a formal claim against APL and Pioneer
Insurance. Having been subrogated to all the rights and cause
of action of BSFIL, Pioneer Insurance sought payment from
APL, but the latter refused. This prompted Pioneer Insurance
to file a complaint for sum of money against APL.
APL invoked a clause in the Bill of lading which absolves
the carrier from any liability unless a case is fled within nine (9)
months after delivery of the goods. Is the clause valid?
260Wallem Philippines Shipping, Inc. v. S.R. Farms, Inc. (2009).
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No. The present case involves lost or damaged cargo. It has

long been settled that in case of loss or damage of cargoes, the one
(l)-year prescriptive period under the COGSA applies. It is at this
juncture where the parties are at odds, with Pioneer Insurance
claiming that the one (l)-year prescriptive period under the COGSA
governs; whereas APL insists that the nine (9)-month prescriptive
period under the Bill of Lading applies.
A reading of the Bill of Lading between the parties reveals that
the nine (9)-month prescriptive period is not applicable in all actions
or claims. As an exception, the nine (9)-month period is inapplicable
when there is a different period provided by a law for a particular
claim or action — unlike in Philippine American General Insurance
Co., Inc. v. Sweet Lines, Inc. where the Bill of Lading stipulated
a prescriptive period for actions without exceptions. Thus, it is
readily apparent that the exception under the Bill of Lading became
operative because there was a compulsory law applicable which
provides for a different prescriptive period. Hence, strictly applying
the terms of the Bill of Lading, the one (l)-year prescriptive period
under the COGSA should govern because the present case involves
loss of goods or cargo.261
165. The liability of the common carrier under the COGSA is US$
500.00 per package unless the shipper declares higher
valuation. Does the term "package" mean container or number
of units?
The term “package” means container unless the bill of lading
disclosed the contents of the containers, the number of cartons or
units, as well as the nature of the goods, in which case, each of those
units and not the container constitutes the “package” referred to in
the liability limitation provision of the COGSA.262
166. Is the liability limitation binding on the parties to the contract

of carriage even though it is not incorporated in the bill of
lading?
Yes. The Civil Code does not limit the liability of the common
carrier to a fixed amount per package. In all matters not regulated
z61Pioneer Insurance and Surety Corp. v. APL Co. Pte. Ltd., G.R. No. 226345,
August 2, 2017.
Êastern Shipping Lines v. Intermediate Appellate Court, G.R. No. L-69044,
May 29,1987.
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by the Civil Code, the right and the obligations of common carriers
shall be governed by the Code of Commerce and special laws. Thus,
the COGSA, which is suppletory to the provisions of the Civil Code,
supplements the latter by establishing a statutory provision limiting
the carrier’s liability in the absence of a shipper’s declaration of a
higher value in the bill of lading. The provisions on limited liability
are as much a part of the bill of lading as though physically in it and
as though placed there by agreement of the parties.263
In this case of Belgian Overseas Chartering and Shipping v.
Philippine First Insurance,264 there was no stipulation in the Bill of
Lading limiting the carrier’s liability. Neither did the shipper declare
a higher valuation of the goods to be shipped. It was held that this
fact notwithstanding, the insertion of the words “L/C No. 90/02447,”
cannot be the basis for the carriers’ liability. First, a notation in the
Bill of Lading which indicated the amount of the Letter of Credit
obtained by the shipper for the importation ofrsteel sheets did not
effect a declaration of the value of the goods as required by the bill.
That notation was made only for the convenience of the shipper and
he bank processing the Letter of Credit. Second, a bill of lading is
Separate from the Other Letter of Credit arrangements. The carriers’
Lability was thus computed based on US$500.00 per package and
not on the per metric ton price declared in the Letter of Credit.
The value of the goods which the carrier must pay in cases of
loss or misplacement shall be determined in accordance with that
declared in the bill of lading, the shipper not being allowed to present
proof that among the goods declared therein there were articles of
greater value and money. In case, however, of the shipper’s failure
to declare the value of the goods in the bill of lading the carrier
nor the ship shall in any event be or become liable for any loss or
damage to or in connection with the transportation of goods in an
amount exceeding $500.00 per package.266
““Belgian Overseas Chartering and Shipping v. Philippine First Insurance

Company, G.R. No. 143133, June 5, 2002.
2MSupra.
205Philam Insurance Company v. Heung-A Shipping Corporation, G.R. No.
187701, July 23, 2014.
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F. PUBLIC SERVICE ACT (Commonwealth Act No. 146)
1. Definition of public utility

i. Define "public utility."
Public utility, unlike the term “public service,” is not defined by
statute. Public service is defined specifically by Commonwealth Act
No. 146 or the Public Service Act, as follows:
The term “public service” includes every person
that now or hereafter may own, operate, manage, or
control in the Philippines, for hire or compensation,
with general or limited clientele, whether permanent,
occasional or accidental, and done for general business
purposes, any common carrier, railroad, street railway,
traction railway, sub-way, motor vehicle, either for
freight or passenger or both, with or without fixed
route and whatever may be its classification, freight or
carrier service of any class, express service, steamboat
or steamship line, pontines, ferries, and water craft,
engaged in the transportation of passengers or freight
or both, shipyard, marine railways, marine repair shop,
wharf or dock, ice plant, ice-refrigeration plant, canal,
irrigation system, gas, electric light, heat and power,
water supply and power, petroleum, sewerage system,
telephone, wire or wireless communications system, wire
or wireless broadcasting stations and other similar public
services: Provided, however, That a person engaged in
agriculture, not otherwise a public service, who owns a
motor vehicle and uses it personally and/or enters into
a special contract whereby said motor vehicle is offered
for hire or compensation to a third party or third parties
engaged in agriculture, not itself or themselves a public
service, for operation by the latter for a limited time and
for specific purpose directly connected with the cultivation
of his or their farm, the transportation, processing, and
marketing of agricultural products of such third party or
third parties shall not be considered as operating a public
service for the purpose of this Act.260
““As amended by Commonwealth Act No. 454 (1939) and R.A. No. 1270 (1955).
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While the concepts of public service and public utility are

related, they do not have the same legal meaning.207 In contrast to
a public service which has a statutory definition, the definition of
public utility has been laid down by the Supreme Court, thus:
“[a] ‘public utility’ is a business or service engaged
in regularly supplying the public with some commodity
or sendee of public consequence such as electricity, gas,
water, transportation, telephone, or telegraph service.
The term implies public use and service.”268
2. Does the fact that a business offers services or goods that

promote public good and serve the interest of the public
automatically make it a public utility?
To constitute a public utility, the facility must be necessary for
the maintenance of life and occupation of the residents. However,
the fact that a business offers services or goods that promote public
good and serve the interest of the public does not automatically
make it a public utility. Public use is not synonymous with public
interest. As its name indicates, the term “public utility” implies
public use and service to the public. The principal determinative
characteristic of a public utility is that of service to, or readiness
to serve, an indefinite public or portion of the public as such which
has a legal right to demand and receive its services or commodities.
Stated otherwise, the owner or person in control of a public utility
must have devoted it to such use that the public generally or that
part of the public which has been served and has accepted the
service, has the right to demand that use or service so long as it
is continued, with reasonable efficiency and under proper charges.
Unlike a private enterprise which independently determines whom
it will serve, a “public utility holds out generally and may not refuse
legitimate demand for service.”209
The Supreme Court has adopted the pronouncement in Allen v.
Railroad Commission of the State of California210 that a public utility
267J. Tinga, Separate Opinion, J.G. Summit Holding, Inc. v. Court of Appeals,
G.R. No. 124293, September 24, 2003.
268NAPOCOR v. Court of Appeals, G.R. No. 112702, September 26, 1997.
269JG Summit Holdings v. Court of Appeals, G.R. No. 124293, September 24,
2003.
270179 Cal., 68; 8 A. L. R., 249 (1918), as cited in Iloilo Ice and Cold Storage,
G.R. No. 19857, March 2, 1923.
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is characterized by such devotion to public use where the public has

the legal right to demand that the service shall be conducted.2’1
3. Can a shipyard be considered a public utility?

No. A shipyard or a place/enclosure where ships are built or
repaired cannot be considered a public utility because its nature
dictates that it serves but a limited clientele whom it may choose to
serve at its discretion. While it offers its facilities to whoever may
wish to avail of its services, a shipyard is not legally obliged to render
its services indiscriminately to the public. It has no legal obligation
to render the services sought by each and every client. The fact that
it publicly offers its services does not give the public a legal right to
demand that such services be rendered.2’2
4. What are the purposes for the enactment of the Public Service
Act?
a. To secure adequate, sustained service for the public at the
least possible cost;
b. To protect the public against unreasonable charges and
poor, inefficient service;
c. To protect and secure investments in public services; and
d. To prevent ruinous competition.2’3
The first two are carried out by the appropriate government
agencies in terms of fixing rates, like water rates and electricity
rates. They are regulated by the State.
The fourth is achieved, among others, by determining who will
be allowed to provide public service in a particular area. Thus, there
is the first operator rule which gives preferential right to the first
operator to perform service, and a second operator shall be allowed
only if public interest will indeed be served.
mId. (Emphasis supplied.)

272JG Summit Holdings v. Court of Appeals, G.R. No. 124293, September 24,
2003.
2,3Luzon Stevedoring Co., Inc. v. Public Service Commission, G.R. No. L-5458,
September 16, 1953; Tan Sima v. Hacbang, G.R. No. 37321, March 3, 1933.
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T

5. The City of Manila passed an ordinance banning provincial

buses from the city. The ordinance was challenged as invalid
under the Public Service Act by X who has a certificate of
public convenience to operate auto-trucks with fixed routes
from certain towns in Bulacan and Rizal to Manila and within
Manila. Firstly, he claimed that the ordinance was null and
void because, among other things, it in effect amends his
certificate of public convenience, a thing which only the
Public Service Commission can do so under Section 16(m) of
the Public Service Act. Under said section, the Commission is
empowered to amend, modify, or revoke a certificate of public
convenience after notice and hearing. Secondly, he contended
that even if the ordinance was valid, it is only the Commission
which can require compliance with its provisions under Section
17( j) of said Act and since the implementation of the ordinance
was without sanction or approval of the Commission, its
enforcement was unauthorized and illegal.
A. May the reliance of X on Section 16(m) of the Public
Service Act be sustained? Explain.
No. The power vested in the Public Service Commission under
Section 16(m) is subordinate to the authority of the City of Manila
under Section 18(hh) of its Revised Charter, to superintend, regulate,
or control the streets of the City of Manila.274
B. Was X correct in his contention that, under Section 17( j)

of the Public Service Act, it is only the Commission
which can require compliance with the provision of the
ordinance? Explain.
No. The powers conferred by law upon the Public Service
Commission were not designed to supersede the regulatory power
of local governments over motor traffic in the streets subject to their
control.275
6. A was granted by the Board of Transportation (BOT) a certificate

of public convenience to operate 50 provincial buses, plying
between llocos Norte and Manila passing through Rizal Avenue
Extension then right on Doroteo Jose. Because of traffic
274BAR 1993.
™Ibid.
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congestion between the hours of seven (7) and nine (9) o'clock
in the morning, and four (4) to eight (8) o'clock in the evening, a
municipal ordinance was passed prohibiting provincial buses
from entering Manila on those hours but allowing them to use
one (1) shuttle bus for every five (5) buses. A challenged the
validity of the ordinance, on the ground that it infringes on his
certificate of public convenience, and that he had acquired
a vested right to enter Manila at any time of the day, thru
aforementioned route. Decide with reasons.
The ordinance is valid. Under its Charter, the City of Manila
has the power to regulate the use of its streets. This Charter is a
special law and therefore prevails over the Public Service Act.
Consequently, the power of the BOT to grant certificates is subject
to this provision of the Charter of Manila. A has thus not acquired
any vested right as alleged by him.276
2. Necessity for Certificate of Public Convenience

7. What is the basic requirement for the operation of a public
utility?
No public service shall operate in the Philippines without
having first secured from the Public Service Commission a certificate,
which shall be known as Certificate of Public Convenience or as
Certificate of Public Convenience and Necessity, as the case may be,
to the effect that the operation of said service and the authorization
to do business will promote the public interests in a proper and
suitable manner.277
8. What is a Certificate of Public Convenience and Necessity?

A Certificate of Public Convenience and Necessity (CPCN)
is a written authority issued by the government to enable a
person to engage in public service, for which service a legislative
franchise is required, e.g., air transportation, shipping, railroad,
telecommunications, subject to the existence of a need.
2,6Lagman v. City of Manila, G.R. No.-L-23305, June 30,1966; BAR 1976.

^’Section 15, Public Service Act, Commonwealth Act No. 146.
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9. What is a Certificate of Public Convenience?

A Certificate of Public Convenience (CPC) is a written authority
issued by the government to enable a person to engage in public
service.
10. The Batong Bakal Corporation filed with the Board of Energy
an application for a Certificate of Public Convenience for the
purpose of supplying electric power and lights to the factory
and its employees living within the compound. The application
was opposed by the Bulacan Electric Corporation contending
that the Batong Bakal Corporation has not secured a franchise
to operate and maintain an electric plant. Is the opposition’s
contention correct?
No. A Certificate of Public Convenience may be granted to
Batong Bakal Corporation, though not possessing a legislative
franchise, if it meets all the other requirements. There is nothing
in the law nor the Constitution which indicates that a legislative
franchise is necessary or required for an entity to operate as a
supplier of electric power and light to its factory and its employees
living within the compound.278
11. What industries are exempted from the requirement of a

certificate (CPCN/CPC)?
a. Warehouses;
b. Animal drawn vehicles and bancas moved by oar or sail,
and tugboats and lighters;
c. Airships within the Philippines except as regards the
fixing of their maximum rates on freight and passengers;
d. Radio companies except for rates fixing;279
e. Public services owned or operated by the government,
except as to rates fixing;280
f. Ice plants; and
278BAR 1998.
279Section 14, Public Service Act, Commonwealth Act No. 146, as amended by
R.A. No. 2677.
^Surigao Electric v. Municipality of Surigao, G.R. No. L-22766, August 30,
1968.
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g- Public markets281
12. Does the issuance of a Certificate of Public Convenience and/

or Necessity confer property right?
No. The certificate constitutes neither a franchise nor a contract,
confers no property right, and is a mere license or privilege. The
holder of said certificate does not acquire a property right in the route
covered thereby. Nor does it confer any property right or interest
or franchise in the public highways. Revocation of this certificate
deprives him of no vested right. New and additional burdens,
alteration of the certificate, or even revocation or annulment thereof
is reserved to the State.282
13. Where should entities engaged in transportation obtain the

necessary certificates of public convenience?283
The appropriate certificates of public convenience may be
obtained by entities engaged in transportation as follows:
a. Those engaged in public land transportation services
by motorized vehicles, from the Land Transportation
Franchising and Regulatory Board;284
b. Those engaged in the operation of domestic and overseas
water carriers, from the Maritime Industry Authority;285
c. Those engaged in air commerce and/or air transportation,
foreign and/or domestic, from the Civil Aeronautics
Board;280 and
d. Those engaged in providing land transportation by the
use of tricycles, from the local Sangguniang Bayan or
Sangguniang Panglungsod.287
“'Chambers of Filipino Retailers v. Villegas, G.R. No. L-29864, February 28,

1969.
282Luque v. Villegas, G.R. No. L-22545, November 28,1969.
283Perez: Quizzer and Reviewer on Commercial Laws Vol. IV — Transportation
Laws and Public Service Act, 2009 Ed., p. 284.
^TFRB. Section 5(b), E.O. No. 125.
"“MARINA. Section 12(c), E.O. No. 125.
“'CAB. Section 11, R.A. No. 776, as amended.
“’Section 446(3,vi) and Section 458(3,vi), Local Government Code.
i
J9JC9B0M
14. What government agencies govern other entities engaged in

public service other than transportation?288
The government agencies governing other entities engaged in
public sendee other than transportation are:
a. Radio, television, telephone, and other telecommunications
entities - National Telecommunications Commission;289
b. Electric companies and cooperatives — National
Electrification Administration;290
c. Local water utilities — Local Water Utilities
Administration;291
d. Express and/or messenger service — Philippine Postal
Corporation.292
15. What are the instances where a Certificate of Public

Convenience and/or Necessity may be revoked or cancelled?
a. The facts and circumstances on the strength of which
said certificate was issued have been misrepresented or
materially changed.293
b. The holder thereof has violated or willfully and
contumaciously refused to comply with any order, rule,
or regulation of the Commission or any provision of the
Act.294
c. Where the holder is a mere dummy;296 (real owner a
foreigner)
d. Where the operator ceased operation and placed his buses
on storage;296 and
288Perez: Quizzer and Reviewer on Commercial Laws Vol. IV — Transportation

2K,R.A. No. 7525.
290R.A. No. 6038 as amended by P.D. No. 269 and P.D. No. 1645.
“‘P.D. No. 198, 768, and 1479.
292P.D. No. 240, as amended.
“’Section 16(m).
“’Section 16(n).
“’Pecson v. Pecson, G.R. No. 45516, July 30, 1938.
’"Paredes v. Public Service Commission, G.R. No. L-7111, May 30, 1955.
J9JC9B0M
e. Where the operator abandons, totally the service.2”
16. Robert is a holder of a certificate of public convenience to

operate a taxicab service in Manila and suburbs. One evening,
one of his taxicab units was boarded by three (3) robbers as
they escaped a'Tter staging a hold-up. Because of said incident,
the LTFRB revoked the certificate of public convenience of
Robert on the ground that said operator failed to render safe,
proper, and adequate service as required under Section 19(a)
of the Public Service Act.
a. Was the revocation of the certificate of public convenience
of Robert justified? Explain.
No. A single hold-up incident which does not link Robert’s
taxicab cannot be construed to mean that he rendered a service that
is unsafe, inadequate, and improper.298
b. When can the Commission (Board) exercise its power to

suspend or revoke certificate of public convenience?
Under Section 19(a) of the Public Service Act, the Commission
(Board) can suspend or revoke a certificate of public convenience
when the operator fails to provide a service that is safe, proper or
adequate, and refuses to render any service which can be reasonably
demanded and furnished.299
17. Pepay, a holder of a certificate of public convenience, failed

to register the complete number of units required by her
certificate. However, she tried to justify such failure by the
accidents that allegedly befell her, claiming that she was
so shocked and burdened by the successive accidents and
misfortunes that she did not know what she was doing, she
was confused and thrown off tangent momentarily, although
she always had the money and financial ability to buy new
trucks and repair the destroyed one. Are the reasons given by
Pepay sufficient to excuse her from registering the complete
number of units? Explain.
“’Collector v. Buan, G.R. No. L-11438, July 31, 1958; Regodon v. Public
Service Commission, G.R. No. L-11899, September 23, 1958; Paez v. Marcelo, G.R.
No. L-1530, March 30, 1962.
““Manzanal v. Ausejo, G.R. No. L-31056; BAR 1993.
299BAR1993. J*
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No. The reasons given by Pepay are not sufficient grounds to

excuse her from completing her units. The same could be undertaken
by her children or by other authorized representatives.300
a. Requisites
18. What requirements must be met before a certificate of public
convenience may be granted under the Public Service Act?
The following are the requirements for the granting of a
certificate of public convenience, to wit:
The applicant must be a citizen of the Philippines, or a
corporation, co-partnership, or association organized under the
laws of the Philippines and at least 60% of the stock or paid-
up capital of which must belong to citizens of the Philippines.
(Citizenship)
The applicant must prove public necessity. (Public
Necessity)
The applicant must prove that the operation of the public
service proposed and the authorization to do business will
promote the public interest in a proper and suitable manner.
(Promotion of Public Interest)
The applicant must be financially capable of undertaking
the proposed service and meeting the responsibilities incident
to its operation. (Financial Capability)301
i. Citizenship
19. What constitutional provision governs the citizenship
requirement for public utilities?
Section 11, Article XII of the 1987 Constitution governs the
citizenship requirement for public utilities. It provides:
No franchise, certificate, or any other form of
authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of
the Philippines at least sixty per centum of whose capital
is owned by such citizens, nor shall such franchise,
““Section 16(n), Public Service Act; Halili Herras, G.R. No. L-18889-90,
April 30, 1964; BAR 1993.
“‘BAR 1995.
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certificate, or authorization be exclusive in character or

for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so
requires. The State shall encourage equity participation
in public utilities by the general public. The participation
of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate
share in its capital, and all the executive and managing
officers of such corporation or association must be citizens
of the Philippines.
20. To what does "capital" in Section 11, Article XII of the 1987
Constitution refer?
The term “capital” refers to shares with voting rights, as well
as with full beneficial ownership. This is precisely because the
right to vote in the election of directors, coupled with full beneficial
ownership of stocks, translates to effective control of a corporation.
Consequently, what the Constitution requires is full and legal
beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights which must rest in the
hands of Filipino nationals.302
21. Can a foreign corporation own the facilities by which a public

utility may operate?
Yes. In law, there is a clear distinction between the “operation”
of a public utility and the “ownership” of the facilities and equipment
used to serve the public. The exercise of the rights encompassed in
ownership is limited by law so that a property cannot be operated
and used to serve the public as a public utility unless the operator
has a franchise.
The right to operate a public utility may exist independently
and separately from the ownership of the facilities thereof. One
can own said facilities without operating them as a public utility,
or conversely, one may operate a public utility without owning the
facilities used to serve the public.303
^Roy III v. Herbosa, G.R. No. 207246, November 22, 2016.

a^Tatad v. Garcia, Jr., G.R. No. 114222, April 6, 1995.
J9JC9B0M
22. Differentiate "operation" of public utility from "ownership" of

facilities and equipment.
While the Constitution in no uncertain terms requires a
franchise for the operation of a public utility, it does not require a
franchise before one can own the facilities needed to operate a public
utility so long as it does not operate them to serve the public. In law,
there is a clear distinction between “operation” of a public utility
and "ownership” of its facilities and equipment.
23. WWW Communications Inc. is an e-commerce company whose

present business activity is limited to providing its clients with
all types of information technology hardware. It plans to re
focus its corporate direction of gradually converting itself into
a full convergence organization. Towards this objective, the
company has been aggressively acquiring telecommunications
businessesand broadcast media enterprises, and consolidating
their corporate structures. The ultimate plan is to have only
two (2) organizations: one to own the facilities of the combined
businesses and to develop and produce content materials,
and another to operate the facilities and provide mass
media and commercial telecommunications services. WWW
Communications will be the flagship entity which will own the
facilities of the conglomerate and provide content to the other
new corporation which, in turn, will operate those facilities and
provide the services. WWW seeks your professional advice
on whether or not its reorganized business activity would be
considered a public utility requiring a franchise or certificate
or any other form of authorization from the government. What
will be your advice? Explain.
The reorganized business activity of WWW Communications
Inc. would not be considered a public utility requiring a franchise or
certificate or any other form of authorization from the government.
It owns the facilities, but does not operate the same.304
ii. Promotion of public interests

24. What is the primordial consideration in granting franchises or
certificates of public convenience?
The grant of franchises or certificates of public convenience
should be guided by public interest. Hence, in the determination
3°'BAR 2000.
J9JC9B0M
of whether a certificate to operate a public service is to be granted

or not, public interest and convenience must be the primary
consideration.305
iii. Financial capability

25. What does financial capability mean in relation to the grant of
franchises or certificates of public convenience?
This means that the applicant must be financially capable of
undertaking the proposed service and meeting the responsibilities
incident to its operation, as reasonably determined by the
government agency or instrumentality granting the franchises or
certificates of public convenience.
b. Prior Operator Rule

i. Meaning
26. What is the Prior Operator Rule?
It is the rule allowing an existing franchise operator to invoke
a preferential right within the authorized territory as long as he
renders satisfactory and economical service.
The policy is not to issue a certificate to a second operator to
cover the same field and in competition with a first operator who
is rendering sufficient, adequate and satisfactory service. The prior
operator must first be given an opportunity to improve its service, if
inadequate or deficient. Where the operator either fails or neglects to
make the improvement or effect the increase in services, especially
when given the opportunity, new operators should be given the
chance to give the services needed by the public.
In other words, a public utility operator should be shielded from
ruinous competition by affording him an opportunity to improve his
equipment and service before allowing a new operator to serve in
the same territory he covers.306
“Republic Telephone Co. v. Philippine Long Distance Co, 25 SCRA 81; Teresa
Electric & Power Co. v. Public Service Commission, 21 SCRA, cited in Perez: Reviewer
and Quizzer in Commercial Law, Vol. IV, ibid., p. 287.
“Mandbusco v. Francisco, 32 SCRA 405, cited in Perez, ibid.
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27. Mr. Mangasiwa applied for a certificate of public convenience

to operate five (5) jeepneys from Batasang Pambansa area to
Cubao, Quezon City. The application was opposed by Hallelujah
Transit and Kingdom Bus Co., which were already serving the
area. They invoked the "prior or old operator rule" in their
opposition. Mangasiwa, in turn, invoked the "prior applicant
rule." Discuss the "prior or old operator rule" and the limitations
or provisos on its application, in case of conflict between the
"prior or old operator rule" and the "prior applicant rule," which
rule shall prevail? Explain.
The “prior or old operator rule” allows an existing franchise
operator to invoke preferential right to render the public service
within the authorized territory as long as he does so satisfactorily
and economically.
In case of conflict between the “prior or old operator rule” and
the “prior applicant rule,” the former will apply as long as again the
operator is able to render satisfactory and economical service.30’
28. What is the Prior Applicant Rule?

This rule presupposes a situation when two interested
persons apply for a certificate to operate a public utility in the same
community over which no person has as yet granted any certificate.
If it turns out after the hearing, that the circumstances between
the two applicants are more or less equal, then the applicant who
applied ahead of the latter will be granted the certificate.
29. A bus line’s service between Manila and Malolos is satisfactory.

A new road is opened between said points, and a new carrier
applies for a certificate of public convenience to operate a bus
line along the new road. The old bus line opposes, claiming
that it should first be given an opportunity to extend its service.
Which party should prevail? Reason.
With all conditions being equal, priority in the filing of the
application for a certificate of public convenience becomes an
important factor in the granting thereof; so, the new carrier who
applies first shall prevail.308
“’BAR 1986.
“8Batangas Transportation Co. v. Orlanes, G.R. No. L-28865, December 19,
1928; BAR 1979.
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ii. Exceptions
30. Bayan Bus Lines had been operating satisfactorily a bus
service over the route Manila to Tarlac and vice versa via
the McArthur Highway. With the upgrading of the new North
Expressway, Bayan Bus Lines service became seemingly
inadequate despite its efforts of improving the same. Pasok
Transportation, Inc., now applies for the issuance to it by the
Land Transportation Franchising and Regulatory Board of a
certificate of public convenience for the same Manila-Tarlac-
Manila route. Could Bayan Bus Lines, Inc., invoke the "prior
operator" rules against Pasok Transportation, Inc.? Why?
No, Bayan Bus Lines, Inc., cannot invoke the “prior operator”
rules against Pasok Transportation, Inc. because such “Prior or Old
Operator Rule” under the Public Service Act only applies as a policy
of the law of the Public Service Commission to issue a certificate
of public convenience to a second operator when prior operator is
rendering sufficient, adequate and satisfactory service, and who in
all things and respects is complying with the rules and regulations
of the Commission.
In the facts of the case at bar, Bayan Bus Lines’ service
became seemingly inadequate despite its efforts of improving the
same. Hence, in the interest of providing efficient public transport
services, the use of the “prior operator” and the “priority of filing”
rules is untenable in this case.309
31. What are the exceptions to the Prior Operator Rule?

a. Where public interest would better be served by the new
operator;310 as when the operator has failed, despite ample
time and opportunity given to it by the Commission, to
render adequate, sufficient and satisfactory service;
b. Where the old operator failed to make an offer to meet the
increase in traffic;311
’“BAR 2003.
31“Guico v. Estate of F.P. Buan, G.R. No. L-9769, August 30, 1957, cited in
Perez: Quizzer and Reviewer in Commercial Law Vol. IV, 2009 Ed., p. 291.
’"Manila Yellow Cab v. Castelo, G.R. No. L-13910, May 30, 1960, cited in
Perez, ibid.
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c. Where the CPC granted to the new operator is a maiden

certificate;311
d. When the application of the rule would be conducive to
monopoly and contrary to the principle that promotes
healthy competition313
iii. Ruinous competition

32. What is the policy behind the Prior Operator Rule?
The policy behind the Prior Operator Rule is the general
principle that public utility operators must be protected from ruinous
competition, such that before permitting a new operator to serve in a
territory already serviced by another operator, the latter should first
be given opportunity to improve his equipment and service.
Note, however, that this policy is not without any exceptions.
The primary consideration will always be public convenience.31*
33. What is "protection of investment" rule?316

“Protection of investment” rule means that one of the purposes
of the Public Service Law is to protect and conserve investments
which have already been made for that purpose by public service
operators.313
3. Fixing of rate
34. What is "rate"?
Rate is a charge, payment, or price fixed according to a ratio,
scale, or standard. It is an amount paid or charged for a good or
service.31’
312Mandbusco v. Francisco, 32 SCRA 405, cited in Perez, ibid.

313Villa Rey Transit v. Pangasinan Trans. Co., Inc., 5 SCRA 234, cited in Perez,
ibid.
’“Halili v. Cruz, G.R. No. L-21061, June 27,1968.
315Perez, Quizzer and Reviewer on Commercial Laws Vol. IV — Transportation
316Batangas Trans. Co. v. Orlanes, 52 Phil. 455 cited in Perez: Quizzer and
Reviewer on Commercial Laws Vol. IV - Transportation Laws and Public Service
Act, 2009 Ed., p. 291.
31,National Power Corp. v. Philippine Electric Plant Owners Association, Inc.,
G.R. No. 159457, April 7, 2006.
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35. How are rates fixed?

Rates are fixed on the basis of the investment amount or
property value that the public utility is allowed to earn — an
amount value otherwise called “rate base.” A just rate is founded on
conditions that are fair and reasonable to both the public utility and
the public. This stipulation means that the public utility must have,
as profit, a fair return on the reasonable value of the property. The
imposition of the maximum rates it charges cannot be confiscatory.
As to the public, reasonableness requires entitlement to the service
at an affordable cost.318
The Commission has the power to fix and determine individual
or joint rates, tools, charges, classifications or schedules thereof, as
well as commutations, mileage, kilometrage and other special rates
which shall be imposed, observed and followed thereafter by a public
service.319
36. What is the standard in the fixing of rates?

In the fixing of rates, the only standard which the legislature is
required to prescribe for the guidance of the administrative authority
is that the rate be reasonable and just. It has been held that even
in the absence of an express requirement as to reasonableness, this
standard may be implied. What is a just and reasonable rate is a
question of fact calling for the exercise of discretion, good sense, and
a fair, enlightened and independent judgment. The requirement of
reasonableness comprehends such rates which must not be so low as
to be confiscatory, or too high as to be oppressive.320
37. What are the major factors to be considered in determining

just and reasonable rates?
In determining the just and reasonable rates to be charged
by a public utility, three (3) major factors are considered by the
regulating agency:
a. Rate of return;
b. Rate base; and
™Ibid.
319Section 16(c), Commonwealth Act No. 146.
’“Republic v. Manila Electric Co., G.R. Nos. 141314 and 141369, November
15,2002.
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c. The return itself or the computed revenue to be earned

by the public utility based on the rate of return and rate
base.
The rate of return is a judgment percentage which, if multiplied
with the rate base, provides a fair return on the public utility for the
use of its property for service to the public. The rate of return of
a public utility is not prescribed by statute but by administrative
and judicial pronouncements. The Supreme Court has consistently
adopted a 12% rate of return for public utilities. The rate base, on the
other hand, is an evaluation of the property devoted by the utility to
the public service or the value of invested capital or property which
the utility is entitled to a return.321
38. What other factors are considered in determining reasonable

rates?
There are many factors considered in ascertaining reasonable
rates, such as:
a. The original cost of construction;
b. The amount expended in permanent improvements;
c. The amount and market value of the bonds and stock of
the public utility;
d. The present cost compared with the original cost of
construction;
e. The probable earning capacity of the property under the
particular rates prescribed; and
f. The sum required to meet operating expenses.
It must be noted that the government is not bound to apply any
particular method or formula for determining rates,322
“'Republic v. Manila Electric Co., G.R. Nos. 141314 and 141369, November
15, 2002.
322National Power Corp. v. Philippine Electric Plant Owners Association, Inc.,
G.R. No. 159457, April 7, 2006.
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39. What is the policy behind the fixing of rates?

The regulation of rates to be charged by public utilities is
founded upon the police powers of the State, and statutes prescribing
rules for the control and regulation of public utilities are a valid
exercise thereof.
When private property is used for a public purpose and is
affected with public interest, it ceases to be juris privati only and
becomes subject to regulation. The regulation is to promote the
common good. Submission to regulation may be withdrawn by the
owner by discontinuing use; but as long as use of the property is
continued, the same is subject to public regulation.
In regulating rates charged by public utilities, the State protects
the public against arbitrary and excessive rates while maintaining
the efficiency and quality of services rendered. However, the power
to regulate rates does not give the State the right to prescribe rates
which are so low as to deprive the public utility of a reasonable
return on investment. Thus, the rates prescribed by the State must
be one that yields a fair return on the public utility upon the value of
the property performing the service and one that is reasonable to the
public for the services rendered. The fixing ofjust and reasonable rates
involves a balancing of the investor and the consumer interests.323
a. Rate of return
40. What is "rate of return"?
The rate of return is a judgment percentage which, if multiplied
with the rate base, provides a fair return on the public utility for the
use of its property for service to the public. The rate of return of
a public utility is not prescribed by statute but by administrative
and judicial pronouncements. The Supreme Court has consistently
adopted a 12% rate of return for public utilities. The rate base, on the
other hand, is an evaluation of the property devoted by the utility to
the public service or the value of invested capital or property which
the utility is entitled to a return.324
’“Republic v. Manila Electric Co., G.R. Nos. 141314 and 141369, November
15,2002.
mIbid.
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b. Exclusion of income tax as expense

41. Can a public utility include income tax payments as part of its
operating expenses in determining the base of its returns?
No. Income tax paid by a public utility is inconsistent with the
nature of operating expenses. In general, operating expenses are
those which are reasonably incurred in connection with business
operations to yield revenue or income. They are items of expenses
which contribute or are attributable to the production of income or
revenue.
Income tax, it should be stressed, is imposed on an individual
or entity as a form of excise tax or a tax on the privilege of earning
income. In exchange for the protection extended by the State to the
taxpayer, the government collects taxes as a source of revenue to
finance its activities.
Clearly, by its nature, income tax payments of a public utility
are not expenses which contribute to or are incurred in connection
with the production of profit of a public utility. Income tax should be
borne by the taxpayer alone as they are payments made in exchange
for benefits received by the taxpayer from the State. No benefit is
derived by the customers of a public utility for the taxes paid by such
entity and no direct contribution is made by the payment of income
tax to the operation of a public utility for purposes of generating
revenue or profit. Accordingly, the burden of paying income tax
should not be shifted to the consumers by including the same in the
computation of public utilities’ operating expenses.326
4. Unlawful arrangements
a. Boundary system
42. Define boundary system.
It is an arrangement whereby a driver is engaged to drive the
owner/operator’s unit and pays the latter a fee - commonly called
“boundary” - for the use of the unit. Whatever he earned in excess of
that amount is his income.326
326Republic v. Manila Electric Co., G.R. Nos. 141314 and 141369, November
15, 2002.
326Paguio Transport Corp. v. NLRC, G.R. No. 119500, August 28, 1998.
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43. Baldo is a driver of Yellow Cab Company under the boundary

system. While cruising along the South Expressway, Baldo's
cab figured in a collision, killing his passenger, Pietro. The
heirs of Pietro sued Yellow Cab Company for damages, but the
latter refused to pay to the heirs, insisting that it is not liable
because Baldo is not an employee. Resolve with reasons.
Yellow Cab Company is liable because there exists an employer
employee relationship between a jeepney owner and a driver under
the boundary system arrangement in accordance with Article 103 of
the Revised Penal Code (where the employer is made subsidiarily
liable). Indeed, to exempt from liability the owner of a public vehicle
who operates it under the “boundary system” on the ground that
he is a mere lessor would not only be to abet a flagrant violation of
the Public Service Law, but it would also place the riding public at
the mercy of reckless and irresponsible drivers. Such drivers are
reckless because the measure of their earnings depends largely on
the number of trips they make and, hence, the speed at which they
drive; and irresponsible because most, if not all of them, are in no
position to pay the damages they might cause.
44. X owns a fleet of taxicabs. He operates it through what is

known as boundary system. Y drives one of such taxicabs and
pays X a fixed amount of P1,000.00 daily under the boundary
system. This means that anything above PI,000.00 would be
the earnings of Y. Y, driving recklessly, hit an old lady crossing
the street. Which statement is most accurate?
a. X as the owner is exempt from liability because he was
not the one driving;
b. X as the owner is exempt from liability because precisely
the arrangement is one under the “boundary system”;
C. X will not be exempt from liability because he
remains to be the registered owner and the
boundary system will not allow the circumvention
of the law to avoid liability;
d. Y is the only one liable because he drove recklessly.337
327BAR 2012.
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b. Kabit system
45. Discuss the "kabit system” in land transportation and its legal
consequences.
The “kabit system” is an arrangement whereby a person who
has been granted a certificate of public convenience allows another
who owns a motor vehicle to operate under his certificate for a fee or
a percentage of the earnings. The owner of the certificate of public
convenience and the actual owner of the motor vehicle should be
held jointly and severally liable for damages to third persons as a
consequence of the negligent operation of the motor vehicle.328
Although the parties to such an agreement are not outrightly
penalized by law, the kabit system is invariably recognized as being
contrary to public policy and therefore void and inexistent under
Article 1409 of the Civil Code. In the early case of Dizon v. Octavio,
the Court explained that one of the primary factors considered in
the granting of a certificate of public convenience for the business
of public transportation is the financial capacity of the holder of
the license, so that liabilities arising from accidents may be duly
compensated. The kabit system renders illusory such purpose and,
worse, may still be availed of by the grantee to escape civil liability
caused by a negligent use of a vehicle owned by another and operated
under his license. If a registered owner is allowed to escape liability
by proving who the supposed owner of the vehicle is, it would be
easy for him to transfer the subject vehicle to another who possesses
no property with which to respond financially for the damage done.
Thus, for the safety of passengers and the public who may have
been wronged and deceived through the baneful kabit system, the
registered owner of the vehicle is not allowed to prove that another
person has become the owner so that he may be thereby relieved of
responsibility. Subsequent cases affirm such basic doctrine. It would
seem then that the thrust of the law in enjoining the kabit system is
not so much as to penalize the parties but to identify the person upon
whom responsibility may be fixed in case of an accident with the end
view of protecting the riding public. The policy therefore loses its
force if the public at large is not deceived, much less involved.329
328BAR 2005.
329Lim v. Court of Appeals, G.R. No. 125817, January 16, 2002.
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46. What are the effects of the Kabit System?

1. The transfer, sale, lease, or assignment of the privilege
granted is valid between the contracting parties but not
upon the public or third persons.330
2. The registered owner is primarily liable for all the
consequences flowing from the operations of the carrier.331
3. The thrust of the law in enjoining the kabit system is to
identify the person upon whom responsibility may be fixed
with the end in view of protecting the riding public.332
4. The registered owner cannot recover from the actual
owner and the latter cannot obtain transfer of the vehicle
to himself, both being in pari delicto.333
5. For the better protection of the public, both the registered
owner and the actual owner are jointly and severally
liable with the driver.334
47. Procopio purchased an Isuzu passenger jeepney from Enteng,

a holder of a certificate of public convenience for the operation
of a public utility vehicle plying the Calamba-Los Banos
route. While Procopio continued offering the jeepney for
public transport services, he did not have the registration of
the vehicle transferred in his name. Neither did he secure for
himself a certificate of public convenience for its operation.
Thus, per the records of the Land Transportation Franchising
and Regulatory Board, Enteng remained its registered owner
and operator. One day, while the jeepney was traveling
southbound, it collided with a ten-wheeler truck owned by
Emmanuel. The driver of the truck admitted responsibility for
the accident, explaining that the truck lost its brakes.
Procopio sued Emmanuel for damages, but the latter
moved to dismiss the case on the ground that Procopio is not
the real party in interest since he is not the registered owner of
the jeepney. Resolve the motion with reasons.
^Gelisan v. Alday, G.R. No. L-30212, September 9,1987.

“'Benedicto v. IAC, G.R. No. 70876, July 19, 1990
^Lim. v. CA, G.R. No. 125817, January 16, 2002.
333Teja Marketing v. IAC, G.R. No. L-65510, March 9,1987.
^Zamboanga Transportation v. CA, G.R. No. L-25292, November 29,1969.
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1
i

The motion to dismiss should be denied because Procopio, as

the real owner of the jeepney, is the real party in interest. Procopio
falls under the kabit system. However, the legal restriction as
regards the kabit system does not apply in this case because the
public at large is not deceived nor involved.335
In any event, Procoprio is deemed to be “the agent” of the
registered owner.336
5. Approval of sale, encumbrance, or lease of property

48. What are the rules governing the sale, encumbrance, or lease
of public utilities' properties?
Under Section 20 of the Public Service Act, it shall be unlawful
for any public service or for the owner, lessee or operator thereof to
sell, alienate, mortgage, encumber, or lease its property, franchises,
certificates, privileges, or rights, or any part thereof; or merge or
consolidate its property, franchises, privileges or rights, or any part
thereof, with those of any other public service without the prior
approval and authorization of the Commission.
The approval shall be given, after notice to the public and after
hearing the persons interested at a public hearing, if it be shown
that there are just and reasonable grounds for making the mortgage
or encumbrance, for liabilities of more than one (1) year maturity, or
the sale, alienation, lease, merger, or consolidation to be approved,
and that the same are not detrimental to the public interest, and
in case of a sale, the date on which the same is to be consummated
shall be fixed in the order of approval.
49. Why is prior approval required for the sale, mortgage or lease
of the franchise or of the property of the public utility?
Since a franchise is personal in nature, any transfer or lease
thereof should be brought to the attention of the Commission so that
the latter may take proper safeguards to protect the interest of the
public. In fact, the law requires that, before the approval is granted,
there should be a public hearing, with notice to all interested parties,
in order that the Commission may determine if there are good and
335Lim v. Court of Appeals, G.R. No. 125817, January 16, 2002, citing Baliwag
Transit v. Court of Appeals, G.R. No. 57493, January 7, 1987.
“’’First Malayan Leasing v. Court of Appeals, G.R. No. 91378, June 9, 1992;
and “F” Transit Co., Inc. v. NLRC, G.R. Nos, 88195-96, January 27, 1994; BAR 2005.
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reasonable grounds justifying the transfer or lease of the property,

or if the sale or lease is detrimental to the public interest.337
50. Is the Commission's approval of the sale, encumbrance, or

lease a condition precedent to the validity of the contract?
No. Under Section 20(g) of the Public Service Act, the sale,
encumbrance, or lease of properties may be negotiated and
completed before the approval by the proper authority. Its approval
is not a condition precedent to the validity of the contract. The
approval is necessary to protect public interest. This means that
the sale, encumbrance or lease is valid and binding between the
contracting parties although not effective against the public and the
Commission.
51. May a certificate of public convenience be sold?

Yes, a certificate of public convenience is included in the term
“property “in the broad sense of the term. Under the Public Service
Law, a certificate of public convenience can be sold by the holder
because it has considerable material value. However, although there
is no doubt that it is a private property, it is affected with a public
interest and must be submitted to the control of the government for
the common good. Hence, approval of the Commission is necessary
prior to the sale thereof.338
52. May a certificate of public convenience be levied on execution

to satisfy a court judgment?
Yes, following the principle that the certificate of public
convenience is property, the same may therefore be levied on
execution to satisfy a court judgment against the holder of the
certificate but the resulting transfer of ownership in favor of the
judgment creditor should have the prior approval of the Commission.
The Commission has to consider the qualifications of the judgment
creditor to operate a public utility subject of the certificate of public
convenience and whether or not public interest will be served.
“’Montoya v. Ignacio, G.R. No. L-5868, December 29, 1953, cited in Perez:
Quizzer and Reviewer in Commercial Law Vol. IV, p. 306, 2009 Ed.
338Cogeo-Cubao Operators and Drivers Association v. Court of Appeals, 207
SCRA 346, cited in Perez, ibid., p. 306.
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T
■

G. AIR TRANSPORTATION
A. The Warsaw Convention339
1. What laws govern persons engaged in air transportation

business?
The Civil Code, particularly the provisions on common carriers,
is the primary law governing persons engaged in air transportation
business. This is on the premise that the place of departure and place
of destination are situated in the Philippines and there is no agreed
stopover in any country which is a party to the Warsaw Convention.
The provisions of the Code of Commerce shall apply suppletorily.
It is not correct that say that Philippine laws, particularly the
Civil Code, shall be the primary law governing air transportation
just because the place of destination is the Philippines. If the place
of departure is a country which signed up or adhered to the Warsaw
Convention, the latter is the governing law even though place of
destination is the Philippines.
The relevant convention that the country now adheres to is the
Convention for the Unification of Certain Rules for International
Carriage by Air, Montreal, 28 May 1999, otherwise known as the
Montreal Convention or “MC99."
It is designed to be a single, universal treaty, governing airline
liability around the world relative to carriage of passengers, baggage,
and cargo. It amended the now defunct Warsaw Convention and
its related protocols — which compensation system, over time has
become outdated. MC99 espouses a more modern and fair liability
regime than its Warsaw counterpart.
MC99 was ratified by the Philippine Senate on 10 August 2015
and became effective on 12 December 2015. To date, 132 of the 191
contracting states of International Civil Aviation Organization are
parties to the MC99.
339The Warsaw Convention has been supplanted by the Montreal Convention.

It is included in this book because it is in the 2020 Bar Exam Syllabus in Commercial
law and for purposes of comparison with the Montreal Convention.
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With the Philippines’ accession to MC99, it has the force and

effect of law in this country.
2. What are the obligations of a common carrier under a contract

of air carriage?
The nature of an airline’s contract of carriage partakes of
two types; namely: contract to deliver a cargo or merchandise to
its destination and to transport passengers to their destination.110
Air carrier, like any other common carrier, is required to exercise
extraordinary diligence in the care and preservation of goods
placed in its possession. It is also required to ensure the safety of
passengers as far as human care and foresight can provide using
the utmost diligence of a very cautious person with due regard to all
circumstances.
3. When is a contract of air carriage perfected?

A contract of air carriage commences when an airline issues
a ticket to a passenger, that he/she is confirmed for a particular
flight on a certain time and date, including the type of flight
accommodation. The passenger has every right to expect that he/
she be transported on that flight and on that date and it becomes
the carrier’s obligation to carry him/her and his/her luggage safely
to the agreed destination.311 If the passenger is not so transported or
if in the process of transporting, he/she dies or is injured, the carrier
may be held liable for breach of contract of carriage. The carrier’s
liability also includes loss, damage to the baggage, as well as delay
in the delivery thereof.
In an action based on a breach of contract of carriage, the
aggrieved party does not have to prove that the common carrier was
at fault or was negligent. All he has to prove is the existence of the
contract and the fact of its non-performance by the carrier, through
the latter’s failure to carry the passenger to its destination.312 Non
performance of contract includes the downgrading of the type of
accommodation of the passenger from first class to economy313 or
upgrading him/her from business class to first class accommodation.311
“British Airways v. Court of Appeals, G.R. No. 92288, February 9,1993,

“Ramos v. China Southern Airlines Co. Ltd., G.R. No. 213418, September
21,2016.
™Ibid.
“Fuentebella v. Court of Appeals, supra.
“Spouses Vasquez v. Cathay Pacific Airways, supra.
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4. When does the obligation to exercise extraordinary diligence

commence?
Unlikeacontractofcarriageofpassengers in land transportation
where the obligation to exercise due diligence commences upon
perfection of the contract, a different rule should be applied in air
transportation. Obviously, the passenger cannot sue the air carrier
if he/she sustains injuries on his/her way to the airport just because
the contract for air carriage has been perfected by the issuance of
the plane ticket. The responsibility should commence when the
baggage is placed in the possession of the air carrier and when the
passenger is within the premises of the air carrier after checking-in
for the flight.
5. What governs the relationship between the passengers/

consignors and the air carrier?
The laws governing air transportation and the terms of the
contract of carriage.
6. Morris and Whittier were booked in as first-class passengers

in Scandinavian Airlines System (SAS) Manila-Tokyo flight.
They then proceeded to the SAS check-in counter and
presented their tickets, passports, immigration cards and
travel documents. Morris and Whittier were informed that
there were no more seats on the plane for which reason they
could not be accommodated on the flight. SAS claimed that
petitioners were denied boarding because of their late arrival
for check-in at the international airport, since they checked-in
at 3:10 in the afternoon and the flight was scheduled at 3:50 in
the afternoon.
Can SAS be faulted for not entertaining the passenger

tickets of Morris and Whittier who arrived after the closure of
the manifest?
No. For having arrived at the airport after the closure of the
flight manifest, respondent’s employee could not be faulted for not
entertaining petitioners’ tickets and travel documents for processing,
as the checking in of passengers for SAS Flight was finished. There
was no fraud or bad faith as would justify the court’s award of moral
damages.346
“Morris v. Court of Appeals, G.R. No. 127957, February 21, 2001.
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r
7. Edmundo Ongsiako, with one piece of checked-in luggage,

was a paying passenger on the Pan American (PAN AM) that
left Manila for Honolulu, Hawaii. Upon arriving at Honolulu,
Ongsiako discovered that his luggage was not carried on board,
and it was left at PAN AM's airport office in Manila where it was
found a week later. A PAN AM employee in Honolulu, instead
of helping him search for his bag, arrogantly threatened to
‘bump him off' in Honolulu should he persist in looking for his
bag. An action for damages was brought against PAN AM. in
its defense, PAN AM alleged that Ongsiako checked in at the
last minute and that there was insufficient time to load his bag
in the plane. Can PAN AM be held liable for damages under the
circumstances?
Yes. It is not a valid excuse to claim that the passenger checked
in at the last minute and that there was insufficient time to load
his bag in the plane. Accepting last minute passengers and their
baggage with no definite assurance that the carrier can comply with
its obligation due to lack of time amounts to negligence so gross and
reckless as to amount to malice or bad faith.346
8. When is the Warsaw Convention applicable?

The Warsaw Convention applies to all international carriage of
persons, luggage or goods performed by aircraft for hire. It applies
equally to gratuitous carriage by aircraft performed by an air
transport undertaking.
The expression “international carriage” means any carriage in
which, according to the contract made by the parties, the place of
departure and the place of destination, whether or not there be a break
in the carriage or a transshipment, are situated either within the
territories of two High Contracting Parties, or within the territory of
a single High Contracting Party, if there is an agreed stopping place
within a territory subject to the sovereignty, suzerainty, mandate or
authority of another Power, even though that Power is not a party to
this Convention. A carriage without such an agreed stopping place
between territories subject to the sovereignty, suzerainty, mandate
or authority of the same High Contracting Party is not deemed to be
international for the purposes of the Convention.147
3'*6Pan American World Airways, Inc. v. Intermediate Appellate Court, and

Edmundo P. Ongsiako, G.R. No. L-68988, June 21, 1990.
347Article 1, Warsaw Convention.
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1

Thus, when the place of departure and the place of destination

in a contract of carriage are situated within the territories of two
High Contracting Parties, said carriage is deemed an “international
carriage.” The High Contracting Parties referred to are the
signatories to the Warsaw Convention and those which subsequently
adhered to it.
The Montreal Convention retained this provision.
As to what is the final place of destination is determined by
the contract of carriage. In one case, the passenger bought a ticket
in San Francisco, United States of America (USA) from Northwest
Airlines. His flight itinerary is San Francisco-Tokyo-Manila-San
Francisco. Despite reconfirmation, he was informed that he had no
reservation for his fight from Tokyo to Manila and therefore had
to be waitlisted. He sued in RTC Manila. It was ruled that the
Philippine court has no jurisdiction because the place of departure
and place of destination are both in San Francisco, USA. It is the
passenger’s “ultimate destination,” not an “agreed stopping place”
that determines the country where suit against international carrier
is to be filed.346
9. What are the liabilities of the air carrier under the Warsaw
Convention?
Under the Warsaw Convention, the air carrier is liable in any
of the following cases:
a. Death or injury to the passenger while on board,
embarking and disembarking.
b. Loss, destruction and damage to baggage during the
carriage.
This means simple loss of luggage without any
improper conduct on the part of carrier’s officials and
employees.’49
The period of responsibilities includes the period
during which the baggage is in the charge, of the carrier
whether in an airport or any place whatsoever.
c. Delay in the flight.
“■‘“Santos v. Northwest, 210 SCRA 256.

“•“Pan America v. IAC.
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Getting bumped off, however, is not delay.350

It was held that Section 2, Article 30 of the Warsaw Convention
does not contemplate the instance of “bumping-off’ but merely of
simple delay. In its ordinary sense, “delay” means to prolong the
time of or before; to stop, detain or hinder for a time, or cause
someone or something to be behind in schedule or usual rate of
movement in progress. “Bumping-off,” which is the refusal to
transport passengers with confirmed reservation to their planned
and contracted destinations, totally forecloses said passengers’ right
to be transported, whereas delay merely postpones for a time being
the enforcement of such right. Consequently, Section 2, Article 30 of
the Warsaw Convention cannot provide a handy excuse for the air
carrier as to exculpate it from any liability to its passenger.351
10. What are the legal effects of the Warsaw Convention on the
liabilities of air carrier engaged in international transportation?
They are as follows:
a. The action against the carrier will prescribe if it is not
brought within two (2) years from date of arrival of the
air carrier at the destination, or it should have arrived or
from the date on which the transportation stopped.352
The Montreal Convention retained this provision.
The Montreal Convention, however, added time
limits in case of filing claims against the carrier. In case
of damage to baggage, the complainant must file his or
her written complaint within seven (7) days from the date
of receipt of the checked-in baggage. In case of delay of
delivery, on the other hand, the complaint must be made
at the latest within 21 days from the date of receipt of the
baggage.353 These time limitations are important since no
action can lie against the carrier if the complaints were
made beyond the period stated, save in the cases where
the carrier employed fraud.
“Lufthansa German Airlines v. Court of Appeals, G.R. No. 83612, November

24,1994.
“'.Ibid.
362Article 29, Warsaw Convention.
Ârticle 31, Montreal Convention.
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1
I

b. There is a limitation on the liability on the air carrier

in case of loss or damage to goods or death or injury to
passengers.
With respect to goods, the limit is US$ 20 or 9.07
pound per kilo unless the shipper declares higher
valuation.351 For unchecked baggage, it is US$400.
For death or injury to passengers, the liability does
not exceed US$25,000.
Under the Montreal Convention, the liability of the air

carrier has been modified, as follows:
a. Death or injury to passengers

The Montreal Convention established a two-tier liability for
death or bodily injury to a passenger. The first tier is on the basis
of a strict liability where an airline carrier shall be made liable for
damage sustained in case of death or bodily injury of a passenger on
the condition that the accident which caused the death or injury took
place on board the aircraft or in the course of any of the operations
of embarking or disembarking.355 Under this first tier of liability, the
carrier cannot limit or exclude its liability provided the damages
sustained does not exceed 113,100 Special Drawing Rights (“SDRs”).
An SDR is a type of foreign exchange reserve asset created by the
International Monetary Fund. Its value is based on an artificial
basket of currencies consisting of the US dollar, the euro, the pound
and the Japanese yen. The liability limits are reviewed every five
(5) years.
In this regard, the carrier may be held liable even if it is not
negligent or at fault.350 The carrier is thus presumptively liable
up to the amount of 113,100 SDRs. The carrier’s liability may be
reduced or exonerated only in case where damage was caused by
contributory or sole negligence of the passenger or person claiming
compensation.357
351Article 22(1), Warsaw Convention.

“Article 17, Montreal Convention.
“Article 21, ibid.
“Article 20, ibid.
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Under the second tier of liability, or for all damages higher

than 113,100 SDRs (or approximately up to US$170,000 based on
current IMF valuation), the carrier shall be liable unless it can show
that the damage was not due to its negligence or wrongful act or
omission, or that the damage was solely due to the negligence or
wrongful act or omission of a third party.358 Otherwise stated, for
those claims above 113,100 SDRs, the carrier shall not be Hable
under this tier only if it shall prove that it was not negligent or at
fault. To emphasize, the burden of proof is on the carrier.
This two-tier liability is a departure from the liability regime
under the Warsaw Convention (and its subsequent amendments)
where the carrier’s liability was limited to $25,000.00 (or its
equivalent) regardless of whether the airline was at fault or not.
Also, the full defense that the carrier or its agents has taken all
reasonable measures to avoid damage is not already availing under
the Montreal Convention.
b. Destruction, loss damage or delay in carrying
baggage.
In the case of destruction, or loss of, or of damage to, checked
baggage, the carrier shall be liable for damages as long as the
destruction, loss or damage took place on board the aircraft or
during any period within which the checked baggage was under the
carrier’s custody. The carrier may be held not Hable if and to the
extent that the damage resulted from the inherent defect, quahty
or vice of the baggage. In case of unchecked baggage, including
personal items, the carrier shall be Hable if the damage resulted
from its faults or that of its agents.359
In those cases where the carrier is held Hable, the carrier’s
liability shall be up to 1,131 SDRs for each passenger, or
approximately US$70 per kg luggage (per current valuation). This
is an apparent increase from the previous hmit under the Warsaw
Convention of only up to US$20 per kg luggage. The passenger may
only claim above the limit of 1,131 SDR if he has made a special
declaration of interest at the time of check-in and has paid a
supplementary sum if the case so requires. In such case, the carrier
will be liable to pay a sum not exceeding the declared sum.
’“Article 21, ibid.

359Article 17, ibid.
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11. May the passenger recover an amount greater than the amount
set forth in the Convention?
The passenger may recover a greater amount in the following
cases:
a. If at the time the packages were handed over to the
carrier, the passenger made a special declaration of the
value at delivery and has paid a supplementary sum;3®
and
b. When the air carrier failed to raise timely objections
during the trial when questions and answers regarding
the actual claims and damages sustained by the passenger
were asked.361
12. Where should the action be filed?

Under Article 28(1) of the Warsaw Convention, the plaintiff may
bring the action for damages before: 1.) the court where the carrier
is domiciled; 2.) the court where the carrier has its principal place
of business; 3.) the court where the carrier has an establishment by
which the contract has been made; or 4.) the court of the place of
destination.362
The Montreal Convention retained the jurisdictional rules
under the Warsaw Convention but as a supplement, the MC99
also allows, in respect of damage resulting from death or injury of
a passenger, the filing of action in the territory of a State Party in
which at the time of the accident the passenger has his principal and
permanent residence and to and from which the carrier operates
services for the carriage of passengers by air.363
13. If a claim is covered by the Warsaw Convention, may the

passenger bring the legal action under local laws?
Article 24 of the Warsaw Convention excludes other remedies
by further providing that “(1) in the cases covered by Articles 18 and
19 (of the Convention), any action for damages, however founded,
can only be brought subject to the conditions and limits set out
““Article 22(1), Warsaw Convention.

“‘British Airways v. Court of Appeals, G.R. No. 121824, January 29, 1998.
“2Edna Diego Lhuillier v. British Airways, G.R. No. 171092, March 15, 2010.
363Article 33, Montreal Convention.
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in this convention.” Therefore, a claim covered by the Warsaw

Convention can no longer be recovered under local law if the statute
of limitations of two (2) years has already lapsed.
The same principle applies under the Montreal Convention.
14. Cite jurisprudence where the Supreme Court ruled that the
Warsaw Convention does not apply.
Jurisprudence recognizes that the Warsaw Convention does
not “exclusively regulate” the relationship between passenger and
carrier on an international flight. For instance, the Supreme Court
distinguished between the (1) damage to the passenger’s baggage and
(2) humiliation he suffered at the hands of the airline’s employees.
The first cause of action was covered by the Warsaw Convention
which prescribes in two (2) years, while the second was covered by
the provisions of the Civil Code on torts, which prescribes in four
(4) years. Had the case merely consisted of claims incidental to the
airlines’ delay in transporting their passengers, the passenger’s
complaint would have been time-barred under Article 29 of the
Warsaw Convention.364
The following cases are illustrative.

a. Consuelo and Rufino were planning a world tour which
would require them to fly on different airlines. The KLM
Royal Dutch Airlines (KLM) secured seat reservations
for Consuelo and Rufino, and their two companions from
the carriers which would ferry them throughout their
trip, with the exception of Aer Lingus. When Consuelo
and Rufino left the Philippines, they were issued KLM
tickets for their entire trip. However, their coupon for the
Aer Lingus portion was marked “RQ” which meant “on
request.” After sightseeing in American and European
cities, Consuelo and Rufino arrived in Germany. They
went to a KLM office there and obtained a confirmation
from Aer Lingus of seat reservations on a flight. Consuelo
and Rufino then went to the Barcelona airport to take
their plane. At the airport, the manager of Aer Lingus
directed the Consuelo and Rufino to check in. They did
^'Philippine Airlines, Inc. v. Hon. Adriano Savillo, et al., G.R. No. 149547,
July 4,2008.
J9JC9B0M
so as instructed and were accepted for passage. However,

although their daughter and niece were allowed to take
the plane, Consuelo and Rufino were off-loaded on orders
of the Aer Lingus manager who brusquely shoved them
aside with the aid of a policeman and who shouted at
them, “Conos! Ignorantes Filipinos!"
The Consuelo and Rufino, referring to KLM as the
principal of Aer Lingus, filed a complaint for damages
with the RTC of Manila arising from breach of contract
of carriage and for the humiliating treatment received
by them at the hands of the Aer Lingus manager in
Barcelona.
KLM contended that as provided in the Article 30 of
Warsaw Convention, the passenger or his representative
can take action only against the carrier who performed
the transportation during which the accident or the
delay occurred. It claimed that all that the KLM did after
Consuelo and Rufino completed their arrangements with
the travel agency was to request for seat reservations
among the airlines called for by the itinerary submitted
to the KLM and to issue tickets for the entire flight as a
ticket-issuing agent.
The Supreme Court ruled that Article 30 of the
Warsaw Convention has no application in this case which
involves, not an accident or delay, but a willful misconduct
on the part of the KLM’s agent, the Aer Lingus. Article
25 of the same Convention provides that the carrier shall
not be entitled to avail himself of the provisions of this
convention which exclude or limit his liability, if the
damage is caused by his willful misconduct or by such
default on his part as, in accordance with the law of the
court to which the case is submitted, is considered to be
equivalent to willful misconduct. That article presupposes
the occurrence of either an accident or a delay, neither of
which took place at the Barcelona airport; what is here
manifest, instead, is that the Aer Lingus, through its
manager, refused to transport the respondents to their
planned and contracted destination.
Similarly, the carrier shall not be entitled to avail
himself of the said provisions, if the damage is caused
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under the same circumstances by any agent of the carrier

acting within the scope of his employment.355
b. Dr. Felipa Pablo, a UP Professor, booked a flight
with ALITALIA to attend a United Nations research
engagement in Ispra, Italy. Upon arrival in Milan, her
luggage which contains her scientific papers and slides
were missing. She returned to Manila without attending
the meeting. It turned out that her suitcases were
located but only after her scheduled appearance in the
UN meeting. The suitcases were returned only after 11
months.
It was ruled that ALITALIA cannot apply the
Warsaw Convention to Emit its liability. The Supreme
Court said that the Warsaw Convention has invariably
been held inapplicable, or as not restrictive of the carrier’s
liability, where there was satisfactory evidence of malice
or bad faith attributable to its officers and employees.
In the case at bar, no bad faith or otherwise improper
conduct may be ascribed to the employees of the airline;
and Dr. Pablo’s luggage was eventually returned to her,
belatedly, it is true, but without appreciable damage.
However, some special species of injury was caused
to Dr. Pablo because ALITALIA misplaced her baggage
and failed to deliver it to her at the time appointed — a
breach of its contract of carriage, to be sure — with the
result that she was unable to read the paper and make
the scientific presentation that she had painstakingly
labored over, at the prestigious international conference,
to attend which she had traveled hundreds of miles, to her
chagrin and embarrassment and the disappointment and
annoyance of the organizers. She felt, not unreasonably,
that the invitation for her to participate at the conference,
extended by the United Nations, was a singular honor not
only to herself, but to the University of the Philippines
and the country as well, an opportunity to make some
sort of impression among her colleagues in that field of
scientific activity. The opportunity to claim this honor
^Koninklijke Luchtvaart Maatschappij N.V. Court of Appeals, G.R. No.

L-31150, July 22, 1975.
J9JC9B0M
or distinction was irretrievably lost to her because of

ALITALIA’S breach of its contract.
Certainly, the compensation for the injury suffered
by Dr. Pablo cannot under the circumstances be restricted
to that prescribed by the Warsaw Convention for delay in
the transport of baggage.3“
C. Sometime in January 1990, Mejia took PAT, from San
Francisco, U.S.A, to Manila, Philippines. Her baggage
included a slightly used microwave oven with the brand
name Sharp. When shipped, it was in good condition with
its front glass intact. The stipulated limit is US$20 per
kilogram of cargo in the event of loss or damage. She did not
declare its value upon the advice of defendant’s personnel
at San Francisco. On her arrival, it was discovered that
the front glass of the microwave oven was already broken
and cannot be repaired because of the danger of radiation.
She demanded P30,000.00 for the damages although a
brand new one costs P40,000.00, but PAL refused to pay.
PAL was made liable. The Supreme Court ruled,
while the Warsaw Convention has the force and effect
of law in the Philippines, being a treaty commitment
by the government and as a signatory thereto, the same
does not operate as an exclusive enumeration of the
instances when a carrier shall be liable for breach of
contract or as an absolute limit of the extent of liability,
nor does it preclude the operation of the Civil Code or
other pertinent laws. The passenger could and would
have complied with the conditions stated in the air
waybill, i.e., declaration of a higher value and payment
of supplemental transportation charges, entitling her to
recovery of damages beyond the stipulated limit of US$20
per kilogram of cargo in the event of loss or damage, had
she not been effectively prevented from doing so upon
the advice of PALs personnel for reasons best known
to themselves. The passenger can hardly be faulted for
relying on the representations of PAL’s own personnel.367
366Alitalia v. Intermediate Appellate Court, G.R. No. 71929, December 4,1990.

“’Philippine Airlines, Inc. v. Court of Appeals, G.R. No. 119706, March 14,
1996.
J9JC9B0M
d. On October 3, 1993, Simplicio and his companions took

the PAL flight to Singapore. Upon their arrival, they
proceeded to the Singapore Airlines office to check-in
for their flight to Jakarta. Singapore Airlines rejected
them because they were not endorsed by PAL. It was
explained to them that if Singapore Airlines honored the
tickets without PAL’s endorsement, PAL would not pay
Singapore Airlines for their passage.
Stranded at the airport in Singapore and left with
no recourse, Simplicio was in panic and at a loss where
to go; and was subjected to humiliation, embarrassment,
mental anguish, serious anxiety, fear and distress.
Eventually, they were forced to purchase tickets from
Garuda Airlines and board its last flight bound for Jakarta.
After the series of nerve-wracking experiences, private
respondent became ill and was unable to participate in
the tournament that they were supposed to attend.
He sent a demand letter to PAL for damages on
December 20, 1993 and another to Singapore Airlines on
March 21, 1994. Complaint was however filed on August
15, 1997. PAL now moved to dismiss the case since the
Complaint was filed more than three (3) years after PAL
received the demand letter; hence, it was already barred
by prescription.
It was ruled that the action is not barred by
prescription under the Warsaw Convention. The emotional
harm suffered by the passenger as a result of having been
unreasonably and unjustly prevented from boarding the
plane should be distinguished from the actual damages
which resulted from the same incident. Under the Civil
Code provisions on tort, such emotional harm gives rise to
compensation where gross negligence or malice is proven.
Had the present case merely consisted of claims incidental
to the airlines’ delay in transporting their passengers,
the private respondent’s Complaint would have been
time-barred under Article 29 of the Warsaw Convention.
However, the present case involves a special species of
injury resulting from the failure of PAL and/or Singapore
Airlines to transport private respondent from Singapore
to Jakarta — the profound distress, fear, anxiety and
J9JC9B0M
humiliation that private respondent experienced when,

despite PAL’s earlier assurance that Singapore Airlines
confirmed his passage, he was prevented from boarding
the plane and he faced the daunting possibility that he
would be stranded in Singapore Airport because the PAL
office was already closed.368
Based on the foregoing cases, the Warsaw Convention
does not apply if there is bad faith, misconduct or tortious
act on the part of the air carrier and its employees or
agents; and, some special species of injury were caused to
the passenger arising from the act or omission of the air
carrier.
The principles enunciated in the foregoing cases are still
applicable under the Montreal Convention.
15. Are death and injuries to passengers or loss, destruction and

damage to goods the only causes of liability of air carrier?
No, the air carrier can also be held liable in case of tortious
conduct of employees or other cases of breach of contract.369
’“Philippine Airlines. Inc. Hon. Adriano Savillo, et al., G.R. No. 149547,
July 4, 2008.
™Supra.
J9JC9B0M
IV. BUSINESS ORGANIZATIONS
A. PARTNERSHIP
1. General provisions
a. Definition
1. What is a contract of partnership?
Partnership is a contract where two or more persons bind
themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves.1
2. What are the kinds of partnerships?

As to its object, a partnership is either: (1) universal or (2)
particular. As regards the liability of the partners, a partnership
may be (1) general or (2) limited.2
3. What are the kinds of universal partnerships?

A universal partnership may refer to all the present property
or to all the profits.3
4. What is a universal partnership of all present property?

A partnership of all present property is that in which the
partners contribute all the property which actually belongs to them
to a common fund, with the intention of dividing the same among
themselves, as well as all the profits they may acquire therewith.4
'Article 1767, Civil Code.

’Article 1776, Civil Code.
335
J9JC9B0M
In a universal partnership of all present property, the property

which belonged to each of the partners at the time of the constitution
of the partnership, becomes the common property of all the partners,
as well as all the profits which they may acquire therewith.
A stipulation for the common enjoyment of any other profits
may also be made; but the property which the partners may acquire
subsequently by inheritance, legacy, or donation cannot be included
in such stipulation, except the fruits thereof.5
5. What is a universal partnership of profits?

A universal partnership of profits comprises all that the
partners may acquire by their industry or work during the existence
of the partnership.
Movable or immovable property which each of the partners
may possess at the time of the celebration of the contract shall
continue to pertain exclusively to each, only the usufruct passing to
the partnership.0
6. What kind of universal partnership is entered into when its

nature is not specified?
Articles of universal partnership, entered into without
specification of its nature, only constitute a universal partnership
of profits.7
7. Who are disqualified from entering into a universal partnership?

Persons who are prohibited from giving each other any donation
or advantage cannot enter into universal partnership.8
Under Article 739 of the Civil Code, the following donations
shall be void:
a. Those made between persons who were guilty of adultery
or concubinage at the time of the donation;
b. Those made between persons found guilty of the same
criminal offense, in consideration thereof;

J9JC9B0M
IV. BUSINESS ORGANIZATIONS 337
C. Those made to a public officer or his wife, descendants,

and ascendants, by reason of his office.
8. Can a husband and wife form a limited partnership to engage

in real estate business, with the wife being a limited partner?9
Yes. The Civil Code prohibits a husband and wife from
constituting a universal partnership. Since a limited partnership is
not a universal partnership, a husband and wife may validly form
one.
While the spouses cannot enter into a universal partnership,
they can enter into a limited partnership or be members thereof.10
9. What are the objects of a particular partnership?

A particular partnership has for its object:
a. Determinate things;
b. Their use or fruits; or
c. Specific undertaking; or
d. Exercise of a profession or vocation."
10. Timothy executed a Memorandum of Agreement (MOA) with

Kristopher setting up a business venture covering three (3)
fast food stores known as "Hungry Toppings" that will be
established at Mall Uno, Mall Dos, and Mall Tres.
The pertinent provisions of the MOA provide that:
a. Timothy shall be considered a partner with thirty percent
(30%) share in all of the stores to be set up by Kristopher;
b. The proceeds of the business, after deducting expenses,
shall be used to pay the principal amount of P500,000.00
and the interest therein which is to be computed based
on the bank rate, representing the bank loan secured by
Timothy;
’BAR 1994.
10CIR v. Suter, el al., G.R. No. L-25532, February 28, 1969.
J9JC9B0M
The net profits, if any, after deducting the expenses and

payments of the principal and interest shall be divided as
follows: seventy percent (70%) for Kristopher and thirty
percent (30%) for Timothy;
d. Kristopher shall have a free hand in running the business
without any interference from Timothy, his agents,
representatives, or assigns, and should such interference
happen, Kristopher has the right to buy back the share of
Timothy less the amounts already paid on the principal
and to dissolve the MOA; and
e. Kristopher shall submit his monthly sales reports in
connection with the business to Timothy.
What is the contractual relationship between Timothy
and Kristopher?12
The contractual relationship between Timothy and Kristopher
is a contract of partnership as defined under Article 1767 of the
Civil Code, since they have bound themselves to contribute money,
property, or industry to a common fund, with the intention of dividing
the profits of the partnership between them. With a seed money of
P500.000.00 obtained by Timothy through a bank loan, they agreed
to divide the profits, 70% for Kristopher and 30% for Timothy.
However, to be more specific, theirs is a limited partnership as
defined under Article 1843 of the Civil Code because Timothy does
not take part in the control of the business pursuant to Article 1848
of the Civil Code. Nevertheless, Timothy is entitled to monthly sales
reports in connection with the business, a right enshrined in Article
1851 of the Civil Code.
11. Can two (2) corporations organize a general partnership?13

No, a corporation is managed by its board of directors. If the
corporation were to become a partner, co-partners would have the
power to make the corporation party to transactions in an irregular
manner since the partners are not agents subject to the control of the
board of directors. But a corporation may enter into a joint venture
with another corporation as long as the nature of the venture is in
line with the business authorized by its charter.
12BAR 2014.
nBARl&94.
J9JC9B0M
12. Can a corporation and an individual form a general

partnership?14
No. A corporation may not be a general partner because the
principle of mutual agency in general partnerships, allowing the
other general partner/s to bind the corporation, will violate the
corporation law principle that only the board of directors may bind
the corporation.
b. Elements
13. Spouses A and B entered into an agreement with the Spouses
C and D to provide mutual assistance to each other by way of
financial support to any commercial and agricultural activity
on a joint business arrangement. This business relationship
proved to be successful as they were able to establish a
manufacturing and trading business, acquire real properties,
and construct buildings, among other things.
Related to this. Spouses C and D executed a document
wherein they acknowledged that while registered only in C's
name, they were not the only owners of the capital of three (3)
businesses. In this same "Acknowledgement of Participating
Capital," they stated the participating capital of their co
owners. Is there a partnership?
Yes. Under Article 1767 of the Civil Code, there are two (2)
essential elements in a contract of partnership: (a) an agreement to
contribute money, property, or industry to a common fund; and (b)
intent to divide the profits among the contracting parties. The first
element is undoubtedly present in the case at bar, for, admittedly,
all the parties in this case have agreed to, and did, contribute money
and property to a common fund. Hence, the issue narrows down to
their intent in acting as they did. It is not denied that all the parties
in this case have agreed to contribute capital to a common fund to
be able to later on share its profits. They have admitted this fact,
agreed to its veracity, and even submitted one common documentary’
evidence to prove such partnership — the Acknowledgement of
Participating Capital.16
"BAR 1994.
l6Jnrnntilla, Jr. v. Jnrnntilln, G.R. No. 154489, December 1, 2010, 051 SCRA
13-38.
J9JC9B0M
c. Characteristics
14. Does a partnership have separate juridical personality?
Yes, the partnership has a juridical personality separate and
distinct from that of each of the partners.16
15. Toby, Shiela, Dustin, and Max are partners in TSDM Partnership,
They executed an "Acknowledgment of Participating Capital"
enumerating the three (3) parcels of land in Cotabato, Davao,
and Bukidnon being used in the partnership business. The
Acknowledgment of Participating Capital states that Toby is
not the sole owner of the three (3) parcels of land despite being
the only registered owner thereof. Shiela filed a complaint for
accounting of the assets and income of the co-ownership, and
for its partition and the delivery of her proportionate share. In
her complaint, she prayed for the distribution of the partnership
assets including a certain land in Zamboanga registered
under the name of Toby. Shiela claimed co-ownership of the
land in Zamboanga since, according to her, the only way Toby
could have purchased these properties were through the
partnership as they had no other source of income. Rule on
Shiela's contention.
Shiela’s contention has no merit. In Villareal u. Ramirez, tlw
Court held that since a partnership is a separate juridical entity,
the shares to be paid out to the partners is necessarily limited
only to its total resources, to wit: “Since it is the partnership, as
a separate and distinct entity, that must refund the shares of the
partners, the amount to be refunded is necessarily limited to its
total resources. In other words, it can only pay out what it has in its
coffers, which consists of all its assets. However, before the partners
can be paid their shares, the creditors of the partnership must first
be compensated. After all the creditors have been paid, whatever is
left of the partnership assets becomes available for the payment of
the partners’ shares.”
There is no evidence that the subject real properties were
assets of the partnership referred to in the Acknowledgement of
Participating Capital.17
’"Article 1768, Civil Code.

’’Jarantilla, Jr. v. Jarantilla, G.R. No. 154486, December 1, 2010, 651 SCRA
13-36
J9JC9B0M
16. Giles Partnership was a defendant in a civil suit for the

collection of a sum of money. Devin Giles, one of the partners of
Giles Partnership, requests to be impleaded as a co-defendant
alongside Giles Partnership. Does Devin Giles have a right,
as a partner, to be named a co-defendant in a suit against the
partnership?
No, in an action against a partnership which is a juridical
person, one partner is not entitled to be made a party as an individual
separate from the firm. As a partner of Giles Partnership, Devin
Giles is represented by the firm and has no right to appear as an
individual separate from the firm.18
17. When is a partnership governed by the provisions relating to

co-ownership?
Associations and societies, whose articles are kept secret
among the members, and wherein any one of the members may
contract in his own name with third persons, shall have no juridical
personality, and shall be governed by the provisions relating to co-
ownership.19
18. What is the purpose of a partnership?

A partnership must have a lawful object or purpose, and must
be established for the common benefit or interest of the partners.20
19. What happens to an unlawful partnership?

When an unlawful partnership is dissolved by a judicial decree,
the profits shall be confiscated in favor of the State, without prejudice
to the provisions of the Penal Code governing the confiscation of the
instruments and effects of a crime.21
20. Z partnership was declared an unlawful partnership and

dissolved by judicial decree.The partners of Z partnership claim
that their capital contributions do not fall within the profits to
be confiscated in favor of the State. Does the confiscation of
profits include the amounts contributed by the partners of the
unlawful partnership?
‘“Hongkong Bank v. Jurado & Co.. G.R. No. 414, November 9,1903.
■’Article 1775, Civil Code.
“‘Article 1770, Civil Code.
J9JC9B0M
No. Our Civil Code does not state whether, upon the dissolution
of the unlawful partnership, the amounts contributed are to be
returned to the partners, because it only deals with the disposition
of the profits; but the fact that said contributions are not included in
the disposal prescribed for said profits, shows that in consequence of
said exclusion, the general rules of law must be followed, and hence,
the partners must be reimbursed the amount of their respective
contributions. Any other solution would be immoral, and the law will
not consent to the latter remaining in the possession of the manager
or administrator who has refused to return them, by denying to the
partners the action to demand them.22
21. TRUE or FALSE. An oral partnership is valid.23

TRUE. Partnership is a consensual contract; hence, it is valid
even though not in writing.
22. Matthew is the proprietor of M&J Tools Shop. James, a former

friend of Matthew, began spreading the rumor that he was
the business partner of Matthew; that the "J" in M&J Tools
Shop referred to his name; and that they had entered into a
verbal partnership agreement. James proceeded to exercise
his legal right for an accounting of the partnership properties
and improvements, relying on testimonies of the reputation
and rumor that M&J Tools Shop is a partnership between
Matthew and James. Are these testimonies enough to prove
the existence of the oral partnership?
No, the declarations of one partner, not made in the presence
of his co-partner, are not competent to prove the existence of a
partnership between them as against such other partner. The
existence of a partnership cannot be established by general
reputation, rumor, or hearsay.24 Here, James did not present enough
evidence to establish the existence of the partnership, as he relied
solely on general reputation, rumors, and hearsay.
22Arbes v. Polistico, G.R. No. 31057, September 7, 1929 (citing Manresa).

“BAR 2009.
“Kiel v. Estate of Sabert, G.R. No. 21639, September 25, 1924.
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23. Is a public instrument required to constitute a partnership?

No. A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary.26
In addition, every contract of partnership having a capital of
P3,000.00 or more, in money or property, shall appear in a public
instrument, which must be recorded in the Office of the Securities
and Exchange Commission.26
24. What are the requirements whenever immovable property is

contributed?
There must be an inventory of said property, signed by the
parties and attached to the public instrument.27
Any immovable property or an interest therein may be acquired
in the partnership name. Title so acquired can be conveyed only in
the partnership name.28
25. When is an appraisal required?

When the capital or a part thereof which a partner is bound
to contribute consists of goods, their appraisal must be made in
the manner prescribed in the contract of partnership, and in the
absence of stipulation, it shall be made by experts chosen by the
partners, and according to current prices, the subsequent changes
thereof being for the account of the partnership.29
d. Rules to determine existence

26. What are applicable rules to determine the existence of a
partnership?
In determining whether a partnership exists, these rules shall
apply:
a. Except as provided by Article 1825, persons who are not
partners as to each other are not partners as to third
persons;

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b. Co-ownership or co-possession does not of itself establish

a partnership, whether such co-owners or co-possessors
do or do not share any profits made by the use of the
property;
c. The sharing of gross return does not of itself establish
a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property
from which the returns are derived;
d. The receipt by a person of a share of the profits of a
business is prima facie evidence that he is a partner in
the business, but no such interference shall be drawn if
such profits were received in payment:
i. As a debt by installments or otherwise;
ii. As wages of an employee or rent to a landlord;
iii. As an annuity to a widow or representative of a
deceased partner;
iv. As interest on a loan, though the amount of payment
varies with the profits of the business;
v. As the consideration for the sale of a goodwill of
a business or other property by installments or
otherwise.30 r
27. In a Memorandum of Understanding, the individuals claiming

to be "partners" of ZAM Law Office provided that partners
Zaira, Aubrey, and Mica shall not in any way be liable for any
loss or liability that may be incurred by the law firm in the course
of its operation, and that all remaining assets upon dissolution
shall accrue exclusively to Kenneth and all liabilities shall be
solely for his account. Zaira, Aubrey, and Mica's contributions
were services.
The opening paragraph of the Articles of Co-Partnershipof
ZAM Law provides: “WE, the undersigned Zaira, Aubrey, Mica,
and Kenneth, all of legal age, Filipino citizens and members
of the Philippine Bar, have this day voluntarily associated
ourselves for the purpose of forming a partnership engaged
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in the practice of law, effective this date, under the terms and
conditions hereafter set forth, and subject to the provisions of
existing laws."
Based on the Memorandum of Understanding and the
Articles of Co-Partnership, is ZAM Law a sole proprietorship
ora partnership?
ZAM Law is a partnership. ZAM Law Office was constituted as a
partnership at the time its partners signed the Articles of Partnership
wherein they bound themselves to establish a partnership for the
practice of law, contribute capital and industry for the purpose, and
receive compensation and benefits in the course of its operation.
The opening paragraph of the Articles of Partnership reveals the
unequivocal intention of its signatories to form a partnership.
The Memorandum of Understanding evinces the parties’
intention to entirely shift any liability that may be incurred by ZAM
Law Office in the course of its operation to Kenneth, who shall also
receive all the remaining assets of the firm upon its dissolution.
This memorandum, however, does not serve to convert ZAM Law
Office into a sole proprietorship. As discussed, ZAM Law Office was
manifestly established as a partnership based on the Articles of
Partnership. The MOU, from its tenor, reinforces this fact. It did not
change the nature of the organization of ZAM Law Office but only
excused the industrial partners from liability.31
28, In 2012, Lisa and Tommy bought two (2) parcels of land located
in Laguna. A year later, they bought another three (3) parcels
of land in Laguna. The first two (2) parcels of land were sold
by Lisa and Tommy to B Corporation in 2015, while the three
(3) parcels of land were sold to Spouses Tecson in 2017. Lisa
and Tommy realized a net profit in the sale made in 2015 in the
amount of Php940,000.00 while they realized a net profit of
Php460,000.00 in the sale made in 2017. The BIR assessed that
corporate income taxes were due, as it alleged that Lisa and
Tommy formed an unregistered partnership. Does the sharing
of returns, in itself, establish a partnership?
31Saludo, Jr. v. Philippine National Bank, G.R. No. 193138, August 20, 2018.
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No, the sharing of returns does not in itself establish a

partnership whether or not the persons sharing therein have a joint
or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical personality
different from the individual partners, and the freedom of each party
to transfer or assign the whole property.32
In the present case, there is clear evidence of co-ownership
between Lisa and Tommy. There is no adequate basis to support
the proposition that they formed an unregistered partnership. The
two (2) isolated transactions whereby they purchased properties
and sold the same a few years thereafter did not thereby make
them partners. They shared in the gross profits as co-owners.
Under the circumstances, they cannot be considered to have formed
an unregistered partnership which is thereby liable for corporate
income tax.
29. Clarence Santos Sr. was the father of five (5) children, including
Clarence Santos, Jr. After Clarence Santos, Sr. passed away, a
project of partition was approved. Instead of distributing the
estate of the deceased, pursuant to the project of partition,
the properties remained under the management of co-heir
Clarence Santos, Jr. who used said properties in business
by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real
properties and securities. This led to said properties and
investments steadily increasing in value yearly.
The heirs never actually received any share of the income
or profits from Clarence Santos, Jr., and instead, they allowed
him to continue using said shares as part of the common fund
for their ventures, even as they paid the corresponding income
taxes on the basis of their respective shares of the profits
of their common business as reported by the said Clarence
Santos, Jr. Is the arrangement formed by the heirs considered
an unregistered partnership?
Yes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said
common properties and/or the incomes derived therefrom are used
32Pascual Commissioner of Internal Revenue, G.R. No. 78133, October 18,

1988.
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rv. BUSINESS ORGANIZATIONS 347
as a common fund with intent to produce profits for the heirs in

proportion to their respective shares in the inheritance as determined
in a project partition either duly executed in an extrajudicial
settlement or approved by the court in the corresponding testate or
intestate proceeding.
The reason is simple. From the moment of such partition, the
heirs are entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to manage and
dispose of as exclusively his own without the intervention of the other
heirs, and, accordingly, he becomes liable individually for all taxes
in connection therewith. If after such partition, he allows his share
to be held in common with his co-heirs under a single management
to be used with the intent of making profit thereby in proportion
to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least,
an unregistered partnership is formed.33
30. Santiago, Eliseo, Tomas, and David subscribed and paid

amounts from their separate funds to purchase a sweepstakes
ticket from the Philippine Charity Sweepstakes Office. The
ticket was registered in the name of Santiago and Company.
Upon the drawing of the sweepstakes, the ticket registered
under the name of Santiago and Company won a price of
PI,000,000.00, and the corresponding check was drawn by the
4 PCSO in favor of Santiago and Company.
Santiago appeared on behalf of the other three to collect
the check. The B1R claims that they formed a partnership and
should be assessed income tax. Santiago and Company raise
the defense that they merely formed a community of property,
and are exempt from income tax. Is the defense tenable?
Santiago, Eliseo, Tomas, and David organized a partnership of a
civil nature because each of them put up money to buy a sweepstakes
ticket for the sole purpose of dividing equally the prize which they
may win, as they did in fact in the amount of Pl,000,000.00 (Article
1665, Civil Code).
“Ona v. Commissioner of Internal Revenue, G.R. No. L-19342, May 25,1972.
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34S DIVI NA ON COMMERCIAL LAW:
The partnership was not only formed, but upon the organization
thereof and the winning of the prize, Santiago personally appeared
in the office of the PCSO, in his capacity as co-partner, as such
collected the prize, the office issued the check for Pl,000,000.00 in
favor of Santiago and Company and the said partner, in the same
capacity, collected the said check. All these circumstances repel the
idea that the four organized and formed a community of property
only.34
31. Juancho and Debbie entered into a written agreement to: (1)
organize a partnership for the bottling and distribution of Best
Milk Tea, with Juancho as the industrial partner, and Debbie
as the capitalist, furnishing the capital necessary; (2) that
Juancho was to secure the Best Milk Tea franchise for and in
behalf of the proposed partnership; and (3) that Juancho was
to receive 30% of the net profits of the business. It turned out
that Juancho did not have the Best Milk Tea franchise, and the
two had to go abroad to secure the franchise in Debbie's name.
Upon returning, they established the business, and
Juancho demanded for the execution of the partnership
agreement. Debbie countered that her consent to the written
agreement was secured by the representation of Juancho
that he was the owner, or was about to become owner of an
exclusive bottling franchise, which representation was false
and that Juancho did not secure the franchise, but such was
given to Debbie herself. Does the alleged fraud perpetrated by
Juancho annul the agreement to form a partnership?
No, in order that fraud may vitiate consent, it must be the
causal (dolo causante), not merely the incidental (dolo incidente),
inducement to the making of the contract. By pretending that he
had the exclusive franchise and promising to transfer it to Debbie,
Juancho obtained the consent of Debbie to give him a big slice in
the net profits. This is incidental fraud because it was used to get
the other party’s consent to a big share in the profits, an incidental
matter in the agreement. Thus, the agreement may not be declared
null and void.
3*Gatchalian v. Collector of Internal Revenue, G.R. No. 4B425, April 29,1939.
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Having arrived at the conclusion that the agreement to

organize a partnership may not be declared null and void, may the
agreement be carried out or executed? Under the Spanish Civil
Code, the defendant has an obligation to do, not to give. The law
recognizes the individual’s freedom or liberty to do an act he has
promised to do, or not to do it as he pleases. This is a very personal
act (acto personalisimd) of which courts may not compel compliance,
as it is considered as an act of violence to do so.36
32. Perfecto, the managing partner of Phoebe and Co., employed

Janice, a bookkeeper, whose compensation amounted to 5%
of the gross profits of the partnership. Janice threatened to
dissolve the partnership when she got into a fight with the
partners of Phoebe and Co. Does Janice have the power to
dissolve the partnership?
No. By the terms of the contract the salary of the bookkeeper
was to be 5% of the net profits of the business. This contract did not
make the bookkeeper a partner.36
e. Partnership term
33. When does a partnership commence?
A partnership begins from the moment of the execution of the
contract, unless it is otherwise stipulated.37
i
34. KLM Partnership was constituted in January 2020 for a fixed
period of five (5) years. What is the status of KLM Partnership
if it is continued by the partners after January 2025?
When a partnership for a fixed term or particular undertaking
is continued after the termination of such term or particular
undertaking without any express agreement, the rights and duties
of the partners remain the same as they were at such termination,
so far as is consistent with a partnership at will.
A continuation of the business by the partners or such of them
as habitually acted therein during the term, without any settlement
or liquidation of the partnership affairs, is prima facie evidence of a
continuation of the partnership.38
“Woodhouse v. Halili, G.R. No. L-4811, July 31,1953.

“Fortis v. Hermanos, G.R. No. 2484, April 11,1906.
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35. Dizon, one of the junior partners, withdrew from the

partnership of Batis, Marian, and Lloyd due to poor working
conditions. Dizon filed a petition for dissolution and liquidation
of partnership. A SEC hearing officer rendered a decision
that Dizon's withdrawal did not dissolve the partnership. The
partnership agreement did not have a specific duration, but
merely stated that the partnership shall continue so long as
mutually satisfactory and upon the death or legal incapacity
of one of the partners, shall be continued by the surviving
partners. The hearing officer however opined that the
partnership is one for a specific undertaking and hence not a
partnership at will.
The SEC En Banc reversed the said decision, and held
that the withdrawal of Dizon dissolved the partnership of
Batis, Marian, and Lloyd. The SEC En Banc ruled that, being
a partnership at will, the law firm could be dissolved by any
partner at any time, such as by his withdrawal therefrom,
regardless of good faith or bad faith, since no partner can be
forced to continue in the partnership against his will. Is thisva
partnership at will?
Yes, a partnership that does not fix its term is 'a partnership
at will. The birth and life of a partnership at will is predicated
on the mutual desire and consent of the partners. The right to
choose with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued existence
is, in turn, dependent on the constancy of that mutual resolve, along
with each partner’s capability to give it, and the absence of a cause
for dissolution provided by the law itself. Verily, any one of the
partners may, at his sole pleasure, dictate a dissolution of
the partnership at will. He must, however, act in good faith, not
that the attendance of bad faith can prevent the dissolution of the
partnership but that it can result in a liability for damages.
Neither would the presence of a period for its specific duration
or the statement of a particular purpose for its creation prevent
the dissolution of any partnership by an act or will of a partner.
Among partners, mutual agency arises and the doctrine of delectus
personae allows them to have the power, although not necessarily
the right, to dissolve the partnership. An unjustified dissolution by
the partner can subject him to a possible action for damages.39
“Ortega v. Court of Appeals, G.R. No. 109248, July 3,1995.
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f. Partnership by estoppel
36. Weyland and Porco were partners of a real estate business,
where they bought and sold properties for a profit. Weyland
was the managing partner who dealt with the clients of the
business. When Weyland died, his wife Irene continued dealing
with the clients of the business, with the approval of Porco.
After Porco and Irene's friendship turned sour, Porco denied all
of the transactions that Irene handled. The irate clients claim
that Irene is a general partner by estoppel, thus, her acts bind
the partnership. Are the clients correct?
Yes, the widow of the managing partner was authorized by
the other partner to manage the partnership, Irene is a partner
by estoppel. By authorizing the widow of the managing partner
to manage partnership property (which a limited partner could
not be authorized to do), the other general partner recognized her
as a general partner, and is now in estoppel to deny her position
as a general partner, with authority to administer and alienate
partnership property.
A third person has the right to presume that a general partner
dealing with partnership property has the requisite authority from
his co-partners. A third person may and has a right to presume that
the partner with whom he contracts has, in the ordinary and natural
course of business, the consent of his co-partner.
Where the express and avowed purpose of the partnership is
to buy and sell real estate (as in the present case), the immovables
thus acquired by the firm form part of its stock-in-trade, and the
sale thereof is in pursuance of partnership purposes, hence within
the ordinary powers of the partner.10
g. Partnership as distinguished from joint venture

37. Explain the differences and similarities of a partnership and
joint venture.
A partnership is defined as two (2) or more persons who bind

themselves to contribute money, property, or industry to a common
fund with the intention of dividing the profits among themselves.
wGoquiolay v. Sycip, G.R. No. L-11840, July 26,1960,
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On the other hand, joint ventures have been deemed to be “akin”

to partnerships since it is difficult to distinguish between joint
ventures and partnerships. Thus:
The relations of the parties to a joint venture and the nature of
their association are so similar and closely akin to a partnership that
it is ordinarily held that their rights, duties, and liabilities are to be
tested by rules which are closely analogous to and substantially the
same, if not exactly the same, as those which govern partnership. In
fact, it has been said that the trend in the law has been to blur the
distinctions between a partnership and a joint venture, very little
law being found applicable to one that does not apply to the other.
Though some claim that partnerships and joint ventures are
totally different animals, there are very few rules that differentiate
one from the other; thus, joint ventures are deemed “akin” or similar
to a partnership. In fact, in joint venture agreements, rules and legal
incidents governing partnerships are applied.
As a rule, corporations are prohibited from entering into
partnership agreements; consequently, corporations enter into
joint venture agreements with other corporations or partnerships
for certain transactions in order to form “pseudo partnerships.”
Obviously, as the intricate web of “ventures” entered into by
and among corporations was executed to circumvent the legal
prohibition against corporations entering into partnerships, then
the relationship created should be deemed as “partnerships,” and
the laws on partnership should be applied. Thus, a joint venture
agreement between and among corporations may be seen as similar
to partnerships since the elements of partnership are present.41
38. Are joint ventures governed by the law on partnerships?

Yes. Generally understood to mean an organization formed for
some temporary purpose, a joint venture is likened to a particular
partnership or one which “has for its object determinate things, their
use or fruits, or a specific undertaking, or the exercise of a profession
or vocation.” The rule is settled that joint ventures are governed by
the law on partnerships which are, in turn, based on mutual agency
or delectus personae.*2
"Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines

Corp., G.R. No. 195580, April 21, 2014, 733 SCRA 365-490.
4zJosefina Realubit v. Prosencio and Eden Jaso, G.R. No. 178782, September
21, 2011.
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h. Professional partnership
39. May a partnership be formed for the exercise of a profession?
Yes, two (2) or more persons may form a partnership for the
exercise of a profession.43
i. Management
40. K has been appointed manager in the Articles of Partnership of
KLM Offices. What are the acts that he may execute?
The partner who has been appointed manager in the articles
of partnership may execute all acts of administration despite the
opposition of his partners, unless he should act in bad faith; and his
power is irrevocable without just or lawful cause. The vote of the
partners representing the controlling interest shall be necessary for
such revocation of power.
A power granted after the partnership has been constituted
may be revoked at any time.44
41. May a managing partner act without the consent of the other
partners entrusted with the management of the partnership?
It depends.
If two (2) or more partners have been entrusted with the
management of the partnership without specification of their
respective duties, or without a stipulation that one of them shall not
act without the consent of all the others, each one may separately
execute all acts of administration, but if any of them should oppose
the acts of the others, the decision of the majority shall prevail. In
case of a tie, the matter shall be decided by the partners owning the
controlling interest.45
However, in case it should have been stipulated that none of
the managing partners shall act without the consent of the others,
the concurrence of all shall be necessary for the validity of the acts,
and the absence or disability of any one of them cannot be alleged,
unless there is imminent danger of grave or irreparable injury to the
partnership.46

k
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42. W, X, Y, and Z organized a general partnership with W and X

as industrial partners and Y and Z as capitalist partners. Y
contributed P50,000.00 and Z contributed P20,000.00 to the
common fund. By a unanimous vote of the partners, W and X
were appointed managing partners, without any specification
of their respective powers and duties.
A applied for the position of Secretary and B applied for

the position of Accountant of the partnership.
The hiring of A was decided upon by W and X, but was

opposed by Y and Z.
The hiring of B was decided upon by W and Z, but was

opposed byXandY.
Who of the applicants should be hired by the partnership?

Explain and give your reasons."
A should be hired as Secretary. The decision for the hiring

of A prevails because it is an act of administration which can be
performed by the duly appointed managing partners, W and X.
B cannot be hired, because in case of a tie in the decision of the
Jnanaging partners, the deadlock must be decided by the partners
owning the controlling interest. In this case, the opposition of X and
Y prevails because Y owns the controlling interest.48
43. What are the rules when the manner of management has not
been agreed upon?
When the manner of management has not been agreed upon,

the following rules shall be observed:
a. All the partners shall be considered agents and whatever
any one of them may do alone shall bind the partnership,
without prejudice to the provisions of Article 1801.
b. None of the partners may, without the consent of the
others, make any important alteration in the immovable
property of the partnership, even if it may be useful to
the partnership. But if the refusal of consent by the other
"BAR 1992.
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partners is manifestly prejudicial to the interest of the

partnership, the court’s intervention may be sought.19
44. Where shall partnership books be kept?
The partnership books shall be kept, subject to any agreement

between the partners, at the principal place of business of the
partnership, and every partner shall at any reasonable hour have
access to and may inspect and copy any of-them (Article 1805, Civil
Code).
2. Rights and obligations of the partnership and partners

a. Rights and obligations of the partnership
45. What are the obligations of the partnership to its partners?
The partnership shall be responsible to every partner for the
amounts he may have disbursed on behalf of the partnership and for
the corresponding interest, from the time the expenses are made; it
shall also answer to each partner for the obligations he may have
contracted in good faith in the interest of the partnership business,
and for risks in consequence of its management.60
46. Who bears the risk of specific and determinate things

contributed to the partnership? When is the partnership liable?
The risk of specific and determinate things, which are not

fungible, contributed to the partnership so that only their use and
fruits may be for the common benefit, shall be borne by the partner
who owns them.
If the things contributed are fungible, or cannot be kept without
deteriorating, or if they were contributed to be sold, the risk shall be
borne by the partnership. In the absence of stipulation, the risk of
things brought and appraised in the inventory, shall also be borne
by the partnership, and in such case the claim shall be limited to the
value at which they were appraised.61
‘“Article 1803, Civil Code.

‘‘Article 1795, Civil Code.
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I

47. John and Mark entered into a partnership for the operation of a
coffee shop, with John contributing cash and Mark contributing
coffee equipment. Mark sold the same coffee equipment to
another person without the consent of his partner. John claims
that Mark cannot do so without his approval as the coffee
equipment is now partnership property. Is John correct?
Yes, an equipment which was contributed by one of the
partners to the partnership becomes the property of the partnership
and as such cannot be disposed of by the party contributing the
same without the consent or approval of the partnership or of the
other partner.62
b. Obligations of the partners among themselves

48. How is the contribution among partners divided?
Unless there is a stipulation to the contrary, the partners shall
contribute equal shares to the capital of the partnership.53
49. When does a partner become a debtor of the partnership?

a. Every partner is a debtor of the partnership for whatever
he may have promised to contribute thereto.64
b. A partner who has undertaken to contribute a sum of
money and fails to do so becomes a debtor for the interest
and damages from the time he should have complied with
his obligation. tI
c. The same rule applies to any amount he may have taken
from the partnership coffers, and his liability shall begin
from the time he converted the amount to his own use.65
50. Is a partner liable for any warranty?

Yes. A partner shall be bound for warranty in case of eviction
with regard to specific and determinate things which he may have
contributed to the partnership, in the same cases and in the same
manner as the vendor is bound with respect to the vendee. He shall
also be liable for the fruits thereof from the time they should have
been delivered, without the need of any demand.66
“Lozana v. Depakakibo, G.R. No. L-13680, April 27, 1960.

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51. Using his own funds, Camaran, a partner in a partnership

together with Gorbert, redeemed the land after it is foreclosed
as a result of failure to pay the loan to which the said land is
mortgaged by the partnership. Camaran requested to cancel
the title in the name of the partnership and to issue a new one
in his name. Gorbert claims that Camaran exploited his status
as a partner to exclusively obtain benefits through the transfer
of title to the land. Is Gorbert correct?
Yes. Above all other persons in business relations, partners are
required to exhibit towards each other the highest degree of good
faith. In fact, the relation between partners is essentially fiduciary,
each being considered in law, as he is in fact, the confidential agent
of the other. It is therefore accepted as fundamental in equity
jurisprudence that one partner cannot, to the detriment of another,
apply exclusively to his own benefit the results of the knowledge and
information gained in the character of partner.
Thus, it has been held that if one partner obtains in his own
name and for his own benefit the renewal of a lease on property used
by the firm, to commence at a date subsequent to the expiration of
the firm’s lease, the partner obtaining the renewal is held to be a
constructive trustee for the firm as to such lease. And this rule has
even been applied to a renewal taken in the name of one partner
after the dissolution of the firm and pending its liquidation from the
latter his contribution to the amount of redemption.67
52. When does a partner become liable for damages?

Every partner is responsible to the partnership for damages
suffered by it through his fault, and he cannot compensate them
with the profits and benefits which he may have earned for the
partnership by his industry. However, the courts may equitably
lessen this responsibility if through the partner’s extraordinary
efforts in other activities of the partnership, unusual profits have
been realized.68
67Pang Lim v. Lo Seng, G.R. No. 16318, October 21,1921.

B8Article 1794, Civil Code
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53. Lopez and Carlos entered into a partnership to construct a

highway. Carlos promised that he would give his contribution to
the partnership after his bank loan had been approved. Lopez
continued with the financing and construction of the highway.
Carlos failed to give his timely contribution to the partnership,
leading to the cancellation of the highway construction project.
Can Carlos be made to reimburse Lopez for the money spent
on the failed construction of the highway?
Yes, a partner in a construction venture who failed to stand
by his commitment to the partnership will be ordered to reimburse
to his co-partner whatever the latter invested and spent for the
projects of the venture.69
54. Megan and Tanya entered into a partnership where they would
both invest P500,000.00 each for the purpose of carving
10 wooden figures. Tanya would also receive a P15,000.00
commission per month from April to December. The business
venture did not succeed, as Megan and Tanya both failed to
give their full contributions. Tanya filed a case in order to get
the promised profits of the venture from Megan and the eight
(8) months of commission worth P15,000.00 per month. Is
Tanya entitled to the supposed profits and commission?
No, being a contract of partnership, each partner must share
in the profits and losses of the venture. That is the essence of a
partnership. And even with an assurance made by one of the partners
that they would earn a huge amount of profits, in the absence of
fraud, the other partner cannot claim a right to recover the highly
speculative profits. A partner is entitled to recover share of profits
actually realized by venture.
The partnership agreement stipulated that the Megan
would give Tanya a monthly commission of P15,000.00 from April
to December for a total of eight (8) monthly commissions. The
agreement does not state the basis of the commission. The payment
of the commission could only have been predicated on relatively
extravagant profits. The parties could not have intended the giving
of a commission in spite of loss or failure of the venture. Since
the venture was a failure, Tanya is not entitled to the P15,000.00
commission.™
“Uy V. Puzon, G.R. No. L-19819, October 26,1977.

“Moran, Jr. v. Court of Appeals, G.R. No. 59956, October 31, 1984.
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55. Four (4) people formed a partnership to rehabilitate a flood

control project. The partnership failed as the four partners were
not able to raise the required capital to fund the rehabilitation
project. Two (2) of the four former partners subsequently
procured a contract between themselves to fund the same
flood control project rehabilitation. Are they compelled to
share the profits with their former partners?
No. After the termination of an agency, partnership, or joint
adventure, the party who stood in the fiduciary relation to the other
is free to act in his own interest with respect to the same subject
matter, provided he has done nothing during the continuance of the
relation to lay a foundation for an undue advantage to himself. To
act as fiduciary of another does not necessarily imply the creation of
a permanent disability in the fiduciary to act for himself in regard to
the same subject matter.61
56. May a partner engage in business for himself?

It depends.
An industrial partner cannot engage in business for himself,
unless the partnership expressly permits him to do so; and if he
should do so, the capitalist partners may either exclude him from the
firm or avail themselves of the benefits which he may have obtained
in violation of thisiprovision, with a right to damages in either case.62
The capitalist partners cannot engage for their own account
in any operation which is of the kind of business in which the
partnership is engaged, unless there is a stipulation to the contrary.
Any capitalist partner violating this prohibition shall bring to the
common funds any profits accruing to him from his transactions,
and shall personally bear all the losses.63
“‘Hanlon v. Haussermann, G.R. No. 14617, February 18,1920.

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57. Joe and Rudy formed a partnership to operate a car repair shop
in Quezon City. Joe provided the capital while Rudy contributed
his labor and industry. On one side of their shop, Joe opened
and operated a coffee shop, while on the other side, Rudy put
up a car accessories store. May they engage in such separate
businesses? Why?61
Joe, the capitalist partner, may engage in the restaurant
business because it is not the same kind of business the partnership
is engaged in. On the other hand, Rudy may not engage in any other
business unless their partnership expressly permits him to do so
because as an industrial partner he has to devote his full time to the
business of the partnership.65
58. Max is indebted to KLM Partnership in the amount of

P500,000.00 and to K, one of its partners, in the same amount
of P500,000.00. K, who is authorized to collect the sums due
KLM Partnership, received the amount of P500,000.00 from
Max. How should this payment be applied?
If a partner authorized to manage collects a demandable sum,
which was owed to him in his own name, from a person who owed the
partnership another sum also demandable, the sum thus collected
shall be applied to the two (2) credits in proportion to their amounts,
even though he may have given a receipt for his own credit only; but
should he have given it for the account of the partnership credit, the
amount shall be fully applied to the latter.
The provisions of this article are understood to be without
prejudice to the right granted to the debtor by Article 1252, but only
if the personal credit of the partner should be more onerous to him.66
59. Shiela borrowed the sum of Php300,000.00 from TFY

Partnership. After paying PhpWO,000.00 to Toby, one of the
three (3) partners, Shiela became insolvent. Is Toby obliged to
bring to the partnership capital the Php100,000.00 he received
from Shiela?
Yes. A partner who has received, in whole or in part, his share
of a partnership credit, when the other partners have not collected
6,bar 2001.
J9JC9B0M
r
theirs, shall be obliged, if the debtor should thereafter become

insolvent, to bring to the partnership capital what he received even
though he may have given receipt for his share only.67
60. Is there an obligation to render a true and full information of

things affecting the partnership?
Yes. Partners shall render on demand true and full information
of all things affecting the partnership to any partner or the legal
representative of any deceased partner or of any partner under legal
disability.68
Likewise, every partner must account to the partnership for any
benefit, and hold as trustee for it any profits derived by him without
the consent of the other partners from any transaction connected
with the formation, conduct, or liquidation of the partnership or
from any use by him of its property.88
61. When may a partner assert his right to a formal account as to

partnership affairs?
Any partner shall have the right to a formal account as to
partnership affairs:
a. If he is wrongfully excluded from the partnership business
or possession of its property by his co-partners;
b. If the right exists under the terms of any agreement;
c. As provided by Article 1807;
d. Whenever other circumstances render it just and
reasonable.™
62. How are the losses and profits of a partnership distributed?

The losses and profits shall be distributed in conformity with
the agreement. If only the share of each partner in the profits has
been agreed upon, the share of each in the losses shall be in the
same proportion.

’“Article 1806, Civil Code.
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In the absence of stipulation, the share of each partner in

the profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If
besides his sendees he has contributed capital, he shall also receive
a share in the profits in proportion to his capital.71
63. In 2005, L, M, N, O, and P formed a partnership. L, M, and N were

capitalist partners who contributed P500,000.00 each, while
O, a limited partner, contributed P1,000,000. P joined as an
industrial partner contributing only his services. The Articles
of Partnership, registered with the Securities and Exchange
Commission, designated L and O as managing partners; L was
liable only to the extent of his capital contribution; and P was
not liable for losses.
In 2006, the partnership earned a net profit of
P800,000.00. In the same year, P engaged in a different
business with the consent of all the partners. However, in 2007,
the partnership incurred a net loss of P500,000.00. In 2008, the
partners dissolved the partnership. The proceeds of the sale
of partnership assets were insufficient to settle its obligation.
After liquidation, the partnership had an unpaid liability of
P300,000.00.72
a. Assuming that the just and equitable share of the
industrial partner, P, in the profit in 2006 amounted to
PI,000,000.00, how much is the share of O, a limited
partner, in the P800,000.00 net profit?
a. P160,000.00
b. P175,000.00
c. P280,000.00
d. P200,000.00
e. None of the above
N.B.: Since after deducting the P100,000.00 share of P
there remains P700,000.00, the three (3) partners, L, M,
and N, will each have one (1) share and O will have two
’■Article 1797, Civil Code.

72BAR 2013.
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(2) shares (2:1). Given the three (3) shares plus two (2)
shares, the balance of P700,000.00 will be divided by five
(5) which will yield the result of P140,000.00 multiplied
by two (2) (for O).
b. In 2007, how much is the share of O, a limited partner, in

the net loss of P500,000.00?
a. P 0.00
b. P100,000.00
c. P125,000.00
d. P200.000.00
e. None of the above
N.B.i Article 1797 provides that the share in profits and
losses is proportionate to contribution.
64. Can the partnership creditors hold L, O, and P liable after all
the assets of the partnership are exhausted?
a. Yes, The stipulation exempting P from losses is
valid only among the partners. L is liable because
the agreement limiting his liability to his capital
contribution is not valid insofar as the creditors are
concerned. Having taken part in the management
of the partnership, O is liable as capitalist partner.
b. No. P is not liable because there is a valid stipulation
exempting him from losses. Since the other partners
allowed him to engage in an outside business activity, the
stipulation absolving P from liability is valid. For 0, it is
basic that a limited partner is liable only up to the extent
of his capital contribution.
c. Yes. The stipulations exempting P and L from losses
are not binding upon the creditors. O is likewise liable
because the partnership was not formed in accordance
with the requirements of a limited partnership.
d. No. The Civil Code allows the partners to stipulate that
a partner shall not be liable for losses. The registration of
the Articles of Partnership embodying such stipulations
serves as constructive notice to the partnership creditors.
e. None of the above is completely accurate.
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N.B.: Article 1799 provides that a stipulation which excludes

one or more partners from any share in profits and losses is void.
P, an industrial partner, may be exempt but that is only with
respect to the partners but not the creditors. O, by taking part in
the management even if he is a limited partner becomes liable as a
general partner.73
65. In a Memorandum of Understanding, the individuals claiming to

be "partners" of ZAM Law Office provided that partners Zaira,
Aubrey, and Mica shall not in any way be liable for any loss or
liability that may be incurred by the law firm in the course of its
operation, and that all remaining assets upon dissolution shall
accrue exclusively to Kenneth and all liabilities shall be solely
for his account. Zaira, Aubrey, and Mica's contributions were
services.
Theopening paragraph ofthe Articles of Co-Partnershipof
ZAM Law provides: "WE, the undersigned Zaira, Aubrey, Mica,
and Kenneth, all of legal age, Filipino citizens and members
of the Philippine Bar, have this day voluntarily associated
ourselves for the purpose of forming a partnership engaged
in the practice of law, effective this date, under the terms and
conditions hereafter set forth, and subject to the provisions of
existing laws."
Is the stipulation in the Memorandum of Understanding
exempting Zaira, Aubrey, and Mica from liability valid? How
will the stipulation affect Zaira, Aubrey, and Mica's liability as
to third persons?
Yes. The stipulation is valid, but their obligations as against
third persons will not be affected.
The law, in its wisdom, recognized the possibility that partners
in a partnership may decide to place a limit on their individual
accountability. Consequently, to protect third persons dealing with
the partnership, the law provides a rule, embodied in Article 1816 of
the Civil Code, which states:
,3Article 1848, Civil Code.
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Art. 1816. All partners, including industrial ones,

shall be liable pro rata with all their property and after
all the partnership assets have been exhausted, for the
contracts which may be entered into in the name and for
the account of the partnership, under its signature and by
a person authorized to act for the partnership. However,
any partner may enter into a separate obligation to
perform a partnership contract.
The foregoing provision does not prevent partners from
agreeing to limit their liability, but such agreement may only be
valid as among them. Thus, Article 1817 of the Civil Code provides:
Art. 1817. Any stipulation against the liability laid

down in the preceding article shall be void, except as
among the partners.
The MOU is an agreement forged under the foregoing provision.
Consequently, the sole liability being undertaken by Kenneth serves
to bind only the parties to the MOU, but never third persons.74
66. JZ-KAM Company, a general partnership registered under the

laws of the Philippines, purchased from Dustin a motor vehicle
on installment basis. Having failed to receive the installment
due, Dustin sued JZ-KAM Company for the unpaid balance
and impleaded Jairus, Zaira, Kenneth, Aubrey, and Mica as co
defendants in their capacity as general partners. On motion
of Dustin, the complaint was dismissed insofar as Kenneth is
concerned. Does the dismissal of a complaint to favor Kenneth,
one of the general partners of a partnership, increase the joint
and subsidiary liability of each of the remaining partners for
the obligations of the partnership?
No. Since the liability of the partners is pro rata, the liability
of the remaining general partners shall each be limited to only one-
fifth (1/5) of the obligations of JZ-KAM Company. The fact that the
complaint against defendant Kenneth was dismissed, upon motion
of Dustin, does not unmake Kenneth as a general partner in JZ-
KAM Company. In so moving to dismiss the complaint, Dustin
merely condoned Kenneth’s individual liability to him.75
75Island Sales, Inc. v. United Pioneers General Construction Company, et al.,
G.R. No. L-22493, July 31, 1975.
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67. May the designation of the share of each partner in the profits
and losses be entrusted to a third person? May the designation
be entrusted to one of the partners?
The designation may be entrusted to a third person, but not to
one of the partners.
If the partners have agreed to entrust to a third person the
designation of the share of each one in the profits and losses, such
designation may be impugned only when it is manifestly inequitable.
In no case may a partner who has begun to execute the decision
of the third person, or who has not impugned the same within a
period of three (3) months from the time he had knowledge thereof,
complain of such decision.
The designation of losses and profits cannot be entrusted to one
of the partners.’6
68. May a partner be excluded from any share in the profits or

losses?
No. A stipulation which excludes one or more partners from
any share in the profits or losses is void.”
69. Ollie and Pearl entered into a partnership agreement to

operate a restaurant, with Ollie furnishing the capital and
Pearl contributing her industry and talent. The restaurant
business was doing well and generated profits over the years.
The relationship of Ollie and Pearl turned sour, which led to
Ollie attempting to divert the profits of the restaurant overseas
away from the reach of Pearl. May Pearl claim for the entirety
of the profits because of the unlawful acts of Ollie?
No, we have here a situation where two (2) persons engaged in
a business venture, with one furnishing the capital, and the other
contributing his industry and talent. Justice and equity dictate that
the two share equally the fruit of their joint investment and efforts.
However, the Court cannot just close its eyes to the devious
machinations and schemes that Ollie employed in attempting to
dispose of, if not dissipate, the properties that he shares with Pearl.

’’Article 1799, Civil Code.
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Since Ollie acted with evident bad faith and malice, they should pay
moral and exemplary damages as well as attorney’s fees to Pearl.”
70. What are the property rights of a partner?

The property rights of a partner are:
a. His rights in specific partnership property;
b. His interest in the partnership; and
C. His right to participate in the management.”
71. What are a partner's rights with respect to specific partnership

property?
A partner is co-owner with his partners of specific partnership
property. The incidents of this co-ownership are such that:
a. A partner, subject to the provisions of Title IX of the Civil
Code (Partnership) and to any agreement between the
partners, has an equal right with his partners to possess
specific partnership property for partnership purposes;
but he has no right to possess such property for any other
purpose without the consent of his partners;
b. A partner’s right in specific partnership property is not
assignable except in connection with the assignment of
rights of all the partners in the same property;
c. A partner’s right in specific partnership property is not
subject to attachment or execution, except on a claim
against the partnership. When partnership property is
attached for a partnership debt the partners, or any of
them, or the representatives of a deceased partner, cannot
claim any right under the homestead or exemption laws;
d. A partner’s right in specific partnership property is not
subject to legal support under Article 291.80
’’Ramnani v. Court of Appeals, G.R. Nos. 85494 and 85496, May 7,1991.
’’Article 1810, Civil Code.
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72. What constitutes a partner's interest in the partnership?

A partner’s interest in the partnership is his share of the profits
and surplus.
73. A, one of the partners of ABC Firm, assigned to D his whole

interest in the partnership. What are the consequences of such
conveyance?
A conveyance by a partner of his whole interest in the
partnership does not of itself dissolve the partnership, or, as
against the other partners in the absence of agreement, entitle the
assignee, during the continuance of the partnership, to interfere
in the management or administration of the partnership business
or affairs, or to require any information or account of partnership
transactions, or to inspect the partnership books; but it merely
entitles the assignee to receive in accordance with his contract the
profits to which the assigning partner would otherwise be entitled.
However, in case of fraud in the management of the partnership, the
assignee may avail himself of the usual remedies.
In case of a dissolution of the partnership, the assignee is
entitled to receive his assignor’s interest and may require an account
from the date only of the last account agreed to by all the partners.81
74. Dielle, Karlo, and Una are general partners in a merchandising

firm. Having contributed equal amounts to the capital, they also
agreed on equal distribution of whatever net profit is realized
per fiscal period. After two (2) years of operation, however,
Una conveys her whole interest in the partnership to Justine,
without the knowledge and consent of Dielle and Karlo.82
a. Is the partnership dissolved?
No, a conveyance by a partner of his whole interest in a
partnership does not of itself dissolve the partnership in the
absence of an agreement.83
“‘Article 1813, Civil Code.

“BAR 1998.
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b. What are the rights of Justine, if any, should she desire to

participate in the management of the partnership and in
the distribution of a net profit of P360,000.00 which was
realized after her purchase of Una's interest?
Justine cannot interfere or participate in the management
or administration of the partnership business or affairs. She
may, however, receive the net profits to which Una would have
otherwise been entitled. In this case, P120,000.00.61
75. When may a partner be obliged to sell his interest to the other
partners?
If there is no agreement to the contrary, in case of an imminent
loss of the business of the partnership, any partner who refuses to
contribute an additional share to the capital, except an industrial
partner, to save the venture, shall be obliged to sell his interest to
the other partners.86
76. X, a partner of XYZ Partnership, is indebted to A in the amount of

P180,000.00. May A charge the interest of X in the partnership?
Yes. Without prejudice to the preferred rights of partnership
creditors under Article 1827, on due application to a competent court
by any judgment creditor of a partner, the court which entered the
judgment, or any other court, may charge the interest of the debtor
partner with payment of the unsatisfied amount of such judgment
debt with interest thereon; and may then or later appoint a receiver
of his share of the profits, and of any other money due or to fall
due to him in respect of the partnership, and make all other orders,
directions, accounts, and inquiries which the debtor partner might
have made, or which the circumstances of the case may require.66
77. How may the interest charged be redeemed?

The interest charged may be redeemed at any time before
foreclosure, or in case of a sale being directed by the court, may be
purchased without thereby causing a dissolution:
a. With separate property, by any one or more of the
partners; or
‘■‘Ibid.
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b. With partnership property, by any one or more of the

partners with the consent of all the partners whose
interests are not so charged or sold.8’
78. May a partner associate another person with him in his share?
Yes. Every partner may associate another person with him in
his share, but the associate shall not be admitted into the partnership
without the consent of all the other partners, even if the partner
having an associate should be a manager.88
c. Obligations of the partnership/partners to third

persons
79. Is a partnership name required?
Yes. Every partnership shall operate under a firm name, which
may or may not include the name of one or more of the partners.89
80. What is the effect of including the name of a person who is not
a partner in the partnership name?
Those who, not being members of the partnership, include
their names in the firm name, shall be subject to the liability of a
partner.90
81. When are partners liable on their personal property?

All partners, including industrial ones, shall be liable pro rata
with all their property and after all the partnership assets have been
exhausted, for the contracts which may be entered into in the name
and for the account of the partnership, under its signature and by a
person authorized to act for the partnership. However, any partner
may enter into a separate obligation to perform a partnership
contract.91

xIbid.
“‘Article 1816, NCC.
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82, ZAM Law Office entered into a Contract of Lease with PNB,
whereby the latter agreed to lease the second floor of the PNB
Financial Center Building. ZAM Law Office then occupied the
leased premises and paid advance rental fees and security
deposit.
The Contract of Lease subsequently expired. However,
ZAM Law Office continued to occupy the leased premises,
but discontinued paying its monthly rental obligations.
Consequently, PN B sent a demand letter for ZAM Law Office to
pay its outstanding unpaid rents. ZAM Law Office sent a letter
proposing a settlement by providing a range of suggested
computations of its outstanding rental obligations, with
deductions for the value of improvements it introduced in the
premises.
Kenneth, in his capacity as managing partner of ZAM Law
Office, filed a complaint for accounting and/or recomputation
of unpaid rentals and damages against PNB in relation to
the Contract of Lease. PNB filed a motion to include an
indispensable party as plaintiff, praying that Kenneth be
ordered to amend his complaint to include ZAM Law Office as
principal plaintiff. PNB argued that the lessee in the Contract
of Lease is not Kenneth but ZAM Law Office, and that Kenneth
merely signed the Contract of Lease as the managing partner
of the law firm.
Is PNB's contention tenable?
Yes. ZAM Law Office is the real party in interest. Section 2,
Rule 3 of the Rules of Court defines a real party-in-interest as the
one “who stands to be benefited or injured by the judgment in the
Suit, or the party entitled to the avails of the suit.” ZAM Law Office
is the party that would be benefited or injured by the judgment in
the suit before the RTC. Particularly, it is the party interested in
the accounting and/or recomputation of unpaid rentals and damages
in relation to the contract of lease. It is also the party that would
be liable for payment to PNB of overdue rentals, if that claim
would be proven. This is because it is the one that entered into the
contract of lease with PNB. As an entity possessed of a juridical
personality, it has concomitant rights and obligations with respect
to the transactions it enters into. Equally important, the general
rule under Article 1816 of the Civil Code is that partnership assets
are primarily liable for the contracts entered into in the name of
k
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the partnership and by a person authorized to act on its behalf. All

partners, including industrial ones, are only liable pro rata with all
their property after all the partnership assets have been exhausted.”
83. The RTC found a partnership liable for damages. Can the
Sheriff immediately levy the personal property of the general
partner?
No. Article 1816 of the Civil Code governs the liability of the
partners to third persons, which states that: “All partners, including
industrial ones, shall be liable pro rata with all their property
and after all the partnership assets have been exhausted, for the
contracts which may be entered into in the name and for the account
of the partnership, under its signature and by a person authorized
to act for the partnership. However, any partner may enter into
a separate obligation to perform a partnership contract.” The
managing partner’s liability would only arise after the properties of
the partnership would have been exhausted.93
84. Is a stipulation exempting a partner from liability valid as to

third persons?
Any stipulation against the liability laid down in Article 1816
of the Civil Code shall be void, except as among the partners.94
85. Are acts and admissions of the partners binding to the

partnership?
Yes. Every partner is an agent of the partnership for the purpose
of its business, and the act of every partner, including the execution
in the partnership name of any instrument, for apparently carrying
on in the usual way the business of the partnership of which he is a
member binds the partnership, unless the partner so acting has iii
fact no authority to act for the partnership in the particular matter,
and the person with whom he is dealing has knowledge of the fact
that he has no such authority.
“Guy v. Gacott, G.R. No. 206147, 778 SCRA 308-326 (2016).
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An act of a partner which is not apparently for the carrying on

of business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners.65
Further, an admission or representation made by any partner
concerning partnership affairs within the scope of his authority in
accordance with Title IX of the Civil Code (Partnership) is evidence
against the partnership.96
86. Greg and Irvin are business partners who stipulated in the
articles of partnership that one partner cannot enter into a
contract with a third person regarding the partnership business
without the consent of the other partner. Leslie, a third party
unaware of this arrangement, entered into a contract with Irvin
without the consent of Greg. Does Leslie's contract with the
partnership through Irvin have legal force?
Yes, the stipulation in the articles of partnership that any of
the two (2) managing partners may contract and sign in the name of
the partnership with the consent of the other, undoubtedly creates
an obligation between the two (2) partners, which consists in asking
the other’s consent before contracting for the partnership. This
obligation of course is not imposed upon a third person who contracts
with the partnership. Neither is it necessary for the third person
to ascertain if the managing partner, with whom he contracts, has
previously obtained the consent of the other.
A third person may and has a right to presume that the partner
with whom he contracts has, in the ordinary and natural course
of business, the consent of his co-partner; for otherwise he would
not enter into the contract. The third person would naturally not
presume that the partner with whom he enters into the transaction
is violating the articles of partnership but, on the contrary, is
acting in accordance therewith. And this finds support in the legal
presumption that the ordinary course of business has been followed,
and that the law has been obeyed.
This last presumption is equally applicable to contracts which
have the force of law between the parties. Unless the contrary is
shown, namely, that one of the partners did not consent to his
co-partner entering into a contract with a third person, and that

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the latter with knowledge thereof entered into said contract, the
aforesaid presumption with all its force and legal effects should
be taken into account. There is nothing in the case at bar which
destroys this presumption.97
87. What acts does one or more but less than all the partners have
no authority to do?
Assign the partnership property in trust for creditors or on
the assignee’s promise to pay the debts of the partnership;
b. Dispose of the goodwill of the business;
c. Do any other act which would make it impossible to carry
on the ordinary business of a partnership;
d. Confess a judgment;
Enter into a compromise concerning a partnership claim
or liability;
f. Submit a partnership claim or liability to arbitration;
g- Renounce a claim of the partnership.98
88. Explain the rules of conveyance on real properties by one or

more partners.
Where title to real property is in the partnership name, any
partner may convey title to such property by a conveyance executed
in the partnership name; but the partnership may recover such
property unless the partner’s act binds the partnership under the
provisions of the first paragraph of Article 1818 of the Civil Code,
or unless such property has been conveyed by the grantee or a
person claiming through such grantee to a holder for value without
knowledge that the partner, in making the conveyance, has exceeded
his authority.
Where title to real property is in the name of the partnership,
a conveyance executed by a partner, in his own name, passes
the equitable interest of the partnership, provided the act is one
within the authority of the partner under the provisions of the first
paragraph of Article 1818.
“’Litton v. Hill & Ceron, G.R. No. 45624, April 25, 1939.
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Where title to real property is in the name of one or more but

not all the partners, and the record does not disclose the right of
the partnership, the partners in whose name the title stands may
convey title to such property, but the partnership may recover such
property if the partners’ act does not bind the partnership under
the provisions of the first paragraph of Article 1818, unless the
purchaser or his assignee, is a holder for value, without knowledge.
Where the title to real property is in the name of one or more
or all the partners, or in a third person in trust for the partnership,
a conveyance executed by a partner in the partnership name, or
in his own name, passes the equitable interest of the partnership,
provided the act is one within the authority of the partner under the
provisions of the first paragraph of Article 1818.
Where the title to real property is in the names of all the
partners, a conveyance executed by all the partners passes all their
rights in such property."
89. Is knowledge of the partner considered as knowledge of the

partnership?
Notice to any partner of any matter relating to partnership
affairs, and the knowledge of the partner acting in the particular
matter, acquired while a partner or then present to his mind, and
the knowledge of any other partner who reasonably could and should
have communicated it to the acting partner, operate as notice to or
knowledge of the partnership, except in the case of a fraud on the
partnership, committed by or with the consent of that partner.100
90. Atty. Badua purchased two (2) transreceivers from Quack Shell
Corporation (QSC) in Manila through its employee Bonsol. Due
I to major defects, Badua personally returned the transreceivers
to QSC and requested that they be replaced. Badua received
the returned transreceivers and promised to send him the
replacement units within two (2) weeks.
7
Time passed and Badua did not receive the replacement
units as promised. Despite several demands, Badua was never
given a replacement or a refund. Thus, Badua filed a complaint
for damages. Summons was served upon QSC and Bonsol,
69Article 1819, NCC.

k
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after which they filed their Answer, verified by Bonsol. The RTC
found that the two (2) transreceivers were defective and that
QSC and Bonsol failed to replace the same or return Badua's
money. The decision became final. During the execution stage,
Badua learned that QSC was not a corporation, but was in fact
a general partnership. In the articles of partnership, Gayya was
appointed as General Manager of QSC.
To execute the judgment, the Sheriff went to the Land
Transportation Office (LTO) and verified whether Bonsol, QSC
and Gayya had personal properties registered therein. Upon
learning that Gayya had vehicles registered in his name, Badua
instructed the sheriff to proceed with the attachment of one of
the motor vehicles of Gayya.
The Sheriff attached Gayya’s vehicle by virtue of the
Notice of Attachment/Levy Upon Personalty served upon
the record custodian of the LTO. A similar notice was served
to Gayya through his housemaid at his residence. Thereafter,
Gayya filed his Motion to Lift Attachment Upon Personalty,
arguing that he was not a judgment debtor and, therefore, his
vehicle could not be attached. Rule on Gayya’s defense.
Gayya’s defense is meritorious. Although a partnership is
based on delectus personae or mutual agency, whereby any partner
can generally represent the partnership in its business affairs, it is
non sequitur that a suit against the partnership is necessarily a suit
impleading each and every partner. It must be remembered that
a partnership is a juridical entity that has a distinct and separate
personality from the persons composing it. Here, Gayya was never
made a party to the case. He did not have any participation in the
entire proceeding until his vehicle was levied upon and he suddenly
became QSC’s “co-defendant debtor” during the judgment execution
stage. It is a basic principle of law that money judgments are
enforceable only against the property incontrovertibly belonging to
the judgment debtor. Indeed, the power of the court in executing
judgments extends only to properties unquestionably belonging to
the judgment debtor alone. An execution can be issued only against
a party and not against one who did not have his day in court.
Further, Article 1821 of the Civil Code does not state that
there is no need to implead a partner in order to be bound by the
partnership liability. It provides that: “Notice to any partner of any
matter relating to partnership affairs, and the knowledge of the
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partner acting in the particular matter, acquired while a partner or

then present to his mind, and the knowledge of any other partner
who reasonably could and should have communicated it to the acting
partner, operate as notice to or knowledge of the partnership, except
in the case of fraud on the partnership, committed by or with the
consent of that partner.”
A careful reading of the provision shows that notice to any
partner, under certain circumstances, operates as notice to or
knowledge to the partnership only. Evidently, it does not provide
for the reverse situation, or that notice to the partnership is notice
to the partners.101
91. When is a partnership bound to make good the loss?

a. Where one partner acting within the scope of his apparent
authority receives money or property of a third person
and misapplies it; and
b. Where the partnership in the course of its business
receives money or property of a third person and the
money or property so received is misapplied by any
partner while it is in the custody of the partnership.102
c. Where, by any wrongful act or omission of any partner
acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss
or injury is caused to any person, not being a partner in the
partnership, or any penalty is incurred, the partnership is
liable therefor to the same extent as the partner so acting
or omitting to act.103
92. ABC entered into a Joint Venture Agreement (JVA) with PP
i
for the development of a residential condominium project on
ABC's land. With ABC contributing the same property to the
joint venture and PP undertaking to develop the condominium,
the JVA provided, among other terms and conditions, that
the developed units shall be shared by the former and the
latter at a ratio of 17%-83%, respectively. While both parties
were allowed, at their own individual responsibility, to pre
sell the units pertaining to them, PP further undertook to use
101Guy v. Gacott, G.R. No. 206147, 778 SCRA 308-326 (2016).

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all proceeds from the pre-selling of its saleable units for the
completion of the Condominium Project.
The Housing and Land Use Regulatory Board (HLURB)
issued a License to Sell in favor of ABC and PP as project
owners. By virtue of said license, PP executed a Contracts to
Sell with Spouses Magsombol over a condominium unit and a
parking lot.
The Spouses filed against ABC and PP the complaint for
the rescission of the aforesaid Contracts to Sell docketed before
the HLURB, contending that the promised date of turnoverwas
not fulfilled. ABC asseverated that, by the terms of the JVA,
each party was individually responsible for the marketing and
sale of the units pertaining to its share; that not being privy to
the Contracts to Sell executed by PP and respondents, it did
not receive any portion of the payments made by the latter;
and that without any contributory fault and negligence on its
part, PP breached its undertakings under the JVA by failing to
complete the condominium project. Is ABC's defense tenable?
No. A joint venture is considered in this jurisdiction as a
form of partnership and is, accordingly, governed by the law of
partnerships. Under Article 1824 of the Civil Code, all partners are
solidarity liable with the partnership for everything chargeable to
the partnership, including loss or injury caused to a third person or
penalties incurred due to any wrongful act or omission of any partner
acting in the ordinary course of the business of the partnership or
with the authority of his co-partners. Whether innocent or guilty, all
the partners are solidarity liable with the partnership itself.104
93. What is the extent of liability of a person admitted as a partner

in an existing partnership?
A person admitted as a partner into an existing partnership
is liable for all the obligations of the partnership arising before his
admission as though he had been a partner when such obligations
were incurred, except that this liability shall be satisfied only out of
partnership property, unless there is a stipulation to the contrary.1®
l0,J. Tiosejo Investment Corp. v. Spouses Ang, G.R. No. 174149, September 8
2010, 644 SCRA 601-616.
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r
94. Are the creditors of the partnership preferred over the private
creditors of each partner?
Yes. The creditors of the partnership shall be preferred to
those of each partner as regards the partnership property. Without
prejudice to this right, the private creditors of each partner may
ask the attachment and public sale of the share of the latter in the
partnership assets.100
3. Dissolution and Winding Up

95. Discuss the concept of dissolution.
The dissolution of a partnership is the change in the relation of
the partners caused by any partner ceasing to be associated in the
carrying on as distinguished from the winding up of the business.107
On dissolution, the partnership is not terminated, but continues
until the winding up of partnership affairs is completed.108
96. What are the causes of dissolution?

a. Without violation of the agreement between the partners:
i. By the termination of the definite term or particular
undertaking specified in the agreement;
ii. By the express will of any partner, who must act
in good faith, when no definite term or particular
undertaking is specified;
iii. By the express will of all the partners who have
not assigned their interests or suffered them to
be charged for their separate debts, either before
or after the termination of any specified term or
particular undertaking;
iv. By the expulsion of any partner from the business
bona fide in accordance with such a power conferred
by the agreement between the partners;

L
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b. In contravention of the agreement between the partners,

where the circumstances do not permit a dissolution
under any other provision of this article, by the express
will of any partner at any time;
c. By any event which makes it unlawful for the business
of the partnership to be carried on or for the members to
carry it on in partnership;
d. When a specific thing, which a partner had promised to
contribute to the partnership, perishes before the delivery;
in any case by the loss of the thing, when the partner who
contributed it having reserved the ownership thereof, has
only transferred to the partnership the use or enjoyment
of the same; but the partnership shall not be dissolved by
the loss of the thing when it occurs after the partnership
has acquired the ownership thereof;
e. By the death of any partner;
f. By the insolvency of any partner or of the partnership;
S- By the civil interdiction of any partner;
h. By decree of court under Article 1831 of the Civil Code.1”
97. Pauline, Patricia, and Priscilla formed a business partnership

for the purpose of engaging in neon advertising for a term
of five (5) years. Pauline subsequently assigned to Philip her
interest in the partnership. When Patricia and Priscilla learned
of the assignment, they decided to dissolve the partnership
before the expiration of its term as they had an unproductive
business relationship with Philip in the past. On the other
hand, unaware of the move of Patricia and Priscilla but sensing
their negative reaction to his acquisition of Pauline's interest,
Philip simultaneously petitioned for the dissolution of the
partnership.
a. Is the dissolution done by Patricia and Priscilla without
the consent of Pauline or Philip valid? Explain.
’“Article 1830. NCC.
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b. Does Philip have any right to petition for the dissolution

of the partnership before the expiration of its specified
term? Explain.110
Answer:
a. Under Article 1830(l)(c) of the NCC, the dissolution by
Patricia and Priscilla is valid and did not violate the
contract of partnership even though Pauline and Philip
did not consent thereto. The consent of Pauline is not
necessary because she had already assigned her interest
to Philip. The consent of Philip is not also necessary
because the assignment to him of Pauline’s interest did
not make him a partner, under Article 1813 of the NCC.
b. No, Philip has no right to petition for dissolution because
he does not have the standing of a partner.111
98. Will the death of a partner terminate the partnership?112

Yes. The death of a partner will terminate the partnership, by
express provision of paragraph 5, Article 1830 of the Civil Code.
99. Can a court issue a decree of dissolution?

Yes. On application by or for a partner, the court shall decree
a dissolution whenever:
a. A partner has been declared insane in any judicial
proceeding or is shown to be of unsound mind;
b. A partner becomes in any other way incapable of
performing his part of the partnership contract;
c. A partner has been guilty of such conduct as tends to
affect prejudicially the carrying on of the business;
d. A partner willfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself
in matters relating to the partnership business that it
is not reasonably practicable to carry on the business in
partnership with him;
110BAR 1995.
“'Article 1813, NCC.
“2BAR 1997.
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e. The business of the partnership can only be carried on at

a loss; ■ p._
f. Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner’s interest
under Article 1813 or 1814:
After the termination of the specified term or particular
undertaking;
b. At any time if the partnership was a partnership at will
when the interest was assigned or when the charging
order was issued.113
100. Will dissolution terminate all authority of any partner to act for
the partnership?
Yes. Except so far as may be necessary to wind up partnership
affairs or to complete transactions begun but not then finished,
dissolution terminates all authority of any partner to act for the
partnership:
a. With respect to the partners,
i. When the dissolution is not by the act, insolvency or
death of a partner; or
ii. When the dissolution is by such act, insolvency or
death of a partner, in cases where Article 1833 so
requires;
b. With respect to persons not partners, as declared in
Article 1834.
101. Explain the rules on liability of one partner to his co-partners

for his share of any liability created by any partner acting for
the partnership as if the partnership had not been dissolved.
Where the dissolution is caused by the act, death, or insolvency
of a partner, each partner is liable to his co-partners for his share of
any liability created by any partner acting for the partnership as if
the partnership had not been dissolved unless:
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TV. BUSINESS ORGANIZATIONS 383
1 Ji/ Ml . ........................................ .
a. The dissolution being by act of any partner, the partner

acting for the partnership had knowledge of the
dissolution; or
b. The dissolution being by the death or insolvency of a
partner, the partner acting for the partnership had
knowledge or notice of the death or insolvency.”’
102. When can a partner bind the partnership even after dissolution?
After dissolution, a partner can bind the partnership,
a. By any act appropriate for winding up partnership affairs
or completing transactions unfinished at dissolution;
b. By any transaction which would bind the partnership if
dissolution had not taken place, provided the other party
to the transaction:
i. Had extended credit to the partnership prior to
dissolution and had no knowledge or notice of the
dissolution; or
ii. Though he had not so extended credit, had
nevertheless known of the partnership prior to
dissolution, and having no knowledge or notice
of dissolution, the fact of dissolution had not been
advertised in a newspaper of general circulation in
the place (or in each place if more than one) at which
the partnership business was regularly carried on.us
103. When is the partnership not bound by any act of a partner after
dissolution?
a. Where the partnership is dissolved because it is unlawful
to carry on the business, unless the act is appropriate for
winding up partnership affairs; or
b. Where the partner has become insolvent; or
c. Where the partner has no authority to wind up partnership
affairs; except by a transaction with one who —
“’Article 1833, NCC.

’“Article 1834, NCC
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i. Had extended credit to the partnership prior to

dissolution and had no knowledge or notice of his
want of authority; or
ii. Had not extended credit to the partnership prior
to dissolution, and, having no knowledge or notice
of his want of authority, the fact of his want of
authority has not been advertised in the manner
provided for advertising the fact of dissolution in the
first paragraph, No. 2(b) of Article 1834 of the Civil
Code.116
104. What is the effect of partnership dissolution to the existing

liability of a partner?
The dissolution of the partnership does not of itself discharge
the existing liability of any partner.
A partner is discharged from any existing liability upon
dissolution of the partnership by an agreement to that effect between
himself, the partnership creditor and the person or partnership
continuing the business; and such agreement may be inferred from
the course of dealing between the creditor having knowledge of the
dissolution and the person or partnership continuing the business.
105. Who has the right to wind up the partnership affairs?

Unless otherwise agreed, the partners who have not wrongfully
dissolved the partnership or the legal representative of the last
surviving partner, not insolvent, has the right to wind up the
partnership affairs, provided, however, that any partner, his lega
representative, or his assignee, upon cause shown, may obtain
winding up by the court.11’
106. How are partnership property applied in cases of dissolution

that are not in contravention to the partnership agreement?
When dissolution is caused in any way, except in contravention
of the partnership agreement, each partner, as against his co
partners and all persons claiming through them in respect of their
"“Article 1834, NCC.

“’Article 1835, NCC.
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interests in the partnership, unless otherwise agreed, may have the

partnership property applied to discharge its liabilities, and the
surplus applied to pay in cash the net amount owing to the respective
partners. But if dissolution is caused by expulsion of a partner, bona
fide under the partnership agreement and if the expelled partner
is discharged from all partnership liabilities, either by payment or
agreement under the second paragraph of Article 1835, he shall
receive in cash only the net amount due him from the partnership.119
107. How are partnership property applied in cases of dissolution

that are in contravention to the partnership agreement?
When dissolution is caused in contravention of the partnership
agreement the rights of the partners shall be as follows:
a. Each partner who has not caused dissolution wrongfully
shall have:
i. All the rights specified in the first paragraph of
Article 1837 of the Civil Code, and
1 ii. The right, as against each partner who has caused
the dissolution wrongfully, to damages for breach of
the agreement.
b. The partners who have not caused the dissolution
wrongfully, if they all desire to continue the business in
the same name either by themselves or jointly with others,
may do so, during the agreed term for the partnership and
for that purpose may possess the partnership property,
provided they secure the payment by bond approved by the
court, or pay any partner who has caused the dissolution
wrongfully, the value of his interest in the partnership
at the dissolution, less any damages recoverable under
the second paragraph, No. 1(b) of Article 1837, and in
like manner indemnify him against all present or future
partnership liabilities.
c. A partner who has caused the dissolution wrongfully
shall have:
i. If the business is not continued under the provisions
of the second paragraph, No. 2 of Article 1837, all the
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rights of a partner under the first paragraph, subject

to liability for damages in the second paragraph, No.
1(b) of Article 1837.
ii. If the business is continued under the second
paragraph, No. 2 of Article 1837, the right as against
his co-partners and all claiming through them
in respect of their interests in the partnership, to
have the value of his interest in the partnership,
less any damage caused to his co-partners by the
dissolution, ascertained and paid to him in cash,
or the payment secured by a bond approved by the
court, and to be released from all existing liabilities
of the partnership; but in ascertaining the value of
the partner’s interest the value of the goodwill of the
business shall not be considered.120
108. What are the entitlements of a party entitled to rescind when a

partnership contract is rescinded on the ground of the fraud or
misrepresentation of one of the parties thereto? t
Where a partnership contract is rescinded on the ground of the
fraud or misrepresentation of one of the parties thereto, the party
entitled to rescind is, without prejudice to any other right, entitled:
a. To a lien on, or right of retention of, the surplus of the
partnership property after satisfying the partnership
liabilities to third persons for any sum of money paid by
him for the purchase of an interest in the partnership and
for any capital or advances contributed by him;
b. To stand, after all liabilities to third persons have been
satisfied, in the place of the creditors of the partnership for
any payments made by him in respect of the partnership
liabilities; and
c. To be indemnified by the person guilty of the fraud or
making the representation against all debts and liabilities
of the partnership.121

““Article 1838, NCC.
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109. Mayurni was the managing partner of the Beta Gloria

Partnership. The other partners decided to dissolve the
partnership, which prompted Mayumi to claim for her partner's
share before liquidation of Beta Gloria Partnership. Is Mayumi
allowed to claim her share before liquidation?
No, a partner’s share cannot be returned without first dissolving
and liquidating the partnership, for the return is dependent on
the discharge of the creditors, whose claims enjoy preference over
those of the partners; and it is self-evident that all members of
the partnership are interested in its assets and business, and are
entitled to be heard in the matter of the firm’s liquidation and the
distribution of its property.
Unless a proper accounting and liquidation of the partnership
affairs is first had, the capital shares of the retiring partners cannot
be repaid, for the firm’s outside creditors have preference over the
assets of the enterprise (Article 1839, Civil Code), and the firm’s
property cannot be diminished to their prejudice.122
110. If only one of the partners of the Beta Gloria Partnership

decided to retire from the partnership. May the partners agree
to give the retiring partner his or her share, instead of going to
liquidation?
Yes. As a general rule, when a partner retires from the
partnership, he is entitled to the payment of what may be due him
after a liquidation. But no liquidation is necessary where there is
already a settlement or an agreement as to what the retiring partner
shall receive, and the latter was in fact reimbursed pursuant to the
agreement.123
111. Explain the rules to be observed in settling accounts between

the partners after dissolution.
In settling accounts between the partners after dissolution, the
following rules shall be observed, subject to any agreement to the
contrary:
122Magdusa v. Albaran, G.R. No. L-17526, June 30, 1962.

123Bonnevie v. Hernandez, G.R. No. L-5837, May 31, 1954.
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a. The assets of the partnership are:

i. The partnership property,
ii. The contributions of the partners necessary for the
payment of all the liabilities specified in No. 2 of
Article 1839.
b. The liabilities of the partnership shall rank in order of
payment, as follows:
i. Those owing to creditors other than partners,
ii. Those owing to partners other than for capital and
profits,
iii. Those owing to partners in respect of capital,
iv. Those owing to partners in respect of profits.
c. The assets shall be applied in the order of their declaration
in No. 1 of Article 1839 to the satisfaction of the liabilities.
d. The partners shall contribute, as provided by Article
1797, the amount necessary to satisfy the liabilities.
e. An assignee for the benefit of creditors or any person
appointed by the court shall have the right to enforce the
contributions specified in the preceding number.
f. Any partner or his legal representative shall have the
right to enforce the contributions specified in No. 4 of
Article 1839, to the extent of the amount which he has
paid in excess of his share of the liability.
g- The individual property of a deceased partner shall be
liable for the contributions specified in No. 4 of Article
1839.
h. When partnership property and the individual properties
of the partners are in possession of a court for distribution,
partnership creditors shall have priority on partnership
property and separate creditors on individual property,
saving the rights of lien or secured creditors.
i. Where a partner has become insolvent or his estate is
insolvent, the claims against his separate property shall
rank in the following order:
i. Those owing to separate creditors;
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ii. Those owing to partnership creditors;

iii. Those owing to partners by way of contribution.124
112. When will creditors of the dissolved partnership be also

creditors of the person or partnership continuing the business?
a. When any new partner is admitted into an existing
partnership, or when any partner retires and assigns
(or the representative of the deceased partner assigns)
his rights in partnership property to two or more of the
partners, or to one or more of the partners and one or
more third persons, if the business is continued without
liquidation of the partnership affairs;
b. When all but one partner retire and assign (or the
representative of a deceased partner assigns) their rights
in partnership property to the remaining partner, who
continues the business without liquidation of partnership
affairs, either alone or with others;
>•<
c. When any partner retires or dies and the business of the
dissolved partnership is continued as set forth in Nos.
1 and 2 of Article 1840, with the consent of the retired
partners or the representative of the deceased partner,
but without any assignment of his right in partnership
property;
d. When all the partners or their representatives assign
their rights in partnership property to one or more third
persons who promise to pay the debts and who continue
the business of the dissolved partnership;
e. When any partner wrongfully causes a dissolution and
the remaining partners continue the business under
the provisions of Article 1837, second paragraph, No. 2,
either alone or with others, and without liquidation of the
partnership affairs;
f. When a partner is expelled and the remaining partners
continue the business either alone or with others without
liquidation of the partnership affairs.126
l24Axticle 1839, NCC.

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113. A, B, and C entered into a partnership to operate a restaurant

business. When the restaurant had gone past break-even
stage and started to garner considerable profits, C died. A and
B continued the business without dissolving the partnership.
They in fact opened a branch of the restaurant, incurring
obligations in the process. Creditors started demanding for
the payment of their obligations.
a. Who are liable for the settlement of the partnership’s
obligations? Explain?
b. What is the creditors' recourse/s? Explain.126
Answer:
a. The two (2) remaining partners, A and B, are liable. When
any partner dies and the business is continued without
any settlement of accounts as between him or his estate,
the surviving partners are held liable for continuing the
business despite the death of C.127
b. Creditors can file the appropriate actions, for instance,
an action for collection of sum of money against the
“partnership at will” and if there are no sufficient funds,
the creditors may go after the private properties of A and
B.128 Creditors may also sue the estate of C. The estate
is not excused from the liabilities of the partnership
even if C is dead already but only up to the time that
he remained a partner.129 However, the liability of C’s
individual properties shall be subject first to the payment
of his separate debts.136
114. A, B, and C formed a partnership for the purpose of contracting

with the Government in the construction of one of its bridges.
On June 30, 1992, after completion of the project, the bridge
was turned over by the partners to the Government. On
August 30,1992, D, a supplier of materials used in the project
sued A for collection of the indebtedness to him. A moved to
126BAR 2010.
“’Articles 1841,1785, par. 2, and Article 1833 of NCC.
‘“Articles 1829, 1835, par. 2, NCC; Testate Estate of Mota v. Serra, 47 Phil.
464 (1925).
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dismiss the complaint against him on the ground that it was

the ABC partnership that is liable for the debt. D replied that
ABC partnership was dissolved upon completion of the project
for which purpose the partnership was formed.
Will you dismiss the complaint against A if you were the
Judge? 131
As Judge, I would not dismiss the complaint against A because
A is still Hable as a general partner for his pro rata share of one-
third (1/3).132 Dissolution of a partnership caused by the termination
of the particular undertaking specified in the agreement does
not extinguish obligations, which must be hquidated during the
“winding up” of the partnership affairs.133
115. Anna, Beth, and Christine formed a partnership with a capital

of P750,000.00 for the operation of a milk tea business under
the name "EquiTea." Daphne joined as a partner afterwards,
contributing P250.000.00 in capital. After Christine withdrew
from the partnership, her capital contribution of P250,000.00
was refunded to her in cash by agreement of the partners.
Without prior knowledge of Daphne, Anna and Beth closed
down the milk tea shop due to a loan encumbrance on the shop.
Two (2) months later. Daphne told Anna and Beth that she was
no longer interested in continuing their partnership and that
she was accepting their offer to return her capital contribution.
Since her request was left unheeded, Daphne filed a Complaint
for the collection of a sum of money from Anna and Beth. The
RTC ruled in favor of Daphne, ordering Anna and Beth to pay
Daphne P250.000.00 in actual damages.
Was the RTC correct in its ruling?
No. Daphne has no right to demand from Anna and Beth the
return of her equity share. It is the EquiTea partnership which has
a separate juridical personality that holds the equity and assets.
Thus, it is EquiTea that must refund the equity of the retiring
partners, not Anna and Beth. As to the amount to be refunded by
EquiTea, it is limited to the total assets the partnership has in its
coffers. However, before the partners can be paid their shares, the
131BAR 1993.
133Articles 1829 and 1830, par. 1-a, Civil Code.
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creditors of the partnership must first be compensated, as provided

for in Article 1839 of the New Civil Code. After all the creditors
have been paid, whatever is left of the partnership assets becomes
available for the payment of the partners’ shares.134
116. Alaya is the President and Chief Executive Officer of Alaya

Properties Corporation, a domestic corporation engaged in
real estate development, while Bunchun is the owner of two
(2) adjoining parcels of land. Alaya Properties Corporation,
represented by A and B, entered into a Joint Venture Agreement
(JVA)forthe development ofthesaid properties. Under the JVA,
Alaya undertook to contribute money, labor, personnel, and
other resources to develop the property and construct units
for sale to the public, while B obliged himself to contribute the
two (2) parcels of land. Despite B's repeated demands, Alaya
failed to comply with its obligations under the JVA. B filed with
the RTC a complaint for rescission and damages. The RTC
granted the rescission based on Alaya's willful and persistent
breach of the JVA and ordered Alaya to return the possession,
including all improvements of the real estate property to B.
Alaya appealed the decision, stating that the return of the
property with all its improvements to B without requiring B to
reimburse Alaya for their incurred expenses is confiscatory.
If you were the judge, how would you rule on Alaya's
appeal?
Alaya’s appeal has no merit. A JVA is a form of partnership,
and as such is to be governed by the laws on partnership. When
the RTC rescinded the JVA on complaint of respondents based on
the evidence on record that petitioners willfully and persistently
committed a breach of the JVA, the court thereby dissolved/
cancelled the partnership. With the rescission of the JVA on account
of petitioners’ fraudulent acts, all authority of any partner to act for
the partnership is terminated except so far as may be necessary to
wind up the partnership affairs or to complete transactions begun
but not yet finished.
According to Article 1836 of the New Civil Code, unless
otherwise agreed upon, the parties who have not wrongfully
dissolved the partnership have the right to wind up the partnership
134Villareal v. Ramirez, G.R. No. 144214, July 14, 2003.
J9JC9B0M
affairs. The transfer of the possession of the parcels of land and

the improvements thereon to B was only for a specific purpose: the
winding up of partnership affairs, and the partition and distribution
of the net partnership assets as provided by law.
It must be stressed, too, that although B acquired possession
of the lands and the improvements thereon, the said lands and
improvements remained partnership property, subject to the rights
and obligations of the parties, inter se, of the creditors and of third
parties under Articles 1837 and 1838 of the New Civil Code, and
subject to the outcome of the settlement of the accounts between the
parties as provided in Article 1839 of the New Civil Code, absent
any agreement of the parties in their JVA to the contrary.135
117. Edward was the Assistant General Manager of a marble

quarrying and export business operated by a registered
partnership with the firm name of "Twice Marble" with A
and B as general partners and C and D as limited partners.
Edward received only half of his stipulated salary. Without
the knowledge of Edward, A, B, C, and D sold and transferred
their interests to Jennie and Lisa who continued to use the old
firm name and continued the actual operation of the business
enterprise as before. Jennie informed Edward that she and Lisa
had bought the business and he is no longer allowed to work in
Twice Marble. They also told him that they are not liable for his
unpaid salaries as he was never hired as an employee by their
new partnership.
If you were the judge, rule on whether there was a new
partnership formed and who is/are liable for Edward's unpaid
salaries.
The legal effect of the changes in the membership of the
partnership was the dissolution of the old partnership which had
hired Edward and the emergence of a new firm composed of Jennie
and Lisa.
The occurrence of events which precipitate the legal consequence
of dissolution of a partnership do not, however, automatically result
in the termination of the legal personality of the old partnership. In
the ordinary course of events, the legal personality of the expiring
135Primelink Properties and Development Corporation v. Lazatin-Magat, G.R.

No. 167379, June 27, 2006.
J9JC9B0M
partnership persists for the limited purpose of winding up and

closing of the affairs of the partnership. In the case at bar, the
business of the old partnership was simply continued by the new
partners, without the old partnership undergoing the procedures
relating to dissolution and winding up of its business affairs. Both
the retiring partners (A, B, C, and D) and the new partnership itself
which continued the business of the old, dissolved, one, are liable for
the debts of the preceding partnership. Under Article 1840, creditors
of the old Twice Marble are also creditors of the new Twice Marble
which continued the business of the old one without liquidation of
the partnership affairs.'36
4. Limited Partnership
118. Define a limited partnership.
A limited partnership is one formed by two (2) or more persons
under the provisions of the following article, having as members
ne or more general partners and one or more limited partners. The
imited partners as such shall not be bound by the obligations of the
partnership.137
119. What are the requirements unique to the formation of a limited

partnership?
Two (2) or more persons desiring to form a limited partnership
shall:
a. Sign and swear to a certificate, which shall state —
i. The name of the partnership, adding thereto the
word “Limited”;
ii. The character of the business;
iii. The location of the principal place of business;
iv. The name and place of residence of each member,
general and limited partners being respectively
designated;
v. The term for which the partnership is to exist;
136Yu v. National Labor Relations Commission, G.R. No. 92712, June 30,1993.
■’’Article 1843, NCC.
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vi. The amount of cash and a description of and the

agreed value of the other property contributed by
each limited partner;
vii. The additional contributions, if any, to be made
by each limited partner and the times at which
or events on the happening of which they shall be
made;
viii. The time, if agreed upon, when the contribution of
each limited partner is to be returned;
ix. The share of the profits or the other compensation
by way of income which each limited partner shall
receive by reason of his contribution;
x. The right, if given, of a limited partner to substitute
an assignee as contributor in his place, and the
terms and conditions of the substitution;
xi. The right, if given, of the partners to admit additional
limited partners;
xii. The right, if given, of one or more of the limited
partners to priority over other limited partners, as
to contributions or as to compensation by way of
income, and the nature of such priority;
xiii. The right, if given, of the remaining general partner
or partners to continue the business on the death,
retirement, civil interdiction, insanity, or insolvency
of a general partner; and
xiv. The right, if given, of a limited partner to demand
and receive property other than cash in return for
his contribution.
b. File for record the certificate in the Office of the Securities
and Exchange Commission.138
120. Can a limited partner contribute services?

No. The contributions of a limited partner may be cash or
property, but not services.139

'“’Article 1845, NCC.
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121. Can the surname of a limited partner appear in the partnership

name?
No. The surname of a limited partner shall not appear in the
partnership name unless:
1. It is also the surname of a general partner, or
2. Prior to the time when the limited partner became such,
the business had been carried on under a name in which
his surname appeared."0
122. What is the liability of a limited partner whose surname was

included in the partnership name?
A limited partner whose surname appears in a partnership
name contrary to the provisions of the first paragraph is liable as
a general partner to partnership creditors who extend credit to
the partnership without actual knowledge that he is not a general
partner."1
123. What is the legal effect of a limited partner taking part in the
control of the business?
The limited partner becomes liable as a general partner.'42
124. After the formation of a limited partnership, may limited

partners be subsequently added?
Yes. After the formation of a limited partnership, additional
limited partners may be admitted upon filing an amendment to the
original certificate in accordance with the requirements of Article
1865.'“
125. In a limited partnership, what acts require the written consent

or ratification by all the limited partners?
Without the written consent or ratification of the specific act
by all the limited partners, a general partner or all of the general
partners have no authority to:

"'Ibid.
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a. Do any act in contravention of the certificate;

b. Do any act which would make it impossible to carry on
the ordinary business of the partnership;
c. Confess a judgment against the partnership;
d. Possess partnership property, or assign their rights in
specific partnership property, for other than a partnership
purpose;
e. Admit a person as a general partner;
f. Admit a person as a limited partner, unless the right so to
do is given in the certificate;
g- Continue the business with partnership property on
the death, retirement, insanity, civil interdiction, or
insolvency of a general partner, unless the right so to do
is given in the certificate.144
126. Can a limited partner:

a. inspect and copy the partnership books?
b. have on demand true and full information of all things
affecting the partnership?
c. have dissolution and winding up by decree of court?
Yes. A limited partner shall have the same rights as a general
partner to:
a. Have the partnership books kept at the principal place of
business of the partnership, and at a reasonable hour to
inspect and copy any of them;
b. Have on demand true and full information of all things
affecting the partnership, and a formal account of
partnership affairs whenever circumstances render
it just and reasonable; and
c. Have dissolution and winding up by decree of court.1’6
■’’Article 1850, NCC.

'’’Article 1851, NCC.
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127. Does a person become a general partner if he contributes to

the capital of a business on an erroneous belief that he has
become a limited partner in a limited partnership?
No. Without prejudice to the provisions of Article 1848, a
person who has contributed to the capital of a business conducted
by a person or partnership erroneously believing that he has become
a limited partner in a limited partnership, is not, by reason of his
exercise of the rights of a limited partner, a general partner with
the person or in the partnership carrying on the business, or bound
by the obligations of such person or partnership; provided that on
ascertaining the mistake he promptly renounces his interest in the
profits of the business, or other compensation by way of income.146
128. Can a person be a general partner and a limited partner in the

same partnership at the same time?
Yes. A person may be a general partner and a limited partner
in the same partnership at the same time, provided that this fact
shall be stated in the certificate provided for in Article 1844.
A person who is a general, and also at the same time a limited
partner, shall have all the rights and powers and be subject to all
the restrictions of a general partner; except that, in respect to his
contribution, he shall have the rights against the other members
which he would have had if he were not also a general partner.147
129. May a limited partner loan money to and transact other

business with the partnership?
Yes. A limited partner also may loan money to and transact
other business with the partnership, and, unless he is also a
general partner, receive on account of resulting claims against the
partnership, with general creditors, a pro rata shhre of the assets. “•
130. What are the prohibitions on a limited partner in respect to his

authority to loan money or transact other business?
No limited partner shall in respect to any such claim:
a. Receive or hold as collateral security any partnership
property, or

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b. Receive from a general partner or the partnership any

payment, conveyance, or release from liability, if at the
time the assets of the partnership are not sufficient to
discharge partnership liabilities to persons not claiming
as general or limited partners.
The receiving of collateral security, or payment, conveyance,
or release in violation of the foregoing provisions is a fraud on the
creditors of the partnership.149
131. Jeff and Aubrey are limited partners in ABCD Partnership. In

the articles of co-partnership, there is a stipulation that Jeff
enjoys priority as to the return of his contribution as compared
to Aubrey. Is the stipulation valid?
Yes. Where there are several limited partners the members may
agree that one or more of the limited partners shall have a priority
over other limited partners as to the return of their contributions, as
to their compensation by way of income, or as to any other matter.
If such an agreement is made it shall be stated in the certificate,
and in the absence of such a statement all the limited partners shall
stand upon equal footing.160
A limited partner shall not receive from a general partner or
out of partnership property any part of his contributions until:
a. All liabilities of the partnership, except liabilities to
general partners and to limited partners on account of
their contributions, have been paid or there remains
property of the partnership sufficient to pay them;
I
b. The consent of all members is had, unless the return of
the contribution may be rightfully demanded under the
provisions of the second paragraph; and
c. The certificate is cancelled or so amended as to set forth
the withdrawal or reduction.161
'"Article 1854, NCC.

““Article 1857, NCC.
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132. When may a limited partner rightfully demand the return of his
contribution?
Subject to the provisions of the first paragraph, a limited
partner may rightfully demand the return of his contribution:
a. On the dissolution of a partnership, or
b. When the date specified in the certificate for its return
has arrived, or
c. After he has given six (6) months’ notice in writing to all
other members, if no time is specified in the certificate,
either for the return of the contribution or for the
dissolution of the partnership.162
133. Kenneth is a limited partner in KLM Partnership. In the

certificate, it is stated that Kenneth has the right to demand
for the return of his contribution on May 8, 2020. On the same
day, Kenneth exercised such right, but the other partners of
KLM Partnership refused to return his contribution. He now
demands for the dissolution of the partnership. Rule on his
demand.
Kenneth’s demand is tenable. A limited partner may have the
partnership dissolved and its affairs wound up when:
a. He rightfully but unsisuccessfully demands the return of
his contribution, or
b. The other liabilities of the partnership have not been
paid, or the partnership property is insufficient for their
payment as required by the first paragraph, No. 1 of
Article 1857, and the limited partner would otherwise be
entitled to the return of his contribution.163
134. A partner cannot demand the return of his share (contribution)

during the existence of a partnership. Do you agree? Explain
your answer.161 I
Yes, he is not entitled to the return of his contribution to
the capital of the partnership, but only to the net profits from the
’“Article 1857, NCC.

164BAR 2012.
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partnership business during the life of the partnership period. If

he is a limited partner, however, he may ask for the return of his
contributions as provided in Articles 1856 and 1857, Civil Code.
135. Zaira is a limited partner in XYZ Partnership. Her co-partners

are Mica and Jairus. In the certificate, it was mentioned that
Zaira will contribute P1,000,000.00, but she only made actual
contributions of P750,000.00.
a. Is Zaira liable to XYZ Partnership for the deficiency?
b. Can Mica unilaterally waive Zaira's liability, if any?
Answer:
a. Yes. A limited partner is liable to the partnership:
i. For the difference between his contribution as
actually made and that stated in the certificate as
having been made, and
ii. For any unpaid contribution which he agreed in the
certificate to make in the future at the time and on
the conditions stated in the certificate.155
b. No. Mica cannot unilaterally waive Zaira’s liability
as the consent of Jairus is required. The liabilities of a
limited partner as set forth in Article 1858 can be waived
or compromised only by the consent of all members; but
a waiver or compromise shall not affect the right of a
creditor of a partnership who extended credit or whose
claim arose after the filing and before a cancellation or
amendment of the certificate, to enforce such liabilities.156
136. Is a limited partner's interest assignable? If yes, what is the

effect of the assignment? Distinguish the effect as to whether
or not consent of all the partners have been obtained.
Yes. A limited partner’s interest is assignable.
A substituted limited partner is a person admitted to all the
rights of a limited partner who has died or has assigned his interest
in a partnership.

lMIbid.
J9JC9B0M
An assignee, who does not become a substituted limited

partner, has no right to require any information or account of the
partnership transactions or to inspect the partnership books; he is
only entitled to receive the share of the profits or other compensation
by way of income, or the return of his contribution, to which his
assignor would otherwise be entitled.
An assignee shall have the right to become a substituted
limited partner if all the members consent thereto or if the assignor,
being thereunto empowered by the certificate, gives the assignee
that right.
The substituted limited partner has all the rights and powers,
and is subject to all the restrictions and liabilities of his assignor,
except those liabilities of which he was ignorant at the time he
became a limited partner and which could not be ascertained from
the certificate.
The substitution of the assignee as a limited partner does not
release the assignor from liability to the partnership under Articles
1847 and 1858.157
137. In what order are liabilities paid in a limited partnership upon

liquidation?
In settling accounts after dissolution, the liabilities of the
partnership shall be entitled to payment in the following order:
a. Those to creditors, in the order of priority as provided by
law, except those to limited partners on account of their
contributions, and to general partners;
b. Those to limited partners in respect to their share of the
profits and other compensation by way of income on their
contributions;
c. Those to limited partners in respect to the capital of their
contributions;
d. Those to general partners other than for capital and
profits;
e. Those to general partners in respect to profits;
f. Those to general partners in respect to capital.
J9JC9B0M
Subject to any statement in the certificate or to subsequent

agreement, limited partners share in the partnership assets in
respect to their claims for capital, and in respect to their claims for
profits or for compensation by way of income on their contribution
respectively, in proportion to the respective amounts of such
claims.168
138. Under what instances shall a certificate of a limited partnership

be amended?
A certificate shall be amended when:
a. There is a change in the name of the partnership or in
the amount or character of the contribution of any limited
partner;
b. A person is substituted as a limited partner;
c. An additional limited partner is admitted;
d. A person is admitted as a general partner;
e. A general partner retires, dies, becomes insolvent or
insane, or is sentenced to civil interdiction and the
business is continued under Article 1860;
f. There is a change in the character of the business of the
partnership;
g- There is a false or erroneous statement in the certificate;
h. There is a change in the time as stated in the certificate
for the dissolution of the partnership or for the return of a
contribution;
i. A time is fixed for the dissolution of the partnership, or
the return of a contribution, no time having been specified
in the certificate; or
j- The members desire to make a change in any other
statement in the certificate in order that it shall accurately
represent the agreement among them.159

J9JC9B0M
139. Discuss the requirements for amending the certificate of a

limited partnership.
The writing to amend a certificate shall:
a. Conform to the requirements of Article 1844 as far as
necessary to set forth clearly the change in the certificate
which it is desired to make; and
b. Be signed and sworn to by all members, and an amendment
substituting a limited partner or adding a limited or
general partner shall be signed also by the member to be
substituted or added, and when a limited partner is to be
substituted, the amendment shall also be signed by the
assigning limited partner.
The writing to cancel a certificate shall be signed by all
members.
A person desiring the cancellation or amendment of a certificate,
if any person designated in the first and second paragraphs as a
person who must execute the writing refuses to do so, may petition
the court to order a cancellation or amendment thereof.
If the court finds that the petitioner has a right to have the
writing executed by a person who refuses to do so, it shall order
the Office of the Securities and Exchange Commission where the
certificate is recorded to record the cancellation or amendment of
the certificate; and when the certificate is to be amended, the court
shall also cause to be filed for record in said office a certified copy of
its decree setting forth the amendment. 1
A certificate is amended or cancelled when there is filed for
record in the Office of the Securities and Exchange Commission,
where the certificate is recorded:
A writing in accordance with the provision^ of the first or
second paragraph; or
b. A certified copy of the order of court in accordance with
the provisions of the fourth paragraph;
c. After the certificate is duly amended in accordance with
this article, the amended certificate shall thereafter be for
all purposes the certificate provided for in this Chapter
(Limited Partnership).
‘“Article 1865, NCC
J9JC9B0M
B. CORPORATIONS
I, Definition of corporation
1. What is a corporation?
A corporation is an artificial being created by operation of
law, having the right of succession and the powers, attributes,
and properties expressly authorized by law or incidental to its
existence.161
2, What are the attributes of a corporation?

The attributes of a corporation are drawn from its statutory
definition.
a. It is an artificial being.
b. It is created by operation of law.
c. It has the right of succession.
d. It has the powers, attributes, and properties expressly
authorized by law or incidental to its existence.
3. Explain the attribute that the corporation is an artificial being.

By this, it means that the law regards a corporation as a
juridical person, with a legal personality separate and distinct
from the persons composing it. As a juridical person, it may own
properties, exercise rights, and incur obligations independently of
the persons comprising it.
As a juridical person, it is entitled to the rights of a person
under the Bill of Rights of the Philippine Constitution. The Supreme
Court pronounced in the landmark case of Stonehill v. Diokno'62
that a corporation may invoke the right against unreasonable
search and seizure. However, it cannot invoke the right against self
incrimination.103
A corporation may also sue for moral damages. While it
cannot experience wounded feelings, anxiety, and sleepless nights,
which are the causes of moral damages under the Civil Code of
l61Section 2, RCC.
,82Stonehill v. Diokno, G.R. No. L-19550, En Banc, June 19,1967.
163BASECO v. PCGG, G.R. No. 75885, En Banc, May 27,1987.
J9JC9B0M
the Philippines, it may acquire goodwill or reputation of its own,

which, if besmirched or tarnished, entitles the corporation to moral
damages.164
A corporation may also be criminally prosecuted if the
imposable penalty is not imprisonment, such as fine, forfeiture of
license, and revocation of franchise.165 ■< .„
4. Explain the attribute that a corporation is created by operation

of law. ,,,
A corporation is not created by mere agreement of the
incorporators nor by their execution of the articles of incorporation.
There ought to be a law from which the corporation derives its legal
existence. This may be a general law governing the formation of
private corporations, which is the RCC, or a special law passed by
Congress to create a government-owned and -controlled corporation.
Since February 8,1935, the legislature has not passed a single
law creating a private corporation. This is because the Constitution
itself precludes the passage of such statute, particularly, Section
16, Article XII of the 1987 Constitution™ which states that, “The
Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations.” The same
provision was contained in Section 7, Article XIV of the 1935
Constitution and Section 4, Article XIVof the 1973 Constitution.
In fact, a law enacted by the legislature to create a private
corporation is unconstitutional. ‘
5. Explain the attribute that it has the right of succession.

The right of succession of a corporation does not connote that
a corporation is immortal. It simply means that it had'the power to
exist continuously, either by opting to have perpetual existence or to
extend its corporate life if a fixed term is specified in its articles of
incorporation. Its capacity for continued existence is not affected by
any changes in the composition of corporators.
l64FiIipinas Broadcasting Network Ago Medical and Educational Center,

G.R. No. 141994, January 17, 2005.
165Ong v. Court of Appeals, G.R. No. 119858, April 29, 2003.
‘“Section 16, Article XII of the 1987 Constitution.
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r
6. Explain the attribute that it has the powers, attributes and

properties expressly authorized by law or incidental to its
existence.
This means that a corporation can only exercise powers
conferred upon it by law, its articles of incorporation, those implied
from the conferred powers, or incidental to its existence. Any act of
the corporation contrary to or outside these powers is ultra vires.
The test is whether the corporate act or transaction is related to
or in furtherance of the purposes of the corporation. For instance,
whether or not a corporation may acquire property will not only
be tested by the lawfulness of the consideration but whether such
property is necessary to achieve the purpose of the corporation.
Thus, a corporation engaged in mining cannot acquire properties for
urban development.167 A corporation organized as a lending investor
cannot engage in pawnbroking.168
7. Distinguish a corporation from other forms of business

organizations.
a. Sole Proprietorship v. Corporation
A sole proprietorship does not possess a juridical personality
separate and distinct from the personality of the owner of the
enterprise. The law merely recognizes the existence of a sole
proprietorship as a form of business organization conducted for
profit by an individual and requires its proprietor or owner to
secure licenses and permits, register its business name, and pay
taxes to the national government.169 Thus, the personal assets of the
proprietor may be held to answer for the obligations incurred by the
sole proprietorship in conducting its business.
In contrast, a corporation possesses a legal personality separate
and distinct from its owners.
,67Heirs of Antonio Pael v. Court of Appeals, G.R. No. 133547, December 7,2001.
■“See further discussion on ultra vires act under Section 44.
169Mangila v. Court of Appeals, G.R. No. 125027, Third Division, August 12,
2002.
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403 DIVIN'A ON COMMERCIAL LAW:
b. Partnership v. Corporation
As to definition:
A partnership is an agreement whereby two or more persons
bind themselves to contribute money, property, or industry to
a common fund, with the intention of dividing the profits among
themselves.”0 ..„ 0>
A corporation is an artificial being created by operation of
law, having the right of succession and the powers, attributes, and
properties expressly authorized by law or incidental to its existence.
As to the manner of creation:

A partnership is created by agreement while a corporation is
created by the operation of law.
As to composition:
In partnership, there should be at least two partners while one
person may compose a corporation.
As to commencement ofjuridical personality:

A partnership acquires juridical personality from the moment
two or more persons agree to form a partnership. The registration of
the Articles of Co-Partnership with the SEC is not a condition sine
Qua non for the acquisition of legal personality but is only necessary
for administrative convenience. Unless the partnership is registered
with the SEC, the partnership cannot obtain the requisite licenses
and permit to conduct its business.
Private corporation commences to have corporate existence
and juridical personality and is deemed incorporated from the date
the SEC issues a Certificate of Incorporation under its official seal.
As to liability:
The liability of the stockholders, who are not directors, officers
and agents, is limited to their subscription to the capital stock of the
corporation while the general partners may be held liable beyond
their contribution to the partnership if the assets thereof are not
sufficient to answer for creditors’ claims.
’’“Article 1767, Civil Code of the Philippines.
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As to transfer of shares or rights:

A stockholder may sell his fully-paid shares of stock without
the necessity of securing the consent of the corporation and/or the
other stockholders, while in a partnership, a partner cannot assign
his interest in the partnership in favor of a third party without the
consent of the partners, because a partnership is essentially based
on trust and confidence.
As to the management:
The business of a corporation is generally conducted by
the Board of Directors whereas a partnership is managed by the
Managing Partner designated in the Articles of Partnership, or in
the absence of designation, by anyone of the general partners.
As to the exercise of powers:

A corporation cannot exercise powers except those conferred
by law and its articles of incorporation, those implied from the
expressly-conferred powers and those incidental to its existence
while a partnership, may perform any act unless it is contrary to
laws, good morals, custom, public order, and public policy.
II. Classes of corporations

8. What are the classes of corporations?
Corporations may be classified as follows:
a. As to the Existence of Shares of Stock
i. Stock Corporation: has a capital stock divided into
shares and is authorized to distribute to the holders
of such shares dividends or allotments of the surplus
5 profits based on the shares held.'’*
The articles of incorporation which only
specifies the amount of authorized capital stock,
without stating the number of shares by which it is
divided, is not valid. Also, the silence in the articles
of incorporation and/or bylaws on the authority
of the corporation to declare dividends does not
make it a nonstock corporation. The provision of
'’•Section 3, RCC.
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■110 DIVINA ON COMMERCIAL LAW:
the RCC on the power of the corporation to declare

dividends should be deemed read into the articles
of incorporation. Similarly, the fact that the articles
of incorporation authorizes the stockholders of the
corporation to distribute the assets to a nonstock
non-profit corporation does not make it a nonstock
corporation, provided that the twin elements of a
stock corporation are present, because at the time
of dissolution, the stockholders, not the corporation,
own the assets and determine their disposition.'72
ii. Nonstock Corporation: has no capital stock and/
or not authorized to distribute dividends to its
members.173
A nonstock corporation may be organized for
any purposes except for profit and political ends.'”
b. As to Organizers:
i. Public: by the State only.
ii. Private: by private persons alone or with the State.
c. As to Function:
i. Public: organized for the government of a portion of
the State.
ii. Private: usually organized for profit.
d. As to Governing Law:
i. Government-owned and -controlled corporation
("GOCC”): governed by the special law creating it
and the provisions of the RCC suppletorily, to the
extent applicable. In case of conflict, the special law
prevails.
ii. Private: governed by the RCC. The RCC is also the
governing law for non-chartered GOCC.
”2BAR 1994.
'’’Sections 3 and 86, RCC.
'’’Section 87, RCC.
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e. As to Legal Status:
i. De Jure: is one that has fulfilled all the requirements
mandated by law and can successfully resist a suit
by the State to challenge its existence. De jure means
“a matter of law” that validates the corporation as a
legal entity.
ii. De Facto: is one organized with colorable compliance
with the requirements of a valid law. Its existence
cannot be inquired into collaterally. Such inquiry
must be by a direct attack by the State through a
quo warranto proceeding.”5
iii. By Estoppel: It exists when two or more persons
assume to act as a corporation knowing it to be
without authority to do so. They are liable as
general partners for all debts, liabilities, and
damages incurred or arising as a result thereof:
Provided, however, that when any such ostensible
corporation is sued on any transaction entered by
it as a corporation or on any tort committed by it
as such, it shall not be allowed to use as a defense
its lack of corporate personality. One who assumes
an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground
that there was, in fact, no corporation.”5
iv. By Prescription: one which has exercised corporate
powers for an indefinite period without interference
on the part of the sovereign power, e.g., Roman
Catholic Church.
f. As to Relationship of Management and Control:
i. Holding corporation: A corporation that holds
stocks in other companies for purposes of control
rather than for mere investment and ‘holding” them
in a conglomerate or umbrella structure along with
other subsidiaries.’”
■’'Section 19, RCC.

’’'Section 20, RCC.
’’’See: Maricalum Mining Corporation Ely. Florentino, G.R. No. 221813,
July 23, 2018.
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ii. Subsidiary corporation: A company that is owned

or controlled by another company, called the parent
company.
iii. Affiliates: Two companies are affiliates when one
company owns less than the majority of the voting
stock of the other.
iv. Parent company: A corporation that owns enough
voting stock in another company to control
management and operation by influencing or electing
its board of directors. Companies that operate under
this management are deemed subsidiaries of the
parent company.
g- As to Place of Incorporation:
i. Domestic: formed, organized, or existing under
Philippine laws.
ii. Foreign: formed, organized, or existing under any
laws other than those of the Philippines and whose
laws allow Filipino citizens and corporations to do
business in its own country or State.”8
h. Other Classifications:
i. Closed Corporation: is one whose articles of
incorporation provides that all of the corporation’s
issued stock of all classes, exclusive of treasury
shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty;
subject to specified restrictions on transfers; and
it shall not list in any stock exchange or make any
public offering of its stocks of any class.”9
Pertinently, a corporation is said to be “going
public” when its shares are being made available for
listing in the stock exchange and for public offering/
trading. On the other hand, a corporation is “going
private” when it is adopting the features of a Closed
Corporation.160
■’“Section 140, RCC.

■’“Section 95, RCC.
‘““BAR 1986.
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Special Corporations: These include educational

corporations'8' and religious corporations.182
Religious corporations include corporation sole188
and religious societies.184
One-Person Corporation: A corporation wherein all
of the stocks are held directly or indirectly by one
person. It is NOT necessarily illegal for as long
as it follows and observes the law throughout its
existence and conducts its business affairs lawfully,
otherwise, the doctrine of piercing the veil may be
applied in such a case.'85
9. The law creating the Bases Conversion and Development

Authority ("BCDA") provides that it has an authorized capital
of One Hundred Billion pesos (P100,000,000.00) which may be
fully subscribed by the Republic of the Philippines and shall
either be paid up from the proceeds of the sales of its land
assets.
It is created, among others, to own, hold and/or
administer military reservations in the country and implement
its conversion to other productive use.
Is it a stock or nonstock corporation?
It is neither a stock nor a nonstock corporation but a
governmental authority vested with corporate powers.
While it has an authorized capital of P100 Billion, it is not
divided into shares of stock. It has no voting shares. There is
likewise no provision which authorizes the distribution of dividends
and allotment of surplus profits to BCDA stockholders. Hence, it is
not a stock corporation.
It does not qualify as a nonstock organization because it is not
organized for any of the purposes mentioned under Section 87 of the
RCC.188
'“Sections 105-106, RCC.

‘“Section 107, RCC.
'“Section 108, RCC.
'“Bases Conversion and Development Authority v. Commissioner of Internal
Revenue, G.R. No. 205925, June 20, 2018.
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10. How are corporations created by special laws or charters

governed? < Jo;> <■■■ •
Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or charter
creating them or applicable to them, supplemented by the provisions
of the RCC, insofar as they are applicable.187
11. What is a de facto corporation?

A de facto corporation is one that is organized with colorable
compliance with the requirements of incorporation under the law
and allowed to exist and exercise the powers of a corporation until
its corporate existence is assailed by the State in a quo warranto
proceeding.
12. What are the powers of a de facto corporation?

A de facto corporation has all the powers and authority of a
le jure corporation until it is ousted of its corporate existence. Its
existence cannot be assailed collaterally in a private suit but only
in a quo warranto proceeding. Thus, if a collection suit is initiated
by a de facto corporation, a motion to dismiss filed on the ground
that the corporation has no power to sue, should not prosper. A de
facto corporation, like a de jure corporation, may sue. The existence
of such de facto corporation cannot be questioned in a collateral
proceeding like a collection suit.
13. What are the elements of a de facto corporation?

The requisites of a de facto corporation are as follows:
a. Existence of a valid law under which it may be
incorporated;
b. Attempt in good faith to incorporate; and
c. Actual use or exercise in good faith of corporate
powers.
As such, if the law under which it is incorporated is declared
unconstitutional, there is neither de jure nor de facto existence.
‘“’Section 4, RCC.
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r
For instance, if Congress enacts a law to create a private

corporation, such corporation cannot be considered de facto because
the law creating it is unconstitutional. 188 Congress can enact a law
to create a corporation only if it is owned and controlled by the
government.189
With regard to the second element, attempt in good faith
to incorporate, at the very least, means obtaining a certificate
of incorporation from the SEC. The execution of the articles of
incorporation and adoption of bylaws, per se, are not enough to
warrant de facto existence. In other words, there is no bona fide
attempt to incorporate until the SEC at the very least issues the
certificate of incorporation.
The filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of a de
facto corporation. In fine, it is the act of registration with the SEC
through the issuance of a certificate of incorporation that marks the
beginning of an entity’s corporate existence.190
14. Are the stockholders of a de facto corporation liable as general

partners?
, No, stockholders of a de facto corporation are liable in the same
)Way as stockholders of a de jure corporation. They are liable only
to the extent of their subscription to the corporation. Those liable
as general partners are persons who assume themselves to be a
corporation when they have no legal authority to do so.191
15. Cite examples of defects in the formation of a corporation

which give rise to a de facto existence.
a. The treasurer’s affidavit on the amount of subscription
and payment is false.
b. The required percentage of Filipino ownership in
corporations engaged in nationalized activities is not
complied with.
C. Natural person incorporators misrepresented their age.
188BAR 1994.
’“Feliciano v. Commission on Audit, G.R. No. 147402, January 14, 2004.
'"Missionary Sisters of Our Lady of Fatima v. Alzona, et al., G.R. No. 224307,
August 6, 2018.
■’■Section 20, RCC.
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16. What is a corporation by estoppel?

A corporation by estoppel is one that exists when two or more
persons assume to act as a corporation knowing it to be without
authority to do so.192
17. What are the liabilities under the doctrine of corporation by
estoppel?
All persons who assume to act as a corporation knowing it to
be without authority to do so shall be liable as general partners
for all debts, liabilities, and damages incurred or arising as a
result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation
or on any tort committed by it as such, it shall not be allowed to
use its lack of corporate personality as a defense. Anyone who
assumes an obligation to an ostensible corporation as such cannot
resist performance thereof on the ground that there was in fact no
corporation.193
Thus, the persons who illegally recruited workers for overseas
employment by representing themselves to be officers of a corporation
which they knew had not been incorporated are liable as general
partners for all debts, liabilities and damages incurred or arising as
a result thereof.193 1
18. Are all those who subscribed for the stock of a proposed
corporation which was never legally formed liable as general
partners?
The doctrine of corporation by estoppel does not apply against a
person who takes no part except to subscribe for stock in the proposed
corporation which was never legally formed, and hence, cannot
be liable as a partner of those who engaged in business under the
name of the pretended corporation.196 However, a passive subscriber
who obtained benefit from a contract entered into by others with
whom he previously had an existing relationship is deemed to be
part of said association and is covered by the scope of the doctrine of
corporation by estoppel.196
™lbid.
'"Section 20, RCC.
""People v. Garcia, G.R. No. 117010, April 18, 1997.
'“Pioneer Insurance and Surety Corporation v. Court of Appeals, G.R. No.
84197, July 28, 1989.
I96Lim Tong v. Philippine Fishing Gear Industries, G.R. No. 136448, November
3, 1999.
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19. May a corporation by estoppel be sued?

In the case of Macasaet v. Francisco,187 a newspaper which the
plaintiff may have believed as registered with the SEC was sued
together with its publisher and editor. The lawyer of the newspaper
company filed a motion to drop such party-defendant because it was
not registered with the SEC and therefore, has no legal personality
to be sued. The court denied the motion. When the case reached the
Supreme Court, it was held that RTC did not abuse its discretion
by denying its motion to drop the ostensible corporation as a party
defendant.
The Supreme court said that a corporation by estoppel may
be impleaded as a party defendant considering that it possesses the
attributes of a juridical person, otherwise, it cannot be held liable for
damages and injuries it may inflict to other persons.198
20. Who cannot invoke the doctrine of corporation by estoppel?

When the petitioner is not trying to escape liability from the
contract but father the one claiming from the contract, the doctrine
of corporation by estoppel is not applicable. This doctrine applies
to a third party only when he tries to escape liability on a contract
from which he has benefited on the irrelevant ground of defective
incorporation."’9
In other words, the doctrine can only be invoked by the
aggrieved party who relied on the representations by others that
they are legally formed as a corporation. It cannot be invoked by the
one who benefited from the transaction.
In another case though, it was held that the doctrine of
corporation by estoppel is founded on principles of equity and is
designed to prevent injustice and unfairness. It applies when a non
existent corporation enters into contracts or dealings with third
persons. In which case, the person who has contracted or otherwise
dealt with the non-existent corporation is estopped to deny the
latter’s legal existence in any action leading out of or involving
such contract or dealing. While the doctrine is generally applied to
protect the sanctity of dealings with the public, nothing prevents
197Macasaet v. Francisco, G.R. No. 156759, First Division, June 5, 2013,

198Macasaet v. Francisco, G.R. No. 156759, June 5, 2013.
'"International Express Travel & Tour Services, Inc. v. Hon. Court of Appeals,
Henri Kahn, Philippine Football Federation, G.R. No. 119002, October 19, 2000.
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its application in the reverse, in fact, the very wording of the law
which sets forth the doctrine of corporation by estoppel permits such
interpretation. Such that a person who has assumed an obligation
in favor of a non-existent corporation, having transacted with the
latter as if it was duly incorporated, is prevented from denying the
existence of the latter to avoid the enforcement of the contract. In
this case, while the donation was accepted at the time the donee
was not yet incorporated, the subsequent incorporation of the donee
corporation and its affirmation of the recipient’s authority to accept
on its behalf cured whatever defect that may have attended the
acceptance of the donation, applying the doctrine of corporation by
estoppel under the Corporation Code.200
The Supreme Court likewise stated that the donee could not
be considered a de facto corporation because, at the time of the
donation, it was not registered with the SEC. The filing of articles of
incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation.
III. Nationality of corporations

21. What are the various tests to determine the nationality of a
corporation?
a. Place of incorporation test — This means that the
nationality of the corporation is determined by the state
of incorporation. Under this test then, a corporation
is a Philippine national if it is organized and existing
under Philippine laws, regardless of the nationality of
the shareholders. It is applied if the corporation is not
engaged in areas of activities reserved, in whole or in
part, for Filipinos.
This test presents a simple method of determining
the nationality of a corporation, the main criterion being
the state of the incorporation, regardless of the nationality
of the stockholders.201
200Missionary Sisters of Our Lady of Fatima v. Alzona, et al., G.R. No. 224307,
August 6, 2018.
2O1SEC-OGC Opinion No. 16-15.
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b. Control test - It is a mode of determining the nationality of

a corporation engaged in nationalized areas of activities,
provided for under the Constitution and other applicable
laws, where corporate shareholders with foreign
shareholdings are present, by ascertaining the nationality
of the controlling stockholder of the corporation. If the
capital of the investing Corporation is at least 60% owned
by Filipinos, then the entire shareholdings of the investing
Corporation shall be recorded as Filipino-owned thus
making both the investing and investee - corporations
Philippine national.
c. Grandfather rule — This is “the method by which the
percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities,
provided for under the Constitution and other applicable
laws, is accurately computed, in cases where corporate
shareholders with foreign shareholdings are present,
by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality
of the corporate shareholder.” Thus, to arrive at the actual
Filipino ownership and control in a corporation, both the
direct and indirect shareholdings in the corporation are
determined. In the case of a multi-tiered corporation, the
stock attribution rule must be allowed to run continuously
along the chain of ownership until it finally reaches the
individual stockholders.
The purpose of this rule is to trace the nationality
of the stockholder of investor corporations to ascertain
the nationality of the corporation where the investment
is made.202
a. Control test
22. What is the prevailing mode of determining the nationality of
corporations engaged in nationalized activities?
The “control test” is the prevailing mode of determining the
nationality of corporations engaged in nationalized activities.
However, when in the mind of the Court there is doubt as to where
2O2SEC Opinion, May 4,1987.
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beneficial ownership and control reside, based on the attendant facts

and circumstances of the case, then it may apply the “grandfather
rule.”
In fact, the Control Test can be, as it has been, applied
jointly with the Grandfather Rule to determine the observance of
foreign ownership restriction in nationalized economic activities.
The Control Test and the Grandfather Rule are not, as it were,
incompatible ownership-determinant methods that can only be
applied alternative to each other. Rather, these methods can, if
appropriate, be used cumulatively in the determination of the
ownership and control of corporations engaged in fully or partly
nationalized activities.203
The Grandfather Rule, standing alone, should not be used
to determine the Filipino ownership and control in a corporation,
as it could result in an otherwise foreign corporation rendered
qualified to perform nationalized or partly nationalized activities.
Hence, it is only when the Control Test is first complied with that
the Grandfather Rule may be applied. Put in another manner, if
the subject corporation’s Filipino equity falls below the threshold of
60%, the corporation is immediately considered foreign-owned, in
which case, the need to resort to the Grandfather Rule disappears.201
The Supreme Court stressed, however, that when the 60%
Filipino ownership, is never in doubt, the control test prevails. In
the relevant case, it was held that the petition is severely wanting
in facts and circumstances to raise legitimate challenges to the
joint venture company’s 60-40 Filipino-Foreigner ownership. The
application of the control test will already yield the result that the
company is a Philippine national. The grandfather rule no longer
applies.205
“03Narra Nickel Mining and Development Corp. Redmont Consolidated

Mines Corp., G.R. No. 195580, April 21, 2014.
201Narra Nickel Mining and Development Corp. Redmont Consolidated
Mining Corp., G.R. No. 195580, January 28, 2015.
20jLeo Y. Querubin v. Commission on Elections, el al., G.R. No. 218787,
December 8, 2015.
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b. Grandfather rule
23. When is the grandfather rule applied?
The grandfather rule is applied in the following cases:
a. Under the Grandfather Rule Proper, if the percentage of
Filipino ownership in the corporation or partnership is
less than 60%, only the number of shares corresponding
to such percentage shall be counted as of Philippine
nationality.
b. Under the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing Corporation and the
Investee Corporation, when traced (i.e., “grandfathered”)
to determine the total percentage of Filipino ownership,
show less than 60% requirement.
c. If based on records, Filipinos own at least 60% of the
investing corporation but there is doubt as to where
control and beneficial ownership in the corporation really
reside.
24. Illustrate the application of the control test and grandfather rule.
For better understanding, below are various diagrams to
illustrate the application of the control test and grandfather rule.
Rule I:
iwmikwiobj'’
100,00!
60% f 40%
TjffiCQ
In this illustration, ABC is a public utility corporation.

Under the Philippine Constitution, at least 60% of its capital
must be owned by Filipinos. The outstanding capital stock is
PhplO million divided into 100,000 shares with par value of
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1OO/share. Of the 100,000 outstanding shares, 60% is owned

by XYZ while 40% is held by foreigners. XYZ, as investing
corporation in ABC, in turn, is 60% owned by Filipinos and 40%
owned by the same foreigners who directly own 40% of ABC
Corporation.
Is ABC a Philippine national? Is it compliant with the
Constitution insofar as 60% Filipino capital requirement is
concerned?
ABC is a Philippine national and compliant with the
Constitution.
The prevailing mode to determine the nationality of a
corporation engaged in nationalized activities is the control test.
ABC, as a public utility, is engaged in a nationalized activity and
as such, subject to the control test. Under the control test, if the
corporation is at least 60% owned by Filipinos, it is a Philippine
national. XYZ, the investing corporation, is also a Philippine
national because 60% of its capital is likewise owned by Filipinos.
Because XYZ is at least 60% owned by Filipinos, then the entire
60,000 shareholdings of XYZ must be registered as Filipino-owned,
making both ABC and XYZ Philippine nationals.
Note that under the control test, it is incorrect to attribute the
40% foreign ownership to the 60,000 shares owned by XYZ as the
entire shareholding should be recorded as Filipino-owned. In other
words, it is erroneous to say that because the foreigners own 40% of
XYZ, 40% of 60,000 shares (or 24,000 shares) should be registered
in their name. If this mode of computation is adopted, ABC will not
be compliant because the foreigners will then directly own 40% and
indirectly own 24% of the corporation, in excess of the 40% limit
that the Constitution has set. The foregoing structure and mode of
computation explain why the control rest is often called the liberal
test in determining the nationality of a corporation.
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Rule II:
W
90,000 10,000
[ wzz
1
In this illustration, XYZ owns 90,000 shares of ABC while

10,000 are held by foreigners. XYZ, in turn, is 50% owned by
Filipinos and 50% by foreigners. Is ABC a Philippine national?
It is not. Because XYZ is not at least 60% owned by Filipinos,
the control test cannot be adopted. Instead, only the percentage that
corresponds to the shares owned by Filipinos should be registered
in the books of the corporation as Filipino-owned, the rest must
be recorded as foreign-owned. The 50% of 90,000 shares or 45,000
shares, therefore, should be registered as Filipino owned and the
other 45,000 as foreign-owned. Adding the 45,000 shares indirectly
owned by foreigners to the 10,000 shares they directly own, the
aggregate shareholdings will exceed the allowable 40% limit.
NB: In the actual cases, there were nominal shares issued in favor of
incorporators to qualify as such. The diagrams limited the number
of shares held by corporations to illustrate the principles.
Rule III:
60,000 40,000
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This case calls for the application of the grandfather rule. First,
the control test is applied because ABC appears to be 60% owned by
a Philippine national, XYZ. XYZ is a Philippine national because
60% of its capital is owned by Filipinos. Let us assume, however,
that the share subscriptions of the Filipinos were not paid and the
foreign held-corporation basically contributed all, or almost all, of the
capital of ABC, creating a doubt as to where beneficial ownership and
control actually reside. Given such doubt, the grandfather rule then
is cumulatively applied with the control test. Under the grandfather
rule, only' the shares that correspond to the percentage owned by
Filipinos shall be registered as Filipino-owned. Therefore, only 60%
of the 60,000 shares owned by XYZ should be recorded as Filipino-
owned while 40% of the 60,000 shares shall be registered as foreign-
owned. Adding the 24,000 shares that the foreign-held corporation
indirectly owns in ABC with the 40,000 shares it directly owns, the
aggregate foreign shareholdings translate to 64,000 or 64% of the
capital of ABC, in excess of the 40% allowable limit.
Rule IV:
60,000 40,000
50%
|[ iWfiQ J | :^Tjiv ]j
Corporate layering is not prohibited provided that it is not used

to circumvent the rules on foreign ownership restriction. Following
the strict application of the grandfather rule, in this case of a multi
tiered corporation, the stock attribution rule must be allowed to run
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continuously along the chain of ownership until it finally reaches the

individual stockholders. In this illustration, despite the corporate
layering, the beneficial ownership and control of XYZ, which owns
60% of ABC, show less than 60% Filipino share ownership. The
grandfather rule, therefore, applies.
/V. Corporate juridical personality
a. Doctrine of separate juridical personality

b. Doctrine of piercing the corporate veil
25. What is the doctrine of piercing the veil of corporate fiction?
It is the doctrine that allows the State to disregard, for certain
justifiable reasons, the notion or fiction that the corporation has a
separate legal personality from those composing it. The doctrine of
separate legal entity is only a fiction to promote public convenience.
If this fiction is misused or abused, then the State shall pierce the
corporate veil and treat the corporation and the persons composing
it as one and the same entity.
i. Grounds for application of doctrine

26. In what areas does the doctrine apply?
The doctrine of piercing the corporate veil applies in three (3)
basic areas, namely: 1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another
corporation.200
“Development Bank of the Philippines v. Hydro Resources Contractors

Corporation, G.R. No. 167603, March 13, 2013; California Manufacturing Company,
Inc. v. Advanced Technology System, Inc., G.R. No. 202454, April 25,2017; ABS-CBN
Broadcasting Corporation v. Honorato Hilario, G.R. No. 193136, July 10,2019.
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The doctrine likewise applies in the following cases:

a. Under a variation of the doctrine of piercing the veil of
corporate fiction, when two business enterprises are
owned, conducted and controlled by the same parties,
both law and equity will, when necessary to protect the
rights of third parties, disregard the legal fiction that
two corporations are distinct entities and treat them as
identical or one and the same.207
b. When the complaint alleges that the directors and/
or officers committed bad faith or gross negligence in
conducting the affairs of the corporation.
27. Cite jurisprudence where the doctrine of piercing the
corporate veil was applied because the fiction of separate legal
personality was used to defeat public convenience.
a. The separate juridical personality of a corporation may
be disregarded where the majority stockholder filed a
derivative suit in behalf of the corporation to declare the
sale as unenforceable against the corporation although
the trial court in another case had already ruled that the
contract of sale between the corporation and its buyer was
deemed perfected. There is forum shopping where the
stockholders, in a second case, and in representation of
the corporation, seek to accomplish what the corporation
itself failed to do in the original case. In this case, the
fiction was used to circumvent the rule against non-forum
shopping.208
28. cite jurisprudence where the doctrine of piercing the corporate

veil was applied because the fiction was used to perpetuate
fraud.
a. At the time an unfair labor practice case was pending
against the corporation, its officers and stockholders
organized a run-away corporation, engaged in the same
line of business, producing the same line of products,
2O7Heirs of Fe Tan Uy, represented by her heir, Mauling Uy Lim v. International

Exchange Bank, G.R. No. 166282 and 83, February 13, 2013.
208First Philippine International Bank v. Court of Appeals, G.R. No. 115849,
January 24, 1996.
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occupying the same compound, using the same pieces of

machinery, buildings, laboratory, bodega and sales and
accounts departments used by the first corporation. It
was held that this is another instance where the fiction
of separate and distinct corporate entities should be
disregarded as the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case
could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation to
its employees.209
b. Piercing the veil of corporate fiction is warranted when
a corporation ceased to exist only in name as it re-
emerged in the person of another corporation, for the
purpose of evading its unfulfilled financial obligation
under a compromise agreement. Thus, if the judgment for
money claim could not be enforced against the employer
corporation, an alias writ may be obtained against the
other corporation considering the indubitable link between
the closure of the first corporation and incorporation of
the other.210
ii. Test in determining applicability

29. What are the elements of the alter ego test?
Case law lays down a three-pronged test to determine the
application of the alter ego theory, which is also known as the
instrumentality theory, namely:
a. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
b. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal right; and
209A.C. Ransom Labor Union-CCLU v. National Labor Relations Commission,

a al., G.R. No. L-69494, May 29, 1987.
21°Livesey v. Binswanger Philippines, G.R. No. 177493, March 19, 2014.
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C. The aforesaid control and breach of duty must have

proximately caused the injury or unjust loss complained
of.
30. Cite jurisprudence where the doctrine of piercing the corporate

veil was applied based on the alter-ego or instrumentality test.
a. In one case, the owner of a business terminated the
employment of his workers on the pretext that there will
be an impending permanent closure of the business as a
result of an intended sale of the assets to an undisclosed
corporation, and that there will be a change in the
management. Subsequent events, however, revealed that
the buyer of the assets was a corporation owned by the
same employer and members of his family. Furthermore,
the business re-opened in less than a month under the
same management. Admittedly, mere ownership by a
single stockholder of all or nearly all of the capital stock
of the corporation does not by itself justify piercing
the corporate veil. Nonetheless, in this case, other
circumstances show that the buyer of the assets of the
proprietor employer is none other than his alter ego.211
31. Cite jurisprudence where the Supreme Court pierced the

corporate veil when two or more businesses are owned,
controlled, and conducted by the same parties.
a. Three (3) companies engaged in a work-pooling scheme,
in which their workers were constantly rotated and
periodically assigned among the three (3) establishments
to perform the same or similar tasks; they operated and
hired employees through a common human resource
department; and, they were under the control and
management of the same party. It was held that the
separate existence of the three (3) companies must be
disregarded in order to safeguard the right of the workers
and their unions to engage in collective bargaining.212
211Leo R. Rosales, el al. v. New A.N.J.H. Enterprises & N.H. Oil Mill
Corporation, el al., G.R. No. 203355, August 18, 2015.
212Erson Ang Lee Doing Business as “Super Lamination Services” v. Samahang
Manggagawa ng Super Lamination (SMSLS-NAFLU-KMU), G.R. No. 193816,
November 21, 2016.
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b. The internal Scenic Department which initially handled

the props and set designs of ABS-CBN was abolished
and shut down and CCI was incorporated to cater to the
props and set design requirements of ABS-CBN, thereby
transferring most of its personnel to CCI. Notably, CCI
was a subsidiary of ABS-CBN and was incorporated
through the collaboration of its former contractor (Ty) and
the other major stockholders and officers of ABS-CBN.
CCI provided services mainly to ABS-CBN and its other
subsidiaries. When Ty organized his own company, ABS-
CBN hired him as a consultant and eventually engaged the
services of his company. As a result of which CCI decided
to close its business operations as it no longer carried out
services for the design and construction of sets and props
for use in the programs and shows of ABS-CBN, thereby
terminating certain employees of CCI. ABS-CBN clearly
exercised control and influence in the management and
closure of CCI’s operations, which justifies the ruling of
the appellate court and labor tribunals of disregarding
their separate corporate personalities and treating them
as a single entity.213
32. Cite jurisprudence when the corporate veil may be pierced if the
complaint alleges that the directors and/or officers committed
bad faith or gross negligence in conducting the affairs of the
corporation.
a. The president of a family-owned corporation who
committed fraud in selling its vehicle to a customer and
collected down payment from the latter knowing fully
well that the vehicle was already sold to another cannot
hide behind the separate corporate personality of the
corporation to escape from liability.214
b. In another case, the building contractor of Shangri-La
mall sued Shangri-La Properties for unpaid fees. The
plaintiff impleaded the directors of the corporation for
bad faith and gross negligence in conducting the affairs of
213ABS-CBN Broadcasting Corporation v. Honorato Hilario, G.R. No. 193136,

July 10 2019.
214Sps. Pedro and Florencia Violago v. BA Finance Corporation and Avelino
Violago, G.R. No. 158262, July 21, 2008.
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430 DMNA ON COMMERCIAL LAW:
the corporation. The lower court, upon motion, suspended

the proceedings on the ground that the plaintiff failed
to submit the case to arbitration despite the arbitration
clause provided in the contract.
The issue is whether or not the directors who are not
parties to the arbitration agreement can be compelled to
participate in the arbitration proceedings.
The Supreme Court eventually held that corporate
representatives may be compelled to submit to arbitration
proceedings pursuant to a contract entered into by the
corporation they represent if there are allegations of bad
faith or malice in their acts representing the corporation
even though the arbitral only covers the corporation.
The Supreme Court stated that when the directors are
impleaded in a case against a corporation alleging malice
and bad faith on their part in directing the affairs of the
corporation, the complainants are effectively alleging that
the directors and the corporation are not acting as separate
entities; that the acts or omission of the corporation
that violated their rights are also the directors’ acts or
omission; that the contracts executed by the corporation
are contracts executed by the directors. Complainants
effectively pray that the corporate veil be pierced because
the cause of action between the corporation and the
directors is the same. In this case, however, the doctrine
was not applied. The arbitral ruling Was that both the
Shangri-La and its directors are not liable.215
33. Should the court first acquire jurisdiction over the corporation
involved before its separate legal personality may be
disregarded? ,
There appears to be a lack of conclusive yardstick as to when
the court may pierce the veil of corporate fiction of a corporation
that has not been brought to its jurisdiction by summons, voluntary
appearance, or other recognized modes of acquiring jurisdiction.
There are, in fact, conflicting Supreme Court decision in this regard.
The author believes that the corporate veil may be pierced without
having to conduct a full-blown trial as long as the corporation,
2l5Gerardo Lanuza, Jr. and Antonio 0. Olbes v. BF Corporation, G.R. No.

174938, October 1, 2014.
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whose veil the court wants to pierce, is given the opportunity to be

heard and based on the hearing, albeit summary in nature, evidence
exists to warrant the application of the doctrine. This is necessary
to prevent multiplicity of suits and save on expenses. Due process,
after all, can be afforded to the corporation even without a full-blown
hearing.
34. Is the doctrine of piercing the corporate veil applicable to a

nonstock non-profit corporation and natural persons?
Yes, the fact that the corporation involved is a nonstock
non-profit corporation does not by itself preclude the court from
applying the equitable remedy of piercing the corporate veil. The
equitable character of the remedy permits a court to look to the
substance of the organization and its decision is not controlled by
the statutory framework under which the corporation was formed
and operated. While it may appear to be impossible for a person to
exercise ownership control over a nonstock non-profit corporation,
a person can be held personally liable under the alter ego theory if
the evidence shows that the person controlling the corporation did
in fact exercise control even though there was no stock ownership.216
35. What is the doctrine of reverse piercing of the corporate veil?

In a traditional veil-piercing action, the court disregards the
existence of the corporate entity so a claimant can reach the assets
of a corporate insider (meaning, the directors, stockholders, and
officers). In reverse piercing action, however, the plaintiff seeks
to reach the assets of the corporation to satisfy claims against
corporate insider. Reverse piercing flows in the opposite direction (of
traditional corporate veil-piercing) and makes the corporation Hable
for the debt of the shareholders or members.
In International Academy of Management and Economics (1/
AME) Litton and Company, Inc. v. Litton and Company, Inc.,217
however, the Supreme Court appHed the reverse piercing doctrine
and made a nonstock corporation Hable for the debts of its member.
™Ibid.
217Intemational Academy of Management and Economics (I/AME) v. Litton
and Company, Inc., G.R. No. 191525, December 13, 2017.
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In this case, a lawyer-lessee failed to pay his rentals. The lessor

filed a complaint for unlawful detainer and secured a favorable
judgment. Judgment was not immediately executed but it was
eventually revived. The sheriff levied a piece of real property in
the name of International Academy of Management and Economics
Incorporated (I/AME), a nonstock corporation, in order to execute
the judgment against the lessee, who is a member of I/AME. The
Supreme Court agreed with the Court of Appeals and sustained the
levy, ruling that the corporation is an alter ego of the lessee and the
lessee - the natural person is the alter ego of the corporation. The
lessee falsely represented himself as president of the corporation in
the Deed of Sale when he bought the property at a time when the
corporation had not yet existed. Uncontroverted facts also revealed
that the lessee and the corporation are one and the same person: The
lessee is the conceptualizer and implementor of the corporation and
the majority contributor of the corporation. I/AME is basically the
corporate entity used by the lessee as his alter ego for the purpose of
shielding his assets from the reach of his creditors.
36. What are the effects of piercing the corporate veil? Does it
result in the dissolution of the corporation?
The piercing of the corporate veil does not dissolve the
corporation. It simply means that the stockholder and/or director
and/or officer, whose action/s became the basis for the application
of the doctrine, and the corporation shall be treated as one and
the same entity. In traditional piercing the corporate veil, the
concerned stockholders, directors/trustees, and officers become
liable for the obligation of the corporation. In reverse piercing the
corporate veil, the corporation becomes liable for the debts of the
concerned stockholders/members, directors/trustees, and officers of
the corporation.
In case the corporation is just an alter ego of another
corporation, both corporations become one and the same entity.
V. Capital structure
a. Number and qualifications of incorporators

37. What are the revisions under the RCC on the number and
qualification of incorporators?
a. Unlike the OCC, which required incorporators to be
natural persons numbering not less than five (5), the
RCC allows partnership, association, or corporation to
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organize a corporation without any minimum number

of incorporators. In fact, there can be a corporation with
only one (1) stockholder, other than a corporation sole, in
the form of a one (l)-person corporation under Title XIII
of the RCC.
b. The RCC likewise eliminated the residency requirement
for incorporators and expectedly, retained the legal
age requirement for natural-persons-incorporators
and ownership of at least one (1) share of stock of the
corporation or membership for a nonstock corporation.
c. Natural persons who are licensed to practice a profession
and partnerships or associations organized for the purpose
of practicing a profession may organize a corporation only
if they are allowed under a special law.
38. What are the number and qualifications of incorporators?

a. Any person, partnership, association or corporation, singly
or jointly with others but not more than 15 in number,
may organize a corporation for any lawful purpose or
purposes.
b. Natural persons who are licensed to practice a profession,
and partnerships or associations organized for the purpose
of practicing a profession, shall not be allowed to organize
as a corporation unless otherwise provided under special
laws.
c. Incorporators who are natural persons must be of legal
age.
d. Each incorporator of a stock corporation must own or be a
subscriber to at least one (1) share of the capital stock or
a be a member in a nonstock corporation.
e. A corporation with a single stockholder is considered a
One Person Corporation.218
218Section 10, RCC.
k
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39. May juridical persons be incorporators?

Yes, unlike the previous law, the RCC allows juridical persons
to be incorporators.219
40. Can a person who signs the AOI on behalf of a juridical

incorporator be named as director or trustee?
No, an individual who signs the AOI on behalf of an
incorporator, which is not a natural person, may not be named as
a director or trustee in the same AOI, unless the said individual is
also the owner of at least one (1) share of stock, or is also a member,
of the corporation being formed.220
41. Other than a one (1)-person corporation, can a corporation

have less than five (5) incorporators?
Yes, because the RCC eliminated the minimum number of
incorporators. Thus, a corporation can have three (3) incorporators
for instance unless otherwise provided by a special law.
Banks, for example, are required to have at least five (5) and a
maximum of 15 directors.221
While incorporators are different from directors, in actuality,
the incorporators are usually the first members of the board of
directors.
42. May foreigners be incorporators of a private domestic

corporation? ,
Yes, foreigners may be incorporators of a private domestic
corporation. The law does not require Philippine citizenship for
incorporators. However, if the corporation will engage in economic
activities which are reserved for Filipinos, foreigners can be
incorporators and/or directors but only in proportion to their foreign
ownership equity in the corporation, as allowed by law. Foreigners
cannot be incorporators of corporations engaged in wholly
nationalized activities.
™Ibid.
"“Section 8, SEC Memorandum Circular No. 16 series of 2019, July 30, 2019.
"'Section 15, R.A. No. 8791, otherwise known as the General Banking Law.
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r
b. Subscription requirements
43. What are the revisions under the RCC on subscription and
paid-up capital requirements upon incorporation?
a. The RCC dispensed with the minimum subscription and
paid-up capital requirement except as otherwise provided
by a special law.
b. After incorporation, however, in case of increase of capital
stock, at least 25% of the increase in capital stock must
be subscribed and at least 25% of the amount subscribed
should be paid in cash or property the valuation of which
is equivalent to at least 25% of the subscription.
44. Are stock corporations required to have a minimum capital

stock?
Stock corporations shall not be required to have minimum
capital stock, except as otherwise specifically provided by special
law.222
45. What do you mean by authorized capital stock, subscribed

capital stock, and paid-up capital stock?
Authorized capital stock means the amount fixed in the articles
of incorporation to be subscribed and paid by the stockholders
of the corporation. It is the maximum number of shares that the
corporation is legally allowed to issue without amending the articles
of incorporation.
Subscribed capital stock is the portion of the authorized capital
stock which is covered by subscription agreements whether fully
paid or not.
Outstanding capital stock means the total shares of stock issued
under binding subscription contracts to subscribers or stockholders,
whether fully or partially paid, except treasury shares.223
Subscribed capital stock and issued or outstanding capital
stock may be interchanged. But while every subscribed share which
is covered by a subscription agreement is outstanding, an issued
share may not have the status of outstanding shares like treasury
shares.
“Section 12, RCC.

“Section 173, RCC.
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Paid-up capital stock is the portion of the authorized capital

stock which has been subscribed and paid by the stockholders of the
corporation.
In one case, a wage order was issued but exempted from its
coverage employer corporation, the paid-up capital of which, is
impaired by a certain percentage. The issue is whether the paid-up
capital includes assets transferred to the company, as well as the
loans or advances obtained. It was held that not all funds or assets
received by the corporation can be considered paid-up capital, for
this term has a technical signification in Corporation Law which
is the portion of the authorized capital stock of the corporation,
subscribed and then actually paid up.224
46. How much of the authorized capital stock should be subscribed

and paid-up upon incorporation?
Unlike the OCC which required that at least 25% of the

authorized capital stock must be subscribed and at least 25% of total
subscriptions must be paid upon incorporation, the RCC dispensed
with the minimum subscription and paid-up capital requirement
except as otherwise provided by a special law.
After incorporation, however, in case of increase of capital
stock, at least 25% of the increase in capital stock must be subscribed
and at least 25% of the amount subscribed should be paid in cash or
property the valuation of which is equivalent to at least 25% of the
subscription.
47. Under the Philippine Constitution, at least 60% of the capital

of corporations engaged in public utility, large scale mining,
and exploration of natural resources should be owned by
Filipinos. What does the term "capital" mean in this context? Is
it synonymous with outstanding capital stock?
In an en banc decision, the Supreme Court clarified that the

term “capital” in Section 11, Article XII of the 1987 Constitution
refers to shares with voting rights, as well as with full beneficial
ownership. This is precisely because the right to vote in the election of
224MSCI-NACUSIP Local Chapter v. National Wages and Productivity SEC

and Monomer Sugar Central, Inc., G.R. No. 125198, March 3, 1997.
J9JC9B0M
directors, coupled with full beneficial ownership of stocks, translates

to effective control of a corporation.225
What the Constitution requires is the full and legal beneficial
ownership of 60% of the outstanding capital stock, coupled with
60% of the voting rights which must rest in the hands of Filipino
nationals.226
By way of example, ABC is a public utility corporation with
30,000,000 outstanding capital stock divided into 100,000 common
shares, 100,000 voting preferred shares, and 100,000 non-voting
preferred shares all with par value of P100 per share. In terms of
Filipino and foreign share ownership, the outstanding shares are
broken down as follows:
100,000 common shares
• 100% — Filipino-owned
> 100,000 voting preferred shares
• 60,000 — Filipino-owned
• 40,000 — Foreign-owned
> 100,000 non-voting preferred shares
• 80,000 — Foreign-owned
• 20,000 — Filipino-owned
If we follow the pronouncement in Gamboa v. Teves, the share
ownership structure will not be compliant with the Constitution
because the 60-40 Filipino-foreign ownership is not reflected in each
class or kind of shares but based on Roy v. Herbosa, this will be
compliant because Filipinos own at least 60% of the voting shares
(100,000 common shares and 60,000 voting preferred shares or
160,000/200,000 shares ) and at least 60% of the outstanding capital
stock (100,000 common shares + 60,000 voting preferred shares +
20,000 non-voting preferred shares or 180,000/300,000 shares).
““Jose M. Roy HI v. Teresita Herbosa, et al., G.R. No. 207246, November 22,
2016.
““Jose M. Roy III v. Teresita Herbosa, et al., G.R. No. 207246, April 18, 2017.
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c. Corporate term
48. What are the revisions under the RCC on corporate term?
a. A corporation shall have perpetual existence unless its
articles of incorporation provides otherwise.
b. Corporations with certificates of incorporation issued prior
to the effectivity of the RCC, and which continue to exist,
shall have perpetual existence, unless the corporation,
upon a vote of its stockholders representing a majority
of its outstanding capital stock, notifies the SEC that it
elects to retain its specific corporate term pursuant to its
articles of incorporation: Provided, That any change in
the corporate term under this section is without prejudice
to the appraisal right of dissenting stockholders.
c. The period to extend the corporate term has been reduced
from five (5) to three (3) years prior to the original or
subsequent expiry date(s).
d. Extension of the corporate term shall take effect only
on the day following the original or subsequent expiry
date(s).
e. A corporation whose term has expired is not ipso facto
dissolved but may apply for a revival of its corporate
existence. Upon approval by the SEC, the corporation
shall be deemed revived and a certificate of revival of
corporate existence shall be issued, giving it perpetual
existence, unless its application for revival provides
otherwise.
49. What is the term of a corporation under the RCC?

A corporation shall have perpetual existence unless its articles
of incorporation provides otherwise.227 In other words, the corporation
continues to exist until the corporation decides to end it, or it may
have a fixed term if specified in the articles of incorporation.
“’Section 11, KCC.
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50. With the enactment of RCC, is the corporate term of a

corporation now deemed perpetual without the need of
amending its Articles of Incorporation (AOI) with the requisite
2/3 affirmative vote of its outstanding shares?
The corporate term of a corporation is deemed extended and
amended to perpetual existence pursuant to paragraph 2, Section 11
of the RCC which provides:
“Section 11. Corporate Term. — A corporation

shall have perpetual existence unless its articles of
incorporation provide otherwise. Corporations with
certificates of incorporation issued prior to the
effectivity of this Code, and which continue to exist
shall have perpetual existence, unless the corporation,
upon a vote of its stockholders representing a majority
of its outstanding capital stock, notifies the SEC that it
elects to retain its specific corporate term pursuant to its
articles of incorporation: xxx” (Emphasis supplied)
It is clear from the aforementioned provision that the corporate

term of a corporation existing prior to, and which continues to exist
upon the effectivity of the RCC, shall be automatically deemed
perpetual without any further action on the part of the corporation.
Further, since the automatic conversion of the corporate term
to perpetual existence does not require an amendment of the AOI,
the 2/3 affirmative vote of the outstanding shares to amend the AOI
would not be required.228
51. What is the remedy of the stockholder in view of the automatic

conversion of the corporate term to perpetual existence of the
corporation organized prior to the effectivity of the RCC?
In view of the automatic conversion of the corporate term to
perpetual existence of a corporation organized prior to the effectivity
of the RCC, the stockholder may exercise his appraisal right,229
meaning demand the payment of the fair value of his shares, unless
the corporation, upon a vote of its stockholders representing a
22BRe: Corporate Term of Existing Corporations under the RCC, SEC-OGC

Opinion No. 28-19, July 22, 2019.
229Section 11, RCC.
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majority of its outstanding capital stock, notifies the SEC that it

elects to retain its specific corporate term pursuant to its articles of
incorporation.230
52. What are the remedies of a corporation whose term has

expired?
A corporation whose term has expired may apply for a revival
of its corporate existence, together with all the rights and privileges
under its certificate of incorporation and subject to all of its duties,
debts, and liabilities existing prior to its revival. Upon approval by
the SEC, the corporation shall be deemed revived and a certificate
of revival of corporate existence shall be issued, giving it perpetual
existence, unless its application for revival provides otherwise.
No application for revival of certificate of incorporation of banks,
banking and quasi-banking institutions, pre-need, insurance and
trust companies, nonstock savings and loan associations (NSSLAs),
pawnshops, corporations engaged in money service business, and
other financial intermediaries shall be approved by the SEC unless
accompanied by a favorable recommendation of the appropriate
government agency.231
The corporation may also decide to reincorporate particularly
if it has no intention to liquidate and wind-up its corporate affairs.232
Thus, the stockholders of the defunct corporation may organize
a new corporation. It may even adopt the name of the dissolved
corporation with the approval of the last stockholders representing
at least a majority of the outstanding capital stock.233
The old and the new corporation may have identical
incorporators, directors, and officers. The assets of the dissolved
corporation are not, however, automatically transferred to the
new corporation. However, the stockholders may assign their right
to the properties of the dissolved corporation in favor of the new
corporation as consideration for the subscription to the shares of the
latter."31
““Section 11, ibid.

“'Section 11, RCC.
“"Chung Ka Bio v. Intermediate Appellate Court, G.R. No. 71837, July 26,
1988.
““Indian Chamber of Commerce Phils., Inc. v. Filipino Indian Chamber of
Commerce in the Philippines, Inc., G.R. No. 184008, August 3, 2016.
“‘Chung Ka Bio, supra.
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53. What are the requisites for extension or shortening of the

corporate term?
The requisites for extension or shortening of the corporate
term are as follows:
a. A corporate term for a specific period may be extended or
shortened by amending the articles of incorporation.235
b. The extension of the corporate term must be approved
by at least the majority of the board of directors and the
stockholders representing at least 2/3s of the outstanding
capital stock.236
c. No extension may be made earlier than three (3) years
prior to the original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier extension as
may be determined by the SEC.237
d. Such an extension of the corporate term shall take effect
only on the day following the original or subsequent
expiry date(s).238
e. The extension or shortening of the term is effective upon
approval of the SEC.
54. Can the extension of the corporate term be done during the
three (3)-year liquidation period?
No, the extension of corporate term can only be done during
the lifetime of the corporation but not earlier than three (3) years
prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined
by the SEC. The activities of the corporation during the liquidation
period should be limited to winding up of corporate affairs. Extension
of term is tantamount to the continuation of the business and as
such, incompatible with the purpose and nature of liquidation.
“•Section 11, RCC.

“•Section 36, RCC.
™Ibid.
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■142 DIVINA ON COMMERCIAL LAW:
d. Classification of shares
55. What are shares of stock?
Shares of stock are forms of securities representing equity
ownership in a corporation, divided up into units. They are the
measure of the stockholder’s proportionate interest in the corporation
in terms of the right to vote and to receive dividends, as well as the
right to share in the assets of the corporation when distributed in
accordance with law and equity.
56. What are the classes of shares?

The shares of stock corporations may be divided into classes or
series of shares, or both. These are as follows:
a. Common shares
b. Preferred shares
c. Par value shares
d. No par value shares
e. Voting shares
f. Non-voting shares
g- Founder’s shares
h. Treasury shares
i. Redeemable shares
j. Watered shares
k. Other classification as may be provided in the articles of
incorporation; provided it is not contrary to law.
i. Preferred shares versus common shares

57. What are preferred shares of stock?
These are shares of stock that are given certain preferences as
may be provided in the articles of incorporation but may be denied
the right to vote.
58. What are common shares of stock?

Common shares are the basic class of stock ordinarily and
usually issued without privileges or advantages except that
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they cannot be denied the right to vote. Owners are entitled to a

pro-rata share in the profits of the corporation and in its assets upon
dissolution and liquidation and, in the management of its affairs.
59. What preferences may be given to preferred shares of stock?

A preferred share of stock’s most common forms may be
classified into two (2): (1) preferred shares as to assets; and (2)
preferred shares as to dividends. The former is a share which gives
the holder thereof the preference in the distribution of the assets
of the corporation in case of liquidation while the latter is a share
which makes the holder entitled to receive dividends to the extent
agreed upon before any dividends at all are paid to the holders of
common stock.239
They may also be given other preferences as may be provided
in the articles of incorporation?10
The board of directors, where authorized in the articles of
incorporation, may also fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, further, That such
terms and conditions shall be effective upon the filing of a certificate
thereof with the SEC.
60. Are holders of preferred shares creditors of the corporation?

The preferences granted to the holders of the preferred
stockholders do not give them a lien upon the property of the
corporation nor make them creditors of the corporation, the right
of the former being always subordinate to the latter. Shareholders,
, both common and preferred, are considered risk-takers who invest
capital in the business and who can look only to what is left after
corporate debts and liabilities are fully paid.241
There is also no guarantee that the shares will receive any
dividends. The right to receive dividends is conditioned on the
availability of the unrestricted retained earnings or surplus profit.
The holders cannot compel the payment of dividends if there is no
surplus profit. The preference as to dividends only applies if the
corporation legally declared dividends.
“Republic Planters Bank v. Hon. Enrique Agana, Sr., G.R. No. 51765, March
3,1997.
’“Section 6, RCC.
’’’Republic Planters Bank, ibid.
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61. Company X issued preferred shares to A. The terms and

conditions of the certificate of stock entitle the holder of
preferred shares to1%quarterly interest as a quarterly dividend.
After the end of the first quarter, A demanded the interest due
but Company X declined to pay for lack of unrestricted retained
earnings. Can A compel the payment of the quarterly interest?
No. Dividends cannot be declared for preferred shares which
were guaranteed a quarterly dividend if there are no unrestricted
retained earnings. “Interest-bearing stocks,” on which the
corporation agrees absolutely to pay interest before dividends
are paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or
surplus only.242
62. What are the kinds of preferred shares as to dividends?

Holders of preferred shares as to dividends are paid first prior
to any distribution to the holders of common shares. Preferred
shares as to dividends may be:
a. Cumulative Preferred Shares: This means that the
stipulated dividend on this type of preferred shares, if not
paid on any given year, shall be added to the dividends
which shall be due the following year/s, and holders of
said preferred shares shall be paid the accumulated
dividends during the accumulated period before dividends
are paid to the holders of common shares. The payment
of cumulative dividends is on the assumption that
unrestricted retained earnings are available to cover the
entire amount. .
b. Non-Cumulative Preferred Shares: This means that if
dividends are not declared for a particular year within
the covered period, the right to receive dividend for such
year is extinguished.
c. Participating Preferred Shares: This means that after
payment of the dividends due to the shares, the holder
thereof is entitled to participate in the remaining
dividends with the holders of the common shares based
on the amount specified in the agreement, otherwise, in
proportion to the common shares.
242Republic Planters Bank v. Agana, G.R. No. 51765, March 3,1997.
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d. Non-Participating Preferred Shares: This means that after

receiving the dividend due on the shares, the remaining
dividends are distributed proportionately to holders of
the common shares.
Preferred shares may also have a combination of the foregoing
features.
ii. Scope of voting rights subject to classification

63. What are voting shares?
These are shares which can vote on all corporate acts requiring
stockholders’ approval. The corporation should always have voting
shares. These are the common shares of stock.
64. What are non-voting shares?

These are shares that are denied the right to vote in the articles
of incorporation. Provided, however, that there shall always be a
class or series of shares which have complete voting rights.
65. What classes of shares may be denied the right to vote?

No share may be deprived of voting rights except those classified
and issued as “preferred” or “redeemable” shares.243
Treasury shares, by their nature, cannot vote and there is no
need to deny them such right in the articles of incorporation.
Delinquent shares are also not entitled to vote244 and similar
to treasury shares, there is no need to deny them such right in the
articles of incorporation. The denial is statutory.
66. In what instances does the law vest the right to vote for non
voting shares?
Holders of non-voting shares shall be entitled to vote on the
following matters:
a. Amendment of the articles of incorporation;
b. Adoption and amendment of bylaws;
243Section 6, RCC.
Z44Section 70, RCC.
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C. Sale, lease, exchange, mortgage, pledge, or other

disposition of all or substantially all of the corporate
property;
d. Incurring, creating, or increasing bonded indebtedness;
e. Increase or decrease of authorized capital stock;
f. Merger or consolidation of the corporation with another
corporation or other corporations;
g- Investment of corporate funds in another corporation or
business in accordance with the RCC; and
h. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph,
the vote required to approve a particular corporate act under the
RCC shall be deemed to refer only to stocks with voting rights.
iii. Founder’s shares

67. What are the revisions under the RCC on the provision on
founders' shares?
a. The RCC made it clear that exclusive right of the holders of
the founders’ shares to vote and be voted as directors shall
not be allowed if its exercise will violate Commonwealth
Act No. 108, otherwise known as the “Anti-Dummy
Law”; R.A. No. 7042, otherwise known as the “Foreign
Investments Act of 1991”; and other pertinent laws.
b. The five (5)-year limitation is counted from the date of
incorporation and not from SEC’s approval.
c. There is no mention of the requirement of SEC’s approval
before the exclusive right to vote and be voted for in the
election of directors can be granted. The approval of the
incorporation is effectively, however, the approval of the
exclusive right to vote and be voted as directors.
68. What are founders' shares?

Founders’ shares are shares classified as such in the articles
of incorporation which may be given certain rights and privileges
not enjoyed by the owners of other stocks. Where the exclusive right
to vote and be voted for in the election of directors is granted, it
must be for a limited period not to exceed five (5) years from the
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date of incorporation: Provided, That such exclusive right shall

not be allowed if its exercise will violate Commonwealth Act No.
108, otherwise known as the “Anti-Dummy Law”; R.A. No. 7042,
otherwise known as the “Foreign Investments Act of 1991”; and
other pertinent laws.246
Note that only the exclusive right to vote and be voted for in
the election of directors is subject to a limited period of five (5) years
from the date of incorporation.
69. The Articles of Incorporation of a corporation provides for

voting rights privilege of its founders* shares, as follows:
"In terms of voting rights, FOUNDERS' shares shall
have a 1:10 ratio as opposed to 1:1 ratio for the COMMON
shares. In the other words, one FOUNDERS' share is
equivalent to ten votes. All shares regardless of whether
it is FOUNDERS' or COMMON shall be allowed to vote on
all matters of the holding corporation, including the right
to vote and be voted for in the election of directors.”
Is the 1:10 voting rights ratio for founders' shares subject
to a limited period not to exceed five (5) years provided under
Section 7 of the RCC?
The 1:10 voting rights ratio for founders’ shares is not subject to
the limited period not to exceed five (5) years provided under Section
7 of the RCC since this provision only applies to the exclusive right
to vote and be voted for in the election of directors.246
iv. Redeemable shares

70. What are redeemable shares?
Redeemable shares are shares classified as such in the
articles of incorporation which may be issued by the corporation
when expressly provided in the articles of incorporation. They are
shares which may be purchased by the corporation from the holders
of such shares upon the expiration of a fixed period, regardless of
the existence of unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions stated in the
245Section 7, RCC.
246Close Holding Corporation; Founder’s Shares, SEC-OGC Opinion No. 02-10,
January 15, 2010.
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articles of incorporation and the certificate of stock representing the

shares, subject to rules and regulations issued by the SEC.2"
Redeemable shares may be redeemed, regardless of the
existence of unrestricted retained earnings, and provided that the
corporation has, after such redemption, sufficient assets in its books
to absorb corporate debts and liabilities.
71. Can the corporation be compelled to redeem redeemable

shares if it has no available surplus profit?
Yes, if the redeemable shares are mandatory in nature,
the issuing corporation may be compelled to redeem the shares,
regardless of the existence of unrestricted retained earnings.248
It should be noted, however, that redemption may not be made
where the corporation is insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its debts as they
mature. In the case of Republic Planters Bank v. Agana (supra),
while the stock certificate does allow redemption, the option to do
so was clearly vested in the issuing corporation. In any case, the
redemption of said shares cannot be allowed because the Central
Bank made a finding that the bank had been suffering from chronic
reserve deficiency. Such findings resulted in the directive prohibiting
the bank from redeeming any preferred share on the ground that
said redemption would reduce the assets of the bank to the prejudice
of its depositors and creditors.249
v. Treasury shares
72. What are treasury shares?
Treasury shares are shares of stock that have been issued
and fully paid for, but subsequently reacquired by the issuing
corporation through purchase, redemption, donation, or some other
lawful means. Such shares may again be disposed of for a reasonable
price fixed by the board of directors.260
247Section 8, RCC.
™Ibid.
249BAR 2009.
““Section 9, RCC.
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Treasury shares shall have no voting right as long as such

shares remain in the Treasury.261 No dividends can be declared
thereon as corporations cannot declare dividends to themselves.
A stock corporation shall have the power to purchase or acquire
its own shares provided that it has unrestricted retained earnings
in its books to cover the shares to be purchased or acquired. The
following are the legitimate corporate purpose or purposes where a
corporation is allowed to acquire its own shares:
a. To eliminate fractional shares arising out of stock
dividends;
b. To collect or compromise an indebtedness to the
corporation, arising out of the unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during the said sale; and
c. To pay dissenting or withdrawing stockholders entitled
to payment for their share under the provisions of the
RCC.262
If treasury shares are purchased from the stockholder, the
transaction in effect is a return to the stockholders of the value of
their investment in the company and a reversion of the shares to the
corporation.
VI. Incorporation and organization

73. Who composes a corporation?
a. Corporators are those who compose a corporation, whether
as stockholders or shareholders in a stock corporation, or
as members in a nonstock corporation.
b. Incorporators are those stockholders or members
mentioned in the articles of incorporation as originally
forming and composing the corporation and who are
signatories thereof.
c. Board of Directors are generally elected by the stockholders
to conduct the business, control the property, and exercise
corporate powers. Directors may also be elected by their
fellow directors in the cases and under the conditions
^Section 56, RCC.

^Section 40, RCC.
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•450 DIVINA ON COMMERCIAL LAW:
specified in Section 28 of the RCC. They are called the

Board of Trustees in a nonstock corporation.
d. Officers are those appointed to assist the Board to manage
the affairs of the corporation.
a. Promoter
74. What is a promoter?
A promoter is a person who brings about or causes to bring
about the formation and organization of a corporation by bringing
together the incorporators or the persons interested in the
enterprise, procuring subscriptions or capital to the corporation and
setting in motion the machinery which leads to the incorporation of
the corporation itself.263
In actuality though, a corporation is usually formed and
organized by the incorporators themselves, without the need for any
promoter.
75. Is the promoter considered the agent of the corporation?

The promoter of a corporation is not in any sense the agent
of the corporation before it comes to existence, for there cannot be
an agency unless there is a principal. But he may of course become
the agent of the corporation after it has been formed provided
that there is assent on the part of the corporation. He, however,
occupies a fiduciary or quasi-trust relation toward the corporation
when it comes to existence and towards the subscribers prior to its
organization. This fiduciary relation imposes upon the promoter
to act in good faith in all dealings on behalf of the corporation. A
promoter violates this duty, for example, if he secretly acquires a
property which he knows the corporation needs and then sells it
to the corporation for profit.261
76. What are the distinctions between corporators and

incorporators?
a. Incorporators are mentioned in the articles of incorporation
as those who originally form part of the corporation
and are signatories thereof, whereas corporators are
otherwise. ■
263 1 8 Am Jur.2d 647, as cited in De Leon: Corporation Code: Annotated, p. 34.

25118 C.J.S 522, cited in De Leon, ibid., page 65.
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b. Incorporators are corporators while corporators are not

necessarily incorporators.
C. Incorporators in a stock corporation should not exceed
15 whereas the number of corporators may exceed 15
taking into account the number of authorized shares of
the corporation.
Under the OCC, the majority of the incorporators should be
residents of the Philippines while no such requirement is imposed
on corporators under the RCC. Similarly, except for corporation sole,
the number of incorporators should not be less than five (5). These
distinctions no longer hold under the RCC because the requirement
of residency for incorporators was removed and a one (l)-person
corporation is now allowed.
b. Subscription contract
77. What is a subscription contract?
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
subscription, notwithstanding the fact that the parties refer to it as
a purchase or some other contract.255
It provides for the kind of shares to be issued, the consideration
for the issuance of the shares, date and other terms of payment.
78. Distinguish purchase/transfer of shares from subscription of

shares.
Purchase/Transfer of Shares Subscription of Shares

Pertains to shares already issued Pertains to unissued shares of the
by the corporation. corporation.
Buyer/transferee cannot exercise Subscriber is entitled to exercise the
the rights pertaining to the rights of a stockholder even without
purchased sales without full full payment of the subscription;
payment of the purchase price, provided the subscriber is not
unless the sale agreement provides delinquent.
otherwise.
255Section 59, RCC.
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The creditor of the corporation The creditor of the corporation may

cannot enforce payment of the enforce payment on the unpaid
unpaid purchase price for lack of subscriptions under the trust fund
privity to the contract. doctrine.
79. May a corporation condone subscription receivables due from

its shareholders?
Upon the acceptance of a stock subscription by a corporation,
the subscription becomes a binding contract to which the subscriber
cannot withdraw. Neither does the corporation have the power to
release an original subscriber from its subscription, and as against
the creditors, a reduction of the capital stock can only take place in
the manner and under the conditions prescribed by law or the charter
of the corporation. To do so would be violative of the Trust Fund
Doctrine since it does not fall under any of the allowable instances
where a corporation may distribute its assets to its creditors and
stockholders. As such, subscription contracts cannot be cancelled by
the board of directors without justifiable cause. This is tantamount to
relieving an original subscriber from the subscription, a contractual
obligation, which a corporation has no power to do so.2M
Subscriptions to the capital of a corporation constitute a fund
to which creditors have a right to look for the satisfaction of their
claims and that the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to realize assets for the
payment of its debt.
80. May the corporate creditors enforce payment of the unpaid

subscription?
Yes, a creditor is allowed to maintain an action upon any
unpaid subscriptions (in the same collection suit against the
corporation) and thereby step into the shoes of the corporation for
the satisfaction of the debt. To make out a prima facie case in a suit
against stockholders of an insolvent corporation to compel them to
contribute to the payment of its debts by making good the balances
upon their subscriptions, it is only necessary to establish that the
stockholders have not in good faith paid the par value of the stocks
of the corporation. Subscriptions to the capital stock of a corporation
25GRe: Condonation of Subscriptions Receivables or Cancellation of Subscriptions,

SEC-OGC Opinion No. 50-19, October 2019.
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constitute a fund to which creditors have the right to look for the
satisfaction of their claims.267
In Philippine National Bank v. Bitulok Sawmill, et al.,268 the
Supreme Court said that the assignee in an insolvency can maintain
an action upon any unpaid stock subscription in order to realize
assets for the payment of its debt. In case of insolvency, all unpaid
stock subscriptions become payable on demand and are immediately
recoverable. The impheation is that the creditor cannot collect
the unpaid subscription unless there is an insolvency proceeding
involving the corporation.
In Halley u. Printwell, Inc. ,2ra there was no insolvency proceeding
and yet the Supreme Court affirmed the right of the creditor to
enforce the payment of the unpaid subscription in the same collection
suit against the corporation. It is submitted that the appropriate
remedy is to enforce the judgment against the corporation first and
it is only when the writ of execution is returned unsatisfied for lack
of leviable assets sufficient to satisfy the judgment debt that the
judgment against the unpaid subscriber may be enforced. Otherwise,
the unpaid subscriber effectively becomes solidarily liable with the
corporation. Such solidary liability has no basis in law.
c. Pre-incorporation subscription agreements

81. What is a pre-incorporation subscription? When is it
irrevocable?
Pre-incorporation subscription refers to subscription of shares
in a corporation still to be formed. This shall be irrevocable for
a period of at least six (6) months from the date of subscription,
unless all of the other subscribers consent to the revocation, or the
corporation fails to incorporate within the same period or within
a longer period stipulated in the contract of subscription. No pre
incorporation subscription may be revoked after the articles of
incorporation is submitted to the SEC.260
“’Halley v. Printwell, Inc., G.R. No. 157549, May 30, 2011.

268G.R. Nos. L-24177-85, June 29,1968.
“9G.R. No. 157549, May 30, 2011.
26»Section 60, RCC.
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82. What happens to the pre-incorporation subscription if the

application for incorporation is rejected by the SEC?
In Fong v. Duenas,20' the Supreme Court ruled that the
parties’ joint venture agreement to incorporate a company, when
not implemented within the stipulated period, maybe rescinded and
will necessitate the return of the pre-incorporation subscription. By
parity of reasoning, the pre-incorporation subscription should also
be returned if the SEC rejected the application for incorporation.
d. Consideration for stocks

83. What are the allowable forms of consideration for the issuance
of shares of stock?
Consideration for the issuance of stock may be:
a. Actual cash paid to the corporation;
b. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and
lawful purposes at a fair valuation equal to the par or
issued value of the stock issued;
c. Labor performed for or services actually rendered to the
corporation;
d. Previously incurred indebtedness of the corporation;
e. Amounts transferred from unrestricted retained earnings
to stated capital;
f. Outstanding shares exchanged for stocks in the event of
reclassification or conversion;
g- Shares of stock in another corporation; and/or
h. Other generally accepted form of consideration.262
Shares of stock shall not be issued in exchange for promissory
notes or future service. The same considerations provided in this
section, insofar as applicable, may be used for the issuance of bonds
by the corporation.263
261G.R. No. 185592, June 15, 2015.

262 Section 64, RCC.
™Ibid.
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84. Under what conditions may a corporation accept property as

consideration for the issuance of its shares of stock?
A corporation may accept property as consideration for the
issuance of its shares of stock under the following conditions:
a. It must be necessary or convenient for its use and lawful
purposes.
b. It must be fairly valued, at least equal to the par or issued
value of the stock issued.
c. The valuation thereof shall initially be determined by the
stockholders or the board of directors.
d. The valuation is subject to the approval of the SEC.26*
If the shares will not be issued in favor of existing stockholders,
the issuance should be approved by the board of directors, as well
as by the stockholders representing at least 2/3 of the outstanding
capital stock, otherwise, it will amount to a violation of the pre
emptive right of the stockholders.266
85. Under what conditions may a corporation issue its shares of

stock in consideration for the payment of debt?
The conditions are:
a. The debt must be previously existing, thus shares cannot
be used in payment but only as security for future debts.
b. If the shares will be issued not to existing stockholders,
the issuance must be approved by the board of directors,
as well as by the stockholders representing at least 2/3 of
the outstanding capital stock, otherwise, it will amount to
a violation of the pre-emptive right of the stockholders.266
c. If its own shares will be acquired by a bank in payment of
a debt, the acquisition has to be approved by the BSP and
the shares have to be disposed of within six months from
acquisition.267
“‘Section 61, RCC.

“’Section 10 of R.A. No. 8791, otherwise known as the General Banking Law.
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86. What does the law mean by amounts transferred from

unrestricted retained earnings to stated capital as
consideration for the issuance of shares?
The law basically refers to the payment of stock dividends.
Stock dividends are capitalized profits. When the corporation
declares stock dividends, it issues shares of stock to the stockholders
in proportion to their shareholdings in the corporation. They do not
directly pay for these additional shares. The consideration therefor
is the corresponding amounts transferred from retained earnings of
the corporation to capital.
87. Give an example of outstanding shares exchanged for stocks

in the event of reclassification or conversion as a form of
consideration.
A corporation may issue common shares in exchange for
preferred redeemable convertible shares, meaning, the preferred
shares may be converted to common stocks if the corporation fails to
redeem the shares on the date specified in the agreement.
88. Does the board of directors, if authorized by the articles of

incorporation to fix the issued price of no-par value shares,
require a majority vote of the entire board of directors?
No, it only requires a majority of the quorum of the board of
directors. This is consistent with Section 52 of the RCC which states
that unless otherwise provided in the RCC, every decision of the
board of directors when it constitutes a quorum is valid.
e. Articles of Incorporation
89. What are the revisions under the RCC on the provision on
articles of incorporation?
a. An arbitration agreement may be provided in the articles
of incorporation.
b. Filing of the articles of incorporation or amendments
thereto may be in the form of an electronic document in
accordance with the rules on electronic filing of the SEC.
c. The articles of incorporation should include an
undertaking to change the corporate name immediately
upon receipt of notice from the SEC that another
corporation, partnership or person has acquired a prior
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right to the use of such name, that the name has been
declared not distinguishable from a name already
registered or reserved for the use of another corporation,
or that it is contrary to law, public morals, good customs
or public policy.
d. It provides that the corporation shall have perpetual
existence or a fixed term as may be indicated in the
articles of incorporation.
e. There is no need to state that at least twenty-five (25%)
percent of the authorized capital stock above stated
has been subscribed and that at least twenty-five (25%)
percent of the total subscription have been paid as this
double 25% requirement under the OCC has been deleted.
f. There is a requirement of certification of receipt of
the paid-up portion of subscription by the Corporate
Treasurer.
g- Since the requirement of Treasurer’s Affidavit has
already been deleted under the RCC, the format for the
said affidavit is omitted as well.
90. What are the nature and functions of the articles of

incorporation?
It is the document prepared by the incorporators organizing a
corporation containing the matters required by the RCC and filed
with the SEC. It offers the ultimate evidence of the nature and
purpose of a corporation and defines the contractual relationships
between the State and the corporation, the stockholders and the
State, and the corporation and the stockholders.268
i. Contents
91. What are the contents of the articles of incorporation?
The articles of incorporation shall contain substantially the
following matters, except as otherwise prescribed by the RCC or by
special law:
a. The name of the corporation;
2MForest Hills Golf and Country Club, Inc. Gardpro, Inc., G.R. No. 164686,
October 22, 2014.
k
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b. The specific purpose or purposes for which the corporation

is being formed. Where a corporation has more than one
stated purpose, the articles of incorporation shall indicate
the primary purpose and the secondary purpose or
purposes: Provided, That a nonstock corporation may not
include a purpose which would change or contradict its
nature as such;
c. The place where the principal office of the corporation is
to be located, which must be within the Philippines;
d. The term for which the corporation is to exist, if the
corporation has not elected perpetual existence;
e. The names, nationalities, and residence addresses of the
incorporators;
f. The number of directors, which shall not be more than
fifteen (15) or the number of trustees which may be more
than fifteen (15);
g- The names, nationalities, and residence addresses of
persons who shall act as directors or trustees until the
first regular directors or trustees are duly elected and
qualified in accordance with the RCC;
h. If it is a stock corporation, the amount of its authorized
capital stock, number of shares into which it is divided,
the par value of each, names, nationalities, and residence
addresses of the original subscribers, the amount
subscribed and paid by each on the subscription, and a
statement that some or all of the shares are without par
value, if applicable;
i. If it is a nonstock corporation, the amount of its capital,
the names, nationalities, and residence addresses of the
contributors, and amount contributed by each; and
j- Such other matters consistent with law and which the
incorporators may deem necessary and convenient.
An arbitration agreement may also be provided in the articles
of incorporation pursuant to Section 181 of the RCC.269
269Section 13, RCC.
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92. May the articles of incorporation provide for more than one (1)
purpose?
Yes, the articles of incorporation may have more than one (1)
purpose provided that the purposes are not contrary to law, capable
of being lawfully combined and there is only one primary purpose. It
is important to distinguish the primary from the secondary purposes
in the articles of incorporation because the stockholders have the
right to expect that the funds and assets of the corporation should be
primarily devoted to attain its primary purpose. Such disbursement
and use only require board approval. Investment of funds and assets
in the secondary purpose/s require the approval of at least a majority
of the entire board and stockholders representing at least 2/3s of the
outstanding capital stock.270
93. Does the SEC have the authority to inquire whether the
corporation has purposes other than those stated in the
articles of incorporation?
If the corporation’s purpose, as stated in the articles of
incorporation is lawful, then the SEC has no authority to inquire
whether the corporation has purposes other than those stated,
and mandamus will lie to compel it to issue the certificate of
incorporation.271
However, if it turns out that the corporation committed
misrepresentation as to its actual purpose, the SEC may revoke the
corporate franchise and dissolve the corporation.272 The corporation
may also be criminally liable for obtaining corporate registration
through fraud.273
94. What is the importance of indicating in the articles of

incorporationthe principal place of business ofthecorporation?
The principal place of business of a corporation, as stated in
the articles of incorporation, determines its residence or domicile. As
such, the place indicated in the corporation’s articles of incorporation
becomes controlling in determining the venue for the filing of legal
270Section 41, RCC.

271Alicia E. Gala, et al. v. Ellice Agro-Industrial Corporation, et al., G.R. No.
156819, December 11, 2003.
2,2Section 138(d), RCC.
273Section 164, RCC.
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action involving the corporation. The principal office ofthe corporation

is that which is stated in the articles of incorporation and not the
place of its actual operations. In one case, the corporation’s principal
office, as indicated in the articles of incorporation, is Makati but the
case was filed in Mandaluyong where the corporation transferred
its operations. The Supreme Court said the venue was improperly
laid.274
ii. Non-amendable items

95. What are the requisites to amend the articles of incorporation
of a private corporation?
a. Any provision stated in the articles of incorporation may
be amended provided there is no prohibition in the RCC
or special law and the amendment must be for legitimate
purposes.
b. The amendment should be approved by at least a majority
vote of the board of directors or trustees and the vote or
written assent of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock. The
articles of incorporation of a nonstock corporation may be
amended by the vote or written assent of a majority of the
trustees and at least two-thirds (2/3) of its members.
c. The original and amended articles together shall contain
all provisions required by law to be set out in the articles
of incorporation. Amendments to the articles shall be
indicated by underscoring the change or changes made,
and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or
trustees, with a statement that the amendments have been
duly approved by the required vote of the stockholders or
members, shall be submitted to the SEC.276
If the amendments pertain to the increase of capital
stock, the certificate of amendments must contain the
matters set forth in Section 37 of the RCC.
274Hyatt Elevators and Escalators Corporation Goldstar Elevators Phils.,

Inc., G.R. No. 161026, October 24, 2005.
27£Section 15, RCC.
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d. The amendments will take effect upon approval of the

SEC or from the date of filing with the SEC if not acted
upon within six (6) months from the date of filing for a
cause not attributable to the corporation.216
96. What items in the articles of incorporation cannot be amended?

Matters of accomplished fact cannot be amended, such as names
and addresses of the incorporators, date and place of incorporation,
and the notary public before whom the articles of incorporation was
acknowledged. Thus, the incorporator who, after obtaining marriage
annulment, wants to change her name as incorporator to drop the
surname of the husband, may not legally do so. She can however
legally request the Corporate Secretary to change her name as a
stockholder.
97. What are the grounds for disapproval of the articles of

incorporation or amendments thereto?
The SEC may disapprove the articles of incorporation or
any amendment thereto if the same is not compliant with the
requirements of the RCC: Provided, That the SEC shall give the
incorporators, directors, trustees, or officers a reasonable time from
receipt of the disapproval within which to modify the objectionable
portions of the articles or amendment. The following are grounds for
such disapproval:
a. The articles of incorporation or any amendment thereto is
not substantially in accordance with the form prescribed
herein;
b. The purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to
government rules and regulations;
c. The certification concerning the amount of capital stock
subscribed and/or paid is false; and
d. The required percentage of Filipino ownership of the
capital stock under existing laws or the Constitution has
not been complied with.
mIbid.
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Additionally, no articles of incorporation or amendment to

articles of incorporation of banks, banking and quasi-banking
institutions, pre-need, insurance and trust companies, NSSLAs,
pawnshops, and other financial intermediaries shall be approved by
the SEC unless accompanied by a favorable recommendation of the
appropriate government agency to the effect that such articles or
amendment is in accordance with law.”7
Other grounds include non-compliance with conditions
imposed by the SEC in relation to the filing of the registration of the
articles of incorporation or amendment thereto and violation by the
corporation of any law, rules, and regulations administered by the
SEC.’”
f. Corporate name; limitations on use of corporate

name
93. What are the limitations on the adoption and use of corporate
name?
Under Section 17 of the RCC, any corporate name is allowed,
provided that none of the following disqualifications are present, to
wit;
a. Not distinguishable from that already reserved or
registered for the use of another corporation.
b. Name is already protected by law.
c. Use is contrary to existing law, rules, and regulations.
Further, appending the following words to the corporate name,
does not mean that it is already distinguishable, to wit:
a. The word corporation, company, incorporated, limited,
limited liability, or an abbreviation of one of such words.
b. Punctuations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, spacing, or
number of the same word or phrase.”9
’’’Section 16, RCC.

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99. When may a corporation prohibit the use of a corporate name

by another corporation?
A corporation may prohibit another corporation from adopting
a corporate name if the following requisites are present:
a. that the complainant corporation acquired a prior right
over the use of such corporate name through earlier
registration; and
b. the proposed name is either: not distinguishable from
that already reserved or registered for the use of the
complainant corporation or a name which is already
protected by law or its use is contrary to existing law,
rules and regulations.280
100. What are the remedies available to a corporation against the

unauthorized use of its corporate name?
The remedies are as follows:
a. File a petition with the SEC to compel the other
corporation to change it. Court action is not necessary.
The SEC may order a change of corporate name based on
its authority under the RCC and the undertaking of the
corporation contained in its articles of incorporation to
change its corporate name if it is not distinguishable from
that already reserved or registered for the use of another
corporation.
b. File a complaint against the unauthorized use of the
corporate name under Section 159 of the RCC.
c. If the corporate name is used as a tradename, file a
complaint for infringement of tradename.
101. Is the corporate name "GSIS Family Bank-A Thrift Bank"

distinguishable from BPI Family Bank?
It is not. The only words that distinguish the two are “BPI,”
“GSIS,” and “Thrift.” The first two words are merely the acronyms
of the proper names by which the two corporations identify
““See Indian Chamber of Commerce Phils., Inc. v. Filipino Indian Chamber of

Commerce in the Philippines, Inc., G.R. No. 184008, August 3,2016. Requisites were
made to conform to the RCC.
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themselves; and the third word simply describes the classification

of the bank. The overriding consideration in determining whether
a person, using ordinary care and discrimination, might be misled
is the circumstance that both corporations are engaged in the same
business of banking. The word “family” cannot be separated from
the word “bank.” This coined phrase, neither being generic nor
descriptive, is merely suggestive and may properly be regarded as
arbitrary. Arbitrary marks are words or phrases used as a mark that
appear to be random in the context of its use. They are generally
considered to be easily remembered because of their arbitrariness.
They are original and unexpected in relation to the products they
endorse, thus, becoming themselves distinctive service.281
GSIS Family Bank-A Thrift Bank was thus ordered to change
its corporate name. It changed its name to simply “GSIS Thrift
Bank”
102. Discuss the authority of the SEC to order a change of corporate

name.
The SEC, upon determination that the corporate name is: (1)
not distinguishable from a name already reserved or registered for
the use of another corporation; (2) already protected by law; or (3)
contrary to law, rules and regulations, may summarily order the
corporation to immediately cease and desist from using such name
and require the corporation to register a new one. The SEC shall also
cause the removal of all visible signages, marks, advertisements,
labels, prints, and other effects bearing such corporate name.
Upon the approval of the new corporate name, the SEC shall
issue a certificate of incorporation under the amended name.
If the corporation fails to comply with the SEC’s order, the SEC
may hold the corporation and its responsible directors or officers
in contempt and/or hold them administratively, civilly and/or
criminally liable and/or revoke the registration of the corporation.
281GSIS Family Bank-Thrift Bank (Formerly Comsavings Bank, Inc.) v. BPI

Family Bank, G.R. No. 175278, September 23, 2015 — answered to conform to RCC.
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g- Registration, incorporation and commencement of

corporate existence
103. What are the procedural steps to be taken for the registration
and incorporation of a corporation?
a. A person or group of persons desiring to incorporate
shall submit the intended corporate name to the
SEC for verification. If the SEC finds that the name
is distinguishable from a name already reserved or
registered for the use of another corporation, not protected
by law and is not contrary to law, rules and regulations,
the name shall be reserved in favor of the incorporators.282
b. The incorporators shall submit to the SEC the
documentary requirements listed below.
c. Payment of filing fees.
If the SEC finds that the submitted documents and information
are fully compliant with the requirements of the RCC, other relevant
laws, rules and regulations, the SEC shall issue the certificate of
incorporation.
104. When does a corporation commence its corporate existence

and juridical personality?
A private corporation organized under the RCC commences
its corporate existence and juridical personality from the date the
SEC issues the certificate of incorporation under its official seal
and thereupon the incorporators, stockholders/members and their
successors shall constitute a body corporate under the name stated
in the articles of incorporation for the period of time mentioned
therein, unless said period is extended or the corporation is sooner
dissolved in accordance with law.283
A corporation does not acquire legal personality from the mere
execution of the articles of incorporation or its filing with the SEC.
No amount of good faith on the part of the incorporators that they
are duly organized will suffice. It commences its corporate existence
and acquires juridical personality from the date the SEC issues the
certificate of incorporation under its official seal.
“Section 18, RCC.

Îbid.
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Thus, the owner, whose real property, was contributed by

another person as the latter’s subscription to the shares of stock
of the proposed corporation cannot sue for reconveyance of the
property the proposed corporation, pending SEC approval of the
incorporation. The suit should be directed against the treasurer who
received the property in trust for the corporation.284
A corporation created under a special law acquires legal
personality upon effectivity of the special law creating it or compliance
with the conditions imposed by such law for the commencement of
corporate existence. In one case, a sports federation was registered
with the SEC but the Supreme Court held the registration was
not enough to confer upon it legal personality because the law
creating sports federation, at that time, required accreditation
from the appropriate government agency before it can acquire legal
personality.285
h. Election of directors or trustees

105. What are the requisites for the election of the directors or
trustees to be valid?
a. Except when the exclusive right to be voted as directors
is reserved for holders of founders’ shares under Section 7
of the RCC, every stockholder or member has the right to
nominate the director or trustee to be elected.
b. There must be a notice of meeting sent to the stockholders
in accordance with the form and mode under the bylaws.***
c. The owners of the majority of the outstanding capital
stock or the majority of the members entitled to vote
must be present, either in person or by a representative
authorized to act by a written proxy. If voting through
remote communication or in absentia will be allowed,
such voter, voting through said means, shall be deemed
present for purposes of counting the majority/quorum.
2MBAR 1978.
Înternational Express Travel and Tour Services Court of Appeals, Henri
Kahn, el al., G.R. No. 119002, October 19, 2000.
286Section 50, RCC.
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d. The meeting must be presided by the officer indicated

under the bylaws.
e. The election must be by ballot if requested by any voting
stockholder or member.
f. For stock corporations, the stockholders may cast such
number of votes based on the shares registered in their
names in the books of corporation multiplied by the whole
number of directors to be elected.
g- On the other hand, for nonstock corporations, unless
otherwise provided in their articles of incorporation or
bylaws, members may cast as many votes as there are
trustees to be elected but may not cast more than one (1)
vote for one (1) candidate.
h. The nominees receiving the highest number of votes shall
be duly elected as directors or trustees.
i. The elected directors or trustees must possess all of the
qualifications and none of the disqualifications under the
RCC and the bylaws of the corporation.
106. How many votes are stockholders entitled to cast?

For stock corporations, the stockholders may cast such number
of votes based on the shares registered in their names in the books of
the corporation, at the time specified in the bylaws, or by the board
of directors or trustees, multiplied by the total number of directors
to be elected.
To illustrate, if a stockholder owns one thousand (1,000) shares
and there are 15 directors to be elected, said stockholder is entitled
to cast a total of fifteen thousand (15,000) votes.
107. How many votes are members of nonstock corporations

entitled to cast?
For nonstock corporations, unless cumulative voting is allowed
in their articles of incorporation or bylaws, members may cast as
many votes as there are trustees to be elected but may not cast more
than one (1) vote for one (1) candidate.
Hence, if there are six (6) trustees to be elected, a member has
six (6) votes but he cannot cast more than one (1) vote for one (1)
candidate. However, if cumulative voting is allowed by the articles
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or bylaws, he can cast all the six (6) votes in favor of any nominee or
spread out the six (6) votes among the nominees as he deems fit?’
108. What are the methods of voting for election of directors?

The stockholder may resort to straight voting or cumulative
method of voting.
Straight voting means voting such number of shares for as
many persons as there are directors to be elected.
Under the cumulative method of voting, he may cumulate said
shares and give one (1) candidate as many votes as the number of
directors to be elected multiplied by the number of the shares owned
or distribute them on the same principle among as many candidates
as may be seen fit: Provided, That the total number of votes cast
shall not exceed the number of shares owned by the stockholders
as shown in the books of the corporation multiplied by the whole
number of directors to be elected.288
Under this provision, there are two (2) methods of cumulative
voting: cumulative voting for one (1) candidate, and cumulative
voting by distribution.
Under the first method, a stockholder is allowed to concentrate
his votes and “give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall
equal.” By way of example, suppose a stockholder owns 200 shares
of stock and there are five (5) directors to be elected, he is entitled
to 1,000 votes all of which he may cast in favor of anyone candidate.
On the other hand, by the second method, a stockholder may
cumulate his shares by multiplying also the number of his shares by
the number of directors to be elected and distribute the same among
as many candidates as he shall see fit. To illustrate, a stockholder
with 100 shares of stock is entitled to 500 votes if there are five (5)
directors to be elected. He may cast his votes in any combination
desired by him provided that the total number of votes cast by him
does not exceed 500, which is the number of shares owned by him
multiplied by the total number of directors to be elected.289
z87BAR2011.
^Section 23, RCC.
289Re: Cumulative Voting in Condominium Corporation, SEC-OGC Opinion
No. 10-14, June 2, 2014.
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109. What is the procedure for voting if the corporation is required

to have independent directors or trustees?
The election of independent directors for a stock corporation
must be made together with the election for regular directors. The
manner of voting will also be the same. The stockholder may vote
such number of shares registered in his name in the books of the
corporation multiplied by the number of directors to be elected
inclusive of independent directors. He can cumulate his votes for
regular directors alone, for independent directors alone, or for a
Combination of both regular and independent directors as long as
his votes will not exceed the shares of stock he owns multiplied by
the total number of directors to be elected.
Ij
For example, a corporation vested with public interest has 10

directors under its articles of incorporation, with eight (8) regular
directors and two (2) independent directors. There are a total
of 18 candidates for regular directors and five (5) candidates for
independent directors. The votes for regular directors should be
segregated from the votes for independent directors. The top eight
(8) candidates who obtained the highest number of votes among the
18 nominees shall be considered elected as regular directors. The
top two (2) candidates, in turn, for independent directors will then
be considered elected even if said nominees obtained less votes than
the nominees for regular directors.290
The same procedure may likewise be applied for nonstock
corporation whether cumulative method of voting is allowed or
not. The candidates who obtained the highest number of votes
among all nominees for regular trustees and independent trustees,
respectively, shall be duly elected as such trustees.
110. What shares of stock are not included in the determination of

the majority of outstanding capital stock to elect directors of a
stock corporation?
a. Non-voting shares;
b. Delinquent shares; and
c. Treasury shares.
^See Procedure for Election of Directors, SEC-OGC Opinion No. 19-11, March
23,2011.
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However, unpaid shares which are not delinquent are included

in the said determination of the majority.
111, What happens if no election is held, or the owners of majority

of the outstanding capital stock or majority of the members
entitled to vote are not present in person, by proxy, or through
remote communication or not voting in absentia at the meeting?
The meeting may be adjourned and the outgoing directors
or trustee shall serve in a hold-over capacity.291
The non-holding of elections and the reasons therefor shall be
reported to the SEC within 30 days from the date of the scheduled
election. The report shall specify a new date for the election, which
shall not be later than 60 days from the scheduled date.
If no new date has been designated, or if the rescheduled
election is likewise not held, the SEC may, upon the application of
a stockholder, member, director or trustee, and after verification of
the unjustified non-holding of the election, summarily order that an
election be held. The SEC shall have the power to issue such orders
as may be appropriate, including orders directing the issuance
of a notice stating the time and place of the election, designated
presiding officer, and the record date or dates for the determination
of stockholders or members entitled to vote.
Notwithstanding any provision of the articles of incorporation
or bylaws to the contrary, the shares of stock or membership
represented at such meeting and entitled to vote shall constitute a
quorum for purposes of conducting an election under this section.®1
i. Adoption of bylaws
112. What are the nature and functions of bylaws?
Bylaws are set of rules and regulations adopted by the
corporation for its internal government, and to regulate the conduct
and prescribe the rights and duties of its members towards itself and
among themselves in reference to the management of its affairs.191
The corporation has the inherent and, at the same time, express
power to adopt bylaws.
291Section 23, RCC.

292Section 25, RCC.
2MJohn Gokongwei, Jr. v. Securities and Exchange Commission, et al„ G.R.
No. L-45911, April 11, 1979.
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1 i
Together with the articles of incorporation, bylaws of a

corporation are the fundamental documents governing the conduct
of corporate affairs; they establish the norms of procedure for
exercising rights, and reflect the purposes and intentions of the
incorporators.
113. How are the bylaws adopted?

* For the adoption of bylaws by the corporation, the affirmative
vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members
in case of nonstock corporations, shall be necessary. The bylaws
shall be signed by the stockholders or members voting for them and
shall be kept; in the principal office of the corporation, subject to
the inspection of the stockholders or members during office hours. A
copy thereof, duly certified by a majority of the directors or trustees
and countersigned by the secretary of the corporation, shall be filed
with the SEC and attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph,
bylaws may be adopted and filed prior to incorporation; in such case,
such bylaws shall be approved and signed by all the incorporators
and submitted to the SEC, together with the articles of incorporation.
The SEC shall not accept for filing the bylaws or any
amendment thereto of any bank, banking institution, building and
loan association, trust company, insurance company, public utility,
educational institution, or other special corporations governed by
special laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such bylaws or amendments
are in accordance with law.201
i. Contents of bylaws
114. What are the contents of bylaws?
A private corporation may provide the following in its bylaws:
a. The time, place and manner of calling and conducting
regular or special meetings of the directors or trustees;
b. The time and manner of calling and conducting regular or
special meetings and mode of notifying the stockholders
or members thereof;
^’Section 45, RCC.
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C. The required quorum in meetings of stockholders or

members and the manner of voting therein;
d. The modes by which a stockholder, member, director, or
trustee may attend meetings and cast their votes;
e. The form for proxies of stockholders and members and
the manner of voting them;
f. The directors’ or trustees’ qualifications, duties
and responsibilities, the guidelines for setting the
compensation of directors or trustees and officers, and the
maximum number of other board representations that an
independent director or trustee may have which shall, in
no case, be more than the number prescribed by the SEC;
g- The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
h. The manner of election or appointment and the term of
office of all officers other than directors or trustees;
i. The penalties for violation of the bylaws;
j. In the case of stock corporations, the manner of issuing
stock certificates; and
k. Such other matters as may be necessary for the proper
or convenient transaction of its corporate affairs for
the promotion of good governance and anti-graft and
corruption measures.
An arbitration agreement may be provided in the bylaws
pursuant to Sections 46 and 181 of the RCC.
115. Will the non-submission of bylaws result in the automatic

dissolution of the corporation?
Non-filing of the bylaws will not result in the automatic
dissolution of the corporation. Under P.D. No. 902-A, the SEC is
empowered to suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of a corporation on the ground
inter alia of‘failure to file bylaws within the required period.295
295Loyola Grand Villas Homeowners (South) Association, Inc. v. Hon. Court

of Appeals, Home Insurance and Guaranty Corporation, Emden Encarnacion and
Horatio Aycardo, G.R. No. 117188, August 7,1997.
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r
Since the RCC removed the one (1) month period to submit
the bylaws, does it mean that non-submission of the bylaws ceased
to be a ground for the suspension or revocation of the certificate
of registration? It appears so. But what if the corporation does not
at all adopt any bylaws? What is the status of the corporation in
the meantime? In Sappari K. Sawadjaan v. Court of Appeals,** the
Supreme Court held that at the very least, by its failure to submit
its bylaws on time, the corporation involved in that case may be
considered a de facto corporation whose right to exercise corporate
powers may not be inquired into collaterally in any private suit to
which such corporations may be a party. The corporation involved
was Al-Amanah Investment Bank of the Philippines. While it was
not a private corporation but a corporation created under a special
law (R.A. No'.- 6848), the Supreme Court, nevertheless, applied the
provisions of the then OCC and the SEC Rules and Regulations for
Suspension/Revocation of the Certificate of Registration.
In actuality though, one of the SEC’s documentary
requirements for incorporation is the bylaws of the proposed
corporation. Nevertheless, for academic discussion, it is submitted
that a corporation which has not adopted bylaws, after incorporation,
should be considered a de facto corporation. It has all the powers
and privileges of a corporation under the RCC until the State
assails its existence in a direct proceeding. But because the one
(l)-month period to submit the bylaws was removed, it may adopt
the bylaws anytime and the basis of the suit against the corporation
is only the inaction or refusal of the corporation to adopt and submit
bylaws despite the order from the SEC.
ii. Binding effects

116. Are the bylaws of the corporation binding on third parties?
No, bylaws are only binding among the stockholders and
members of the corporation. To be bound, a third party must
have acquired knowledge of the pertinent bylaws at the time the
transaction or agreement was entered into. Thus, a provision in the
bylaws of a country club granting it a preferred lien over the share of
stock of a member for unpaid dues is not binding on the pledgee of the
same share of stock if the latter had no actual knowledge of it when
the shares were assigned to it as security for a loan transaction.2”
2MG.R. No. 141735, June 8, 2005.

“’China Banking Corporation v. Court of Appeals, G.R. No. 117504, March
26,1997.
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In another case, a school questioned the validity of the

employment contract entered into with its instructor because the
signatory thereon was not the Chairman of the Board as required
by its bylaws. However, since bylaws operate merely as internal
rules among the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have knowledge
of the contents of bylaws.298
117. When do bylaws become effective?

Under Section 45 of the RCC, bylaws become effective only
upon the issuance of the SEC of a certification that the bylaws are
in accordance with the RCC.
Amended or new bylaws become effective upon the issuance by
the SEC of a certification that the same is in accordance with the
RCC and other relevant laws.299
Hi. Amendments
118. How are bylaws amended or revised?
Under Section 47 of the RCC, bylaws may be amended by at
least majority of the board of directors or trustees and the owners of
at least majority of the outstanding capital stock in case of a stock
corporation or of the members in case of a nonstock corporation, at a
regular or special meeting duly called for the purpose.
Owners of two-thirds (2/3) of the outstanding capital stock of
stock corporations or two-thirds (2/3) of the members in a nonstock
corporation can delegate to the board of directors or trustees the
power to amend or repeal the bylaws or adopt new bylaws. This
delegation is revoked by the vote of stockholders owning or
representing a majority of the outstanding capital stock or a majority
of the members at a regular or special meeting.
Whenever the bylaws are amended or new bylaws are adopted,
the corporation shall file with the SEC such amended or new
bylaws and, if applicable, the stockholders’ or members’ resolution
authorizing the delegation of the power to amend and/or adopt new
298PMI Colleges v. The National Labor Relations Commission and Alejandro

Galvan, G.R. No. 121466, August 15, 1997.
299Section 47, RCC.
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bylaws, duly certified under oath by the corporate secretary and a

majority of the directors or trustees.300
119. May the bylaws reflect the actual delegation of authority to the
board of directors to amend the bylaws?
Under the RCC, the delegation of authority should be made
through a shareholders’ or members’ resolution. The bylaws cannot
reflect the actual delegation. The delegated authority is temporary.
It may be revoked anytime by a majority vote of the shareholders or
members.301 If the delegation is in the bylaws, the authority cannot
be simply recalled for it would have required an amendment to the
bylaws itself.
j. Effects of non-use of corporate charter

120. What are the revisions under the RCC regarding the non-use of
corporate charter?
a. The period to organize and commence business is fixed
at five (5) years from incorporation. Under the OCC,
the corporation must organize within two (2) years from
incorporation.
b. The SEC is given the authority to place a corporation under
delinquent status but only after due notice and hearing,
that is, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least
five (5) consecutive years.
c. A delinquent corporation shall have a period of two
(2) years to resume operations and comply with all
requirements that the SEC shall prescribe. Upon
compliance by the corporation, the SEC shall issue an
order lifting the delinquent status. Failure to comply
with the requirements and resume operations within the
period given by the SEC shall cause the revocation of the
corporation’s certificate of incorporation.

“‘SEC-OGC Opinion 18-08, dated April 20, 2018.
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d. The SEC shall also give reasonable notice to, and

coordinate with the appropriate regulatory agency
prior to the suspension or revocation of the certificate of
incorporation of companies under their special regulatory
jurisdiction.
121. When should the corporation formally organize and commence

its business?
A corporation should formally organize and commence its
business within five (5) years from the date of its incorporation,
otherwise, its certificate of incorporation shall be deemed revoked
as of the day following the end of the five (5)-year period.302
However, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least five (5)
consecutive years, the SEC may, after due notice and hearing, place
the corporation under delinquent status.
Note that failure to formally organize and commence business
within five (5) years from incorporation results to the automatic
revocation of the certificate of incorporation, whereas commencement
of business but subsequent lack of operation for five (5) consecutive
years does not.
122. What is the consequence if a corporation is placed in delinquent

status?
A delinquent corporation shall have a period of two (2) years to
resume operations and comply with all requirements that the SEC
shall prescribe. Upon compliance by the corporation, the SEC shall
issue an order lifting the delinquent status. Failure to comply with
the requirements and resume operations within the period given by
the SEC shall cause the revocation of the corporation’s certificate of
incorporation.
The SEC shall give reasonable notice to, and coordinate with the
appropriate regulatory agency prior to the suspension or revocation
of the certificate of incorporation of companies under their special
regulatory jurisdiction.
“Section 21, RCC.
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VII. Corporate powers

123. What are the classifications of corporate powers and capacity?
The powers of a corporation can be classified as follows:
a. Express powers — those which are expressly granted
under the RCC303 and those embodied in the corporation’s
articles of incorporation, as sanctioned by the State.
b. Implied or incidental powers - these are the corporation’s
“powers, attributes and properties . . . incident to its
existence,” which may be “essential or necessary to carry
out its purpose or purposes as stated in its articles of
incorporation.”304
c. Inherent powers — those which are not expressly stated
but are deemed to be within the capacity of corporate
entities. Incidental powers are also called inherent
corporate powers and include those which a corporation
can exercise by the mere fact of its corporate existence,
such as:
i. Right to succession
ii. Right to have a corporate name
iii. Right to adopt its own bylaws
The inherent powers of the corporation are also included in the
enumeration of express powers under Section 35(k) of the RCC.
Acts outside these powers are ultra vires acts. The statutory
provision prohibiting them is Section 44 of the RCC.
124. Give example of implied or incidental powers.

In the case of National Power Corporation v. Vera,305 the
stevedoring services which involve the unloading of the coal
shipments into the NPC pier for its eventual conveyance to the
power plant were considered as incidental and indispensable to the
operation of the plant. The Court ruled that, “a corporation is not
“Sections 35 to 43.
^‘Corporate Powers: Ultra Vires Acts, SEC-OGC Opinion No. 20-09, August
4,2009.
“National Power Corp. v. Vera, G.R. No. 83558, Third Division, February 27,
1989, J. Cortes.
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restricted to the exercise of powers expressly conferred upon it by

its charter, but has the power to do what is reasonably necessary or
proper to promote the interest or welfare of the corporation,”
a. General powers; theory of general capacity

125. What is the theory of general capacity?
Under the theory of general capacity, a corporation holds such
powers which are not prohibited or withheld from it by general laws.
The general powers of a corporation are enumerated under
Section 35 of the RCC, to wit-.
a. To sue and be sued in its corporate name;
b. To have perpetual existence unless the certificate of
incorporation provides otherwise;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with
the provisions of the RCC;
e. To adopt bylaws, not contrary to law, morals or public
policy, and to amend or repeal the same in accordance
with the RCC;
f. In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with
the provisions of the RCC; and to admit members to the
corporation if it be a nonstock corporation;
g- To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage, and otherwise deal with such
real and personal property, including securities and
bonds of other corporations, as the transaction of the
lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed
by law and the Constitution;
h. To enter into a partnership, joint venture, merger,
consolidation, or any other commercial agreement with
natural and juridical persons;
i. To make reasonable donations, including those for
the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no
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r
foreign corporation shall give donations in aid of any

political party or candidate or for purposes of partisan
political activity;
j. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers, and employees;
and
k. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated
in the articles of incorporation.300
126. Discuss the specific powers of the corporation under the

theory of general capacity.
Power of a Corporation to Sue and Be Sued in its Corporate
Name
Under Section 35 of the RCC, read in relation to Section 22, it is
clear that where the corporation is the injured party, the power to sue
is lodged with the board of directors or trustees. For this purpose, the
board may authorize a representative of the corporation to perform
all necessary physical acts, such as the signing of documents. Such
authority may be derived from the bylaws or from a specific act of
the board of directors, i.e., a board resolution. In the absence of any
clear authority from the board, charter, or by-laws, no suit may
be maintained on behalf of the corporation. A case instituted by a
corporation without authority from its board of directors is subject
to dismissal on the ground of failure to state a cause of action.307
Thus, in the absence of proof that he was authorized by
the board, a minority stockholder and member of the board had
no authority to sue (for violation of B.P. Big. 22) on behalf of the
corporation308 unless he is suing on a derivative cause of action.
It is also not lodged with the President of the corporation. In
one case, it was held that a derivative suit should not prosper if it is
filed by the president, not authorized by the corporate shareholder
for whose benefit the shares are held.309
C

“’Ago Realty & Development Corporation v. Dr. Angelita F. Ago, el al., G.R.
Nos. 210906 and 211203, October 16, 2019.
““Tam Wing Talk v. Makasiar, G.R. No. 122452, January 29, 2001.
3o9Nora Bitong v. Court of Appeals, G.R. No. 123553, July 13,1998.
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•180 DIVINA ON COMMERCIAL LAW:
The only instance that board resolution is not necessary in filing

legal action on behalf of the corporation is through a derivative suit.
A derivative suit is an action filed by a minority stockholder in the
name and on behalf of the corporation to enforce a corporate right
or cause of action against the directors and officers who committed
a wrongful act against the corporation. Obviously, the directors who
committed the wrongful act, being in control of the corporation, are
not expected to adopt a resolution to authorize the filing of legal
action to nullify their very own acts. To require a board resolution
on the part of the suing stockholder will render illusory the right of
a stockholder to file a derivative suit.
However, where a corporation under the effective control of
the majority is wronged, board-sanctioned litigation should take
precedence over derivative actions. After all, the law expressly vests
the power to sue in the board of directors, and a remedy based on
equity, such as the derivative suit, can prevail only in the absence of
one provided by statute. In other words, majority stockholders who
have undisputed corporate control cannot resort to derivative suits
when there is nothing preventing the corporation itself from filing
the case.310
b. Power of the Corporation to Have Perpetual Existence
As previously discussed, unlike the OCC which prescribed a
maximum corporate term of 50 years unless extended, corporations
are now expressly allowed to have perpetual existence unless their
certificate of incorporation provides otherwise.
&L. Power of the Corporation to Issue or Sell Stocks to
Subscribers
The power of the corporation to issue stocks includes the
authority to set the terms and conditions of the issuance. These may
include terms and dates of payment. Ordinarily, the 25% payment
requirement for subscription only applies in case of an increase of
capital stock. The corporation, however, by stipulation, may require
that 25% of the subscription be likewise paid upon issuance of the
shares and the balance on a specified date.
3,0Ago Realty, ibid.
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Power of Corporation to Deal with Properties

The RCC expressly allows corporations "to purchase, receive,
take or grant, hold, convey, sell, lease, pledge, mortgage, and
otherwise deal with such real and personal property, including
securities and bonds of other corporations." This, however, is subject
to the following limitations:
i. It must be in furtherance of the purpose for which
the corporation was organized.
ii. It is subject to Constitutional limitations.
1) Corporations cannot acquire public lands
except by lease, for a period not exceeding 25
years, renewable for not more than 25 years,
and not to exceed 1,000 hectares in area.311
2) Only corporations at least 60 per centum of
whose capital is owned by Filipino citizens can
acquire private lands.312
iii. It is subject to the provisions of special laws such
as the Bulk Sales Law, Philippine Competition Act,
and other related laws.313
It shall be noted that under Section 36 of the OCC, corporations
were expressly allowed to only enter into merger or consolidation
with other corporations as a form of corporate combination.
g,. Power of Corporation to Make Donations
There is no more prohibition for domestic corporations to
donate in favor of a political party or candidate.
Hence, the following are the requisites for a valid donation by
a corporation:
a. The donation must be reasonable;
b. It must be for a valid purpose including public welfare
or for hospital, charitable, cultural, scientific, civic,
or similar purposes; and
311Section 3, Article XII, 1987 Constitution.

312Section 7, Article XII, 1987 Constitution.
3,3Section 39, RCC.
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C. The donation must bear a reasonable relation to the

corporation’s interest and must not be so remote and
fanciful.
For foreign corporations, there is an additional requirement in
making donations:
The donation must not be in aid of any:
i. Political party;
ii. Candidate; or
iii. Partisan political activity.
f. Power of Corporation to Provide Gratuity Pay
Providing gratuity pay is one of the express powers of the
corporation and therefore, resolutions duly passed by the board
approving the grant of gratuity pay to the employees of the
corporation are not ultra vires. The grant of gratuity pay does
not require shareholders’ approval as it is not tantamount to the
sale, lease, exchange or disposition of all or substantially all of the
corporation’s assets.31,1
b. Specific powers; theory of specific capacity
127. What is the Theory of Specific Capacity?

Under the Theory of Specific Capacity, a corporation cannot
exercise powers except those expressly or impliedly given to it.
The specific powers of a corporation can be found in Sections 36
to 43 of the RCC.
314Lopez Realty, Inc. v. Fontecha, G.R. No. 76801, Second Division, August 11,
1995.
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128. What are the different corporate powers and their respective
voting requirements?
Powers of Board of Directors Outstanding Capital

Corporation Stock (or members,
for nonstock
corporations)
Sec. 15 — Amendment At least majority of At least 2/3 of the
of Articles of the board outstanding capital
Incorporation stock
Sec. 23 - Election of At least majority

Directors of the outstanding
capital stock
Sec. 24 - At least majority of

Appointment of the board
Corporate Officers
Removal of Corporate At least majority of
Officers the board
Sec. 27 - Removal of At least 2/3 of the

Directors/Trustees outstanding capital
stock
Sec. 28 - Filling If the ground is If the ground is

Vacancy in the Board not expiration of expiration, removal,
the term, removal, increase in number
increase in number of of directors; or If
board seats and the the ground is not
remaining directors expiration, removal,
constitute a quorum increase in number
— Majority of the of board seats but the
remaining directors/ remaining directors
trustees do not constitute a
quorum - at least
majority of the
outstanding capital
stock
Sec. 29 - Payment At least majority

of Compensation to of the outstanding
Directors capital stock
Sec. 34 — Majority of the

Appointment of quorum
the members of the
Executive Committee
k
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for nonstock
corporations)
Sec. 34 - Creation of Majority of the
Special Committees quorum .
Sec. 36 - Extension/ At least majority of At least 2/3 of the
Shortening of the the board outstanding capital
Term stock
Sec. 37 - Incurring, At least majority of At least 2/3 of the
Creating or the board outstanding capital
Increasing Bonded stock
Indebtedness;
Increasing or
Decreasing Capital
Stock
Incurring Debt in the Majority of the
Ordinary Course of quorum
Business
Sec. 39 - Sale or In the ordinary
other Disposition of course of business <
Assets - Majority of the
quorum
All or substantially At least 2/3 of the
all of corporate assets outstanding capital
- At least majority of stock
the board
Sec. 41 — Invest Majority of the
Funds in the Primary quorum
Purpose
Invest Funds to Majority of the

Incidental Purpose quorum
for which Corporation
is Created
Invest the Funds in a At least majority of At least 2/3 of the
Secondary Purpose or the board outstanding capital
another business stock
Sec. 42 - Declaration Majority of the

of Cash Dividends quorum
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for nonstock
corporations)
Cash Dividends
Sec. 42 - Declaration Majoritôfjthe At least 2/3 of the
of Stock Dividends ( quorum J outstanding capital
stock
Sec. 43 - Enter Majority of the At least majority

into Management quorum for both of the outstanding
Contract managed and capital stock of
managing corporation each managed and
managing corporation
(but at least 2/3 of the
outstanding capital
stock is required
from the managed
corporation in case
interlocking directors
and stockholders)
Sec. 45 - Adoption, of Majority of the
By-laws « outstanding capital
stock
Sec. 46 - Amendment At least majority of At least majority
of Bylaws the board of the outstanding
capital stock.
If authority to amend
will be delegated by
stockholders to the
board at least 2/3
of the outstanding
capital stock.
Revocation of the
delegation made
to the Board-At
least majority of the
outstanding capital
stock.
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for nonstock
corporations)
Sec. 61 - Fixing Majority of the or At least majority
the Issued Value quorum (pursuant to of the outstanding
of No Par Value authority conferred capital stock
Shares (if not fixed by the Articles of
in the Articles of Incorporation or the
Incorporation) Bylaws)
Sec. 75 - Merger or At least majority of At least 2/3 of the
Consolidation the board outstanding capital
stock
Sec. 102 - At least majority of At least 2/3 of the
Amendment the board outstanding capital
of articles of stock
incorporation of a
close corporation
Sec. 134 - Voluntary At least majority of At least majority
Dissolution Where No the board of the outstanding
Creditors are Affected capital stock
Sec. 135-Voluntary At least majority of At least 2/3 of the

Dissolution Where the board outstanding capital
Creditors are Affected stock
c. Power to extend or shorten corporate term

129. When may the power to extend or shorten the corporate term
be exercised?
This power to extend the corporate term may be exercised in
case the corporation has opted to have a fixed term, as specified in
its articles of incorporation, in lieu of perpetual existence, and under
the conditions specified by the RCC.
On the other hand, the corporate term may be shortened for
corporations with a specified term in the articles of incorporation or
even those with perpetual existence.
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130. What are the requirements for extending or shortening the

corporate term?
The requirements are as follows:
a. At least majority vote of the board;
b. Ratification by the stockholders representing at least 2/3
of the outstanding capital stock or by at least 2/3 of the
members in case of nonstock corporations;
c. Written notice of proposed action and the time and place
of the meeting must be given to stockholders’ or members’
residences, served personally or sent electronically;
d. The extension or shortening of corporate term entails an
amendment of the articles of incorporation. As such, it
has to comply with the requirements of Section 15 which
requires a favorable endorsement of the appropriate
government agency in case of special corporations (banks,
banking and quasi-banking institutions, pre-need,
insurance and trust companies, NSSLAs, pawnshops,
and other financial intermediaries); and
e. The extension must be done during the lifetime of the
corporation but not earlier than three (3) years prior to
the original or subsequent expiry date unless there are
justifiable reasons for an earlier extension as may be
determined by the SEC.316
131. What is the effect of the failure of the corporation to extend its
corporate term?
In the case of Philippine National Bank v. Court of First
Instance of Rizal, Pasig,3'0 the Supreme Court ruled that upon the
expiration of the period fixed in the articles of incorporation, in the
absence of compliance with the legal requisites for the extension of
the period, the corporation ceases to exist and is dissolved ipso facto.
The automatic dissolution of the corporation is no longer applicable
under the RCC given the option available to the corporation to revive
the corporate term.317 Since the period of revival is not indicated in
’‘’Section 11, RCC.

316Philippine National Bank v. Court of First Instance of Rizal, Pasig, G.R. No.
63201, First Division, May 27,1992.
’‘’Section 11, RCC.
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the RCC, the option may be exercised within a reasonable period,

but prior to the dissolution and liquidation of the corporation. What
is a reasonable period is for the SEC to determine.
132. What is the remedy available to the stockholder not in favor of

the extension of corporate term?
The stockholder not in favor of extension of the corporate term
may exercise his appraisal right,318 that is, he may get out of the
corporation and demand for the payment of the fair value of his
shares subject to the conditions specified in Section 80 of the RCC.
133. May a stockholder also exercise appraisal right in case of

shortening of the corporate term?
Yes, a stockholder may also exercise appraisal right in case of
shortening of the corporate term. While Section 36 of the RCC refers
to the remedy of appraisal right only in case of extension of corporate
term, Section 80 of the RCC also provides for the same remedy in
case a stockholder votes against the shortening of corporate term.
It should be stressed, however, in relation to the appraisal
right of the dissenting stockholder, a distinction should be made
on whether the shortening of the term is intended to dissolve the
corporation or not. If the intention is to dissolve the corporation,
the exercise of appraisal right will be a mere superfluity, since the
dissolution of the corporation necessarily involves the distribution
of assets to the stockholders after the satisfaction of the claims of
corporate creditors.
d. Power to increase or decrease capital stock or incur,

create, increase bonded indebtedness
134. What are the practical reasons for increasing the capital stock
of the corporation?
The practical reasons are as follows:
a. To obtain additional funds — an increase in the capital
stock entails compliance with the 25% subscription-25%
payment requirement; in which case, the corporation is
guaranteed to obtain fresh equity from the stockholders.
3,8Section 36, RCC.
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b. To acquire corporate assets - Section 37 of the RCC

provides that the required additional paid-in capital can
be paid in cash or property. Moreover, Section 61 of the
RCC provides that a property may be used as consideration
for the issuance of shares. The properties exchanged for
shares become the assets of the corporation.
c. To support stock dividend declaration- if the unsubscribed
shares of the authorized capital stock of the corporation
are not sufficient to accommodate the shares that the
corporation may issue as a result of the stock dividends,
the capital stock must be increased to support such stock
dividend. Over-issuance of shares is not allowed, being an
u/tra vires act.3'9
135. The authorized capital stock of ABC Corporation is PhplOO

million divided into 100,000,000 shares with par value of Phpl/
share. The subscribed capital stock is P50,000,000 divided into
50,000,000 shares with par value of PhpVshare and fully paid-
up. The corporation posted a surplus profit of PhplOO,000,000
in the preceding year. The corporation would like to declare
200% stock dividends. What steps should the corporation
take?
The stock dividend declaration has to be approved by the
board of directors by at least majority vote and the stockholders
representing at least 2/3 of the outstanding capital stock.320
The corporation should also increase the capital stock. Their
base figure for the declaration of stock dividends is the number of
subscribed shares which is 50 million. The 200% stock dividend
declaration translates to 100 million shares. This means that the
corporation will have to issue this number of shares because of the
200% stock dividend declaration. The only available shares are the
50 million unsubscribed shares. The capital stock then has to be
increased by at least P150 million divided into 150 million shares to
support the stock dividend declaration.
3192001 Bar Exam.

320Section 42, RCC.
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136. What are the procedural requirements in increasing or

decreasing the capital stock of the corporation and in incurring,
creating, or increasing bonded indebtedness?
The procedural requirements are as follows:
a. At least majority vote of the board;
b. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock, or at least 2/3 of the
members;
C. Written notice of proposed action and the time and place
of the meeting sent to the stockholders’ or members’
residences, served personally or sent electronically;
d. A certificate signed by at least majority of the directors
of the corporation, countersigned by the chairman and
secretary of the stockholder’s meeting, setting forth:
i. That the foregoing requirements have been complied
with;
ii. The amount of increase or diminution of the capital
stock;
iii. In case of an increase of the capital stock, the amount
of capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities
and addresses of the persons subscribing, the
amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on
the subscription in cash or property, or the amount
of capital stock or number of shares of no-par stock
allotted to each stockholder if such increase is for the
purpose of making effective stock dividend therefor
authorized;
iv. Any bonded indebtedness to be incurred, created, or
increased;
v. The amount of stock represented at the meeting;
and
vi. The vote authorizing the increase or decrease of the
capital stock, or the incurring, creating or increasing
of any bonded indebtedness;
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e. In case of an increase in capital stock, the application

to be filed with SEC shall be accompanied by the sworn
statement of the treasurer of the corporation, showing
at least 25% of the increase in the capital stock was
subscribed and 25% of the said amount has been paid
either in actual cash to the corporation, or that property,
the valuation of which is equal to 25% of the subscription,
has been transferred to the corporation.
The law expressly requires the prior approval of the SEC, and
where appropriate, of the Philippine Competition Commission before
the increase or decrease in the capital stock can be effected, or before
the incurring, creating, or increasing of any bonded indebtedness.
137. What are the ways of increasing or decreasing capital stock?

The increase or decrease in the capital stock can be effected by:
a. increasing or decreasing the number of shares and
retaining the par value;
b. increasing or decreasing the par value of existing shares
and retaining the number of shares; or
c. increasing or decreasing both the number of shares and
the par value.
In decreasing the capital stock, resorting to reduction of number
of shares may also be done through i) redemption of redeemable
shares; ii) acquiring the corporation’s own shares; and iii) canceling
or retiring the shares, including treasury shares.
138. The authorized capital stock of ABC Corporation is Phpl billion

divided into 1 billion shares with a par value of P1.00 per share.
The subscribed capital stock is Php500,000,000 divided into
500,000,000 shares with par value of Phpl.OO per share while
the paid-up capital stock is Php250,000,000 divided into
250,000,000 shares with par value of Phpl.OO per share. ABC
Corporation intends to increase its capital stock to Php2 billion
pesos divided into 2 billion shares.
a. May ABC corporation increase its capital stock even if its

authorized capital stock is not yet fully subscribed?
Yes, a corporation is not prohibited from increasing its
authorized capital stock even if the same has not yet been fully
subscribed.
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b. Is the corporation required to collect payment on the

subscription to the increase in capital stock considering
that Php500,000,000 already amounts to 25% of the Php2
billion increased capital stock?
Yes, because the 25% subscription is based on the Pl billion
increase in the capital stock and not on the total capital stock as
increased. The 25% subscription requirement in case of an increase
of capital stock is intended to ensure the infusioniof fresh capital to
the corporation.
Are there other ways by which ABC Corporation can

increase its authorized capital stock from Phpl billion to
Php2 billion?
ABC Corporation may increase the number of shares from 1
billion to 2 billion while retaining the par value per share, or it may
maintain the number of shares at 1 billion while increasing the par
value from Phpl.00 to Php2.00 per share, or increase the number
of shares from 1 billion to 1.6 billion shares and increasing the par
value from Phpl.00 to Phpl.25 per share.
The most practical approach though is to increase the number
of shares and maintain the par value because the other way's of
increasing the capital stock may require the surrender of stock
certificates to change the par value thereof.
139. Is the 25% payment requirement for the increase in capital

stock imposed on per a subscriber basis or based on the
totality of subscription?
The law does not require each subscriber to pay 25% of his
subscription. The amount of payment therefore depends on the terms
of the subscription agreement. The 25% payment requirement is
based on the total amount of subscription. Thus, when the corporation
issues a mixture of shares, the 25% subscription requirement may
be applied to only one (1) class of shares or it may distribute to all
classes of shares as the corporation may determine.
140. Distinguish between issuance of shares arising from the

increase in capital stock and subscription to the unissued
portion of the authorized capital stock.
The distinctions are as follows:
a. The increase of capital stock requires approval by at
least the majority of the board and the stockholders
representing at least 2/3s of the outstanding capital
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stock while a subscription to the unissued portion of the

authorized capital stock only requires a majority of the
quorum of the board of directors.
b. At least 25% of the increase in capital stock must be
subscribed and at least 25% of the amount subscribed
must be paid while the required payment for subscription
to the unissued portion of the authorized capital stock
depends on the amount that the Board of Directors may
approve, which can be higher or lower than 25% of the
subscription.
141. How may the capital stock of the corporation be decreased?

The capital stock of the corporation may be decreased by
decreasing the number of authorized shares or by decreasing the
par value of the authorized shares, or both.
142. Cite instances of decrease of capital stock through decrease in

number of authorized shares.
a. Redemption of redeemable shares.
b. Purchase by the corporation of its own shares and then
canceling or retiring them.
c. Canceling shares that have not yet been issued.
There is, however, no decrease of capital stock despite the
redemption of redeemable shares or the purchase by the corporation
of its own shares unless the shares redeemed or acquired are
canceled or retired. Otherwise, these shares are considered treasury
shares and they can be resold upon such terms and conditions that
the Board of Directors may determine.
143. The authorized capital stock of the corporation is P100,000,000

divided into 100,000,000 shares with par value of Phpl.OO per
share. It is fully subscribed and paid-up. Can the corporation
reduce it to P50,000.00?
Yes, but it has to comply with the formalities for decrease of
capital stock.
144. If the subscribed capital stock is P60,000,000 divided into

60,000,000 shares with par value of Phpl.OO per share and the
paid-up capital stock is Php50,000,000 divided into 50,000,000
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shares with par value of P1.00 per share, can the corporation
reduce the capital stock to Php50,000,000?
No, the capital stock of the corporation may be decreased only if
it will not result in prejudice to corporate creditors. In this case, the
reduction of the capital stock to 50,000,000 will mean the release or
condonation of the 10,000,000 unpaid subscription, thereby causing
prejudice to the creditors as subscriptions to the capital stock are
funds held in trust for their benefit under the trust fund doctrine.
145. When is the increase or decrease in capital stock effective?

It is effective only upon approval by the SEC and its issuance of
a certificate of filing of increase or decrease of capital stock.
146. What is a bonded indebtedness?

It is a borrowing by the corporation which is long term in nature
involving a large number of lenders and secured by the encumbrance
on corporate assets. Since bonds are securities, they should also be
registered with the SEC.
147. ABC Corporation wants to obtain a loan from a bank in an

amount equivalent to 25% of the bank's net worth. Whose
approval is needed to authorize the transaction?
Such type of borrowing which is against the general credit of
the corporation only requires board approval despite the significant
amount.
148. Supposing that the corporation wants to obtain funds from the
public through the issuance of bond, is stockholders’ approval
required in addition to board approval?
No, even though the bond will be issued to the public, it does
not require stockholders’ approval. Board approval will suffice. The
bond though being in the nature of securities must be registered
with the SEC. Only borrowings in the nature of bonded indebtedness
require approval of the board by at least majority vote and by the
stockholders representing at least 2/3s of the outstanding capital
stock.321
32ISEC Opinion, April 6,1990.
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149. What are the characteristics or features of a bonded

indebtedness?
The two (2) principal elements of distinction are time duration
and the division of the whole debt into like aliquot part units of round
number denominations, represented by negotiable or assignable
certificates of indebtedness.
a. Such certificates are generally called bonds, the purpose
being to enable the corporation to make use of the
borrowed money for a long period of years, to obtain from
a large number of people and to facilitate the transfer of
the certificate of indebtedness from hand to hand during
the term of the collective obligation.
b. Such bond issues are usually secured by the transfer to a
trustee of specific property to secure payment of the debt.
c. The bonds usually, but not necessarily, run to bearer and
transferable by delivery.
d. The effect of the creation and issuance of such obligations
is borrowing from the general public.
Whenever a corporation resorts to this method of borrowing
funds, the resulting obligations constitute a bonded indebtedness,
subject to the requirements of Section 37 as to creation and
increase.322
150. What is the procedure to enable the corporation to incur,

create, and increase bonded indebtedness?
The procedure prescribed in Section 37 of the RCC regarding
an increase or decrease of capital stock also applies to incurring,
creating, and increasing bonded indebtedness. The certificate,
however, is not required to be accompanied by a treasurer’s certificate
concerning the amount of subscription and payment made in the
increase of capital stock, as this is obviously not applicable.
322H.C. Bentley, Corporate Finance and Accounting, cited in Fisher, pp. 315-
316, cited in De Leon: The Corporation Code, Annotated, p. 191.
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e. Power to deny pre-emptive rights

151. What is pre-emptive right?
It is the right of stockholders to subscribe to all issues or
disposition of shares of any class by the corporation, in proportion
to their respective shareholdings.323 In practical terms, this means
that the shares of stock of the corporation should first be offered
proportionately to the stockholders before they can be issued or sold
to nonstockholders.324
152. What is the rationale of pre-emptive right?

The foundation or underlying basis of this right is to maintain
the proportionate voting strength and control of existing stockholders,
that is, the existing ratio of their interest and voting power in the
corporation. This right prevents the dilution and impairment of the
stockholders’ interest in the corporation.
For example, the authorized capital stock of the corporation
is PhplOO.OOO.OOO divided into 100,000,000 shares with par value
of Phpl per share, 50,000,000 of which is fully subscribed. Of these
shares, A, B, C, D, and E subscribed to 10 million shares each. Each
of them gets to receive 20% of the dividends that the corporation
may declare. In case of dissolution, they will also receive 20% each of
the residual assets of the corporation. In case of new share issuance,
the stockholders should be given the first opportunity to subscribe
thereto, in proportion to their shareholdings in the corporation,
before such new shares can be issued to nonstockholders otherwise,
the 20% equity stake of each stockholder will be diluted.
153. What are the remedies available to stockhplders in case of an

amendment to the corporation's articles.'of incorporation to
create preferred redeemable shares?
The remedies of the stockholders in case of an amendment
to the corporation’s articles of incorporation to create redeemable
shares are as follows:
a. Vote in favor of the amendment but pass up to the
opportunity to subscribe to the preferred redeemable
shares since this type of shares is non-voting and as such,
will not dilute the stockholder’s voting rights, save for the
eight (8) cases under Section 6 of the RCC;
323Section 38, RCC.

3242019 Bar Exam.
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b. Subscribe to the new preferred shares since the

stockholders’ pre-emptive right covers shares of any class;
or
c. Exercise their appraisal right.326
154. Cite the instances when pre-emptive right does not apply.
The pre-emptive right of stockholders is not an absolute right.
It is subject to the following exceptions:
a. Denial of pre-emptive right in the articles of incorporation
or amendment thereto.
Take note that the denial of pre-emptive right must
be contained in the articles of incorporation or amendment
thereto. The denial cannot be by mere board resolution or
as an amendment to the bylaws of the corporation.326
b. Waiver of such right by the stockholder, whether express
or implied.
If the board resolution approving the issuance of
shares prescribes certain number of days to exercise the
pre-emptive right and the stockholder fails to exercise
such right within the fixed period, the stockholder is
deemed to have impliedly waived his right.
c. Shares issued in compliance with the laws requiring
minimum stock ownership by the public.
Public companies are required to have a portion of
their outstanding capital stock owned by the public. The
current minimum public ownership set by law is 10% of
the corporation’s outstanding capital stock. Failure to
comply with this requirement will result to the delisting
of the shares in the Stock Exchange. Thus, the issuance
of shares to comply with the minimum public ownership
requirement is not subject to pre-emptive right.
d. Issuance of shares ip exchange for property given for
a corporate purpose, if approved by the stockholders
representing at least 2/3 of the outstanding capital stock.

’“2011 Bar Exam.
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e. Issuance of share in payment of debt made in good faith,

if approved by the stockholders representing 2/3 of the
outstanding capital stock.
155. "X" Realty, Inc., a corporation engaged in the subdivision

business, has an authorized capital of P8, 000,000, all of
which has been fully subscribed. At a special meeting of the
board of directors, the majority vote decided, on the basis
of the recommendation of its Executive Committee, that the
corporation purchase a 5-hectare property offered to it because
it was ideal for its subdivision business, the price offered was
lower than the prevailing market price, and John Roque, the
owner of the property, was willing to accept P2,000,000 worth
of shares of the corporation in exchange of, or as payment for,
his property. No cash was involved in the transaction. Thus, the
board approved a resolution increasing the authorized capital
stock from P800,000 to PI Million, stipulating that the additional
P200,000 worth of shares shall be issued in exchange for the
5-hectare property and that the existing stockholders shall
have no pre-emptive right to subscribe to the additional shares
as the same were being issued to pay for the property.
Was the action of the Board correct and sufficient?
The action of the Board of Directors was correct, but not
sufficient. Under Sections 38 and 61 of the RCC, shares may be
issued for property needed for corporate purposes but subject to SEC
approval to ensure that the real property is fairly valued, to prevent
the issuance of watered stocks. The increase of capital stock is also
subject to the approval of the stockholders representing at least 2/3s
of the outstanding capital stock. No SEC and stockholders approvals
were indicated in the problem.327
156. What is the remedy of the stockholder not in favor of an

amendment to the articles of incorporation to deny pre
emptive right?
He can exercise his appraisal right. One of the instances
where appraisal right is available is in case of an amendment to the
articles of incorporation that has the effect of changing or restricting
3271982 Bar Exam but answered under the RCC.
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the rights of the stockholder or any shares.328 Denial of pre-emptive

right restricts his right to subscribe to the issuance of shares by the
corporation.329
f. Power to sell or dispose corporate assets

157. What are the two (2) kinds of sale, encumbrance, or disposition
of corporate assets that the corporation may undertake?
One is the sale, encumbrance or disposition (collectively
referred to as “disposition”) of any of its property and assets if the
same is necessary for the usual and regular course of business of
the corporation or if the proceeds of the sale or other disposition
of such property and assets shall be appropriated for the conduct
of its remaining business. The other is the disposition of all or
substantially all of the properties of the corporation.
Disposition in the ordinary course of business requires only
board approval, meaning, majority of the quorum of the board.
The disposition of all or substantially all properties of the
corporation requires approval by at least majority of the board and
the affirmative votes of the stockholders representing at least two-
thirds (2/3) of the voting power in the corporation in a meeting duly
called for that purpose330 or at least 2/3 of the members for a nonstock
corporation in a meeting called for the purpose.
In nonstock corporations where there are no members with
voting rights, the vote of at least a majority of the trustees in office
will be sufficient authorization for the corporation to enter into any
transaction authorized by the foregoing rule.331
158. Where the asset to be disposed of constitutes the only property

of the corporation, whose approvals are needed?
Where an asset constitutes the only property of the corporation,
its sale to a third-party is a sale or disposition of all the corporate
property and assets of said corporation falling squarely within
the contemplation of Section 39 of the RCC. In the case of Islamic
“Section 80, RCC.

“See Turner v. Lorenzo Shipping Corporation, G.R. No. 157479, November
24, 2010.
“Section 40, RCC; Rosita Pena v. Court of Appeals, et al., G.R. No. 91478,
February 7,1991.
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Directorate of the Ph ilippines v. Court of Appeals, the Court ruled

that for such sale to be valid, the majority vote of the legitimate
board, concurred in by the vote of at least 2/3 of the bona fide
members of the corporation should have been obtained.332
Similarly, the assignment of the right to redeem the only asset
of the corporation amounts to a sale of all or substantially all of
the corporate assets. As such, it requires approval by at least a
majority of the board and the affirmative vote of the stockholders
representing at least 2/3 of the outstanding capital stock.333
159. State the gist of the Bulk Sales Law.

Under the Bulk Sales Law, any sale in bulk must comply with
certain procedural requirements, otherwise, the sale is deemed to be
in fraud of creditors and therefore null and void.
A sale is in bulk in any of the following cases:
i. Sale, transfer, mortgage, or assignment of properties not
in the ordinary course of business;
ii. Sale, transfer, and mortgage or assignment of all or
substantially all of the assets used in and about the
business of the vendor, mortgagor, transferor, or assignor
(collectively referred to as vendor); and
iii. Sale, transfer, mortgage or assignment of all or
substantially all of the business or trade conducted by the
vendor of Section 2.
Under the Bulk Sales Law, the following requirements have to
be satisfied in case of sales in bulk:
i. The seller must provide the buyer with a verified list
of the creditors containing the names of the creditors,
their addresses, amounts owing to each of them, and the
respective maturity dates;
ii. There must be a full detailed inventory of the properties
or assets to be sold, including their cost or acquisition
price;
Îslamic Directorate of the Philippines, et al. Court of Appeals and Iglesia

Ni Cristo, G.R. No. 117897, May 14, 1997.
333Rosita Pena v. Court of Appeals, et al., G.R. No. 91478, February 7,1991.
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iii. The inventory and the list must be filed with the
Department of Trade and Industry.
If the sale in bulk failed to comply with these requisites and the
vendor does not apply the purchase price of the said properties to the
pro-rata payment of creditors’ claims, the vendor shall be deemed to
have violated the law and any such sale, transfer, or mortgage shall
be fraudulent and void.334
The buyer shall hold in trust the properties of the vendor for
the benefit of the creditors with the concomitant right to require the
return of the purchase price and ask for damages.
160. What is the remedy available to a stockholder not in favor

of the disposition of all or substantially all of the corporate
properties?
He may exercise his appraisal right, which means, that he can
demand the payment of the fair value of his shares subject to the
conditions under Section 80 of the RCC.335
161. AAA Corporation is a bank. The operations of AAA Corporation

as a bank were not doing well. So, to avert any bank run, AAA
Corporation, with the approval of the Monetary Board, sold all
its assets and liabilities to BBB Banking Corporation which
includes all deposit accounts. In effect then, BBB Corporation
will service all deposits of all depositors of AAA Corporation.
Will the sale of all assets and liabilities of AAA Corporation
to BBB Banking Corporation automatically dissolve or
terminate the corporate existence of AAA Corporation? Explain
your answer.330
No, the sale of all the assets and liabilities of AAA Corporation
to BBB Banking Corporation will not result in the automatic
dissolution or termination of the existence of the former. Such sale
is not one of the modes of dissolution under the Corporation Code.
Moreover, having assets is not a condition for the continuation of
juridical existence.
“’Section 4, Bulk Sales Law.

’“Sections 39 and 80, RCC.
“°2012 Bar Exam.
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162. Underthe Nell Doctrine, so called because it was first pronounced

by the Supreme Court in the 1965 ruling in Nell v. Pacific Farms,
Inc.,337 the general rule is that where one corporation sells or
otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor,
State the exceptions to the Nell Doctrine.
The exceptions to the Nell doctrine are as follows:
a. When the buyer expressly or impliedly assumes the
liabilities of the seller;
b. If the sale amounts to a merger or consolidation;
c. If the sale is entered into fraudulently or made in bad
faith; and
d. If the buyer is merely a continuation of the personality
of the seller or the so-called business-enterprise transfer
rule.338
g- Power to acquire own shares

163. May a corporation acquire its own shares of stock?
Ordinarily, a stock corporation has no power to acquire its own
shares as it is illogical for the corporation to be its own stockholder.
Moreover, the funds of the corporation should be devoted to attain the
purposes of incorporation. However, the RCC allows the corporation
to acquire or purchase its own shares in certain instances.
164. Under what conditions may a corporation acquire or purchase

its own shares?
For a corporation to be able to acquire its own shares, the
following conditions must be present: (1) it is for a legitimate and
proper corporate purpose; (2) there shall be an unrestricted retained
earnings to purchase the same and its capital is not thereby
impaired; (3) the corporation acts in good faith and without prejudice
to the rights of creditors and stockholders; and (4) the conditions of
corporate affairs warrant it.”9
33,G.R. No. L-20850, November 29, 1965.

’’’Forced Acquisition of Foreign-Held Shares of Stock in an Educational
Institution, SEC-OGC Opinion No. 33-14, November 18, 2014.
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It is imperative that there must be unrestricted retained

earnings before it may purchase its own shares. Otherwise, this
would lead to an unauthorized increase of shares of stock, as well as
constitutes a violation of the trust fund doctrine. The rationale for
this is that share repurchase constitutes in effect a distribution to the
stockholders which, if abused and without proper safeguards, will
deplete and impair the assets of the corporation, to the prejudices of
the stockholders and creditors of the corporation.340
With respect to banks, as previously indicated, no bank shall
purchase or acquire shares of its own capital stock or accept its
own shares as security for a loan, except when authorized by the
Monetary Board; Provided that in every case the stock so purchased
or acquired shall, within six (6) months from the time of its purchase
or acquisition, be sold or disposed of at a public or private sale.3”
165. Cite examples of legitimate corporate purposes to warrant

acquisition or purchase by the corporation of its own shares of
stock.
a. To eliminate fractional shares arising out of stock
dividends.
j A fractional share is less than one (1) share.
For example, a stockholder owns 250 shares and the
corporation declares 25% stock dividends. 25% of 250 is
62.5; the 0.5 is the fractional share that the corporation
may acquire.
b. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during the said sale.
In case of delinquent stocks, arising out of unpaid
subscription, the corporation may either file an action for
collection or bid for the delinquent shares, if in the public
auction, there is no bidder willing to pay the full amount
of the subscription plus interest, costs, and expense.3’2
“°SEC Opinion, ibid.

“’Section 10, R.A. No. 8791, General Banking Law.
“’Section 67, RCC.
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c. To pay dissenting or withdrawing stockholders entitled to

payment for their shares under the provisions of the RCC.
A dissenting or withdrawing stockholder is one
who exercised his appraisal right in any of the instances
specified in Section 80 of the RCC.343
d. To acquire redeemable shares.
Redeemable shares may be issued by the corporation
when expressly so provided in the articles of incorporation.
They may be purchased or taken up by the corporation
upon the expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the books
of the corporation.344
e. To acquire treasury shares.
Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by
the issuing corporation through purchase, redemption,
donation, or some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the
board of directors.346
j
166. In what instances may a corporation acquire its own shares

despite the absence of unrestricted retained earnings?
A corporation may acquire its own shares despite the absence
of unrestricted retained earnings in the following cases:
a. Redemption of redeemable shares.
b. Donation of shares to the corporation.
c. Levy/garnishment of shares to satisfy the judgment in
favor of the corporation.
d. Conveyance of shares to the corporation in payment of a
debt.
By express provision of law, a corporation may redeem
redeemable shares regardless of the existence of retained earnings.
343Section 40, RCC.

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Surplus profit should only be required if the corporation will

disburse its funds. Thus, the conveyance and garnishment of shares
to satisfy a debt may be done even without surplus profit, otherwise,
the corporation’s right as a creditor will be significantly impaired.
h. Power to invest corporate funds in another

corporation or business
167. Where may the funds of the corporation be invested?
The funds of the corporation may be invested in the primary
purpose or in the secondary purpose/s of the corporation as specified
in the articles of incorporation or in any other corporation or business
other than the corporation’s primary and secondary purposes.
168. What are the distinctions among the different kinds of

investment of corporate funds?
Where the funds are invested in the primary purpose or any
activity reasonably necessary to accomplish the primary purpose
of the corporation, board approval suffices. For the other kinds of
investment, board and stockholders’ approvals are required. And if
the investment of funds will be made in any business other than
the corporation’s primary and secondary purpose, there should be a
corresponding amendment to the articles of incorporation to include
the desired business activity, otherwise, the investment is ultra
vires.
169. What are the requisites for the exercise by the corporation of
the power to invest corporate funds for purposes other than
the primary purpose?
a. Such action must be approved by a majority of the board

of directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two-thirds (2/3) of the members
in case of a nonstock corporation, at a stockholders’ or
members’ meeting duly called for the purpose.
b. Notice of the proposed investment and the time and place
of the meeting shall be addressed to each stockholder or
member at the place of residence as shown in the books of
the corporation and deposited to the addressee in the post
office with postage prepaid, served personally, or sent
electronically in accordance with the rules and regulations
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of the SEC on the use of electronic data message, when

allowed by the bylaws or done with the consent of the
stockholders.
C. Any dissenting stockholder shall have appraisal right as
provided in the RCC.
170. ABC Corporation is engaged in the business of manufacturing

soft drinks. Forthe past 10 years, it has bought all its bottlesfrom
XYZ Corporation. Considering the volume of its production, it
now finds that it will be more economical to manufacture its
own bottles.
The board of directors, after studying and discussing
the matter thoroughly, decides to set aside the amount of 1
Million for this project. Most of this amount will go to the cost
of equipment and materials.
M is a stockholder of ABC Corporation and is against this
investment in the bottling project and would like to withdraw
from the corporation by exercising his appraisal right if the
project goes through. He, therefore, demands that the project
be submitted to the stockholders for approval, but the board
refuses to do so on the ground that there is no need for such
approval and that the calling of a special stockholders' meeting
would entail too much expenses.
M thus cannot have the opportunity to exercise his
appraisal right. He wants to sue the board to compel it to submit
the matter to the stockholders and to enjoin it from pursuing
the project until the stockholders shall have approved it.
Do you think the matter needs the stockholders' approval
or is the action of the board of directors sufficient? Explain.
No, it does not need stockholders’ approval. Under Section 41
of the RCC, a corporation may, as a general rule, invest its funds in
another business or in any purpose other than the primary purpose
for which it was organized, when approved by the board of directors
and by the stockholders representing at least 2/3 of the outstanding
capital stock in a meeting duly called for the purpose. Any dissenting
stockholder may exercise his appraisal right. However, where
the investment is reasonably necessary to accomplish its primary
purpose, the approval of the stockholders is not necessary. In this
case, the manufacture of bottles is reasonably necessary for the
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corporation’s primary business of manufacturing soft drinks and

does not, therefore, need the approval of the stockholders. Board
approval suffices.346
In a related case, the Supreme Court ruled that the purchase
of beer manufacturing facilities by a corporation in a foreign country
for the manufacture of beer thereat was held as an investment in
the same business stated as its primary purpose in the articles
of incorporation, which is to manufacture and market beer and
therefore, stockholder approval is not necessary.347
171. Stikki Cement Corporation ("STIKKI") was organized primarily

for cement manufacturing. Anticipating substantial profits,
its President proposed that STIKKI invest in (a) a power plant
project, (b) a concrete road project, and (c) quarry operations
for limestone used in the manufacture of cement.
What corporate approvals or votes are needed for the
proposed investments? Explain.
Unless the power plant and the concrete road project are
reasonably necessary to the manufacture of cement by STIKKI
(and they do not appear to be so), then the approval of the said
projects by a majority of the board of directors and the ratification
of such approval by the stockholders representing at least 2/3 of the
outstanding capital stock would be necessary.
As for the quarry operations for limestone, the same is an
indispensable ingredient in the manufacture of cement and may,
therefore, be. considered reasonably necessary to accomplish the
primary purpose of STIKKI. In such a case, only the approval of the
board of directors would be necessary.
i. Power to declare dividends

172. What are dividends?
Dividends are corporate profits allocated, lawfully declared
and ordered by the directors to be paid proportionately to the
stockholders in the form of cash, property, or stocks.
“Del Rama v. Maao Sugar Central, G.R. No. 17504, February 28,1969; 1983
Bar Exam.
“Gokongwei v. Securities and Exchange Commission, G.R. No. L-45911, April
11,1979.
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173. Are profits the same as dividends?

Profits are the sources of dividends. Profits are dividends only
when they have been set aside for distribution to stockholders under
the conditions specified by law.
Profits belong to the corporation while dividends once declared,
belong to the stockholder.348
174. Under what conditions may the corporation declare

dividends?349
a. The corporation must have unrestricted retained earnings
as of the last fiscal or calendar year.
Dividends, whether cash, property or stock, must
be declared out of unrestricted retained earnings of the
corporation. Accordingly, a corporation cannot declare
dividends when it has zero or negative retained earnings.
For such purpose, the surplus profits or income must
be a bona fide income founded upon actual earnings or
profits. The existence, therefore, of surplus profits arising
from the operation of corporate business is a condition
precedent to the declaration of dividend.360
The term unrestricted retained earnings may be
interchanged with surplus profit.
b. The dividends shall be payable in cash, in property, or in
stock to all stockholders based on outstanding stock held
by them.
c. The cash dividend declaration must be approved by the
board of directors. In case of stock dividends, in addition
to board approval, the declaration must likewise be
approved by the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose.381
Board approval does not mean the majority of the
entire board. Majority of the quorum will suffice unless
the bylaws provide otherwise.382
34s2005 Bar Exam.

3492009 Bar Exam.
’“Section 5, SEC Circular No. 11-08.
36z2011 Bar Exam.
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175. What are retained earnings?

Retained earnings are the accumulated profits realized out of
normal and continuous operations of the business after deducting
therefrom distributions to stockholders and transfers to capital
stock or other accounts.363
Stated otherwise, the corporation has retained earnings if its
assets exceed the total liabilities and combined subscriptions to
the capital stock of the corporation. This may be expressed in the
following formula:
Retained Earnings = Assets - Liabilities and Subscriptions

Such retained earnings or portion thereof are unrestricted if
there are no legal and contractual impediment for their distribution
to the stockholders.
The total subscriptions are deducted from the assets to
determine the availability of retained earnings because, under the
trust fund doctrine, subscriptions to the capital stock constitute a
fund to which creditors have a right to look for the satisfaction of
their claims and which the corporation is not allowed to impair to
their prejudice.
176. Is it necessary for the corporation to wait for the written

approval/advice of the SEC before it can validly distribute cash
and stock dividends to its stockholders?
It is not mandatory for the corporation to seek prior approval/
advice from the SEC to declare cash and stock dividend provided the
following are complied with:
a. For cash dividend declaration:
i. Board of Directors approval of the cash dividend
declaration; and
ii. Sufficient unrestricted retained earnings as of the
last fiscal or calendar year.
b. For stock dividend declaration:
i. Board of Directors approval of the stock dividend
declaration;
3“SEC Circular, ibid.
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ii. Stockholders’ approval representing at least two-

thirds (2/3) of the outstanding capital and sufficient
portion of the present authorized capital; and
iii. Sufficient unrestricted retained earnings as of the
last fiscal or calendar year.
Further, if the stock dividend declaration requires an increase
of authorized capital stock, an application therefor is mandated to
be filed with the SEC pursuant to Section 37 of the RCC.364
177. Is it a ministerial duty of the corporation to declare dividends if

surplus profit is available?
The declaration of dividends is discretionary, covered by the
business judgment rule. However, stock corporations are prohibited
from retaining surplus profits in excess of one hundred percent
(100%) of their paid-in capital stock, except: (a) when justified by
definite corporate expansion projects or programs approved by the
board of directors; or (b) when the corporation is prohibited under
any loan agreement with financial institutions or creditors, whether
local or foreign, from declaring dividends without their consent, and
such consent has not yet been secured; or (c) when it can be clearly
shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special
reserve for probable contingencies.
Thus, the board of directors may be compelled to declare
dividends if the surplus profit is in excess of 100% of its paid-in capital
and no justifiable reasons exist to withhold dividend declaration.3"
Under Section 49 of the RCC, however, the board of directors
must endeavor to present to the stockholders an explanation on
dividend policy and the fact of payment of dividends or the reasons
for the nonpayment thereof.
178. What are the classes and sources of surplus?

a. Surplus arising from profits earned by the corporation in
the regular course of its business.
3MRe: SEC Approval of Issuance of Cash and Stock Dividends. SEC-OGC

Opinion No. 23-19, June 17, 2019.
3652015 Bar Exam; Section 42, RCC.
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b. Earned surplus which includes non-operating profits
arising from the sale of fixed assets, investments, and
other non-recurring profit transactions.
In one case, it was held that dividends received by a
company which is a stockholder in another corporation is
a corporate earning arising from corporate investment. It
forms part of the assets of the corporation.356
C. Paid-up surplus which arises from the issuance of shares
for a premium or a price above par value.
Unlike par value shares, when no par value shares
are sold at a premium, the entire consideration paid is
considered capital (Section 6, RCC).
d. Revaluation or appraisal surplus which arises from the
revaluation of the acquired corporate assets or marking
up their value in the books of the corporation.
e. Reduction surplus which arises from the reduction of the
corporation’s capital stock.
179. May dividends be paid out of the paid-in capital, meaning, the
premium above par value?
Additional Paid-In Capital Stock shall neither be declared
as dividend nor shall it be reclassified to absorb deficiency except
through an organizational restructuring duly approved by the
SEC.357
t
180. May the corporation declare dividends out of revaluation/
appraisal surplus?
■ No, the SEC opined that an increase in the value of a fixed
asset as a result of its revaluation is not retained earnings.353 Such
are mere increments in the value of corporate assets which may
fluctuate from time to time.
““Madrigal & Company. Inc. v. Zamora, G.R. No. L-48237, June 30,1987.
“’SEC Memorandum Circular No. 11-08.
’“SEC Opinion, January 25, 1977.
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Thus, if a parcel of land originally acquired for PIO,000,000 had

doubled in value after three (3) years, the recognition in the corporate
books of the revaluation does not justify dividend declaration. It is
the gain arising from the sale of the revalued property which may
serve as the basis for the declaration of dividends.369
181. What are the kinds of dividends?

Dividends may either be cash or stock. Any dividend other than
from the unissued shares of the corporation is, in contemplation of
law, a cash dividend. Thus, property dividend is essentially a cash
dividend. Stockholders’ approval, therefore, is not required for
property dividends.
A stock dividend is one that is declared and paid out from
the unissued shares of the corporation. It is paid in shares of stock
instead of cash.
182. Discuss the concept of stock dividends.

Stock dividend is actually a two-step process: (1) a dividend,
and (2) the enforced use of the dividend money to purchase additional
shares of stock at par value to be proportionately distributed to the
stockholders on the basis of the shares held.360
183. Palmavera Corporation has an authorized capital stock of

P500,000,000 all subscribed and outstanding as of December
31, 2019. The corporation also has unrestricted retained
earnings in its book amounting to P375,000,000. Since the
corporation needed the cash surplus to carry outits expansion
projects, the board of directors, in its meeting held on January
5, 2020, approved a resolution declaring and ordering the
issuance of 50% stock dividends in lieu of cash dividends.
a. Was the resolution declaring the issuance of stock
dividends valid? Explain your answer.
Yes, the resolution of the Board of Directors declaring the
issuance of stock dividends was valid, but still insufficient for
purposes of stock dividend.361
3591987 Bar Exam.

360Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., G.R. No. L-21601,
En Banc, December 28, 1968.
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b. What is/are the step/s needed to be taken so that the

decision of the board could be implemented? State the
required vote.
The aforesaid approval of the Board of Directors for the
declaration of stock dividends should still be concurred in by the
stockholders representing not less than 2/3 of the outstanding
capital stock, at a regular or special meeting called for the purpose.
In addition, the authorized capital stock must be increased to
accommodate the stock dividends since the authorized capital stock
of Palmavera Corporation is fully subscribed. The increase in capital
stock is subject to SEC approval.362
184. Distinguish cash dividends from stock dividends.

A cash dividend involves the disbursement of earnings
to stockholders, while a stock dividend does not require any
disbursement.
A cash dividend increases the wealth of the stockholder, while
a stock dividend does not. While the stockholder may get additional
shares arising out of the stock dividend, the stock dividend decreases
the fractional interest in corporate property which each share
represents.
A cash dividend does not affect the fractional interest in
property which each share represents, while a stock dividend
decreases the fractional interest in corporate property which each
share represents.
Cash dividends when received by natural persons are subject
to tax, while stock dividends, regardless of the recipient, are not
subject to tax.
In this connection, the Supreme Court said that a stock dividend
representing the transfer of surplus to the capital account shall
not be subject to tax. In this case, the exchange of shares, without
more, produces no realized income to the subscriber. There is only a
modification of the subscriber’s rights and privileges — which is not
a flow of wealth for tax purposes. The issue of taxable dividend may
arise only once a subscriber disposes of his entire interest and not
when there is still maintenance of proprietary interest.363
Ânswered based Sections 37 and 42, RCC; 1982 Bar Exam.

^Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576,
January 20, 1999.
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Declaration of stock dividend requires the approval of at least

a majority of the board of directors and stockholders representing at
least 2/3 of the outstanding capital stock. In the declaration of cash
dividend, board approval suffices.
Declaration of cash dividends may not be revoked since, upon
declaration, a creditor-debtor relationship is established between
the stockholder and the corporation. Hence, the debtor-corporation
is bound to make good its obligation to the creditor-stockholder to
pay' the cash dividends. Stock dividends may be revoked even after
declaration but prior to the actual issuance of shares because what
consummates stock dividend is not the declaration but the share
issuance.
Any cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs
and expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully paid.361
185. Can the corporation offset the cash dividends against any debt
of the stockholder to the corporation?
Yes, the corporation may offset or apply the cash dividends
against any debt of the stockholder because as to cash dividends
that are declared, the stockholders are creditors of the corporation.365
Thus, the principle of legal compensation under the Civil Code may
apply.
186. ABC Management, Inc. presented to DEF Mining Corp, the

draft of its proposed Management Contract. As'an incentive,
ABC included in the terms of compensation that ABC would be
entitled to 10% of any stock dividend which DEF may declare
during the lifetime of the Management Contract. Would you
approve of such provision? If not, what would you suggest as
an alternative?
I would not approve of a proposed stipulation in the management
contract that the managing corporation, as additional compensation
to it, should be entitled to 10% of any stock dividend that may be
declared. Stockholders are the only ones entitled to receive stock
“'2005 Bar Exam.

“Maria Carla Pirovano De La Rama Steamship Co., G.R. No. L-5377, En
Bane, December 29, 1954,
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dividends. I would add that the unsubscribed capital stock of a

corporation may only be issued for cash or property or for services
already rendered constituting a demandable debt. As an alternative,
I would suggest that the managing corporation should instead be
given net profit participation and, if later so desires, to then convert
the amount that may be due thereby to equity or shares of stock at
no less than the par value thereof.366
187. Can treasury shares be distributed as property dividends to

the stockholders?
Treasury shares are regarded as property owned by the
corporation and cannot be distributed as property dividends among
the stockholders in the absence of unrestricted retained earnings
other than the amount equivalent to the cost of treasury shares,
because to do so would violate the trust fund doctrine.367
j. Power to enter into management contract

188. What is a management contract?
A management contract is an agreement under which a
corporation delegates the management of its affairs to another
corporation for a certain period of time. The contract can have
a different nomenclature but falls within the purview of a
management contract for so long as the intention is to entrust to
another corporation the management of the business affairs of the
corporation.
189. What are the requirements and limitations for the exercise of
the power to enter into Management Contracts?
a. Such contract shall have been approved by the board of
directors and by stockholders owning at least the majority
of the outstanding capital stock, or by at least the majority
of the members in the case of a nonstock corporation, of
both the managing and the managed corporation, at a
meeting duly called for the purpose;
b. Where a stockholder or stockholders representing the
same interest of both managing and managed corporation
own and control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing

“’Treasury Shares, SEC-OGC Opinion No. 06-12, April 20, 2012.
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corporation; or where a majority of the members of the

board of directors of the managing corporation also
constitute a majority of the board of directors of the
managed corporation, then the management contract
must be approved by the stockholders of the managed
corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least
two-thirds (2/3) of the members in case of a nonstock
corporation; and
C. No management contract shall be entered into for a
period longer than five (5) years for one (1) term except for
service contracts or operating agreements which relate to
the exploration, development, exploitation, or utilization
of natural resources may be entered into for such periods
as may be provided by the pertinent laws or regulations.
As a rule, the period of management contracts is five (5)
years for any one (1) term, and for so long as it is between two (2)
corporations. However, the following are some of the exceptions:
a. Management contract between two (2) corporations
pursuant to the Mining Act of 1995. Under this law, the
contract may be for 25 years.
b. Technical/Financial Service Agreement or Production
Agreement can be for 25 years.308
The aforementioned conditions shall apply to any contract
whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation whether
such contracts are called service contracts, operations agreements,
or otherwise.309
k. Limitations
i. Ultra vires acts
190. What is the test to determine whether or not an act is within
the powers of the corporation?
The test to be applied is whether the act in question is in direct
and immediate furtherance of the corporation’s business, fairly
incident to the express powers and reasonably necessary to their
“’Section 2, Article XII, 1987 Constitution.

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exercise. If so, the corporation has the power to do it; otherwise,

not. It is a question therefore in each case of the logical relation of
the act to the corporate purpose expressed in the charter. If the act,
which is lawful in itself and not otherwise prohibited, is done for the
purpose of serving corporate ends, and is reasonably tributary to the
promotion of those ends, in a substantial, and not in a remote sense,
it may fairly be considered within the powers.370
In Querubin v. COMELEC,311 the Supreme Court reiterated
this test and held that notwithstanding the specific mention of
the 2010 national and local elections in SMARTMATIC’s primary
purpose, it is not precluded from entering into contracts over
succeeding ones. Here, SMTC cannot be deemed to be overstepping
its limits by participating in the bidding for the 23,000 new optimal
mark readers for the 2016 polls since upgrading the machines that
the company supplied to COMELEC for the automation of the 2010
elections and offering them for subsequent elections is but a logical
consequence of SMTC’s course of business and should, therefore, be
considered included in, if not incidental to, its corporate purpose.
191. What is an ultra vires act of the corporation?

The term is used to describe a corporate transaction that is
outside the objects for which the corporation was created as defined
in the law of its organization, and therefore, beyond the powers
conferred upon it by law.372
A corporation may exercise its powers only within those
definitions. Corporate acts that are outside those express definitions
under the law or articles of incorporation or those committed outside
the object for which a corporation is created are ultra vires. The only
exception to this rule is when acts are necessary and incidental to
carry out a corporation’s purposes and to the exercise of powers
conferred by the Corporation Code and under a corporation’s articles
of incorporation.373
370Montelibano v. Bacolod-Murqia Milling Co., Inc., G.R. No. L-16092, May 18,
1962.
371Querubin v. COMELEC, G.R. No. 218787, December 8, 2015.
372III Fletcher, Section 1511; 19 C.J.S. 419; Atrium Management Corporation
v. Court of Appeals, G.R. No. 109491, February 28, 2001.
373University of Mindanao, Inc. v. Bangko Sentral Pilipinas, et al., G.R. Nos.
194964-65, January 11, 2016.
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a. Applicability of ultra vires doctrine

192. Is ultra vires act limited to any act which is outside the express
and incidental powers of the corporation?
No, there are three (3) types of ultra vires acts;
a. Acts done beyond the powers of the corporation as
provided in the law or its articles of incorporation.
b. Acts entered into on behalf of the corporation by persons
who have no corporate authority or exceeded the scope of
their authority.
c. Acts or contracts, which are per se illegal as being contrary
to law.
193. Cite jurisprudence on ultra vires acts for being outside or

beyond the powers of the corporation.
a. Petitioner, an educational institution does not have the
power to mortgage its properties in order to secure loans
of a savings and loan association (“SLA”) even though
they have common stockholders. Securing SLA’s loans
by mortgaging the school’s properties does not appear to
have even the remotest connection to its operations as an
educational institution. Further, not having the proper
board resolution to authorize the signatory to execute
the mortgage contracts for the school, the contracts he
executed are unenforceable against the petitioner. While
the lender’s mortgage is annotated on the certificates
of titles of petitioner’s properties, the annotations are
merely claims of interest or claims of the legal nature and
incidents of the relationship between the person whose
name appears on the document and the person who
caused the annotation. It does not say anything about
the validity of the claim nor convert a defective claim or
document into a valid one.374
b. While Section 13 of DBP’s charter, exempts it from
existing laws on compensation and position classification,
it concludes by expressly stating that DBP’s system of
compensation shall nonetheless conform to the principles
iulbid.
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under the Salary Standardization Law (SSL). From this,

there is no basis to conclude that the DBP’s Board of
Directors was conferred unbridled authority to fix the
salaries and allowances of its officers and employees.
The authority granted DBP to freely fix its compensation
structure under which it may grant allowances and
monetary awards remains circumscribed by the SSL; it
may not entirely depart from the spirit of the guidelines
therein.
The grant of a wider latitude to DBP’s Board of Directors
in fixing remunerations and emoluments does not include an
abrogation of the principle that employees in the civil service “cannot
use the same weapons employed by the workers in the private sector
to secure concessions from their employees.” While employees of
chartered GFIs enjoy the constitutional right to bargain collectively,
they may only do so for non-economic benefits and those not fixed
by law, and may not resort to acts amounting to work stoppages
or interruptions. There is no other way to view the Governance
Forum Productivity Award (GFPA) other than as a monetary benefit
collectively wrung by DBP’s employees under threat of disruption to
the bank’s smooth operations.
All told, the grant of GFPA was indeed an ultra vires act or
beyond the authority of DBP’s Board of Directors.376
194. Cite instances where the corporate acts are within the powers
of the corporation but are considered ultra vires because they
were entered into on behalf of the corporation by persons who
have no corporate authority or have exceeded the scope of
their authority.
a. Another, a contract to sell cement signed by the president

and chairman of the corporation is not binding upon it
where they were not authorized by the board of directors
to enter into a contract and the company board of directors
disapproved the contract and the bylaws conferred the
power to manage the business of the corporation upon the
general manager.376
’’’Development Bank of the Philippines v. Commission on Audit, G.R. No.

210838, July 3, 2018.
3,6Yao Ka Sin Trading v. Court of Appeals, G.R. No. 53820, June 15,1992.
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b. There is also ultra vires act on the part of the board of

directors when it performs a corporate act without the
affirmative or ratificatory vote of the stockholders in
those instances where the RCC so requires.3” And there
is an ultra vires act on the part of the corporate officers
when they performed acts, purportedly on behalf of the
corporation, without having been so expressly or impliedly
authorized by the bylaws or board of directors, even when
the act or contract falls within the corporation’s express,
implied or incidental power, unless the acts are ratified
by the corporation.3’8 (l
195. Is an ultra vires act illegal?

An illegal act, such as one that is contrary to law, is necessarily
ultra vires but an ultra vires act is not necessarily an illegal act if it
only one that is outside the conferred powers of the corporation.”9
The term ultra vires should be distinguished from an illegal
act for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and
cannot be validated. It being merely voidable, an ultra vires act can
be enforced or validated if there are equitable grounds for taking
such action.380
196. May an ultra vires act be ratified?

An act that is ultra vires for being an illegal act cannot be
ratified. If a contract is ultra vires in the strict sense of the word,
it cannot ordinarily be ratified to make it valid. As to the question
of whether the consent of all the stockholders to an act of the
corporation can put such act within the powers of the corporation,
it may be stated as a general rule that the ratification of an ultra
vires act does not validate it, and this is also true as to ratification
by the stockholders. However, there is some authority tending to
hold the contrary case of ratification by stockholders, at least where
’’’Sections 36 to 43 of the RCC and 2009 Bar Exam.

”“2009 Bar Exam.
”9Maria Carla Pirovano v. De La Rama Steamship, Co., G.R. No. L-5377, En
Banc, December 29, 1954, J. Bautista Angelo; Republic v. Acoje Mining Co., Inc.,
G.R. No. L-18062, En Banc, February 28, 1963, J. Bautista Angelo; Gokongwei, Jr.
v. Securities and Exchange Commission, G.R. No. L-45911, En Banc, April 11, 1979,
J. Antonio.
“““Republic v. Acoje Mining Company, G.R. No. L-18062, February 28,1963.
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the rights of the state or creditors are not involved.3*1 The majority
of the cases though hold that acts which are merely ultra vires, or
acts which are not illegal, maybe ratified by the stockholders of a
corporation.382
It was held that a contract entered into by corporate officers
who exceed their authority generally does not bind the corporation
except when the contract is ratified by the Board of Directors. In
Office of the Ombudsman v. Antonio Z. De Guzman, there was no
evidence presented that the Board of Directors of the Philippine
Postal Corporation repudiated the contract with Aboitiz One for
outsourcing mail deliveries. The contract remained effective until
a certain period. Considering that the Board of Directors remained
silent and the Postmaster Generals continued to approve the
payments to Aboitiz One, they are presumed to have substantially
ratified the company official’s unauthorized acts. Therefore, the
official’s action is not considered ultra vires.363
The foregoing case affirms that an ultra vires act, which is not
an illegal act, may be ratified by the stockholders of the corporation.
6. Consequences of ultra vires acts

197. What are the consequences of ultra vires acts?
a. If the contract is executed on both sides, the courts will
not set aside or interfere to deprive either party of what
has been acquired under them.
b. If the contract is executory on both sides, it will not
be enforced at the suit of either party, because their
enforcement is not required by any equitable principles,
and will be contrary to public policy.
c. If the contract is executed on one side, and executory on
the other, courts in some jurisdictions, although not in
all, will enforce in favor of the party who has executed the
same on his part against the other party who has received
and retained the benefits on the ground that equitable
principles and outweighing considerations of public
38IIII Fletcher, Section 1518.

“’Brooklyn Heights R. Co. v. Brooklyn City R. Co., 135 N.Y. Supp. 1001, cited
in Pirovano v. Dela Rama Steamship, G.R. No. L-5377, December 29,1954.
’“Office of the Ombudsman v. Antonio Z. De Guzman, G.R. No. 197886,
October 4, 2017.
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policy, require that the latter should not be permitted,

while retaining the benefits of the contract, to escape
liability on the ground that it was ultra vires.
d. Contracts, whether wholly executory or executed on
one side, apparently authorized, but in fact, ultra vires
because they are made for a purpose not within the scope
of the business of the corporation, the ultra vires purpose
being unknown to the other party, are enforceable against
the corporation.384
198. What is the remedy of the stockholder against an ultra vires

act?
If the act is yet to be done, the remedy is one of injunction to
enjoin the performance or continued performance of the ultra vires
act. If the act has already been performed, a stockholder may file
a derivative suit on behalf of the corporation to set aside the ultra
vires act.
c. Doctrine of individuality of subscription

199. What is the doctrine of individuality of subscription?
This means that a subscription is one, entire, and indivisible
whole contract. This indivisibility of subscription is absolute as
Section 63 of the RCC speaks no exception.
The purpose of the doctrine is to prevent the partial disposition
of a subscription, which is not fully paid, because if it is permitted
and the stockholder subsequently becomes delinquent in the
payment of his subscription, the corporation may not be able to sell
as many of his subscribed shares as would be necessary to cover the
total amount from him pursuant to Section 67 of the RCC.
d. Doctrine of equality of shares

200. What is the doctrine of equality of shares?
The doctrine of equality of shares means that all stocks issued
by the corporation are presumed equal, with the same privileges
and liabilities, provided that the articles of incorporation is silent
384III Fletcher, Section 1515.
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on such differences.385 Stated otherwise, each share shall be equal

in all respects to every other share, except as otherwise provided
in the articles of incorporation and the certificate of stock.388 Thus,
all shares have the same rights and privileges unless classified
differently in the Articles of Incorporation, and such classification
is not contrary to law. Preferred shares, therefore, have the same
voting rights similar to common shares unless the preferred shares
are denied such right in the articles of incorporation.
Any restriction on shares should also be stated in the articles
of incorporation, otherwise, it is not valid. In a couple of cases,38’
the Supreme Court held that any lien on shares, like being held
as security for payment of dues and assessments, must be in the
articles of incorporation, not only in the bylaws, otherwise, it is
invalid.388
e. Trust fund doctrine

201. What is the trust fund doctrine?
The trust fund doctrine provides that subscriptions to the
capital stock of a corporation constitute a fund to which the creditors
have a right to look for the satisfaction of their claims.389 In a sense,
they have to be unimpaired for the protection of creditors. These
cover the entire consideration received for the issuance of no par
value shares or the aggregate amount for the par value shares
issued by the corporation.
It must be noted, however, that the trust fund doctrine is not
limited to the stockholders’ subscriptions. The scope of the doctrine
encompasses not only the capital stock but also other property and
assets generally regarded in equity as a trust fund for the payment
of corporate debts.390
’“Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576,

January 20,1999.
’“Section 6. RCC.
387Valley Golf and Country Club v. Vda de Caram, G.R. No. 158805, April 16,
2009; Calatagan Golf Club, Inc. v. Clemente, Jr., G.R. No. 165443, April 16,2009.
388See also discussion on restriction on transfers, infra.
™0ng v. Tiu, G.R. Nos. 144476 and 144629, April 8, 2003.
’“Halley v. Printwell, Inc., G.R. No. 157549, May 30, 2011; 2015 and 2019 Bar
Exams.
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202. When is the trust fund violated?

The Trust Fund Doctrine is violated in the following cases:
a. The corporation has distributed its capital among the
stockholders without providing for the payment of
creditors.
b. It released the subscribers to the capital stock from their
unpaid subscriptions.
c. It transferred corporate property in fraud of its creditors.
d. It distributed properties to stockholders except by way of
dissolution and liquidation, the redemption of redeemable
shares, and reduction of capital stock.391
e. When it declared dividends without unrestricted retained
earnings.392
f. When it acquired its shares without unrestricted retained
earnings.393
203. Does the additional paid-in capital ("APIC"), that is, the
premium above par value, form part of the trust fund doctrine?
APIC forms part of the equity emanating from the original
subscription agreement. APIC, as a premium, forms part of the
capital of the corporation and therefore, falls within the purview of
the trust fund doctrine.391 There have been previous SEC Opinions3”
that stock dividends can be declared out of APIC but the most
recent SEC regulation, as previously pointed out, is that APIC shall
neither be declared as dividend nor shall it be reclassified to absorb
deficiency except through an organizational restructuring duly
approved by the SEC.390
39lOng V. Tiu, G.R. Nos. 144476 and 144629, April 8, 2003; 2007 and 2015 Bar
Exams.
’91SEC-OGC Opinion No. 50-2019.
395SEC Letter Opinion, July 5, 1994; Re: William, Gothong & Aboitiz (WG&A)
SEC Opinion dated October 2, 2001.
396SEC-OGC Opinion No. 23-19, June 17, 2019; SEC Memorandum Circular
No. 11-08, December 5,2008; SEC Opinion No. 01-05, January 4,2005; SEC Opinion,
August 8, 1991.
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204. ABC Corporation ("ABC") obtained a loan from XYZ Bank

secured by a mortgage on its real property. ABC defaulted.
To stave off foreclosure, A, the controlling stockholder of ABC
invited investor X to invest in ABC. X subscribed to shares
of stock of ABC and became a significant stockholder. In
further consideration of his investment, X and A agreed on
how to manage the corporation. Unfortunately, the two (2)
stockholders had a disagreement, with each one claiming
a breach of the subscription agreement. May A rescind the
subscription of X?
No, the rescission of the Subscription Agreement will
effectively result in the unauthorized distribution of the capital
assets and property of the corporation, thereby violating the Trust
Fund Doctrine. Rescission of a subscription agreement is not one of
the instances when the distribution of capital assets and property of
the corporation is allowed. The Trust Fund Doctrine provides that
subscriptions to the capital stock of a corporation constitute a fund
to which the creditors have a right to look for the satisfaction of their
claims.397
i. How exercised
a. By the shareholders338
b. By the board of directors31>»
c. By the officers
205. When is the act of the officer of the corporation considered
the act of the corporation and therefore, valid and enforceable
against the corporation?
The authority of certain individuals to bind the corporation
is generally derived from law, corporate bylaws or authorization
by the board, either expressly or impliedly, by habit, custom or
acquiescence. Thus, the act of the officer binds the corporation if he
is authorized by law, the bylaws, or by the board of directors, or if
despite lack of authority from any of the three (3) sources, his act is
ratified by the corporation.100
3970ng Yong, et al. v. David S. Tiu, et al., G.R. No. 144476 and G.R. No. 144629,
April 8, 2003.
39sSee discussion on cases requiring stockholders’ approval, infra.
399See discussion on board of directors, infra.
400People’s Aircargo and Warehousing Company v. Court of Appeals, G.R. No.
117847, October 7, 1998; Citibank, N.A. v. Hon. Segundino G. Chua, et al., G.R. No.
102300, March 17, 1993.
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For instance, since the bylaws are a source of authority for

corporate officers and agents of the corporation, a resolution of
the Board of Directors of Citibank appointing an attorney in fact
to represent and bind it during the pre-trial conference of the case
at bar is not necessary because its bylaws allow its officers, the
Executing Officer and the Secretary Pro-Tem to execute a power of
attorney to a designated bank officer clothing him with authority to
direct and manage corporate affairs, including the appointment of
legal counsel.'01
The board, on the other hand, as previously discussed, has the
power to designate the officer who will perform specified acts on
behalf of the corporation.
In one case, it was held that a board resolution authorizing a
corporate officer to obtain a loan includes the authority to assign
receivables to secure the loan if the resolution empowers the officer
to agree to the terms and conditions of the loan and to sign the
implementing documents.'02 1
Even in the absence of authority from the articles of
incorporation and/or the bylaws or from the board of directors, the
acts of the officer are binding on the corporation if such acts are
ratified by the corporation, either subsequent thereto or under the
doctrine of apparent authority. In the People’s Aircargo case,'03 the
Supreme Court held that in the absence of charter or bylaw provision
to the contrary, the president is presumed to have the authority to act
within the domain of the general objectives of its business and falls
within the scope of his usual duties. And even if a certain contract
is outside the usual powers of the president, the corporation’s
ratification of the same and acceptance of benefits make it binding,
Thus, where the president of the corporation hired a consultant to
prepare an operations manual in connection with its application
for a license as a bonded warehouse, the corporation accepted the
operations manual and allowed the contract to conduct a seminar
for its employees, the contract is binding on the corporation even
though there was no written authorization from the board which is
deemed to have ratified the contract.
'“'Citibank, N.A. Hon. Segundino G. Chua, et al., G.R. No. 102300, March
17,1993.
'^Great Asian Sales Center Corporation v. Court of Appeals, G.R. No. 105774,
April 25, 2002.
mSupra.
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206. What is the doctrine of apparent authority?

The doctrine of apparent authority provides that a corporation
will be estopped from denying the agent’s authority if it knowingly
permits one of its officers or any other agent to act within the scope of
apparent authority, and it holds him out to the public as possessing
the power to do those acts.
Although an officer or agent acts without, or in excess of, his
actual authority if he acts within the scope of an apparent authority
with which the corporation has clothed him, by holding him out or
permitting him to appear as having such authority, the corporation
is bound thereby in favor of a person who deals with him in good
faith in reliance on such apparent authority, as where an officer
is allowed to exercise a particular authority with respect to the
business, or a particular branch of its continuously and publicly, for
a considerable time.404
207. Cite jurisprudence where the Supreme Court applied the

doctrine of apparent authority.
a. When a bank, by its acts and failure to act, has clearly
clothed its manager with apparent authority to sell an
acquired asset in the normal course of business, it is legally
obliged to confirm the transaction by issuing a board
resolution to enable the buyers to register the property
in their names. It has a duty to perform necessary and
lawful acts to enable the other parties to enjoy all benefits
of the contract which it had authorized.405
b. A bank is liable to the seller who transferred ownership
of his property in favor of its buyer after the seller relied
on the letter of the bank manager that the buyer had an
approved real estate loan with the bank and guaranteed
that subsequent releases from the loan would be made
directly to the seller, but the manager released the loan
instead to the buyer who, however, failed to pay the
seller.406
404TERP Construction Corporation v. Banco Filipino Savings and Mortgage

Bank, G.R. No. 221771, September 18, 2019.
405Rural Bank of Milaor (Camarines Sur) v. Francisca Ocfemia, et al., G.R. No.
137686, February 8, 2000.
406Games and Garment Developers v. Allied Banking Corporation, G.R. No.
181426, July 13, 2015.
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c. The records of the case show no evidence that the

corporation authorized the president to file a complaint
and enter into a compromise agreement on its behalf.
Neither was there any showing that the corporate bylaws
authorize its president to do such acts. The corporation’s
grant of authority to the president, however, falls under
the doctrine of apparent authority. Furthermore, having
availed of benefits under the Compromise Agreement, the
corporation is estopped from repudiating it.407
d. Banco Filipino purchased a bond from TERP Construction
(“TERP”) and relied on TERP senior vice president’s
(“SVP’) apparent authority to promise interest payments
over and above the guaranteed 8.5%, considering the
SVP’s position in TERP. His apparent authority was
further demonstrated when TERP paid Banco Filipino
what the SVP promised during the Bonds’ term.408
I
208. Cite jurisprudence where the Supreme Court did not apply the
doctrine of apparent authority.
a. There having been no quorum present during the meeting
where his authority was supposed to have been given, the
filing of a petition for the reconstitution of the owner’s
duplicate of a transfer certificate of title by the branch
manager is unauthorized. The doctrine of apparent
authority cannot apply because being a mere branch
manager, he could not be looked upon as a corporate
officer clothed with the implied or apparent power to
file the suit (particularly given his responsibility in the
corporation which is not at all connected with the filing of
the petition).409
b. Although a branch manager, within his field and as to
third persons, is the general agent and is in general
charge of the corporation, with apparent authority
commensurate with the ordinary business entrusted
“’Engineering Geoscience, Inc. v. Philippine Savings Bank, G.R. No. 187262,

January 10, 2019.
408TERP Construction Corporation v. Banco Filipino Savings and Mortgage
Bank, G.R. No. 221771, September 18, 2019.
409New Durawood Company v. Court of Appeals, G.R. No. 111732, February
20,1996.
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him and the usual course and conduct thereof, yet the
power to modify or nullify corporate contracts remains
generally in the board of directors. Being a mere branch
manager alone is insufficient to support the conclusion
that he has been clothed with “apparent authority* to
verbally alter terms of written contracts, especially
when viewed against the telling circumstances of this
case: the unequivocal provision in the mortgage contract;
the corporation’s vigorous denial that any agreement to
release the mortgage was ever entered into by it; and, the
fact that the purported agreement was not even reduced
into writing considering its legal effects on the parties’
interests.410
C. While in the absence of a charter or bylaw provision to
the contrary the president is presumed to have authority,
the questioned act should still be within the domain of the
general objectives of the company’s business and within
the scope of his or her usual duties. Here, the corporation
is an association of professional horse trainers in the
Philippine horse racing industry organized as a nonstock
corporation and it is committed to the uplifting of the
economic condition of the working sector of the racing
industry. It is not in its ordinary course of business to
enter into housing projects, especially not in such scale and
magnitude so massive as to amount to P101,150,000.00.4U
Based on these cases, the doctrine of apparent
authority will not apply if the transaction is not part of
the function of the officer within the corporation and/
or the transaction is not related to the purposes of the
corporation. As a simple example, the officer of the
corporation in charge of the administration of facilities
can never bind the corporation for contracts relating to an
investment in securities as the latter transaction is not
related to the function of the officer in the corporation.
110Banate v. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., G.R. No.
163825, July 13, 2010.
‘■'Philippine Race Horse Trainer’s Association, Inc. v. Piedras Negras
Construction and Development Corporation, G.R. No. 192659, December 2,2015.
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VIII. Stockholders and members
a. Fundamental rights of a stockholder

209. What are the rights of a stockholder?
In exchange for his equity investment in a corporation, a
stockholder is entitled to the following rights:
a. Proprietary Rights — these rights pertain to certain
economic benefits that accrue to his shares, such as:
i. Right to receive dividends; and
ii. Right to participate in the assets of the corporation
upon dissolution and liquidation.
b. Management Rights - these refer to participation in
the conduct of the business of the corporation exercised
through the following:
i. Right to vote on all corporate acts requiring
stockholder’s approval; and
ii. Right to elect the directors of the corporation.
c. Remedial Rights — these refer to remedies the stockholder
may pursue depending on the issues involved, such as:
i. Appraisal right;
ii. Pre-emptive right;
iii. Right to inspect;
iv. Right to copy of the financial statements of the
company; and
v. Right to file a derivative suit.
b. Participation in management
i. Proxy
210. What is a proxy?
A proxy is the written instrument signed by the stockholder
authorizing another person to exercise the voting rights of the
former. It may also refer to the person exercising the voting authority
granted by the stockholder.
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211. What is the purpose of proxies?

A stockholder is allowed to vote in person or by proxy. Through
proxies, stockholders can ensure their participation and voting
during the stockholders meeting and protect their interest even
though they may not be physically present.
The system of proxy voting also helps the corporation achieve
quorum during stockholders’ meetings and assists Management
secure control of the corporation.
212. Who may be a proxy?

Any natural person who has the legal capacity to act may be
a proxy. He is basically an agent, with the stockholder granting the
proxy as his principal. A stockholder disqualified to vote under the
RCC or the bylaws of the corporation may be appointed proxy as
long as he has the legal capacity.
If the stockholder is a natural person, the proxy will be basically
in the form of a power of attorney. In case of corporate stockholder,
the proxy will be in the form of a board resolution authorizing
another person to exercise the stockholder’s voting rights in the
corporation.
213. What are the limitations on proxies?

a. Proxies shall be in writing, signed, and filed, by the
stockholder or member, in any form authorized in the
bylaws and received by the corporate secretary on the
date fixed in the bylaws but not later than a reasonable
time before the scheduled meeting.
b. Unless otherwise provided in the proxy form, it shall be
valid only for the meeting for which it is intended.
c. No proxy shall be valid and effective for a period longer
than five (5) years at any one (1) time.412 While the proxy
cannot exceed five (5) years, a new proxy can always be
given with another five-year period.
1l2Section 57, RCC.
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ii. Voting trust J
214. What is a voting trust?

It is an agreement where one (1) or more stockholders of a
stock corporation confer upon a trustee or trustees the right to vote
and other rights pertaining to the shares for a period generally not
exceeding five (5) years at any time.
By its nature, a voting trust agreement creates a dichotomy
between the voting rights of the stockholder and his other rights."’
The transferring stockholder parts away with his voting rights but
retains equitable or beneficial ownership over the stock. As such, he
has the right to receive dividends and other rights a stockholder is
entitled to, until the dissolution and liquidation of the corporation.
He also retains his right of inspection which he can exercise
concurrently with the voting trustee. But, having conveyed the legal
title to the trustee, the transferring stockholder is disqualified from
being elected as a director.
If he executes the voting trust agreement during his term as a
director, he shall cease to be a director of the corporation.'111
215. What are the powers of the voting trustee?

The voting trustee is entitled to all the rights of a stockholder
pertaining to the shares transferred subject to the terms and
conditions of the agreement. He may vote in person or by proxy
unless the agreement provides otherwise. Having legal title to the
shares, he is qualified to be elected as a director. However, he is
not entitled to proprietary rights, like to receive dividends and
the assets of the corporation upon dissolution and liquidation. He
may, however, create a security interest over the dividends of the
transferring stockholder, as a security for a loan.
216. A distressed company ("Company") executed a voting trust

agreement for a period of three (3) years over 60% of its
outstanding paid-up shares in favor of a bank to whom it was
indebted, with the Bank named as trustee. Additionally, the
Company mortgaged all its properties to the Bank.
n3Lee v. Court of Appeals, G.R. No. 91436, February 4, 1992.
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Because of the insolvency of the Company, the Bank

foreclosed the mortgaged properties, and as the highest
bidder, acquired said properties and assets of the Company.
The three-year period prescribed in the Voting Trust
Agreement having expired, the Company demanded the
turnover and transfer of all its assets and properties, including
the management and operation of the Company, claiming that
under the Voting Trust Agreement, the bank was constituted
as trustee of the management and operations of the Company.
Does the demand of the Company tally with the concept
of a Voting Trust Agreement? Explain briefly.
No. The demand of the Company does not tally with the concept
of a Voting Trust Agreement. Under a voting trust agreement, the
transferring stockholder merely conveys to the trustee the right to
vote and other rights of a stockholder over the transferred shares
except for proprietary rights.
The consequence of the foreclosure of the mortgaged properties
is distinct and separate from the Voting Trust Agreement and its
effects.416
217. What is the purpose of a voting trust?

Voting trust is a control device by which a group may gain or
retain control over the management of the corporation. This control
device is allowed as long as it is not entered into for purposes of
circumventing the laws against anti-competitive agreements, abuse
of dominant position, anti-competitive mergers and acquisitions,
violation of nationality and capital requirements, or for the
perpetuation of fraud.
218. What are the formalities and limitations on voting trust

agreement?
a. It should not exceed five (5) years at any time, provided,

that in the case of a voting trust specifically required as a
condition in a loan agreement, said voting trust may be for
a period exceeding five (5) years but shall automatically
expire upon full payment of the loan.
4161992 Bar Exam.
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b. A voting trust agreement must be in writing^nd notarized

and shall specify the terms and conditions thereof.
C. A certified copy of such agreement shall be filed with the
corporation and with the SEC; otherwise, the agreement
is ineffective and unenforceable.
d. The certificate or certificates of stock covered by the voting
trust agreement shall be canceled and new ones shall be
issued in the name of the trustee or trustees, stating that
they are issued pursuant to said agreement. The books of
the corporation shall state that the transfer in the name
of the trustee or trustees is made pursuant to the voting
trust agreement.
e. The trustee or trustees shall execute and deliver to the
transferors, voting trust certificates, which shall be
transferable in the same manner and with the same effect
as certificates of stock.
f. The voting trust agreement filed with the corporation
shall be subject to examination by any stockholder of the
corporation in the same manner as any other corporate
book or record: Provided, That both the trustor and the
trustee or trustees may exercise the right of inspection
of all corporate books and records in accordance with the
provisions of the RCC.
g- No voting trust agreement shall be entered into for
purposes of circumventing the laws against anti
competitive agreements, abuse of dominant position,
anti-competitive mergers and acquisitions, violation
of nationality and capital requirements, or for the
perpetuation of fraud.
h. Unless expressly renewed, all rights granted in a voting
trust agreement shall automatically expire at the end of
the agreed period. The voting trust certificates, as well
as the certificates of stock in the name of the trustee
or trustees, shall thereby be deemed canceled and new
certificates of stock shall be reissued in the name of the
trustors.
i. The voting trustee or trustees may vote by proxy or in
any manner authorized under the bylaws unless the
agreement provides otherwise.
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219. Distinguish proxy from voting trust agreement.

__________ f______________________ ________ ________
__________ Proxy Voting Trust Agreement
As to form It must be in writing, signed It must be in writing,
by the stockholder and filed signed by the stockholder
with the corporate secretary and notarized. A copy of
on the date fixed in the the voting trust agreement
bylaws but not later than a must be submitted to the
reasonable time before the SEC, otherwise, it is not
meeting. enforceable.
The RCC clarified that proxy
may be in any form as long
as the same is authorized by
the bylaws.
As to the A proxy is vested the right to A trustee is vested legal
rights vote. title to the shares and as
conferred such, may exercise not only
No right to inspect is granted,
voting right but the right of
unless separately authorized
inspection as well.
for that purpose.
A trustee is qualified to be
A proxy cannot be voted and
elected as director or trustee.
cannot qualify as director of
a corporation unless he is a All rights of a stockholder
stockholder in his own right. may be exercised by trustee
EXCEPT proprietary
rights (e.g., right to receive
dividends and to receive
the assets upon dissolution
and liquidation of the
corporation).
As to term Valid only for the meeting Valid for a period not
intended, unless general and exceeding five (5) years.
continuing in nature but not The voting trust can be
to exceed five (5) years. longer than five (5) years if
executed pursuant to a loan
The presence of stockholder
agreement, but expires upon
or principal revokes the
full payment of a loan.
authority of the proxy holder.
The voting trust can be
extended if it is co-terminus
with the loan agreement.
The presence of trustor does
not revoke the authority of
the trustee.
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iii. Cases when stockholders’ action is.required

(a) By a majority vote
(b) By a two-thirds vote
220. Enumerate the corporate acts requiring stockholders' approval
in a meeting called for the purpose.
The concurrence of the stockholders to the resolutions of the
Board of Directors is required in the following cases:
a. By a Majority Vote of the Outstanding Capital Stock
i. To enter into management contract (Section 43,
RCC)
ii. To amend or repeal bylaws (Section 47, RCC)
iii. To dissolve a corporation when creditors are not
affected (Section 134, RCC)
b. By a Two-Thirds (2/3) Vote of the Outstanding Capital
Stock 1
i. To amend the articles of incorporation (except when
mere written assent is allowed) (Section 15, RCC)
ii. To extend or shorten the corporate term (Section 36,
RCC)
iii. To increase or decrease capital stock, and create or
incur bonded indebtedness (Section 37, RCC)
iv. To amend the articles of incorporation to deny pre
emptive right (Section 38, RCC)
v. To sell or dispose of all or substantially all of
corporate assets (Section 39, RCC)
vi. To invest corporate funds in another corporation or
business or for any other purpose (Section 41, RCC)
vii. To declare stock dividends (Section 42, RCC)
viii. To enter into management contract if (a) a
stockholder or stockholders representing the same
interest of both the managing and the managed
corporations own or control more than one-third
(1/3) of the total outstanding capital stock entitled
to vote of the managing corporation; or (b) where a
majority of the members of the board of directors of
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the managing corporation also constitute a majority

of the members of the board of directors of the
managed corporation (Section 43, RCC)
ix. Merger or consolidation (Section 75, RCC)
x. Dissolution where creditors are affected (Section
135, RCC)
However, in the following instances, the stockholders may act
even without the concurrence of board resolution:
i. Delegate to the board the power to amend, repeal or adopt
new bylaws - by at least 2/3 of Outstanding Capital Stock
(Section 47, RCC)
ii. Ratification of contracts of the corporation with one (1) or
more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity
or affinity — by at least 2/3 of outstanding capital stock
(Section 31, RCC)
iii. Revocation of the power delegated to the board to amend,
repeal or adopt new bylaws — by at least majority of the
outstanding capital stock (Section 47, RCC)
iv. Grant of compensation to directors - by at least majority
of the outstanding capital stock (Section 29, RCC)
v. Election of director (Section 23, RCC) -by at least majority
of the outstanding capital stock
vi. Filling of vacancies in the board due to expiration of term,
removal or increase in the number of board seats, or if
the cause of the vacancy is not due to expiration of term,
removal, or increase in the number of board seats but
the remaining directors or trustees do not constitute a
quorum (Section 28, RCC) - by at least majority of the
outstanding capital stock
vii. Removal of directors (Section 27, RCC) - by at least 2/3 of
viii. Fixing the issue price of no-par value shares (Section 61,
RCC)—by at least majority of the outstanding capital stock
ix. Amendment of the articles of incorporation of a close
corporation which seeks to delete or remove any provision
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required to be contained in the articles of incorporation of

a close corporation (Section 102, RCC) — by at least 2/3 of
_• •! >ri: ci
(c) By cumulative voting
Please see discussion on cumulative voting.416
iv. Manner of voting

221. What are the modes of voting in a stockholders’ or members1
meeting under the RCC?
The right to vote of stockholders or members may be exercised
in person, through a proxy, or when so authorized in the bylaws,
through remote communication or in absentia.417
At all elections of directors or trustees, the right to vote
through remote communication or in absentia may be exercised in
corporations vested with public interest, notwithstanding the absence
of a provision in the bylaws of such corporations. A stockholder or
member who participates through remote communication or in
absentia shall be deemed present for purposes of quorum.418
The board may, therefore, allow such mode of voting even if
the bylaws are silent on such provision. Should the board, however,
resolve to allow voting through remote communication or in absentia,
it has to approve the guidelines and procedure therefor.
C. Proprietary rights
i. Right to dividends'
ii. Appraisal right
(a) When available
222. What is appraisal right?
It is the right of the stockholder to demand the payment of the
fair value of his shares after dissenting against a proposed corporate
act in the cases specified by law.420 In practical terms, it means the
right to get out of the corporation and get back his equity investment.
""Supra.
*xlIbid.
4l8Section 23, RCC.
419See previous discussion on dividends.
420Section 80, RCC.
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223. What are the instances when appraisal right is available?

The appraisal right can be exercised by a dissenting stockholder
in the following cases:
a. In case an amendment to the articles of incorporation
has the effect of changing or restricting the rights of
any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term
of corporate existence.
b. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of the
corporate property and assets.’21
C. In case of merger or consolidation.
d. In case of investment of corporate funds for any purpose
other than the primary purpose of the corporation.’22
e. In a close corporation, a stockholder may, for any reason,
compel the said corporation to purchase his shares at
their fair value, which shall not be less than their par or
issued value, when the corporation has sufficient assets
in its books to cover its debts and liabilities exclusive of
capital stock.423
224. Cite examples of the amendment to the articles of incorporation

that has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences
in any respect superior to those of outstanding shares of any
class, which then warrants the exercise of appraisal right.
a. Denial of pre-emptive right.
b. Creating shares which are given preferences in payment
of dividends or in the distribution of assets or other
preferences as may be indicated in the amendment to the
articles of incorporation provided they are not contrary to
law.
’21See discussion in Section 39, RCC.

’“Article 104, RCC.
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C. Converting non-voting preferred shares to voting shares.

d. Making non-voting redeemable preferred shares into
convertible voting shares in case of non-redemption of the
redeemable shares.
225. What are the requisites for the valid exercise of appraisal right?
The requisites are:
a. It can only be exercised in cases specified by law.424
b. The dissenting stockholder must have voted against a
proposed corporate action specified by law.426
c. The stockholder must make a written demand on the
corporation for the payment of the fair value of shares
held within 30 days from the date on which the vote was
taken.426
d. If the proposed corporate action is implemented, the
corporation shall pay the stockholder, upon surrender
of the certificate or certificates of stock representing the
stockholder’s shares, the fair value thereof as of the day
before the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.427
e. The fair value must be determined in accordance with the
mechanism set forth by law.426
f. Within 10 days after demanding payment for shares held,
a dissenting stockholder shall submit the certificates
of stock representing the shares to the corporation for
notation that such shares are dissenting shares. Failure
to do so shall, at the option of the corporation, terminate
appraisal right.429
g- Availability of unrestricted retained earnings.420
424Section 79, RCC.

™Ibid.
™Ibid.
,2aIbid.
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226. Is the stockholder's presence in the meeting where the

proposed corporate action was taken up necessary?
He must be present to vote against the corporate act in
those cases where stockholders’ meeting is required by the RCC
or to approve such corporate act. All of the corporate acts where
appraisal right may be exercised require a stockholders’ meeting
under the relevant provisions of the RCC (Section 36 for extension
or shortening of term, Section 39, for sale of all or substantially all of
corporate assets, Section 41, for the investment of corporate funds in
the secondary purpose or another business and Section 76 for merger
and consolidation).
Amendment to the articles of incorporation that has the effect
of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class can be approved by mere
written assent131 unless the articles of incorporation or the bylaws
require stockholders’ meeting for the purpose. In close corporation,
a stockholder may, for any reason, compel the said corporation to
purchase his share at their fair value, which shall not be less than
their par or issued value, when the corporation has sufficient assets
in its books to cover its debts and liabilities exclusive of capital stock.
This does not require any meeting.
Under Section 11 of the RCC, a stockholder is entitled to
exercise his appraisal right by reason of the automatic conversion of
the term to perpetual existence.
In these cases where stockholders’ meeting is not compulsory
under the law, the vote of dissent can be communicated to the
corporation. This is particularly more true now under the RCC which
allows for voting in absentia or through remote communication, if so
provided in the bylaws or if approved by a majority of the board of
directors/32
227. ABC Corporation proposed to amend its articles of

incorporation to deny the pre-emptive right of its stockholders.
In the stockholders' meeting where the matter was taken up,
"X" a stockholder, voted against the proposal. He, thereafter,
demanded the payment of his shares. Unfortunately, when

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J9JC9B0M
he made a demand for payment, the Corporation had no

unrestricted retained earnings. Thus, his demand for payment
was not acted upon. He filed a collection suit. While the case
was pending, the corporation posted surplus profit.
Is the exercise of appraisal right as a result of the
amendment of the articles of incorporation correct?
Yes, because the amendment of the articles of incorporation
to deny pre-emptive right restricts his right as a stockholder to
subscribe to issuance and disposition of shares by the corporation.
Under Section 80 of the RCC, such kind of amendment allows for the
exercise of appraisal right.
b. Is "X" entitled to payment?

No, his demand for payment and collection suit are premature
because, at the time of demand, the corporation had no available
surplus profit. The fact that the corporation posted retained earnings
during the pendency of the case did not cure the prematurity of
cause of action. The availability of surplus profit did not retroact to
the date of demand for payment/33
Please note while the law requires that demand for payment
should be made within 30 days the vote was taken, this is on the
assumption there are available unrestricted retained earnings.
Otherwise, the stockholder must wait. Based on Turner v. Lorenzo
Shipping Corporation,'34 once surplus profit is available, the
stockholder must make another demand for payment. Only if he is
refused that he can file the action in court to enforce the payment of
the fair value of his shares.
(b) Manner of exercise of right

228. How is appraisal right exercised?
The dissenting stockholder who votes against a proposed
corporate action may exercise the right of appraisal by making
a written demand on the corporation for the payment of the fair
value of shares held within 30 days from the date on which the
vote was taken: Provided, That failure to make the demand within
such period shall be deemed a waiver of the appraisal right. If the
‘“Turner v. Lorenzo Shipping Corporation, G.R. No. 157479, November 24,2010.

431G.R. No. 157479, November 24, 2010.
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proposed corporate action is implemented, the corporation shall pay

the stockholder, upon surrender of the certificate or certificates of
stock representing the stockholder’s shares, the fair value thereof as
of the day before the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
If, within 60 days from the approval of the corporate action by
the stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be determined
and appraised by three disinterested persons, one of whom shall be
named by the stockholder, another by the corporation, and the third
by the two thus chosen. The findings of the majority of the appraisers
shall be final, and their award shall be paid by the corporation within
30 days after such award is made: Provided, That no payment shall
be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment:
Provided, further, That upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer
the shares to the corporation.435
229. What is the effect of demand for the payment of the fair value
of the stockholder's share?
From the time of demand for payment of the fair value of a
stockholder’s shares until either the abandonment of the corporate
action involved or the purchase of the said shares by the corporation,
all rights accruing to such shares, including voting and dividend
rights, shall be suspended in accordance with the provisions of the
RCC, except the right of such stockholder to receive payment of the
fair value thereof: Provided, That if the dissenting stockholder is not
paid the value of the said shares within 30 days after the award, the
voting and dividend rights shall immediately be restored.435
230. May a dissenting stockholder withdraw his demand for

payment in order to be restored to his rights as a stockholder?
No demand for payment of the fair value of the shares may be
withdrawn unless the corporation consents thereto.437

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231. When does the right to demand payment cease? When are the
rights of the dissenting stockholder restored?
The right to demand payment of the fair value of the shares
ceases in the same cases where his rights as a stockholder are
restored. These are:
a. demand for payment is withdrawn with the consent of the
corporation.
b. if the proposed corporate action is abandoned or rescinded
by the corporation or disapproved by the SEC where such
approval is necessary.
c. if the SEC determines that such stockholder is not entitled
to the appraisal right.438
d. if the dissenting stockholder is not paid the value of the
said shares within 30 days after the award, the voting
and dividend rights shall immediately be restored.439
232. What is the effect of appraisal right on the right of the

stockholder to dividends?
Upon demand for the payment of the fair value of the shares,
the right of the stockholder to receive dividends is suspended/40
Once appraisal right ceases in the cases provided by law, all
dividends which would have accrued on the shares shall be paid to
the dissenting stockholder.441
If the dissenting stockholder is not paid the value of the said
shares within 30 days after the award, the voting and dividend rights
shall immediately be restored.442 The right to demand payment does
not, of course, cease.
Note that based on a plain reading of these provisions, it
appears that if appraisal right ceases, the effect thereof is retroactive
with respect to dividends but if the stockholder is not paid within 30
days from the award, the right to dividends is only prospective in
application.
"“Section 83, RCC.

u0Ibid.
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233. Who bears the cost of the appraisal?

The costs and expenses of appraisal shall be borne by the
corporation, unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation may have
offered to pay the stockholder, in which case they shall be borne by
the latter. In the case of an action to recover such fair value, all cost
and expenses shall be assessed against the corporation, unless the
refusal of the stockholder to receive payment was unjustified."3
234. A dissenting stockholder sold his shares while awaiting

payment from the corporation. Can the buyer demand the
payment of the fair value of the shares sold?
If shares represented by the certificates bearing such notation
are transferred, and the certificates consequently canceled, the
rights of the transferor as a dissenting stockholder under the RCC
shall cease and the transferee shall have all the rights of a regular
stockholder."’ This means that the buyer cannot demand the
payment of the fair value of the shares.
235. What are the rules on the determination of the fair value of
shares?
The fair value of the shares is determined by the parties.
However, if, within 60 days from the approval of the corporate
action by the stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the shares, it shall be
determined and appraised by three (3) disinterested persons, one of
whom shall be named by the stockholder, another by the corporation,
and the third by the two (2) thus chosen. The findings of the majority
of the appraisers shall be final, and their award shall be paid by the
corporation within 30 days after such award is made."6
iii, Right to inspect

236. What are the records that corporations are required to keep
and preserve at its principal office?
Every corporation shall keep and carefully preserve at its
principal office all information relating to the corporation including,
but not limited to:
"3Section 84, RCC.

"’Section 85, RCC.
’"Section 81, RCC.
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a. The articles of incorporation and bylaws of the corporation

and all their amendments; ■ •/■
b. The current ownership structure and voting rights of the
corporation, including lists of stockholders or members,
group structures, intra-group relations, ownership data,
and beneficial ownership;
c. The names and addresses of all the members of the board
of directors or trustees and the executive officers;
d. A record of all business transactions;
e. A record of the resolutions of the board of directors or
trustees and of the stockholders or members;
f. Copies of the latest reportorial requirements submitted to
the SEC;
g- The minutes of all meetings of stockholders or members,
or of the board of directors or trustees. Such minutes shall
set forth in detail, among others: the time and place of
the meeting held, how it was authorized, the notice given,
the agenda therefor, whether the meeting was regular or
special, its object if special, those present and absent, and
every act done or ordered done at the meeting. Upon the
demand of a director, trustee, stockholder, or member,
the time when any director, trustee, stockholder, or
member entered or left the meeting must be noted in the
minutes; and on a similar demand, the yeas and nays
must be taken on any motion or proposition, and a record
thereof carefully made. The protest of a director, trustee,
stockholder, or member on any action or proposed action
must be recorded in full upon their demand;”0
h. Book of accounts, original, and duplicate originals of
invoices and receipts for goods and services purchased;*1'
and
i. Records as may be required under other applicable laws.
Stock corporations must also keep a stock and transfer book,
which shall contain a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and
’’“Section 73, RCC.

’’’Section 237 of the Tax Code, as amended by TRAIN Law.
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unpaid on all stocks for which subscription has been made, and the
date of payment of any installment; a statement of every alienation,
sale or transfer of stock made, the date thereof, by and to whom
made; and such other entries as the bylaws may prescribe.41*
237. Is the stock and transfer book conclusive evidence to show the
outstanding capital stock of the corporation?
A stock and transfer book is necessary as a measure of
precaution, expediency, and convenience since it provides the only
certain and accurate method of establishing the various corporate
acts and transactions and of showing the ownership of stock and like
matters. However, a stock and transfer book, like other corporate
books and records, is not in any sense a public record, and thus is
not exclusive evidence of the matters and things which ordinarily
are or should be written therein.449
238. What is the nature of the stockholders' right to inspect

corporate records?
Every stockholder has the right to inspect the records of a
corporation. The stockholders’ right of inspection of the corporation’s
books and records is based upon their ownership of the assets and
property of the corporation.
The Corporation Code has granted to all stockholders the right
to inspect the corporate books and records, and in so doing has not
required any specific amount of interest for the exercise of the right
to inspect. The right cannot be denied on the basis that the inspection
is for a doubtful or dubious reason. The right of the shareholder
to inspect the books and records should not be made subject to
the condition of a showing of any particular dispute or of proving
any mismanagement or other occasion rendering an examination
proper, but if the right is to be denied, the burden of proof is upon the
corporation to show that the purpose of the shareholder is improper,
by way of defense.460

’“Jesus v. Lanuza, et al. v. Court of Appeals, et al., G.R. No. 131394, March
28, 2005.
450Terelay Investment and Development Corporation v. Cecilia Teresita J.
Yulo, G.R. No. 160924, August 5, 2015.
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The burden of proof is on the corporation to show that the

stockholder’s action in seeking examination of the corporate records
was moved by unlawful or ill-motivated design.’61
239. Is the stockholder's possession of a stock certificate

a condition precedent for the exercise of the right of
inspection?
No, a stockholder may exercise his right of inspection even
though he is not in the possession of a stock certificate. A stock
certificate is prima facie evidence that the holder is a shareholder of
the corporation, but the possession of the certificate is not the sole
determining factor of one’s stock ownership. It expresses the contract
between the corporation and the stockholder, but it is not essential
to the existence of a share in stock or the creation of the relation of
a shareholder to the corporation. More so, if the stockholder being
denied the right of inspection is a former director of the corporation.
The corporation would not have allowed his election as a director if
he was disqualified for lack of stock ownership.’62
Moreover, a stock certificate is issued only upon full payment
of the subscription’63 and holder of subscribed shares not fully paid
which are not delinquent has all the rights of a stockholder,*51
including the right of inspection.
240. What is the extent or scope of the right of inspection?

The right of inspection extends to all corporate records,
regardless of the form in which they are stored.’66 It covers the stock
and transfer book because it is part of corporate records.’66
It also extends to books and records of the corporation’s
wholly-owned subsidiary which are in the corporation’s possession
and control as it is more in accord with equity, good faith and
’’’Republic Sandiganbayan, G.R. Nos. 88809 and 88858 (Resolution), July

10,1991.
’62Abra Valley. Grace Borgona Insigne, et al. Abra Valley Colleges, Inc. and
Francis Borgona, G.R. No. 204089, July 29, 2015.
’56Aderito Z. Yujuico v. Cezar T. Quiambao, et al., G.R. No. 180416, June 2,
2014; Section 73, RCC.
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fair dealing to construe the statutory right of a stockholder to

cover such books and records.457
241. Who are the persons allowed to inspect corporate records?

Corporate records, regardless of the form in which they
are stored, shall be open to inspection by any director, trustee,
stockholder, or member of the corporation in person or by a
representative at reasonable hours on business days, and a demand
in writing may be made by such director, trustee, or stockholder
at their expense, for copies of such records or excerpts from said
records.
A requesting party who is not a stockholder or member of
record, or is a competitor, director, officer, controlling stockholder
or otherwise represents the interests of a competitor shall have no
right to inspect or demand reproduction of corporate records.458
242. What is the penalty for unjustified refusal to grant the right of
inspection?
Any officer or agent of the corporation who shall refuse to allow
the inspection and/or reproduction of records in accordance with
the provisions of the RCC shall be liable to such director, trustee,
stockholder, or member for damages, and in addition, shall be guilty
of an offense which shall be punishable under Section 161 of the
RCC.459
If such refusal is made pursuant to a resolution or order of
the board of directors or trustees, the liability under this section
for such action shall be imposed upon the directors or trustees who
voted for such refusal.400
Under Section 161 of the RCC, the unjustified failure or
refusal by the corporation, or by those responsible for keeping and
maintaining corporate records, to comply with Sections 45, 73, 92,
128, 177 and other pertinent rules and provisions of the RCC on
inspection and reproduction of records shall be punished with a fine
ranging from Ten Thousand Pesos (P10,000.00) to Two Hundred
457John Gokongwei, Jr. v. Securities and Exchange Commission, el at, G.R.

No. L-45911, April 11, 1979.
458Section 73, RCC.
,mIbid.
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Thousand Pesos (P200.000.00), at the discretion of the court,

taking into consideration the seriousness of the violation and its
implications. When the violation of this provision is injurious or
detrimental to the public, the penalty is a fine ranging from Twenty
Thousand Pesos (P20,000.00) to Four Hundred Thousand pesos
(P400,000.00).
243. Did the RCC de-criminalize violation of stockholder's right of

inspection?
The RTC did not de-criminalize the violation of stockholder’s
right of inspection. It only removed the penalty of imprisonment and
limited the penalty to monetary fines.
244. What are the requisites before the penal provision may be
applied in a case of violation of a stockholder or member's
right to inspect the corporate books/records?
The elements of the offense are:
First. A director, trustee, stockholder, or member has made a
prior demand in writing for a copy of excerpts from the corporation’s
records or minutes;
Second. Any officer or agent of the concerned corporation shall
refuse to allow the said director, trustee, stockholder, or member of
the corporation to examine and copy said excerpts;
Third. If such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section
for such action shall be imposed upon the directors or trustees who
voted for such refusal; and
Fourth. Where the officer or agent of the corporation sets up the
defense that the person demanding to examine and copy excerpts
from the corporation’s records and minutes has improperly used any
information secured through any prior examination of the records
or minutes of such corporation or of any other corporation, or was
not acting in good faith or for a legitimate purpose in making his
demand, the contrary must be shown or proved.
Thus, in a criminal complaint for violation of Section 74 of
the Corporation Code (now Section 73 of the RCC), the defense of
improper use or motive is in the nature of a justifying circumstance
that would exonerate those who raise and are able to prove the same.
Accordingly, where the corporation denies inspection on the ground
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of improper motive or purpose, the burden of proof is taken from the

shareholder and placed on the corporation. However, where no such
improper motive or purpose is alleged, and even though so alleged,
it is not proved by the corporation, then there is no valid reason to
deny the requested inspection.461
245. What are the remedies of a stockholder if the corporation

denies or does not act on his demand for inspection?
The remedies are as follows:
a. If the corporation denies or does not act on a demand for
inspection and/or reproduction, the aggrieved party may
report such denial or inaction to the SEC. Within five (5)
days from receipt of such report, the SEC shall conduct a
summary investigation and issue an order directing the
inspection or reproduction of the requested records;462
b. He may file with a criminal complaint for violation of his
right of inspection;463 and
c. He may file a petition for inspection of corporate records
(Rule 7 of the Rules of Procedure for Intra-Corporate
Controversies).
246. Is an action to recover possession of a stock transfer from the

former secretary of the corporation enforceable by criminal
prosecution based on violation of the stockholders' right of
inspection?
No, a criminal action based on the violation of a stockholder’s
right to examine or inspect the corporate records and the stock
and transfer book of a corporation can only be maintained against
corporate officers or any other persons acting on behalf of such
corporation. A violation of Section 74 of the OCC (now, Section 73
of the RCC) contemplates a situation wherein a corporation, acting
through one of its officers or agents, denies the right of any of its
stockholders to inspect the records, minutes and the stock and
transfer book of such corporation.
461Sy Tiong Shiou, et al. v. Sy Chim, el al., G.R. No. 179438, March 30, 2009.
KiIbid.
’“Sections 73 and 161, RCC.
k
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The proprietary right of the corporation to be in possession

of such records and book, though certainly legally enforceable by
other means, cannot be enforced by a criminal prosecution based on
a violation of the Corporation Code.164
247. What are the limitations on the stockholder's right of

inspection?
The right of inspection is not absolute. It is subject to the
following limitations:
a. It can only be exercised for a purpose germane to his
interest as a stockholder;
b. He must be acting in good faith or for a legitimate purpose
in making the demand to examine or reproduce corporate
records;
c. It must be exercised during reasonable hours on business
days;
d. Copies of corporate records or excerpts from said records
must be at the expense of the requesting director, trustee,
or stockholder; and
e. It is subject to other applicable laws.465
248. What are the defenses available to the corporation against

a person demanding to examine and copy excerpts from the
corporation's records?
a. The stockholder demanding to examine and copy
excerpts from the corporation’s records and minutes
has improperly used any information secured through
any prior examination of the records or minutes of such
corporation or of any other corporation.
b. The stockholder was not acting in good faith or for a
legitimate purpose in making the demand to examine or
reproduce corporate records.
464Aderito Z. Yujuico v. Cezar T. Quiambao, et al., G.R. No. 180416, June 2,

2014.
46520 17 Bar Exam.
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C. The person demanding inspection or is a competitor,

director, officer, controlling stockholder or otherwise
represents the interests of a competitor.466
d. The purpose of inspection is not germane to his interest
as a stockholder.467
e. The right is not being exercised during reasonable hours
on a business day.
f. The subject matter of the inspection is a protected
information under other applicable laws R.A. No. 8293,
otherwise known as the Intellectual Property Code of the
Philippines, as amended, and R.A. No. 10173, otherwise
known as the Data Privacy Act of 2012 and R.A. No.
1405, otherwise known as Law on Secrecy of Philippine
Currency Bank Deposits.
249. Cite examples of legitimate purposes to warrant the exercise of

the right of inspection.
Among the purposes held to justify a demand for inspection
are the following: (1) to ascertain the financial condition of the
company or the propriety of dividends; (2) to determine the value of
the shares of stock for sale or investment; (3) to determine whether
there has been mismanagement; (4) in anticipation of shareholders’
meetings, to obtain a mailing list of shareholders to solicit proxies
or influence voting; (5) to obtain information in aid of litigation with
the corporation or its officers as to corporate transactions.468
250. Cite examples of improper purposes which may justify denial

of the right of inspection.
Among the improper purposes which may justify denial of the
right of inspection are: (1) obtaining of information as to business
secrets or to aid a competitor; (2) to secure business “prospects”
or investment or advertising lists; (3) to find technical defects in
corporate transactions in order to bring “strike suits” for purposes of
blackmail or extortion.'169

467Gonzales v. Philippine National Bank, supra.
468Terelay Investment and Development Corporation v. Cecilia Teresita J.
Yulo, G.R. No. 160924, August 5, 2015.
ttaIbid.
k
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251. Is the right of inspection extinguished by the dissolution of the

corporation?
The termination of the life of a juridical entity does not, by
itself, cause the extinction or diminution of the rights and liabilities
of such entity nor those of its owners and creditors. Thus, the
revocation of the corporation’s registration does not automatically
strip off the stockholder of his right to examine pertinent documents
and records of the corporation.470
The rights and remedies against, or liabilities of, the officers
shall not be removed or impaired by reason of the dissolution of the
corporation. Corollary then, a stockholder’s right to inspect corporate
records subsists during the period of liquidation. Accordingly, if
the stockholder was deprived of the exercise of an effective right of
inspection, offenses had in fact been committed, regardless of lack
of criminal intent.471
252. What are the obligations of the stockholder allowed to inspect

or reproduce corporate records?
The inspecting or reproducing party shall remain bound by
confidentiality rules under prevailing laws, such as the rules on
trade secrets or processes under R.A. No. 8293, otherwise known as
the Intellectual Property Code of the Philippines, as amended, R.A.
No. 10173, otherwise known as the Data Privacy Act of 2012, R.A.
No. 8799, otherwise known as The Securities Regulation Code, and
the Rules of Court.472
253. What is the liability of a stockholder who abused his right of

inspection?
Any stockholder who shall abuse the rights granted under this
section shall be penalized under Section 158 of the RCC, without
prejudice to the provisions of R.A. No. 8293, otherwise known as the
Intellectual Property Code of the Philippines, as amended, and R.A
No. 10173, otherwise known as the Data Privacy Act of 2012.
Under Section 158 of the RCC, if, after due notice and hearing,
the SEC finds that any provision of the RCC, rules or regulations,
or any of the SEC’s orders has been violated, the SEC may impose
470Alejandro - D.C. Roque v. People of the Philippines, G.R. No. 211108, June
7, 2017.
471Alfredo L. Chua v. People of the Philippines, G.R. No. 216146, August 24,2016.
472Section 73, RCC.
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any or all of the following sanctions, taking into consideration the

extent of participation, nature, effects, frequency and seriousness of
the violation:
a. Imposition of a fine ranging from Five Thousand Pesos
(P5,000.00) to Two Mihion Pesos (P2,000,000.00), and
not more than One Thousand Pesos (Pl,000.00) for each
day of continuing violation but in no case to exceed Two
Million Pesos (P2,000,000.00);
b. Issuance of a permanent cease and desist order;
c. Suspension or revocation of the certificate of incorporation;
and
d. Dissolution of the corporation and forfeiture of its assets
under the conditions in Title XIV of the RCC.
The last two (2) sanctions may obviously be imposed only if the
stockholder that abused the right of inspection is a corporation.
iv. Pre-emptive right"3

v. Right to vote"1
vi. Right to dividends"5
d. Remedial rights
254. What are the remedial rights available to stockholders

aggrieved by certain wrongful acts of the board and corporate
officers?
Certain wrongful acts on the part of the directors and corporate
officers may give rise to certain rights and the corresponding types
or kinds of suit, to wit:
i. Individual Suit
An individual suit is filed when the cause of action belongs to
the individual stockholder personally, and not to the stockholders as
a group or to the corporation (e.g., denial of the right to inspection
and denial of dividends to a stockholder).4’8
113 Supra.
474See previous discussion.
■’’“See previous discussion.
476Villamor v. Umale, G.R. Nos. 172843, 172881, September 24,2014.
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556 DIVINA ON COMMERCIAL LAW;
In one case, it was held that the suit cannot be characterized

as derivative, because she was complaining only of the violation of
her pre-emptive right and was merely praying that she be allowed
to subscribe to the additional issuances of stocks in proportion to her
shareholdings to enable her to preserve her percentage of ownership
in the corporation. She was therefore not acting for the benefit of the
corporation. Quite the contrary, she was suing on her own behalf,
out of a desire to protect and preserve her pre-emptive rights.4”
ii. Representative Suit

If the cause of action belongs to a group of stockholders, such
as when the rights violated belong to preferred stockholders, or
denial of the pre-emptive right to a group or class of stockholders, a
representative suit may be filed to protect the stockholders similarly
situated.478
Hi. Derivative Suit

255. What is a derivative suit?
A derivative suit is an action filed by stockholder in the name
and on behalf of the corporation to enforce a corporate right or cause
of action to set aside the wrongful acts of the corporation’s directors
and officers.
It concerns a wrong to the corporation itself. The real party in
interest is the corporation, not the stockholders filing the suit. The
stockholders are technically nominal parties but are nonetheless
the active persons who pursued the action for and on behalf of the
corporation.479
256. What is the rationale of the derivative suit?

A derivative suit is an exception to the general rule that the
corporation’s power to sue is exercised only by the board of directors
or trustees.
477Gilda C. Lim, el al. v. Patricia Lim-Yu, In her capacity as a Minority

Stockholder of Limpan Investment Corporation, G.R. No. 138343, Third Division,
February 19, 2001.
478Cua, Jr. v. Tan, 622 Phil. 661 (2009), e.g., denial of pre-emptive right of a
group of stockholders.
4,92019 Bar Exam; Florete v. Florete, G.R. No. 174909, January 20, 2016.
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Individual stockholders may be allowed to sue on behalf of the

corporation whenever the directors or officers of the corporation
refuse to sue to vindicate the rights of the corporation or are the
ones to be sued and are in control of the corporation.
Remedies through derivative suits are not expressly provided
for in our statutes — more specifically, in the Corporation Code and
the Securities Regulation Code — but they are “impliedly recognized
when the said laws make corporate directors or officers liable for
damages suffered by the corporation and its stockholders for
violation of their fiduciary duties. They are intended to afford reliefs
to stockholders in instances where those responsible for running the
affairs of a corporation would not otherwise act.480
However, a derivative suit cannot prosper without first
complying with the legal requisites for its institution.481
257. What are the elements of a derivative suit?

Rule 8, Section 1 of the Interim Rules of Procedure for Intra-
Corporate Controversies (“Interim Rules”) provides the five (5)
requisites for filing derivative suits:
"SECTION 1. Derivative action. - A stockholder or
member may bring an action in the name of a corporation or
association, as the case may be, provided, that:
a. He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time
the action was filed;
b. He exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, bylaws,
laws or rules governing the corporation or partnership to
obtain the relief he desires;
c. No appraisal rights is available for the act or acts
complained of; and
d. The suit is not a nuisance or harassment suit.”
480Florete v. Florete, GR. No. 174909, January 20, 2016.

<81Nestor Ching v. Subic Bay Golf and Country Club, Inc., et al., G.R. No.
174353, September 10, 2014.
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In case of a nuisance or harassment suit, the court shall

forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not included
in the enumeration, is implied in the first paragraph of Rule 8,
Section 1 of the Interim Rules: The action brought by the stockholder
or member must be “in the name of [the] corporation or association
to enforce a corporate right or cause of action.”482
258. AA, a minority stockholder, filed a suit against BB, CC, DD,
and EE, the holders of majority shares of MOP Corporation, for
alleged misappropriation of corporate funds. The complaint
averred, inter alia, that MOP Corporation is the corporation
in whose behalf and for whose benefit the derivative suit is
brought. In their capacity as members of the board of directors,
the majority stockholders adopted a resolution authorizing
MOP Corporation to withdraw the suit. Pursuant to said
resolution, the corporate counsel filed a motion to dismiss in
the name of MOP Corporation.
Should the motion be granted or denied? Reason briefly.
The motion should be denied. The complaint is in the nature of
a derivative suit. In Conmart (Phils.) Inc. v. Securities and Exchange
Commission)83 it was held that to grant the corporation concerned
the right of withdrawing or dismissing the suit, at the instance of
the majority stockholders and directors who themselves are the
persons alleged to have committed the breach of trust against the
interest of the corporation would be to emasculate the right of the
minority stockholders to seek redress for the corporation. Filing
such action as a derivative suit even by a lone stockholder is one of
the protections extended by law to the minority stockholders against
the abuses of the majority.'184
482OBcar C. Reyes v. Hon. Regional Trial Court of Makati, Branch 142, Zenith
Insurance Corporation, and Rodrigo C. Reyes, G.R. No. 165744, August 11, 2008;
Anthony Yu, et al. v. Joseph Yukayguan, et al., G.R. No. 177549, January 18, 2009;
Juanito Ang, for and in behalf of Sunrise Marketing (Bacolod), Inc. v. Sps. Roberto
and Rachel Ang, G.R. No. 201675, June 19, 2013; Alfredo L. Villamor, Jr. v. John S.
Umale, G.R. Nos. 172843 & 172881, September 24, 2014; Nestor Ching v. Subic Bay
Golf And Country Club, Inc., et al., G.R. No. 174353 September 10, 2014.
483Commart (Phils.) Inc., et al. v. Securities and Exchange Commission and
Alice Magtulac, G.R. No. 85318, June 3, 1991.
4842004 Bar Exam.
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259. What is the intent behind the second requisite for filing a
derivative suit - that there is exhaustion of intra-corporate
remedies?
The obvious intent behind the rule is to make the derivative
suit the final recourse of the stockholder after all other remedies to
obtain the relief sought had failed. Thus, the complaint before the
RTC should allege with particularity the remedies exhausted that
are available under the articles of incorporation, bylaws, laws or
rules governing the corporation to obtain the relief desired.
In one case, the Supreme Court held that the allegation of the
suing stockholder’s repeated attempts to talk to the other directors
regarding their dispute hardly constitutes “all reasonable efforts
to exhaust all remedies available.” The fact that the corporation
involved is a family corporation should not in any way exempt the
suing stockholder from complying with the clear requirements and
formalities of the rules for filing a derivative suit.485
260. What is the rationale for the fourth requisite for filing a
derivative suit - that the derivative suit is not a nuisance or
harassment suit?
The complaint must likewise allege that the derivative suit is
not a nuisance or harassment suit to remind the stockholders not to
abuse the remedy and that the same should only be resorted to when
warranted by the circumstances.
261. Cite jurisprudence where resort to derivative suit was held to

be improper for failure to meet the fifth requisite for its filing
- it should be filed in the name of the corporation to enforce a
corporate right or cause of action.
a. A derivative suit filed by stockholders of a corporation
against the bank that foreclosed the mortgage of the
property of the corporation, but without impleading the
corporation in the suit.486
485Anthony Yu, et al. Joseph Yukayguan, et al., G.R. No. 177549, January
18,2009.
486Asset Privatization Trust v. Court of Appeals, G.R. No. 121171, December
29,1988.
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b. A suit to enforce pre-emptive rights in a corporation is not

a derivative suit because it was not filed for the benefit of
the corporation.487
c. Whether as an individual or as a derivative suit, the
RTC — sitting as special commercial court - has no
jurisdiction to hear the plaintiffs complaint since what
is involved is the determination and distribution of
successional rights to the shareholdings of his mother as
the controlling shareholder of the corporation. Plaintiffs
proper remedy, under the circumstances, is to institute a
special proceeding for the settlement of the estate of the
deceased. The bare claim that the complaint is a derivative
suit will not suffice to confer jurisdiction to the RTC (as a
special commercial court) if plaintiff cannot comply with
the requisites for the existence of a derivative suit.488
d. Petitioners who are members of the board for 2003-2004
sought the nullification of the election where the new
board of directors for 2004-2005 pushed through with the
election even if petitioners had adjourned the meeting
allegedly due to lack of quorum. Petitioners are the injured
party whose right to vote and to be voted upon were
directly affected by the election of the new set of board
of directors. The party-in-interest are the petitioners as
stockholders who wield such right to vote. The cause of
action devolves on petitioners, not the condominium
corporation, which did not have the right to vote. Hence,
the complaint for nullification of the election is a direct
action by the petitioners who were the members of the
board of directors of the corporation before the election,
against respondents, who are the newly elected board
of directors. Under the circumstances, the derivative
suit filed by petitioners on behalf of the condominium
corporation is improper.489
48,Lim v. Lim-Yu, G.R. No. 138343, February 19, 2001.

4880scar C. Reyes v. Hon. Regional Trial Court of Makati, Branch 142, Zenith
Insurance Corporation, and Rodrigo C. Reyes, G.R. No. 165744, August 11, 2008.
489Legaspi Towers 300, Inc. v. Muer, G.R. No. 170783, June 18, 2012; 2014 Bar
Exam.
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e. The complaint filed by a stockholder to compel another

I stockholder to settle his share of the loan because
nonpayment would affect the financial viability of the
corporation could not be considered as a derivative suit
because the loan was not a corporate obligation but a
personal debt of the stockholders. There is no damage
caused to the corporation. The fact that the stockholders
attempted to constitute a mortgage over their pro-indiviso
share in a corporate asset cannot affect the corporation
since shares only represent an aliquot interest in the
property of the corporation. The right of a stockholder to
the corporate property is only inchoate which will ripen
into full ownership only upon dissolution and liquidation
of the corporation.490
f. There is no derivative suit where the action is clearly
not for the benefit of the corporation, particularly where
a judgment in favor of the plaintiff, in his capacity as
third party mortgagor, would mean recovery of his own
properties.491
g- The action should be a proper derivative suit even if the
assailed acts do not pertain to a corporation’s transactions
with third persons. The pivotal consideration is whether
the wrong done as well as the cause of action arising
from it accrues to the corporation itself or to the whole
body of its stockholders. An action “seeking to nullify and
invalidate the duly constituted acts [of a corporation]”
entails a cause of action that “rightfully pertains to [the
corporation itself and which stockholders] cannot exercise
. . . except through a derivative suit.” In this case, the
Marcelino Jr. Group prays for the cancellation of share
transfers and subscription to the capital stock of the
Rogelio Group, all intended to reconfigure the capital
structure of the corporation to reflect a status quo ante.
Erroneously pursuing a derivative suit as a class
suit not only meant that the Marcelino, Jr. Group
lacked a cause of action; it also meant that they failed
490Juanito Ang, for and in behalf of Sunrise Marketing (Bacolod), Inc. v. Sps.
Roberto and Rachel Ang, G.R. No. 201675, June 19, 2013.
491Bangko Sentral ng Pilipinas v. Vicente Jose Campa, Jr., et al., G.R. No.
185979, March 16, 2016.
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to implead an indispensable party. In derivative suits,

the corporation concerned must be impleaded as a party.
Hence, Marcelino Jr. Group’s complaint must fail for
failure to implead the corporation.492
262. Cite jurisprudence where recourse to a derivative suit was held

to be proper.
a. The complaint is one of a derivative suit if it avers
diversion of corporate income by the company president
and the relief prayed for is the recovery of a sum of money
in favor of the corporation.493
b. Where a minority stockholder alleged in his petition that
earnest efforts were made to reach a compromise among
family members/stockholders before he filed the case
and that the Board of Directors did nothing to rectify
the unauthorized loan and mortgage by the corporation,
the derivative suit is proper. The action to annul the real
estate mortgage should only be seen as incidental to the
derivative suit. The RTC of the city where the principal
office of the corporation is located has jurisdiction even
though the mortgaged properties are situated in a
different jurisdiction.494
e. Obligations of a stockholder
263. What are the obligations of a stockholder?
A stockholder has the following obligations:
1. To pay to the corporation unpaid subscription;
2. To pay to the corporation interest on unpaid subscription
if so required by the bylaws or in case of default;
3. He is liable to the creditors of the corporation for unpaid
subscription based on the trust fund doctrine;
4. He is liable for watered stocks;
492Marcelino M. Florete v. Rogelio M. Florets, et al., G.R. No. 174909, January

20, 2016; Rogelio M. Florete, Sr., et al. v. Marcelino M. Florete, Jr., et al., G.R. No-
223321, April 2, 2018, Second Division.
493Commart (Phils.) Inc., et al. v. Securities and Exchange Commission and
Alice Magtulac, G.R. No. 85318, June 3, 1991.
494Hi-Yield, Inc. v. Court of Appeals, G.R. No. 168863, June 23, 2009.
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5. He is liable to return dividends unlawfully paid; and

6. He is liable for claims against the corporation in cases
where the corporate veil is pierced.
f. Meetings
264. What are the types of meetings covered by the RCC?
Only two (2) types of meetings are covered by the RCC -
meetings of the (1) board directors or trustees, and (2) stockholders
or members. Management meetings, among others, are not indicated
therein.
i. Regular or special
265. What are the requisites of a valid stockholders meeting?
The following requisites must be present for a stockholders’
meeting to be considered valid:
a. It must be held at the stated date and the appointed
time or at a reasonable time thereafter. To determine the
date of the annual stockholder’s meeting, reference must
be made to the pertinent provision of the bylaws of the
corporation.
b. There must be previous notice. The notice must be in the
form required by the bylaws, given within the period fixed
in the bylaws and sent by the proper officer authorized
therein.
c. It must be called by the proper person. The person
authorized to call the meeting is normally stated in the
bylaws. If no person is designated in the bylaws, the
authority to call a stockholders’ meeting rests with the
board of directors.
d. It must be held in the proper place. It is mandatory that
stockholders’ meetings be held in the principal office of the
corporation, as indicated in the articles of incorporation,
and if not practicable, in the city or municipality where
the principal office of the corporation is located.
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e. The quorum and voting requirements must be met.495
ii. Notice of meetings

266. State the notice requirement for stockholders or members
meetings under the RCC.
That written notice of regular meetings shall be sent to all
stockholders or members of record at least 21 days prior to the
meeting, unless a different period is required in the bylaws, law,
or regulation: Provided, further, That written notice of regular
meetings may be sent to all stockholders or members of record
through electronic mail or such other manner as the SEC shall allow
under its guidelines.
For special meetings, at least one (1) week written notice shall
be sent to all stockholders or members, unless a different period is
provided in the bylaws, law or regulation.496
Notice of any meeting may be waived, expressly or impliedly, by
any stockholder or member: Provided, That general waivers of notice
in the articles of incorporation or the bylaws shall not be allowed;
Provided, further, That attendance at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened.497
Notice of meetings shall be sent through the means of
communication provided in the bylaws, which notice shall state the
time, place, and purpose of the meetings.
Each notice of meeting shall further be accompanied by the
following:
a. The agenda for the meeting;
b. A proxy form which shall be submitted to the corporate
secretary within a reasonable time prior to the meeting;
c. When attendance, participation, and voting are allowed by
remote communication or in absentia, the requirements
and procedures to be followed when a stockholder or
member elects either option; and
495Requisites for DirectorsVStockholders’ Meeting, SEC-OGC Opinion No. 09-

06, February 8, 2006; Mary E. Lim v. Moldex Land, Inc., et al., G.R. No. 206038,
January 25, 2017; answered based on RCC,
™Ibid.
mIbid.
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d. When the meeting is for the election of directors or

trustees, the requirements and procedure for nomination
and election.498
267. What are the modes of notice of meeting to stockholders?

Notices can be made personally, or by mail or publication or
through electronic mail or other modes as may be allowed by the
SEC; provided that the mode of notice conforms to what the bylaws
provide.
268. When is regular stockholder meeting valid even without notice

to the stockholders?
The regular stockholders’ meeting is valid despite lack of
written notice to the stockholders if the bylaws specify the date and
time of the annual meeting. It was held that the failure to give notice
of the regular or annual meetings, when the date thereof is fixed in
the bylaws, as in “at twelve-thirty P.M., on the THIRD MONDAY OF
AUGUST in each year, if not a legal holiday, and if a legal holiday,
then on the first day following which is not a legal holiday,” will not
affect the validity of the regular or annual stockholders’ meeting or
the proceedings therein.’99
269. Who calls the stockholders' or members’ meeting?

The meeting should be called by the person authorized by
the bylaws. However, whenever for any cause, there is no person
authorized or the person authorized unjustly refuses to call a meeting,
the SEC, upon petition of a stockholder or member on a showing of
good cause therefor, may issue an order, directing the petitioning
stockholder or member to call a meeting of the corporation by giving
proper notice required by the RCC or the bylaws. The petitioning
stockholder or member shall preside thereat until at least a majority
of the stockholders or members present have chosen from among
themselves, a presiding officer.600

’"Corazon H. Ricafort, et al. Honorable Isaias P. Dicdican, G.R. Nos.
202647-50, March 9, 2016.
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iii. Place and time of meetings

270. When are stockholders’ meetings conducted?
Regular meetings of stockholders or members shall be held
annually on a date fixed in the bylaws, or if not so fixed, on any date
after April 15 of every year as determined by the board of directors
or trustees.
Any date after April 15 of every year replaced “any date in
April” under the OCC unless the bylaws provide otherwise. April 15
is usually the last day to file the annual tax return for taxpayers.
It would be more practical and convenient to conduct the regular
meeting thereafter since the financial report to be submitted to the
stockholders is based on such return and its supporting financial
statements.
Special meetings of stockholders or members shall be held at
any time deemed necessary or as provided in the bylaws.
A stockholder or member may propose the holding of a special
meeting and items to be included in the agenda.601 ,
Shareholders, who alone or together with other shareholders,
hold at least five percent (5%) of the outstanding capital stock of a
publicly-listed company shall have the right to include items on the
agenda prior to the regular/special stockholders’ meeting. Further,
any director, officer, or agent of a publicly-listed company who shall
unjustly refuse to allow the exercise of such right of the shareholders
shall be Hable for administrative sanctions under Section 158 of the
RCC.602
271. Where is the required venue for the meetings of stockholders?

Stockholders’ meetings, whether regular or special, shall
be held in the principal office of the corporation as set forth in
the articles of incorporation, or, if not practicable, in the city or
municipality where the principal office of the corporation is located.
Any city or municipality in Metro Manila, Metro Cebu, Metro
Davao, and other Metropolitan areas shall, for purposes of this
section, be considered a city or municipality.603

6O2SEC Memorandum Circular No. 14 Series of 2020, April 28, 2020.
“"Section 50, RCC.
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Note that under the RCC, the stockholders or members

meeting should be held in the principal office itself and only if it is
not practicable that the meetings can be held in its vicinity, in the
city or municipality where the principal office is located. Under the
OCC, the meetings can be held in the city or municipality where the
principal office is located and if practicable in the principal office
itself. The RCC effectively removes the flexibility in the venue of
meetings.
If the bylaws indicate the City of Makati as the principal office
of the corporation, the meetings cannot be held in any other city
even though located within Metro Manila.
iv. Quorum
272, What is the quorum requirement for stockholders' meetings?
Unless otherwise provided in the Corporation Code or in the
bylaws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock.604 Quorum is based on
the totality of the shares which have been subscribed and issued,
whether it be founders’ shares or common shares. The totality of
shares issued is not only based on the stock and transfer book of the
corporation but also the articles of incorporation and all records of
the corporation.605
To be more precise, for stock corporations, the quorum is the
majority of the outstanding voting stocks whereas for a nonstock
corporation, the basis in determining the presence of quorum in
nonstock corporations is the numerical equivalent of all members
who are entitled to vote, unless some other basis is provided by the
bylaws of the corporation.600 The bylaws, for instance, may provide
that members who are delinquent in the payment of their dues
are not entitled to vote, in which case, they are not included in the
computation of quorum.607

““Jesus V. Lanuza, et al. v. Court of Appeals, et al., G.R. No. 131394, March
28, 2005.
““Mary E. Lim v. Moldex Land, Inc., et al., G.R. No. 206038.
M7Re: Quorum in Meetings of a Nonstock Condominium Corporation, SEC-
OGC Opinion No. 31-19, September 9, 2019.
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273. Is it permissible for the bylaws to provide quorum of

stockholders' meetings which is less than a majority?
A corporation can state in its bylaws that a quorum shall be
less than the majority or greater than what was provided for in the
RCC unless the RCC specifically provides otherwise.
Worthy of note, however, is that the bylaws provision on
quorum will not apply in instances where the RCC explicitly requires
a specific number of stockholders or members necessary to resolve or
carry out a particular corporate proposal.608
274. Can a stockholders' or members' meeting be considered valid

even if it is improperly held or called?
All proceedings and any business transacted at a meeting of
the stockholders or members, if within the powers or authority of
the corporation, shall be valid even if the meeting is improperly
held or called. Provided, That all the stockholders or members of the
corporation are present or duly represented at the meeting and not
one of them expressly states at the beginning of thermeeting that
the purpose of their attendance is to object to the transaction of any
business because the meeting is not lawfully called or convened.509
v. Minutes and agenda of meetings

275. What are the matters required to be discussed in the Regular
Stockholders' Meeting?
At each regular meeting of stockholders or members, the board
of directors or trustees shall endeavor to present to stockholders or
members the following:
a. The minutes of the most recent regular meeting which
shall include, among others:
i. A description of the voting and vote tabulation
procedures used in the previous meeting;
ii. A description of the opportunity given to stockholders
or members to ask questions and a record of the
questions asked and answers given;
“’Answered based on RCC and SEC-OGC Opinion No. 37-06, November 9,

2006.
“Section 50, RCC.
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iii. The matters discussed and resolutions reached;

iv. A record of the voting results for each agenda item;
V. A list of the directors or trustees, officers and
stockholders or members who attended the meeting;
and
vi. Such other items that the SEC may require in
the interest of good corporate governance and the
protection of minority stockholders.
b. A members’ list for nonstock corporations and, for
stock corporations, material information on the current
stockholders, and their voting rights;
c. A detailed, descriptive, balanced and comprehensible
assessment of the corporation’s performance, which
shall include information on any material change in the
corporation’s business, strategy, and other affairs;
d. A financial report for the preceding year, which shall
include financial statements duly signed and certified in
accordance with RCC and the rules the SEC may prescribe,
a statement on the adequacy of the corporation’s internal
controls or risk management systems, and a statement of
all external audit and non-audit fees;
e. An explanation of the dividend policy and the fact of
payment of dividends or the reasons for nonpayment
thereof;
f. Director or trustee profiles which shall include, among
others, their qualifications and relevant experience, length
of service in the corporation, trainings and continuing
education attended, and their board representations in
other corporations;
g- A director or trustee attendance report, indicating the
attendance of each director or trustee at each of the
meetings of the board and its committees and in regular
or special stockholder meetings;
h. Appraisals and performance reports for the board and the
criteria and procedure for assessment;
i. A director or trustee compensation report prepared in
accordance with the RCC and the rules the SEC may
prescribe;
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j- Director disclosures on self-dealings and related party

transactions; and/or
k. The profiles of directors nominated or seeking election or
reelection.”0
A director, trustee, stockholder, or member may propose any
other matter for inclusion in the agenda at any regular meeting of
stockholders or members.’”
276. When should the stock and transfer book or membership book
be closed?
Unless the bylaws provide for a longer period, the stock and
transfer book or membership book shall be closed at least 20 days
for regular meetings and seven (7) days for special meetings before
the scheduled date of the meeting.
277. State the rule on the postponement of meetings.

In case of postponement of stockholders’ or members’ regular
meetings, written notice thereof and the reason therefor shall be
sent to all stockholders or members of record at least two (2) weeks
prior to the date of the meeting, unless a different period is required
under the bylaws, law or regulation.”2
For the regular stockholders meeting, the non-holding of
elections and the reasons therefor shall be reported to the SEC
within 30 days from the date of the scheduled election. The report
shall specify a new date for the election, which shall not be later
than 60 days from the scheduled date.
a stockholder, member, director, or trustee, and after verification of

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quorum for purposes of conducting an election under this section?13
278. Cite instances where the SEC ruled that the postponement of
the regular election of directors or trustees is not valid.
The SEC, on several occasions, had consistently opined that,
as a general rule, the regular election of directors and officers as
stated in the bylaws cannot be dispensed with or postponed by the
directors and officers in order to extend their term of office as fixed
in the bylaws. While ‘hold over term’ may be allowed under Section
22 of the RCC, such situation arises only when no successors are
elected due to valid and justifiable reasons.
In another SEC Opinion,614 incurring big expenses for the
purpose of holding a meeting and because there is the uncertainty
that a quorum can be secured is NOT considered a valid and justifiable
reason. If the members cannot be present in person, Section 88 of
the RCC (for nonstock corporation) allows voting by proxy, by mail,
or other similar means, that could sufficiently address the problem
of quorum.
279. What is the effect of the stockholder’s abstention during

stockholders* meetings?
In those cases specified by law on instances of appraisal right,
a stockholder present in a meeting but abstains, is not entitled to
exercise such right. He cannot demand payment of the fair value
of his shares, because one of the elements of appraisal right is his
vote against the proposed corporate act. As such, abstention is
tantamount to a waiver of appraisal right.
Stockholders who abstain from voting are, however, counted
for quorum purposes.

“4Re; Queries on Quorum, Special Election, & Financial Assistance, SEC-OGC
Opinion No. 31-11, July 13, 2011.
1
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IX. Board of directors and trustees

a. Repository of corporate powers
280. What is the function of the board of directors or trustees
in terms of exercising the powers of the corporation and
conducting its business?
Unless otherwise provided in the RCC, the board of directors
or trustees shall exercise the corporate powers, conduct all business,
and control all properties of the corporation.615 Stated otherwise,
corporate acts must be approved by the board of directors, otherwise,
such acts are generally not binding on the corporation. They do not
create rights nor impose obligations upon the corporation. Thus, if a
corporation will enter into contracts, initiate legal action or perform
any of the corporate acts under the RCC, the same must be supported
by a resolution that the board has duly adopted authorizing such
acts and designating the person who will carry them out on behalf
of the corporation.
281. What is the doctrine of centralized management?

It means that corporate powers are vested in a body, called
board of directors for a stock corporation and board of trustees for a
nonstock corporation. Except in those instances where stockholders’
or members’ approval is required for certain acts under the RCC or
the corporation’s bylaws, it is the board which exercises corporate
powers. The stockholders or members, regardless of number, will
have to delegate the power to manage the corporation to the board.
The concentration in the board of the powers of control of
the corporate business and appointment of corporate officers and
managers is necessary for efficiency in any large organization.
Stockholders are too numerous, scattered, and unfamiliar with the
business of a corporation to conduct its business directly. And so the
plan of corporate organization is for the stockholders to choose the
directors who shall control and supervise the conduct of corporate
business.610
In other words, stockholders or members periodically elect the
board of directors or trustees, who are charged with the management
of the corporation. The board, in turn, periodically elects officers to
carry out management function on a day-to-day basis. As owners
616Section 22, RCC.

6l0Filipinas Port Services v. Victoriano Go, el al., G.R. No. 161886, March 16,
2007.
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though, the stockholders or members have residual powers over

fundamental and major corporate changes. Acts of management
pertain to the board; and those of ownership, to the stockholders or
members.617
6. Tenure, qualifications, and disqualifications of

directors
282. What is the distinction between term and tenure?
Term is the time during which the officer may claim to hold
the office as a right and fixes the interval after which the several
incumbents shall succeed one another. The term is fixed by statute
and it does not change simply because the office may have become
vacant, nor because the incumbent holds over in office beyond the
end of the term due to the fact that a successor has not been elected
and has failed to qualify.
Term is distinguished from tenure in that an officer’s “tenure”
represents his actual incumbency. The tenure may be shorter (or, in
case of holdover, longer) than the term for reasons within or beyond
the power of the incumbent.
The former is fixed while the latter extends until his successor
is duly elected and qualified.518
283. What do you understand by the provision under the RCC that
each director and trustee shall hold office until the successor
is elected and qualified?
It means that if his successor is not elected and qualified, the
director, or trustee may continue to perform his duties in a hold-over
capacity. The hold-over period is not, however, part of the term of
office of the director or trustee.
Thus, if'a hold-over director resigns, the vacancy is due to the
expiration of term and not resignation. Accordingly, the vacancy
can only be filled by the stockholders in a meeting called for the
purpose and not by the board of directors even though the remaining
■directors may still constitute a quorum.619
I
517Paul Lee Tan v. Paul Sycip, et al., G.R. No. 153468, August 17,2006.
518Valle Verde Country Club, Inc., et al. v. Victor Africa, G.R. No. 151969,
September 4, 2009; Re-Election of The Members of The Board of Directors, SEC-OGC
Opinion No. 48-11, December 2, 2011.
519Valle Verde, ibid., see discussion on “Vacancies in the Office of Director or
Trustee”.
1
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284. The election of the new members of the Board of Directors of

the Condominium Corporation ("CondoCor”) has been nullified
due toa.) lack of quorum and b.) disqualification of the nominee
directors of the developer for the position. Consequently,
it caused the nullification of the subsequent organizational
meeting and election of officers. Under the circumstances,
may the incumbent Board of Directors continuously function
in a "hold-over" capacity until a new set of members of the
Board of Directors are elected and qualified? If the answer
is in the affirmative, is the authority of the Board of Directors
limited only to handle the corporation's daily operations such
as payment of utilities, salaries, the management of personnel,
and other issues/problems that requires immediate attention?
The old or incumbent Board of Directors can act as a legitimate
managing body pending the election of the successor directors.
Pursuant to the hold-over principle as provided in Section 22 of the
RCC the incumbent Board of Directors shall serve as directors until
their successors are elected and qualified in accordance with the
RCC or the Bylaws.
On the other hand, the position that the hold-over Board’s
authority is limited only to “handling the corporation’s daily operation
such as payment of utilities, salaries, the management of personnel
and other issues/problems that requires immediate attention” is
mistaken. The RCC expressly states that the “corporate powers of all
corporations formed under the Code shall be exercised, all business
conducted and all property of such corporations controlled and held
by the board of directors or trustees.” Thus, the Board of Directors
has the authority to: (1) exercise all powers provided for under the
RCC; (2) conduct all business of the corporation; and (3) control and
hold all property of the corporation.
t,
285. What are the qualifications of directors or trustees?
The directors and trustees must have all the qualifications
provided under Section 22, in relation to Sections 10, 13, and 91, of
the RCC as well as those provided under the bylaws, and none of the
disqualifications under Section 26 of the RCC and the bylaws.
Below are the qualifications for directors or trustees under the
RCC:
a. Since any person, partnership, association or corporation,
singly or jointly with others but not more than 15 in
number, may now organize a corporation for any lawful
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purpose or purposes,620 directors or trustees need not be

natural persons. However, juridical persons, as directors,
need to be represented by their nominees.
b. If the director or trustee is a natural person, he must be
of legal age.621
c. The director must own at least one (1) share of stock of
the corporation and the trustee must be a member of the
corporation.622
In Grace Christian High School v. Court of Appeals,
et al.,523 the Supreme Court held that a provision in
the bylaws which allots a permanent seat in the board
to a non-member of the association is contrary to law.
Similarly, the fact that said permanent seat was held for
15 years cannot give rise to a vested right and estoppel
cannot forestall a challenge against an act that it is
contrary to law.
d. The number of directors shall not be more than 15 while
the number of trustees may be more than 15.‘24
e. Except with respect to independent trustees of nonstock
corporations vested with public interest, only a member
of the corporation shall be elected as trustee.526
f. Trustees of educational institutions organized as nonstock
corporations or religious societies shall not be less than
five (5) nor more than 15.626 However, with respect to
educational institutions, the number of trustees shall
only be in multiples of five (5).627
On disqualification, the RCC expanded and qualified the
grounds such that a person shall be disqualified from being a
director, trustee or officer of any corporation if, within 5 years prior
to the election or appointment as such, the person was:

mIbid.
‘“Grace Christian High School v. Court of Appeals, et al., G.R. No. 108905,
October 23,1997.
624Sections 13 and 91, RCC.
‘“Sections 106 and 114, RCC.
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a. Convicted by final judgment:

i. Of an offense punishable by imprisonment for a
period exceeding six (6) years;
ii. For violating the RCC; and
iii. For violating Republic Act No. 8799, otherwise
known as “The Securities Regulation Code”;
b. Found administratively liable for any offense involving
fraudulent acts; and
c. By a foreign court or equivalent foreign regulatory
authority for acts, violations or misconduct similar to
those enumerated in paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other
disqualifications, which the SEC, the primary regulatory agency, or
the Philippine Competition Commission may impose in its promotion
of good corporate governance or as a sanction in its administrative
proceedings.
To be a ground for disqualification, it is not enough then that the
violation of the RCC, be committed within 5 years prior to election.
It is also required that there is conviction by final judgment.
Based on the language of the law, the administrative liability
may be imposed by any government agency, different from the SEC,
as long as it is an offense involving fraudulent act. The SEC, by
itself, is authorized to impose disqualification from being elected to
the board, as a sanction in its administrative proceeding.
286. X is a director of ABC Corporation. In the sixth month of his

term, he sold all his shares to A. A now claims that by reason
of his purchase of X's shares, he should serve the unexpired
portion of X's term.
X, on the other hand, insists otherwise citing the provision
of the Corporation Code that his term is one (1) year.
Who between X and A should be the director of the
corporation?
Neither of them should be the director of the corporation. The
director’s ownership of at least one (1) share of stock and the trustee’s
membership in the corporation is a continuing qualification. If at
any time, a director ceases to be a stockholder or a trustee ceases
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to be a member of the corporation, he shall automatically cease to

be such director or trustee. X then ceased to be a director of the
corporation after the sale. A cannot take the place of X just because
he acquired the share of the latter unless he is appointed by the
board of directors.628
287. Is it necessary that the director be the owner of the share of

the corporation in his own right to qualify as such director?
Generally, the director must have full ownership of the shares,
i.e. both the legal title and beneficial title. However, based on Lee v.
Court of Appeals;629 the Supreme Court ruled that a trustee, under a
voting trust agreement, can qualify as a director, and that in order
to be eligible as a director, what is material is the legal title to, and
not beneficial ownership of, the stock as appearing on the books of
the corporation. Similarly, when a director loses his legal title over
all his shares, he automatically forfeits his director position.
288. Can the bylaws require that the director own more than one (1)
share of stock?
Yes, the bylaws may enlarge the share ownership requirement
provided that it is not intended to deprive minority representation.
As provided under Section 46 of the RCC, additional
qualifications of directors and trustees may be prescribed under the
bylaws of the corporation.
In the absence of a provision in the bylaws, a corporation
cannot require additional qualifications for directors other than the
mandatory requirement under the RCC.630
289. Are directors or trustees required to be residents of the

Philippines?
The requirement of the OCC which provides that “[a] majority
of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines” was removed under the
RCC. As such, it is possible that a majority or even all directors or
trustees may be non-residents.
6281984 Bar Exam.

6Z9Lee v. Court of Appeals, G.R. No. 93695, February 4,1992.
“SEC-OGC Opinion No. 51-19, October 11, 2019.
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290. Are directors or trustees required to be Filipino citizens?

Similar to the OCC, the RCC does not require Filipino
citizenship for the directors or trustees of a corporation. However,
if the corporation is engaged in nationalized activities, citizenship
becomes a qualification. Foreigners cannot be appointed to the
board of corporations engaged in wholly-nationalized activities. For
partly nationalized activities, foreigners can be elected to the board
of directors in proportion to their foreign equity, as allowed by law.
291. Bohol Mining Corporation is 60% Filipino-owned and 40%

Canadian-owned. As provided in its Articles of Incorporation
and Bylaws, its Board of Directors is composed of nine (9)
members. During the last annual stockholders meeting held on
May 31, three (3) of the nine (9) elected directors were Canadian
citizens. Juan de la Cruz together with two (2) other Filipino
stockholders petitioned the SEC to disqualify the said three (3)
Canadians and to enjoin them from discharging their functions
as directors, on the grounds that: (1) aliens cannot participate
in any capacity in a nationalized industry, like mining; and (2)
the exploitation of natural resources is reserved under the
Constitution to Filipino citizens.
a. Will the petition prosper?
The petition will not prosper. The elections of aliens as
members of the board of directors or governing body of corporations
or associations, engaging in partially nationalized-activities, are
allowed by law, in proportion to their allowable participation or
share in the capital of such entities, like mining or development of
natural resources, in which the foreigners may even own 40% of the
capital.631
b. Supposing that Bohol Mining Corporation is 70% Filipino-

owned while the 30% remaining stocks are owned by
foreigners, how many foreigners can be elected to the
board?
6311985 Bar Exam.
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Since 70% of the capital is owned by Filipinos and 30% by

aliens, only 30% of its directors may be foreigners. Since three (3)
out of nine (9) is more than 30% only two (2) aliens may sit in X’s
board. Rounding off to the nearest number is obviously not allowed
for the election of directors.632
292. Assuming that the stockholder has enough votes to be assured

of a board seat, does a stockholder have any vested right to be
elected as a director?
No, because while he may have enough votes, he may not
have the qualifications of a director or trustee under the law and
bylaws of the corporation. The bylaws, for instance, may provide
as a ground for disqualification being a director, stockholder, or a
representative of a competing corporation. Any person who buys
stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters
within the limits of the act of incorporation and lawfully enacted
bylaws and not forbidden by law. To this extent, therefore, the
stockholder may be considered to have parted his personal right or
privilege to regulate the disposition of his property which he has
invested in the capital stock of the corporation, and surrendered it
to the will of the majority of his fellow incorporators.533
c. Requirement of independent directors

293. Who is an independent director?
An independent director is a person who, apart from
shareholdings and fees received from the corporation, is independent
of management and free from any business or other relationship
which could or could reasonably be perceived to materially interfere
with the exercise of independent judgment in carrying out the
responsibilities as a director.
Independent directors must be elected by the shareholders
present or entitled to vote in absentia during the election of
directors. Independent directors shall be subject to rules and
regulations governing their qualifications, disqualifications, voting
6321983 Bar Exam.

633John Gokongwei v. Securities and Exchange Commission, G.R. No. L-45911,
April 11,1979.
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requirements, duration of term and term limit, the maximum

number of board memberships, and other requirements that the
SEC will prescribe to strengthen their independence and align with
international best practices.531
294. What corporations are required to have independent directors

in their Boards?
Independent directors are now explicitly required by RCC to
constitute at least twenty percent (20%) of the Board of corporations
vested with public interest.
Below are the corporations vested with public interest specified
in the RCC:
a. Public companies as described under the Securities
Regulation Code (“SRC”);
b. Banks and quasi-banks, NSSLAs, pawnshops,
corporations engaged in money service business, pre
need, trust and insurance companies, and other financial
intermediaries; and
c. Other corporations engaged in businesses vested with
public interest similar to the above, as may be determined
by the SEC.
A public company is any corporation with class of equity
securities listed for trading on an Exchange, or with assets in excess
of Fifty Million Pesos (Php50,000,000.00) and has 200 or more
holders, at least 200 of which hold at least 100 shares each.635 This
is also the definition of a public company for the purpose of electing
independent directors.630
295. CMCI is required by the Securitiesand Regulation Code("SRC")

to have two (2) independent directors in its Board. Thus, the
Bylaws of CMCI provides for the segregation of casting of votes
for the election of their regular and independent directors, as
follows:

635Rule 3 (O) of the Revised Implementing Rules and Regulations of the
Securities Regulation Code.
““Section 38 of the SRC.
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“1. That the segregation of the votes for regular

and independent directors is acceptable, such that
one vote cast per independent director (since there
are only two nominees for independent director)
would already be sufficient to elect them. On the
other hand, for the regular directors, the nominees
with the highest votes cast in their favor would be
elected. Under this procedure, the losing nominee
for regular director, even if he/she gets a higher
number of votes than the independent directors,
would still not be elected.”
Is the segregate casting of votes for regular and independent
directors sanctioned by the Corporation Code?
The segregate casting of votes for regular and independent
directors is not contrary to the Corporation Code. The segregation of
the voting for regular directors and independent ones is a practical
device in order to ensure that at least two (2) independent directors
are elected to the CMCI’s member Board of Directors in accordance
with SRC Rule 38.“’
d. Elections
296. What are the requisites for the election of the directors or
trustees to be for the valid?
a. Except when the exclusive right to be voted as directors
is reserved for holders of founders’ shares under Section
7 of the RCC, every stockholder or member has the right
nominate the director or trustee to be elected.
b. There must be a notice of meeting sent to the stockholders
in accordance with the form and mode under the bylaws.638
c. The owners of the majority of the outstanding capital
stock or the majority of the members entitled to vote
must be present, either in person or by a representative
authorized to act by a written proxy. If voting through
remote communication or in absentia will be allowed,
such voter, voting through said means, shall be deemed
present for purposes of counting the majority/quorum.
“’Procedure for Election of Directors, SEC-OGC Opinion No. 1911, March

23,2011.
“Section 50, RCC.
k
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d. The meeting must be presided by the officer indicated

under the bylaws.
e. The election must be by ballot if requested by any voting
stockholder or member.
f. For stock corporations, the stockholders may cast such
number of votes based on the shares registered in their
names in the books of corporation multiplied by the whole
number of directors to be elected.
g- On the other hand, for nonstock corporations, unless
otherwise provided in their articles of incorporation or
bylaws, members may cast as many votes as there are
trustees to be elected but may not cast more than one (1)
vote for one (1) candidate.
h. The nominees receiving the highest number of votes shall
be duly elected as directors or trustees.
i. The elected directors or trustees must possess all of the
qualifications and none of the disqualifications under the
RCC and the bylaws of the corporation.
i. Cumulative voting
ii. Quorum
297. EPCC is a nonstock corporation. Article 6 of EPCC Articles
of Incorporation states: "That the number of trustees of the
association shall be 15."
Based on the foregoing:
a. Should there be 11 nominees to the Board of Trustees,
which is below the required number of trustees to be
elected [15] as provided by the Corporation's Articles of
Incorporation, are all 11 considered automatically elected
regardless of the number of votes received by each?
While the Corporation Code requires the presence of at least a
majority of the members of a nonstock corporation for the election
of its Board, it does not require such number of votes for one to
be declared elected. Under the aforecited provision, the candidates
receiving the highest number of votes shall be declared elected.
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Thus, for a candidate to be elected as trustee, said candidate

must be among the group of candidates who received the highest
number of votes. In case the number of candidates does not exceed
the number of seats in the board, said candidates, provided they
received votes, can be said to have received the highest number
of votes, as the law requires only plurality of the votes cast at the
election.
b. What is the minimum number of trustees/nominees in

order for the election to be valid?
SEC has previously opined that an election of less number of
directors than the number which the meeting was called to elect is
valid as to those actually elected.
Thus, the stockholders or members of a corporation may opt to
elect a number of directors/trustees less than the number of directors/
trustees as fixed in the articles of incorporation. Such a situation
would merely give rise to a vacancy in the board, which may be later
filled up. The power of the board is not suspended by vacancies in
the board unless the number is reduced below a quorum.
The number of candidates elected, however, is not without
importance.
The grant of corporate power is to the Board as a body, and not
to the individual members thereof, and that the corporation can be
bound only by the collective act of the Board. In relation to this, the
Board can only transact business if it reaches a quorum.
298. What shares of stock are not included in the determination of

the majority of outstanding capital stock to elect directors of a
stock corporation?
a. Non-voting shares;
b, Delinquent shares; and
c. Treasury shares.
However, unpaid shares which are not delinquent are included
in the said determination of the majority.
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299. What happens if no election is held, or the owners of majority

of the outstanding capital stock or majority of the members
entitled to vote are not present in person, by proxy, or through
remote communication or not voting in absentia at the meeting?
The meeting may be adjourned and the outgoing directors or
trustee shall serve in a hold-over capacity.639
The non-holding of elections and the reasons therefor shall be
reported to the SEC within 30 days from the date of the scheduled
election. The report shall specify a new date for the election, which
shall not be later than 60 days from the scheduled date.
a stockholder, member, director, or trustee, and after verification of
quorum for purposes of conducting an election under this section.610
e. Removal
300. May a director or trustee be removed from office? If yes, under
what conditions?
Yes, a director or trustee may be removed from office. The
removal may be carried out by the stockholders or the SEC.
Within the corporation, only stockholders or members have the
power to remove the directors of trustees elected by them. The board
of directors or trustees may remove an officer but not a director or
trustee.641
639Section 23, RCC.

54°Section 25, RCC.
“’Nectarina Raniel v. Paul Jochico, G.R. No. 153413, March 1, 2007.
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I
The removal of a director or trustee by the stockholders or

members is subject to the following requisites:
a. There must be a previous notice of the meeting to
stockholders or members, and the procedures prescribed
by the RCC and bylaws must be followed.
b. The notice of the meeting must specify the intention to
propose the removal of a director.
Note, however, that RCC does not require that the
name of the director proposed to be removed be specified.
Thus, it is enough to include in the agenda that there is
such an intention to remove a director.
c. The removal must be approved by stockholders
capital stock or by at least two-thirds (2/3) of the members
entitled to vote for non-corporation.
d. The removal may be with or without just cause. However,
if the removal is intended to deprive the minority of their
representative, the removal has to be with cause.512
e. The vacancy brought about by the removal of the director
may be filled at the same stockholders’ meeting where
the removal was effected as long as this fact is similarly
stated in the agenda and notice of the said meeting,543 or
in a separate meeting called for that purpose.
Note, however, that only a majority of the outstanding capital
stock of the corporation must be present to have a quorum on the
election to be held to fill the aforesaid vacancy.
The SEC may order the removal, after due notice and
hearing, of a director or trustee who has been elected despite his
disqualification, or whose disqualification arose or is discovered
subsequent to an election.644
H2Section 27, RCC.

^Section 28, RCC.
“'Ibid.
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301. May the SEC remove a director or trustee motu propria?

The power to remove a director or trustee may be exercised
by SEC motu proprio or upon receiving a verified complaint. The
removal, however, cannot be carried out without due notice and
hearing,515 consistent with due process requirement.
The removal of a disqualified director shall be without prejudice
to other sanctions that the SEC nevertheless may impose sanctions
on the board of directors or trustees who, with knowledge of the
disqualification, failed to remove such director or trustee.646
In other words, the removal is without prejudice to the
imposition of sanctions against the responsible directors or trustees.
302. The bylaws of the corporation provide that a director or trustee

who is absent for three (3) consecutive meetings or not current
on the payment of his monthly dues to the corporation may be
removed by 2/3s vote of the board of directors or trustees. Is
this provision in the bylaws valid?
The provision is invalid. The board of directors has no power
to remove one (1) of their members. Within the corporation, such
power to remove belongs only to the stockholders.
The absences or nonpayment of dues and assessment of the
director or trustee can be considered as just cause for removal.
Thus, said director or trustee may be removed by the stockholders
representing two-thirds (2/3) of the outstanding capital stock, or
two-thirds (2/3) of the members for a nonstock corporation, even if
he is a representative of the minority group.
f. Filling of vacancies
303. What are the grounds or causes of vacancy in the position of
board director or trustee?
a. Vacancy in the position of director or trustee may be due
to expiration of term, removal or increase in the number
of board seats; or,
b. It may be due to resignation, retirement, withdrawal,
death, abandonment, or similar grounds, other than those
stated in the preceding paragraph.
545Z6id.
iwIbid.
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304. Who may fill the vacancy?

The stockholders or the board of directors, depending on the
circumstances may fill the vacancy.
a. The stockholders have the sole power to fill the vacancy in
b. The cause of the vacancy is the expiration of term, removal
of a director or increase in the number of board seats;
c. The cause of the vacancy is not any of the three (3)
grounds referred to above but the remaining directors do
not constitute a quorum;647 and
The cause of the vacancy is not any of the three (3) grounds
referred to above, the remaining directors constitute a quorum but
the board of directors referred the authority to fill the vacancy to the
stockholders.
The filling of vacancy by the stockholders is subject to the notice
and quorum requirements under Section 24 of the RCC. Nonvoting
shares are not included in the computation of quorum because the
election of directors is outside the eight (8) cases where nonvoting
shares are vested the right to vote.548
The board of directors may fill the vacancy if the following
requisites are present:
a. The cause of the vacancy is due to any ground other than
expiration of term, removal of a director or increase in
the number of board seats; and, .
b. The remaining directors constitute a quorum.549
305. What is the term of the replacement director?

A director elected to fill a vacancy shall be referred to as a
replacement director and shall serve only for the unexpired term of
the predecessor in office.550
“’Section 28.
’“Section 28, ibid.
1
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306. Within what periods should the vacancies be filled?

a. If the vacancy is due to term expiration, the election shall
be held no later than the day of such expiration.
b. If the vacancy arises as a result of removal by the
stockholders or members, the election may be held on
the same day of the meeting authorizing the removal,
However, this fact must be so stated in the agenda and
notice of the said meeting.
c. For all other cases, the election must be held no later than
45 days from the time the vacancy arose.
307. Who should fill the vacancy due to the resignation of a hold
over director?
In the case of Valle Verde Country Club, Inc., et al. v. Africa,1*'
the Supreme Court ruled the resignation as a hold-over director will
not change the nature of the cause of the vacancy which is due to the
expiration of director’s term. The term of a hold-over director has
expired. The hold-over period is not part of his term. So, the cause of
the vacancy is not resignation but the expiration of term. As such,
the vacancy must be filled by the stockholders in a regular or special
meeting called for the purpose pursuant to Section 29 of OCC.652
308. What are the requisites to create an Emergency Board?
The requisites are:

a. The vacancy prevents the remaining directors from
constituting a quorum;
b. Emergency action is required to prevent grave, substantial,
and irreparable loss or damage to the corporation;
c. The vacancy may be temporarily filled from among the
officers of the corporation;
d. The appointment must be made by the unanimous vote of
the remaining directors or trustees; and
“‘Valle Verde Country Club, Inc., et al. v. Africa, G.R. No. 151969, September
4, 2009.
“2Now, Section 28 of RCC.
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r
e. The action by the designated director or trustee shall be

limited to the emergency action necessary, and the term
shall cease within a reasonable time from the termination
of the emergency or upon the election of the replacement
director or trustee, whichever comes earlier.
The corporation must notify the SEC within three (3) days
from the creation of the emergency board, stating therein the reason
for its creation.
g. Compensation
309. Are directors or trustees entitled to compensation for their
services rendered to the corporation in their capacity as such?
As a general rule, directors, or trustees are not entitled to
compensation in their capacity as such, because they are supposed
to render their services to the corporation gratuitously, and the
return upon their shares adequately furnishes the motives for
service, without compensation.653 In other words, the directors
presumably have significant equity stake in the corporation since
one generally cannot be elected to the board unless he has sufficient
number of shares. The return on their equity is sufficient motive or
consideration for their work.
The exceptions to this rule are as follows: (1) the bylaws authorize
the said compensation, or, (2) the stockholders representing at
least a majority of the outstanding capital stock or a majority of
the members grant the directors or trustees with compensation and
approve the amount thereof at a regular or special meeting.
310. "A" is the President of ABC Corporation, a corporation vested

with public interest while X is a director and at the same
time Vice Chairman of the Board with executive functions.
The Compensation Committee of the Board of Directors
fixed their compensation package as President and Vice-
Chairman, respectively. The Board of Directors thereafter
confirmed it. When their compensation package was reported
to the stockholders during the regular meeting, a stockholder
representing minority interest argues that the compensation
is invalid and irregular because it is not authorized by the laws
nor approved by the stockholders. Is he correct?
653Western Institute of Technology, Inc., et al. v. Salas, et al., G.R. No. 113032,
August 21,1997.
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He is not correct. The Supreme Court held in Western Institute

of Technology, Inc., et al. v. Salas, et al.66* that the above proscription
against granting compensation to directors or trustees of a corporation
is not a sweeping rule. The said provision itself delimits the scope
of the prohibition to the compensation given to directors for the
services which were performed purely in their capacity as directors
or trustees. The members of the board may receive compensation, in
addition to reasonable per diems, when they render services to the
corporation in a capacity other than as directors/trustees.
In sum, there are, therefore, three (3) instances when directors
or trustees may receive compensation, to wit-.
a. the bylaws authorize the said compensation, or
b. the stockholders representing at least a majority of the
outstanding capital stock or a majority of the members
grant the directors or trustees with compensation and
approve the amount thereof at a regular or special
meeting, or
c. they render services in their capacity other than as
directors or trustees, even though the payment of
compensation is not authorized by the bylaws or the
stockholders.
311. The Board of Directors adopted a couple of resolutions, the first

one approving car and housing plans for the board members
and the second, fixing the per diem allowance of directors
to P35,000 for every board meeting. The board resolutions
shall be applicable to directors who will be elected in the next
stockholders' meeting.
Are the resolutions valid?
The first resolution is invalid. The housing and car plan are
considered forms of compensation. They are to be given to directors
as a form of remuneration for their services in their capacity as
directors. These require authority in the bylaws or approval by
the stockholders representing at least majority of the outstanding
capital stock in a duly called stockholders meeting.
6MIbid.
J9JC9B0M
r

I .'.H/ri ;< >/.'•Iill i,> ■■III., "
The second resolution is valid. The Board of Directors may

fix the directors’ per diem allowance. The only conditions are the
amount must be reasonable and the directors must not participate
in the determination of their own per diem allowance.
Per diem (Latin term for each day) is a specific amount a
corporation or organization gives an individual per day to cover
living expenses when traveling and attending board meetings.
The reasonableness depends on the amount, the stature of the
directors, the income and size of the corporation, and other related
considerations. Per diem of Php35,000 for every board meeting is
deemed to be reasonable.
312. Is there a limit on the amount of compensation of directors or

trustees?
Yes, total yearly compensation of directors shall not exceed ten
percent (10%) of the net income before income tax of the corporation
during the preceding year.
Note that unlike the OCC where the 10% limit applies to the
annual compensation of directors or trustees, as such, the 10%
percent limit under the RCC does not make any such qualification.
It should, therefore, apply to all forms of compensation for services
rendered by the directors or trustees to the corporation in whatever
capacity.
h. Disloyalty
313. What is the so-called "doctrine of corporate opportunity"?
What is the underlying philosophy upon which such doctrine
rests?
The doctrine of corporate opportunity means that if the director
acquired for himself a business opportunity that should belong
to the corporation, he must account to the corporation for all the
profits he obtained unless his act was ratified by the stockholders
representing at least 2/3s of the outstanding capital stock.
Under such doctrine, a director of the corporation is prohibited
from competing with the business in which the corporation is
engaged in, as otherwise, he would be guilty of disloyalty, where
profits he may realize will have to go to the corporate funds except if
the disloyal act is ratified.655
K5IENT v. Tullett Prebon, G.R. No. 189158, January 11,2017.
J9JC9B0M
This doctrine rests fundamentally on the unfairness, in

particular circumstances, of an officer or director taking advantage
of an opportunity for his own personal benefit when the interest of
the corporation should have been more paramount.666
Under Section 33 of RCC, when a director seized an opportunity
belonging to the corporation, there is an obligation to account for
and remit any profit he earned from that venture or transaction.
The obligation to account and remit is not excused even if he risked
his own funds unless the act was ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding capital
stock.
i. Business judgment rule

314. What is the business judgment rule?
Questions of policy and management are left to the sound
discretion and honest decision of the officers and directors of a
corporation, and the courts are without authority to substitute their
judgment for the judgment of the board of directors. The board is the
business manager of the corporation, and so long as it acts in good
faith, its orders are not reviewable by the courts.667 Courts are barred
from intruding into the business judgments of the corporation when
the same are made in good faith.668
Similarly, under the same business judgment rule, stockholders
cannot interfere with the board in conducting the business affairs of
the corporation. They cannot, for instance, revoke resolutions of the
board or repudiate their acts on account of mere disagreement. If
the stockholders are not satisfied with the way the board exercises
its powers or manages the corporation, their remedies consist of
replacing the board members upon expiration of their term, or vote
for their removal under Section 27 of the RCC or file a derivative
suit on behalf of the corporation to set aside the board’s wrongful
acts but not to supplant the board’s business judgment for their
own. To repeat, save for the authority granted to them by law and
the bylaws, stockholders cannot exercise corporate powers and have
no management rights. In the absence of gross negligence or bad
6661985 and 2005 Bar Exams.

667Cua, Jr. v. Tan. G.R. Nos. 181455-56 and 182008, December 4, 2009; Sales v.
Securities and Exchange Commission, G.R. No. 54330, January 13, 1989.
668Balinghasay v. Castillo, G.R. No. 185664, April 8, 2015.
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r
faith,559 the board may not even be held liable for mistakes or errors
in directing the affairs of the corporation.
The business judgment rule is not absolute. Corporate acts
cannot be justified under the business judgment rule if they are
contrary to law. For instance, the board cannot invoke this rule to
declare dividends when there is no surplus profit or declare dividends
out of re-appraisal surplus,560 or to pay compensation to directors, as
this power is lodged with the stockholders. It cannot be relied upon
to support a request for a new stock and transfer book on the pretext
that the original is lost (when in fact it is not) and declare entries in
the supposed lost stock and transfer book as invalid.561
j. Solidary liabilities for damages

k. Personal liabilities
315. Are directors, trustees, and officers liable for action they have
taken on behalf of the corporation?
A corporation, as a juridical entity, may act only through its
directors, officers, and agents. Obligations incurred as a result of
the directors’ and officers’ acts as corporate agents are not their
personal liability but the direct responsibility of the corporation
they represent.662
As such, as a general rule, directors, or officers are not liable
for any action taken on behalf of the corporation.
316. What are the instances when personal liability may attach to
directors, trustees, or officers of the corporation?
A director, officer, or trustee may be held personally liable in
a. Knowingly voting for or assenting to patently unlawful
acts of the corporation;
b. Gross negligence or bad faith in directing the affairs of
the corporation;
M9Section 30, RCC.

6601985 Bar Exam.
“‘Provident International Resources v. Joaquin Venus, et al., G.R. No. 167041,
June 17, 2008.
“2Girly G. Ico v. Systems Technology Institute Inc., et al., G.R. No. 185100,
July 9,2014.
L
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C. Acquiring any personal or pecuniary interest in conflict

with his duty as director or trustee or officer resulting in
damage to the corporation;663
d. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
e. He agrees to hold himself personally liable with the
corporation; and
f. He is made, by a specific provision of law, to personally
answer for his corporate action.664
317. Explain each instance when personal liability may attach to

directors, trustees, or officers of a corporation.
a. Knowingly Voting or Assenting to Patent Unlawful Acts of
the Corporation
It is not just to vote for, but to assent likewise to, a patently
unlawful act which makes a director, trustee, or officer personally
liable. It is not enough that the act is unlawful, it must be a patently
unlawful act, meaning without doubt, whatsoever that the act is
unlawful.
In Carag v. NLRC,™ the Supreme Court ruled that what
makes the act unlawful is the existence of a law declaring the act
to be unlawful. Thus, the failure of a director or officer to inform
the Department of Labor and Employment about the termination of
an employee due to authorized cause may affect the legality of the
termination but it will not make the director or officer personally
liable because there is no law declaring such act to be unlawful.
The erring officer though may be held liable though if such omission
amounts to gross negligence or bad faith.
663Section 30, RCC.

564Pioneer Insurance Surety Corporation v. Morning Star Travel & Tours Inc.,
G.R. No. 198436, July 8,2015; Carag v. NLRC, G.R. No. 147590, April 2, 2007; Atrium
Management v. Court of Appeals, et al., G.R. No. 109491, February 28, 2001; John
F. McLeod v. National Labor Relations Commission First Division, et al., G.R. No.
146667, January 23, 2007; Philex Gold Philippines v. Philex Bulawan Supervisors
Union, G.R. No. 149758, April 25, 2005.
'“Carag v. NLRC, G.R. No. 147590, April 2, 2007.
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The Supreme Court similarly held in Carag v. NLRC that the

liability of the officers of the corporation is not determined by the
Labor Code but by the Corporation Code, particularly, Sections 31
and 34 of the Corporation Code (now Section 30, RCC).
b. Gross Negligence or Bad Faith in Directing the Affairs of

the Corporation
Directors, trustees, and officers are not liable for oversight,
imprudence, or ordinary negligence. They cannot be held Hable just
because they erred in their business decision. Under the business
judgment rule, questions of business policy and management are
left to the sound discretion of the board and they cannot be held
liable for any adverse consequence of those decisions as long as they
acted in good faith and not contrary to law.5“ They are not, after
all, insurers of the profitability of the corporation. Their liability
will attach under this ground only if their acts amount to gross
negligence or bad faith in directing the affairs of the corporation.
There is no hard and fast rule as to when an act amounts
to ordinary or gross negligence or bad faith. It depends on the
surrounding circumstances.
However, before a director or officer of a corporation can be held
personally liable for corporate obligations, the following requisites
must concur:
i. The complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of
the corporation, or that the officer was guilty of gross
negligence or bad faith; and
ii. The complainant must clearly and convincingly prove
such unlawful acts, negligence, or bad faith.56’
It should be noted that the stockholders are not included in
the enumeration of persons who may be held personally liable.
Stockholders are liable only to the extent of their subscription563
unless they also act as directors, officers, or agents of the corporation.
“6Balinghasay v. Castillo, G.R. No. 185664, April 8, 2015.

“’Heirs of Fe Tan Uy v. International Exchange Bank, G.R. No. 166282,
February 13, 2013; See also Bank of Commerce v. Marilyn P. Nite, G.R. No. 211535,
July 22, 2015 and Polymer Rubber Corporation v. Ang, G.R. No. 185160, July 24,
2013.
“’Donnina Halley v. Printwell, Inc., G.R. No. 157549, May 30,2011.
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C. Acquiring any personal or pecuniary interest in conflict

with their duty as directors or trustees
This conflict of interest must result in damage to the corporation.
In relation thereto, the doctrine of corporate opportunity refers to
a case when a director, by virtue of his office, acquires for himself
a business opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such corporation. There
is a responsibility not just to account but to remit to the corporation
any profit he realized from the venture.569
d. Consenting to the issuance of watered stocks

Under Section 64 of the RCC, a director or officer of a corporation
who: (a) consents to the issuance of stocks for a consideration less
than their par or issued value; (b) consents to the issuance of
stocks for a consideration in any form other than cash, valued in
excess of their fair value, or (c) having knowledge of the insufficient
consideration, does not file a written objection with the corporate
secretary, shall be liable to the corporation or its creditors, solidarily
with the stockholder concerned for the difference between the value
received at the time of the issuance of the stock and the par or issued
value of the same.670
e. Contractual liability
If a director or officer makes himself contractually liable with
the corporation, is he automatically liable solidarily? It depends on
the nature of the agreement he entered to secure the obligation of
the corporation. If he signs a surety agreement, he is liable solidarily
with the corporation. If it is a guaranty agreement, he is liable
subsidiarily with the corporation because as a guarantor, he has the
right of excussion. However, if the guaranty agreement waives the
benefit of excussion, then he is liable solidarily with the corporation.
It is thus clear that the assumption of the corporation’s liability
does not always translate to solidary liability. It has to be read in
conjunction with the provisions of the Civil Code on guaranty.
f- Statutory liability for corporate act or omission

There are cases when the law makes the directors and
officers liable for the corporate act or omission. The general rule is
that directors, trustees, and officers can be held criminally liable
“’Section 33, infra.

6,0See discussion in Section 64.
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for acts or omission done on behalf of the corporation only when

they are made by specific provision of law to personally answer for
their corporate act or omission.571 If the offender is a corporation,
certain laws jimpose criminal liability on the directors, officers, or
even agents responsible for the violation or offense. An example is
Presidential Decree 115 (“P.D. No. 115”) or Trust Receipts Law.
In Ching v. Secretary of Justice™ the director/officer, who
signed the trust receipt agreement, did not receive the goods under
the trust receipt. He did not get the loan himself nor derived any
personal benefit under the trust receipt transaction. The Supreme
Court said that these are not valid justifications to negate his
criminal liability because it is the law that makes him liable for the
corporate act of violating the trust receipt.
The director or officer who signed the trust receipts cannot,
thus, hide behind the cloak of the separate corporate personality
of the corporation. In the words of Chief Justice Earl Warren, a
corporate officer, cannot protect himself behind a corporation where
he is the actual, present, and efficient actor.
In Edward C. Ong v. the Court of Appeals and the People of the
Philippines,573 criminal liability was imposed against the person who
signed the trust receipt agreement on behalf of the corporation even
though he is not a director or officer of the corporation. It is because
under P.D. No. 115, or the Trust Receipts Law, if the offender is a
corporation the penalty shall be imposed upon the director, officer,
or any person responsible for the violation.
g. Responsibility for crimes

Of course, even if the law does not impose liability upon
directors or officers for the corporate act omission, the officers of
the corporation, other than the board of directors, can be made
criminally liable for their criminal acts if it can be proven that they
participated therein.574
Labor disputes such as that of illegal recruitment can also
trigger the liability of employees and employers. An employee of
6,1Sia v. People of the Philippines, G.R. No. L-30896, April 28,1983.

5,2Ching v. Secretary of Justice, G.R. No. 164317, February 6, 2006.
573Edward Ong v. Court of Appeals and People of the Philippines, G.R. No.
119858, April 29, 2003.
6,4Gregorio Singian, Jr. v. Honorable Sandiganbayan and the Presidential
Commission on Good Government, G.R. Nos. 160577-94, December 16, 2005.
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a corporation engaged in illegal recruitment may be held liable as

principal, together with his employer, if it is shown that he actively
and consciously participated in illegal recruitment because the
existence of the corporate entity does not shield froiti prosecution
the corporate agent who knowingly and intentionally causes the
corporation to commit a crime. The corporation obviously acts and
can act, only’ by and through its human agents, and it is their conduct
which the law must deter.676
There is likewise jurisprudence that not only persons who
participated in the act can be made criminally liable. Even those
with power to prevent the illegal act may be held criminally liable.
Thus, to be held criminally liable for the acts of a corporation, there
must be a showing that its officers, directors, and shareholders
actively participated in or had the power to prevent the wrongful
act.6’6
h. Special fact doctrine

318. What is the special fact doctrine?
This doctrine makes a director or officer liable when he takes
advantage of an information by virtue of his office to the disadvantage
of the corporation.
i. Inside information
319. What is an inside information?
It is an information not known to the public that one has
obtained by virtue of being an insider — called also as insider
information.
320. When may a director be held liable for obtaining insider

information?
A director may be held liable for obtaining insider information
if he trades securities based on such insider information. Trading
on insider information amounts to an unfair manipulation of the
free market.677
676The Executive Secretary, et al. Court of Appeals, et al., G.R. No. 131719,
May 25, 2004.
“’“Securities and Exchange Commission v. Price Richardson Corp., et al., G.R.
No. 197032, July 26, 2017.
“’’Please see discussion on insider trading under the SRC part of the reviewer.
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j. Contracts
i. By self-dealing directors with the corporation
321. What is the legal status of a contract between the corporation
and any' of its directors, trustees, or officers or their related
interest?
A contract of the corporation with one (1) or more of its directors,
trustees, officers or their spouses and relatives within the fourth
civil degree of consanguinity or affinity is voidable, at the option of
such corporation, unless all the following conditions are present:
a. The presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
b. The vote of such director or trustee was not necessary for
the approval of the contract;
c. The contract is fair and reasonable under the
circumstances;
d. In case of corporations vested with public interest,
material contracts are approved by at least two-thirds
(2/3) of the entire membership of the board, with at least
a majority of the independent directors voting to approve
the material contract; and
e. In the case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first three (3) conditions set forth in the
preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds (2/3) of the members in a
meeting called for the purpose: Provided, That full disclosure of
the adverse interest of the directors or trustees involved is made
at such meeting and the contract is fair and reasonable under the
circumstances.678
Under this provision, such a contract is voidable at the option
of the corporation, meaning valid, until annulled by the corporation.
The option to void the contract ceases if the foregoing requisites are
duly complied with.
8™Section 31, RCC.
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Note further that the presence and vote of the self-dealing

director may be dispensed with in lieu of the ratification by the
stockholders representing at least 2/3s of the outstanding capital
stock or at least 2/3s of the members for a nonstock corporation
in a meeting called for the purpose. The condition that cannot be
dispensed with is that the contract must be fair and reasonable
under the circumstances.
ii. Between corporations with interlocking

directors
322. What is the legal status of a contract between two (2)
corporations with interlocking directors?
Except in cases of fraud, and provided the contract is fair
and reasonable under the circumstances, a contract between two
(2) or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of
the interlocking director in one (1) corporation is substantial and the
interest in the other corporation or corporations is merely nominal,
the contract shall be subject to the provisions of the preceding section
insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty percent (20%) of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors.679
In other words, the mere fact that there is a contract between
two (2) corporations with common directors is not a ground to
invalidate the said contract. However, the contract must be fair and
reasonable under the circumstances and should not be tainted with
fraud.
323. What are the other requirements if the interest of the
interlocking director is substantial in one and nominal in the
other corporation?
In relation to Section 31 of RCC, if the contract is between
two (2) corporations with interlocking directors and the interest
of the interlocking director is substantial in one, and nominal in
the other, then such interlocking director shall be subjected to the
requirement of the aforesaid prior section. The interest shall be
considered substantial in the context of Section 32 of the RCC if it is
"’Section 32, RCC.
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more than twenty percent (20%), and not necessarily more than fifty
percent (50%). Conversely, an interest amounting to twenty percent
(20%) or less will be considered nominal.
To illustrate, let us assume that the interest of Juan Dela
Cruz in ABC Corporation is substantial and his interest in XYZ
Corporation is nominal, and Mr. Dela Cruz is also in the board of
both ABC and XYZ Corporation. Under Section 32 of RCC, in so
far as XYZ Corporation is concerned, Mr. Dela Cruz is subject to
the requirements of Section 31. Thus, his presence must not be
necessary in the meeting of XYZ Corporation, and also his vote
must not be necessary for the approval of the contract between ABC
and XYZ Corporation. Similarly, the said contract must be fair and
reasonable under the circumstances. It is as if the said contract
is between ABC Corporation and Mr. Dela Cruz in so far as the
nominal corporation is concerned.
The foregoing requirements will not apply if the interest of
the interlocking director in the corporations is both substantial or
nominal.
If the contract is a management contract under Section 43
of the RCC, in addition to the requirements under Section 32, the
following approvals must likewise be obtained:
a. board of directors of each corporation - majority of the
quorum of each of the managing and managed corporation
(not majority of their respective boards);580 and
b. stockholders representing at least majority of the
outstanding capital stock, or at least majority of the
members of both the managing and managed corporation.
Moreover, where: (a) a stockholder or stockholders representing
the same interest ofboth the managing and the managed corporations
own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation, or (b) a
majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board
of directors of the managed corporation, then the management
contract must be further approved by the stockholders owning at
As a guide, if the RCC only mentions the approval of the “board of directors,"
a quorum of said directors will suffice. This must be distinguished from other
provisions, e.g., Sections 15, 36, 37, and 41, where the RCC provides the requirement
of approval of a “majority of the board of directors.”
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least two-thirds (2/3) of the total outstanding capital stock entitled

to vote or by at least two-thirds (2/3) of the members of the managed
corporation.
k. Executive and other special committees

324. What is the rationale for the creation of an executive committee?
Regular board meetings are often conducted only once a month.
There are occasions where transactions require corporate approval
but cannot wait for the Board to meet, given the urgency or the need
to make a prompt decision. The bylaws may authorize the creation
of an executive committee, which is an adjunct or extension of the
board, that can act on matters falling within the board’s competence.
i. Creation
325. Can the board of directors or trustees create positions or
committees?
Yes, the board has the power to create positions, committees,
or offices as may be necessary to conduct the business affairs of the
corporation. This is covered by the business judgment rule. It was
held that the determination of the necessity for additional offices
and/or positions is a management prerogative which courts are not
wont to review in the absence of any proof that such prerogative was
exercised in bad faith.6"1
In fact, this power is now explicit under the RCC which
provides that the board of directors may create special committees
of temporary or permanent nature and determine the members'
term, composition, compensation, powers, and responsibilities,™
However, the board cannot create the executive committee
referred to under Section 34 of the RCC nor a corporate office,
because these are required to be created by the bylaws.6"3
326. Who may create the executive committee?

The executive committee is created by the bylaws. Once
created, the board may fill the composition of the committee. As the
power to adopt bylaws is lodged with the stockholders, by parity of
■' Port '.y-r/m v. v. '/irlormooGo, <-/ «/., G.K. No. HIIHHIJ, Mnn h III, 2007.
"'•‘fioct.ion 34, Yf
h'fi'i
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reasoning, only the stockholders may decide to create a committee

that will serve as an adjunct or extension of the board of directors or
a mini-board of directors.
However, the board can create a committee and name it
“executive committee” as long as it will not perform the functions of
the executive committee referred to in Section 34 of RCC. Otherwise,
only the bylaws may authorize its creation.584
327. Who may be appointed members of the Executive Committee?

Only board directors, not less than three (3), can be appointed
members of the Executive Committee. Non-board directors can be
appointed members but only in an advisory capacity. Note that the
law does not set any maximum number. Obviously, it cannot be the
same size as the board as it will be inconsistent with the rationale of
its creation. The maximum number may be indicated in the bylaws
or determined by the Board, if authorized by the bylaws, taking into
account what is reasonably necessary to attain the purpose of its
creation.
328. Can a foreigner be appointed as a member of the Executive

Committee of a corporation engaged in partly nationalized
business activity?
While “foreigners” are disqualified to be elected/appointed
as “corporate officers” in wholly or partially nationalized business
activities, they are allowed representation in the "Board of
Directors” or “governing body” of said entities in proportion to their
shareholdings. The reason for the exception is that the Board of
Directors/governing body performs specific duties as a "body." Unlike
corporate officers, each member of the Board of Directors/governing
body has no individual power or authority to perform management
functions.
The logical conclusion is that the rule allowing foreigners to sit
in the Board of Directors extends to the "Executive Committee" which
in authorized to act on such specific matters within the competence
of the Board of Directors. Accordingly, a foreigner can be a member
of the Executive Committee without violating the Anti-Dummy Law.
provided, however, that foreign representation in the said governing
body shall only be in proportion to the foreign shareholdings in the
Port BovvieoH Inc. v. Gw G K No. IGtSSv. March Ux .VO
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corporation, and provided further, that the foreigners shall not be

given specific individual managerial responsibility.685
ii. Limitations on its powers

329. What are the powers of the executive committee?
Generally, the executive committee can do almost all the
authorized acts of the board under the RCC, except for the following:
a. any corporate act requiring stockholders approval;
b. filling of vacancies in the board;
c. amendment or repeal of bylaws, or the adoption of new
bylaws;
d. amendment of a board resolution, which by its express
terms is not amendable or repealable; and
e. distribution of cash dividends to shareholders.
It should be clear that the executive committee cannot also
approve stock dividends since the said act requires stockholders’
approval.
a. Meetings
330. What are the requisites of a valid board meeting?
a. The meeting must be held on the date fixed in the bylaws
or in accordance with law;
b. Prior written notice of such meeting must be sent to all
directors/trustees;
c. It must be called by the proper party;
d. It must be held at the proper place; and
e. Quorum and voting requirements must be met.685
MiRe: Anti-Dummy Law in Condominium Corporations, SEC-OGC Opinion

No. 19-14, July 15, 2014.
58GLim v. Moldex, supra.
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Hi. Regular or special

(a) When and where
331. When and where are board meetings conducted?
Regular meetings of the board, such must be held monthly,
unless the bylaws provide otherwise. On the other hand, special
meetings may be held at any time upon the call of the president or
as provided in the bylaws.
The aforesaid board meetings may be held anywhere in or
outside of the Philippines, unless the bylaws provide otherwise.
(b) Notice
332. What are the notice requirements for board meetings?
The notices of the regular or special board meetings must state
the date, time, and place of the meeting. Such notices must also be
sent to every director or trustee at least two (2) days prior to the
scheduled meeting, unless a longer time is provided in the bylaws.
However, a director or trustee may waive this requirement, either
expressly or impliedly.
Thus, the required period for notices was increased from one
(1) to two (2) days prior to the scheduled meeting. It must also be
noted that such notices need not be in writing, unless the bylaws
require otherwise.
333. What is the effect of failure to give notice of the board meeting
to even one director?
In Lopez Realty, Inc. v. Spouses Tanjangco,687 the Supreme
Court held that such board meeting is legally infirm considering that
there is a failure to comply with the requirements or formalities of
the law or the corporation’s bylaws. As such, any action taken during
the said meeting may be challenged. However, said action may be
subsequently ratified by the board. Ratification can be made either
expressly or impliedly. Implied ratification may take various forms
— like silence or acquiescence, acts showing approval or adoption of
the act, or acceptance and retention of benefits flowing therefrom.688
“’G.R. No. 154291, November 12, 2014.

“’Lopez Realty, Inc. v. Spouses Tanjangco, citing Yasuma v. Heirs of Cecilio S.
De Villa and East Cordillera Mining Corporation, G.R. No. 150350, August 22,2006.
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(c) Attendance in meetings

334. In what instances can the directors or trustees of a corporation
participate in a meeting through remote communication?
Directors or trustees who cannot physically attend or vote
at board meetings can participate and vote through remote
communication such as videoconferencing, teleconferencing, or other
alternative modes of communication that allow them reasonable
opportunities to participate. However, directors or trustees cannot
attend or vote by proxy at board meetings.
If a director or trustee intends to participate in a meeting
through remote communication, he/she shall notify in advance the
Presiding Officer and the Corporate Secretary of his/her intention.
The Corporate Secretary shall note such fact in the minutes of the
meeting.
Corporations may issue their own internal procedures for the
conduct of board meetings through remote communication or other
alternative modes of. communication to address administrative,
technical and logistical issues.689
335. Is a director or trustee who participates through remote

communication deemed present for purpose of quorum?
Yes, a director or trustee who participates through remote
communication shall be deemed present for purpose of attaining
quorum.690
if. Who presides

336. Who presides during board meetings?
Compared to the OCC, the RCC provides that the president
can only preside during meetings in the absence of the chairman,
unless the bylaws provide otherwise.
The revision recognized the long-standing practice wherein the
chairman presides over the board’s and stockholders’ meetings. As
such, the chairman need not be specifically authorized in the bylaws
to preside over the meetings.
689Seetion 4, SEC Memorandum Circular No. 6 series of 2020, March 12, 2020.
‘"Section 5, SEC Memorandum Circular No. 6 series of 2020, March 12,2020.
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Hi. Quorum
337. What is the quorum for board meetings?
Based on Section 52 of the RCC, a majority of the directors or
trustees as stated in the articles of incorporation shall constitute
a quorum to transact corporate business, unless the articles
of incorporation or the bylaws provides for a greater majority.
Furthermore, every decision reached by at least a majority of the
directors or trustees constituting a quorum, except for the election of
officers which shall require the vote of a majority of all the members
of the board, shall be valid as a corporate act.
338. Under the Bylaws of Corporation A, its Board of Trustees

(Board) is composed of five (5) members, two (2) of whom
are nominated and appointed by the three original members.
Further, under Section 2, Article I of the Bylaws, only a
majority of the three (3) original members of the Board shall be
necessary at all meetings to constitute a quorum. Is Section 2,
Article I of the Bylaws of Corporation A consistent with existing
Corporation laws?
Section 2, Article I of the Bylaws is not consistent with the law
for two (2) reasons:
a. It is not in accord with Section 52 of the RCC.
As a general rule, the quorum in board meetings
is the majority of the number of directors or trustees.
However, under Section 52 of the RCC, the articles
of incorporation or bylaws of the corporation may fix a
greater number than the majority of the number of board
members to constitute the quorum necessary for the valid
transaction of business.
Thus, the SEC opined that the articles of
incorporation or the bylaws cannot provide for a lesser
number than the majority provided in Section 52 of the
RCC. To provide that only a majority of the three original
members would be necessary to constitute a quorum
would be repugnant to the directive of Section 52 of the
RCC.
b. It is also conflicting with Section 91 of the RCC which
allows nonstock corporations to provide in their articles
of incorporation or bylaws the term of office of the board.
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While the term of directors or trustees of nonstock

corporations may vary under the articles of incorporation
or bylaws, lifetime or unlimited term of the board is
not allowed. A lifetime or unlimited term of the board
absolutely deprives other stockholders or members of
the opportunity to participate in the management of
the corporation. To provide that only the majority of the
original members of the board of trustees is required
to constitute a quorum for all board meetings implies
that the original members will be holding their office as
members of the board for an unlimited term.691
Note that while the articles of incorporation or bylaws cannot
fix the quorum to less than the majority of the board, or it may
provide for a greater majority. The case of Pena v. Court ofAppeals132
provides an example where the bylaws of a corporation provided for
a greater majority. The Supreme Court held that when only three
(3) out of five (5) members of the board of directors convened by
virtue of a prior notice of a special meeting, there was no quorum
to validly transact business since, under Section 4 of the amended
bylaws of the corporation, at least four (4) members must be present
to constitute a quorum in a special meeting of the board of directors.
339. What are the corporate acts under the RCC requiring only
majority of the quorum?
a. Declaration of dividends.
b. Entering into a management contract.
c. Fixing the issued price of no-par value shares.
d. And such other corporate acts which under the RCC and
the bylaws do not require approval by at least majority of
the entire board.
This is because under Section 52 of the RCC, unless the RCC or
the bylaws require otherwise, every decision reached by a majority
of the directors or trustees constituting a quorum shall be valid.
691Answered based on Section 91 of the RCC; Re: Quorum; Majority, SEC-OGC

Opinion No. 07-16, April 4, 2016.
69ZG.R. No. 91478, February 7, 1991
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Thus, whenever the RCC or the bylaws require board approval,

as opposed to the majority of the entire board, it means the majority
of the quorum of the board of directors.
340. How can a director or trustee cast vote in a meeting via remote
communication?
The director or trustee in the meeting via remote communication
may cast his vote through electronic mail, messaging service or such
other manner as may be provided in internal procedures. The vote
shall be sent to the Presiding Officer and the Corporate Secretary
for notation.593
iv. Rule on abstention

341. What is the effect of the stockholder's abstention during
stockholders' meetings?
In those cases specified by law on instances of appraisal right,
a stockholder present in a meeting but abstains, is not entitled to
exercise such right. He cannot demand payment of the fair value
of his shares, because one of the elements of appraisal right is his
vote against the proposed corporate act. As such, abstention is
tantamount to a waiver of appraisal right.
Stockholders who abstain from voting are, however, counted
for quorum purposes.
342. When is a director or trustee required to recuse from voting

during a board meeting?
Without prejudice to Section 31 of the RCC (Dealings of
Directors, Trustees or Officers with the Corporation), a director or
trustee who has a potential interest in any related party transaction
is required to recuse from voting on the approval of the related party
transaction pursuant to Section 52 of the RCC.
343. Is the director who abstained or recused himself from voting

on a particular measure counted for quorum purposes?
A director who abstained or recused himself from voting should
be considered as present for quorum purposes. His abstention,
however, may have a bearing on the validity of the board approval
693Section 8, SEC Memorandum Circular No. 6 series of 2020, March 12,2020.
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depending on whether the RCC or the bylaws require the majority

of the entire board or simply, majority of the quorum.
For example, if there are 15 board members and only eight
(8) are present, on matters where only a majority of the quorum is
needed, the abstention of a director on a particular item requiring
board approval will be immaterial. On the other hand, if the
approval of a majority of the entire board is required, the abstention
of a director is tantamount to a “No” vote and thus the transaction
cannot be effected.
344. Distinguish meetings of the board of directors/trustees from

stockholders/members' meetings.
As discussed above but for ease of reference, here are the
distinctions between meetings of the board of directors/trustees and
stockholders/members ’ meetings.
Regular Stockholders/ once a year

meeting members
Board/trustees once a month unless the bylaws
provide otherwise
Special Stockholders/ whenever needed
meeting members
Board/trustees whenever needed
Notice requirem:-;|j|
Regular Stockholders/ at least 21 days prior written notice
meeting members unless the bylaws provide otherwise.
Directors/Trustees at least 2 days’ notice unless bylaws
provide otherwise
Special Stockholders/ at least one-week written notice
meeting members unless bylaws provide otherwise
Directors/Trustees at least 2 days’ notice unless bylaws
provide otherwise
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Quorum-requiremer J
Regular Stockholders/ at least majority of the outstanding
meeting members capital stock or majority of the
members unless the RCC or the
bylaws provide otherwise. The
bylaws may provide for less or
greater than majority in determining
quorum
Special Board/trustees at least majority of the board of
meeting directors or trustees as fixed in the
articles of incorporation or bylaws.
The bylaws may provide for a greater
but not lesser than majority of the
board members for quorum purposes
Vent
Stockholders/ principal office of the corporation
Members and if not practicable in the city or
municipality where the principal
office is located
Directors/Trustees anywhere unless otherwise provided
in the bylaws
Modeol
Stockholders/ in person or by proxy, or through
Members remote communication or in absentia
when provided by the bylaws
Directors/Trustees proxy voting is not allowed
I. Capital affairs
a. Certificate of stock
345. What is a stock certificate?
A certificate of stock is a written instrument signed by the
proper officer of a corporation stating or acknowledging that the
person named therein is the owner of a designated number of shares
of its stock. It indicates the name of the holder, the number, kind
and class of shares represented, and the date of issuance.
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Pertinently, it was held that the mere inclusion as a shareholder

in the General Information Sheet of a corporation is not sufficient
proof that one is a shareholder of such corporation.694
f. Nature of the certificate
346. What is the nature of shares of stock?
Shares of stock are units of capital stock. Once issued, they are
considered personal property of the stockholder owning it. While
shares of stock constitute personal property, they do not represent
the property of the corporation. The corporation has property of its
own. A share of stock only typifies an aliquot part of the corporation’s
property, or the right to share in its proceeds to that extent when
distributed according to law and equity.696
As personal property, shares of stock may be transferred, either
through sale, donation or succession, or encumbered or otherwise be
subject to a security interest.
347. Is possession of stock certificate an indispensable condition

for the exercise of stockholders' rights?
Possession of stock certificate is not an indispensable condition
for the exercise of stockholders’ rights. This is because a certificate
of stock shall only be issued to a subscriber upon payment of the full
amount of the subscription together with interest and expenses.596
Any holders of unpaid shares that are not delinquent have all the
rights of stockholders.697
ii. Uncertificated shares

348. Is there any revision under the RCC on the issuance of stock
certificates?
Yes, the SEC may require corporations whose securities are
traded in trading markets and which can reasonably demonstrate
their capability to do so to issue their securities or shares of stocks
in uncertificated or scripless form in accordance with the rules of
the SEC.
“‘David C. Lao v. Dionisio Lao, G.R. No. 170585, October 6, 2008.

696BoyerRoxasv.CourtofAppeals,G.R.No. 100866, July 14,1992; Stockholders
of F. Guanson v. Register of Deeds of Manila, G.R. No. L-18216, October 30,1962.
‘"Section 63, RCC.
697Section 71, RCC.
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Hi. Negotiability; requirements for valid transfer

of stocks
349. Is a stock certificate a negotiable instrument?
Although a stock certificate is sometimes regarded as quasi-
negotiable, in the sense that it may be transferred by delivery, it
is well-settled that the instrument is non-negotiable, because the
holder thereof takes it without prejudice to such rights or defenses
as the registered owner or creditor may have under the law, except
insofar as such rights or defenses are subject to the limitations
imposed by the principles governing estoppel. That the holder found
the stock certificates endorsed in blank does not necessarily make it
the owner of the shares represented therein. Their true ownership
has to be ascertained in a proper proceeding.598
350. What is the procedure in transferring a common/voting stock

and when is it legal?
The mere endorsement of the certificate of stock shall be
sufficient to legally effect the transfer of title to a share of stock, even
without executing a deed of assignment of the shares, provided the
same is coupled with delivery and recorded in the stock and transfer
book of the corporation. An unrecorded transfer, though valid
between the parties, cannot be effective as against the corporation.
The right of a stockholder accrues only upon entry of his name in the
books of the corporation.
However, the use of the word “may” means that the transfer
may be effected in a manner different from that provided for in the
law. In the case of Gonzalo Chua Guan v. Samahang Magsasaka,
Inc.,™ which covers Section 35 of Act 1459 and has been carried
over in Section 63 of the OCC (now Section 62 of the RCC), the
Supreme Court held that the use of the verb “may” does not exclude
the possibility that a transfer may be made in a different manner,
thus, leaving the creditor in an insecure position even though he has
the certificate in his possession.600
In view of the foregoing, while it is usual to effect the transfer
of shares by indorsement on the certificate, a conveyance may be
made by an assignment or sale in a separate instrument in lieu
““Republic of the Phils. (PCGG) v. Sandiganbayan, ibid.

“"G.R. No. L-42O91, November 2,1935
““Alfonso S. Tan v. Securities and Exchange Commission, G.R. No. 95696,
March 3,1992.
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of the indorsement of the certificate, unless the bylaws expressly

provide that the transfer shall be made exclusively in the manner
authorized by the statute.601
351. What are the documentary requirements on the transfer of

shares?
The documentary requirements for the transfer of shares will
depend on whether the stockholder is in possession of the stock
certificates covering his shares. If the stockholder has custody of
the stock certificates, the stock certificate must be endorsed by the
owner or his attorney-in-fact or any other person legally authorized
to make the transfer.
Accordingly, for as long as the certificate of stock is duly
indorsed in accordance with the provisions of the RCC, the same
may be considered a valid transfer of the shares covered by the
certificate of stock, even without executing a “deed of assignment”
of the shares.
A “deed of assignment” on the other hand is necessary only
when no certificate of stock has yet been issued or where the same is
not in the possession of the transferor.602
352. What is the nature of delivery that the law contemplates for the
transfer of shares?
The delivery contemplated in Section 63 (now 62 of the RCC),
pertains to the delivery of the certificate of shares by the transferor
to the transferee, that is, from the original stockholder named in the
certificate to the person or entity the stockholder was transferring
the shares to, whether by sale or some other valid form of absolute
conveyance of ownership. It is the delivery of the certificate,
coupled with the endorsement by the owner or his duly authorized
representative that is the operative act of transfer of shares from
the original owner to the transferee.603
w‘' Re: Classification of Corporations; Express Powers; Right of First Refusal;

Procedure in Transferring Shares of Stock; Qualifications of Directors; and Probative
Value of the Stock and Transfer Book. SEC-OGC Opinion No. 51-19, October 11,
2019.
““Transfer of Shares; Documentary Requirements, SEC-OGC Opinion No. 06-
07, April 19. 2007.
M3Anna Teng v. Securities and Exchange Commission, et al., G.R. No. 184332,
February 17, 2016.
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In another case, it was held that where the seller indorsed the
stock certificates but did not deliver them, ownership of the shares
cannot be transferred to the buyer. For an effective transfer of
shares of stock, the mode and manner of transfer as prescribed by
law should be followed.604
353. What other steps should the transferee take for the registration
of the transfer of shares and the issuance of the stockcertificate
in his favor?
He should pay the taxes due on the transaction, if any, then
obtain from the Bureau of Internal Revenue a certificate authorizing
registration (“CAR”). The transferee should present the CAR and
the document evidencing the conveyance, and surrender the duly
endorsed stock certificate to the secretary of the corporation who
shall then cancel the stock certificate of the transferor and issue a
new stock certificate to the transferee.
In one case, the Supreme Court ruled that with regard to the
issuance of a new certificate of stock, the surrender of the original
certificate of stock is necessary before the issuance of a new one so
that the old certificate may be cancelled. A corporation is not bound
and cannot be required to issue a new certificate unless the original
certificate is produced and surrendered. Surrender and cancellation
of the old certificates serve to protect not only the corporation but
the legitimate shareholder and the public as well, as it ensures that
there is only one document covering a particular share of stock.605
354. Is delivery or surrender of the certificate of stock a requisite

before the conveyance may be recorded in the books of the
corporation?
No, to compel delivery to the corporation of the certificates
as a condition for the registration of the transfer would amount
to a restriction on the right of a stockholder to have the stocks
transferred to his name, which is not sanctioned by law. The only
limitation imposed by Section 63 of the OCC (now Section 62 of the
RCC) is when the corporation holds any unpaid claim against the
shares intended to be transferred.606
“’Embassy Farms, Inc. v. Court of Appeals, G.R. No. 80682, August 13,1990.
605Anna Teng v. Securities and Exchange Commission, ibid.
mIbid.
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Nevertheless, as previously pointed out, the surrender of the

original certificate of stock is necessary before the issuance of a new
one so that the old certificate may be cancelled.60’’
iv. Issuance
355. What are the formalities for the issuance of a stock certificate?
a. The certificate should be signed by the president or vice
president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation.608
Thus, a mere typewritten statement advising a
stockholder of the extent of his ownership in a corporation
without qualification and/or authentication cannot be
considered a formal certificate of stock.609
b. It shall be issued in accordance with the bylaws of the
corporation.
c. Every certificate must state on its face that the corporation
is organized under the laws of the state, the name of the
person to whom issued, the number and class of shares
and the designation of a series if any which the certificates
represents, the par value of each share represented, or a
statement that the shares are without par value.610
d. It should be detached from the book of stock certificate
and issued to the stockholder.
e. No certificate of stock shall be issued to a subscriber until
the full amount of the subscription together with interest
and expenses (in case of delinquent shares), if any is due,
has been paid.
It should be noted that the SEC may require corporations whose
securities are traded in trading markets and which can reasonably
demonstrate their capability to do so to issue their securities or
shares of stocks in uncertificated or scripless form in accordance
with the rules of the SEC.611
mIbid.
“““Bitong v. Court of Appeals, ibid.
“'“Bearer Certificates, SEC Opinion No. 02-05, January 31, 2005.
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(a) Full payment

356. Can "Bearer" stock certificates be issued by a corporation
upon the request of a subscriber?
The issuance of “bearer” stock certificates is not allowed under
the law. Certificates of stock may be issued only to registered owners
of stock in a corporation upon full payment of subscription.612
357. Does "unpaid claim," which justifies the corporation to refuse

the registration of the transfer, include any obligation or liability
that the subscriber may owe the corporation?
No, the term “unpaid claim” only refers to “any unpaid claim
arising from unpaid subscription. It does include any indebtedness
which a subscriber or stockholder may owe the corporation arising
from any other transaction. It does not, for instance, include monthly
dues imposed by the corporation for the use of its facilities.613
(b) Payment pro-rata

358. May a corporation consider the portion paid by a shareholder
as full payment for the corresponding number of shares and
cancel the subscription as to the rest?
The SEC has consistently opined that a subscription is
one, entire and indivisible whole contract. This indivisibility of
subscription is absolute as Section 63 of the RCC speaks no exception.
The purpose of the doctrine is to prevent the partial disposition
of a subscription, which is not fully paid, because if it is permitted
and the stockholder subsequently becomes delinquent in the
payment of his subscription, the corporation may not be able to sell
as many of his subscribed shares as would be necessary to cover the
total amount from him pursuant to Section 67 of the RCC.
Applying the aforementioned doctrine, a corporation cannot
issue certificates of stock for the portion of the subscription that is
paid and cancel the portion which remains unpaid as it violates the
doctrine of indivisibility of subscription contracts. In effect, it is also
condonation of part of the subscription of a stockholder, which is
violative of the trust fund doctrine.614
6l2Re; Bearer Certificates, SEC Opinion No. 02-05, January 31,2005.

613China Banking Corporation v. Court of Appeals, and Valley Golf and
Country Club, Inc., G.R. No. 117604, March 26,1997.
614Re: Condonation of Subscriptions Receivables or Cancellation of
Subscriptions, SEC-OGC Opinion No. 50-19, October 11, 2019.
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V. Stock and transfer book

(a) Contents
359. What is a stock and transfer book ("STB")?
A stock and transfer book is a record of all stocks in the names
of the stockholders alphabetically arranged; the installments paid
and unpaid on all stocks for which subscription has been made,
and the date of payment of any installment; a statement of every
alienation, sale or transfer of stock made, the date thereof, by and to
whom made; and such other entries as the bylaws may prescribe.616
It is the quintessential record of all stockholders and their
corresponding stockholdings in the corporation. It is the best
evidence to prove the status of a person as a stockholder of the
corporation. However, the same is not conclusive in nature to prove
one’s stockholdings. Should the STB be lost or destroyed, other pieces
of evidence such as but not limited to the latest General Information
Sheet of the corporation or the stock certificate may be presented to
substantiate one’s claim as a stockholder.616
360. Is the stock and transfer book conclusive evidence to show the
outstanding capital stock of the corporation?
A stock and transfer book is necessary as a measure of
precaution, expediency and convenience since it provides the only
certain and accurate method of establishing the various corporate
acts and transactions and of showing the ownership of stock and like
matters. However, a stock and transfer book, like other corporate
books and records, is not in any sense a public record, and thus is
not exclusive evidence of the matters and things which ordinarily
are or should be written therein.617
(b) Who may make valid entries

361. What is the nature of the obligation of the corporate secretary
to register the transfer of the shares assuming that all the
formalities have been complied with?
el6Section 73, RCC; 2009 Bar Exam.

616SEC-OGC Opinion No. 51-2019.
617Jesus v. Lanuza, et al. v. Court of Appeals, et al., G.R. No. 131394, March
28, 2005.
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In transferring stock, the secretary of a corporation acts in a

purely ministerial capacity.618 In another case, the Supreme Court
ruled that where a stockholder executed a special power of attorney
(“SPA”) in favor of his wife who, pursuant to the SPA, sold the shares
but after the sale, the stockholder died, the corporation cannot refuse
to register the shares in favor of the assignee on the pretext that
upon the death of the stockholder, his shares of stock became the
property of the estate which should be settled and liquidated first
before any distribution could be effected. It is the ministerial duty
of a corporation to register the shares of stock which were assigned
in the name of assignees even if there is a pending action in court
questioning the validity of the assignment.619
362. What is the appropriate legal remedy if the corporation refuses

to register the transfer of shares?
Because it is its ministerial duty to register the transfer of
shares, the corporation, if it refuses without good cause to make
such transfer, may be compelled to do so by mandamus.620
363. Who may file the petition for mandamus to compel the
registration of the transfer?
In Ponce v. Alsons Cement Corporation621 the Supreme Court
ruled that only the transferor may file the petition for mandamus.
The transferee cannot compel the corporate secretary to cause the
registration and issuance of a stock certificate because the transferee
has not acquired standing yet in the books of the corporation and that
the transferee can only file such petition if he has been authorized
by the transferor to cause such transfer.
Subsequently, in Andaya t>. Rural Bank of Cabadbaran,6-
the Supreme Court held that transferees of shares of stock are real
parties in interest having a cause of action for mandamus to compel
the registration of the transfer and the corresponding issuance of
stock certificates.
618Anna Teng v. SEC, ibid.

619Rural Bank of Salinas, Inc. v. Court of Appeals, G.R. No. 96674, June 26,
1992.
62»Anna Teng v. SEC, ibid.
621G.R. No. 139802, December 10, 2002.
622G.R. No. 188769, August 3, 2016.
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The Supreme Court ruled that the reliance of the RTC on

the Ponce case in finding that petitioner had no cause of action for
mandamus against the defendant bank was misplaced. In Ponce,
the issue resolved by the Court was whether the petitioner therein
had a cause of action for mandamus to compel the issuance of
stock certificates, not the registration of the transfer. Ruling in the
negative, the Court said in that case that without any record of the
transfer of shares in the stock and transfer book of the corporation,
there would be no clear basis to compel that corporation to issue a
stock certificate.
In contrast, at the crux of this petition are the registration of
the transfer and the issuance of the corresponding stock certificates.
Requiring petitioner to register the transaction before he could
institute a mandamus suit in supposed abidance by the ruling in
Ponce was a palpable error. It led to an absurd, circuitous situation
in which the petitioner was prevented from causing the registration
of the transfer, ironically because the shares had not been registered.
With the logic resorted to by the RTC, transferees of shares of stock
would never be able to compel the registration of the transfer and
the issuance of new stock certificates in their favor. Transferees of
shares of stock are real parties in interest then having a cause of
action for mandamus to compel the registration of the transfer and
the corresponding issuance of stock certificates.
364. When may a corporation refuse to register the transfer of the

shares in the books of the corporation?
a. If the formalities prescribed by law for the transfer of
shares, which are endorsement of the stock certificate and
delivery to the transferee, are not complied with.
b. If the above-stated formalities have been complied with
but the corresponding taxes for the transfer have not
been paid.
c. If the corporation holds any unpaid claim on the shares.623
(c) Stock transfer agent

vi. Lost or destroyed certificates
365. What is the procedure to be followed by a corporation in issuing
new certificates of stock in lieu of those which have been lost,
stolen, or destroyed?
623Section 62, RCC.
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a. The registered owner of a certificate of stock in a

corporation or such person’s legal representative shall
file with the corporation an affidavit in triplicate,
setting forth, if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number of
shares represented by such certificate, the serial number
of the certificate and the name of the corporation which
issued the same. The owner of such certificate of stock
shall also submit such other information and evidence as
may be deemed necessary; and
b. After verifying the affidavit and other information and
evidence with the books of the corporation, the corporation
shall publish a notice in a newspaper of general circulation
in the place where the corporation has its principal office,
once a week for three consecutive weeks at the expense
of the registered owner of the certificate of stock which
has been lost, stolen or destroyed. The notice shall state
the name of the corporation, the name of the registered
owner, the serial number of the certificate, the number
of shares represented by such certificate, and shall state
that after the expiration of one year from the date of the
last publication, if no contest has been presented to the
corporation regarding the certificate of stock, the right to
make such contest shall be barred and the corporation
shall cancel the lost, destroyed or stolen certificate of stock
in its books. In lieu thereof, the corporation shall issue a
new certificate of stock, unless the registered owner files
a bond or other security as may be required, effective for a
period of one year, for such amount and in such form and
with such sureties as may be satisfactory to the board of
directors, in which case a new certificate may be issued
even before the expiration of the one year period provided
herein. If a contest has been presented to the corporation
or if an action is pending in court regarding the ownership
of the certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock in
lieu thereof shall be suspended until the court renders a
final decision regarding the ownership of the certificate of
stock which has been lost, stolen or destroyed.624
624Section 72, RCC.
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366. What is the remedy available to the corporation in case of

conflicting claims of ownership over the same shares of stock
issued by the corporation?
The corporation may bring an action for interpleader to compel
the conflicting claimants to interplead and litigate their claims
between or among themselves (Rule 62 of the 1997 Rules of Court).
The corporation will basically recognize the claimant who will be
adjudged by the court as the owner of the shares.
367. Juan is the registered owner of 100,000 shares of stock of ABC

Corporation covered by stock certificate no. 143. He claims
to have lost his stock certificate. He filed an affidavit stating
the circumstances surrounding the loss of his certificate. The
affidavit further contains all the information required by the
Corporate Secretary. The Corporation caused the publication
of the notice of loss once a week for three (3) consecutive
weeks in a newspaper of general circulation in the city where
the principal office of the corporation is located. There being no
claimant after the one year publication period, the Corporation
canceled the stock certificate and issued a replacement in
favor of Juan.
Thereafter, Pedro came forward claiming that the stock
certificate was in fact endorsed to him pursuant to a sale transaction
and asked the Corporation to cancel the replacement certificate
issued to Juan.
a. Is the Corporation liable for issuing a replacement

certificate?
No, except in case of fraud, bad faith, or negligence on the part
of the corporation and its officers, no action may be brought against
any corporation which shall have issued certificate of stock in lieu of
those lost, stolen or destroyed pursuant to the procedure laid down
in Section 72 of the RCC.
b. Can the corporation be compelled to cancel the

replacement certificate?
No, because in the books of the corporation, the stock certificate
of Juan as purportedly sold to Pedro had already been canceled and
is no longer outstanding in the books of the corporation. The remedy
of Pedro is to file an action against Juan.
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C. Suppose Juan did not really lose the stock certificate but
had previously endorsed it to Maria. After obtaining the
replacement stock certificate, Juan endorsed it to Anna.
Who has a better right, Maria as endorsee of the
. purportedly lost certificate, or Anna, the endorsee of the
replacement stock certificate?
The endorsee of the replacement certificate has a better right
because the lost certificate of Juan had already been canceled and is
no longer outstanding in the books of the corporation.
368. Is it mandatory on the part of the corporation to shorten the one-

year publication period if the stockholder is willing to furnish
the corporation with a bond to indemnify the corporation for
any loss or liability it may incur as a result of the issuance of
the replacement certificate?
There is nothing in the law that mandates the corporation to
waive the one-year publication period upon offer of a bond by the
stockholder. It is only an option available to the corporation to
protect itself from liability in case it agrees to waive the one-year
period.
vii. Situs of the shares of stock

369. What is the situs of the shares of stock?
The situs of share of stock is deemed to be the State where the

issuing corporation has its domicile which is ordinarily the State
under whose laws it was created, while a certificate of stock may
have a situs at the place where it is located or at the domicile of
the owner, even though the corporation is domiciled elsewhere. (2
Fletcher, pp. 62-63, 95.)
b. Watered stocks
i. Definition
370. What is a watered stock?
A watered stock is a stock issued for a consideration less than
the par or issued price thereof or for a consideration in any form
other than cash, valued in excess of its fair value.626
625Section 61, RCC; 2015 Bar Exam.
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“Water” in the stock represents the difference between the fan

value at the time of the issuance of the stock and the par or issued
value of the said stock.
ii. Liability of directors for watered stocks

iii. Trust fund doctrine for liability for watered
stocks
371. What is the liability of directors or officers relating to the
issuance of watered stocks?
A director or officer of a corporation who: (a) consents to the
issuance of stocks for a consideration less than its par or issued
value; (b) consents to the issuance of stocks for a consideration in
any form other than cash, valued in excess of its fair value; or (c)
having knowledge of the insufficient consideration, does not file
a written objection with the corporate secretary, shall be liable
to the corporation or its creditors, solidarily with the stockholder
concerned for the difference between the value received at the time
of the issuance of the stock and the par or issued value of the same.626
Applying the trust fund doctrine, the aggregated par value of
the shares subscribed, regardless if the consideration is less than its
par or issued value, is treated as equity in trust of the corporation’s
creditors. As such, the subscription for less than the par or issued
value of the shares is violative of the trust fund doctrine.
372. Can treasury shares be sold for a price below par value? If yes,
are they not considered watered shares?
Yes, treasury shares may be sold for a price below par value;
provided that such price is reasonable under the circumstances as
determined by the board of directors.027 They are not watered stocks
because rule against watered stocks only applies to the issuance of
original or primary shares and not disposition of existing shares.
C. Payment of balance of subscription

i. Call by board of directors
ii. Notice requirement

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373. When should the balance of subscription be paid?

The balance of subscription should be paid on the date specified
in the contract of subscription. In the absence of due date in the
contract of subscription, the board of directors may, at any time,
declare due and payable to the corporation unpaid subscriptions and
may collect the same or such percentage thereof, in either case, with
accrued interest, if any, as it may deem necessary.628
The due date for the payment of the balance is either the
stipulated date or in the absence of such stipulation, the call or
demand by the board of directors.
Demand is not necessary to put the subscriber in default if the
due date of payment is specified in the contract of subscription based
on Article 1169 of the Civil Code that demand is not necessary to put
the debtor in default when the law so declares.
374. What are the legal consequences if the balance of the

subscription is not paid on the due date?
Failure to pay the subscription on the due date shall render
the entire balance due and payable and shall make the stockholder
liable for interest at the legal rate on such balance, unless a different
interest rate is provided in the subscription contract. The interest
shall be computed from the date specified, until full payment of the
subscription.
If no payment is made within 30 days from the said date, all
stocks covered by the subscription shall thereupon become delinquent
and shall be subject to sale as hereinafter provided, unless the board
of directors orders otherwise.
The subscriber is also liable to pay interest on the unpaid
subscription.
375. What are the remedies available to the corporation to enforce

the payment of the unpaid subscription?
a. The corporation may declare the shares as delinquent
and subject such delinquent shares to sale;629 or
62flSection 66, RCC.

™Ibid.
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b. It may collect, through court action, the unpaid

subscription.630
376, Does the subscriber have any right as a stockholder despite

the failure to pay the subscription?
The subscriber retains all his rights as a stockholder despite
his failure to pay the balance of the subscription on the date specified
in the contract of subscription or upon call made by the board of
directors (“due date”). He is entitled to such rights until his stocks
become delinquent. Stocks become delinquent only if not paid within
30 days from due date.631 This is consistent with Section 71 of the
RCC which states that holders of subscribed shares not fully paid
which are not delinquent shall have all the rights of a stockholder.
If the stocks are delinquent, the only right available to the
subscriber is the right to dividends which should be exercised in
accordance with law. This means that the cash dividends due on
delinquent stock shall be applied against the unpaid balance on
the subscription plus interest, cost and expenses while the stock
dividends shall be withheld until full payment of the subscription.632
d. Sale of delinquent shares

i. Effect of delinquency
377. What are the effects of delinquency?
No delinquent stock shall be voted for, be entitled to vote, or
be represented at any stockholders’ meeting, nor shall the holder
thereof be entitled to any of the rights of a stockholder except the
right to dividends in accordance with the provisions of the RCC,
until and unless payment is made by the holder of such delinquent
stock for the amount due on the subscription with accrued interest,
and the costs and expenses of advertisement, if any.633
ii. Call by resolution of the board of directors

iii. Notice of sale
iv. Auction sale

631Section 66, RCC.
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378. State the procedure for the sale of delinquent stocks.

a. Subject to the provisions of the subscription contract,
the board of directors may at any time declare due and
payable to the corporation unpaid subscriptions to the
capital stock and may collect the same or such percentage
thereof, in either case with accrued interest, if any, as it
may deem necessary.634
b. Failure to pay on the date specified in the subscription
contract or on the date stated in the call made by the
board shall render the entire balance due and payable and
shall make the stockholder liable for interest at the legal
rate on such balance, unless a different rate of interest is
provided in the subscription contract.635
c. If no payment is made within 30 days from the date
specified in the subscription contract or on the date stated
in the call made by the board, all stocks covered by said
subscription shall thereupon become delinquent.636
d. The board of directors may, by resolution, order the sale
of delinquent stock and shall specifically state the amount
due on each subscription plus all accrued interest, and
the date, time and place of the sale which shall not be less
than 30 days nor more than 60 days from the date the
stocks become delinquent.637
e. Notice of the sale, with a copy of the resolution, shall be
sent to every delinquent stockholder either personally,
by registered mail, or through other means provided in
the bylaws. The same shall be published once a week
for two (2) consecutive weeks in a newspaper of general
circulation in the province or city where the principal
office of the corporation is located.638
f. The delinquent stock shall be sold at a public auction
to such bidder who shall offer to pay the full amount of
the balance on the subscription together with accrued

“Section 66, RCC.
“Section 66, RCC.
“Section 67, RCC.
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interest, costs of advertisement and expenses of sale, for

the smallest number of shares or fraction of a share.639
g- The stock so purchased shall be transferred to such
purchaser in the books of the corporation and a certificate
for such stock shall be issued in the purchaser’s favor.
The remaining shares, if any, shall be credited in favor of
the delinquent stockholder who shall likewise be entitled
to the issuance of a certificate of stock covering such
shares.640
h. Should there be no bidder at the public auction who offers
to pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement,
and expenses of sale, for the smallest number of shares or
fraction of a share, the corporation may bid for the same,
and the total amount due shall be credited as fully paid
in the books of the corporation. Title to all the shares of
stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by
said corporation in accordance with the provisions of the
RCC.641
379. On June 15, 2019, Pedro subscribed to 1 million shares of XYZ

Corporation in the amount of P1,OOO,OOO. He paid P250,000.00
and agreed to pay the balance on June 15,2020 as specified in
the contract of subscription. The contract stipulated that the
balance of the subscription shall earn 12% interest from the
date of the contract until full payment. Pedro failed to pay on
the due date. Despite demands, the balance remained unpaid
after 30 days from June 15,2020.
a. How much is the total amount of unpaid subscription?
It should be P750.000 plus 12% interest as stipulated in the
contract of subscription. Interest at the legal rate may also be
collected on the same amount of P750,000 from the due date until
full payment of the subscription. The first interest is due by reason
of stipulation while the second is by reason of the default of the
subscriber.

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b. How many shares are delinquent? 750,000 or 1,000,000

shares?
The 1,000,000 shares are considered delinquent. Under Section
66 of the RCC, if no payment is made within 30 days from the date
specified in the subscription contract or on the date stated in the
call made by the board, all stocks covered by said subscription shall
thereupon become delinquent.
This is because, under Section 63 of the RCC, no certificate
of stock shall be issued to a subscriber until the full amount of
his subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid. This implicitly sets
forth the doctrine that a subscription contract is one, entire and
indivisible contract. It cannot be divided into portions so that the
stockholder shall not be entitled to a certificate of stock until full
payment of his subscription together with interest, and expenses, if
any, is due. Therefore, the entire delinquent subscription cannot be
voted for or be entitled to vote.642
c. The board of directors adopted the appropriate resolution

to direct the sale of the delinquent shares in a public
auction. Assume that the total unpaid subscription
inclusive of interest, cost and expense is P850,000.00.
Three bidders who are willing to settle P850,000.00
unpaid subscription joined the auction sale. "A" tendered
a bid for 1,000,000 shares. "B" submitted a bid for 850,000
shares, while "C" made a bid for 750,000 shares.
Who among the three will be considered the winning
bidder?
Under Section 67 of the RCC, the delinquent stock shall be

sold at a public auction to such bidder who shall offer to pay the full
amount of the balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share.643
The winning bidder is therefore “C” because he offers to pay
the full amount of the balance of subscription plus interest, cost and
expense for the least number of shares. The sale of delinquent shares
“Delinquent Stocks, Delinquency Sale, Effect of Delinquency, SEC-OGC

Opinion No. 15-10, April 23, 2010.
“Section 67, RCC.
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is not the same as execution or foreclosure sale of teal property

where the winning bidder is the one who offers the highest amount
for the purchase of the property.
d. Does Pedro have any right to the shares after the auction
sale?
Under Section 67 of the RCC, the stock so purchased during the
public auction shall be transferred to such purchaser in the books of
the corporation and a certificate for such stock shall be issued in the
purchaser’s favor. The remaining shares, if any, shall be credited in
favor of the delinquent stockholder who shall likewise be entitled to
the issuance of a certificate of stock covering such shares.644
Therefore, C shall be issued a stock certificate for 750,000
shares corresponding to the stocks he purchased while Pedro will be
issued a stock certificate covering 250,000 shares.
In the event, however, that the auction is successful but there
is only one (1) bidder who offered to pay the full amount for the
entire delinquent stocks, the corporation must issue a certificate of
stock covering the entire subscription and not for only the unpaid
portion of the subscription.
The principle of indivisibility of subscription is absolute as
Section 63 of the RCC speaks of no exception. Thus, partial payment
to a subscription contract shall be deemed forfeited and the whole
subscription shall be declared delinquent.
May the corporation participate in the public auction for

the sale of delinquent shares?
The corporation may bid for the delinquent shares only if there
is no bidder at the public auction who offers to pay the full amount of
the balance on the subscription together with accrued interest, costs
of advertisement, and expenses of sale, for the smallest number of
shares or fraction of a share. After the bid, the total amount due
shall be credited as fully paid in the books of the corporation. Title
to all the shares of stock covered by the subscription shall be vested
in the corporation as treasury shares and may be disposed of by said
corporation in accordance with the provisions of the RCC.646
UiIbid.
M6Ibid.
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I I,. ... ■ .■. • ■ ■.
380. A stockholder in a corporation subscribed to 59.99% of the

total stocks of a corporation, of which 46.12% thereof remained
unpaid. A call for payment was made by the corporation
wherein the said stockholder failed to pay for his subscription
and said subscription was subsequently declared delinquent.
Later on, the same was made the subject of an auction sale,
however, the same ended in failure for lack of a bidder.
a. Is a delinquent stockholder entitled to notices for the
stockholders’ meeting?
Notice need be given only to each stockholder of record entitled
to vote at the meeting, or to those entitled to be present. Section 70
of the RCC is explicit that the moment a stock becomes delinquent,
the holder thereof loses his right to vote, and thus his right to be
represented at any stockholders’ meeting.646
b. In the event that a delinquent subscription, which was

previously a subject of an auction sale with no bidder,
was again put up for sale in another auction sale, can the
corporation enter into an agreement with the bidder to
subject the payment for the said sale to terms of payment,
i.e., to be paid in installment basis?
The payment must be made in full at the time of the sale, and
not subject to terms, or in installment basis. In the sale of delinquent
stocks, the highest bidder is the person who offers to pay or is willing
to pay the full amount of the balance on the subscription together
with accrued interest, costs of advertisement and expenses of sale,
for the smallest number of shares or fraction of a share. The stock
so purchased shall be transferred to such purchaser in the books
of the corporation and a certificate for such stock shall be issued
in his favor. Because a certificate of stock shall be issued in favor
of the successful bidder, with more reason should the payment be
made in full, otherwise, the certificate of stock cannot be issued, as
prescribed by Section 63 of the RCC.647
c. Assuming that the delinquency affects the whole

subscription of the delinquent stockholder, are the
stockholders of the remaining paid-up subscriptions
Ânswered based on RCC; SEC-OGC Opinion No. 27-10, August 27,2010.

MIbid.
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(40.01% of the total stocks), which are not delinquent,

the only ones entitled to vote during the stockholders'
meeting?
Because the corporation’s major stockholder (59.99% of the
total stocks) has been declared delinquent, only 40.01% of the total
stocks, fully paid and not delinquent, are the only stocks entitled to
vote during the stockholders’ meeting, based on Section 70 of the
RCC. Even if the subscriptions are not fully paid, as long as they are
not delinquent, the stockholders thereof are entitled to vote, based
on Section 71 of the RCC.
However, Section 51 of the RCC provides that unless otherwise
provided for in the RCC or in the bylaws, a quorum shall consist of
the stockholders representing a majority of the outstanding capital
stock.
Therefore, it appears that even if 40.01% of the total stocks,
fully paid and not delinquent, are entitled to vote, the corporation
cannot muster a quorum unless the 59.99% of the total stocks are
sold.648
d. Is there a limit to the number of times that unpaid

subscriptions may be auctioned?
Section 67 of the RCC provides for the sale in a public auction
of delinquent shares. Nothing therein provides any limit to the
number of times that unpaid subscriptions may be auctioned. The
RCC allows two (2) remedies for the enforcement of liability for
unpaid subscriptions: 1) to put up delinquent unpaid subscription
for sale under Section 67; and 2) to file an action in court under
Section 69 of the RCC.649
e. Can the corporation sell portions of the delinquent shares

("in small pieces") even while they are not treasury shares
inasmuch as the corporation cannot buy all the remaining
shares of the delinquent stockholder?
Again, because of the principle of the indivisibility of
subscription under Section 63 of the RCC, the subscription cannot
be divided into portions. The SEC has previously opined that:
C4SAnswered based on RCC; Delinquent Stocks, Delinquency Sale, Effect of

Delinquency, SEC-OGC Opinion No. 15-10, April 23, 2010.
™Ibid.
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IV. BUSINESS ORGANIZATION'S 333
“Accordingly, if the stockholder has not paid the full

amount of his subscription, he cannot transfer part of it in
view of the indivisible nature of subscription contract. It
is only upon full payment of the whole subscription that a
stockholder can transfer the same to several transferees.
However, the entire subscription, although not yet fully
paid, may be transferred to a single transferee, who
as a result of the transfer, must assume the impaid
balance. It is necessary, however, to secure the consent
of the corporation since the transfer of subscription right
contemplates a novation of contract which under Article
1293 of the Civil Code of the Philippines, cannot be made
without the consent of the creditor.”650
381. When may the sale of delinquent shares be averted?

The sale may be averted if the delinquent stockholder pays to
the corporation, on or before the date specified for the sale of the
delinquent stock, the balance due on the former’s subscription, plus
accrued interest, costs of advertisement and expenses of sale, or
unless the board of directors otherwise orders.651
382. Under what conditions may the stockholder recover the

delinquent stock if there is an irregularity in the notice of sale
or the sale itself?
No action to recover delinquent stock sold can be sustained
upon the ground of irregularity or defect in the notice of sale, or in
the sale itself of the delinquent stock, unless the party seeking to
maintain such action first pays or tenders to the party holding the
stock the sum for which the same was sold, with interest from the
date of sale at the legal rate. No such action shall be maintained
unless a complaint is filed within six months from the date of sale.652
e. Alienation of shares
383. When is the sale of shares perfected?
Sale of share is perfected not upon the meeting of the minds
by the parties on the cause, consideration and object of the sale but
upon compliance with the formalities prescribed by the RCC.
““/bid.
“2Section 68, RCC.
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In one case, the buyer of the shares had fully paid the purchase
price but the stock certificate was only delivered after close to three
(3) years from the sale. The seller clearly failed to deliver the stock
certificates to the buyer, representing the shares of stock purchased
by the buyer, within a reasonable time from the transaction. This
was a substantial breach of their contract that entitles the buyer the
right to rescind the sale under Article 1191 of the Civil Code. It is
not entirely correct to say that a sale had already been consummated
as the buyer already enjoyed the rights a shareholder can exercise.
The enjoyment of these rights cannot suffice where the law, by its
express terms, requires a specific form to transfer ownership.653
i. Allowable restrictions on the sale of shares

384. May the corporation impose restrictions on the transfer of
shares?
The authority granted to a corporation to regulate the transfer
of its stock does not empower it to restrict the right of a stockholder
to transfer his shares by means of bylaws provisions, but merely
authorizes the adoption of regulations as to the formalities and
procedure to be followed in effecting the transfer.65'*
The corporation may then impose restrictions on the transfer
of shares but subject to the following requisites:
a. Restrictions on the right to transfer shares must appear
in the articles of incorporation, in the bylaws, as well as
in the certificate of stock; otherwise, the same shall not be
binding on any purchaser in good faith.
b. Restrictions shall not be more onerous than granting
the existing stockholders or the corporation the option to
purchase the shares of the transferring stockholder with
such reasonable terms, conditions or period stated.
c. Upon the expiration of the said period, the existing
stockholders or the corporation fails to exercise the option
to purchase, the transferring stockholder may sell their
shares to any third person.666
653Fil-Estate Golf and Development, Inc. Vertex Sales And Trading, Inc.,
G.R. No. 202079, June 10, 2013.
“’Marsh Thomson v. Court of Appeals and the American Chamber of
Commerce of the Philippines, Inc., G.R. No. 116631, October 28, 1998.
C55Section 97, RCC.
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As a rule, a stockholder has an absolute right to transfer, convey,

assign, sell or dispose of his shares. He may freely sell his shares in
a corporation to any party without having to offer the same to the
corporation or to his co-stockholders, unless a right of first refusal
is granted in favor of stockholders and such right is embodied in the
articles of incorporation, bylaws and stock certificate.
Note that third persons being transferees of shares are not
bound by the articles of incorporation and bylaws of a corporation.
As such, they can only be bound by the right of first refusal if
incorporated in the stock certificate.
While these restrictions appear in the chapter on close
corporations, there is no reason not to apply the same to open or
regular corporation.
385. Mr. A is a stockholder/founding member of Rural Bank of Maria

Aurora Incorporated, (RBMAI for brevity). Previously, he was
able to sell shares of stock of RBMAI.
However, at present, Mr. A could not sell his shares
to outsiders since the new manager/majority stockholder
imposed a new policy that the shares should be sold only
to insiders, particularly, to the employees who are also
stockholders of RBMAI. Mr. A is now questioning the new
policy since these employees/stockholders buy at very low
prices while there are third-party buyers willing to buy his
shares at a higher price.
Is the restriction on the transfer of shares to insiders a

valid restriction?
The company policy restricting the transferability of shares is

not valid.
In order to be valid and enforceable, any restriction on the
transfer of shares of stock must be explicitly provided for in the
articles of incorporation and in the certificate of stocks.
Restrictions on the transfer of shares are essentially contractual
in nature between the stockholders and the corporation. Hence, such
restrictions must be embodied in their contract, i.e., the articles of
incorporation.
L
J9JC9B0M
Considering further that shares of stock burdened with

restrictions on transferability may fall into the hands of innocent
purchasers, the SEC, as a matter of policy, also requires that the
restrictions on the transfer of shares must be printed in the stock
certificates.656
386. What are the remedies available to a creditor, who is a

successful bidder in an auction sale of shares of stocks of a
corporation, in the event that the corporate secretary refuses
to issue certificates of stock and record the auction sale in the
stock and transfer book in his favor?
If the corporation wrongfully refuses to issue a certificate of
stock, the following are the remedies available to an assignee or
transferee of shares of stock:
a. file a suit for specific performance of an express or implied
contract;
b. file for an alternative relief by way of damages where
specific performance cannot be granted; and
c. file a petition for mandamus to compel issuance of a
certificate.657
ii. Sale ofpartially paid shares

iii. Sale of a portion of shares not fully paid
387. How may partially paid shares be transferred?
Because partially paid shares are not covered yet by a stock
certificate, and as such, there is no certificate which can be endorsed
and delivered to the transferee as required by Section 62 of the RCC,
the subscriber, as the owner of the shares, may assign his right to
the contract of subscription in favor of the assignee.
The corporation, may, however, refuse the transfer of shares
based on Section 62 of the RCC which provides that the corporation
may refuse the transfer if it holds unpaid claim over the shares. The
term “unpaid claim” means unpaid subscription.668
c56Re: Restrictions on Transferability of Shares, SEC Opinion No. 22-05,

December 12, 2005.
“’Refusal to Issue Certificates of Stock; Remedies of a Successful Bidder in an
Auction Sale of Shares of Stock, SEC-OGC Opinion No. 21-06, March 23, 2006.
“8China Banking Corporation v. Court of Appeals and Valley Golf and Country
Club, Inc., G.R. No. 117604, March 26, 1997.
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iv. Sale of all of shares not fully paid

388. Is the consent of the corporation necessary or required in case
of sale of unpaid shares?
If the subscription is fully paid, the stockholder may sell or
dispose of his shares without having to secure the consent of the
corporation. In fact, the corporation cannot require its consent for
the transfer of the shares. It will be contrary to law and public policy.
To be valid, the restriction on transfer cannot be more onerous
than the option granted to a stockholder to purchase the shares
of a transferring stockholder on reasonable terms and conditions,
or simply, the right of first refusal. Requiring the consent of the
corporation is certainly more onerous than the right of first refusal.
However, if the subscription is not fully paid, the consent of the
corporation is necessary before the subscriber may assign his right
to the contract of subscription. Assignment of shares with unpaid
subscription basically amounts to novation as there will be a change
of debtor from the subscriber to the assignee. The obligation to pay
the balance of the subscription will be assumed by the assignee. To
be valid, novation requires the consent of the creditor which in this
case is the corporation.
V. Sale of fully paid shares

vi. Requisites of a valid transfer
389. What are the requisites for a valid transfer of stocks?
For a valid transfer of stocks, there must be strict compliance
with the mode of transfer prescribed by law. The requirements are:
a. There must be a delivery of the stock certificate;
b. The certificate must be endorsed by the owner or his
attorney-in-fact or other persons legally authorized to
make the transfer; and,
c. No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books
of the corporation showing the names of the parties to
the transaction, the date of the transfer, the number of
the certificate or certificates, and the number of shares
transferred.669
L
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Thus, where an incorporator organized a corporation and

a certain number of shares was issued to a stockholder but the
certificate of stock covering said shares was in the possession of
the incorporator who refused to deliver the same to the heir of the
stockholder after the latter died, the stockholder of record should
be considered the owner of the shares since he did not indorse the
certificate in favor of the incorporator. The allegation that it was
delivered to him by the stockholder because he was the one who paid
for it does not hold.660
The fact that the stock certificates covering the shares registered
in the names of certain persons were found in the possession of
another does not necessarily prove that the latter owned the shares.
A stock certificate is merely a tangible evidence of ownership of
shares of stock. Its presence or absence does not affect the right of
the registered owner to dispose of the shares covered by the stock
certificates.661
390. Is the payment of the capital gains tax on the part of the seller,
assuming there was a gain in the sale, a requirement for the
validity of the sale or assignment or transfer of the shares to
the buyer?
Nonpayment of capital gains tax does not affect the validity
of the transfer as between the seller and the buyer. However, if the
capital gains tax is not paid, the sale or the transfer of the shares
shall not be registered in the books of the corporation by the transfer
agent or secretary of the corporation.602
391. Is the corporation, whose shares of stock are the subject of

a transfer transaction (through sale, assignment, donation, or
any other mode of conveyance), required to be a party to the
sale transaction?
The Corporation whose shares of stock are the subject of a
transfer transaction (through sale, assignment, donation, or any
other mode of conveyance) need not be a party to the transaction,
as may be inferred from the terms of Section 63 of the OCC (now
““Razon v. Intermediate Appellate Court, G.R. No. 74306, March 16,1992.

““‘Republic v. Estate of Hans Menzi, G.R. No. 152578, November 23, 2005.
“““Transfer of Shares; Documentary Requirements, SEC-OGC Opinion No. 06-
07, April 19, 2007.
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62 of the RCC). However, to bind the corporation as well as third

parties, it is necessary that the transfer is recorded in the books of
the corporation.663
vii. Involuntary dealings

392. Are transactions where the shares of stock are subjected to
security interest or encumbrance required to be recorded
in the books of the corporation in order to make the transfer
effective as against the corporation and third persons?
Only the transfer of shares resulting in a change of ownership
is required to be registered in the books of the corporation. These
include sale, donation or succession. Encumbrances, like security
interest on shares, are not required to be registered to bind the
corporation and third persons. They are binding and enforceable
against third persons if they are registered with the appropriate
registration registry under R.A. No. 11057, otherwise known as the
Personal Property Security Act.
f. Corporate books and records

393. What are the revisions under the RCC on corporate records
and stockholders' right of inspection?
a. It required all information about the corporation to be
preserved, and expanded the list of records required to be
kept by the corporation at its principal office.
b. Inspecting/reproducing party is bound by confidentiality
rules. However, a person who is not a stockholder or
member of record, a competitor, or who represents the
interests of a competitor is prohibited to inspect/reproduce
corporate records.
c. A stockholder who shall abuse the right to inspect/
reproduce shall be penalized under the provisions of the
following laws: (a) RCC, (b) Intellectual Property Code of
the Philippines; and (c) Data Privacy Act of 2012.
d. The SEC may require the presence of an independent
transfer agent in case the stock transfer corporation
transfers or trades stocks in secondary markets.
“’Forest Hills Golf & Country Club v. Vertex Sales and Trading, Inc., G.R. No.
202205, March 6, 2013.
1
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e. It expanded the remedies available to a stockholder

exercising his right of inspection in that if the corporation
denies or does not act on a demand for inspection and/
or reproduction, the aggrieved party may report such
denial or inaction to the SEC. Within five (5) days from
receipt of such a report, the SEC shall conduct a summary
investigation and issue an order directing the inspection
or reproduction of the requested records.
i. Records to be kept at principal office

394. What are the records that corporations are required to keep
and preserve at its principal office?
Every corporation shall keep and carefully preserve at its
principal office all information relating to the corporation including,
but not limited to:
a. The articles of incorporation and bylaws of the corporation
and all their amendments;
b. The current ownership structure and voting rights of the
corporation, including lists of stockholders or members,
group structures, intra-group relations, ownership data,
and beneficial ownership;
c. The names and addresses of all the members of the board
of directors or trustees and the executive officers;
d. A record of all business transactions;
e. A record of the resolutions of the board of directors or
trustees and of the stockholders or members;
f. Copies of the latest reportorial requirements submitted to
the SEC;
g- The minutes of all meetings of stockholders or members,
or of the board of directors or trustees. Such minutes shall
set forth in detail, among others: the time and place of
the meeting held, how it was authorized, the notice given,
the agenda therefor, whether the meeting was regular
or special, its object if special, those present and absent,
and every act done or ordered done at the meeting.
Upon the demand of a director, trustee, stockholder or
member, the time when any director, trustee, stockholder
or member entered or left the meeting must be noted in
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the minutes; and on a similar demand, the yeas and nays

must he taken on any motion or proposition, and a record
thereof carefully made. The protest of a director, trustee,
stockholder or member on any action or proposed action
must be recorded in full upon their demand;664
h. Book of accounts, original and duplicate originals of
invoices and receipts for goods and services purchased;665
and
i. Records as may be required under other applicable laws.
Stock corporations must also keep a stock and transfer book,
which shall contain a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and
unpaid on all stocks for which subscription has been made, and the
date of payment of any installment; a statement of every alienation,
sale or transfer of stock made, the date thereof, by and to whom
made; and such other entries as the bylaws may prescribe.666
ii. Right to inspect corporate records1"
II. Dissolution and liquidation

a. Modes of dissolution
395. What is dissolution?
Dissolution is the extinguishment or cancellation of the
corporate franchise and the termination of its corporate existence
for business purposes.
396. What is the consequence of dissolution?

A corporation that has already been dissolved, be it voluntarily
or involuntarily, retains no juridical personality to conduct its
business save for those directed towards corporate liquidation. In
other words, the corporation ceases to be a body corporate for the
purpose of continuing the business for which it was organized. But
it shall, nevertheless, be continued as a body corporate for three (3)
years after the time when it would have been so dissolved, for the

““Section 237, Tax Code, as amended by TRAIN Law.
“’Please see discussion on right of inspection, supra.
I
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purpose of prosecuting and defending suits by or against it and of

enabling it gradually to settle and close its affairs, to dispose of and
convey its property and to divide its assets.668
Thus, a real estate mortgage executed by a corporation after
its dissolution is void. The redemption of the mortgaged property is
likewise void for being inconsistent with liquidation. A real estate
mortgage is not part of the liquidation powers that could have been
extended to the corporation. It could not have been for the purpose
of prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and convey its property and
to distribute its assets.
Consequently, any redemption exercised by the Corporation
pursuant to this void real estate mortgage is likewise void, and could
not be given any effect. If a real estate mortgage agreement was
entered prior to its dissolution, then the redemption of the subject
property, even if already after its dissolution (as long as it would not
exceed three [3] years thereafter), would still be valid because of the
liquidation/winding up powers accorded by the Corporation Code.669
A corporation whose term has expired and, ipso facto, dissolved
can no longer exercise an option to lease a property because the same
is tantamount to the continuation of the business.670
397. Barn filed an action to enjoin SN Company's board of

directors from selling a parcel of land registered in the
corporation's name, to compel the corporation to recognize
Barn as a stockholder with 50 shares, to allow him to inspect
the corporate books, and to claim damages against the
corporation and its officers. Subsequently, the corporation
and the individual defendants moved to dismiss the complaint
since the corporation’s certificate of registration was revoked
by the SEC during the pendency of Barn's case on the ground
of noncompliance with reportorial requirements. The special
commercial court granted the motion and reasoned that only
action for liquidation of assets can be maintained when a
corporation has been dissolved and Barn cannot seek reliefs
“““Philippine National Bank v. Court of First Instance of Rizal, et al., G.R. No.
63201, May 27, 1992.
“““Dr. Gil J. Rich v. Guillermo Paloma III, G.R. No. 210538, March 7, 2018.
“’“Philippine National Bank v. Court of First Instance of Rizal, et al., G.R. No.
63201, May 27, 1992.
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which in effect lead to the continuation of the corporation's

business. The court also ruled that it lost jurisdiction over
the intra-corporate controversy upon the dissolution of the
corporation.
a. Was the court correct?

The court is not correct. An action to be recognized as a
stockholder and to inspect corporate documents is an intra-corporate
dispute which does not constitute a continuation of the business. The
dissolution of the corporation simply prohibits it from continuing its
business. Moreover, under Section 145 of the OCC (now Section 184
of the RCC), no right or remedy in favor of or against any corporation,
its stockholders, members, directors and officers shall be removed or
impaired by the subsequent dissolution of the corporation.
The dissolution does not automatically convert the parties
into strangers or change their intra-corporate relationship. Neither
does it terminate existing causes of action which arose because
of the corporate ties of the parties. The cause of action involving
an intra-corporate controversy remains and must be filed as an
intra-corporate dispute despite the subsequent dissolution of the
corporation.671
The foregoing bar exam question is based on the case of Aguirre
v. FQB +7, Inc.672 In that case, the Supreme Court said that the
complaint does not show any intention to continue the corporate
business of FQB+7. It does not seek to enter into contracts, issue
new stocks, acquire properties, execute business transactions, etc.
Its aim is not to continue the corporate business, but to determine
and vindicate an alleged stockholder’s right to the return of his
stockholdings and to participate in the election of directors, and a
corporation’s right to remove usurpers and strangers from its affairs.
Neither are these issues mooted by the dissolution of the corporation.
A corporation’s board of directors is not rendered functus officio by
its dissolution. Since Section 122 of the OCC (now Section 139 of
the RCC) allows a corporation to continue its existence for a limited
purpose, necessarily there must be a board that will continue acting
for and on behalf of the dissolved corporation for that purpose. Thus,
the determination of which group is the bona fide or rightful board
of the dissolved corporation will still provide practical relief to the
67lAguirre v. FQB +7, Inc., G.R. No. 170770, January 9, 2013.

™Ibid.
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parties involved. The same is true with regard to the shareholdings

in the dissolved corporation. A party’s stockholdings in a corporation,
whether existing or dissolved, is a property right which he may
vindicate against another party who has deprived him thereof. The
corporation’s dissolution does not extinguish such property right.
b. Four (4) years later, SN Company files an action against

Barn to recover corporate assets allegedly held by the
latter for liquidation. Will this action prosper?673
The action cannot prosper because the corporation has no more
legal capacity to sue after three (3) years from its dissolution.674
It would have been different if the complaint was filed during
the three-year liquidation period for in such case, the action may be
continued even thereafter.
398. What are the methods of dissolution?

Dissolution may be voluntary or involuntary. It is voluntary if
the dissolution is initiated by the corporation and it is involuntary,
if it is against the will of the corporation or initiated by an aggrieved
party or the SEC.
i. Voluntary dissolution
399. What are the voluntary modes of dissolution?
The voluntary modes of dissolution are:
a. Verified request for dissolution which does not prejudice
the rights of creditors having a claim against it;
b. Petition for dissolution where creditors are affected;
c. Shortening of the corporate term;
d. Merger or consolidation; and
e. Affidavit of dissolution by a corporation sole.
6732015 Bar Exam.

674AJabang Development Corporation v. Alabang Hills Village Association,
G.R. No. 187456, June 2, 2014.
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(a) Where no creditors are affected

400. State the procedure for the dissolution of a corporation where
creditors are not affected.675
The procedure is as follows:
a. The dissolution must be effected by a majority vote of the
board of directors or trustees, and by a resolution adopted
by the affirmative vote of the stockholders owning at least
majority of the outstanding capital stock or majority of
the members for a nonstock corporation in a meeting to
be held upon the call of the directors or trustees.
b. At least 20 days prior to the meeting, notice shall be given
to each shareholder or member of record personally, by
registered mail, or by any means authorized under its
bylaws, whether or not entitled to vote at the meeting, in
the manner provided in Section 50 of the RCC and shall
state that the purpose of the meeting is to vote on the
dissolution of the corporation.
c. Notice of the time, place, and object of the meeting shall
be published once prior to the date of the meeting in a
newspaper published in the place where the principal
office of said corporation is located, or if no newspaper
is published in such place, in a newspaper of general
circulation in the Philippines.
d. A verified request for dissolution shall be filed with the
SEC stating: (a) the reason for the dissolution; (b) the
form, manner, and time when the notices were given; (c)
names of the stockholders and directors or members and
trustees who approved the dissolution; (d) the date, place,
and time of the meeting in which the vote was made; and
(e) details of publication.
e. The corporation shall submit the following to the SEC:
(1) a copy of the resolution authorizing the dissolution,
certified by a majority of the board of directors or trustees
and countersigned by the secretary of the corporation; (2)
proof of publication; and (3) favorable recommendation
from the appropriate regulatory agency, when necessary.
6,62012 Bar Exam.
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f. The application for dissolution of banks, banking and

quasi-banking institutions, pre-need, insurance and
trust companies, NSSLAs, pawnshops, and other
financial intermediaries should be accompanied by a
favorable recommendation of the appropriate regulatory
government agency.
g- Within 15 days from receipt of the verified request for
dissolution, and in the absence of any withdrawal within
said period, the SEC shall approve the request and issue
the certificate of dissolution. The dissolution shall take
effect only upon the issuance by the SEC of a certificate of
dissolution.676
401. What do you mean by a request for dissolution where no

creditors are affected?
This covers a situation where the corporation has no creditors
or with creditors but without conflicting claims and the corporate
assets are enough to satisfy the claims.
(b) Where creditors are affected

402. State the procedure for voluntary dissolution where creditors
are affected.
a. The dissolution should be adopted by at least majority of
the board of directors or trustees677 and resolved upon by
the affirmative vote of the stockholders representing at
least two thirds (2/3) of the outstanding capital stock or at
least two thirds (2/3) of the members at a meeting called
for the purpose.
b. The verified petition for dissolution should be signed by a
majority of the corporation’s board of directors or trustees,
verified by its president or secretary or one of its directors
or trustees, and shall set forth all claims and demands
against it, and that its dissolution was resolved upon

677Even though the RCC does not expressly state that board approval is
needed, this is implied from the requirement that the petition should be signed by at
least majority of the board.
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by the affirmative vote of the stockholders representing

at least two-thirds (2/3) of the outstanding capital stock
or at least two-thirds (2/3) of the members at a meeting
of its stockholders or members called for that purpose.
The petition shall likewise state: (a) the reason for the
dissolution; (b) the form, manner, and time when the
notices were given; and (c) the date, place, and time of the
meeting in which the vote was made.
c. The petition should be filed with the SEC. The corporation
shall likewise submit to the SEC the following: (1) a copy
of the resolution authorizing the dissolution, certified
by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation; and (2)
a list of all its creditors.
d. If the petition is sufficient in form and substance, the SEC
shall, by an order reciting the purpose of the petition, fix
a deadline for filing objections to the petition which date
shall not be less than 30 days nor more than 60 days after
the entry of the order. Before such date, a copy of the
order shall be published at least once a week for three
consecutive weeks in a newspaper of general circulation
published in the municipality or city where the principal
office of the corporation is situated, or if there be no such
newspaper, then in a newspaper of general circulation
in the Philippines, and a similar copy shall be posted for
three consecutive weeks in three public places in such
municipality or city.
e. Upon five days’ notice, given after the date on which the
right to file objections as fixed in the order has expired, the
SEC shall proceed to hear the petition and try any issue
raised in the objections filed; and if no such objection is
sufficient, and the material allegations of the petition are
true, it shall render judgment dissolving the corporation
and directing such disposition of its assets as justice
requires, and may appoint a receiver to collect such assets
and pay the debts of the corporation.
f. The dissolution shall take effect only upon the issuance
by the SEC of a certificate of dissolution.678
6,8Section 135, RCC.
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403. Distinguish between voluntary dissolution where creditors are

not affected and creditors are affected.
The distinctions are as follows:
a. Where creditors are not affected, the dissolution should be
adopted by at least majority of the board of directors or
trustees and approved by the stockholders representing at
least majority of the outstanding capital stock or majority
of the members in nonstock corporation in a meeting to be
called by the board of directors or trustees.
Where creditors are affected, the dissolution should
be adopted by at least majority of the board of directors
and approved by the stockholders representing at least
2/3 of outstanding capital or 2/3 of the members in a
meeting called for the purpose.
b. Where creditors are not affected, verified request for
dissolution is filed with the SEC stating: (a) the reason
for the dissolution; (b) the form, manner, and time when
the notices were given; (c) names of the stockholders and
directors or members and trustees who approved the
dissolution; (d) the date, place, and time of the meeting in
which the vote was made; and (e) details of publication.
Where creditors are affected, a verified petition for
dissolution is filed with the SEC. The petition should be
signed by a majority of the corporation’s board of directors
or trustees, verified by its president or secretary or one of
its directors or trustees, and shall set forth all claims and
demands against it.
c. Where creditors are not affected, what is given to the
stockholders or members is written notice of the meeting.
Notice is given at least 20 days prior to the meeting and
should be published once prior to the date of the meeting
in a newspaper published in the place where the principal
office of said corporation is located, or if no newspaper
is published in such place, in a newspaper of general
circulation in the Philippines.
Where creditors are affected, what is published is a
copy of the order setting the date and time of the hearing
on the petition. It shall be published at least once a week
for three consecutive weeks in a newspaper of general
circulation published in the municipality or city where the
principal office of the corporation is situated, or if there
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IV. BUSINESS ORGANIZATIONS 6-19
be no such newspaper, then in a newspaper of general

circulation in the Philippines, and a similar copy shall be
posted for three consecutive weeks in three public places
in such municipality or city.
d. Where creditors are not affected, the SEC should approve
the request for dissolution within 15 days from receipt of
the verified request for dissolution, and in the absence of
any withdrawal within said period, the SEC shall approve
the request and issue the certificate of dissolution.
Where creditors are affected, the SEC shall render
judgment dissolving the corporation only after hearing
on the petition and determination that the material
allegations in the petition are true.
(c) By shortening of corporate term

404. What is the procedure for the dissolution of the corporation
through the shortening of corporate term?
a. The articles of incorporation should be amended to
shorten the corporate term.679
b. The amendment should be approved by at least the
majority vote of the board of directors or trustees, and
ratified at a meeting by the stockholders or members
capital stock or of its members in a meeting duly called
for the purpose.680
c. A copy of the amended articles of incorporation shall be
submitted to the SEC in accordance with the RCC.
d. Upon the expiration of the shortened term, as stated
in the approved amended articles of incorporation, the
corporation shall be deemed dissolved without any
further proceedings, subject to the provisions of the RCC
on liquidation.681
e. In the case of expiration of corporate term, dissolution
shall automatically take effect on the day following the

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last day of the corporate term stated in the articles of

incorporation, without the need for the issuance by the
SEC of a certificate of dissolution.682
When the shortening of the corporate term has
the effect of immediate dissolution, it is submitted that
there should be publication similar to a request for
dissolution where creditors are not affected. If creditors
will be affected, the rules similar to petition for voluntary
dissolution should be followed.
405. Is there any distinction between expiration of the original term

and expiration of the shortened term as a ground to dissolve
the corporation?
Expiration of the shortened term ipso facto results in the
automatic dissolution of the corporation. This is clear under
Section 136 of the RCC which provides that upon the expiration of
the shortened term, as stated in the approved amended articles of
incorporation, the corporation shall be deemed dissolved without
any further proceedings, subject to the provisions of the RCC on
liquidation. In the case of expiration of corporate term, dissolution
shall automatically take effect on the day following the last day of
the corporate term stated in the articles of incorporation, without
the need for the issuance by the SEC of a certificate of dissolution.683
The expiration of term should be without prejudice to the
remedy available to the corporation to apply for a revival of its
corporate existence.684 Since the law does not prescribe the period
to file it, the application may be filed prior to the liquidation of the
corporation.
It is submitted that the Supreme Court decision in Philippine
National Bank v. The Court of First Instance of Rizal, Pasig, et
al.™ that upon the expiration of the period fixed in the articles of
incorporation, the corporation ceases to exist and is dissolved ipso
facto and there is no need for the institution of a proceeding for
quo warranto to determine the time or date of the dissolution of a
corporation should now be construed to refer to corporations that
shortened their corporate term to dissolve the corporation.

“Section 11, RCC
68SG.R. No. 63201, May 27,1992.
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(d) Withdrawal of dissolution

406. Discuss the right of incorporator, director, trustee, shareholder
or member to withdraw the request for dissolution of the
corporation in cases where creditors are not affected.
The request for dissolution should be verified by any
incorporator, director, trustee, shareholder, or member but should
be signed by the same number of incorporators, directors, trustees,
shareholders, or members necessary to request for dissolution.686 This
means that the request should be signed by at least a majority of the
board of directors or trustees and by the stockholders representing
at least a majority of the outstanding capital stock or majority of the
members in nonstock corporation.687
The withdrawal should be submitted no later than 15 days
from receipt by the SEC of the request for dissolution. Upon receipt
of a withdrawal of request for dissolution, the SEC shall withhold
action on the request for dissolution and shall, after investigation:
(a) make a pronouncement that the request for dissolution is deemed
withdrawn; (b) direct a joint meeting of the board of directors or
trustees and the stockholders or members for the purpose of
ascertaining whether to proceed with dissolution; or (c) issue such
other orders as it may deem appropriate.688
407. May a petition for dissolution, where creditors are affected, be

withdrawn?
Yes, a withdrawal of the petition for dissolution shall be in the
form of a motion and similar in substance to a withdrawal of request
for dissolution but shall be verified and filed prior to pubheation of
the order setting the deadline for filing objections to the petition.659

“’Section 137, RCC. It is not clear under the RCC who will sign the motion to
Kithdraw the petition for dissolution. But since the withdrawal should be signed by
the same required number of directors or trustees and stockholders or members who
made the request for dissolution, then, for consistency, the withdrawal of the petition
for dissolution should likewise be signed by the same required number of directors
or trustees and stockholders or members for filing the petition, that is, majority of
directors or trustees and stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of nonstock corporation.
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ii. Involuntary dissolution

408. What are the grounds for the involuntary dissolution of the
corporation?
A corporation may be dissolved by the SEC motu proprio or
upon filing of a verified complaint by any interested party. The
following may be grounds for dissolution of the corporation:
a. Non-use of the corporate charter as provided under Section
21 of the RCC.
Under Section 21 of the RCC, if a corporation does not formally
organize and commence its business within five (5) years from the
date of its incorporation, its certificate of incorporation shall be
deemed revoked as of the day following the end of the five-year
period.
b. Continuous in operation of a corporation as provided
under Section 21 of the RCC.
Under Section 21 of the RCC, if a corporation does not formally
organize and commence its business within five (5) years from the
date of its incorporation, its certificate of incorporation shall be
deemed revoked as of the day following the end of the five-year
period.
However, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least five (5)
consecutive years, the SEC may, after due notice and hearing, place
the corporation under delinquent status.
A delinquent corporation shall have a period of two (2) years to
resume operations and comply with all requirements that the SEC
shall prescribe. Upon compliance by the corporation, the SEC shall
issue an order lifting the delinquent status. Failure to comply with
the requirements and resume operations within the period given by
the SEC shall cause the revocation of the corporation’s certificate of
incorporation.
The grounds under (a) and (b) will lead to the dissolution of
the corporation unless the corporation files a petition to set aside its
delinquency status and the SEC grants it.
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C. Upon receipt of a lawful court order dissolving the

corporation.
This may involve or arise from a quo warranto proceeding
involving a de facto corporation690 or a liquidation proceeding
involving an insolvent debtor under R.A. No. 10142, otherwise
known as the Financial Rehabilitation and Insolvency Act (FRIA).
One of the effects of a liquidation order under FRIA is to dissolve the
corporation.891
d. Upon finding by final judgment that the corporation
procured its incorporation through fraud.
This may happen when the corporation misrepresented its
purpose of incorporation and/or the incorporators use fictitious
names.
e. Upon finding by final judgment that the corporation:
i. Was created for the purpose of committing,
concealing or aiding the SEC of securities violations,
smuggling, tax evasion, money laundering, or graft
and corrupt practices;
ii. Committed or aided in the commission of securities
violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices, and its
stockholders knew of the same; and
iii. Repeatedly and knowingly tolerated the commission
of graft and corrupt practices or other fraudulent
or illegal acts by its directors, trustees, officers, or
employees.
If the corporation is ordered dissolved by final judgment
pursuant to the grounds set forth in subparagraph (e) hereof, its
assets, after payment of its liabilities, shall, upon petition of the
SEC with the appropriate court, be forfeited in favor of the national
government. Such forfeiture shall be without prejudice to the rights
of innocent stockholders and employees for services rendered, and
to the application of other penalties or sanctions under the RCC or
other laws.
690Section 19, RCC.

691Section 113, R.A. No. 10142.
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The SEC shall give reasonable notice to, and coordinate with,
the appropriate regulatory agency prior to the involuntary dissolution
of companies under their special regulatory jurisdiction.692
Note that it is only on the grounds specified in paragraph (e)
that the SEC may file a petition with the appropriate court that the
assets be forfeited in favor of the national government but without
prejudice to the rights of innocent stockholders and employees for
services rendered.
Note further that while the three (3) grounds provided in
paragraph (e) refer to commission of graft and corrupt practices,
fraudulent or other illegal acts, these are distinct from one another.
Under the first ground, the corporation was organized for the purpose
of creating, concealing or aiding in the commission of the specified
illegal acts. Obviously, in this case, there was misrepresentation too
as to the purposes of the corporation because the SEC will not approve
the incorporation if the articles of incorporation, on its face, indicates
as the corporation’s purposes the commission of illegal acts. Under the
second ground, the corporation is lawfully organized and conducting
business but it committed or aided in the commission of the same
specified illegal acts and its stockholders knew about them. Under
the third ground, the corporation is created for lawful purposes and
legally conducting business but it repeatedly and knowingly tolerated
the commission of graft and corrupt practices or other fraudulent or
illegal acts by its directors, trustees, officers, or employees.
409. Are there other grounds to dissolve the corporation upon order
of the SEC?
The SEC may also suspend or revoke, after proper notice and
hearing, the certificate of registration of private corporations upon
any of the following grounds:
a. Fraud in procuring its certificate of incorporation.
b. Serious misrepresentation as to what the corporation can
do or is doing to the great prejudice of or damage to the
general public.
c. Refusal to comply or defiance of any lawful order of the
SEC restraining commission of acts which amount to a
grave violation of its franchise.
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d. Failure to file bylaws.693

e. Failure to file required reports in appropriate forms as
determined by the SEC within the prescribed period.69*
The above-stated grounds under P.D. No. 902-A were
reinforced by Section 158 of the RCC which provides that, if, after
due notice and hearing, the SEC finds that any provision of the
RCC, rules or regulations, or any of its orders has been violated, the
SEC may impose any or all of the following sanctions, taking into
consideration the extent of participation, nature, effects, frequency,
and seriousness of the violation:
(P5,000.00) to Two Million Pesos (P2,000,000.00), and
Million Pesos (P2,000,000.00); and
b. Issuance of a permanent cease and desist order.
The SEC may also order the dissolution of a close corporation
when there is a deadlock in the management of its affairs695 or
upon petition of a stockholder whenever any acts of the directors,
officers, or those in control of the corporation is illegal, fraudulent,
dishonest, oppressive or unfairly prejudicial to the corporation or
any stockholder, or whenever corporate assets are being misapplied
or wasted.696
b. Methods of liquidation
410. What is liquidation?
Liquidation is the process of settling the affairs of the
corporation after its dissolution. This consists of: (1) collection of
693As previously explained, the RCC removed the one-month period to submit
the bylaws and therefore, non-submission of the bylaws within such period does not
appear to be a ground to suspend or revoke the certificate of registration. In actuality,
one of the SEC-prescribed documentary requirements for incorporation is the bylaws
of the corporation. Submission after incorporation is, therefore, merely theoretical for
private corporation. For corporations governed by special law and which are required
to submit bylaws, or if for whatever reason, the SEC approves the incorporation of
a private corporation sans the bylaws, it will be the refusal or failure to submit the
bylaws, despite SEC order, which will serve as a ground to suspend or revoke the
corporate franchise.
691P.D. No. 902-A, Section 6(i).
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all that is due the corporation, (2) the settlement and adjustment
of claims against it, and (3) the payment of its debts and (4) the
distribution of the remaining assets, if any among the stockholders
thereof in accordance with their contracts, or if there be no special
contract, on the basis of their respective interests. The manner
of liquidation or winding up may be provided for in the corporate
bylaws and this would prevail unless it is inconsistent with law.
The finds basis under Section 122 of the OCC (now Section 139
of the RCC), which empowers every corporation whose corporate
existence has been legally terminated to continue as a body
corporate for three (3) years after the time when it would have been
dissolved. This continued existence would only be for the purposes of
“prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and convey its property and
to distribute its assets.”697
411. Do liquidation and winding up of corporate affairs automatically

follow after dissolution?
Generally, liquidation is the necessary consequence of
dissolution. However, winding up is the sole activity of a dissolved
corporation that does not intend to incorporate anew. If it does,
however, it is not unlawful for the old board of directors to negotiate
and transfer the assets of the dissolved corporation to the new
corporation intended to be created as long as the stockholders have
given their consent.698
i. By the corporation itself

ii. Conveyance to a trustee within a three-year
period
Hi. By management committee or rehabilitation
receiver
412. What are the methods of liquidation?
There are four (4) methods of liquidation, namely: a) by the
corporation itself; b) by the trustee duly appointed by the corporation;
c) by the receiver that the SEC may appoint upon judgment
dissolving the corporation after hearing the corporation’s petition
for voluntary dissolution; and, d) by the rehabilitation receiver or
697Dr. Gil J. Rich v. Guillermo Paloma III, G.R. No. 210538, March 7, 2018.
698Chung Ka Bio v. Intermediate Appellate Court, G.R. No. 71837, July 26,
1988.
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Equidator appointed by the court after judgment on a petition for

Equidation involving an insolvent debtor
a. By the corporation itself

Under Section 139 of the RCC, the corporation is granted a
period of three (3) years after dissolution, whether voluntary or
involuntary, to wind up it affairs. Ideally, the winding-up process
should be completed in three (3) years. Otherwise, it should appoint
a trustee to carry out the liquidation even beyond three (3) years.
But, in the absence of an appointed trustee, the board of directors
shall be deemed the trustees of the corporation.
b. By the trustee appointed by the corporation
Under Section 139 of the RCC, at any time during said
three-year liquidation period, the corporation is authorized and
empowered to convey all of its property to a trustee for the benefit
of stockholders, members, creditors and other persons in interest.
After any such conveyance by the corporation of its property in trust
for the benefit of its stockholders, members, creditors and others
in interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustee, and the beneficial
interest in the stockholders, members, creditors or other persons-in-
interest.
The trustee is not bound by the three-year period. What
is important is the completion of the liquidation process so that
creditors will be paid and the residual assets are distributed to the
stockholders.
c. By the Receiver appointed by the SEC
Under Section 135 of the RCC, the SEC shall proceed to hear
the petition (filed by a corporation where creditors are affected) and
try any issue raised in the objections filed; and if no such objection
is sufficient, and the material allegations of the petition are true,
it shall render judgment dissolving the corporation and directing
such disposition of its assets as justice requires, and may appoint a
receiver to collect such assets and pay the debts of the corporation.
The receiver represents the SEC, as well as the stockholders
and creditors. The receiver is not bound by the three-year Equidation
period.699
699Pepsi Cola Products Philippines Court of Appeals, G.R. No. 145855,

November 24, 2004.
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The appointment of a receiver operates to suspend the

authority of a corporation and its directors and officers over its
property and effects, such authority being reposed in the receiver.
Thus, a corporate officer had no authority to condone a debt.700
In Bank of the Philippine Islands v. Eduardo Hong,101 the
Supreme Court held, however, that while the SEC has jurisdiction
to order the dissolution of a corporation, jurisdiction over the
liquidation of the corporation now pertains to the appropriate
regional trial courts. This is the correct procedure because the
liquidation of a corporation requires the settlement of claims for and
against the corporation, which clearly falls under the jurisdiction of
the regular courts. The trial court is in the best position to convene
all the creditors of the corporation, ascertain their claims, and
determine their preferences.
It should be noted that the power of the SEC to appoint a
receiver existed even under the OCC and retained under the RCC
despite the ruling in Bank of the Philippine Islands v. Eduardo Hong.
It is submitted that the receiver may carry out the liquidation of the
corporation if the creditors and the corporation are able to agree
among themselves on how the creditors’ claims shall be satisfied.
Otherwise, the RTC should carry out the liquidation process.
d. By the rehabilitation receiver or the liquidator appointed
by the competent RTC in cases involving insolvent debtor
under FRIA
The receiver who may be appointed by the SEC is different from
the rehabilitation receiver that the competent Regional Trial Court
may appoint in cases involving the rehabilitation of an insolvent
debtor under FRIA.
In cases falling under FRIA, the liquidation of the debtor
will be carried out by the rehabilitation receiver or the liquidator
appointed by the court.
Under Section 25 of the FRIA, the rehabilitation court may
convert a petition for rehabilitation to liquidation if there is no
showing that the debtor may be rehabilitated. In which case, the
rehabilitation receiver may perform the functions of the liquidator.
’“Victor Yam & Yek Sun Lent, doing business under the name and style of
Philippine Printing Works v. Court of Appeals and Manphil Investment Corporation,
G.R. No. 104726, February 11, 1999.
701G.R. No. 161771, February 15, 2012.
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The insolvent debtor may also file a petition for voluntary

liquidation or be the subject of a petition for involuntary liquidation
by his creditors. In either case, if the petition is sufficient in form
and substance, the rehabilitation court shall issue the Order of
Liquidation. Such order has the effect of dissolving the corporation
and title to the properties of the debtor shall be transferred to
the Liquidator who will then carry out the liquidation of the
corporation.702
413. How are the assets of the corporation distributed during the
liquidation process?
The assets of the corporation shall be used to pay off the claims
of various creditors based on the law on concurrence and preference
of credit. The residual assets shall then be distributed to the holders
of the preferred shares of stock, if any, then to the holders of common
shares based on their agreement, if any, otherwise, in proportion to
their respective shareholdings in the corporation.
Note that SEC approval is not required in the approval of the
distribution or liquidation of the assets of the dissolved corporation.
This falls within the authority of the directors and stockholders or
the duly appointed trustee or receiver.
Any asset distributable to the creditor or stockholder or
member who is unknown or cannot be found shall be escheated in
favor of the national government.703
414. Within what period should the liquidation of the corporation be

concluded?
Every corporation whose charter expires pursuant to its
articles of incorporation, is annulled by forfeiture, or whose corporate
existence is terminated in any other manner, shall nevertheless
remain as a body corporate for three (3) years after the effective date
of dissolution, for the purpose of prosecuting and defending suits by
or against it and enabling it to settle and close its affairs, dispose
of and convey its property, and distribute its assets, but not for the
purpose of continuing the business for which it was established.™
I
’“Section 112, FRIA.

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In the absence of a statutory provision to the contrary, pending

actions by or against a corporation are abated upon the expiration
of the three-year period allowed by law for the liquidation of its
affairs.705
Nevertheless, a corporation that has a pending action and
which cannot be terminated within the three-year period after its
dissolution is authorized under Section 139 of the RCC to convey all
its property to a trustee to enable it to prosecute and defend suits by
or against the corporation beyond the three-year period. The trustee
may commence a suit which can proceed to final judgment even
bej’ond the three-year period.
Even if no trustee is formally appointed, the directors of the
dissolved corporation may be permitted to continue as trustees to
complete the liquidation of the corporation.706
iv. Liquidation after three (3) years

415. May a corporation be allowed to dispose of its remaining assets
after three (3) years from the time of its dissolution?
Yes, a corporation may still dispose of its assets despite the
lapse of the three-year period for liquidation of assets provided
under Section 139 of the RCC.
Based on the above provision, there is, as a general rule, no
juridical personality after dissolution. If there is, it is only a juridical
personality to serve but one purpose — liquidation, culminating
in the disposition and distribution of the dissolved corporation’s
remaining assets. As pointed out, any matter entered into that is
not for the purpose of liquidation will be a void transaction because
of the non-existence of the corporate party.
While Section 139 of the RCC gives a dissolved corporation
three (3) years to continue as a body corporate for purposes of
liquidation, the disposition of the remaining undistributed assets
must necessarily continue even after such period. This should not,
however, be construed to prevent a corporation from pursuing
activities which would complete the final liquidation of a dissolved
corporation. Accordingly, it should be allowed to continue liquidating
’“Mambulao Lumber Company v. Philippine National Bank, G.R. No, L-22973,

January 30, 1968.
’“Clemente v. Court of Appeals, G.R. No. 82407, March 27, 1995.
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its remaining assets in order to complete the process of dissolving

the corporation. Likewise, it should be allowed to distribute the
proceeds from the said disposition to its stockholders or creditors
if any. A contrary interpretation would have unjust and absurd
results.
In Clemente v. Court of Appeals, the Supreme Court affirmed
that if the three-year extended life has expired without a trustee or
receiver having been expressly designated by the corporation within
that period, the board of directors (or trustees) itself, following the
rationale of the Supreme Court’s decision in Gelano v. Court of
Appeals, G.R. No. L-39050, February 24, 1981, maybe permitted to
continue as “trustees” by legal impheation to complete the corporate
liquidation. Still, in the absence of a board of directors or trustees,
those having any pecuniary interest in the assets including not
only the shareholders but likewise the creditors of the corporation,
acting for and on its behalf, might make proper representations
with the SEC which has primary and sufficiently broad jurisdiction
in matters of this nature, for working out a final settlement of the
corporate concerns.707
In the Gelano v. Court of Appeals, the word “trustee” as used
in the corporation statute must be understood in its general concept
which could include the counsel to whom was entrusted in the
instant case, the prosecution of the suit filed by the corporation. The
purpose in the transfer of the assets of the corporation to a trustee
upon its dissolution is more for the protection of its creditor and
stockholders.708
416. May the following legal actions involving the corporation be

enforced by or against the corporation beyond the three-year
liquidation period?
a. Action filed during the lifetime of the corporation?
The trustee (of a dissolved corporation) may commence a
suit which can proceed to final judgment even beyond the three-
year period of liquidation. No reason can be conceived why a suit
already commenced by the corporation itself during its existence,
not by a mere trustee who, by fiction, merely continues the legal
7O7See SEC-OGC Opinion No. 31-09, December 9, 2009.

708Carlos Gelano v. Honorable Court of Appeals, et al., G.R. No. L-39050,
February 24, 1981.
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personality of the dissolved corporation, should not be accorded

similar treatment — to proceed to final judgment and execution
thereof. Indeed, the rights of a corporation that has been dissolved
pending litigation are accorded protection by Section 145 of the OCC
(now Section 184 of the RCC) which provides “no right or remedy
in favor of or against any corporation, its stockholders, members,
directors, trustees, or officers, nor any liability incurred by any such
corporation, stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent dissolution
of said corporation.”709
A dissolved corporation may also maintain actions in court for
the protection of its rights including the right to appeal from an
adverse decision.710
b. Action filed during the three-year liquidation period?

Yes, the trustee appointed by the corporation may initiate a
suit during the three-year liquidation period, which may continue
even beyond the said period.711 As pointed out, in Gelano v. Court
of Appeals, it was held that the lawyer handling the case for
the corporation is deemed a trustee with respect to that case. In
Clemente v. Court of Appeals, it was held that in the absence of a
trustee formally appointed, the board of directors shall be deemed
the trustees of the corporation to carry out the liquidation of the
corporation.”
Moreover, it is clear under Section 184 of the RCC that “no right
or remedy in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability incurred
by any such corporation, stockholders, members, directors, trustees,
or officers, shall be removed or impaired either by the subsequent
dissolution of said corporation.”
™Rene Knecht and Knecht, Inc. v. United Cigarette Corp., represented by

Encarnacion Gonzales Wong, and Eduardo Bolima, Sheriff, Regional Trial Court,
Branch 151, Pasig City, G.R. No. 139370, July 4, 2002.
’’“Paramount Insurance Corp. v. A.C. Ordonez Corporation and Franklin
Suspine, G.R. No. 175109, August 6, 2008.
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Action filed more than three (3) years from the dissolution
of the corporation?
As previously expounded, an action filed more than three (3)
years from the dissolution of the corporation should be dismissed
since by that time the corporation lacks the capacity to sue because it
no longer possesses juridical personality by reason of its dissolution.
While there are cases that a corporation may still sue, even
after it has been dissolved and despite the lapse of the three-year
liquidation period, the corporations involved in those cases filed
their respective complaints while they were still in existence. In
other words, they already had pending actions at the time that their
corporate existence was terminated.712
417. Other than dissolution, when else may the assets or property
of the corporation be distributed?
Except by decrease of capital stock and as otherwise allowed by
the RCC, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities.713
III. Other corporations

a. Close corporations
418. What is a close corporation?
Under Section 95 of the RCC, a close corporation is one whose
articles of incorporation provides that:
a. all the corporation’s issued stock of all classes, exclusive
of treasury shares, shall be held of record by not more
than a specified number of persons, not exceeding 20;
b. all the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this
Title; and
c. the corporation shall not list in any stock exchange or
make any public offering of its stocks of any class.
712Alabang Corporation Development v. Alabang Hills Village Association and

Rafael Tinio, G.R. No. 187456, June 2, 2014.
,13Section 139, RCC.
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Notwithstanding the foregoing, a corporation shall not be

deemed a close corporation when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled by another corporation
which is not a close corporation within the meaning of the RCC.714
419. Is the narrow distribution of share ownership the only criterion

in determining the nature of a close corporation?
No, in one case,715 the Supreme Court held that a corporation
does not become a close corporation just because a man and his
wife own 98.86% of its subscribed capital stock; So too, a narrow
distribution of ownership does not, by itself, make a close corporation.
The features of a close corporation under the Corporation Code must
be embodied in the articles of incorporation to make it as one.
420. What corporation cannot be incorporated as a close

corporation?
Any corporation may be organized as a close corporation except
the following:
i. Mining or oil companies;
ii. Stock exchanges;
iii. Banks;
iv. Insurance companies;
v. Public utilities;
vi. Educational Institutions; and
vii.
vn. Corporations declared to be vested with public
interest in accordance with the provisions of the
RCC.716
714Section 95, RCC.

71BSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, G.R.
No. 129459, September 29,1998.
,16Section 95, RCC.
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421. What is the main difference between a close corporation and

other corporations?
The main difference between a close corporation and
other corporations is the identity of stock ownership and active
management, that is, all or most of the stockholders of a close
corporation are active in the corporate business either as directors,
officers or other key men in management. Where business associates
belong to a small, closely-knit group, they usually prefer to keep
the organization exclusive and would not welcome strangers. Since
it is through their efforts and managerial skill that they expect
the business to grow and prosper, it is quite understandable why
they would not trust outsiders to come in and interfere with their
management of the business, and much less share whatever fortune,
big or small, that the business may bring.
i. Characteristics of a close corporation

422. What are the principal characteristics of close corporations?
The principal characteristics of close corporations are the
following:
a. The business of the corporation may be managed by the
stockholders of the corporation rather than by a board of
directors.
Stockholders who are actively involved in the management of
the corporation are liable in the same manner as directors are liable.
They are personally liable for corporate torts unless the corporation
has obtained reasonably adequate liability insurance. An example of
corporate tort is the nonpayment of separation benefits of employees
who were terminated due to authorized cause.717
While Section 97 of the Corporation Code (now Section 96,
RCC) only specifies that “the stockholders of the corporation shall
be subject to all liabilities of directors,” nowhere in that provision
do we find any inference that stockholders of a close corporation are
automatically liable for corporate debts and obligations.
’■’Sergio Naguiat and Clark Field Taxi, Inc. v. NLRC, G.R. No. 116123, March
13,1997.
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It is true that the stockholders who are actively engaged in

the management or operation of the business and affairs of a close
corporation, shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability insurance.
But, as can be read in that provision, several requisites must be
present for its applicability.718
b. If a corporation is classified as a close corporation, a
board resolution authorizing the sale or mortgage of the
corporate property is not necessary to bind the corporation
for the action of its president.719 . ,
c. Quorum may be greater than a mere majority.
d. Transfers of stocks to others which would increase the
number of stockholders to more than the maximum are
invalid.
Corporate actions may be binding even without a formal
board meeting, if the director had knowledge or ratified
the informal action of the others, unless after having
knowledge thereof, the director promptly files his written
objection with the secretary of the corporation.
f. Pre-emptive right extends to all stocks issued, including
re-issuance of treasury shares, whether for money or for
property or personal services, or in payment of corporate
debts, unless the articles of incorporation provide
otherwise.
g- Deadlocks in the board may be settled by the SEC, on
written petition by any stockholder.
h. A stockholder may withdraw for any reason and avail
himself of his right of appraisal when the corporation
has sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock.720
’’“Joselito Hernand M. Bustos v. Millians Shoe, Inc., G.R. No. 185024, April
24, 2017.
71BManuel R. Dulay Enterprises, Inc. Court of Appeals, G.R. No. 91889,
August 27, 1993.
’“Sections 96-104, RCC.
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ii. Validity of restrictions on transfer of shares

423. What are the requisites for a valid restriction on the right to
transfer?
The requisites are:
a. Restrictions on the right to transfer shares must appear
in the articles of incorporation, in the bylaws, as well as
in the certificate of stock; otherwise, the same shall not be
binding on any purchaser in good faith.
b. Restrictions shall not be more onerous than granting
the existing stockholders or the corporation the option to
purchase the shares of the transferring stockholder with
such reasonable terms, conditions or period stated.721
c. Upon the expiration of said period (period to exercise the
option to purchase shares), the existing stockholders or
the corporation fails to exercise the option to purchase,
the transferring stockholder may sell their shares to any
third person.
424. In a close corporation, is a provision prohibiting the transfer,

conveyance, sale or assignment of shares to non-blood
relatives allowed?
A close corporation’s articles of incorporation may provide
restrictions on the transfers of shares, as long as the said restrictions
are not more onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period. If the
existing stockholders or the corporation fail to exercise the option
to purchase, the Corporation Code expressly provides that the
transferring stockholder may sell his shares to any third person.
Thus, the provision prohibiting the transfer, conveyance, sale or
assignment of shares to non-blood relatives is not allowed.’-
721Section 97, RCC.

722Close Holding Corporation; Founder's Shares, SEC-OGC Opinion No. 02-10,
January 15, 2010.
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425. The board of directors of the corporation adopted a resolution

that no stockholder can sell his fully paid shares in favor of
any person without the prior consent of the corporation. Is this
restriction valid?
It is void. While the corporation may impose restrictions on
share transfers, to be valid, the restrictions should be embodied in
all of the articles of incorporation, bylaws and stock certificate of
the corporation and cannot be more onerous than the right of first
refusal. In this case, the restriction is only by way of board resolution.
Most importantly, securing the consent of the corporation prior to
the sale of fully paid shares is a restriction more onerous than the
right of first refusal. ,
426. The bylaws of the corporation provide that a stockholder has

the option to purchase the shares of a transferring stockholder
for a price equivalent to 25% above par value but the offer price
of the buyer of the shares of the selling stockholder is 100%
above the par value of the share. Is such restriction valid?
It is void because the restriction is only in the bylaws.
427. Assuming that the restriction is similarly incorporated in the

articles of incorporation and embodied in the stock certificate
but the offer price of the buyer of the shares of the selling
stockholder is 100% above the par value of the share, may
the existing stockholder validly enforce the pricing provision
restriction?
Yes, the restriction may be enforced. The selling stockholder
cannot complain that the offer of the buyer is higher than the option
price granted to existing stockholders because he is bound by the
restrictions as appearing in the articles of incorporation and bylaws
of the corporation. The proposed buyer, while not bound by these
documents, is charged with notice because the restriction also
appears in the stock certificate.
Also, the restriction on pricing is not more onerous than the
right of first refusal. In fact, the law does not require that the option
to purchase the shares of the transferring stockholder be on the
same price, terms and conditions. It is enough that they are based
on reasonable terms. The option to buy shares at 25% above par
value is a reasonable provision.
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428. Is a judgment creditor or a creditor with a security interest

over shares of stock bound by the right of first refusal granted
to stockholders of the corporation?
No, transfer in the context of the chapter on close corporation
means transfer for value.723 The right of first refusal therefore
contemplates voluntary transfer of shares. Judgment creditors
and lien holders are involuntary creditors of the stockholders. A
judgment creditor may, therefore, garnish shares in satisfaction of a
judgment against the judgment debtor and the creditor with security
interest may enforce his lien over the shares without having to give
existing stockholders the option to purchase first the shares covered
by the garnishment or lien.
Hi. Issuance or transfer of stock in breach of

qualifying conditions
429. What are the effects of issuance or transfer of stock in bread
of qualifying conditions?
Section 98 of the RCC provides for the following consequence
a. If a stock of a close corporation is issued or transferred
to any person who is not eligible to be a holder thereof
under any provision of the articles of incorporation, and
if the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record
thereof, such person is conclusively presumed to have
notice of the fact of the ineligibility to be a stockholder.
b. If the articles of incorporation of a close corporation states
the number of persons, not exceeding 20, who are entitled
to be stockholders of record, and if the certificate for such
stock conspicuously states such number, and the issuance
or transfer of stock to any person would cause the stock to
be held by more than such number of persons, the person
to whom such stock is issued or transferred is conclusively
presumed to have notice of this fact.
c. If a stock certificate of a close corporation conspicuously
shows a restriction on transfer of the corporation’s stock
and the transferee acquires the stock in violation of such
4
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restriction, the transferee is conclusively presumed to

have notice of the fact that the stock was acquired in
violation of the restriction.
d. Whenever a person to whom stock of a close corporation
has been issued or transferred has or is conclusively
presumed under this section to have notice of: (1) the
person’s ineligibility to be a stockholder of the corporation;
or (2) that the transfer of stock would cause the stock of
the corporation to be held by more than the number of
persons permitted under its articles of incorporation; or
(3) that the transfer violates a restriction on transfer of
stock, the corporation may, at its option, refuse to register
the transfer in the name of the transferee.
e. The provisions of subsection (d) shall not be applicable if
the transfer of stock, though contrary to subsections (a),
(b) or (c), has been consented to by all the stockholders
of the close corporation, or if the close corporation has
amended its articles of incorporation in accordance with
this Title.
The foregoing shall not impair any right which the transferee
may have to either rescind the transfer or recover the stock under
any express or implied warranty.724
iv. When board meeting is unnecessary or

improperly held
430. When is any corporate action taken by directors valid even
without a meeting called properly?
Section 100 of the RCC provides that any action taken by the
directors of a close corporation without a meeting called properly
and with due notice shall nevertheless be deemed valid, unless the
bylaws provide otherwise, if:
a. Before or after such action is taken, a written consent
thereto is signed by all the directors; or
b. All the stockholders have actual or implied knowledge of
the action and make no prompt objection in writing; or
724Section 98, RCC.
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c. The directors are accustomed to take informal action with

the express or implied acquiescence of all the stockholders;
or
d. All the directors have express or implied knowledge of
the action in question and none of them makes a prompt
objection in writing.
v. Preemptive right
431. Distinguish right of first refusal from pre-emptive right.
Right of first refusal is the option granted to the corporation
and/or its stockholders to purchase the shares of a transferring
stockholder upon reasonable terms and conditions while pre-emptive
right refers to the right of the stockholder to subscribe to any and all
issuances and disposition of shares by the corporation.
' The corporation and its stockholders have no right of first
refusal unless such restriction on transfer is embodied in the articles
of incorporation, bylaws of the corporation and stock certificate f
the corporation. This means that a stockholder may freely conve
his shares to any person without having to offer the shares to th
corporation and/or the stockholders first, unless a right of first
refusal is granted to the latter.
Pre-emptive right is available to all stockholders unless such
right is denied in the articles of incorporation or amendment thereto.
Pre-emptive right pertains to stockholders by law and does not
require any statutory enabling provision, the right of first refusal, if
not provided for by law or by the articles of incorporation, does not
exist at all.726
432. How do you distinguish the pre-emptive right in ordinary

corporation from the same right in close corporation?
Pre-emptive right in an ordinary corporation does not extend
to issuance of shares in exchange for property given for a corporate
purpose or in payment of debt made in good faith, if approved by
the stockholders representing at least 2/3 of the outstanding capital
stock.726
’“SEC-OGC Opinion 51-19.

720Section 38, RCC.
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The pre-emptive right of stockholders in close corporations

shall extend to all stock to be issued, including reissuance of
treasury shares, whether for money, property or personal services,
or in payment of corporate debts, unless the articles of incorporation
provides otherwise. ,
vi. Amendment of articles of incorporation

433. What are the permissible provisions in the articles of
incorporation of a close corporation?
Pursuant to Section 96 of the RCC, the permissible provisions in
the articles of incorporation of a close corporation are the following:
a. A classification of shares or rights, the qualifications for
owning or holding the same, and restrictions on their
transfers, subject to the provisions of Section 97 of the
RCC.
b. A classification of directors into one or more classes,
each of whom may be voted for and elected solely by a
particular class of stock.
c. Greater quorum or voting requirements in meetings of
stockholders or directors than those provided in the RCC.
d. That the business of the corporation shall be managed by
the stockholders of the corporation rather than by a board
of directors.
e. That all officers or employees or that specified officers
or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
Note that any amendment to the articles of incorporation
which seeks to delete or remove any provision required or to reduce a
quorum or voting requirement stated in said articles of incorporation
shall require the affirmative vote of at least two-thirds (2/3) of the
outstanding capital stock, whether with or without voting rights, or
of such greater proportion of shares as may be specifically provided
in the articles of incorporation for amending, deleting or removing
any of the aforesaid provisions, at a meeting duly called for the
purpose.727
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Under Section 96 of the RCC, the articles of incorporation of a

close corporation may provide that the business of the corporation
shall be managed by the stockholders of the corporation rather than
by a board of directors. This agreement that the stockholders shall
exercise the corporate powers in lieu of the board of directors likewise
distinguishes a close corporation from an ordinary corporation,
which is mandated to be managed and controlled by a board of
directors under Section 22 of the RCC.728
vii. Deadlocks
434. May the SEC interfere in the management of a close corporation
without violating the business judgment rule?
Under Section 103 of the RCC, if the directors or stockholders
are so divided on the management of the corporation’s business
and affairs that the votes required for a corporate action cannot
be obtained, with the consequence that the business and affairs
of the corporation can no longer be conducted to the advantage of
the stockholders generally, the SEC, upon written petition by any
stockholder, shall have the power to arbitrate the dispute.
In the exercise of such power, the SEC shall have the authorit
to make appropriate orders, such as:
a. canceling or altering any provision contained in the
articles of incorporation, bylaws, or any stockholder’s
agreement;
b. canceling, altering or enjoining a resolution or act of the
corporation or its board of directors, stockholders, or
officers;
c. directing or prohibiting any act of the corporation or its
board of directors, stockholders, officers, or other persons
party to the action;
d. requiring the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the
availability of unrestricted retained earnings in its books,
or by the other stockholders;
e. appointing a provisional director;
,28Close Corporations; Powers of the President; Right of Inspection, SEC-OGC

Opinion No. 23-14, August 26, 2014.
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f. dissolving the corporation; or

g- granting such other relief as the circumstances may
warrant.
Note that a provisional director, under the RCC, shall be an
impartial person who is neither a stockholder nor a creditor of the
corporation or any of its subsidiaries or affiliates, and whose further
qualifications, if any, may be determined by the SEC. A provisional
director is not a receiver of the corporation and does not have the title
and powers of a custodian or receiver. A provisional director shall
have all the rights and powers of a duly elected director, including
the right to be notified of and to vote at meetings of directors
until removed by order of the SEC or by all the stockholders. The
compensation of the provisional director shall be determined by
agreement between such director and the corporation, subject to
the approval of the SEC, which may fix the compensation absent an
agreement or in the event of disagreement between the provisional
director and the corporation.
b. Nonstock corporations
i. Definition
435. What is a nonstock corporation?
A nonstock corporation is one without a capital stock and/
or where no part of its income is distributable as dividends to
its members, trustees, or officers, subject to the provision on
dissolution.729 Any profit which a nonstock corporation may obtain
incidental to its operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for which the
corporation was organized.
436. Is it unlawful for a nonstock corporation to obtain profit?

It is not unlawful for a nonstock corporation to obtain profit
provided that the profit is only incidental to its operations and shall,
whenever necessary or proper, be used only for the furtherance of
the purpose or purposes for which the corporation was organized.
The profits cannot be distributed as income to the members, trustees
or officers.730
’"Sections 3 and 86, RCC.

""Section 86, RCC.
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437. What are the most common characteristics of a nonstock

corporation?
The following are the most common characteristics of a
nonstock corporation:
a. Any profit derived by it from any authorized activity
cannot be distributed as dividends to its members;
b. It may not lawfully engage in any business activity for
profit as it would run counter to its very nature as a non
profit entity;
c. When incidental to the objects and purposes of the
corporation and without the end of making profits to be
distributed to the members, it may engage in certain
economic activities stated in its articles of incorporation;
d. Do not issue stock and distribute dividends to their
members; they are created not for profit but for public
good and welfare; and
e. The mere fact that a nonstock corporation may earn pro!
does not make it a profit-making corporation where su
profit or income is used to carry out the purposes set fort
in the articles of incorporation and is not distributed to its
incorporators, members, trustees or officers.731
ii. Purposes
438. What are the allowable purposes for a nonstock corporation?
It may be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject
to the special provisions governing particular classes of nonstock
corporations.732
731Nonstock Corporations; Use of Profits Derived by Nonstock Corporations.

Special Corporations; Nonstock Educational Corporations; Required Number of
Members of the Board of Trustees of Nonstock Educational Corporation, SEC-OGC
Opinion No. 29-06, June 7, 2006.
732Section 87, RCC.
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A nonstock corporation cannot be organized for profit since it

is not engaged in business. Neither can it be organized for political
purpose or end, otherwise, it should be registered as a party with the
Commission on Elections.
iii. Treatment of profits

439. If profits cannot be distributed to the members, trustees and
officers of the corporation, how are the profits treated?
Since profits that a nonstock corporation earns cannot be
distributed to the members, trustees, or officers, such profits will
form part of the income of the corporation. The income can be used
to invest in shares of stock, bonds and other securities provided
that such investment is allowed by the articles of incorporation and
income from such investments is used in furtherance of the purpose
for which the nonstock corporation was organized.
iv. Plan and distribution of assets upon dissolution

440. Are the members of the nonstock corporation entitled to the
assets of the corporation upon its dissolution?
The assets of a nonstock corporation cannot be distributed to
the members, trustees, or officers thereof unless their distributive
rights upon dissolution are specified in the articles of incorporation
or are specified in a plan of distribution duly adopted by at least
majority of the board of trustees and approved by at least 2/3 of the
members.733
Thus, during the lifetime of the corporation, there can be no
distribution of assets of the corporation, unlike in a stock corporation.
441. How are the assets of the corporation distributed upon its
dissolution?
Section 93 of the RCC provides for the rules of distribution, as
follows:
a. All liabilities and obligations of the corporation shall
be paid, satisfied and discharged, or adequate provision
shall be made therefor;
733Section 93, RCC.
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b. Assets held by the corporation upon a condition requiring

return, transfer or conveyance, and which condition occurs
by reason of the dissolution, shall be returned, transferred
or conveyed in accordance with such requirements;
c. Assets received and held by the corporation subject to
limitations permitting their use only for charitable,
religious, benevolent, educational or similar purposes,
but not held upon a condition requiring return, transfer
or conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more corporations,
societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted
pursuant to this Chapter;
d. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance
with the provisions of the articles of incorporation or the
bylaws, to the extent that the articles of incorporation or
the bylaws determine the distributive rights of members
or any class or classes of members, or provide f-
distribution; and
e. In any other case, assets may be distributed to sue
persons, societies, organizations or corporations, whethei
or not organized for profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter.
If the distributive rights are not specified in the articles of
incorporation, then there should be a plan of distribution upon
dissolution which should be adopted in the following manner as
stated in Section 94 of the RCC:
a. The board of trustees shall, by majority vote, adopt a
resolution recommending a plan of distribution and
directing the submission thereof to a vote at a regular or
special meeting of members having voting rights;
b. Each member entitled to vote shall be given a written
notice setting forth the proposed plan of distribution or
a summary thereof and the date, time and place of such
meeting within the time and in the manner provided in
the RCC for the giving of notice of meetings; and
c. Such plan of distribution shall be adopted upon approval
of at least two-thirds (2/3) of the members having voting
rights present or represented by proxy at such meeting.
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c. Educational corporations
442. What are educational corporations?
Educational corporations are those organized for educational
purposes, particularly the establishment and maintenance of a
school, college or university.
443. How are educational corporations organized?

Educational corporations may be organized as a stock or a
nonstock corporation. They are governed by special laws and by
the general provisions of the RCC. The special law applicable to
educational corporations is R.A. No. 7798, otherwise known as the
Education Act of 1982, as amended.
444. What is the number and term of trustees for educational

corporations? '
Unlike in an ordinary nonstock corporation where the number
of trustees may or may not be more than 15, the number of trustees
in educational institutions organized as nonstock corporations shall
not be less than five nor more than 15: Provided, That the number of
trustees shall be in multiples of five (5).734
Also, while the term of the trustees can be less than three
years for ordinary nonstock corporations, Section 106 of the RCC
provides that the board of trustees of incorporated schools, colleges,
or other institutions of learning shall so classify themselves that
the term of office of one-fifth (1/5) of their number shall expire every
year. Unless otherwise provided in the articles of incorporation
or bylaws. Trustees thereafter elected to fill vacancies, occurring
before the expiration of a particular term, shall hold office only for
the unexpired period. Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office for five (5) years.736
For institutions organized as stock corporations, the number
and term of directors shall be governed by the provisions on stock
corporations.736
™Section 106, RCC.

™Ibid.
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■
d. Religious corporations
i. Corporation sole; nationality
445. What are the classes of religious corporations?
Religious corporations may be incorporated by one or more
persons. Such corporations may be classified as corporations sole or
religious societies.737
446. How are religious corporations governed?

Religious corporations are governed by Chapter II, Title XTTT
of the RCC and by the general provisions on nonstock corporations
insofar as applicable.738
447. What is a corporation sole?

A corporation sole is one which is formed by the chief archbishop,
bishop, priest, minister, rabbi, or other presiding elder of a religious
denomination, sect or church for the purpose of administering and
managing, as trustee, the affairs, property and temporalities of such
religious denomination, sect or church.739
448. What are the procedures for incorporating a corporation sole

In order to become a corporate sole, the chief archbishop,
bishop, priest, minister, rabbi, or presiding elder of any religious
denomination, sect or church must do the following:
a. He must file with the SEC articles of incorporation setting
forth the following:
i. That the applicant chief archbishop, bishop, priest,
minister, rabbi, or presiding elder represents the
religious denomination, sect or church which desires
to become a corporation sole;
ii. That the rules, regulations and discipline of the
religious denomination, sect or church are consistent
with becoming a corporation sole and do not forbid
it;
’’’Section 107. RCC.

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iii. That such chief archbishop, bishop, priest,

minister, rabbi, or presiding elder is charged with
the administration of the temporalities and the
management of the affairs, estate and properties of
the religious denomination, sect or church within
the territorial jurisdiction, so described succinctly in
the articles of incorporation;
iv. The manner by which any vacancy occurring in the
office of chief archbishop, bishop, priest, minister,
rabbi, or presiding elder is required to be filled,
according to the rules, regulations or discipline of
the religious denomination, sect or church; and
The place where the principal office of the corporation
sole is to be established and located, which place
must be within the territory of the Philippines.
The articles ofincorporation may include any other provision not
contrary to law for the regulation of the affairs of the corporation.740
b. The articles of incorporation must be verified, by affidavit
or affirmation of the chief archbishop, bishop, priest,
minister, rabbi, or presiding elder, as the case may be, and
accompanied by a copy of the SEC, certificate of election
or letter of appointment of such chief archbishop, bishop,
priest, minister, rabbi, or presiding elder, duly certified to
be correct by any notary public.
c. From and after filing with the SEC of the said articles
of incorporation, verified by affidavit or affirmation,
and accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop,
priest, minister, rabbi, or presiding elder shall become
a corporation sole and all temporalities, estate and
properties of the religious denomination, sect or church
theretofore administered or managed as such chief
archbishop, bishop, priest, minister, rabbi, or presiding
elder shall be personally held in trust as a corporation
sole, for the use, purpose, exclusive benefit and on behalf
of the religious denomination, sect or church, including
hospitals, schools, colleges, orphan asylums, parsonages,
and cemeteries thereof.741
’■““Section 109, RCC.

’^“Section 110, RCC.
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I
The procedure is a verbatim reproduction of the OCC. While

the law, then and now, provides that after the filing of the articles
of incorporation with the SEC, the chief archbishop, bishop, priest,
minister, rabbi shall become a corporation sole, the incorporation
becomes effective only upon approval of the SEC and its issuance of
the certificate of incorporation.
449. May a corporation sole acquire and hold real property in the
Philippines if its presiding bishop, priest, minister or rabbi is a
foreigner?
Yes, a corporation sole, regardless of the nationality of its
presiding bishop, priest, minister, rabbi or presiding elder, may
acquire real property in the Philippines; provided that at least 60%
of the members of the religious denomination are Filipino citizens
and the real property is necessary and convenient for the lawful use
of the corporation.
ii. Religious societies

450. What is the procedure for incorporating religious societies?
. Unless forbidden by competent authority, the Constitutioi
pertinent rules, regulations, or discipline of the religion
denomination, sect or church of which it is a part, any religious
society, religious order, diocese, or synod, or district organization
of any religious denomination, sect or church, may, upon written
consent and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership, incorporate
for the administration of its temporalities or for the management
of its affairs, properties, and estate by filing with the SEC, articles
of incorporation verified by the affidavit of the presiding elder,
secretary, or clerk or other member of such religious society or
religious order, or diocese, synod, or district organization of the
religious denomination, sect or church, setting forth the following:
a. That the religious society or religious order, or diocese,
synod, or district organization is a religious organization
of a religious denomination, sect or church;
b. That at least two-thirds (2/3) of its membership has given
written consent or has voted to incorporate, at a duly
convened meeting of the body;
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C. That the incorporation of the religious society or religious

order, or diocese, synod, or district organization is not
forbidden by competent authority or by the Constitution,
rules, regulations or discipline of the religious
denomination, sect or church of which it forms part;
d. That the religious society or religious order, or diocese,
synod, or district organization desires to incorporate for
the administration of its affairs, properties and estate;
e. The place within the Philippines where the principal
office of the corporation is to be established and located;
f. The names, nationalities, and residence addresses of the
trustees, not less than five nor more than 15, elected by
the religious society or religious order, or the diocese,
synod, or district organization to serve for the first year
or such other period as may be prescribed by the laws of
the religious society or religious order, or of the diocese,
synod, or district organization.742
451. What is the number and term of trustees for religious societies?
Like in educational institutions, trustees of religious societies
shall not be less than five (5) nor more than 15. Note, however, that
the term of these trustees can be one (1) year or such other period
as may be prescribed by the laws of the religious society or religious
order, or of the diocese, synod, or district organization.743
e. One person corporations

452. What is a One Person Corporation ("OPC")?
OPC is a corporation with a single stockholder: Provided, That
only a natural person, trust, or an estate may form a OPC.
453. What is the rationale for the RCC provision on OPC?

According to SEC Chairperson Emilio B. Aquino, the provision
for OPC aims to encourage the formation of businesses in the country
by making it easier for entrepreneurs to start a limited liability
company. In turn, this will benefit our economy where micro, small

™Ibid.
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I
and medium enterprises comprise the majority of the business

establishments and would generate more jobs in the Philippines.
454. May a foreign natural person organize an OPC?

In case of a natural person, the only requirement under the
RCC is that he/she must be of legal age. There is no provision
on any nationality requirement. Thus, subject to the applicable
constitutional and statutory restrictions on foreign participation in
certain investment areas or activities, a foreign natural person may
organize an OPC.744
455. What is the "trust" referred to under the RCC which can
organize an OPC?
The “trust” as used by the law does not refer to a trust entity,
but to the subject being managed by the trustee.745
456. What is the additional requirement for incorporation of an

OPC if the single stockholder is a trustee, administrator,
executor, guardian, conservator, custodian or any other person
exercising fiduciary duties?
If the single stockholder is a trustee, administrator, executoi
guardian, conservator, custodian or any other person exercising
fiduciary duties, proof of authority to act on behalf of the trust or
estate must be submitted at the time of incorporation.746
i. Excepted corporations
457. Which corporations are not allowed to incorporate as OPC?
Banks and quasi-banks, pre-need, trust, insurance, public and
publicly-listed companies, and non-chartered government-owned
and -controlled corporations may not incorporate as OPC: Provided,
further, That a natural person who is licensed to exercise a profession
may not organize as an OPC for the purpose of exercising such
profession except as otherwise provided under special laws.
’“Section 15, SEC MC No. 7.

’“Section 1, SEC MC No. 7.
’“SEC MC No. 7, ibid.
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ii Capital stock requirement

iii. Articles of incorporation and bylaws
iv. Corporate name
458. What are the characteristics of OPC?

An OPC has the following characteristics:
a. It has a single stockholder.
b. It is not required to have a minimum authorized capital
stock except as otherwise provided by special law. Further,
no portion of the authorized capital is required to be paid
up at the time of the incorporation, unless otherwise
required by applicable laws or regulations.7,17
c. It is not required to submit and file corporate bylaws.748
d. It is required to indicate the letters “OPC” either below or
at the end of its corporate name.749
e. The single stockholder shall be the sole director and
president of the OPC.760
f. The single stockholder is required to designate a nominee
and an alternate nominee who shall, in the event of the
single stockholder’s death or incapacity, take the place of
the single stockholder as director and shall manage the
corporation’s affairs.751
g- The liability of the single stockholder shall be limited to
his subscription to the corporation unless there is ground
to pierce to pierce the veil of corporate fiction.752
459. What should the articles of incorporation of a OPC contain?

OPC shall file articles of incorporation in accordance with
the requirements under Section 14 of the RCC. It shall likewise
substantially contain the following:
747Section 117, RCC and Section 8 of MC No. 7.

’^Section 119, RCC.
’■“’Section 120, RCC.
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rv. BUSINESS ORGANIZATIONS HH6
a. If the single stockholder is a trust or an estate, the name,

nationality, and residence of the trustee, administrator,
executor, guardian, conservator, custodian, or other
person exercising fiduciary duties together with the proof
of such authority to act on behalf of the trust or estate;
and
b. Name, nationality, the residence of the nominee and
alternate nominee, and the extent, coverage and limitation
of the authority.763
The articles of incorporation should also state the names,
residence addresses and contact details of the nominee and alternate
nominee, as well as the extent and limitations of their authority in
managing the affairs of the OPC.
The written consent of the nominee and alternate nominee
shall be attached to the application for incorporation. Such consent
may be withdrawn in writing any time before the death or incapacity
of the single stockholder.754
V. Corporate structure and officers

460. Who are the officers of a OPC?
OPC should appoint a treasurer, corporate secretary, and other
officers as it may deem necessary, within 15 days from the issuance
of its certificate of incorporation and should be reported to the SEC
within five days from appointment.
The single stockholder may not be appointed as the corporate
secretary.
A single stockholder who is likewise the self-appointed
treasurer of the corporation shall give a bond to the SEC in such
a sum as may be required: Provided, That the said stockholder/
treasurer shall undertake in writing to faithfully administer the
OPC’s funds to be received as treasurer, and to disburse and invest
the same according to the articles of incorporation as approved by
the SEC. The bond shall be renewed every two years or as often as
may be required.766

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The surety bond coverage is subject to renewal every two

years or as may be required, upon review of the audited financial
statements certified under oath by the company’s president and
treasurer. Further, the bond is a continuing requirement as long as
the single stockholder is the self-appointed treasurer of the OPC.
However, the bond may be cancelled upon proof of appointment
of another person as the treasurer and filing of amended form for
appointment of officers.
461. What are the special functions of the corporate secretary in a

OPC?
In addition to the functions designated by the OPC, the
corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or
records of the corporation;
b. Notify the nominee or alternate nominee of the death or
incapacity of the single stockholder, which notice shall be
given no later than five days from such occurrence;
c. Notify the SEC of the death of the single stockholder
within five days from such occurrence and stating in such
notice the names, residence addresses, and contact details
of all known legal heirs; and
d. Call the nominee or alternate nominee and the known
legal heirs to a meeting and advise the legal heirs with
regard to, among others, the election of a new director,
amendment of the articles of incorporation, and other
ancillary and/or consequential matters.760
vi. Nominee
462. Who shall take the place of the single stockholder in managing
the affairs of the corporation in case of the latter's death or
incapacity?
The nominee and alternate nominee designated by the single
stockholder shall, in the event of the single stockholder’s death or
incapacity, take the place of the single stockholder as director and
shall manage the corporation’s affairs.767

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r
463. What is the term of the nominee and alternate nominee?

When the incapacity of the single stockholder is temporary, the
nominee shall sit as director and manage the affairs of the OPC
until the stockholder, by self-determination, regains the capacity to
assume such duties.
In case of death or permanent incapacity of the single
stockholder, the nominee shall sit as director and manage the affairs
of the OPC until the legal heirs of the single stockholder have been
lawfully determined, and the heirs have designated one of them or
have agreed that the estate shall be the single stockholder of the
OPC.
The alternate nominee shall sit as director and manage the
OPC in case of the nominee’s inability, incapacity, death, or refusal to
discharge the functions as director and manager of the corporation,
and only for the same term and under the same conditions applicable
to the nominee.768
464. How may the single stockholder change its nominee and
alternate nominee?
The single stockholder may, at any time, change its nomine
and alternate nominee by submitting to the SEC the names of tht
new nominees and their corresponding written consent. For this
purpose, the articles of incorporation need not be amended.7’9
vii. Minutes and records

465. How does an OPC approve a corporate act?
When action is needed on any matter, it shall be sufficient
to prepare a written resolution, signed and dated by the single
stockholder, and recorded in the minutes book of the OPC. The date
of recording in the minutes book shall be deemed to be the date of
the meeting for all purposes under the RCC.7“
An OPC shall maintain a minutes book which shall contain all
actions, decisions, and resolutions taken by the OPC.

L
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viii. Liability
466. What are the requisites for the limited liability of the single
stockholder of OPC?
The liability of the sole stockholder shall be limited to his
subscription to the corporation if the following requisites are present:
a. The sole shareholder must show that the corporation was
adequately financed;
b. He must prove that the property of the OPC is independent
of the stockholder’s personal property; and
c. There is no ground to pierce the veil of corporate fiction.
Otherwise, the sole stockholder shall be jointly and severally
liable for the debts and other liabilities of the OPC.761
ix. Conversion of corporation to one person

corporations and vice-versa
467. When may an ordinary corporation be converted to an OPC?
When a single stockholder acquires all the stocks of an ordinary
stock corporation, the latter may apply for conversion into a OPC,
subject to the submission of such documents as the SEC may require.
If the application for conversion is approved, the SEC shall issue a
certificate of filing of amended articles of incorporation reflecting the
conversion. The OPC converted from an ordinary stock corporation
shall succeed the latter and be legally responsible for all the latter’s
outstanding liabilities as of the date of conversion.702
468. When may a OPC be converted to an ordinary stockcorporation?

An OPC may be converted to an Ordinary Stock Corporation in
a. After due notice to the SEC of such fact and of the
circumstances leading to the conversion, and after
compliance with all other requirements for stock
corporations under the RCC and applicable rules. Such
notice shall be filed with the SEC within sixty days from the
occurrence of the circumstances leading to the conversion
’"'Section 130, RCC.

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into an ordinary stock corporation. If all requirements

have been complied with, the SEC shall issue a certificate
of filing of amended articles of incorporation reflecting the
conversion.
b. In case of death of the single stockholder, the nominee or
alternate nominee shall transfer the shares to the duly
designated legal heir or estate within seven days from
receipt of either an affidavit of heirship or self-adjudication
executed by a sole heir, or any other legal document
declaring the legal heirs of the single stockholder and
notify the SEC of the transfer.
Within 60 days from the transfer of the shares, the legal heirs
shall notify the SEC of their decision to either wind up and dissolve
the OPC or convert it into an ordinary stock corporation.
The ordinary stock corporation converted from an OPC shall
succeed the latter and be legally responsible for all the latter’s
outstanding liabilities as of the date of conversion.763
f. Foreign corporations
469. What is a foreign corporation?
A foreign corporation is one formed, organized or existing
under laws other than those of the Philippines and whose laws allow
Filipino citizens and corporations to do business in its own country
or State.764
470. A corporation, composed entirely of Filipino citizens, is formed,

organized and existing under the laws of the USA. Is this a
foreign or domestic corporation?
It is a foreign corporation. Whether the corporation is domestic
or foreign is determined by the country or State of incorporation.
Thus, a corporation is foreign if it is formed, organized or existing
under the laws of a foreign country regardless of the nationality of
the stockholders.

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i. Bases of authority over foreign corporations

(a) Consent
471. What is the legal consequence if a foreign corporation transacts
business in the Philippines without the corresponding license
from the SEC?
No foreign corporation transacting business in the Philippines
without a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court
or administrative agency of the Philippines; but such corporation
may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized
under Philippine laws.766
In other words, a foreign corporation doing business in the
country, without a license, cannot sue but can be sued.
(b) Doctrine of “doing business”

472. When is a foreign corporation deemed doing business in the
Philippines?
The term “doing business” is not specifically defined by the
OCC and the RCC. There are certain activities, however, which are
deemed as doing business under R.A. No. 7042, otherwise known as
the Foreign Investments Act of 1991 (“FIA”). Under the FIA, doing
business shall include:
a. soliciting orders;
b. service contracts;
c. opening offices, whether called “liaison” offices or
branches;
d. appointing representatives or distributors domiciled in
the Philippines or who in any calendar year stay in the
country for a period or periods totaling 180 days or more;
e. participating in the management, supervision or control
of any domestic business, firm, entity or corporation in
the Philippines; and
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I
f. any other act or acts that imply a continuity of commercial

dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some
of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and
object of the business organization.766
473. May one act or transaction be considered as doing business?

There is no general rule or governing principle laid down as to
what constitutes “doing” or “engaging in” or “transacting” business
in the Philippines. Each case must be judged in the light of its
peculiar circumstances. Thus, it has often been held that a single
act or transaction may be considered as “doing business” when a
corporation performs acts for which it was created or exercises some
of the functions for which it was organized. The amount or volume
of the business is of no moment, for even a singular act cannot be
merely incidental or casual if it indicates the foreign corporation’s
intention to do business. A foreign corporation engaged in ports
operation which participated in a bidding to operate the Subic Bay
ports is considered as doing business in the Philippines even thoug
it is only one transaction because it shows the intention of the foreig
corporation to attain the purpose of its incorporation. 767
In another case, a foreign corporation engaged in the
manufacture of uniforms entered into one purchase transaction
but involving thousands of soccer jerseys from the Philippines was
considered doing business in the Philippines since the purchase
was within its ordinary course of business. The Supreme Court said
that when a single act or transaction of a foreign corporation is not
merely incidental or casual but is of such character as distinctly to
indicate a purpose on the part of the foreign corporation to do other
business in the state, such act will be considered as constituting
doing business.708
474. What activities are specifically excluded under FIA as doing

business?
Under the FIA, the phrase “doing business” shall not be deemed
to include the following activities:
’“Section 3(d), R.A. No. 7042.

767Hutchison Ports Philippines Limited v. Subic Bay Metropolitan Authority,
G.R. Nos. 100801-02, August 25, 2000.
’“Litton Mill, Inc. v. Court of Appeals, G.R. No. 94980, May 15, 1996.
L
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a. Mere investment as a shareholder in a domestic

corporation duly registered to do business and/or the
exercise of rights as such investor;
b. Having a nominee director or officer to represent its
interest in such corporation;
c. Appointing a representative or distributor domiciled in
the Philippines which transacts business in its own name
and for its own account;
d. Publication of a general advertisement through any print
or broadcast media;
e. Maintaining a stock of goods in the Philippines solely
for the purpose of having the same processed by another
entity in the Philippine;
f. Consignment by FC of equipment with a local company to
be used in the processing of products for export;
g- Collecting information in the Philippines; and
h. Performing services auxiliary to an existing isolated
contract of sale which is not on a continuing basis.769
foreign corporation is doing business in the Philippines.
a. When a foreign corporation engaged in the manufacture
of uniforms purchased thousands of soccer jerseys from
the Philippines since the purchase was within its ordinary
course of business. When a single act or transaction of a
foreign corporation is not merely incidental or casual but
is of such character as distinctly to indicate a purpose on
the part of the foreign corporation to do other business
in the state, such act will be considered as constituting
doing business.770
b. When it granted a 90-day credit term to a domestic
corporation over a period of seven months for every
purchase, as in the usual course of a commercial
transaction, credit is extended only to customers in good
’“Section 1, Implementing Rules and Regulations of R.A. No. 7402.

770Litton Mill, Inc. v. Court of Appeals, G.R. No. 94980, May 15, 1996.
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standing or to those on whom there is an intention to

maintain a long-term relationship.771
C. When as foreign corporation engaged in the port
operations, it participated in a bidding process to operate
the Subic Bay free ports.
The bidding for the concession contract is but
an exercise of the corporation’s reason for creation or
existence. Participating in the bidding process constitutes
“doing business” because it shows the foreign corporation’s
intention to engage in business here.772
activities of the foreign corporation are not deemed as doing
business.
a. The hiring of an attorney-in-fact by a foreign corporation
which owns the copyright to foreign films and exclusive
distribution rights in the Philippines to file criminal cases
for the protection of its property rights, if the contracts are
consummated abroad, as this is merely for the protectic
of its property rights.773
b. A reinsurance company is not doing business in a certa
state merely because the property or Eves which ai
insured by the original insurer are located in that State.
The reason for this is that a contract of reinsurance is
generally a separate and distinct arrangement from the
original contract of insurance. Thus, a foreign reinsurance
company which accepted reinsurance from a domestic
insurance company cannot be sued in the Philippines.
c. Mere ownership by a corporation of a property in a certain
state, unaccompanied by its active use in furtherance of
the business for which it was formed, is insufficient in
itself to constitute doing business. A foreign corporation
which becomes the assignee of mining properties,
facilities and equipment and assumes the loan obligation
,71Eriks Pte. Ltd. v. Court of Appeals, G.R. No. 118843,1997.

’’’Hutchison Ports Philippines Limited v. Subic Bay Metropolitan Authority,
G.R. Nos. 100801-02, August 25, 2000.
’’’Columbia Pictures, Inc. v. Court of Appeals, G.R. No. M0318. August 28,
1996.
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of its subsidiary cannot be automatically considered as

doing business in the Philippines even if its subsidiary
was doing business in the Philippines.77'’
d. The filing of collection suits by a foreign corporation, as
an assignee to claims, does not constitute doing business
in the Philippines.776
The insurer is suing on a casual transaction when the
insured goods are covered by two bills of ladings but
arising from a single marine insurance policy that the
insurer issued in favor of the consignee.776
f. The mere act of exporting from one’s own country, without
doing any specific commercial act within the territory
of the importing country, cannot be deemed as doing
business in the importing country. The importing country
does not acquire jurisdiction over the foreign exporter who
has not performed any specific commercial acts within the
territory of the importing country. Without jurisdiction
over the foreign exporter, the importing country cannot
compel the foreign exporter to secure a license to do
business in the importing country.
Otherwise, Philippine exporters, by the mere act
alone of exporting their products, could be considered
by the importing countries to be doing business in those
countries. This will require Philippine exporters to secure
a business license in every foreign country where they
usually export their products, even if they do not perform
any specific commercial act within the territory of such
importing countries. Such a legal concept will have a
deleterious effect not only on Philippine exports, but also
on global trade.777
™MR Holdings, Ltd. v. Bajar, G.R. No. 138104, April 11, 2002.
776Aetna Casualty and Surety Co. v. Pacific Star Line, G.R. No. L-26809.
December 29, 1977.
7,cLorenzo Shipping Corp. v. Chubb and Sons, G.R. No. 147724, June 8, 2004.
777Van Zuiden Bros Ltd. v. GTVL Manufacturing Industries, G.R. No. 147905,
May 28, 2007; 2015 Bar.
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g- A foreign company that merely imports goods from

a Philippine exporter, without opening an office or
appointing an agent in the Philippines, is not doing
business in the Philippines.778
h. The appointment of a distributor in the Philippines is not
sufficient to constitute doing business unless it is under
the full control of the foreign corporation. If the distributor
is an independent entity which buys and distributes
products, other than those of the foreign corporation,
doing business for its own name and account, the latter
cannot be considered as doing business.779
i. A foreign corporation may file a petition to enforce a
foreign arbitral award even though it is not licensed to
do business in the Philippines. When a party enters into
a contract containing a foreign arbitration clause and
submits itself to arbitration, it becomes bound by the
contract, by the arbitration and by the result of arbitration,
conceding thereby the capacity of the other party to enter
into the contract, participate in the arbitration and cause
the implementation of the result.780
j. A foreign corporation, if it is a holder in due course c
a draft, can file a suit in the Philippines to enforce the
warranties of the drawer and endorser after the drawee
dishonored the instrument.781
k. Subscribing to shares to stock of a domestic corporation,
maintaining investments therein and deriving dividend
income therefrom does not qualify as “doing business”
contemplated under R.A. No. 7042. Hence, the foreign
corporation is not required to secure a license before it
can file a claim for tax refund.782
’’’Cargill, Inc. Intra Strata Assurance Corporation, G.R. No. 168266, March
16,2010.
’’’Steel Case v. Design International Selection, G.R. No. 171995, April 18,
2012; 2015 Bar Exam.
”°Tuna Processing, Inc. v. Philippine Kingford, Inc., G.R. No. 185582, February
29,2012.
”‘Llorente v. Star City Pty Limited, G.R. Nos. 212050 and 212216, January
15,2020.
’’’Commissioner of Internal Revenue Interpublic Group of Companies, G.R.
No. 207039, August 14, 2019.
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if. Necessity of a license to do business

(a) Requisites for issuance of a license
477. What are the requirements for the application by a foreign
corporation of a license to transact business in the Philippines?
a. A foreign corporation applying for a license to transact
business in the Philippines shall submit to the SEC a
copy of its articles of incorporation and bylaws, certified
in accordance with law, and their translation to an official
language of the Philippines, if necessary. The application
shall be under oath and, unless already stated in its
articles of incorporation, shall specifically set forth the
following:
i. The date and term of incorporation;
ii. The address, including the street number, of the
principal office of the corporation in the country or
State of incorporation;
iii. The name and address of its resident agent
authorized to accept summons and process in all
legal proceedings and all notices affecting the
corporation, pending the establishment of a local
office;
iv. The place in the Philippines where the corporation
intends to operate;
v. The specific purpose or purposes which the
corporation intends to pursue in the transaction of
its business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in
the certificate of authority issued by the appropriate
government agency;
vi. The names and addresses of the present directors
and officers of the corporation;
vii. A statement of its authorized capital stock and the
aggregate number of shares which the corporation
has authority to issue, itemized by class, par value
of shares, shares without par value, and series, if
any;
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viii. A statement of its outstanding capital stock and the

aggregate number of shares which the corporation
has issued, itemized by class, par value of shares,
shares without par value, and series, if any;
ix. A statement of the amount actually paid in; and
X. Such additional information as may be necessary or
appropriate in order to enable the SEC to determine
whether such corporation is entitled to a license
to transact business in the Philippines, and to
determine and assess the fees payable.
Attached to the application for Ecense shall be a
certificate under oath duly executed by the authorized
official or officials of the jurisdiction of its incorporation,
attesting to the fact that the laws of the country or State
of the appEcant allow Filipino citizens and corporations to
do business therein, and that the appEcant is an existing
corporation in good standing. If the certificate is in a
foreign language, a translation thereof in EngEsh under
oath of the translator shaU be attached to the application.
The appEcation for a Ecense to transact busines
in the Philippines shall likewise be accompanied by i
statement under oath of the president or any other person
authorized by the corporation, showing to the satisfaction
of the SEC and when appropriate, other governmental
agencies that the applicant is solvent and in sound
financial condition, setting forth the assets and liabihties
of the corporation as of the date not exceeding one year
immediately prior to the filing of the application.
Foreign banking, financial, and insurance
corporations shall, in addition to the above requirements,
comply with the provisions of existing laws applicable
to them. In the case of aU other foreign corporations,
no application for license to transact business in the
Philippines shall be accepted by the SEC without previous
authority from the appropriate government agency,
whenever required by law.783
a
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b. As a condition to the issuance of the license for a foreign

corporation to transact business in the Philippines,
such corporation shall file with the SEC written power
of attorney designating a person who must be a resident
of the Philippines, on whom summons and other legal
processes may be served in all actions or other legal
proceedings against such corporation, and consenting
that service upon such resident agent shall be admitted
and held as valid as if served upon the duly authorized
officers of the foreign corporation at its home office. Such
foreign corporation shall likewise execute and file with the
SEC an agreement or stipulation, executed by the proper
authorities of said corporation, in form and substance as
follows:
“The (name of foreign corporation) hereby
stipulates and agrees, in consideration of being
granted a license to transact business in the
Philippines, that if the corporation shall cease
to transact business in the Philippines, or shall
be without any resident agent in the Philippines
on whom any summons or other legal process
may be served, then service of any summons
or other legal process may be made upon the
SEC in any action or proceeding arising out
of any business or transaction which occurred
in the Philippines and such service shall have
the same force and effect as if made upon the
duly authorized officers of the corporation at its
home office.”
Whenever such service of summons or other process
is made upon the SEC, the SEC shall, within 10 days
thereafter, transmit by mail a copy of such summons
or other legal process to the corporation at its home or
principal office. The sending of such copy by the SEC shall
be a necessary part of and shall complete such service.
All expenses incurred by the SEC for such service shall
be paid in advance by the party at whose instance the
service is made.784
78'Section 145, RCC.
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It shall be the duty of the resident agent to

immediately notify the SEC in writing of any change in
the resident agent’s address.
If the SEC is satisfied that the applicant has complied
with all the requirements of the RCC and other special
laws, rules and regulations, the SEC shall issue a license
to transact business in the Philippines to the applicant
for the purpose or purposes specified in such license.
Upon issuance of the license, such foreign corporation
may commence to transact business in the Philippines
and continue to do so for as long as it retains its authority
to act as a corporation under the laws of the country
or State of its incorporation, unless such license is
sooner surrendered, revoked, suspended, or annulled in
accordance with the RCC or other special laws.785
(b) Resident agent

478. Who may be a resident agent?
A resident agent may be either an individual residing in the
Philippines or a domestic corporation lawfully transacting busines
in the Philippines: Provided, That an individual resident ager
must be of good moral character and of sound financial standing
Provided, further, That in case of a domestic corporation who will act
as a resident agent, it must likewise be of sound financial standing
and must show proof that it is in good standing as certified by the
SEC.786
Note that the removal of the resident agent and failure to
appoint a replacement can be a ground for revocation or suspension
of its license to do business.787
(c) Amendment of license

479. What is the obligation of the foreign corporation authorized to
transact business in case there are amendments to its Articles
of Incorporation and/or Bylaws?
Whenever the articles of incorporation or bylaws of a foreign
corporation authorized to transact business in the Philippines are
amended, such foreign corporation shall, within 60 days after the

78720 12 Bar Exam.
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amendment becomes effective, file with the SEC, and in proper cases;
with the appropriate government agency, a duly authenticated copy
of the amended articles of incorporation or bylaws, indicating clearly
in capital letters or underscoring the change or changes made, duly
certified by the authorized official or officials of the country or state
of incorporation. Such filing shall not in itself enlarge or alter the
purpose or purposes for which such corporation is authorized to
transact business in the Philippines 788
It should also obtain an amended license in the event it
changes its corporate name, or desires to pursue other or additional
purposes in the Philippines, by submitting an application with the
SEC, favorably endorsed by the appropriate government agency in
the proper cases.789
Hi. Personality to sue

480. What confers upon the foreign corporation the legal capacity
to sue in the Philippines?
The foreign corporation has the legal capacity to sue if it has
procured from the SEC a license to do business or it is suing on a
casual or isolated transaction.
For purposes of acquiring jurisdiction by way of service of
summons, there is no need to prove first the fact that the defendant
is doing business in the Philippines. Where a complaint alleges
that the defendant has an agent in the Philippines, summons can
validly be served thereto even without prior evidence of the truth of
such factual allegation. If in fact, a foreign corporation does not do
business here, that is a matter that should be ventilated in the trial
on the merits but not in a motion to dismiss.790
It does not follow that the insurer, as subrogee, has also no
capacity to sue in this jurisdiction simply because the insured
party (which is a foreign corporation) has no legal capacity to sue
in the Philippines. The rights inherited by the insurer pertain only
to the payment it made to the insured and which amount it now
seeks to recover from the shipping company which caused the loss
sustained by the insured. The capacity to sue is a right personal to

’"Signetics Corp. v. Court of Appeals, G.R. No. 105141 (Resolution), August
31, 1993.
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its holder. It is conferred by law and not by the parties. The insurer
has satisfactorily proven its capacity to sue, after having shown that
it is not doing business in the Philippines, but is suing only under
an isolated transaction, i.e., under the one marine insurance policy
issued in favor of the consignee/insured.791
iv. Suability of foreign corporations

481. State the principles governing the right to sue and suability of
foreign corporations.
The following principles governing a foreign corporation’s right
to sue in local courts have long been settled, to wit-.
a. if a foreign corporation does business in the Philippines
without a license, it cannot sue before the Philippine
courts;
b. if a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or on a cause of action
entirely independent of any business transaction; and
c. if a foreign corporation does business in the Philippine
with the required license, it can sue before Philippic
courts on any transaction.
It is not the absence of the prescribed license but the “doing (of)
business” in the Philippines without such license which debars the
foreign corporation from access to our courts.792
Tersely, the issue on whether a foreign corporation, which
does not have a license to engage in business in the Philippines can
seek redress in Philippine courts depends on whether it is doing
business or it merely entered into an isolated transaction. A foreign
corporation that is not doing business in the Philippines must
disclose such fact if it desires to sue in Philippine courts under the
isolated transaction rule because, without such disclosure, the court
may choose to deny it the right to sue.793
791Lorenzo Shipping Corp. v. Chubb and Sons, G.R. No. 147724, June 8, 2004.
792MR Holdings, Ltd. v. Sheriff Carlos P. Bajar, Sheriff Ferdinand M. Jandusay,
Solidbank Corporation, and Marcopper Mining Corporation, G.R. No. 138104, April
11, 2002.
793Llorente v. Star City Pty Limited, G.R. Nos. 212050 and 212216, January
15, 2020,
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V. Instances when unlicensed foreign corporations

may be allowed to sue (isolated transactions)
482. What are the instances when an unlicensed foreign corporation
may be allowed to sue?
The following are the instances when an unlicensed foreign
corporation may be allowed to sue in the Philippines courts.
a. If the foreign corporation is suing on a casual or isolated
transaction.194
An isolated transaction will not result in the
enterprise being deemed as doing business in the
Philippines. The phrase “isolated transaction” has a
definite and fixed meaning, i.e., a transaction or series
of transactions set apart from the common business of a
foreign enterprise in the sense that there is no intention
to engage in a progressive pursuit of the purpose and
object of the business organization.796
The ascertainment of whether a foreign corporation
is merely suing on an isolated transaction or is actually
doing business in the Philippines requires the elicitation
of at least a preponderant set of facts. It simply cannot
be answered through conjectures or acceptance of
unsubstantiated allegations.796
b. Action to protect the good name, goodwill and reputation
of a foreign corporation.
Foreign corporation not doing business in the
Philippines may sue here even if not licensed in order
to protect intellectual property rights. Under the Paris
Convention for the Protection of Intellectual Property
Rights, the Philippines is obligated to assure nationals of
countries of the Paris Convention that they are afforded
effective protection against violation of their intellectual
property rights in the Philippines in the same way
™See discussions on Question No. 21 (cases where the Supreme Court held
that the activities of the foreign corporation do no amount to doing business).
’“Lorenzo Shipping Corp. v. Chubb and Sons, G.R. No. 147724, June 8, 2004.
796Rimbunan Hijau Group of Companies Oriental Wood Processing
Corporation, G.R. No. 152228. September 23, 2005.
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4 that their own countries are obligated to accord similar

protection to Philippine nationals.797
Our obligation under the Paris Convention is
incorporated in Section 3 of R.A. No. 8293, otherwise
known as the Intellectual Property Code.
C. Where the contract provides the Philippine court as the
exclusive venue for court action, to the exclusion of other
courts.
Stipulation as to venue which is not permissive but
exclusive in nature is binding to the parties.
d. A license to engage in business granted subsequent to
the transaction enables the foreign corporation to sue on
contracts executed before grant of license.
In one case, the Supreme Court ruled that a contract
entered into by a foreign corporation not licensed to do
business in the Philippines is not void even as against
the erring foreign corporation. The lack of capacity at the
time of the execution of the contracts was cured by the
subsequent grant of a license to engage in business.
It was likewise held in this case that while the grai
of the license retroacts to the date of the transaction, thi
is without prejudice to criminal prosecution against the
foreign corporation for doing business without a license.
The basis of criminal liability is Section 144 of the OCC
(now Section 170 of the RCC) that any violation of the
provisions of the Corporation Code or its amendments not
otherwise specifically penalized therein shall be punished
by a fine or by imprisonment. (The RCC retained the
language but removed the penalty of imprisonment.)
In TENT v. Tullett Prebon,™ the Supreme Court,
however, ruled that its declaration in Home Insurance
Company v. Eastern Shipping Lines that “the prohibition
against doing business without first securing a license
is now given a penal sanction which is also applicable to
’’’Converse Rubber Corporation v. Universal Rubber Products, Inc., G.R. No.

L-27906, January 8, 1987; Philip Morris, Inc. v. Court of Appeals, G.R. No. 91332^
July 16, 1993; Fredco Manufacturing Corporation v. T.~~ President and----------
----- ----- Fellows of
Harvard College, G.R. No. 185917, June 1, 2011.
798G.R. No. 189158, January 11, 2017.
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other violations of the Corporation Code under the general

provisions of Section 144 of the Code” is unmistakably an
obiter dictum. The issue in the Home Insurance case was
whether or not a foreign corporation previously doing
business here without a license has the capacity to sue
in our courts when it had already acquired the necessary
license at the time of the filing of the complaints. The
statement regarding the supposed penal sanction was
not essential to the resolution of the case as none of the
parties was being made criminally liable.
e. When the unlicensed foreign corporation has domestic
corporation as a co-plaintiff/petitioner.
This is necessary to prevent multiplicity of suits.
f. Under the doctrine of estoppel when the counterparty is
estopped or precluded from questioning the lack of legal
capacity of the foreign corporation, as held in the following
cases:
A foreign corporation which licensed a domestic
corporation to manufacture and market its products
and equipment is doing business in the Philippines and
cannot sue the domestic corporations if it has no license to
do business in the Philippines. For being in pari delicto,
the domestic corporation cannot ask the courts to prohibit
the foreign corporation from terminating its contract and
giving the license to produce and market its products to
another.799
A foreign corporation doing business in the
Philippines may sue in the Philippine courts although it
has no license to do business here against a Philippine
citizen who had contracted with and been benefited by
said corporation where such party is aware that the
foreign corporation is doing business in the Philippines
without a license and received benefits from transacting
business with it, under the principle of estoppel.800
’"Top-Weld Manufacturing, Inc. V. Eced, S.A., G.R. No. L-44944, August

9, 1985; See also Granger Associates v. Microwave Systems, Inc., G.R. No. 79986.
September 14, 1990.
““’Merrill Lynch Futures, Inc. v. 1Court of Appeals, G.R. No. 97816, July 24,
1992.
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i A party is estopped from challenging the personality

of a corporation after having acknowledged the same by
entering into a contract with it. The principle is applied
to prevent a person contracting with a foreign corporation
from later taking advantage of its noncompliance with the
statutes, chiefly in cases where such person has received
the benefits of the contract.801
vi. Grounds for revocation of license

483. When may the SEC revoke or suspend the license of a foreign
corporation to transact business in the Philippines?
Without prejudice to other grounds provided under special
laws, the license of a foreign corporation to transact business in the
Philippines may be revoked or suspended by the SEC upon any of
the following grounds:
a. Failure to file its annual report or pay any fees as required
by the RCC;
b. Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
c. Failure, after change of its resident agent or address, tc
submit to the SEC a statement of such change as require
by this Title;
d. Failure to submit to the SEC an authenticated copy of
any amendment to its articles of incorporation or bylaws
or of any articles of merger or consolidation within the
time prescribed by this Title;
e. A misrepresentation of any material matter in any
application, report, affidavit or other document submitted
by such corporation pursuant to this Title;
f. Failure to pay any and all taxes, imposts, assessments
or penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political subdivisions;
g- Transacting business in the Philippines outside of
the purpose or purposes for which such corporation is
authorized under its license;
“‘Global Business Holdings, Inc. v. Surecomp Software, B.V., G.R. No. 173463,
October 13, 2010; Steelcase, Inc. v. Design International Selections, Inc., G.R. No.
171995, April 18, 2012.
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h. Transacting business in the Philippines as agent of or

acting on behalf of any foreign corporation or entity not
duly licensed to do business in the Philippines; or
i. Any other ground as would render it unfit to transact
business in the Philippines.802
Upon the revocation of the license to transact business in
the Philippines, the SEC shall issue a corresponding certificate of
revocation, furnishing a copy thereof to the appropriate government
agency in the proper cases.
The SEC shall also mail the notice and copy of the certificate
of revocation to the corporation, at its registered office in the
Philippines.803
Merger and Consolidation

a. Definition and concept
484. What are the different forms of corporate combinations and
acquisitions?
The different forms of corporate combinations and acquisitions
are:
a. Sale of all or substantially all of the assets (asset sale).
b. Sale of controlling block of stock to new stockholder/s
(stock sale).
c. Merger or consolidation.
485. What is a merger?

A merger is a reorganization of two (2) or more corporations
that results in their consolidating into a single corporation, which is
one of the constituent corporations, one disappearing or dissolving
and the other surviving.
To put it another way, merger is the absorption of one (1) or
more corporations by another existing corporation, which retains its
identity and takes over the rights, privileges, franchises, properties,
claims, liabilities and obligations of the absorbed corporation(s). The

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r
surviving corporation continues its existence while the life or lives of

the other corporation(s) is or are terminated.804
486. What is consolidation?

Consolidation is the union of two (2) or more existing corporations
to form a new corporation called the consolidated corporation. It is a
combination by agreement between two (2) or more corporations by
which their rights, franchises, and property are united and become
those of a single, new corporation, composed generally, although not
necessarily, of the stockholders of the original corporations.805
487. Distinguish merger from asset sale between corporations.

In merger, the constituent corporations cease to exist except
the surviving corporation which retains its corporate identity but
acquires all the rights and liabilities of the acquired corporation/s
whereas in asset sale, both the seller corporation and buyer
corporation continue to exist. The seller corporation is not dissolved
even though it may not have any asset left.
In merger, the surviving corporation assumes all the liabilities
of the absorbed corporation whereas in asset sale, the buyer, as a
general rule, does not assume the liabilities of the seller.
b. Distinguish: constituent and consolidatei

corporation
488. Distinguish merger from consolidation.
Consolidation is the union of two (2) or more existing
corporations to form a new corporation called the consolidated
corporation.
Merger, on the other hand, is a union whereby one corporation
absorbs one or more existing corporations, and the absorbing
corporation survives and continues the combined business.
The parties to a merger or consolidation are called constituent
corporations. In consolidation, all the constituents are dissolved
and absorbed by the new consolidated enterprise. In merger, all
’‘’ ’Bank of Commerce v. RPN, G.R. No. 195615, April 21, 2014.
®°5McLeod v. National Labor Relations SEC First Division, et al., G.R. No.
146667, January 23, 2007; PNB v. Andrada Electric and Engineering Co., GK. No.
142936, April 17, 2002.
L
J9JC9B0M
constituents, except the surviving corporation, are' dissolved. In both

cases, however, there is no liquidation of the assets of the dissolved
corporations, and the surviving or consolidated corporation acquires
all their properties, rights and franchises and their stockholders
usually become its stockholders.
The surviving or consolidated corporation assumes
automatically the liabilities of the dissolved corporations, regardless
of whether the creditors have consented or not to such merger or
consolidation.606
c. Plan of merger or consolidation

d. Articles of merger or consolidation
e. Procedure
489. What is the procedure for merger or consolidation?
The RCC requires the following steps for merger or
consolidation:
a. The board of each corporation draws up a plan of merger
or consolidation. Such a plan of merger or consolidation
consists of:
i. The names of the corporations proposing to merge
or consolidate, hereinafter referred to as the
constituent corporations;
ii. The terms of the merger or consolidation and the
mode of carrying the same into effect;
iii. A statement of the changes, if any, in the articles
of incorporation of the surviving corporation in
case of merger; and, in case of consolidation, all the
statements required to be set forth in the articles of
incorporation for corporations organized under this
RCC; and
iv. Such other provisions with respect to the proposed
merger or consolidation as are deemed necessary or
desirable.607
““John F. McLeod v. National Labor Relations SEC First Division, et al., G.R.
No. 146667, January 23, 2007.
'“"Section 75, RCC.
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b. Upon approval by a majority vote of each of the board

of directors or trustees of the constituent corporations
of the plan of merger or consolidation, the same shall be
submitted for approval by the stockholders or members of
each of such corporations at separate corporate meetings
duly called for the purpose.808
c. Notice of such meetings shall be given to all stockholders
or members of the respective corporations in the same
manner as giving notice of regular or special meetings
under Section 49 of the RCC. The notice shall state the
purpose of the meeting and include a copy or a summary
of the plan of merger or consolidation.808
d. The affirmative vote of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or at least
two- thirds (2/3) of the members in the case of nonstock
corporations shall be necessary for the approval of such
plan.810
After the approval by the stockholders or members o:
the plan of merger or consolidation, articles of merger of
articles of consolidation shall be executed by each of the
constituent corporations to be signed by the president
or vice-president and certified by the secretary of each
corporation.811
The contents of the articles of merger or articles of
consolidation shall include the following:
i. The plan of the merger or the plan of consolidation;
ii. As to stock corporations, the number of shares
outstanding, or in the case of nonstock corporations,
the number of members;
iii. As to each corporation, the number of shares or
members voting for or against such plan, respectively;
iv. The carrying amounts and fair values of the assets
and liabilities of the respective companies as of the
agreed cut-off date;

“'“Section 76, RCC.
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V. The method to be used in the merger or consolidation

of accounts of the companies;
vi. The provisional or pro-forma values, as merged or
consolidated, using the accounting method; and
vii. Such other information as may be prescribed by the
SEC.
f. The articles shall be submitted to the SEC for its approval
provided that in the case of merger or consolidation
of special corporations governed by special laws, the
favorable recommendation of the appropriate government
agency shall first be obtained.812
g- If upon investigation, the SEC has reason to believe
that the proposed merger or consolidation is contrary or
inconsistent with the provisions of the RCC or existing
laws, it shall set a hearing to give the corporations
concerned the opportunity to be heard.813
h. Where the SEC is satisfied that the merger or consolidation
of the corporations concerned is not inconsistent with the
provisions of the RCC and existing laws, it shall issue a
certificate of merger or consolidation, at which time the
merger or consolidation shall be effective.814
f. Effectivity
490. When is merger or consolidation effective?
The merger or consolidation is effective upon issuance by the
SEC of a certificate approving the articles and plan of merger or
of consolidation.816 It is the operative fact by which the merger or
consolidation shall be effective.
In case of merger of banks, it is not the approval of the plan
of merger by the BSP that makes the merger effective but upon
issuance of by the SEC of the certificate of merger or consolidation.
Hence, prior to the SEC approval, any payment of an obligation
by the debtor of the absorbed corporation in favor of the surviving
“‘“Section 78, RCC.

“'"Section 78, RCC.
“‘■•Section 78, RCC; Bank of Commerce v. Radio Philippines Network, Inc., ibid.
“'“Section 78, RCC.
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corporation is not valid. The issuance of the certificate of merger is

crucial because not only does it bear out SEC’s approval but it also
marks the moment when the consequences of a merger take place.
By operation of law, upon the effectivity of the merger, the absorbed
corporation ceases to exist but its rights and properties, as well as
liabilities, shall be taken and deemed transferred to and vested in
the surviving corporation.816
g. Limitations
491. In 2015, Total Bank ("Total") proposed to sell to Royal Bank
("Royal") its banking business for P10 billion consisting of
specified assets and liabilities. The parties reached an eventual
agreement, which they termed as "Purchase and Assumption
Agreement" ("P&A") in which Royal would acquire Total’s
specified assets and liabilities, excluding contingent claims,
with the further stipulation that it should be approved by
the Bangko Sentral ng Pilipinas ("BSP"). BSP imposed the
condition that Total should place in escrow PI billion to cover for
contingent claims against it. Total complied. After securing the
approval of the BSP, the two (2) banks signed the agreement.
BSP thereafter issued a circular advising all bank and non
bank intermediaries that effective January 1,2016, "the banking
activities of Total Bank and Royal Bank have been consolidated
and the latter has carried out their operations since then."
a. Was there a merger and consolidation of the two (2)banks
in point of the Corporation Code? Explain.
There was no merger or consolidation of the two (2) banks in
point of the Corporation Code. The Supreme Court ruled in Bank
of Commerce v. Radio Philippine Network, Tnc.817 that there can be
no merger if the requirements and procedure for merger were not
observed and no certificate of merger was issued by the SEC.
The transaction is basically a sale of all or substantially all
of the assets. It is settled if one (1) corporation sells or otherwise
transfers all its assets to another corporation, the latter is not liable
for the debts and liabilities of the transferor if it has acted in good
faith and has paid adequate consideration for the assets, except:
8l6Mindanao Savings and Loan Association Willkom, G.R. No. 178618,

October 11, 2010.
817G.R. No. 195615, April 21, 2014.
L
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(1) where the purchaser expressly or impliedly'agrees to assume

such debts; (2) where the transaction amounts to a consolidation or
merger of the corporations; (3) where the purchasing corporation is
merely a continuation of the selling corporation; and (4) where the
transaction is entered into fraudulently in order to escape liability
for such debts.
The evidence fails to show that BOC was a mere continuation
of TRB. TRB retained its separate and distinct identity after the
purchase. Although it subsequently changed its name to Traders
Royal Holding’s, Inc., such change did not result in its dissolution.
As such, BOC and TRB remained separate corporations.
a. What is meant by a de facto merger? Discuss.818
De facto merger means that a corporation called the Acquiring
Corporation acquired the assets and liabilities of another corporation
in exchange for an equivalent value of shares of stock of the
Acquiring Corporation making the other corporation a stockholder
of the Acquiring Corporation.819
In the present case, there is no de facto merger because the
Acquiring Corporation acquired the assets and liabilities of the
other corporation but not in exchange for stocks. The assets were
acquired in exchange for the assumption of liabilities.
h. Effects
492. What are the effects of merger or consolidation?
The following are the effects of merger or consolidation:
a. The constituent corporations shall become a single
corporation which, in case of merger, shall be the surviving
corporation designated in the plan of merger; and, in case
of consolidation, shall be the consolidated corporation
designated in the plan of consolidation.
b. The separate existence of the constituent corporations
shall cease, except that of the surviving or the consolidated
corporation.
81820 1 6 Bar Exam.

819Bank of Commerce v. Radio Philippines Network, Inc., et al., G.R. No.
195615, April 21, 2014.
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C. The surviving or the consolidated corporation shall

possess all the rights, privileges, immunities, and powers
and shall be subject to all the duties and liabilities of a
corporation organized under the RCC.
d. The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and
franchises of each constituent corporation; and all real
or personal property, all receivables due on whatever
account, including subscriptions to shares and other
choses in action, and every other interest of, belonging to,
or due to each constituent corporation, shall be deemed
transferred to and vested in such surviving or consolidated
corporation without further act or deed.
e. The surviving or consolidated corporation shall be
responsible for all the liabilities and obligations of
each constituent corporation as though such surviving
or consolidated corporation had itself incurred such
liabilities or obligations; and any pending claim, action
or proceeding brought by or against any constituent
corporation may be prosecuted by or against the survivin
or consolidated corporation. The rights of creditors o
liens upon the property of such constituent corporations
shall not be impaired by the merger or consolidation.820
493. Is merger a mode of dissolution?

Yes, because the absorbed corporation ceases to exist upon
approval by the SEC of the merger.
494. Should the absorbed corporation undertake dissolution to

transfer its assets to the surviving corporation?
Although there is a dissolution of the absorbed corporations,
there is no winding up of their affairs or liquidation of their assets,
because the surviving corporation automatically acquires all their
rights, privileges and powers, as well as their liabilities.
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495. Can the surviving corporation collect a promissory note issued

in favor of the absorbed corporation after the effectivity of the
merger?
The fact that the promissory note was executed after the
effectivity date of the merger does not militate against the surviving
corporation because all contracts — irrespective of the date of
execution — entered into in the name of the absorbed corporation
shall be understood as pertaining to the surviving bank.821
496. Can the debtor of the absorbed bank invoke novation against
the surviving corporation which demanded payment of the
debtor’s loan?
A bank which merged with another bank can sue the debtor
of the absorbed bank because it acquired the rights of the latter.
Novation (because of the change of creditor) is not a valid defense
because it is settled that in a merger of two (2) existing corporations,
one of the corporations survives and continues the business, while
the other is dissolved and all its rights, properties and liabilities are
acquired by the surviving corporation.822
The surviving or consolidated corporation shall be responsible
for all the liabilities and obligations of each constituent corporation
as though such surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any pending claim, action
or proceeding brought by or against any constituent corporation
may be prosecuted by or against the surviving or consolidated
corporation. The rights of creditors or liens upon the property of
such constituent corporations shall not be impaired by the merger
or consolidation.823
497. Cite jurisprudence where the surviving corporation was made

to assume the liabilities of the absorbed corporation.
a. Upon service of the writ of garnishment, the garnishee
becomes a “virtual party” or “forced intervenor” to the
case. Citytrust, therefore, upon service of the notice of
“'Associated Bank Court of Appeals and Lorenzo Sarmiento, Jr., G.R. No.
123793, June 29, 1998.
822Babst v. Court of Appeals, G.R. Nos. 99398 and 104625, January 26, 2001.
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garnishment and its acknowledgment that it was in

possession of defendants’ deposit accounts, became a
“virtual party” to or a “forced intervenor” in the civil case.
As such, it became bound by the orders and processes
issued by the trial court despite not having been properly
impleaded therein. Consequently, by virtue of its merger
with BPI, BPI, as the surviving corporation, effectively
became the garnishee, thus the “virtual party” to the
civil case. BPI cannot avoid the obligation attached to
the writ of garnishment by claiming that the fund was
not transferred to it, in Eght of the rule on merger that
all liabilities and obligations of the absorbed corporation
(Citytrust) shall be transferred to and become the
liabilities and obligations of the surviving corporation
(BPI) in the same manner as if the BPI had itself incurred
such liabilities or obligations.821
b. In a case where an employee obtained judgment against
two corporations holding them solidarity liable for
money claim and damages, the surviving corporation,
which absorbed one of the judgment debtor-corporations
assumes the same solidary liability and not only for tht
money claim corresponding to the period the employee
was employed with the absorbed corporation. One of the
effects of a merger is that the surviving company shall
inherit not only the assets, but also the liabilities of the
corporation it merged with.826
C. The merger of a corporation with another does not operate
to dismiss the employees of the corporation absorbed by
the surviving corporation. This is in keeping with the
nature and effects of a merger as provided under law and
the constitutional policy protecting the rights of labor.
The employment of the absorbed employees subsists.
Necessarily, these absorbed employees are not entitled to
separation pay on account of such merger in the absence
821Bank of Philippine Islands v. Lee, G.R. No. 190144, August 1, 2012.

825Sumifru (Philippines) Corporation (Surviving Entity In A Merger With
Davao Fruits Corporation and Other Companies) v. Bernabe Baya, G.R. No. 188269,
April 17, 2017.
1
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of any other ground for its award.826 The surviving

corporation, however, may terminate employment for
redundancies resulting from the merger.
d. Since BSA incurred delay in the performance of its
obligations and subsequently cancelled the omnibus line
without the mortgagor’s consent, its successor BPI cannot
be permitted to foreclose the mortgage for the reason that
its predecessor BSA violated the terms of the contract
even prior to the mortgagor’s justified refusal to continue
paying the amortizations. As such, BPI is liable for BSA,
its predecessor. BPI did not only acquire all the rights,
privileges and assets of BSA but likewise acquired the
liabilities and obligations of the latter as if BPI itself
incurred it.827
XI. Investigations, offenses, and penalties

a. Authority of Commissioner
i. Investigation and prosecution of offenses
498. Does the SEC have prosecutorial power to file criminal
information in court?
No, the SEC has no prosecutorial power. If the SEC has
reasonable basis to believe that a person has violated the RCC or
any of its rules and regulations, it may transmit the evidence to
the Department of Justice for preliminary investigation or criminal
prosecution and/or to initiate criminal prosecution for such violation.
By initiating criminal prosecution, it means that SEC will be the
complainant against the offender.
The only sanctions that the SEC may impose are administrative,
not penal, in nature.
ii. Administration of oath and issuance of

subpoena
Hi. Cease and desist power
820The Philippine Geothermal, Geothermal, Inc. v. Unocal Philippines, Inc.

(Now Known As Chevron Geothermal Philippines Holdings, Inc.), G.R. No. 190187,
September 28, 2016.
827Spouses Ong v. BPI Family Savings Bank, G.R. No. 208638, January 14,
2018.
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499. In what cases may SEC issue a cease and desist order under
the RCC?
The RCC contains two (2) provisions granting authority to the
SEC to issue a cease and desist order.
The first is Section 156, to wit:
“Whenever the SEC has reasonable basis
to believe that a person has violated, or is about
to violate this Code, a rule, regulation, or order of
the SEC, it may direct such person to desist from
committing the act constituting the violation.”
The SEC “may issue a cease and desist order ex
parte to enjoin an act or practice which is fraudulent
or can be reasonably expected to cause significant,
imminent, and irreparable danger or injury to public
safety or welfare” and the ex parte order shall be
valid for a maximum period of twenty (20) days.
Said order may also become permanent after due
notice and hearing.”
While the RCC explicitly allows the issuance of a cease and
desist order ex parte only when the act sought to be restrained is
fraudulent or can be reasonably expected to cause significant,
imminent and irreparable danger or injury to public safety or welfare,
it is submitted that a cease and desist order may also be issued by
the SEC ex parte to enjoin an actual or threatened violation of the
RCC any rule, regulation or order of the SEC, consistent with the
thrust of the RCC to strengthen the regulatory powers of the SEC.
The other is Section 179(f) which allows the issuance of a cease
and desist orders ex parte to prevent imminent fraud or injury
to the public. This is almost identical though with Section
156.
500. Is the power of the SEC to issue cease and desist orders under
the RCC the same as its authority to issue similar orders under
SRC?
They are different. The SRC is a different source of authority
for the SEC to issue a cease and desist order.
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In GSIS v. Court of Appeals,828 GSIS was a stockholder of

Meralco. It was able to obtain a cease and desist order (“CDO”) from
the SEC to enjoin the Lopez family, then the controlling stockholder
of Meralco, from using and voting the proxies in the election of
directors, for alleged violation of the SRC rules on proxy solicitation.
The CDO, signed by only one SEC Commissioner, did not accordingly
state the exact provision of the SRC which was violated. It was held
that there are three (3) distinct bases for the issuance by the SEC of
the cease and desist order. The first, under Section 5(i) of the SRC, is
predicated on a necessity “to prevent fraud or injury to the investing
public.” No other requisite or detail is tied to this CDO authorized
under Section 5(i), SRC.
The second basis, found in Section 53.3 of the SRC, involves
a determination by the SEC that “any person has engaged or is
about to engage in any act or practice constituting a violation of
any provision of the SRC, any rule, regulation or order thereunder,
or any rule of an Exchange, registered securities association,
clearing agency or other self-regulatory organization.” The provision
additionally requires a finding that “there is a reasonable likelihood
of continuing [or engaging in] further or future violations by such
person.” The maximum duration of the CDO issued under Section
53.3 is ten (10) days.
The third basis for the issuance of a CDO is Section 64 of the
SRC. This CDO is founded on a determination of an act or practice,
which unless restrained, “will operate as a fraud on investors or is
otherwise likely to cause grave or irreparable injury or prejudice
to the investing public.” Section 64.1 plainly provides three (3)
segregate instances upon which the SEC may issue the CDO under
this provision: (1) after proper investigation or verification, (2) motu
proprio, or (3) upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO under Section
64, the respondent to the CDO may file a formal request for the
lifting thereof, which the SEC must hear within 15 days from filing
and decide within 10 days from the hearing.
It appears that the CDO under Section 5(i) is similar to the
CDO under Section 64.1. Both require a common finding of a need
to prevent fraud or injury to the investing public. At the same time,
no mention is made whether the CDO defined under Section 5(i)
82eG.R. Nos. 183905 and 184275, April 16, 2009.
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r
may be issued ex-parte, while the CDO under Section 64.1 requires
“grave and irreparable” injury, language absent in Section 5(i).
Notwithstanding the similarities between Section 5(i) and Section
64.1, it remains clear that the CDO issued under Section 53.3 is a
distinct creation from that under Section 64.
The CDO as contemplated in Section 53.3 or in Section 64,
may be issued “ex-parte” (under Section 53.3) or “without necessity
of hearing” (under Section 64.1). Nothing in these provisions impose
a requisite hearing before the CDO may be issued thereunder.
Nonetheless, there are identifiable requisite actions on the part of
the SEC that must be undertaken before the CDO may be issued
either under Section 53.3 or Section 64. In the case of Section 53.3,
the SEC must make two (2) findings: (1) that such person has
engaged in any such act or practice, and (2) that there is a reasonable
likelihood of continuing, (or engaging in) further or future violations
by such person. In the case of Section 64, the SEC must adjudge that
the act, unless restrained, will operate as a fraud on investors or is
otherwise likely to cause grave or irreparable injury or prejudice to
the investing public.”
A singular CDO could not be founded on Section 5.1, Section
53.3 and Section 64 collectively. At the very least, the CDO under
Section 53.3 and under Section 64 have their respective requisites
and terms. It is an error on the part of the SEC in granting the CDO
without stating which kind of CDO as it is an act that contravenes
due process of law.
Also, the fact that the CDO was signed, much less apparently
deliberated upon, by only by one commissioner likewise renders
the order fatally infirm. The SEC is a collegial body composed of
a Chairperson and four Commissioners. In order to constitute
a quorum to conduct business, the presence of at least three (3)
Commissioners is required.829
It is also in this case that the Supreme Court ruled that if
the proxies were obtained on matters which are intra-corporate in
nature, like the election of directors or determination of quorum for
the election of directors, any issue about the validity and legality of
the proxies partakes of an election contest, falling under the rules
on intra-corporate controversy and outside the jurisdiction of the
SEC even though the petition may ostensibly raise a violation of
the SRC. If the proxies were sought and to be voted on any non-
8Z9GSIS v. Court of Appeals, G.R. No. 183905, April 16, 2009.
1
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intra-corporate matter, such as approval of certain corporate acts

under the RCC, the SEC has jurisdiction to rule on issues related
to validation of proxies. This ruling was reiterated in Securities and
Exchange Commission v. Omico and Court of Appeals.830
iv. Contempt
b. Sanctions for violations
i. Administrative sanctions
501. What are the administrative sanctions that the SEC may
impose if it finds that any provision of the RCC or any of the
SEC's orders has been violated?
The SEC may impose administrative sanctions against
the corporation any or all of the following sanctions, taking into
consideration the extent of participation, nature, effects, frequency
and seriousness of the violation.
(P5,000.00) to Two Million Pesos (P2,000,000.00), and
Million Pesos (P2,000,000.00);
b. Issuance of a permanent cease and desist order;
c. Suspension or revocation of the certificate of incorporation;
and
d. Dissolution of the corporation and forfeiture of its assets
under the conditions in Title XIV of the RCC.831
It should be noted that the SEC also has the authority to
punish for contempt, issue subpoena and summons, impose fines,
and suspend, revoke, after proper notice and hearing, the franchise
or certificate of registration of the corporation under the SRC.832 But
these are distinct from the similar powers and authority granted
to the SEC under the RCC. Obviously, the said powers of the SEC
under the SRC are for the purpose of implementing the provisions
of the SRC, its rules and regulations while the similar authority
granted to the SEC under the RCC is intended to enforce the RCC,
its rules and regulations.
™G.R. No. 187702, October 22, 2014.

““Section 5, SRC
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I
502. Is the involuntary dissolution imposed when a corporation

commits a violation of the RCC a form of criminal sanction?
No, it is an administrative penalty.833
ii. Prohibited Acts
Hi. Penalties
503. What are the acts penalized under the RCC and their
corresponding sanctions?
Violation Penalty
SECTION 159. Unauthorized use of a Fine ranging from
corporate name. P10,000.00 to P200,000.00.
Unauthorized
Use of Corporate
Name; Penalties.
SECTION 160. When, despite the Fine ranging from
knowledge of the PIO,000.00 to P200,000.00
Violation of existence of a ground at the discretion of the
Disqualification
for disqualification as court, and permanent
Provision; provided in Section 26 disqualification from being
Penalties. of the RCC, a director, a director, trustee or officer
trustee or officer of any corporation; if the
willfully holds office, violation is injurious or
or willfully conceals detrimental to the public,
such disqualification, the fine ranges from
such director, trustee or P20,000.00 to P400,000.00. I
officer.
“IENT v. Tullett Prebon, G.R. No. 189158, January 11, 2017.
I
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Violation Penalty
SECTION 161. Unjustified failure Fine ranging from
or refusal by the P10,000.00 to P200,000.00,
Violation of Duty
corporation, or by those at the discretion of
to Maintain
responsible for keeping the court, taking into
Records, to Allow
and maintaining consideration the
their Inspection
corporate records, to seriousness of the violation
or Reproduction;
comply with Sections and its implications.
Penalties.
45, 73, 92, 128, 177 and When the violation of this
other pertinent rules provision is injurious or
and provisions of the detrimental to the public,
RCC on inspection and the penalty is a fine
reproduction of records. ranging from P20,000. 00 to
P400,000.00.
The penalties imposed
under this section shall
be without prejudice to
the SEC’s exercise of its
contempt powers under
Section 157 hereof.
SECTION 162. Willful certification Fine ranging from
of a report required P20,000.00 to P200,000.00;
Willful
under the RCC, if the wrongful certification
Certification is injurious or detrimental
knowing that the same
of Incomplete, to the public, the auditor or
contains incomplete,
Inaccurate, False the responsible person may
inaccurate, false, or
or Misleading
misleading information also be punished with a fine
Statements ranging from P40,000.00 to
or statements.
or Reports;
P400,000.00.
Penalties.
SECTION 163. An independent Fine ranging from
auditor who, in P80,000.00 to P500,000.00.;
Independent if the statement or report
collusion with the
Auditor
corporation’s directors certified is fraudulent, or
Collusion;
or representatives, has the effect of causing
Penalties.
certifies the injury to the general public,
corporation’s financial the auditor or responsible
statements despite officer may be punished
its incompleteness or with a fine ranging from
inaccuracy, its failure to P100,000.00 to P600,000.00.
give a fair and accurate
presentation of the
corporation’s condition,
or despite containing
false or misleading
statements.
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I
Violation Penalty
SECTION 164. Those responsible for Fine ranging from
the formation of a P200,000.00 to
Obtaining corporation through P2,000,000.00; if the
Corporate fraud, or who assisted violation of this provision
Registration directly or indirectly is injurious or detrimental
Through Fraud; therein. to the public, the
Penalties. penalty is a fine ranging
from P400,000.00 to
P5,000,000.00.
SECTION 165. Conduct of the Fine ranging P200,000.00
corporation’s business to P2,000,000.00; if the
Fraudulent through fraud. violation of this provision
Conduct of is injurious or detrimental
Business; to the public, the
Penalties. penalty is a fine ranging
from P400,000.00 to
P5,000,000.00.
SECTION 166. A corporation used for Fine ranging P100,000.00 to
fraud, or for committing P5,000,000.00.
Acting as or concealing graft and
Intermediaries corrupt practices as
for Graft and defined under pertinent
Corrupt statutes.
Practices; When there is a
Penalties. finding that any of
its directors, officers,
employees, agents, or
representatives are
engaged in graft and
corrupt practices, the
corporation’s failure to
install:
(a) safeguards for the
transparent and lawful
delivery of services;
and (b) policies, code of
ethics, and procedures
against graft and
corruption shall be
prima facie evidence
of corporate liability
under this section.
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Violation Penalty
SECTION 167. A corporation Fine ranging from >. i
that appoints an P100,000.00 to
Engaging Pl,000,000.00. , 10
intermediary who
Intermediaries
engages in graft and
for Graft and
corrupt practices for the
Corrupt corporation’s benefit or
Practices; interest.
Penalties.
SECTION 168. A director, trustee, or Fine ranging from
officer who knowingly P500,000.00 to
Tolerating Graft Pl,000,000.00.
fails to sanction,
and Corrupt
report, or file the
Practices;
appropriate action
Penalties. with proper agencies,
allows or tolerates
the graft and corrupt
practices or fraudulent
acts committed by a
corporation’s directors,
trustees, officers, or
employees.
SECTION 169. Any person who, At the discretion of
knowingly and with the court, be punished
Retaliation
Against
intent to retaliate,
commits acts
with a fine ranging
from P100,000.00 to I
Whistleblowers. detrimental to a Pl,000,000.00.
whistleblower such as
interfering with the
lawful employment
or livelihood of the
whistleblower.
A whistleblower
refers to any person
who provides truthful
information relating
to the SEC or possible
SEC of any offense or
violation under the
RCC.
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Violation Penalty
SECTION 170. Violations of any of the Fine of not less than
other provisions of the PIO,000.00 but not more
Other Violations RCC or its amendments than Pl,000,000.00; if the
of the Code; not otherwise violation is committed by
Separate specifically penalized a corporation, the same
Liability. therein. may, after notice and
hearing, be dissolved in
appropriate proceedings
before the SEC: Provided,
That such dissolution
shall not preclude the
institution of appropriate
action against the director,
trustee, or officer of the
corporation responsible for
said violation: Provided,
further, That nothing in this
section shall be construed to
repeal the other causes for
dissolution of a corporation
provided in the RCC.
Liability for any of the
foregoing offenses shall be
separate from any other
administrative, civil, or
criminal liability under the
RCC and other laws.
The RCC shows the clear legislative intent to consider the

foregoing acts as criminal offenses. Under OCC, only the violation of
the right of the inspection was considered a criminal offense. While
Section 144 of the OCC provided that any other violation of the OCC
shall be punishable by fine or imprisonment, it was held in the case
of James IENT v. Tullett Prebon,834 that the sanction under this
section encompassed administrative penalties and not criminal in
nature, in the absence of clear legislative intent to criminalize the
violation.
“'G.R. Nos. 189158 and 189530, January 11, 2017.
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J9JC9B0M
504. Are the enumerated acts considered criminal offenses if the

penalty is only a fine and not imprisonment?
Yes, under Article 26 ofthe Revised Penal Code, a fine, whether
imposed as a single or as an alternative penalty, shall be considered
an afflictive penalty, if it exceeds One Million Two Hundred
Thousand Pesos (Pl,200,000.00); a correctional penalty, if it does not
exceed One Million Two Hundred Thousand Pesos (Pl,200,000.00)
but is not less than Forty Thousand Pesos (P40,000.00); and a light
penalty, if be less than Forty Thousand Pesos (P40.000.00).
There are, in fact, various criminal offenses under the Revised
Penal Code and special laws when the penalty for the criminal
offense consists only of monetary fines such as: Occupation of real
property or usurpation of real rights in property under Article 312 of
the Revised Penal Code, Reckless acts of imprudence and negligence
resulting in damage to property of another under Article 365 of
the Revised Penal Code, violation of R.A. No. 10054 or Motorcycle
Helmet Act of 2009, violation of R.A. No. 8750 or “Seat Belts Use
Act of 1999,” violation of R.A. No. 10913 or the “Anti-Distracted
Driving Act”, violation of certain provisions of R.A. No. 11313 or
the “Safe Spaces Act”, violation of R.A. No. 9211 or the “Tobacco
Regulation Act of 2003.”
iv. Who are liable

505. If the offender is a corporation, against whom may the penalty
be imposed?
Under Section 171 of RCC, if the offender is a corporation, the
penalty may, at the discretion of the court, be imposed upon the
corporation and/or its directors, trustees, stockholders, members,
officers, or employees responsible for the violation or indispensable
to its commission.
Moreover, anyone who shall aid, abet, counsel, command,
induce, or cause any violation of the RCC, or any rule, regulation,
or order of the SEC shall be punished with a fine not exceeding that
imposed on the principal offenders, at the discretion of the court,
after taking into account their participation in the offense.835
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■
c. Authority of the Securities and Exchange

Commission
506. What are the powers, functions and jurisdiction of the SEC as
provided under the RCC?
It has the power and authority to:
a. Exercise supervision and jurisdiction over all corporations
and persons acting on their behalf, except as otherwise
provided under the RCC;
b. PursuanttoP.D. No. 902-A,retainjurisdictionoverpending
cases involving intra-corporate disputes submitted for
final resolution. The SEC shall retain jurisdiction over
pending suspension of payment/rehabilitation cases filed
as of 30 June 2000 until finally disposed;
c. Impose sanctions for the violation of the RCC, its
implementing rules and orders of the SEC;
d. Promote corporate governance and the protection of
minority investors, though, among others, the issuance of
rules and regulations consistent with international best
practices;
e. Issue opinions to clarify the application of laws, rules and
regulations;836
f. Issue cease and desist orders ex parte to prevent
imminent fraud or injury to the public;
g- Hold corporations in direct and indirect contempt;
h. Issue subpoena duces tecum and summon witnesses to
appear in proceedings before the SEC;
i. In appropriate cases, order the examination, search and
seizure of documents, papers, files and records, and books
of accounts of any entity or person under investigation as
may be necessary for the proper disposition of the cases,
subject to the provisions of existing laws;
j. Suspend or revoke the certificate of incorporation after
proper notice and hearing;
’“In Gamboa v. Teves, G.R. No. 176579, October 9, 2012, the Supremo Court
pronounced that only the SEC en banc can issue opinions which shiill have the force
and effect of rules and regulations.
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k. Dissolve or impose sanctions on corporations, upon final

court order, for committing, aiding in the SEC of, or in any
manner furthering securities violations, smuggling, tax
evasion, money laundering, graft and corrupt practices,
or other fraudulent or illegal acts;
1. Issue writs of execution and attachment to enforce
payment of fees, administrative fines, and other dues
collectible under the RCC;
m. Prescribe the number of independent directors and the
minimum criteria in determining the independence of a
director;
n. Impose or recommend new modes by which a stockholder,
member, director, or trustee may attend meetings or cast
their votes, as technology may allow, taking into account
the company’s scale, number of shareholders or members,
structure, and other factors consistent with the basic
right of corporate suffrage;
o. Formulate and enforce standards, guidelines, policies,
rules and regulations to carry out the provisions of the
RCC; and
P- Exercise such other powers provided by law or those
which may be necessary or incidental to carrying out the
powers expressly granted to the SEC.837
In imposing penalties and additional monitoring and
supervision requirements, the SEC shall take into consideration the
size, nature of the business, and capacity of the corporation.838
It may also exercise visitorial powers over all corporations,
which powers shall include the examination and inspection of
records, regulation and supervision of activities, enforcement of
compliance, and imposition of sanctions in accordance with the
RCC.839
Thus, a corporation cannot deny the SEC access to corporate
records on the pretext that it is not a stockholder.
“’Section 179, RCC

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CASE INDEX
A
Aboitiz Shipping Corporation v. Court of Appeals, G.R. No. 84458, November
6,1989, 233
Aboitiz Shipping Corporation v. General Accident Fire and Life Assurance
Corporation, 217 SCRA 359 (1993), 264, 265, 271
Aboitiz Shipping Corporation v. Insurance Company of North America, G.R.
No. 168402, August 6, 2008, 98, 249, 251
Abra Valley. Grace Borgona Insigne, et al. v. Abra Valley Colleges, Inc. and
Francis Borgona, G.R. No. 204089, July 29, 2015, 548
ABS-CBN Broadcasting Corporation v. Honorato Hilario, G.R. No. 193136,
July 10, 2019, 425, 429
Abueg v. San Diego, 44 Off. Gaz. 80, 265
AC. Ransom Labor Union-CCLU v. National Labor Relations Commission,
et al., G.R. No. L-69494, May 29, 1987, 427
Aderito Z. Yujuico v. Cezar T. Quiambao, et al., G.R. No. 180416, June 2,
2014, 552, 548
Aetna Casualty and Surety Co. v. Pacific Star Line, G.R. No. L-26809.
December 29, 1977, 694
A.F Sanchez Brokerage v. Court of Appeals, G.R. No. 147079, December 21,
2004, 191
Agapito Gutierrez v. Capital Insurance & Surety Co., Inc., G.R. No. L-26827,
June 29, 1984, 160
Ago Realty & Development Corporation v. Dr. Angelita F. Ago, et al., G.R.
Nos. 210906 and 211203, October 16, 2019, 479
Aguirre v. FQB +7, Inc., G.R. No. 170770, January 9, 2013, 643
Alabang Corporation Development v. Alabang Hills Village Association and
Rafael Tinio, G.R. No. 187456, June 2, 2014, 663
Alabang Development Corporation v. Alabang Hills Village Association,
G.R. No. 187456, June 2, 2014, 644
Alberta Yobido v. Court of Appeals, G.R. No. 113003, October 17,1997, 241
Alejandro D.C. Roque v. People of the Philippines, G.R. No. 211108, June
7, 2017, 554
Alfonso S. Tan v. Securities and Exchange Commission, G.R. No. 95696,
March 3, 1992, 613
729
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Alfredo L. Chua v. People of the Philippines, G.R. No. 216146, August 24,
2016, 554
Alfredo L. Villamor, Jr. v. John S. Umale, G.R. Nos. 172843 & 172881,
September 24, 2014, 558
Alfredo Manay, Jr. v. Cebu Air, Inc., G.R. No. 210621, April 4, 2016, Leonen,
J., 201
Alfredo S. Ramos v. China Southern Airlines Co. Ltd., G.R. No. 213418,
September 21, 2016, 205
Alicia E. Gala, et al. v. Ellice Agro-Industrial Corporation, et al., G.R. No.
156819, December 11, 2003, 459
Alitalia v. Intermediate Appellate Court, G.R. No. 71929, December 4,1990,
332
Allen v. Railroad Commission of the State of California, 179 Cal., 68; 8 A. L.
R., 249 (1918), as cited in Iloilo Ice and Cold Storage, G.R. No. 19857,
March 2, 1923, 296
Alpha Insurance and Surety Co. v. Arsenia Sonia Castor, G.R. No. 198174,
September 2, 2013, 9, 163
American Home Assurance Company v. Court of Appeals, G.R. No. 94149,
May 5, 1992, 199, 202
American Home Assurance v. Antonio Chua, G.R. No. 130421, June 28,
1999, 50
Andaya v. Rural Bank of Cabadbaran, G.R. No. 188769, August 3, 2016, 619
Andrew Palermo v. Pyramid Insurance Co., Inc., G.R. No. L-36480, May 31,
1988, 159
Ang v. American Steamship, G.R. No. L-22491, January 27, 1967, 283
Ang v. Compania Maritima, 133 SCRA 600 (1984), 283
Anna Teng v. Securities and Exchange Commission, et al., G.R. No. 184332,
February 17, 2016, 614, 615, 619
Annie Tan v. Great Harvest Enterprises, G.R. No. 220400, March 20, 2019,
200, 204
Anthony Yu, et al. v. Joseph Yukayguan, et al., G.R. No. 177549, January
18, 2009, 558, 559
Arbes v. Polistico, G.R. No. 31057, September 7, 1929 (citing Manresa), 342
Armando Geagonia v. Court of Appeals and Country Bankers Insurance
Corporation, G.R. No. 114437, February 6, 1995, 37
Arriesgado v. Tiu, G.R. No. 138060, September 1, 2004, 212
Asia Lighterage and Shipping, Inc. v. Court of Appeals, G.R. No. 147246,
August 9, 2003, 409 SCRA 340, 192
Asian Terminals, Inc. v. First Lepanto Taisho Insurance, G.R. No. 185964,
June 16, 2014, 106
Asian Terminals, Inc. v. Simon Enterprises, Inc., G.R. No. 177116, February
27, 2013, 206
Asian Terminals v. Daehan Fire and Marine Insurance, G.R. No. 171194,
February 4, 2010, 191
730
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Asian Terminals Philam Insurance Co., G.R. No. 181262, July 24, 2013,
286
Asset Privatization Trust v. Court of Appeals, G.R. No. 121171, December
29, 1988, 559
Associated Bank v. Court of Appeals and Lorenzo Sarmiento, Jr., G.R. No.
123793, June 29, 1998, 714
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731
1
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Bonnevie v. Hernandez, G.R. No. L-5837, May 31, 1954, 387
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c
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Carlos Gelano v. Honorable Court of Appeals, et al., G.R. No. L-39050,
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C.B. Williams v. Yangco, 27 Phil. 68, 277
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Cellpage International Corporation v. The Solid Guaranty, G.R. No. 226731,
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China Banking Corporation v. Court of Appeals, and Valley Golf and
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Ching v. Secretary of Justice, G.R. No. 164317, February 6, 2006, 597
Choa Tiek Seng, doing business under the name and style of Seng’s
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732
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r
Chua Yek Hong v. Intermediate Appellate Court, G.R. No. 74811, September
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Chua Yek Hong v. Intermediate Appellate Court, G.R. No. L-74811,
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Chung Ka Bio v. Intermediate Appellate Court, G.R. No. 71837, July 26,
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CIR v. Suter, et al., G.R. No. L-25532, February 28, 1969, 337
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Clemente v. Court of Appeals, G.R. No. 82407, March 27,1995, 660, 661, 662
Cogeo-Cubao Operators and Drivers Association v. Court of Appeals, 207
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Collector v. Buan, G.R. No. L-11438, July 31, 1958, 303
Columbia Pictures, Inc. v. Court of Appeals, G.R. No. 110318. August 28,
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Commart (Phils.) Inc., et al. v. Securities and Exchange Commission and
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Commissioner of Internal Revenue v. Interpublic Group of Companies, G.R.
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Communication and Information Systems Corporation v. Mark Sensing
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Converse Rubber Corporation v. Universal Rubber Products, Inc., G.R. No.
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Country Bankers Insurance Corporation v. Travellers Insurance and Surety
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Crisostomo v. Court of Appeals, infra, 193
Cua, Jr. v. Tan, G.R. Nos. 181455-56 and 182008, December 4, 2009, 592
Cua, Jr. v. Tan, 622 Phil. 661 (2009), 556
David C. Lao v. Dionisio Lao, G.R. No. 170585, October 6, 2008, 612
Dela Torre v. Court of Appeals, G.R. No. 160088, July 13, 2011, 265
Del Rama v. Maao Sugar Central, G.R. No. 17504, February 28, 1969, 507
733
L
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Delsan Transport Lines v. Court of Appeals, G.R. No. 127897, November
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Designer Baskets. Inc. v. Air Sea Transport, Inc. and Asia Cargo Container
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Development Bank of the Philippines v. Commission on Audit, G.R. No.
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Development Bank of the Philippines v. Hydro Resources Contractors
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Development Insurance Corporation v. Intermediate Appellate Court, et al.,
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De Villola v. Stanley, 32 Phil. 541, 192
Dizon v. Octavio, 316
Dole Philippines v. Maritime Company of the Philippines, G.R. No. L-61352,
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Donnina Halley v. Printwell, Inc., G.R. No. 157549, May 30, 2011, 595
Dr. Gil J. Rich v. Guillermo Paloma III, G.R. No. 210538, March 7, 2018,
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DSR-Senator Lines v. Federal Phoenix Assurance Co., G.R. No. 135377,
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Eastern and Australian Steamship Co., Ltd. v. Great American Insurance

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Eastern Shipping Lines v. Intermediate Appellate Court, G.R. Nos. L-69044
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Edna Diego Lhuillier v. British Airways, G.R. No. 171092, March 15, 2010,
328
Edward C. Ong v. Court of Appeals and People of the Philippines, G.R. No.
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E.M. Bachrach v. British American Assurance Company, G.R. No. L-5715,
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Embassy Farms, Inc. v. Court of Appeals, G.R. No. 80682, August 13, 1990,
615
Emilio Tan, Juanito Tan, Alberto Tan, and Arturo Tan v. Court of Appeals
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734
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Engineering Geoscience, Inc. v. Philippine Savings Bank, G.R. No. 187262,
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Equitable Insurance Corporation v. Transmodal International, Inc., G.R.
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Eriks Pte. Ltd. v. Court of Appeals, G.R. No. 118843,1997, 693
Erson Ang Lee Doing Business as “Super Lamination Services” v. Samahang
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Everett Steamship Corporation v. Court of Appeals, G.R. No. 122494,
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F
“F” Transit Co., Inc. v. NLRC, G.R. Nos, 88195-96, January 27,1994, 318
Far Eastern Shipping Company v. Court of Appeals, G.R. No. 130068,
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Federal Phoenix Assurance • Fortune Sea Carrier, G.R. No. 188118,
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FGU Insurance Corporation v. Court of Appeals, et al., G.R. No. 13777!
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FGU Insurance Corporation v. Roxas, G.R. No. 189526, G.R. No. 189526,
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F.H. Stevens & Co v. Nordeutscher Lloyd, 6 SCRA 180, 288
Fieldman’s Insurance Co., Inc. v. Vda. de Songco, G.R. No. L- 24833,
Figuration Vda. de Maglana, et al. v. Hon. Francisco Consolacion and Afisco
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Filipinas Broadcasting Network v. Ago Medical and Educational Center,
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Filipinas Port Services Inc. v. Go, G.R. No. 161886, March 16, 2007, 603
Filipinas Port Services v. Victoriano Go, et al., G.R. No. 161886, March 16,
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Filipino Merchants Insurance Co., Inc. v. Court of Appeals, et al., G.R. No.
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Filipino Merchants Insurance Company, Inc. v. Hon. Jose Alejandro, G.R.
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735
1
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Finman General Assurance Corporation v. Honorable Court of Appeals and
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First Malayan Leasing v. Court of Appeals, G.R. No. 91378, June 9, 19921
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First Philippine Industrial Pipeline Court of Appeals, G.R. No. 125948,
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Florendo v. Philam, ibid., 68
Florete v. Florete, GR. No. 174909, January 20, 2016, 556, 557
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Fortis v. Hermanos, G.R. No. 2484, April 11, 1906, 349
Fortune Express, Inc. v. Court of Appeals, G.R. No. 119756, March 18, 1999,
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Fortune Insurance and Surety Co., Inc. v. Court of Appeals and Producers
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Fortune Medicare, Inc. v. David Robert Amorin, G.R. No. 195872, March
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Fredco Manufacturing Corporation v. President and Fellows of Harvard
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G
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Games and Garment Developers v. Allied Banking Corporation, G.R. No.
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Gatchalian v. Collector of Internal Revenue, G.R. No. 45425, April 29, 1939,
348
Geagonia v. Court of Appeals, 241 SCRA 152 (1995), 27
Gelano v. Court of Appeals, G.R. No. L-39050, February 24, 1981, 661, 662
736
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Gelisan v. Alday, G.R. No. L-30212, September 9, 1987, 317
Gen. Insurance & Surety Corporation v. Ng Hua, G.R. No. L-14373, January
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Gerardo Lanuza, Jr. and Antonio O. Olbes v. BF Corporation, G.R. No.
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Gilda C. Lim, et al. v. Patricia Lim-Yu, In her capacity as a Minority
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Gokongwei v. Securities and Exchange Commission, G.R. No. L-45911,
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Gonzales v. Philippine National Bank, supra, 553
Gonzalo Chua Guan v. Samahang Magsasaka, Inc., G.R. No. L-42091,
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Goquiolay v. Sycip, G.R. No. L-11840, July 26, 1960, 351
Government Service Insurance System v. Court of Appeals, et al., G.R. No.
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Gov’t of the P.I. v. Phil. Steamship Co., Inc., 44 Phil. 359, 278
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Granger Associates v. Microwave Systems, Inc., G.R. No. 79986. September
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Great Asian Sales Center Corporation v. Court of Appeals, G.R. No. 105774
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Guan v. Cia Maritime (SC), 38 Off. Gaz. 2536; etc., 263
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Guzman v. Behn, Meyer & Co., 9 Phil. 112, 263
737
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Heirs of Antonio Pael v. Court of Appeals, G.R. No. 133547, December 7,
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Heirs of Fe Tan Uy, represented by her heir, Mauling Uy Lim v. International
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Home Ins. Co. v. American Steamship Agencies, Inc. v. Luzon Stevedoring
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Home Insurance Co. v. American Steamship Agencies, April 4, 1968; 23
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Home Insurance Company v. Eastern Shipping Lines, 703
Hongkong Bank v. Jurado & Co., G.R. No. 414, November 9, 1903, 341
Hutchison Ports Philippines Limited v. Subic Bay Metropolitan Authority,
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Hyatt Elevators and Escalators Corporation v. Goldstar Elevators Phils.,
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I
IENT v. Tullett Prebon, G.R. No. 189158, January 11, 2017, 591, 703, 721
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International Academy of Management and Economics (I/AME) v. Litton
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International Express Travel & Tour Services, Inc. v. Hon. Court of Appeals,
Henri Kahn, Philippine Football Federation, G.R. No. 119002, October
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Isabela Roque, doing business under the name and style of Isabela Roque
Timber Enterprises and Ong Chiong v. Hon. Intermediate Appellate
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Islamic Directorate of the Philippines, et al. v. Court of Appeals and Iglesia
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Island Sales, Inc. v. United Pioneers General Construction Company, et al.,
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Ivor Robert Dayton Gibson v. Hon. Pedro Revilla, et al., G.R. No. L-41432,
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J
J. Tinga, Separate Opinion, J.G. Summit Holding, Inc. v. Court of Appeals,
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J. Tiosejo Investment Corp. v. Spouses Ang, G.R. No. 174149, September I
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Jaime T. Gaisano v. Development Insurance and Surety Corporation, G.R.
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James IENT v. Tullett Prebon, G.R. Nos. 189158 and 189530, January 11,
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James McGuire v. Manufacturers Life Insurance Co., G.R. No. L-3581,
James Stokes, as Attorney-in-Fact of Daniel Stephen Adolfson v. Malayan
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Jarantilla, Jr. v. Jarantilla, G.R. No. 154486, December 1, 2010, 651 SCRA
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Jesus v. Lanuza, et al. v. Court of Appeals, et al., G.R. No. 131394, March
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JG Summit Holdings v. Court of Appeals, G.R. No. 124293, September 24,
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739
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John F. McLeod v. National Labor Relations Commission First Division, et
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Keihin-Everett Forwarding Co. v. Marine Malayan Insurance Corporation,

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Keihin-Everett Forwarding v. Tokio Marine Malayan Insurance, et al., G.R.
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Keng Hua Paper Products v. Court of Appeals, 286 SCRA 257, 242
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Kiel v. Estate of Sabert, G.R. No. 21639, September 25, 1924, 342
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K.S. Young v. Midland Textile Insurance Company, G.R. No. 9370, March
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La Mallorca v. Court of Appeals, G.R. No. L-20761, July 27, 1966, 232
La Razon v. Union Insurance, G.R. No. 139983, September 1, 1919, 111
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741
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Mandbusco v. Francisco, 32 SCRA 405, 307, 310
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743
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0
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745
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747
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J9JC9B0M
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Senior Associate Justice

The motivational writer Paul J. Meyer once said:

"Productivity is never an accident. It is always the result of

Never has this observation been as valid as when applied to the

The author examines, analyzes and deconstructs into understandable

Entitled Divina on Commercial Law: A Comprehensive Guide and

Thus, we say: Mabuhay, DeanI

Knowledge production is the lifeblood of any field or discipline. It nurtures academic

REV, HGRICHARD GMNG, O.P.

Justice Angelina Sandoval-Gutierrez (Ret.)

“The field of commercial law serves as the backbone of a vibrant

Similar to its predecessor, this 2-volume compendium is responsive as

Commercial Law as a study and practice has always been marked by

ATTY. ALDEN FRANCGONZALES

II. PRE-NEED CODE OF THE PHILIPPINES

III. TRANSPORTATION LAWS

IV. BUSINESS ORGANIZATIONS

i. What is an insurance contract?

2. Is a surety agreement signed by a person undertaking to

‘Section 2, Insurance Code.

4. Philippine Health Care Providers, Inc. is a domestic corporation

No, Maxicare, as an HMO, is not engaged in insurance business.

5. Is the health care agreement an insurance contract for the

Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,

4 DIVINA ON COMMERCIAL LAW:

from sickness, injury, or other stipulated contingent, the health care

6. Who are the parties to a contract of insurance?

7, May a member of the MILF or its breakaway group, the Abu

life insurance, the insured may insure someone else’s life,

B. Elements of an insurance Contract

9. What is insurable interest?

’Philippine Health Care Providers v. Commissioner of Internal Revenue, G.R.

If person procuring interest has no insurable interest in the

10. What may be insured against?

11. Cite examples of perils which may result in risk of loss.

12. What is an actuarial risk?

“Section 3, Insurance Code.

13. Is actuarial risk the same an investment risk?

14. What is an insurance premium?

C. Characteristics and Nature of Insurance Contracts

15. What are the characteristics of an insurance contract?

12Fieldman’s Insurance Co., Inc. v. Vda. de Songco, G.R. No. L- 24833,

e. It is a voluntary contract, as the parties may incorporate

16. Spouses Cha and CKS Development Corporation entered into

The automatic assignment of the policy to CKS under the

17. State the rules on interpretation of insurance contract.

In another case, when a Health Care Contract stipulates that

Similarly, if loss of hand is defined in the policy

a) Insurable interest on his own life, his spouse,

18Ty v. First National Surety, No. L-16138, April 29,1961.

21. If any person, other than those disqualified to receive donation

the person in whose name or for whose benefit it is made unless

It would have been different if it was Montenegro, as creditor,

28. On July 14, 1985, X, a homosexual, took an insurance policy

b) Of any person on whom he depends wholly or

29. Carlo and Bianca met in the La Boracay festivities. Immediately,

Yes. Carlo can claim the insurance benefit. If a person insures

c) Of any person under a legal obligation to

30. Give examples.

d) Of any person upon whose life any estate or

31. Can the insured change his beneficiary?