TABLE OF CONTENTS a. Definition ......................................................

6
b. Divisions ....................................................... 6
I. INSURANCE ............................................ 1
c. Loan on Bottomry and Loan on
A. Basic Concepts ..................................................... 1 Respondentia Distinguished ........................... 6
1. Definition .......................................................... 1 d. Risks ............................................................... 6
a. Insurance ....................................................... 1 e. Loss ................................................................ 7
b. Contract of Insurance ................................. 1 f. Abandonment ............................................... 8
2. Form ................................................................... 1 g. Average .......................................................... 9
3. Doing or Transacting Insurance Business.... 2 h. Warranties ................................................... 10
Principal Object and Purpose Test ............... 2 2. Fire .................................................................... 11
4. Governing Law ................................................. 2 a. Definition .................................................... 11
5. Parties to an Insurance Contract.................... 2 b. Risks ............................................................. 11
a. Insurer ........................................................... 2 c. Alterations in Use or Condition .............. 11
b. Insured .......................................................... 3 d. Measure of Indemnity ............................... 12
c. Exception ...................................................... 3 3. Casualty ............................................................ 12
B. Elements of An Insurance Contract ................. 3 a. Definition .................................................... 12
1. Cause .................................................................. 3 b. Intentional Injury and Accidental Injury
2. Consideration .................................................... 3 Distinguished .................................................. 13
3. Risk of Loss or Damage .................................. 3 c. Divisions ...................................................... 13
4. Risk-Distributing Scheme ............................... 3 d. No-Action Clause ...................................... 13
5. Insurable Interest ............................................. 3 4. Suretyship......................................................... 14
6. Meeting of the Minds ...................................... 4 a. Definition .................................................... 14
C. Characteristics and Nature of an Insurance b. Nature of Contract .................................... 14
Contract ...................................................................... 4 c. Liability of Surety ....................................... 14
1. In General.......................................................... 4 5. Life .................................................................... 14
a. Consensual .................................................... 4 a. Types ............................................................ 15
b. Aleatory ......................................................... 4 b. Other Classifications of Life Policies ..... 15
c. Voluntary....................................................... 4 c. Risks ............................................................. 16
d. Executory and Unilateral but 6. Microinsurance................................................ 17
Synallagmatic .................................................... 4
7. Compulsory Motor Vehicle Insurance ........ 17
e. Conditional ................................................... 5
8. Compulsory Insurance Coverage for
f. Contract of Adhesion (Fine Print Rule) ... 5 Agency-Hired Workers ...................................... 18
g. Personal Contract ........................................ 5 a. Definition .................................................... 18
h. Uberrimae fides Contract (i.e. a contract of b. Qualifications ............................................. 19
the highest degree of good faith)................... 5
c. Disqualifications ......................................... 19
2. For Specific Kinds of Insurance Contracts .. 5
E. Variable Contracts .............................................. 19
a. For Non-Life Insurance ............................. 5
F. Insurable Interest ................................................ 20
b. For Life Insurance....................................... 5
When insurable interest should exist ............... 21
D. Classes ................................................................... 6
1. In Life/Health................................................. 21
1. Marine Insurance .............................................. 6
a. In Life Insurance ........................................ 22
 b. In Health Insurance .................................. 23 b. Kinds ........................................................... 36
2. In Property ...................................................... 23 c. Test of Materiality ...................................... 36
a. Time of Existence ...................................... 24 d. Effects ......................................................... 36
b. Measure of Indemnity .............................. 24 e. Concealment vs. Misrepresentation ........ 37
c. Interest in Property and Life 3. Breach of Warranties...................................... 37
Distinguished .................................................. 25 a. Warranties, Riders, and Endorsements .. 38
3. Double Insurance and Over- insurance...... 25 b. Kinds ........................................................... 38
4. Multiple or Several Interests on Same c. Effect of Breach ......................................... 38
Property................................................................ 26
I. Claims Settlement and Subrogation .................. 39
5. No Fault, Suicide, and Incontestability
Clauses .................................................................. 27 1. Loss ................................................................... 39
a. No Fault Clause ......................................... 27 a. Requisites..................................................... 39
b. Suicide Clause ............................................ 28 b. Causes .......................................................... 39
c. Incontestability Clause .............................. 28 c. Liability ........................................................ 40
G. Perfection of the Insurance Contract ............. 28 d. Notice and Proof of Loss ......................... 40
1. Offer and Acceptance/Consensuality ......... 28 e. Guidelines on Claims Settlement............. 41
a. Delay in Acceptance .................................. 29 J. Business of Insurance; Requirements ............... 44
b. Delivery of Policy ...................................... 29 1. Requirements to Engage in the Business of
Insurance .............................................................. 45
2. Premium Payment .......................................... 29
a. Certificate of Authority ............................. 45
a. Authority of Agent to Receive Premium30
b. Sufficient paid-up capital, Surplus Fund &
b. Payment by Post-Dated Check ............... 30 Solvency [Sec. 194, 197, 200] ....................... 45
c. Non-Payment of Premium ....................... 30 c. Filing with the Commissioner [Sec. 195] 46
d. Non-Default Options in Life Insurance 30 d. Reserves............................................. 47
e. Reinstatement of a Lapsed Policy of Life e. For foreign companies: Sufficient capital
Insurance ......................................................... 31 and securities deposited with the
f. Refund of Premiums ................................ 32 Commissioner [Sec. 197, 198] ...................... 47
H. Rescission of Insurance Contracts .................. 32 f. For foreign companies: Resident Agent . 47
1. Concealment ................................................... 32 g. For foreign companies: Surplus Fund,
a. Duty to Communicate by the Insured.... 33 Legal Reserves [Sec. 196, 199]...................... 48

b. Matters which Need Not be Disclosed.. 33 K. Insurance Commissioner and Its Powers ....... 49

c. Requisites .................................................... 33 1. Jurisdiction and Adjudicatory Powers ......... 49

d. Proof of Fraud in Concealment .............. 34 2. Revocation of Certificate of Authority ....... 49

e. Test of Materiality ...................................... 34 3. Liquidation of Insurance Company ............. 50

f. Effects .......................................................... 34 II. TRANSPORTATION LAW ....................52

g. Incontestability Clause .............................. 34 A. Common Carriers ............................................... 52

h. Concealment in Marine and Ordinary 1. Common Carriers ........................................... 52

Private Insurance Distinguished .................. 35 2. Test for a Common Carrier .......................... 52
i. Concealment in Non-Medical Insurance 35 3. Common Carrier vs. Private Carrier ............ 53
2. Misrepresentation/Omissions ...................... 35 4. Diligence Required of Common Carrier..... 54
a. Requisites of misrepresentation ............... 36 a. Standard of Diligence ................................ 54
 b. Presumption of Negligence ..................... 54 1. Charter Parties................................................. 74
5. Liabilities of Common Carriers.................... 55 Bill of Lading distinguished from Charter
a. Principles Governing the Liability of Party ................................................................. 75
Common Carriers .......................................... 55 Persons who make a charter:........................ 75
b. Registered Owner Rule............................. 55 Requisites for a valid charter party: ............. 75
c. Kabit System ................................................ 55 a. Bareboat or Demise Charter .................... 75
d. Classification of Transport Network b. Time Charter .............................................. 76
Vehicle Services and Transport Network c. Voyage or Trip Charter ............................. 76
Companies ...................................................... 55
2. Liability of Ship Owners and Shipping
B. Obligations and Liabilities................................. 56 Agents ................................................................... 76
1. Vigilance Over Goods ................................... 56 a. Liability for Acts of Captain ..................... 77
a. Presumption of Negligence ...................... 56 b. Exceptions to Limited Liability ............... 78
b. Exempting Causes ..................................... 57 3. Accidents and Damages in Maritime
c. Contributory Negligence .......................... 59 Commerce ............................................................ 79
d. Duration of Liability ................................. 59 a. General Average ......................................... 79
e. Stipulations for Limitation of Liability ... 60 b. Collisions and Allisions............................. 81
f. Liability for Baggage of Passengers ......... 62 4. Carriage of Goods by Sea Act (COGSA) ... 82
2. Safety of Passengers ....................................... 63 a. Application .................................................. 83
a. Void Stipulations........................................ 64 b. Notice of Loss or Damage ....................... 83
b. Duration of Liability ................................. 64 c. Period of Prescription ............................... 83
c. Liability for Acts of Others ...................... 66 d. Limitation of Liability ............................... 83
d. Liability for Delay in Commencement ... 67 E. Public Service Act............................................... 84
of Voyage ........................................................ 67 1. Definition of Public Utility ........................... 84
e. Liability for Defects in Equipment and . 68 Elements of a Public Utility ......................... 84
Facilities ........................................................... 68 2. Necessity for Certificate of Public
f. Extent of Liability for Damages .............. 68 Convenience ........................................................ 84

C. Bill of Lading....................................................... 70 a. Requisites..................................................... 84

1. Three-Fold Character .................................... 70 b. Prior Operator Rule .................................. 85

2. Delivery of Goods.......................................... 71 3. Fixing of Rate .................................................. 85

a. Period of Delivery .................................... 71 a. Rate of Return ............................................ 86

b. Delivery without Surrender of Bill of b. Exclusion of Income Tax as Expense .... 86

Lading .............................................................. 72 4. Unlawful Arrangements................................. 86
c. Refusal of Consignee to Take Delivery .. 72 a. Boundary System........................................ 86
3. Period for Filing Claims ................................ 72 b. Kabit System ................................................ 86
4. Period for Filing Actions............................... 73 5. Approval of Sale, Encumbrance or Lease of
a. Overland Transportation and Coastwise Property ................................................................ 87
Shipping........................................................... 73 F. The Warsaw Convention ................................... 87
b. International Carriage of Goods by Sea 73 1. Applicability ..................................................... 87
e. Effects of Stipulations ................................... 74 Notice of Claim .............................................. 88
D. Maritime Commerce ......................................... 74 2. Limitation of Liability .................................... 88
 a. Liability to Passengers ............................... 88 1. Basic principles .............................................112
b. Liability for Checked Baggage ................. 89 a. Doctrine of centralized management ....112
c. Liability for Hand-Carried Baggage ........ 89 b. Business judgment rule ..........................113
3. Willful Misconduct ......................................... 90 2. Tenure and qualifications of directors or
III. CORPORATION LAW ..........................92 trustees ................................................................113
a. Tenure .......................................................113
A. General Principles .............................................. 92
b. Qualifications and Disqualifications .....114
1. Definition of Corporation ............................ 92
c. Election and removal of directors or
2. Attributes of a Corporation .......................... 92
trustees ...........................................................115
a. An Artificial Being ..................................... 92
3. Duties, responsibilities, and liabilities for
b. Created by Operation of Law................. 92 unlawful acts ......................................................116
c. Has the Right of Succession .................... 92 a. Duties and Responsibilities ...................116
d. Has the Powers, Attributes, and b. Liabilities ...................................................116
Properties Expressly Authorized by Law or
E. Stockholders and Members.............................118
Incident to Its Existence............................... 92
1. Rights and obligations of stockholders and
3. Classes of Corporations ................................ 92
members .............................................................118
a. Stock Corporation ..................................... 92
a. Doctrine of equality of shares ................118
b. Non-stock Corporation........................... 93
b. Participation in management .................118
c. One Person Corporations ....................... 95
c. Cases when stockholders’ action is
d. Other Corporations ................................. 95 required ..........................................................120
4. Nationality of Corporations.......................... 99 1. By a majority vote ....................................121
a. Place of Incorporation Test .................... 99 2. By a two-thirds vote ................................122
b. Control Test .............................................. 99 3. By cumulative voting ...............................125
c. Grandfather Rule .................................... 101 4. Proprietary rights .....................................129
5. Corporate Juridical Personality .................. 102 5. Remedial Rights .......................................136
a. Doctrine of separate juridical personality 6. Intra-corporate disputes .........................138
........................................................................ 102
Meetings ........................................................141
b. Doctrine of piercing the corporate veil 103
Quorum .........................................................142
B. De Facto Corporations vs. Corporations by
F. Capital Structure ................................................143
Estoppel .................................................................. 106
1. Shares of Stock..............................................143
1. De facto corporations.................................. 106
a. Nature of Shares of Stock.......................143
2. Corporations by estoppel ............................ 107
b. Consideration for Stocks ........................143
Effects of Corporation by Estoppel ......... 107
c. Watered stock ...........................................144
3.Doctrine of Apparent Authority ................. 108
d. Situs of shares of stock ...........................145
C. Corporate Powers............................................. 108
e. Classes of shares of stock .......................145
1. How powers are exercised .......................... 108
2. Certificate of stock .......................................149
a. By the Shareholders or Members .......... 108
a. Nature of the certificate ..........................149
b. By the Board of Directors...................... 109
b. Uncertificated shares ...............................150
2. Ultra Vires Doctrine ..................................... 109
c. Negotiability; requirements for valid
3. Trust fund doctrine ...................................... 110
transfer of stocks ..........................................150
D. Board of Directors and Trustees ................... 112
d. Issuance .....................................................152
 e. Lost or destroyed certificates ................. 152 6. One-person corporations ............................182
3. Disposition and encumbrance of shares... 152 a. Extended Corporations ...........................183
a. Sale of Shares ............................................ 152 b. Capital stock requirement.......................183
b. Participation in management ................ 155 c. Articles of incorporation and by-laws...183
G. Dissolution and Liquidation .......................... 155 d. Corporate Structure .................................183
1. Modes of dissolution ................................... 155 e. Corporate structure and officers............183
a. Voluntary and involuntary dissolution . 156 f. Nominee ....................................................184
2. Methods of liquidation ................................ 160 g. Minutes and Records ...............................185
a. By the Corporation Itself........................ 161 h. Liability ......................................................185
b. Conveyance to A Trustee Within A 3- i. Conversion of corporation to One Person
Year Period ................................................... 162 Corporations (OPC) and vice-versa ..........185
c. By Management Committee or I. Mergers and Consolidations .............................186
Rehabilitation Receiver ............................... 162 1. Concept ..........................................................186
d. Liquidation after three years .................. 164 a. Procedure ..................................................187
H. Other corporations .......................................... 165 2. Effects and limitations .................................188
1. Close corporations ....................................... 165 a. Limitations ................................................188
a. Characteristics of a Close Corporation 165 b. Effects .......................................................188
b. Validity of restrictions on transfer of J. Securities ..............................................................190
shares ............................................................. 166
1. State Policy ....................................................190
c. Issuance or Transfer of Stock in Breach of
Qualifying Conditions ................................. 166 2. Definition of Securities ................................190
d. When board meeting is unnecessary or 3. Kinds of Securities .......................................191
improperly held ............................................ 167 a. Exempt Securities [Sec. 9] .....................191
e. Pre-emptive Right .................................... 168 b. Exempt Transactions [Sec. 10] ..............192
f. Deadlocks .................................................. 169 c. Non-exempt transactions .......................195
2. Non-stock corporations .............................. 170 4. Powers and Functions of the SEC.............195
a. Definition .................................................. 170 5. Procedure for Registration of Securities ...195
b. Purposes.................................................... 170 a. Registration of Securities [Secs. 12 and 13]
c. Treatment of Profits................................ 170 .........................................................................195
d. Plan and distribution of assets upon 6. Prohibition on Fraud, Manipulation and
dissolution ..................................................... 171 Insider Trading ..................................................197
3. Educational Corporations ........................... 175 a. Manipulation of security prices [Sec. 24]
.........................................................................197
4. Religious Corporations ................................ 175
b. Short sales [Rule 24.2-2, 2015 SRC IRR]
a. Corporation sole ...................................... 175 .........................................................................199
b. Religious Societies ................................... 178 c. Option trading [Sec. 25] ..........................200
5. Foreign corporations ................................... 179 d. Fraudulent Transactions [Sec. 26] .........200
a. What constitutes “doing business” ....... 179 e. Insider trading [Sec. 61] ..........................201
b. Necessity of a license to do business ... 179 7. Prohibition on Fraud, Manipulation and
c. Requisites for issuance of a license ....... 179 Insider Trading ..................................................202
d. Resident agent .......................................... 181 a. Tender offer rule ......................................202
e. Personality to sue and suability.............. 181 b. Rules on proxy solicitation .....................204
 c. Disclosure rule ......................................... 205 c. Acquisition of Ownership of Mark .......221
IV. INTELLECTUAL PROPERTY CODE 3. Well-known marks........................................223
..................................................................... 209 a. Determinants ............................................223
A. In General ......................................................... 209 b. Protection Extended to Well-Known
1. Definition ...................................................... 209 Marks..............................................................223
2. Intellectual Property Rights under the c. Sec. 123.1 (e) vs. Sec. 123.1 (f) ...............223
Intellectual Property Code (RA 8293) ........... 209 4. Rights conferred by registration .................224
3. Differences between copyright, trademarks, a. When Such Rights are Conferred ..........224
and patents ......................................................... 209
b. Limitations on Such Right......................224
4. Intellectual Property Office ........................ 211
c. Assignment and Transfer of Application
B. Patents ................................................................ 211 and Registration............................................225
1. Patentable vs. non-patentable inventions . 211 5. Cancellation of registration .........................225
a. Patentable Invention ............................... 211 6. Trademark infringement..............................225
b. Non-Patentable Inventions ................... 212 a. Elements of Trademark Infringement ..226
2. Ownership of a patent ................................. 213 b. Doctrine of Natural Expansion of
a. Right to a Patent ...................................... 213 Business .........................................................227
b. First-to-File Rule ..................................... 213 c. Requirement of Notice............................227
c. Invention created pursuant to a d. Penalties ....................................................227
commission/in the course of employment 7. Unfair competition .......................................227
........................................................................ 214
a. Particular Acts of Unfair Competition .228
d. Right of Priority ....................................... 214
b. Elements of an Action for Unfair
3. Grounds for cancellation of a patent ........ 214 Competition ..................................................228
a. Effect of Cancellation of Patent or Claim c. Who May File an Action for Unfair
........................................................................ 214 Competition? ................................................228
b. Remedies of a Person with a Right to a d. Trademark Infringement vs. Unfair
Patent ............................................................. 214 Competition ..................................................228
4. Patent infringement ..................................... 215 D. Copyrights .........................................................229
a. Tests in Patent Infringement ................. 215 1. Basic Principles .............................................229
b. Civil and Criminal Actions ..................... 215 a. Works are protected by the sole fact of
c. Prescriptive Period .................................. 216 their creation. ................................................229
d. Defenses in Actions for Infringement . 216 b. Protection extends only to the expression
of an idea, not the idea itself. .....................229
C. Trademarks ........................................................ 216
c. The copyright is distinct from the
1. Marks vs. collective marks vs. trade names
property in the material object subject to it.
............................................................................. 216
.........................................................................230
a. Definition .................................................. 216
d. Copyright, like other intellectual property
b. Trademark/Service Mark vs. Trade Name rights, is a statutory right.............................230
(Under the IP Code) .................................... 217
2. Copyrightable works ....................................230
c. Spectrum of Distinctiveness .................. 217
a. Original Works .........................................230
d. What May Not Be Registered? .............. 218
3. Non-copyrightable works............................231
2. Acquisition of ownership ............................ 219
a. Unprotected Subject Matter ...................231
a. Concept of actual use .............................. 219
b. Effect of registration............................... 220
 b. Works of the Government of the Customer Identification ...................................248
Philippines..................................................... 231 Record Keeping ................................................248
c. Works of the Public Domain ................. 232 Reporting of Covered and Suspicious
d. Useful Articles.......................................... 232 Transactions.......................................................248
4. Rights conferred by copyright .................... 233 When reporting covered transactions to the
a. Economic Rights ..................................... 233 AMLC: ................................................................248

b. Moral Rights ............................................. 233 Anti-money laundering regulations ................249

c. Right to Transfer, Assign or License .... 234 1. Customer due diligence (CDD)
obligations .....................................................249
d. Rights to Proceed on Subsequent
Transfers (Droit de Suite or Follow Up 2. Transaction reporting ..............................251
Rights)............................................................ 235 3. Record keeping.........................................251
e. Related Rights (Neighboring Rights) .... 235 4. Adoption of a money laundering and
5. Ownership of a copyright ........................... 236 terrorist financing prevention program
(MTPP) ..........................................................251
a. Presumption of Ownership.................... 237
5. Designation of an AML compliance
b. Transfer or Assignment of Copyright .. 237 officer .............................................................252
c. Collective Management Organizations C. Covered and Suspicious Transactions ...........252
(CMO) ........................................................... 238
D. Safe Harbor Provision .....................................252
6. Limitations on copyright ............................. 238
E. When is Money Laundering Committed
a. Fair Use ..................................................... 238 (Including Predicate Crimes) ...............................252
b. Limitations on Protection of Neighboring F. Authority to Inquire into Banks .....................254
Rights ............................................................. 239
G. Freezing and Forfeiture...................................255
c. Term of Protection .................................. 239
Application for Freeze Orders ........................255
7. Copyright infringement ............................... 240
a. Who may apply ......................................255
a. What Constitutes Infringement ............. 240
b. Effectivity ..............................................255
b. Substantial Reproduction ....................... 241
c. Duties of covered institutions ............255
c. Knowledge not an Element of
Infringement ................................................. 241 Forfeiture Provisions ........................................255

d. What Does NOT Constitute Civil Forfeiture .............................................255

Infringement ................................................. 241 H. Anti-Money Laundering Council; Functions
e. Reproduction of Published Work ......... 242 ..................................................................................257

f. Reprographic Reproduction by Libraries VI. ELECTRONIC COMMERCE ACT .... 258

........................................................................ 242 A. Policy of the Law ..............................................258
g. Reproduction of Computer Program ... 243 B. Definition of Terms .........................................258
8. Remedies........................................................ 243 C. Legal Recognition of Electronic Data
9. Criminal Penalties......................................... 244 Messages, Documents and Signatures ................259

Determination of Penalty ........................... 244 Legal Recognition of Electronic Data Messages

.............................................................................259
V. ANTI-MONEY LAUNDERING ACT.. 247
Legal Recognition of Electronic Documents
A. Policy of the Law ............................................. 247 .............................................................................259
B. Covered Institutions and their Obligations .. 247 Legal Recognition of Electronic Signatures..259
Covered Institutions......................................... 247 Original Documents .........................................260
Obligations of Covered Institutions .............. 248
 Authentication of Electronic Data Messages b. Objections to the Petition or
and Electronic Documents ............................. 260 Rehabilitation Plan .......................................274
D. Presumption Relating to Electronic Signatures c. Period and Effect of Approval of the Plan
.................................................................................. 260 .........................................................................274
Presumption Relating to Electronic Signatures 3. Out-of-Court or Informal Restructuring
............................................................................. 260 Agreement or Rehabilitation Plan .................275
E. Admissibility and Evidential Weight of a. Minimum requirements ...........................275
Electronic Data Message or Electronic Document b. Standstill period/agreement ...................275
.................................................................................. 261
c. Effects of the OCRA ..............................275
Admissibility ...................................................... 261
d. Cram down effect ....................................275
F. Obligation of Confidentiality .......................... 261
e. Annulment of the OCRA/Standstill
G. Punishable Acts and Penalties ....................... 261 Agreement .....................................................276
Hacking or cracking ......................................... 261 C. Liquidation .........................................................276
Piracy .................................................................. 261 1. Voluntary liquidation vs. involuntary
Violations of the RA No. 7394 or the liquidation vs. conversion ................................277
Consumer Act ................................................... 261 2. Procedure .......................................................277
Other violations of the provisions of the a. Conversion of rehabilitation to liquidation
Electronic Commerce Act [Sec. 33(d)].......... 261 proceedings ...................................................277
VII. FINANCIAL REHABILITATION, b. Liquidation order; effects .......................277
INSOLVENCY, LIQUIDATION &
SUSPENSION OF PAYMENTS ............... 262 3. Rights of Secured and Unsecured Creditors
.............................................................................280
A. Basic Concepts ................................................. 262
a. General Unsecured Creditors.................280
1. Insolvency...................................................... 262
b. Secured Creditors ....................................280
2. Rehabilitation ................................................ 262
4. Liquidator.......................................................281
3. Liquidation .................................................... 262
a. Qualifications ............................................281
4. Suspension of Payment ............................... 262
b. Powers, Duties and Responsibilities .....281
B. Modes of Rehabilitation .................................. 263
5. Determination of claims ..............................282
1. Court-supervised rehabilitation .................. 264
a. Qualifications ............................................282
a. Voluntary vs. involuntary ....................... 264
b. Treatment of Contracts ..........................282
b. Commencement Order (including stay
order) ............................................................. 265 6. Liquidation Plan ............................................282

c. Stay or Suspension Order ....................... 266 7. Suspension of Payments; Suspension of

Payment Order ..................................................292
d. Rehabilitation receiver ............................ 268
a. Effects ........................................................292
e. Management committee ......................... 269
b. Actions Suspended ..................................292
f. Determination of claims ......................... 270
c. Most Important Elements of the
g. Rehabilitation Plan .................................. 270 Suspension of Payments Order .................292
h. Creditor approval and confirmation..... 272 d. Creditor’s Meeting ...................................293
i. Failure of rehabilitation ........................... 273
2. Pre-negotiated rehabilitation ...................... 274
a. How Initiated; Requirements for Petition
........................................................................ 274
INSURANCE
COMMERCIAL LAW
INSURANCE
I. INSURANCE
A. Basic Concepts
1. Definition
a. Insurance
Insurance is essentially a contract by which
one party (the insurer), for a consideration that
is usually paid in money, either in a lump sum
or at different times during the continuance of
the risk, promises to make a certain payment,
usually of money, upon the destruction or injury
of “something” in which the other party (the
insured) has an interest [Carale, The Philippine
Insurance Law (2014)].
On August 15, 2013, RA 10607 (An Act
Strengthening the Insurance Industry, Further
Amending Presidential Decree No. 612,
Otherwise Known as “The Insurance Code,” as
Amended by Presidential Decree Nos. 1141,
1280, 1455, 1460, 1814 and 1981, and Batas
Pambansa Blg. 874, and for Other Purposes)
was signed into law. It is a restatement of the
Insurance Code (PD 612), with
amendments.
The section numbers hereinafter generally
pertain to RA 10607, unless otherwise
indicated.
b. Contract of Insurance
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 [Sec. 2(a)].
Note: A contract of suretyship shall be
deemed to be an insurance contract, within the
meaning of the Insurance Code, only if made
by a surety who or which, as such, is doing
an insurance business as hereinafter
provided.
Thus, a contract of insurance is:
1. A contract of indemnity;
2. Wherein one undertakes for a
consideration;
Page 1 of 293
UP Law Bar Operations Commission 2022
COMMERCIAL LAW
3. To indemnify another against loss,
damage, or liability;
4. Arising from an unknown or contingent
event.
Contingent Event Unknown Event
Event that is not Event which is
certain to take place. certain to happen,
but the time of its
happening is not
known.
General Rule: A past event cannot be a
designated event in an insurance contract.
Exception: It may be a designated event only
in cases where it has happened already, but
the parties do not know about it e.g., prior loss
of a ship at sea (applicable only to marine
insurance) [De Leon, The Insurance Code of
the Philippines Annotated (2014)].
The unknown event may be past or future.
Even if the proximate cause of the loss is a
fortuitous event, the insurer may still be liable if
it is the event or peril insured against [De Leon].
2. Form
There is no particular form required for a
contract of insurance.
May an Insurance Contract be Oral?
The Insurance Code has no provision requiring
a particular form for the validity of an insurance
contract. In our jurisdiction, the Supreme Court
has not made a categorical ruling against the
validity of an oral contract of insurance
[Carale].
Note: An insurance policy is different from the
contract of insurance. The policy is the
formal written instrument evidencing the
contract of insurance entered into between the
insured and the insurer [Sec. 232].
INSURANCE
3. Doing or Transacting Insurance
Business
The term “doing an insurance business or
transacting an insurance business”
includes:
a. Making or proposing to make, as
insurer, any insurance contract;
b. Making or proposing to make, as
surety, any contract of suretyship as a
vocation and not as merely incidental
to any other legitimate business or
activity of the surety;
c. Doing any kind of business, including a
reinsurance business, specifically
recognized as constituting the doing
of an insurance business within the
meaning of the Insurance Code;
d. Doing or proposing to do any business
in substance equivalent to any of the
foregoing in a manner designed to
evade the provisions of the Insurance
Code [Sec. 2(b)].
Note: That no profit is derived from the making
of insurance contracts, agreements, or
transactions, or that no separate or direct
consideration is received therefor, shall not be
deemed conclusive to show that the making
thereof does not constitute the doing or
transacting of an insurance business [Sec.
2(b)].
General Rule: An insurance business consists
in undertaking, for a consideration, to
indemnify another against loss, damage or
liability arising from an unknown or contingent
event.
Exception: Those not formally designated as
insurance businesses but are deemed “doing
or transacting an insurance business” as listed
in Sec. 2(b).
Principal Object and Purpose Test
The “principal object and purpose test” !
a. Determines:
1. Whether the assumption of risk
and indemnification of loss are
the principal object and
purpose of the organization; or
2. Whether they are merely
incidental to its business.
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b. From such determination, it concludes
that:
1. If these are the principal
objectives, the business is that
of insurance.
2. But if they are merely incidental
and service is the principal
purpose, then the business is
not insurance.
4. Governing Law
General Rule: The Insurance Code primarily
governs insurance contracts.
Exception: When there is a special law which
specifically governs (e.g., insurance contract
under R.A. 1161 or the Social Security Act), in
which case, the Insurance Code governs
subsidiarily.
Matters not expressly provided for in the
Insurance Code and special laws are regulated
by the Civil Code.
Other Special Laws:
a. National Health Insurance Act of 2013
(RA 10606, amending RA 7875)
b. The Revised Government Service
Insurance Act of 1997 (RA 8291)
c. The Social Security Act (RA 8282)
d. The Property Insurance Law (RA 656,
as amended by PD 245)
e. The Philippine Deposit Insurance Act
of 1963 (RA 3591).
f. RA 4898, as amended by RA 5756
providing life, disability, and accident
insurance to barangay officials
g. Universal Health Care Act (RA 11223)
5. Parties to an Insurance Contract
a. Insurer
The insurer is the party who assumes or
accepts the risk of loss and undertakes for
consideration to indemnify the insured or to pay
a certain lump sum on the happening of the
event or peril insured against. May be any
corporation, partnership, or association, duly
authorized to transact insurance business
[Sec. 6].
INSURANCE
b. Insured
The insured is the person in whose favor the
contract is operative and whose loss is the
occasion for the payment of the insurance
proceeds by the insurer [Carale].
c. Exception
Anyone except a public enemy may be
insured [Sec. 7].
There is no definition of what a “public enemy”
is, but a definition that is generally accepted
and in keeping with the nature of an insurance
contract is one where a person possesses the
nationality of the state with which another is at
war [Carale].
B. Elements of An Insurance
Contract
Elements [C2R2IM]
1. Cause — event or peril insured against
2. Consideration — premium payments
paid by the insured
3. Risk of loss or damage being assured
by the insurer
4. Risk-distributing scheme —
distribution and transfer by the insurer
of risk of loss, damage or liability
among persons having similar risks
5. Insurable interest — the insured
possesses an interest of some kind,
susceptible of pecuniary estimation,
which the event insured against may
cause loss or damage
6. A meeting of minds of the parties
upon all the foregoing essentials
1. Cause
Cause refers to an event or peril insured
against.
2. Consideration
An insurance premium is the agreed price for
assuming and carrying the risk. It is the
consideration paid to the insurer for
undertaking to indemnify the insured against a
designated peril. It is based on probability of
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loss and extent of liability [43 Am. Jur. 2d326].
Premium Assessment
A sum levied and A sum collected to
paid to meet meet actual loss
anticipated loss [Vance].
[Vance].
A sum specifically
levied by mutual
insurance
companies or
associations, upon a
fixed and definite
plan, to pay losses
and expenses [Sec.
403]
3. Risk of Loss or Damage
Peril is any contingent or unknown event which
may cause a loss. Its existence creates a risk
and its occurrence results in loss.
The event or peril insured against must be such
that its happening will:
a. Damnify or cause loss to a person; or
b. Create liability against him [Sec. 3]
4. Risk-Distributing Scheme
Insurance contracts serve to distribute the
risk of economic loss, damage or liability
among as many as possible of those who are
subject to the same kind of risk.
Scheme:
a. The payment of premiums by all will
inure to a general fund, out of which
payment will be made for anyone who
has suffered an economic loss.
b. Hence, each member contributes to a
small degree toward compensation for
losses suffered by any member of the
group.
5. Insurable Interest
Insurable interest is the interest which the law
requires the owner of an insurance policy to
have in the person or thing insured [Carale].
INSURANCE
In terms of the event insured against, it is the
relation between the insurer and the risk
insured, such that the occurrence of the risk will
cause substantial loss or harm of some kind to
the insured [Carale].
Under the Code, the following are void:
a. Stipulation in a policy for the payment
of loss whether the person insured has
or has not any interest in the property
insured;
b. Stipulation that the policy shall be
received as proof of such interest;
c. Policy executed by way of gaming or
wagering [Sec. 25].
Note: Insurable interest is not required in
industrial life insurance.
6. Meeting of the Minds
The two parties to a contract of insurance
whose minds need to meet regarding the
essential elements are the insurer and the
insured.
The insured is not always the person to whom
the proceeds are paid. Such person is the
beneficiary [Vance].
C. Characteristics and Nature of
an Insurance Contract
1. In General
An insurance contract is [CAVE-CCPU]
a. Consensual;
b. Aleatory;
c. Voluntary;
d. Executory and unilateral but
synallagmatic;
e. Conditional;
f. Contract of adhesion;
g. Personal contract;
h. Uberrimae fides contract
a. Consensual
General Rule: An insurance contract is
perfected by the meeting of the minds of the
parties. There must be a concurrence of offer
and acceptance. The insurance policy merely
evidences the terms and conditions thereof.
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Exception: It is stipulated that the policy is
essential to the existence of the contract
[Campos].
b. Aleatory
It is aleatory because it depends upon some
contingent event. The obligation of the insurer
to pay depends on the happening of an event
which is uncertain, or though certain, is to occur
at an indeterminate time [Art. 2010, NCC].
Being an aleatory contract does not
necessarily mean that it is a “contract of
chance” because in a contract of insurance,
the parties seek to distribute possible loss by
reason of mischance, unlike a wagering
contract [Carale].
c. Voluntary
General Rule: Parties may incorporate
appropriate provisions and conditions they
choose, as long as they are not contrary to law,
morals, good customs, public order, or public
policy [Art. 1305, NCC].
Exception: Some insurance contracts,
particularly liability insurance, may be required
by law in certain instances:
1. Compulsory motor vehicle liability
insurance for motor vehicles [Secs.
386-402];
2. Compulsory coverage in state
insurance fund for employees [Arts.
168-184, Labor Code];
3. As a condition to granting a license to
conduct business or calling affecting
the public safety or welfare [De Leon];
4. Social insurance for members of the
GSIS and for employees of the private
sector covered by the SSS.
d. Executory and Unilateral but
Synallagmatic
Once the insured pays the premium, the
contract already takes effect. After the payment
of premiums, the insurance imposes a
unilateral obligation on the insurer who
promises to indemnify in case of loss.
It is also synallagmatic [Vitug, J., Separate
INSURANCE
Opinion in UCPB General Insurance Co., Inc.
v. Masagana Telemart, Inc., G.R. No. 137172
(2001)] and reciprocal such that even if the
contingent event or designated peril does not
occur, the insurer has still provided protection
against the risk for the period covered by the
insurance contract.
e. Conditional
It is conditional because the insurer incurs
liability only upon the happening of the event
insured against. However, many other
conditions are usually required (e.g. payment
of premium or performance of other acts) as
precedent to the right of the insured to claim
benefits under the insurance.
f. Contract of Adhesion (Fine Print Rule)
Insurance contracts are already presented to
the insured in its printed form on a “take it or
leave it” basis. The insured merely must agree
to its terms. Such contracts of adhesion are
valid.
General Rule: When the terms of the contract
are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of
its stipulations shall control [Art. 1370, NCC].
Exception: Where the terms of the contract
are ambiguous and susceptible to various
interpretations, the issue is to be resolved
against the insurer, being the party who
prepared the contract [Art. 1377, NCC].
Ambiguity is interpreted liberally in favor of the
insured and strictly against the insurer who
prepared the same.
g. Personal Contract
The contract of insurance is basically between
the insurer and the insured.
The insured cannot assign, before the
happening of the loss, his rights under a
property policy to others without the consent of
the insurer [Secs. 20, 58, 83].
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h. Uberrimae fides Contract (i.e. a
contract of the highest degree of good
faith)
Each party is required to:
1. Deal with each other in utmost good
faith;
2. Disclose conditions affecting the risk of
which he is aware;
3. Disclose any material fact which the
applicant knows and ought to know.
Violation of this duty gives the aggrieved party
the right to rescind the contract. Where the
aggrieved party is the insured, the bad faith of
the insurer will preclude it from denying liability
on the policy based on breach of warranty
[Campos].
2. For Specific Kinds of Insurance
Contracts
a. For Non-Life Insurance
Contract of Indemnity
The insured who has insurable interest over
the property is only entitled to recover the
amount of actual loss sustained. The burden
is upon him to establish the amount of such
loss. Property insurance is personal in the
sense that it is the damage to the personal
interest and not the property that is being
reimbursed.
General Rule: Only non-life insurance or
property insurance contracts are contracts
of indemnity. Life insurance contracts are not
contracts of indemnity because the value of life
cannot be quantified.
Exception: The basis of the insurable interest
of the policy owner on the life of the insured is
a commercial relationship (e.g. creditor-
debtor, mortgagor/guarantor-mortgagee).
b. For Life Insurance
Nature of Property
Life insurance policies, unlike property
insurance, are generally assignable or
transferable as they are in the nature of
property [Sec. 81].
INSURANCE
D. Classes
1. Marine Insurance
a. Definition
Marine insurance covers loss or damage to
property and persons in connection with all
risks or perils of navigation. It includes “marine
protection and indemnity insurance” against
liability incidental to ownership, operation,
maintenance or construction of vessels and
facilities therefor [Carale].
Marine insurance includes:
1. Loss or damage to:
a. Vessels, cargo, freightage,
profits, and all kinds of property
and interests therein, in
connection with any and all
risks or perils of navigation;
b. Person or property
appertaining to a marine,
inland marine, transit or
transportation insurance;
c. Precious stones, jewels,
jewelry, precious metals,
whether in course of
transportation or otherwise;
d. Instrumentalities of
transportation and
communication, excluding
buildings, aids to navigation
and transportation, and
appurtenant facilities for the
control of waterways.
2. Marine protection and indemnity
insurance against liability incidental to
ownership, operation, maintenance or
construction of vessels and facilities
therefore [Sec. 101; Carale].
b. Divisions
1. Ocean Marine Insurance
Ocean marine insurance insures against risk
connected with navigation to which a ship,
cargo, freightage, profits, or other insurable
interest in movable property, may be exposed
during a certain voyage or a fixed period of
time. Its scope includes:
a. Ships or hulls;
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b. Goods or cargoes;
c. Earnings such as freight, passage
money, commissions, or profits; and
d. Liability (protection and indemnity
insurance).
2. Inland Marine Insurance
Inland marine insurance covers the land or
over-the-land transportation perils of property
shipped by railroads, motor trucks, airplanes,
and other means of transportation. It also
covers risks of lake, river or other inland
waterway transportation and other waterborne
perils outside those covered by ocean marine
insurance.
c. Loan on Bottomry and Loan on
Respondentia Distinguished
Loan on Bottomry Loan on
Respondentia
Loan obtained for the Loan obtained as
value of the vessel security for the value
on a voyage of the cargo to be
transported
Both depend upon the safe conclusion of the
voyage [Carale]
In a loan on bottomry, the insurable interest
of a shipowner on its bottomed boat is the
difference between the amount of the loan and
the value of the boat. Thus, if the amount of the
loan does not cover the total value of the boat,
the owner can still insure the boat.
d. Risks
1. Types of Risk
Perils of the Sea
Ocean marine insurance protects ships at sea
and the cargo or freight on such ships from
standard “perils of the sea” or “perils of
navigation.”
Perils of the sea include:
a. Losses caused by sea damage, or by
the violence of the elements;
b. Losses from extraordinary occurrences
or those which cannot be guarded
INSURANCE COMMERCIAL LAW
against by the ordinary exertion of 2. Rules on All Risks Covered
human skill or prudence;
c. Barratry or the willful and intentional act General Rule: An “all risks” provision of a
on the part of the master or the crew, in marine policy extends coverage to risks not
pursuance of some unlawful or usually contemplated and avoids putting upon
fraudulent purpose, without the the insured the burden of establishing that the
consent of the owner, and to the loss was due to peril falling within the policy’s
prejudice of his interest (e.g., burning coverage. The insurer avoids liability by
the ship, unlawfully selling the cargo). demonstrating that a specific provision
expressly excludes the loss from coverage
Perils of the sea do not include ordinary wear [Choa Tiek Seng v. Court of Appeals, G.R. No.
and tear of the voyage and injuries suffered by 84507 (1990)].
the vessel in consequence of her not being
unseaworthy [Roque v. IAC, G.R. No. L-66935 Exception: In an all-risk policy, all risks are
(1985)]. covered unless expressly excepted. The
burden rests on the insurer to prove that the
Perils of the Ship loss is caused by a risk that is excluded
Perils of the ship are those which cause a loss [Filipino Merchants Ins. Co. v. CA, G.R. No.
which, in the ordinary course of events, results 85141(1989)].
from the:
a. Ordinary, natural, and inevitable action e. Loss
of the sea;
b. Ordinary wear and tear of the ship; and Loss may be total (actual or constructive) or
c. Negligent failure of the shipowner to partial.
provide the vessel with the proper
equipment to convey the cargo under 1.Total Loss
ordinary conditions [De Leon].
Actual Loss
Perils of the Sea Perils of the Ship Actual total loss exists when the subject
matter of the insurance is wholly destroyed or
Covers casualties Covers losses lost or when it is so damaged that it no longer
due to unusual resulting from exists in its original character [Vance].
violence or ordinary wear and
extraordinary tear or other damage Actual loss is caused by:
causes connected to incidental to the a. A total destruction of the thing insured;
navigation voyage b. The irretrievable loss of the thing by
sinking, or by being broken up;
Covers losses which Covers losses which c. Any damage to the thing which renders
cannot be guarded result from the it valueless to the owner for the
against by prudence negligent failure of purpose for which he held it;
and the ordinary the shipowner to d. Any other event which effectively
exertion of human provide the vessel deprives the owner of the possession,
skill with the proper at the port of destination of the thing
equipment, and can insured [Sec. 132].
thus be guarded
against by ordinary Actual loss may be presumed from the
exertion of human continued absence of a ship without being
skill heard of. The length of time which is sufficient
to raise this presumption depends on the
circumstances of the case [Sec. 134].

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INSURANCE
Constructive Loss
Constructive total loss or “technical total
loss” is one in which the loss, although not
actually total, is of such character that the
insured is entitled, if he thinks fit, to treat it as
total by abandonment [45 CJS 1150]. A
constructive total loss is one which gives to a
person insured a right to abandon [Sec. 133].
Three rules exist as to determining when there
is a constructive total loss:
1. English rule
There is constructive total loss when the
subject matter of the insurance, while still
existent in specie, is so damaged as not to be
worth, when repaired, the cost of the repairs.
2. American rule
There is constructive total loss when it is so
damaged that the costs of repairs would
exceed one-half of the value of the thing as
acquired (also known as the “fifty percent
rule”).
3. Philippine rule
The insured may not abandon the thing insured
unless the loss or damage is more than three-
fourths of its value [De Leon].
A person insured by a contract of marine
insurance may abandon the thing insured and
recover for a total loss thereof when the cause
of the loss is a peril insured against—
a. If more than 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 by more than 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 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 is 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
either an expense to the insured of
more than 3⁄4 the value of the thing
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abandoned or a risk which a prudent
man would not take under the
circumstances [Sec. 141].
Note: Freightage cannot, in any case, be
abandoned, unless the ship is also abandoned.
f. Abandonment
Abandonment 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 [Sec. 140].
Aside from the requirements under Sec. 141
above-mentioned:
1. An abandonment must be neither
partial nor conditional [Sec. 142];
2. An abandonment 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 [Sec. 143];
3. Abandonment 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 days from such oral notice [Sec.
145];
4. Abandonment must be absolute and
total.
No notice of abandonment is required for
recovery of loss in cases of actual total loss.
Where the information upon which an
abandonment has been made proves
incorrect, or the thing insured was so far
restored when the abandonment was made
that there was in fact no total loss, the
abandonment becomes ineffectual.
A valid abandonment has the following
characteristics:
1. There must be an actual
relinquishment by the person insured
of his interest in the thing insured;
2. There must be a constructive total
loss;
INSURANCE COMMERCIAL LAW
3. It must be factual [Sec. 144];
master of the vessel have not inured to
4. The notice of abandonment must be
or upon his authority, the common benefit
explicit and must specify the
in order to save the and profit of all the
particular cause of the abandonment
vessel, her cargo, or persons interested in
[Sec. 146].
both at the same the vessel and her
time from a real and cargo [Art. 809]
Effects of abandonment:
known risk [Art. 811,
1. An abandonment is equivalent to a
Code of Commerce]
transfer by the insured of his interest to
the insurer, with all the chances of Loss is borne by all Loss is borne alone
recovery and indemnity [Sec. 148]; the owners of the by the owner of the
2. If a marine insurer pays for a loss as if interests involved, cargo or of the
it were an actual total loss, he is entitled who are pro tanto vessel, as the case
to whatever may remain of the thing obliged to give may be [De Leon];
insured, or its proceeds or salvage, as proportionate such loss is not
if there had been a formal contributions to suffered by all
abandonment [Sec. 149]; make up for such persons contributing
3. Upon an abandonment, acts done in loss, since the ratably [Carale]
good faith by those who were agents of sacrifice was made
the insured in respect to the thing for the common
insured, subsequent to the loss, are at benefit of all who
the risk of the insurer, and for his have an interest in
benefit [Sec. 150]. the venture [Art. 812;
Carale]
g. Average
Requisites to claim general average
The following are considered averages: contributions:
1. All extraordinary or accidental 1. There must be a common danger to the
expenses which may be incurred vessel or cargo;
during the navigation for the 2. The sacrifice must be for the common
preservation of the vessel or cargo, or safety or for the benefit of all;
both; 3. It must be successful (i.e. resulted in
2. All damages or deterioration the vessel the saving of the vessel and/or cargo);
may suffer from the time she puts to 4. Expenses or damages should have
sea from the port of departure until she been incurred or inflicted after taking
casts anchor in the port of destination, proper legal steps and authority
and those suffered by the merchandise [Magsaysay v. Agan, G.R. No. L-6393
from the time it is loaded in the port of (1955)].
shipment until it is unloaded in the port
of consignment [Art. 806, Code of Vance, however, includes as part of the
Commerce]. requisites:
1. Sacrifice was made by the master or
There are two kinds of averages: upon his authority; and
1. Gross or general 2. That it was not caused by any fault of
2. Simple or particular the party asking for the contribution.

An example of particular average loss would

Gross/General Simple/Particular be the wages of the crew when the vessel is
Average Average detained by reason of force majeure. In such a
case, the loss is only partial and must be borne
Includes damages Includes damages by the owner of the vessel alone [Carale].
and expenses which and expenses
are deliberately caused to the vessel Rules on averages in marine insurance
caused by the or her cargo, which Where it has been agreed that an insurance
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INSURANCE
upon a particular thing, or class of things, shall
be free from particular average:
1. A marine insurer is not liable for any
particular average loss not depriving
the insured of the possession of the
whole of such thing, or class of things
at the port of destination (even though
it becomes entirely worthless);
2. However, such insurer is liable for his
proportion of all general average loss
assessed upon the thing insured [Sec.
138].
h. Warranties
Implied warranties in marine insurance:
1. Implied warranty of seaworthiness
2. Implied warranty against improper
deviation
3. Implied warranty of proper
documentation
Implied Warranty of Seaworthiness
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 [Sec. 115].
A vessel is seaworthy if:
1. It is fit to perform the service and to
encounter the ordinary perils of the
voyage contemplated by the parties to
the policy [Sec. 116];
2. It is properly laden;
3. It is provided with a competent master;
4. It is provided with a sufficient number
of competent officers and seamen;
5. It is provided with the requisite
appurtenances and equipment;
6. It is provided with other necessary or
proper stores and implements for
voyage [Sec.118].
Note: There is an implied warranty of
seaworthiness in every contract of ordinary
marine insurance, as provided in Sec. 113 in
relation to Sec. 99. It becomes the obligation of
a cargo owner to look for a reliable common
carrier which keeps its vessels in seaworthy
condition [Roque v. Intermediate Appellate
Court, G.R. No. L-66935 (1985)].
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A vessel should be seaworthy at the time
commencement of the risk or start of the
voyage, except:
1. Time policy: When the insurance is
made for a specified length of time, the
implied warranty is not complied with
unless the ship be seaworthy at the
commencement of every voyage it
undertakes during that time;
2. Cargo policy: When the insurance is
upon the cargo which, by the terms of
the policy, description of the voyage, or
established custom of the trade, is to
be transhipped at an intermediate port,
the implied warranty is not complied
with unless each vessel upon which the
cargo is shipped, or transhipped, be
seaworthy at the commencement of
each particular voyage [Sec. 117].
Where different portions of the voyage
contemplated by a policy differ in respect to the
things requisite to make the ship seaworthy
therefor, a warranty of seaworthiness is
complied with if, at the commencement of each
portion, the ship is seaworthy with reference to
that portion [Sec. 119].
The insurer is not liable despite breach of
warranty when the ship becomes unseaworthy
during the voyage to which an insurance
relates, but there is an unreasonable delay in
repairing the defect [Sec. 120].
Implied Warranty Against Improper
Deviation
A 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 [Sec.125].
There is proper deviation when:
1. Caused by circumstances over which
neither the master nor the owner of the
ship has any control;
2. Necessary to comply with a warranty,
or to avoid a peril, whether or not the
peril is insured against;
3. Made in good faith, and upon
reasonable grounds of belief in its
necessity to avoid a peril; or
INSURANCE COMMERCIAL LAW
4. Made in good faith, for the purpose of disaster or casualty not attributable to human
saving human life or relieving another agency [Phil. Home Assurance Corp. v. CA,
vessel in distress [Sec. 126]. G.R. No. 106999 (1996)].

Note: In instances when deviation is proper,
insurer remains liable.
Every deviation not specified in the last section
is improper [Sec. 127].
The effect of any loss subsequent to an
improper deviation is that the insurer is not
liable [Sec. 128].
Fire or other so-called “allied risks”
enumerated in Sec. 169 must be the
proximate cause of the damage or loss.
The presence of heat, steam, or even smoke is
evidence of fire, but taken by itself will not
prove the existence of fire.
b. Risks

Implied Warranty of Proper The risk assumed by the insurer is the loss and
Documentation damage caused by hostile fire and not
friendly fire.
Where the nationality or neutrality of a ship or
cargo is expressly warranted, it is implied that
Hostile Fire Friendly Fire
the ship will carry the requisite documents to
show such nationality or neutrality and that it Fire that escapes Fire that burns in a
will not carry any documents which cast from the place where place where it is
reasonable suspicion thereon [Sec. 122]. it was intended to intended to burn
burn and ought to be, and ought to be (e.g.
2. Fire or one which remains fire burning in a stove
completely within its or a lamp) [De Leon].
a. Definition proper place but
because of the But friendly fire may
Fire insurance is a contract of indemnity by unsuitable materials become hostile fire
which the insurer, for a stipulated premium, used to light it, by escaping from the
agrees to indemnify the insured against loss becomes inherently place where it ought
by: dangerous and to be to some place
1. Fire, lightning, windstorm, tornado, or uncontrollable [De in which it ought not
earthquake; and Leon]. to be [Carale].
2. Other allied risks, when such risks are
covered by extension to fire insurance
policies or under separate policies The principle underlying this distinction is that
[Sec. 169]. the policy shall not be construed to protect the
insured from injury consequent upon his
Fire is oxidation which is so rapid as to produce negligent use or management of fire, so long
either a flame or a glow. Spontaneous as it burns in the place where it ought to be
combustion is usually rapid oxidation. Fire is [Carale].
always caused by combustion, but combustion
does not always cause fire [Western Woolen c. Alterations in Use or Condition
Mills Co. v. Northern Assurance Co., 139 Fed
637 (1905)]. An alteration in the use or condition of a thing
insured from that to which it is limited by the
General Rule: Fire cannot be considered a policy:
natural disaster or calamity or an act of God 1. Entitles an insurer to rescind a contract
since it almost always arises from acts of man of fire insurance if such alteration:
or by human means. a. Increases the risks, and
b. Was made:
Exception: It is caused by lightning or a natural
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1. Without the consent of
the insurer, and
2. By means within the
control of the insured.
2. Does not affect a contract of fire
insurance if the alteration does not
increase the risk [Secs. 170-171].
Note: A contract of fire insurance is not affected
by any act of the insured after the execution of
the policy, which does not violate its provisions,
even though it increases the risk and is the
cause of the loss [Sec. 172].
Transferring machinery to another location,
despite a provision in the policy stating that the
machine cannot be transferred without the
consent of the insurer, is considered an
alteration in the condition and location of the
thing insured [Malayan Insurance Co, Ltd. v.
PAP Co., Ltd., G.R. No. 200784 (2013)].
d. Measure of Indemnity
In an open policy, only the expense necessary
to replace the thing lost or injured in the
condition it was at the time of the injury will be
paid.
In a valued policy, the parties are bound by
the valuation, in the absence of fraud or
mistake [Sec. 173].
The parties may provide for an option-to-
rebuild clause concerning the repairing,
rebuilding, or replacing of buildings or
structures wholly or partially damages [Sec.
174].
Note: No policy of fire insurance shall be
pledged, hypothecated, or transferred to any
person, firm, or company who acts as agent for
or otherwise represents the issuing company
[Sec. 175].
Open policy
In the absence of express valuation in a fire
insurance policy, the insured is only entitled to
recover the amount of actual loss sustained
and the burden of proof is upon him to establish
the amount of such loss by preponderance of
evidence.
In an open policy, the actual loss, as
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determined, will represent the total indemnity
due the insured except only that the total
indemnity shall not exceed the total value of the
policy [Development. Ins. Corp. v. IAC, G.R.
No. 71360 (1986)].
Valued policy
If there is a valuation, the effect shall be like a
marine insurance policy wherein the valuation
is conclusive between the parties in adjusting
the loss [Sec. 158].
Option-to-rebuild clause
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 [Sec.
174].
3. Casualty
a. Definition
Casualty insurance is insurance covering loss
or liability arising from accident or mishap.
Casualty insurance includes but is not limited
to:
1. Employer’s liability insurance;
2. Motor vehicle liability insurance;
3. Plate glass insurance;
4. Burglary and theft insurance;
5. Personal accident and health
insurance, as written by non-life
insurance companies; and
6. Other substantially similar kinds of
insurance.
Casualty insurance does not include 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 [Sec. 176].
INSURANCE COMMERCIAL LAW
b. Intentional Injury and Accidental Under this kind of insurance, no action will lie
Injury Distinguished against the insurer unless brought by the
insured for loss actually sustained and paid by
Intentional Injury Accidental Injury him. Liability of the insurer attaches only after
the insured has paid his liability to the third
Injury involves the Injury happens by
party [De Leon].
exercise of the chance or
reasoning faculties, fortuitously, without
Note: Except with respect to compulsory motor
consciousness, intention or design,
vehicle liability insurance, the Insurance Code
and volition which is unexpected,
contains no other provisions applicable to
unusual and
casualty insurance or to robbery insurance in
unforeseen
particular. These contracts are, therefore,
Where a provision of The terms do not, governed by the general provisions applicable
to all types of insurance. Outside of these, the
the policy excludes without qualification,
intentional injury, it is exclude events rights and obligations of the parties must be
determined by the terms of their contract,
the intention of the resulting in damage
person inflicting the due to fault, taking into consideration its purpose and
injury that is recklessness, or always in accordance with the general
controlling negligence of third principles of insurance law [Fortune Insurance
parties & Surety Co. v. CA, G.R. No. 115278 (1995)].
If the injuries
suffered by the d. No-Action Clause
insured clearly
resulted from the A no-action clause is a requirement in a policy
intentional act of the of liability insurance which provides that a suit
third person, the must first be instituted, and a final judgment be
insurer is relieved first obtained against the insured before the
from liability as person injured can recover on the policy.
stipulated
However, a no-action clause cannot prevail
over Rules of Court provisions which are aimed
c. Divisions at avoiding multiplicity of suits. Parties (i.e. the
insured and the insurer) may be joined as
1. Liability Insurance defendants in a case commenced by the third
party claiming under a liability insurance, as the
This is insurance against specified perils which right to relief in respect to the same
may give rise to liability on the part of the transactions is alleged to exist [Sec. 5, Rule 2;
insured. Sec. 6, Rule 3, 2019 Rules of Civil Procedure;
Guingon v. Del Monte, G.R. No. L- 22042
The insurer assumes the obligation to pay the (1967)].
third party in whose favor the liability of the
insured arises. The liability of the insurer
attaches as soon as the liability of the insured
to the third party is established. It covers
liability incurred from quasi-delict or criminal
negligence but cannot cover deliberate criminal
acts [De Leon].

2. Indemnity Insurance

This is insurance against specified perils which

may affect the persons.

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4. Suretyship
a. Definition
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 [Sec. 177].
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 2206 [Sec. 177].
Note: The Civil Code shall be applied in a
suppletory character whenever necessary in
interpreting the provisions of a contract of
suretyship [Sec. 180].
b. Nature of Contract
It shall be deemed as insurance contract if
the surety’s main business is that of suretyship,
and not where the contract is merely incidental
to any other legitimate business or activity of
the surety.
It is an accessory contract unlike a contract
of insurance which is the principal contract
itself.
The contract of a surety is evidenced by a
document called surety bond which is
essentially a promise to guarantee the
obligation of the obligor. In turn, the obligor
executes an indemnity agreement in favor of
the insurer [De Leon].
When the obligee accepts the bond, the bond
becomes valid and enforceable, whether or not
the premium has been paid by the obligor,
unlike in an insurance contract where payment
of premium is necessary for the contract to be
valid. If the obligee has not yet accepted, then
payment of premium is still necessary for the
contract of suretyship to be valid.
c. Liability of Surety
The liability of the surety or sureties under a
bond is joint and several, or solidary [Sec. 178].
This means that upon the default of the
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principal obligor, the surety becomes primarily
liable. Unlike a guarantor, a surety is not
entitled to the benefit of exhaustion of the
principal obligor’s assets and assumes as a
regular party to the undertaking.
Said liability is limited or fixed to the amount of
the bond.
5. Life
Life insurance is insurance on human lives
and insurance appertaining thereto or
connected therewith.
The following shall be considered a life
insurance contract for purposes of the
Insurance Code:
a. 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;
b. Every contract or pledge for the
payment of endowments or annuities
[Secs. 181-182].
An insurance upon life may be made payable:
a. On the death of the person;
b. On his surviving a specified period; or
c. On the continuance or cessation of life
[Sec. 182].
The parties to a life insurance are the
following:
a. Owner of the policy: One who has the
power to name the beneficiary, assign
it, cash it in or use as collateral, with the
obligation to pay the premiums.
b. Cestui que vie: One on whose life
insurance is obtained.
c. Beneficiary: One to whom the
proceeds may be paid.
Note: There may be only one person for all
three parties.
INSURANCE
a. Types
1. Individual Life
Individual life insurance is insurance on
human lives and insurance appertaining
thereto or connected therewith. It may be made
payable on the death of the person, or after his
surviving a specified period (as an annuity or
endowment), or otherwise contingently on the
continuation or cessation of life.
2. Group Life
Group life insurance is a blanket policy
covering a number of individuals who are
usually a cohesive group (e.g. employees of a
company) and are subjected to a common risk.
No medical examination is usually required of
each person insured (in contrast to individual
life insurance).
Group insurance is a single insurance
contract that provides coverage for many
individuals. The employer-policy holder is the
agent of the insurer in collecting the premium
[Pineda v. CA, G.R. No. 105562 (1993)].
Typically, the policy owner is an employer, and
the policy covers the employees or members of
the group, with one master contract kept by the
employer. Where the employee is required to
pay a portion of the premium, the arrangement
is called a contributory plan, wherein his
share is deducted from his wages [Carale].
3. Industrial Life
Industrial life insurance refers to an
insurance policy under which the premiums are
payable either monthly or oftener, if:
a. The face amount of insurance provided
in any policy is not more than 500 times
that of the current statutory minimum
daily wage in the City of Manila; and
b. The words “industrial policy” are
printed upon the policy as part of the
descriptive matter [Sec. 235].
It provides insurance coverage to industrial
workers or people who are unable to afford
insurance for bigger amounts.
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It shall not lapse after non-payment of
premiums in 3 months after the expiration of
the grace period if such non-payment is due to
the failure of the company to send its
representatives to the insured to collect
premium [Sec. 235].
4. Microinsurance
Infra.
b. Other Classifications of Life Policies
1. Ordinary or Whole Life Policy
2. Term Life Insurance
3. Modified Life Insurance
Ordinary or whole life policy is where the
insurer agrees to pay the face value of the
policy upon the death of the insured.
The following are distinct variations of whole
life policy:
1. Ordinary Life Insurance — Premiums
are paid throughout the lifetime of the
person insured or until the person
reaches a predetermined specified age
at which point the coverage continues
without the payment of additional
premiums.
2. Limited Payment Life Insurance —
Premiums are paid only during a
specified number of years or until a
specified event occurs.
3. Single Premium Life Insurance —
The coverage is acquired by the
payment of a single premium.
4. Joint Life Insurance — Coverage is
payable upon the first death among two
or more insured (normally purchased
by business partners or spouses) and
paid to the survivor.
5. Universal Life Insurance —
Emphasizes the separation of the
portion of the premium that is used to
cover the insurance protection from the
portion of the premium allocated to an
investment.
6. Variable Life Insurance — Some
amount of death benefit provided by a
variable life insurance policy is
guaranteed by the insurer, but the total
death benefit and the cash value of the
insurance before death depend on the
INSURANCE
investment performance of that portion
of the premium which is allocated to a
separate fund.
7. Pure Endowment Policy — Where
the insurer pays the insured if the
insured survives a specified period. If
the insured dies within the period, the
insurer is released from liability and
unless the contract otherwise provides,
need not reimburse any part of the
premiums paid.
8. Endowment Policy — Where the
insured is paid the face value of the
policy if he outlives the designated
period. If he dies within said period, the
insurer pays the proceeds to the
beneficiary. This is a combination of
term policy and pure endowment
policy.
Term life insurance provides for the payment
of a specified amount if death occurs within the
period designated in the policy, usually for
periods of one to five years.
Modified life insurance is a policy that
combines term and whole life insurance into a
single insurance policy. Premiums paid by the
insured are substantially less during the first
few years then later increases during the
remaining term of the policy [Carale].
c. Risks
Five important risks:
1. Death or Survival;
2. Suicide
3. Death at the hands of the law;
4. Killing by the beneficiary; and
5. Accidental Death
1. Death or Survival
Life insurance may be made payable on the
death of the person, or on his surviving a
specified period, or otherwise contingently on
the continuation or cessation of life [Campos].
Death of the insured must be proven by the
beneficiary before the insurer can be made to
pay.
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2. Suicide
Insurer is liable only when:
a. Suicide is committed after the policy
has been in force for a period of 2 years
from the date of its issue or of its last
reinstatement unless the policy
provides a shorter period.
Note: Any stipulation extending the 2-
year period is void.
b. Suicide is committed in a state of
insanity, regardless of the date of the
commission, unless suicide is an
excepted peril [Sec. 183].
Since suicide is contrary to the laws of nature
and the ordinary rules of conduct, it is never
presumed. The burden of proving lies with the
insurer, who seeks to avoid liability under a life
policy, excepting it from coverage [Campos].
Suicide as an Excepted Risk vs. Willful
Exposure to Needless Peril
Suicide and willful exposure to needless peril
are in pan materia because they both signify a
disregard for one's life. The only difference is in
degree, as suicide imports a positive act of
ending such life whereas the second act
indicates a reckless risking of it that is almost
suicidal in intent. To illustrate, a person who
walks a tightrope one thousand meters above
the ground and without any safety device may
not actually be intending to commit suicide, but
his act is nonetheless suicidal. He would thus
be considered as 'willfully exposing himself to
needless peril [Sun Life Insurance v. Court of
Appeals, G.R. No. 92383 (1992)].
3. Death at the Hands of the Law
Death at the hands of the law (e.g. legal
execution) is one of the risks assumed by the
insurer under a life insurance policy in the
absence of a valid policy exception [Campos].
4. Killing by the Beneficiary
General Rule: The interest of a beneficiary in
a life insurance policy shall be forfeited when
the beneficiary is the principal, accomplice, or
accessory in willfully bringing about the death
INSURANCE
of the insured. In such an event, the other
beneficiaries so named shall receive their
share and divide among them the forfeited
share of the “guilty” beneficiary. In the absence
of other beneficiaries, proceeds shall be paid
according to the policy contract, and if silent, it
shall be paid to the estate of the insured [Sec.
12].
Exceptions:
a. Accidental killing
b. Self-defense
c. Insanity of the beneficiary at the time
he killed the insured
d. Negligence
Note: Conviction of the beneficiary is
necessary before his interest in the insurance
policy is forfeited in favor of the others indicated
in Sec. 12.
5. Accidental Death
The terms “accident” and “accidental means”
have been taken to mean that they happen by
chance or fortuitously, without intention and
design and are unexpected, unusual, and
unforeseen.
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 [Carale].
General Rule: Death or injury does not result
from accident or accidental means within the
terms of an accident-policy if it is the natural
result of the insured’s voluntary act,
unaccompanied by anything unforeseen
except the death or injury.
There is no accident when a deliberate act is
performed, unless some additional,
unexpected, independent, and unforeseen
happening occurs which produces or brings
about the result of injury or death [Finnman
General Assurance Corp. v. CA, G.R. No.
100970 (1992)].
An event is not an accident if it is due to a
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voluntary and intentional act on the part of
anyone, including third parties. In the absence
of proof that the incident was intentional, the
insurer shall pay the beneficiary the value of
the supplemental policy covering death by
accident [Calanoc v. CA, G.R. No. L-8151
(1955)].
The fact that there were nine wounds in total is
proof that the victim was killed intentionally, as
this cannot be considered accidental. Thus, the
incident is not covered by the supplemental
insurance on death by accident [Biagtan v.
Insular G.R. No. L-25579 (1972)].
6. Microinsurance
Microinsurance is a financial product or
service that meets the risk protection needs of
the poor, where:
a. The number of contributions,
premiums, fees, or charges, computed
on a daily basis, does not exceed 7.5%
of the current daily minimum wage rate
for nonagricultural workers in Metro
Manila; and
b. The maximum sum of guaranteed
benefits is not more than 1,000 times of
the said current daily minimum wage
rate [Sec. 187].
No insurance company or mutual benefit
association shall engage in the business of
microinsurance unless it possesses all the
requirements as may be prescribed by the
Commissioner [Sec. 188].
7. Compulsory Motor Vehicle
Insurance
Compulsory motor vehicle liability
insurance is a policy of insurance or guaranty
in cash or surety bond to indemnify the death,
bodily injury, and/or damage to property of a
third-party or passenger arising from the use of
a motor vehicle.
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, a policy of insurance or guaranty in
cash or surety bond:
INSURANCE
a. Issued in accordance with the
provisions of this chapter;
b. To indemnity the death, bodily injury
and/or damage to property of a third-
party or passenger arising from the use
thereof [Sec. 387].
It is a requisite for registration or renewal of
registration of a motor vehicle by every land
transportation operator or owner [Sec. 390]. It
is the only type of compulsory insurance
provided for under the Insurance Code.
It applies to all vehicles whether public or
private.
To the extent that motor vehicle insurance is
compulsory, it must be a liability policy, and
the provision making it merely an indemnity
insurance contract cannot have any effect
[Campos].
The insurer’s liability is direct and primary, so
the insurer need not wait for final judgment in
the criminal case to be liable. The purpose is to
give immediate financial assistance to victims
of motor vehicle accidents and/or their
dependents, regardless of the financial
capability of motor vehicle owners or operators
responsible for the accident sustained [Shafer
v. Judge, RTC Olongapo, G.R. No. 78848
(1988)].
The claimants/victims may be a passenger or
a third party. The insured may be the party at
fault as against claims of third parties (i.e. third-
party liability) or the victim of the contingent
event.
The following clauses are relevant to
compulsory motor vehicle liability insurance:
a. Authorized Driver Clause is a
stipulation in a motor vehicle insurance
policy which provides that the driver,
other than the insured owner, must be
duly licensed to drive the motor vehicle,
otherwise the insurer is excused from
liability;
b. Theft Clause is a stipulation including
theft as one of the risks insured
against. If there is such a provision and
the vehicle was unlawfully taken, the
insurer is liable under the theft clause
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and the authorized driver clause does
not apply. The insured can recover
even if the thief has no driver’s license.
c. No Fault Clause is a provision
required in every compulsory motor
vehicle liability insurance regarding
claims for death or injury to a
passenger or third party on a liability
insurance policy covering the vehicle.
Any claim for death or injury to any passenger
or third party shall be paid without the necessity
of proving fault or negligence of any kind,
provided the total indemnity in respect of any
person shall not exceed P15,000.
The claim shall be made against only one
motor vehicle. It shall lie against the insurer of
the vehicle in which the occupant is riding, and
no other. The claimant is not free to choose
from which insurer he will claim the no fault
indemnity [Perla Compania de Seguros v.
Ancheta, G.R. No. L-49699 (1988)].
8. Compulsory Insurance Coverage
for Agency-Hired Workers
a. Definition
Compulsory insurance coverage for
agency-hired workers is an insurance
mechanism made available by the law to
provide insurance protection for OFWs.
Each migrant worker to be deployed by a
recruitment/manning agency shall be covered
by a compulsory insurance contract which shall
be secured at no cost to the said worker.
Basis: It is the policy of the State to provide
adequate protection to the overseas Filipino
workers by ensuring coverage under the
compulsory insurance requirement in Section
37-A of the Migrant Workers and Overseas
Filipinos Act of 1995, as amended [Sec. 1(b),
Guideline I, Insurance Guidelines on Rule XVI
of the Omnibus Rules and Regulations
Implementing RA 8042].
INSURANCE
b. Qualifications
To be qualified to provide for the Migrant
Workers’ Compulsory Insurance Coverage, the
insurance company must:
1. Be a reputable private life, non-life and
composite insurance company;
2. Be duly licensed by IC;
3. Be in existence and operational for at
least five (5) years;
4. Have a net worth of at least Php
500,000,000 based on the audited
financial statements for the
immediately preceding year;
5. Have a current year certificate of
authority; and
6. Have an IC-approved standard polic
[Sec. 1, Guideline III, Insurance
Guidelines on Rule XVI of the Omnibus
Rules and Regulations Implementing
RA 8042].
c. Disqualifications
Insurance companies who have directors,
partners, officers, employees, or agents with
relatives within the fourth civil degree of
consanguinity or affinity who work or have
interest in any of the licensed
recruitment/manning agencies or in any of the
government agencies involved in the overseas
employment program shall be disqualified from
providing the migrant worker’s insurance
coverage.
It shall be the duty of the said directors,
partners, officers, employees, or agents to
disclose any such interest to the IC and POEA
[Sec. 2, Guideline III, Insurance Guidelines on
Rule XVI of the Omnibus Rules and
Regulations Implementing RA 8042].
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E. Variable Contracts
Variable contract refers to any policy or
contract, on either a group or on an individual
basis, issued by an insurance company
providing:
1. Benefits or other contractual payments
or values thereunder to vary, to reflect
investment results of:
a. Any segregated portfolio of
investments; or
b. 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; AND/OR
2. Benefits or values incidental thereto
payable in fixed or variable amounts, or
both.
It shall not be deemed to be a security or
securities as defined in The Securities Act, as
amended, or in the Investment Company Act,
as amended, nor subject to regulations under
said Acts [Sec. 238(b)].
No insurance company authorized to transact
business in the Philippines shall issue, deliver,
sell or use any variable contract in the
Philippines, unless and until such company
shall have satisfied the Commissioner that:
1. Its financial and general condition; and
2. Its methods of operations, including the
issue and sale of variable contracts,
are not and will not be hazardous to the
public or to its policy and contract
owners [Sec. 238(a)].
No foreign insurance company shall be
authorized to issue, deliver, or sell any variable
contract in the Philippines, unless it is likewise
authorized to do so by the laws of its domicile
[Sec. 238 (a)].
In determining the qualifications of a company
requesting authority to issue, deliver, sell, or
use variable contracts, the Commissioner shall
always consider the following:
1. The history, financial and general
condition of the company: Provided,
that such company, if a foreign
INSURANCE
company, must have deposited with
the Commissioner for the benefit and
security of its variable contract owners
in the Philippines, securities
satisfactory to the Commissioner
consisting of bonds of the Government
of the Philippines or its
instrumentalities with an actual market
value of Two million pesos;
2. The character, responsibility and
fitness of the officers and directors of
the company; and
3. The law and regulation under which the
company is authorized in the state of
domicile to issue such [Sec. 238 (c)].
If after notice and hearing, the Commissioner
shall find that the company is qualified to issue,
deliver, sell, or use variable contracts in
accordance with this Code and the regulations
and rules issued thereunder, the
corresponding order of authorization shall be
issued. Any decision or order denying authority
to issue, deliver, sell, or use variable contracts
shall clearly and distinctly state the reasons
and grounds on which it is based [Sec. 238 (d)].
Any insurance company issuing variable
contracts pursuant to this Code may, in its
discretion, issue contracts providing a
combination of fixed amount and variable
number of benefits, and for option lump-sum
payment of benefits [Sec. 239].
Variable contracts may be issued on industrial
basis if the Insurance Code and the rules and
regulations on variable contracts are complied
with [Sec. 242].
Every variable contract form delivered or
issued for delivery in the Philippines, and every
certified form evidencing variable benefits
issued pursuant to any such contract on a
group basis, and the application, rider, and
endorsement forms applicable thereto and
used in connection therewith, shall be subject
to the prior approval of the Commissioner
[Sec. 240].
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F. Insurable Interest
Insurable interest (or what may be insured) is
that interest which a person is deemed to have
in the subject matter insured, where he has a
relation or connection with or concern in it, such
that the person will:
1. Derive pecuniary benefit or advantage
from the preservation of the subject
matter insured; and
2. Suffer pecuniary loss or damage from
its destruction, termination, or injury by
the happening of the event insured
against [Lalican v. Insular Life Ins.,
G.R. No. 183526 (2009)].
An insurable interest is one of the most basic
and essential requirements in an insurance
contract. The existence of an insurable interest
gives a person the legal right to insure the
subject matter of the policy of insurance
[Lalican v. Insular Life Ins., G.R. No. 183526
(2009)]. It may not be waived by stipulation.
Absence of insurable interest renders the
insurance contract void [Sec. 25].
General Rule: Insurable interest must be
capable of pecuniary estimation because the
purpose of insurance is to indemnify. It would
be difficult to measure if the benefit derived or
the loss incurred is not capable of pecuniary
estimation.
Exception: The insurable interest need not
always be pecuniary in nature (e.g. in insuring
the life of a person, the purpose is not to
indemnify but to act as an investment or
savings instrument) [Lucena v. Crawford, 2Bos
& PNR 269 (1806)].
Ratio: It is a deterrence to the insured.
A policy issued to a person without insurable
interest is a mere wager policy or contract and
is void for illegality [De Leon].
Evidence that life insurance is regarded as a
wager policy:
1. The original proposal to take out
insurance was that of the beneficiary;
2. The premiums are paid by the
beneficiary;
INSURANCE
3. The beneficiary has no interest,
economic or emotional, in the
continued life of the insured [De Leon].
The insurable interest is the measure of the
upper limit of his provable loss under the
contract. Insurance should not provide the
insured means of making a net profit from the
happening of the event insured against [De
Leon].
When insurable interest should exist
Insurable Interest Required
Life/Health Property
Inception ✓ ✓
Intervening
Period
Occurrence ✓ to the selling partners or co-owners,
of Loss
For Life Insurance: Insurable interest over
life/health must exist at the time of the inception
of the contract but may be lost after [Sec. 19].
For Property Insurance: Insurable interest
must exist at the time of the inception of the
contract and at the occurrence of the loss. But
it need not exist during the intervening period
or from the time between when the policy takes
effect, and the loss occurs. The alienation of
insured property will not defeat a recovery if the
insured has subsequently reacquired the
property and possesses an insurable interest
at the time of loss [Sec. 19].
Change of interest means the absolute
transfer of the property insured.
General Rule: A change of interest in the thing
insured does not transfer the policy but
suspends the insurance to an equivalent extent
until the interest in the thing and the interest in
the insurance policy are vested in the same
person. Thus, the contract is not rendered void
but is merely suspended [Sec. 20].
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Exception:
1. Life, health, and accident insurance.
2. A change of interest in the thing insured
after the occurrence of an injury which
results in a loss does not affect the
policy [Sec. 21].
3. A change in the interest in one or more
of several things, separately insured by
one policy, such as a conveyance of
one or more things, does not affect the
policy with respect to the others not so
conveyed [Sec. 22].
4. A change of interest by will or
succession on the death of the insured.
His interest passes to his heir or legal
representative who may continue the
insurance policy on the property by
continuing paying premiums [Sec. 23].
5. A transfer of interest by one of several
partners, joint owners, or owners in
common, who are jointly insured, to the
others. This will avoid the policy only as
but not as to others [Sec. 24].
6. Automatic transfers of interest in cases
in which the policy is so framed that it
will inure to the benefit of whosoever
may become the owner of the interest
insured during the circumstance of the
risk [Sec. 57].
It is an exception to the general rule that upon
maturity, the proceeds of a policy shall be given
exclusively to the proper interest if the person
in whose name or for whose benefit it is made.
In case of an express prohibition against
alienation in the policy [Art. 1306, NCC],
alienation will not merely suspend the contract
but avoid it entirely.
1. In Life/Health
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;
General Rule: For blood relationships,
no pecuniary relationship is needed.
INSURANCE
The relationship suffices for family
members regardless of whether or not
financial interest exists.
Ratio: One would naturally protect the
life of his family member regardless of
whether there is monetary
consideration. Good faith is presumed.
Exception: Relationships with lesser
degree of kinship (e.g., aunt, niece,
nephew, cousin). Pecuniary benefit is
essential. Relationships by affinity (in-
laws) and gratitude and affection are
not deemed sufficient. There must be
actual pecuniary benefit.
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 [Sec. 10].
A person is not allowed to take out insurance
upon the life of a stranger [Carale].
There is no insurable interest in the life of
an illegitimate spouse. A creditor may take
out insurance on the life of his debtor, but his
insurable interest is only up to the amount of
the debt, and only when the debt is unsecured
[Carale].
The Insurance Code does not expressly
provide the type of spouse, whether illegitimate
or legitimate. However, it can be presumed that
the provision refers to legitimate spouses,
based on Art. 195 of the Family Code on
support, as well as Art. 739, NCC on prohibited
donations.
On the insurable interest of children: the law
does not make any qualifications on the status
of the child. This is in accord with Art. 195 of
the Family Code.
Measure of Indemnity
General Rule: The measure of indemnity
under a policy of insurance upon life or health
is the sum fixed in the policy.
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Exception: The interest of a person insured is
susceptible of exact pecuniary measurement
[Sec. 186].
a. In Life Insurance
Life insurance policies may be divided into two
general classes:
1. Insurance upon one’s life
2. Insurance upon the life of another
i. Interest in One’s Own Life
The cestui que vie is the insured himself. The
insured can designate anyone to be the
beneficiary of the policy.
Each person has unlimited interest in his own
life, whether the insurance is for the benefit of
himself or another [40 CJS 909].
The beneficiary designated need not have any
interest in the life of the insured when the latter
takes out policy on his own life [De Leon].
ii. Interest in Life of Another
The insurable interest in the life of another:
a. Must be a pecuniary interest;
b. Exists whenever the relation between
the assured and the insured is such
that the assured has a reasonable
expectation of deriving benefit from the
continuation of the life insured or of
suffering detriment through its
termination [De Leon].
General Rule: When the owner of the policy
insures the life of another, and designates a
third party as beneficiary, both the owner
and beneficiary must have an insurable
interest in the life of the cestui que vie.
Exception: An assignee of the insurance
contract is not required to have insurable
interest in the life of the insured, since insurable
interest over life should exist only during the
inception of the contract.
Note: An assignment of the insurance contract
is different from a change in the designated
beneficiary.
INSURANCE
But if a person obtains a policy on the life of
another and names himself as the beneficiary,
he must have insurable interest therein [De
Leon].
iii. Beneficiary
A beneficiary is the person named or
designated in a contract of life, health, or
accident insurance as the person who is to
receive the proceeds or benefits which become
payable, if the insured risk occurs.
General Rule: A person may designate a
beneficiary, irrespective of the beneficiary’s
lack of insurable interest, provided he acts in
good faith and without intent to make the
transaction merely a cover for a forbidden
wagering contract [De Leon].
Exception: Any person who is forbidden from
receiving any donation under Art. 739, NCC
cannot be named beneficiary of a life insurance
policy by the person who cannot make any
donation to him [Art. 2012, NCC].
Art. 739, NCC. The following donations are void:
1. Those made between persons who were
guilty of adultery or concubinage at the
time of the donation;
2. Those made between persons found guilty
of the same criminal offense, in
consideration thereof;
3. Those made to a public officer or his wife,
descendants and ascendants, by reason
of his office. (…)
iv. Changing the Beneficiary
General Rule: The insured shall have the right
to change the beneficiary he designated in the
policy [Sec. 11].
Exception: If the insured expressly waived his
right to change the beneficiary, this makes the
latter an irrevocable beneficiary. But despite
the waiver, he can still change the beneficiary,
provided he obtained the beneficiary’s consent
[Sec. 11].
Under the Slayer Statute, when the
beneficiary is the principal, accomplice or
accessory in willfully bringing about the death
of the insured, the interest of beneficiary in life
insurance policy is forfeited [Sec. 12].
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v. Transfer of Policy
The life insurance policy can be transferred
whether the transferee has insurable interest or
not. Notice of the transfer to the insurer is not
required for the validity of the same [Secs. 184-
185].
There is no right of subrogation in life
insurance, because it is not a contract of
indemnity.
b. In Health Insurance
General Rule: Interest in the life or health of a
person must exist at the inception of the
insurance contract but need not exist thereafter
or when the loss occurs [Sec. 19].
Exception:
1. In the case of a creditor’s insurance
taken on the life of the debtor, insurable
interest disappears once the debt has
been paid;
2. In the case of a company’s insurance
taken on the life of an employee,
insurable interest disappears once the
employee leaves the company.
2. In Property
The following are considered as insurable
interest, provided that they are of such nature
that a contemplated peril might directly damnify
the insured:
● Every interest in real or personal
property; or (e.g. Ownership)
● Any relation thereto; or (e.g.
Interest of a trustee or a
commission agent)
● Any liability in respect thereof [Sec.
13] (e.g. Interest of a carrier or
depository of goods)
A person has an insurable interest in property
when he sustains such relation with respect to
it that he has a reasonable expectation of:
a. Benefit to be derived from its continued
existence; or
b. Loss or liability from its destruction
[Carale; Gaisano Cagayan Ins. V. Ins.
Co. of North America, G.R. No. 147839
(2006)].
INSURANCE
An insurable interest in property may consist in:
a. An existing interest [Sec. 14];
Existing interest in property may be a legal
title or equitable title [De Leon].
Examples of those having existing interest
are:
1. Owners as regards their properties,
2. A buyer in a perfected contract of
sale,
3. A carrier or depository [Sec 15],
4. A warehouseman [General Bonded
Warehouse Act],
5. Trustees in the case of the seller of
property not yet delivered,
6. Mortgagors over the property
mortgaged, and lessor, lessee and
sublessee over the property leased
[De Leon].
b. An inchoate interest founded on an
existing interest [Sec. 14]; or
Inchoate interest in property exists but
is incomplete or unripe until the
happening of an event [De Leon].
Examples of inchoate interests are:
1. The interest of stockholders with
respect to dividends in case of
profits and shares in the assets,
and
2. The interest of a partner in the
properties belonging to the
partnership [De Leon].
c. An expectancy, coupled with an
existing interest in that out of which
the expectancy arises [Sec. 14].
- For example, a farmer who
planted crops has insurable
interest over his harvest which can
be expected [De Leon].
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 [Sec. 16]. A son has no insurable
interest over the property of his father because
such is just a mere expectancy and has no
legal basis before he inherits such property
[Carale].
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a. Time of Existence
General Rule: Interest in property insured
must exist both at inception and at time of loss,
but not in the intervening period [Sec. 19].
This means that the insurable interest in the
property must exist both at the inception of the
contract and at the time of the loss [Carale].
Exceptions:
1. A change in interest over the thing
insured after the loss contemplated.
The insured may sell the remains
without prejudice to his right to recover
[Sec. 21];
2. A change of interest in one or more
several distinct things, separately
insured by one policy. This does not
avoid the insurance as to the others
[Sec. 22].
3. A change in interest by will or
succession upon the death of the
insured [Sec. 23];
4. A transfer of interest by one of several
partners, joint owners, or owners in
common who are jointly insured. The
acquiring co-owner has the same
interest; his interest merely increases
upon acquiring other co-owners
interest [Sec. 24].
Note: This makes a distinction between a
transfer in favor of a partner and in favor of a
stranger. The latter will avoid the policy while
the former will not [Carale].
Mere transfer of the property does not transfer
the policy but suspends it until the same person
becomes the owner of both the policy and the
thing insured [Sec. 20].
b. Measure of Indemnity
Being a contract of indemnity, the measure of
insurable interest in property is the extent to
which the insured might be damnified by the
loss of injury thereof [Sec. 17].
The insured cannot recover a greater value
than that of his actual loss because it would be
a wagering policy contrary to public policy and
void.
INSURANCE COMMERCIAL LAW
A carrier or depository of any kind has an 3. Double Insurance and Over-
insurable interest in a thing held by him as insurance
such, to the extent of his liability but not to
exceed the value thereof [Sec. 15]. Double insurance exists where the same
person is insured by several insurers
c. Interest in Property and Life separately in respect to the same subject and
Distinguished interest [Sec. 95].
Property Life
Requisites of double insurance:
a. The same person is insured;
Extent b. Two or more insurers insuring
separately;
c. The same subject matter;
Limited to actual Unlimited (save in life
d. The same interest insured; and
value of the interest insurance effected by
e. The same risk or peril insured against
thereon a creditor on the life
[Malayan Insurance v. Philippine First
of the debtor –
Insurance, G.R. No. 184300 (2012)].
amount of debt only)

Existence Double insurance is not prohibited under the

law unless the policy contains a stipulation to
the contrary. Usually, insurance policies
Must exist when the Must exist at the time contain other insurance clause, which
insurance takes the insurance takes requires disclosure of other existing insurance
effect and when the effect, BUT need not policy. In such case, non-disclosure will avoid
loss occurs, BUT exist thereafter. the policy. It is intended to prevent over
need not exist in the insurance and thus avert the perpetration of
meantime fraud.

Expectation of benefit to be derived If there is double insurance and loss occurs:

a. Each of the insurers will be liable only
up to the face value of their respective
Must have legal Need not have legal
policies; and
basis basis
b. The insured has the option of choosing
the order by which he will claim from
Interest of beneficiary the insurers [Carale].

Over insurance occurs when the value of the

Must have insurable Need not have insurance exceeds the value of the insurable
interest over the insurable interest interest.
thing insured over the life of the
insured if the insured Over insurance It is not per se void, however,
himself secured the recovery is allowed only to the extent of the
policy. But if the loss or damage incurred by the insured
insurance was [Carale].
obtained by the
beneficiary, the latter An insurer may cancel an insurance policy,
must have insurable
other than life, based on a “discovery of other
interest over the life
insurance coverage that makes the total
of the insured insurance in excess of the value of the property
[Sundiang; Aquino] insured,” subject to the requirement of prior
notice [Sec. 64(f)].

The insured is entitled to a ratable return of the

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INSURANCE
premium, proportioned to the amount by which
the aggregate sum insured in all the policies
exceeds the insurable value of the thing at risk
(in case of an over insurance by several
insurers other than life) [Sec. 83].
If there is over-insurance and loss occurs, then
the insurers will pay pro-rata or in the order as
stated in contract or excess clause.
COMMERCIAL LAW
insured
Where the insured receives any sum in
excess of the valuation (for valued policies),
or of the insurable value (for unvalued
policies), the insured must hold such sum in
trust for the insurers, according to their right
of contribution among themselves

Double Insurance Over-insurance Sec. 96 enunciates the principle of contribution

which requires each insurer to contribute
ratably to the loss or damage considering that
Amount of insurance Amount of insurance the several insurances cover the same subject
may or may not exceeds the value of matter and interest against the same peril. If
exceed the value of the insured’s the loss is greater than the sum of all the
the insured’s insurable interest policies issued, each insurer is liable for the
insurable interest amount of his policy.

There are always There may be one or 4. Multiple or Several Interests on

several insurers more insurers Same Property

General Rule: The insurance proceeds shall

Rules for Payment be applied exclusively to the proper interest of
Where the insured in a policy other than life is the person in whose name or for whose benefit
over insured by double insurance: it is made.
a. The insured, unless the policy
otherwise provides, may claim Exception: It is otherwise specified in the
payment from the insurers in such policy [Sec. 53].
order as he may select, up to the
amount for which the insurers are Examples wherein multiple persons may each
severally liable under their respective have insurable interest over the same property:
contracts; a. Corporations — the corporation and its
b. Each insurer is bound, as between stockholders have insurable interest
himself and the other insurers, to over the corporate assets.
contribute ratably to the loss in b. Partnerships — the partnership and the
proportion to the amount for which he partners composing it have insurable
is liable under his contract [Sec. 96]. interest over its assets.
c. Assignments — the assignor and
Rules for claiming payment under Valued assignee have insurable interest over
Policies vs. Unvalued Policies [Sec. 96] the property assigned.
Valued Policy Unvalued policy d. Trusts — the trustor and trustee have
insurable interest over the property in
trust.
Any sum received by Any sum received by e. Lease Agreements — the lessor,
him under any other him under any policy lessee and sub-lessees have insurable
policy shall be shall be deducted interest over the property in lease.
deducted from the against the full f. Mortgages — the mortgagor and
value of the policy insurable value for mortgagee/s have insurable interest
without regard to the any sum received by over the property mortgaged.
actual value of the him under any policy
subject matter

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INSURANCE
5. No Fault, Suicide, and
Incontestability Clauses
a. No Fault Clause
The “no fault” clause connotes that the victim
of a tort can recover for his loss from his insurer
without regard to his own contributory fault or
the fault of the tortfeasor. This is to guarantee
compensation or indemnity to persons
suffering loss in motor vehicle accidents
[Campos].
Its essence is in seeking to provide victims of
vehicular accidents or their heirs immediate
compensation, although in a limited amount,
pending final determination of who is
responsible for the accident and liable for the
victims’ injuries or death [Campos].
i. Multiple Interests over Mortgaged
Property
The Insurance Code recognizes that both the
mortgagor and mortgagee have each separate
and distinct insurable interest in the mortgaged
property. They may take out separate policies
with the same or different insurance
companies. Insurance taken by one on his own
name only, does not inure to the benefit of the
other [Sec. 53].
Thus, a mortgagor has an insurable interest
equal to the value of the mortgaged property
and a mortgagee, only to the extent of the debt
secured by the mortgage [Geagonia v. CA,
G.R. No. 114427(1995)].
Mortgagor Mortgagee
As owner, the Only to the extent of
interest is to the the debt secured
extent of the value of
the property,
regardless of
whether it equals to
the mortgage debt or
not
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His interest lies in What is insured is not
that the loss or the property, but his
destruction of the interest as
property will not mortgagee, which
extinguish his subsists until the
mortgage debt mortgage debt is
extinguished
[Carale].
When mortgagee takes out insurance
policy
a. When a mortgagee insures his own
interest in the mortgaged property
without reference to the right of the
mortgagor, the mortgagee is entitled to
the proceeds of the policy in case of
loss to the extent of his credit [De
Leon].
b. If the proceeds are more than the total
amount of credit, then the mortgagee
has no right to the excess.
c. If the proceeds are equal to the credit,
then the insurer is subrogated to the
mortgagee’s rights and the mortgagee
can no longer recover the mortgagor’s
indebtedness.
d. If the proceeds are less than the credit,
then the mortgagee may recover from
the mortgagor the deficiency. Upon
payment, the insurer is subrogated to
the rights of the mortgagee against the
mortgagor to the extent of the amount
paid.
When a mortgagee insured his own interest
and a loss occurs, he is entitled to recover on
the insurance. The mortgagee, however, is not
allowed to retain his claim against the
mortgagor, but it passes by subrogation to the
insurer, to the extent of the insurance money
paid [Palileo v. Cosio, G.R. No. L- 7667
(1955)].
When a mortgagor takes out an insurance for
his own benefit, only he can recover from the
insurer but the mortgagee has a lien on the
proceeds by virtue of the mortgage. A
mortgagor can make the proceeds payable to
or assigned to the mortgagee [De Leon].
INSURANCE
Ways where a mortgagee may be the
beneficial payee:
a. As assignee with the consent of the
insurer
b. A pledge without such consent;
c. The original policy may contain a
mortgage clause;
d. A rider making the policy payable to the
mortgagee “as his interest may appear”
may be attached;
e. A “standard mortgage clause,”
containing a collateral independent
contract between the mortgagee and
the insurer may be attached;
f. The policy, though by its terms payable
absolutely to the mortgagor, may have
been procured by a mortgagor under a
contract duty to insure for the
mortgagee's benefit [Geagonia v. CA,
G.R. No. 114427 (1995)].
ii. Open Loss Payable Mortgage Clause
An open loss payable clause states that the
proceeds of the insurance contract is payable
to the mortgagee as beneficiary.
The contract, however, is procured by the
mortgagor for his interest in the property. He is
the party to the contract, not the mortgagee.
The acts of the mortgagor prior to the loss,
which would otherwise avoid the insurance,
affects the mortgagee, even if the property is in
the hands of said mortgagee.
3. Union Mortgage or Standard Mortgage
Clause
A standard or union mortgage clause makes a
separate and distinct contract of insurance on
the interest of the mortgagee, thus any act of
the mortgagor will not affect the mortgagee
[Carale].
This clause is like an open loss payable clause,
except that it is stipulated that the acts of the
mortgagor cannot invalidate the insurance,
provided that if the mortgagor fails to pay the
premiums due, the mortgagee shall, on
demand, pay said premiums [De Leon].
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b. Suicide Clause
[See IV. Classes, E. Life, 3. Risks, b) Suicide,
p. 16]
c. Incontestability Clause
[See VIII. Rescission of Insurance Contracts,
A. Concealment, 7. Incontestability Clause, p.
35]
G. Perfection of the Insurance
Contract
1. Offer and
Acceptance/Consensuality
An insurance contract is consensual, it is
therefore perfected by mere consent. Consent
is manifested by the meeting of the offer and
the acceptance upon the object or the cause
which are to constitute the contract.
There is an offer when the insured submits an
application to the insurer. There is acceptance
when the insurer approves the application.
So long as an application for insurance has not
been either accepted or rejected, it is merely a
proposal or an offer to make a contract [Perez
v. CA, G.R. No. 112329 (2000)].
The insurance contract becomes effective
upon payment of first premium, provided there
has been an approval of the application.
The parties may impose additional conditions
precedent to the validity of the policy as a
contract as they see fit. Usually, it is stipulated
in the application that the contract shall not
become binding until the policy is delivered and
the first premium is paid [De Leon].
Cognition Theory: An acceptance made by
letter shall not bind the person making the offer,
except from the time it came to his knowledge.
In Enriquez v. Sun Life Assurance Co. [G.R.
No. L-15895 (1920)] the Court held that:
a. The submission of an application, even
with premium payment is a mere offer
INSURANCE
on the part of the applicant, and does
not bind the insurer;
b. An insurance contract is also not
perfected where the applicant dies
before the approval of his application or
it does not appear that the acceptance
of the application ever came to the
knowledge of the applicant.
a. Delay in Acceptance
Delay in acting on the application does not
constitute acceptance even though the insured
has forwarded his first premium with his
application [Perez v. CA, G.R. No. 112329
(2000)].
When there is delay in acceptance due to the
negligence of the insurance company which
takes unreasonably long time before the
application is processed and the applicant dies,
the contract is not perfected.
The insurer can be liable for damages in
accordance with the “tort theory:” An
insurance contract is imbued with public
interest. Thus, the insurer should act on an
application for insurance within a reasonable
time, otherwise the applicant loses the
opportunity to obtain insurance from other
sources. Unreasonable delay in the
acceptance or rejection of these applications
can constitute negligence under Art. 2176 of
the Civil Code.
An acceptance made by letter shall bind the
person making the offer from the date it came
to his knowledge [Enriquez v. Sun Life, 41 Phil.
269 (1920)].
The insurance business is imbued with public
interest; thus, it is the duty of the insurer to act
with reasonable promptness in acting on
applications submitted to it [Wallace v. Hartford
Fire Insurance Co, 31 Idaho 48r (1918)].
b. Delivery of Policy
Delivery is the act of placing the insurance
policy (i.e. the physical document) into the
possession of the insured.
The delivery can be proof of the acceptance of
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COMMERCIAL LAW
the insurer of the offer of the insured.
It is not, however, a pre-requisite of a valid
contract of insurance.
Note: Actual manual delivery is not necessary
[Vda. De Sindayen v. Insular Life, 62 Phil 51
(1935)].
Delivery to the agent cannot be considered
delivery to the insured, as the agent of the
insurance company is not the agent of the
insured [Bradley v. New York Life Ins., 275 F.
657 (1921)].
2. Premium Payment
An insurance premium is the agreed price for
assuming and carrying the risk, i.e. the
consideration paid to an insurer for undertaking
to indemnify the insured against the specified
peril.
General Rule: No insurance policy issued or
renewal is valid and binding until actual
payment of the premium. Any agreement to
the contrary is void [Sec. 77].
Exceptions:
a. Whenever the grace period provision
applies in the case of a life or an
industrial life policy [Sec. 77].
b. Whenever under the broker and
agency agreements with duly licensed
intermediaries, a 90-day credit
extension is given.
Note: No credit extension to a duly
licensed intermediary should exceed
90 days from the date of issuance of
the policy [Sec. 77].
c. When there is an acknowledgment in
the contract that the premium has been
paid [Sec. 79].
d. Payment to an agent [South Sea
Surety v. CA 244 SCRA 744 (1995);
Arreola v. CA 236 SCRA 643 (1994)].
Now included In Section 315 of the
Insurance Code [American Home
Assurance v. Chua 309 SCRA 250
(1999)].
INSURANCE
e. Credit Extension [UCPB General
Insurance v. Masagana 356 SCRA 307
(2001)].
Jurisprudence decided before the enactment of
RA 10607 has provided two further exceptions:
a. Agreement to grant payment of
premium in installment basis and
partial payment has been made
[Makati Tuscany v. CA, G.R. No. 95546
(1992)].
b. When parties are barred by estoppel
[UCPB v. Masagana Telemart, G.R.
No. 137172 (2001)].
a. Authority of Agent to Receive
Premium
Where an insurer authorizes an insurance
agent or broker to deliver a policy to the
insured, it is deemed to have authorized said
agent to receive the premium on its behalf.
The insurer is bound by its agent’s
acknowledgement of receipt of payment of
premium [American Home Assurance Co. v.
Chua, G.R. No. 130421 (1999)].
b. Payment by Post-Dated Check
The payment of premium by a postdated check
at a stated maturity subsequent to the loss is
insufficient to put the insurance into effect.
But payment by a check bearing a date prior
to the loss, assuming availability of funds,
would be sufficient, even if it remains
unencashed at the time of the loss. The
subsequent effects of encashment would
retroact to the date of the instrument and its
acceptance by the creditor [Vitug].
c. Non-Payment of Premium
1. Effects
a. Prevents the contract from becoming
binding, unless waived [Philippine
Phoenix Surety and Insurance v.
Woodworks, G.R. No. L-25317 (1979)].
b. Does not affect the validity of the
contracts unless, by express
stipulation, it is provided that the policy
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shall, in that event, be suspended or
shall lapse.
2. Applicable Grace Periods
In case of individual life insurance, the policy
holder is entitled a grace period of either 30
days or one month within which payment of any
premium after the first may be made [Sec. 233].
In cases of industrial life insurance, the grace
period is four weeks, and where premiums are
paid monthly, either 30 days or one month
[Sec. 236].
3. Excuses for Non-Payment
a. Fortuitous events which render
payment by the insured wholly
impossible will not prevent forfeiture
of the policy when the premium
remains unpaid. In other words, it is not
an excuse.
b. Non-payment of premiums occasioned
by war causes an insurance to be not
merely suspended, but completely
abrogated [Constantino v. Asia Life
Ins. Co. G.R. No. L-1669 (1950)].
d. Non-Default Options in Life Insurance
In the case of individual life or endowment
insurance, the policy shall contain a provision
specifying the options to which the policyholder
is entitled to in the event of default in a premium
payment after three (3) full annual premiums
shall have been paid [Sec. 233(f)].
Such option shall consist of:
• A cash surrender value payable upon
surrender of the policy which shall not
be less than the reserve on the policy.
The basis of which shall be indicated,
for the then current policy year; and
Any dividend additions thereto, shall be
reduced by a surrender charge, which
shall not be more than one-fifth (1/5) of
the entire reserve or two and one-half
percent (2½%) of the amount insured
and any dividend additions thereto
INSURANCE
• One or more paid-up benefits on a plan
or plans specified in the policy of such
value as may be purchased by the cash
surrender value [Sec. 233(f)].
1. Cash Surrender Value (CSV)
The CSV is the amount that the insured is
entitled to receive if he surrenders the policy
and releases his claims upon it.
a. The right to CSV accrues only after
three full annual premium payments.
b. The insured is given the right to claim
the amount less than the reserve,
reduced by surrender charge [Sec.
233(f)(1)].
The CSV is an amount which the insurance
company holds in trust for the insured to be
delivered to him upon demand. When the
company’s credit for advances is paid out of the
cash value or cash surrender value, that value
and the company’s liability is diminished
[Manufacturer’s Life Ins. v. Meer, G.R. No. L-
2910 (1951)].
Ratio: The premium is uniform throughout a
lifetime, but the risk is varied (i.e. higher risk
when older, lower when young). Thus, the cost
of protection is more expensive during the early
years of the policy.
2. Alternatives to CSV
Extended Insurance / Term Insurance
This is where the insured, after having paid
three full annual premiums, is given the right
to have the policy continued in force from date
of default for a time either stated or equal to the
amount of the CSV, taken as a single premium.
The face value of the policy remains the same
but only within the term.
If death occurs during this period, the
beneficiary can recover the face value of the
policy, but if the insured survives, the
beneficiary gets nothing.
Reinstatement is allowed if made within the
term purchased; no reinstatement after the
lapse of the term purchased.
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Paid-up insurance
This is where, after the insurance is “paid-up,”
the insured who has paid three full annual
premiums is given the right, upon default, to
have the policy continued from the date of
default for the whole period of insurance
without further payment of premiums.
It is also called “reduced paid-up'' because, in
effect, the policy, terms, and conditions are the
same but the face value is reduced to the “paid-
up” value.
The terms and conditions of the original policy
remain the same, however, the amount will be
less than the original face value.
Automatic premium loan (APL)
This is where, upon default, the insurer lends
or advances to the insured without any need of
application on his part, the amount necessary
to pay overdue premium, but not to exceed the
CSV of the policy.
It only applies if requested in writing by the
insured either in the application or at any time
before expiration of the grace period.
In effect, the insurance policy continues in
force for a period covered by the payment.
After the period, if the insured still does not
resume paying his premiums, the policy
lapses, unless CSV still remains. If there is still
CSV, APL continues until CSV is exhausted.
e. Reinstatement of a Lapsed Policy of
Life Insurance
In the case of individual life or endowment
insurance, the policy shall contain a provision
that the policyholder shall be entitled to have
the policy reinstated:
1. At any time within three (3) years from
the date of default of premium payment
a. Unless the cash surrender
value has been duly paid
b. Unless the extension period
has expired
2. Upon production of evidence of
insurability satisfactory to the
company; and
INSURANCE
3. Upon payment of all overdue premiums
and any indebtedness to the company
upon said policy, with interest rate not
exceeding that which would have been
applicable to said premiums and
indebtedness in the policy years prior
to reinstatement [Sec. 233(j)].
Reinstatement of a lapsed life insurance policy
is NOT a non-default option. It does not create
a new contract, but merely revives the original
policy so the insurer cannot require a higher
premium than the amount stipulated in the
contract. It does not apply to group/industrial
life insurance.
Requisites [Sec. 233(j)]:
● It must be exercised within three
years from date of default;
● The insured must present evidence
of insurability satisfactory to the
insurer;
● He must pay all back premiums
and all indebtedness to the insurer
(with interest);
● The CSV must not have been duly
paid to the insured nor the
extension period expired;
● The application must be filed
during the insured’s lifetime
[Andres v. Crown Life Ins., G.R.
No. L-10874 (1958)].
f. Refund of Premiums
Return of premiums can be made in the
following cases:
1. If the thing insured was never exposed
to the risks insured against, the whole
premium should be refunded [Sec.
80(a)].
2. When the contract is voidable due to
the fraud or misrepresentation of the
insurer or his agent, the whole
premium should be refunded [Sec. 82].
3. When by any default of the insured
other than actual fraud, the insurer
never incurred any liability under the
policy and the whole premium should
be refunded [Sec. 82].
4. When the contract is voidable because
of the existence of facts of which the
insured was ignorant without his fault,
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the whole premium should be refunded
[Sec. 82].
5. Where the insurance is for a definite
period 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, the
premium should be returned [Sec.
80(b)].
6. When there is over-insurance by
several insurers, the return premiums
should be proportioned to the amount
by which the aggregate sum insured in
all the policies exceeds the insurable
value of the thing at risk [Sec. 83].
7. When rescission is granted due to the
insurer’s breach of contract.
H. Rescission of Insurance
Contracts
1. Concealment
Concealment is the failure to disclose facts
which the applicant, at the time of application,
knows or ought to know and are material to the
insurance applied for [Carale].
A neglect to communicate that which a party
knows and ought to communicate, is called a
concealment [Sec. 26].
A concealment, whether intentional or
unintentional, entitles the injured party to
rescind a contract of insurance [Sec. 27].
Ratio: The contract of insurance is one of
perfect good faith (uberrimae fides) not for the
insured alone, but equally for the insurer [Qua
Chee Gan v. Law Union & Rock Insurance,
G.R. No. L-4611(1955)].
Four primary concerns of parties to an
insurance contract
a. Correct estimation of risk – wherein the
insurer will assume the risk
b. Precise delimitation of the risk – to
determine the duty to pay of insure
INSURANCE
c. Control of risk by insurer – to guard
against the increase of risk and change
of conditions, and
d. Determining whether loss occurred,
and if so, the amount of loss
Five devices for ascertaining and
controlling risk and loss i.e. Risk Limiting
Devices
a. Concealment and representations –
developed to enable the insurer to
secure the same information from the
applicant so that he can form a just
estimate of its quality
b. Warranties and conditions – created to
make more definite the general words
to describe the risk as to designation of
specific property interest to be covered
and the specification of the perils
c. Exception – also makes more definite
the coverage by excluding certain
specified risks that otherwise would
have been included under the general
language
d. Executory warranties and conditions –
conditions that should no longer exist in
the future, otherwise, the insurer can
rescind the contract because he is no
longer to bear the risk
e. Conditions precedent – used by the
insurer to protect himself from
fraudulent claims of loss
a. Duty to Communicate by the Insured
Each party to a contract of insurance must
communicate to the other, in good faith, all
facts within his knowledge:
1. Which are material to the contract;
2. As to which he makes no warrant; and
3. Which the other has not the means of
ascertaining [Sec. 28].
An intentional or fraudulent omission, on the
part of one insured, to communicate
information of matters proving or tending to
prove the falsity of a warranty, entitles the
insurer to rescind [Sec. 29].
Note: If the applicant is aware of the existence
of some circumstance which he knows would
influence the insurer in acting upon his
application, good faith requires him to disclose
that circumstance, though unasked [Vance].
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b. Matters which Need Not be Disclosed
1. Matters already known to the insurer
[Sec. 30(a)];
2. Matters which each party are bound to
know [Sec. 30(b) and Sec. 32];
3. Matters of which the insurer waives
communication [Sec. 30(c) and Sec.
33];
4. Matters which prove or tend to prove
the existence of a risk excluded by a
warranty and which are not otherwise
material [Sec. 30(d)];
5. Matters which relate to a risk excepted
in the policy, and which are not
otherwise material [Sec. 30(e)];
6. Information of the nature or amount of
the interest of one insured unless if
inquired upon by the insurer, except if
required by Sec. 51 [Sec. 34];
7. Matters of opinion [Sec. 35].
Each party to a contract of insurance is bound
to know all the general causes which are open
to his inquiry, equally with that of the other, and
which may affect the political or material perils
contemplated; and all general usages of trade
[Sec. 32].
c. Requisites
1. A party knows a fact which he neglects
to communicate or disclose to the
other;
2. Such party concealing is duty bound to
disclose such fact to the other;
3. Such party concealing makes no
warranty of the fact concealed;
4. The other party has not the means of
ascertaining the fact concealed;
5. The fact concealed is material.
Failure of the insured to disclose conditions
affecting the risk, of which he is aware, makes
the contract voidable at the insurer’s option, the
ratio being that a contract of insurance is of
good faith.
However, Sec. 27 uses the phrase “injured
party;” thus, the insured may also rescind the
contract.
Concealment may be committed by either the
INSURANCE
insurer or the insure [Qua Chee Gan v. Law
Union & Rock Ins. Co. G.R. No. L-4611(1955)].
d. Proof of Fraud in Concealment
General Rule: Fraud need not be proven in
order to prove concealment. Good faith is not a
defense [Saturnino v. Phil. American Life
Insurance, G.R. No. L-16163 (1963)].
Exception: When the concealment is made by
the insured in relation to the falsity of a
warranty, the non-disclosure must be
intentional and fraudulent in order that the
contract may be rescinded [Sec. 29].
Ratio: The insured is under no obligation to
reveal things of which he makes a warrant
because it would constitute a superfluity of
disclosure [Carale].
e. Test of Materiality
The test of materiality is whether the insurer
would have agreed to issue the policy had it
known of the facts concealed or, perhaps,
impose additional terms or require higher
premium [Carale].
Materiality relates to the probable and
reasonable influence of the facts upon the
party to whom the communication should have
been made, in:
1. Assessing the risk involved;
2. Making or omitting to make further
inquiries; and
3. Accepting the application for insurance
[Sec. 31].
The test is the effect which the knowledge of
the fact in question would have on the contract.
It is sufficient if the knowledge of it would
influence the party in making the contract [De
Leon].
In several cases, the cause of death may have
no relation to the fact or facts concealed
[Carale].
f. Effects
General Rule: Concealment vitiates the
contract and entitles the insurer to rescind,
even if the death or loss is due to a cause not
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related to the concealed matter [Sec. 27].
Exceptions:
1. Concealment after the contract has
become effective, because
concealment must take place at the
time the contract is entered into in order
that the policy may be avoided [Vance];
2. Waiver or estoppel;
3. In marine insurance, where
concealment of the following matters
does not vitiate the entire contract, but
merely exonerates the insurer from a
loss resulting from the risk concealed:
a. The national character of the
insured;
b. The liability of the thing insured
to capture and detention;
c. The liability to seizure from
breach of foreign laws of trade;
d. The want of necessary
documents; and
e. The use of false and simulated
papers [Sec. 112].
4. Incontestability clause: stipulates that
the policy shall be incontestable after
two years from its date of issue or of its
last reinstatement. The incontestability
clause is a mandatory provision in life
and endowment policies [Sec. 233 (b)
and Sec. 48].
g. Incontestability Clause
In the case of individual life or endowment
insurance, the policy shall contain a provision
that the policy shall be incontestable.
After it shall have been in force during the
lifetime of the insured for a period of two (2)
years from its date of issue as shown in the
policy, or date of approval of last reinstatement
[Sec. 233(b)].
Exceptions:
1. Non-payment of premium
2. Violation of the conditions of the policy
relating to military or naval service in
time of war [Sec. 233(b)]
Effect
The insurer cannot prove that the policy is void
ab initio or is rescindable by reason of the
INSURANCE COMMERCIAL LAW
fraudulent concealment or misrepresentation h. Concealment in Marine and Ordinary
of the insured or his agent: Private Insurance Distinguished
1. After a policy of life insurance made
payable on the death of the insured Marine Ordinary
shall have been in force during the Insurance Insurance
lifetime of the insured for a period of
two (2) years from the date of its issue Required Exact and Substantial
or of its last reinstatement [Sec. 48] Disclosure whole truth truth
2. The insurer’s right to rescind a contract
is not exercised previous to the
commencement of an action on the Effect of Concealment Any kind of
contract [Sec. 48]. Concealment of the matters concealme
specified in nt will make
The incontestability clause is made for the Sec. 112 will the insurer
benefit of the insured, and not the insurer, not entirely not liable.
considering that its effect and purpose is to cut avoid the
off, after a considerable period, any assertion contract but
that the policy is invalid. will merely
exonerate the
Defenses, other than concealment, insurer from
misrepresentation and breach of warranty are losses
still available to the insurer, subsequent to the resulting from
2-year period [Carale]. the risk
concealed.
Grounds still available:
1. Non-payment of premium to make the
i. Concealment in Non-Medical
policy effective or remain in force
Insurance
2. Lack of insurable interest
3. Coverage such that the loss/damage
The cause of death is not important because it
did not arise from the risks covered
is well settled that the insured need not die of
4. Violation of military or naval service
the disease he had failed to disclose to the
provisions of the policy (also an issue
insurer. It is sufficient that his nondisclosure
of coverage)
misled the insurer in forming his estimates of
5. Failure to commence action within
the risks of the proposed policy or in making
reglementary period
inquiries [Sunlife v. Sps. Bacani G.R. No.
6. Failure to comply with conditions (proof
105135 (1995)].
of loss, etc.) after the loss; or
7. The viciousness of the fraud employed
Where matters of opinion or judgment are
by the insured to procure the contract,
called for, answers made in good faith and
such as:
without intent to deceive will not avoid the
Where the policy was taken
policy even though they are untrue. The reason
pursuant to a scheme to murder the
for this is because the insurer cannot simply
insured, or
rely on those statements; he must make further
the insured substitutes himself with
inquiry [Philamcare Health Systems v. CA,
another during the medical
G.R. No. 125678 (2002)].
examination.
2. Misrepresentation/Omissions

Representations are factual statements made

by the insured at the time of, or prior to, the
issuance of the policy, which give information
to the insurer and induce him to enter the
insurance contract. It may be about a past, an
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INSURANCE
existing fact, or a future happening [Carale].
A representation:
a. May be oral or written [Sec. 36].
b. May be made at the time of or before,
the issuance of the policy [Sec. 37].
c. May be altered or withdrawn before the
insurance is effected, but not
afterwards [Sec. 41].
d. Must be presumed to refer to the date
on which the contract goes into effect
[Sec. 42].
Misrepresentation is a false representation
which the insured states with knowledge that is
untrue, intended to deceive the insurer into
accepting risk. It can be distinguished from
concealment in a sense that it is an active form
of deception, while concealment is the passive
form thereof [Carale].
Just like concealment, misrepresentation is
committed before or at the time of the
commencement of the insurance contract.
After this time, an insured may no longer be
guilty of misrepresentation as the insurer had
already been persuaded to assume the risk
[Carale].
There is no false representation if the matter is
true at the time the contract takes effect
although false at the time it was
made/represented.
a. Requisites of misrepresentation
1. The insured stated a fact which is
untrue;
2. Such fact was stated with knowledge
that it is untrue and with intent to
deceive or which he states positively as
true without knowing it to be true and
which has a tendency to mislead;
3. Such fact in either case is material to
the risk.
Like in concealment, fraud or intent is not
essential to entitle the insurer to rescind on the
ground of misrepresentation [Sec. 45].
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b. Kinds
1. Affirmative
This refers to any allegation as to the existence
or non-existence of a fact when the contract
begins [De Leon].
2. Promissory
This refers to any promise to be fulfilled after
the contract has come into existence, or any
statement concerning what is to happen during
the existence of the insurance [Sec. 39]. A
promissory representation is substantially a
condition or warranty [De Leon].
c. Test of Materiality
The materiality of a representation is
determined by the same rules as the materiality
of a concealment [Sec. 46].
Materiality is a judicial question and not left to
the insurance company’s sole discretion.
d. Effects
General Rule: The injured party is entitled to
rescind from the time when the representation
becomes false [Sec. 45].
Exceptions:
1. Incontestability clause;
2. Misrepresentation after contract takes
effect;
3. Waiver, made by acceptance of insurer
of premium payments despite
knowledge of the ground for rescission
[Sec. 45];
4. A representation of the expectation,
belief, opinion, or judgment of the
insured, although false, and even if
material to the risk [Philamcare Health
Systems, Inc. v. CA, G.R. No. 125678
(2002)];
5. Representation by insured based on
information obtained from third persons
(not his agent), provided the insured:
a. Has no personal knowledge of
the facts;
b. Believes them to be true; and
INSURANCE COMMERCIAL LAW
c. Explains to the insurer that he e. Concealment vs. Misrepresentation
does so on the information of
Concealment Misrepresentation
others;
6. A misrepresentation as to age does not Who may commit
constitute a ground for rescission. If the
age of the insured was considered in May be committed Committed only by
determining the premium and the by either insured insured
benefits under the policy and the age is or insurer
misstated, the amount payable for the
policy shall be as if the policy was Act involved
purchased at the correct age [Sec.
233(d); Carale]. Passive form Active form

Insured Insured makes

A representation cannot qualify an express
withholds erroneous statements
provision or an express warranty of insurance
information of of facts with the intent of
[Sec. 40] because a representation is not part
material facts from inducing the insurer to
of the contract but only a collateral inducement
the insurer; he enter into the insurance
to it. However, it may qualify as an implied
maintains silence contract
warranty.
when he ought to
speak
It is sufficient that the representation is
substantially or materially true, and in case of Materiality
promissory representation, it is sufficient that it
is substantially complied with [Carale]. Determined by the same rules.

The insurer is not entitled to rescission for Effects

misrepresentation of age if the birth date on the
policy leads to the conclusion that the insured
is beyond the age covered. Insurer is deemed
estopped [Edillon v. Manila Bankers Life, G.R.
No. L-34200 (1982)].
Despite not answering the questions and
keeping blank certain questions in the
application regarding ailments he has suffered,
when the insured signed the pension plan
application, he adopted the written
representations and declarations embodied in
as his own. Therefore, it is clear from these
representations that he concealed his chronic
heart ailment and diabetes [Florendo v. Philam
Plans, G.R. No. 186983 (2012)].
Same effects on the part of the insured;
insurer has right to rescind
Injured party is entitled to rescind a contract
of insurance on the ground of concealment
or false representation, whether intentional
or not.
3. Breach of Warranties
A warranty is a statement or promise by the
insured set forth in the policy itself or
incorporated in it by proper reference, the
untruth or nonfulfillment 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 [Vance].

Statements or promises agreed upon by both

parties to the insurance contract which are
contained in the contract or properly
incorporated constitute warranties [Carale].

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A warranty may:
a. Relate to the past, the present, the
future, or to all of these [Sec. 68]
b. Be made in any form of words [Sec. 69]
c. Also be made by the insurer [Carale].
a. Warranties, Riders, and
Endorsements
A rider is a printed or typed stipulation
contained in a slip of paper attached to the
policy and forming an integral part thereof.
Thus, it does not need to be signed by the
insured.
The signature of the insured is required only if
the warranties, or endorsements are in another
instrument.
For any rider, clause, warranty, or
endorsement to be binding on the insured [Sec.
50]:
1. Such rider, clause, warranty or
endorsement, must be pasted or
attached to the policy;
2. The descriptive title or name of the
rider, clause, warranty or endorsement
must also be mentioned and written on
the blank spaces provided in the policy;
3. Such rider, clause, warranty or
endorsement issued after the original
policy must be countersigned by the
insured or owner.
a. Unless the same is applied for
by the insured or owner
b. Such countersignature shall be
taken as his agreement to the
contents of such rider, clause,
warranty or endorsement
Notwithstanding the foregoing, the policy may
be in electronic form subject to the pertinent
provisions of Republic Act No. 8792,
(Electronic Commerce Act) and to such rules
and regulations as may be prescribed by the
Commissioner.
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b. Kinds
1. Express Warranty
The Code does not prescribe a particular form
for a warranty to be considered as such [Sec.
69].
However, the Code prescribes a requirement
for express warranties. It must be an
agreement contained in the policy or clearly
incorporated therein as part thereof, relating to
the person or thing insured or to the risk as a
fact [Sec. 71].
Thus, it is not enough, for a stipulation to
become a warranty, that the parties intended it
as such. It must form part of the contract of
insurance.
2. Implied Warranty
This is deemed included in the contract
although not expressly mentioned (e.g. implied
warranty of seaworthiness of the vessel in
marine insurance and implied warranty not to
alter the circumstances of the thing insured).
This is only available for marine insurance.
3. Affirmative Warranty
This asserts the existence of a fact or condition
at the time it is made.
c. Effect of Breach
1. Material Warranty
The violation of a material warranty, or other
material provision of the policy, on the part of
either the insured or insurer, entitles the other
to rescind [Sec. 74].
Breach of a material warranty may either be:
a. Without fraud, in which case, the
insurer will be exonerated from the time
it occurs. If made during the inception,
it will prevent the policy from taking
effect [Sec. 76].
b. With fraud, in which case, the policy is
avoided ab initio and the insured is not
entitled to the return of the premiums
paid [De Leon].
INSURANCE COMMERCIAL LAW
Exceptions: Materiality
a. Loss occurs before the time of
performance of the warranty [Sec. 73]; Presumed Must be proved to be
b. Performance becomes unlawful [Sec. material material
73];
c. Performance becomes impossible
[Sec. 73]; Compliance
d. Waiver or estoppel.
Must be strictly Requires only
complied with substantial truth and
2. Immaterial Warranty
compliance
A policy may declare that a violation of Applicability of incontestability clause
specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision Does not apply Applies
does not avoid the policy [Sec. 75].

General Rule: Breach of an immaterial I. Claims Settlement and

provision does not avoid the policy [Sec. 75].
Exception: The parties stipulate that violation
of a particular provision, though immaterial,
shall avoid the policy. In effect, the parties
converted the immaterial provision into a
material one [Sundiang and Aquino].
A condition in the policy which requires the
insured to disclose to the insurer of any
insurance that, if violated by the insured, would
ipso facto avoid the contract [Pioneer v. Yap,
G.R. No. L-36232 (1974)].
Insurer is barred by waiver (or estoppel) to
claim violation of the so-called hydrants
warranty when, despite knowing fully that only
2 fire hydrants existed (out of the 11 hydrants
required), it still issued the insurance policies
and received the premiums [Qua Chee Gan v.
Law Union, G.R. No. L-4611 (1955)].
Subrogation
1. Loss
Loss in insurance law embraces injury or
damage.
a. Requisites
Recovery upon a loss requires that:
1. The insured must have insurable
interest in the subject matter;
2. The interest is covered by the policy;
3. There be a loss; and
4. The loss must be one for which the
insurer is liable;
5. Notice and proof of loss must be given
if policy is fire insurance or when the
same is stipulated in the policy.
b. Causes

Warranty Representation 1. Remote Cause

An event preceding another in a causal chain,

Nature
but separated from it by other events.
Part of the Mere collateral
contract inducement 2. Proximate Cause

That cause, which, in natural and continuous

Form sequence, unbroken by any efficient
intervening cause, produces the injury, and
Written on the May be written in the
without which the result would not have
policy, actually or policy or may be oral
occurred [Vda. De Bataclan v. Medina, G.R.
by reference
No. L-10126 (1957)].

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3. Immediate Cause d. Notice and Proof of Loss

The cause, not the proximate cause, which
immediately precedes the loss.
c. Liability
Loss for which the Loss for which the
insurer is liable insurer is not liable
Loss the proximate Loss by insured’s
cause of which is the willful act
peril insured against
[Sec. 86]
Loss the immediate Loss due
cause of which is the connivance of the
peril insured against, insured [Sec. 89]
except where the
proximate cause is
an excepted peril
This refers to the formal notice given the
insurer by the insured or claimant under a
policy of the occurrence of the loss insured
against.
Its purpose is to apprise the insurance
company so that it may make proper
investigation and take such action as may be
necessary to protect its interest.
Failure to Give Notice
In fire insurance, an insurer is exonerated, if
notice of loss is not given to him by an insured
or some person entitled to the benefit of the
insurance, without unnecessary delay [Sec.
to
90].
In other types of insurance, the general rule is
that failure to give notice will not exonerate the
insurer. The exception is if there is a stipulation
in the policy requiring the insured to do so.

Loss through Loss where the However, it has been held that formal notice of
negligence of excepted peril is the loss is not necessary if the insurer has actual
insured except proximate cause notice of loss [Fidelity Phoenix Insurance v.
where there was Friedman, 174 SW 215 (1987)] but there is also
gross negligence a ruling to the contrary [Col. Sav. Bank v.
amounting to willful American Surety, 87 P 118].
acts
Form
Loss caused by
In case of loss as regards fire insurance, there
efforts to rescue the
must be a written notice thereof [Sec. 90]. But
thing from peril
as to other non-life insurance policies, the law
insured against if,
does not provide for a necessity of written
during the course of
notice [De Leon].
the rescue, the thing
is exposed to a peril
The notice of loss may be in the form of an
not insured against,
informal or provisional claim containing a
which permanently
minimum of information, as distinguished from
deprives the insured
a formal claim which contains the full details of
of its possession in
the loss, computations of the amounts claimed,
whole or in part [Sec.
and supporting evidence, together with a
87]
demand or request for payment [De Leon].

Time for Giving Notice

Notice of loss must be given within reasonable
time [Bachrach v. Britain American Assurance,
G.R. No. L-5715 (1910)].

For compulsory motor vehicle insurance, the

notice must be given within six months from the
date of the accident [Sec. 397].

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For other non-life insurance, the Commissioner
may specify the period for the submission of
the notice of loss [Sec. 90].
Proof of Loss
It is the formal evidence given to the insurance
company by the insured or claimant, under a
policy, of:
1. The occurrence of the loss,
2. The particulars thereof, and
3. The data necessary to enable the
company to determine its liability and
the amount [De Leon].
COMMERCIAL LAW
specifically upon that ground
[Sec. 93].
2. For notice of loss, a formal notice of
loss is not necessary if the insurer has
actual notice of loss.
e. Guidelines on Claims Settlement
Claims settlement is the indemnification of the
loss suffered by the insured. The claimant may
be the insured or reinsured, the insurer who is
entitled to subrogation, or a third party who has
a claim against the insured.

Its purpose is to give the insurer information by
which he may determine the extent of his
liability but also to afford him a means of
detecting any fraud that may have been
practiced upon him, and to operate as a check
upon extravagant claims.
Where a policy gives the insurer the control of
the decision to settle claim or litigate it, the
insurer nevertheless is required to observe a
certain measure of consideration for the
interest of the insured.

Like a notice of loss, in the absence of any Life Insurance Non-Life

Insurance
stipulation in the policy, proof may be given
orally or in writing. Maturity
The insured is not bound to give such proof as
would be necessary in a court of justice; but it Can be: 1. Upon happening
is sufficient for him to give the best evidence 1. Upon death of the of event insured
which he has in his power at the time [Sec. 91]. person insured; against; and

Rules for Recovery 2. Upon his 2. Event must occur

General Rule: Timely compliance with the surviving a specific within the period
notice and proof of loss is a condition period; or specified in policy,
precedent to the right to recover if the policy is otherwise the insurer
fire insurance, or when the same is stipulated 3.Otherwise has no liability
in the policy [Sec. 90]. contingently on the
continuance or
Exceptions: cessation of life
1. For both notice and proof of loss, [Sec. 182].
defects or delay in the presentation of
notice may be waived: Delivery of Proceeds
a. Defects in a notice or proof
of loss may be waived when General Rule: The 1. Within 30 days
such defects, which the insured proceeds should be after:
might remedy, are not specified delivered - Proof of loss is
without unnecessary delay to immediately upon received by insurer;
him as grounds of objection by maturity of policy. and
the insurer [Sec. 92]. - Ascertainment of
b. Delay in presentation to an Exceptions: loss or damage is
insurer of notice or proof of loss 1. If payable in made either by
is waived if caused by any act installments or as an agreement between
of his, or if he omits to take annuity, when such the insured and
objection promptly and installments or insurer or by
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annuities become arbitration
due;
2. If
2. If maturity is upon ascertainment is not
death, within 60 days made within 60 days
after presentation of after such receipt by
claim and filing of the insurer of proof of
proof of death of loss, then loss or
insured [Sec. 248]. damage shall be
paid within 90 days
after such receipt
[Sec. 249].
Effect of refusal or failure to pay claim
within time prescribed
1. This entitles the beneficiary to
collect interest on the proceeds of
policy for the duration of the delay at
rate of twice the ceiling prescribed
by the monetary board (unless
refusal to pay is based on ground
that claim is fraudulent)
2. In case damages are awarded, this
includes attorney’s fees and other
expenses incurred due to delay (plus
the interest) [Secs. 248-249]
In case of litigation for the enforcement of any
policy or contract of insurance, it is the duty of
the Commissioner or the Court to determine
whether the payment of the claim of the insured
has been unreasonably denied or withheld.
Failure to pay any such claim within the time
prescribed shall be considered prima facie
evidence of unreasonable delay in payment
[Sec. 250].
1. Unfair Claims Settlement; Sanctions
No insurance company doing business in the
Philippines shall:
a. Refuse, without just cause, to pay or
settle claims arising under coverages
provided by its policies; nor
b. Engage in unfair claim settlement
practices [Sec. 247].
Any of the following acts by an insurance
company, if committed without just cause and
performed with such frequency as to indicate a
general business practice, shall constitute
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COMMERCIAL LAW
unfair claim settlement practices:
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 [Sec. 247].
The following shall be admissible in evidence
in an administrative or judicial proceeding for
the purpose of determining whether unfair
claim settlement practices have been
committed:
a. Evidence as to numbers and types of
valid and justifiable complaints to the
Commissioner against an insurance
company; and
b. The Commissioner’s complaint
experience with other insurance
companies writing similar lines of
insurance [Sec. 247].
Penalty Per Violation
If it is found, after notice and an opportunity to
be heard, that an insurance company has
violated this section, each instance of
noncompliance:
a. May be treated as a separate violation;
and
b. Shall be considered sufficient cause for
the suspension or revocation of the
company’s certificate of authority.
Sec. 247 lists the grounds which are sufficient
cause for the suspension or revocation of the
insurer’s certificate of authority [Sec. 247(c)].
INSURANCE
2. Prescription of Action
Should the insurer reject the claim of the
insured, the remedy of the latter would be to file
an action against the insurer with the proper
tribunal [Carale].
An “action” or “suit” is an act by which one sues
another in a court of justice for the enforcement
or protection of a right, or the prevention or
redress of a wrong [Lopez v. Filipinas
Compania de Seguros, G.R. No. L-19613
(1966)].
General Rule: It being based on a written
contract, the action prescribes in 10 years [Art.
1144, NCC].
Exception: The parties may validly agree on a
shorter period, provided it is not less than one
year from the time the cause of action accrues
[Sec. 63].
Note: In compulsory motor vehicle insurance, a
notice of claim must be given within 6 months
from the time of the accident, and any action or
suit must be brought within 1 year from denial
of the claim [Sec. 397].
If there is failure to file a written notice within
six months from the accident, there was never
any denial of such claim that would give rise to
a cause of action [Travellers Insurance &
Surety Corp v. CA (272 SCRA 536) 199)].
Note: The condition contained in an insurance
policy that claims must be presented within one
year after the rejection is not merely a
procedural requirement. The condition is an
important matter, essential to a prompt
settlement of claims against insurance
companies, as it demands that insurance suits
be brought by the insured while the evidence
as to the origin and case of destruction have
not yet disappeared [Ang v. Fulton Fire 2 SCRA
945 (1961)].
The denial referred to in the law refers to the
rejection in the first instance, and not the
rejection of a petition for consideration [Sun
Insurance v. CA (195 SCRA 193) 1991].
The reckoning point or period of commencing
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an action under a policy of insurance under
Sec. 63 is to be computed from the time when
the insured has a right to bring an action
against the insurer, not from the time when
the loss occurs.
The cause of action in an insurance contract
does not accrue until the insured's claim is
finally rejected by the insurer. This is because
before such final rejection, there is no real
necessity for suing [Eagle Star Insurance v.
Chia Yu, G.R. No. L-5915 (1955)].
3. Subrogation
In subrogation, “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” [Coastwise Lighterage Corporation
v. CA 245 SCRA 796 (19950; Cebu Shipyard
v. William Lines 306 SCRA 769 (1999),
Philippine American General Insurance v. CA
273 SCRA 262 (1997)].
Also referred to as the doctrine of
substitution, it is an arm of equity that may
guide or even force one to pay a debt for which
an obligation was incurred but which was in
whole or in part paid by another. As such, the
consent of the insured is not required for legal
subrogation to take place [Fireman’s Fund
Insurance v. Jamila & Co. 70 SCRA 323
(1976)].
By subrogation, the insurer steps into the
shoes of the insured and becomes entitled to
whatever the latter may claim from the third
party responsible for the loss or damage to the
extent of what the insurer has paid. The
provision expressly reserves to the insured the
right to claim from the party responsible the
deficiency when the proceeds do not cover the
entirety of the loss [Carale].
Note: Subrogation applies only to property
insurance and non-life insurance [Art. 2207,
NCC].
INSURANCE
Right of Subrogation
The insurance company shall be subrogated to
the rights of the insured against the wrongdoer
or the person who has violated the contact if:
a. The plaintiff’s property has been
insured, and
b. The plaintiff has received indemnity
from the insurance company for the
injury or loss arising out of the wrong or
breach of contract complained of [Art.
2207, NCC].
Rights Transferred
A subrogee-insurer cannot succeed to a right
not possessed by the subrogor. A subrogee
can recover only if the insured likewise could
have recovered [Sulpicio Lines, Inc. v. First
Lepanto-Taisho Ins. Corp., G.R. No. 140349
(2005)].
Right to Recover Deficiency Not
Subrogated
If the amount paid by the insurance company
does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or
injury [Art. 2207, NCC].
The insured can no longer recover from the
offended party what was paid to him by the
insurer, but he could recover any deficiency if
the damages suffered are more than what was
paid. The deficiency is not covered by the right
of subrogation.
The insurer must present the policy as
evidence to determine the extent of its
coverage [Wallem Phil. Shipping v. Prudential
Guarantee, G.R. No. 152158 (2003)].
Where There is No Right of Subrogation
a. Where the insured by his own act
releases the wrongdoer or third party
liable for the loss or damage;
b. Where the insurer pays the insured the
value of the loss without notifying the
carrier who has in good faith settled the
insured’s claim for loss;
c. Where the insurer pays the insured for
a loss or risk not covered by the policy
[Pan Malayan Ins. Co. v. CA, G.R. No.
81026 (1990)];
d. In life insurance;
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COMMERCIAL LAW
e. For recovery of loss in excess of
insurance coverage [De Leon].
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 [Pan Malayan Ins. Co v. CA, G.R.
No. 81026 (1990)].
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 [Manila Mahogany v. CA G.R.
No. L- 52756 (1987)].
J. Business of Insurance;
Requirements
Insurance Code (as amended by RA 10607)
Sec. 190 provides additional coverage of the
term insurer or insurance company.
1. Insurer or insurance company shall
include all partnerships, associations,
cooperatives or corporations, including
government-owned or -controlled
corporations or entities, engaged as
principals in the insurance business,
excepting mutual benefit associations.
Unless the context otherwise requires,
the term shall also include professional
reinsurers defined in Section 288.
2. Domestic companies shall include
companies formed, organized or
existing under the laws of the
Philippines.
3. Foreign companies, when used
without limitation, shall include
companies formed, organized, or
existing under any laws other than
those of the Philippines [Sec. 190].
The Corporation Code is applicable to
insurance corporations as far as practicable
[Sec. 191].
INSURANCE
The term “doing an insurance business or
transacting an insurance business”
includes:
1. Making or proposing to make, as
insurer, any insurance contract;
2. Making or proposing to make, as
surety, any contract of suretyship as a
vocation;
a. Must not be merely incidental
to any other legitimate
business or activity of the
surety
3. Doing any kind of business, specifically
recognized as constituting the doing of
an insurance business within the
meaning of the Insurance Code;
a. Including a reinsurance
business,
4. Doing or proposing to do any business
in substance equivalent to any of the
foregoing in a manner designed to
evade the provisions of the Insurance
Code [Sec. 2(b)].
The following shall not be deemed conclusive
to show that the making thereof does not
constitute the doing or transacting of an
insurance business:
1. The fact that no profit is derived from
the making of insurance contracts,
agreements or transactions; or
2. The fact that no separate or direct
consideration is received therefor
[Sec. 2(b)].
For determining what "doing an insurance
business" means, we have to scrutinize the
operations of the business as a whole and not
its mere components [Philippine Health Care
Providers, Inc. v. CIR, G.R.167330 (2009)].
1. Requirements to Engage in the
Business of Insurance
a. Certificate of Authority
b. Sufficient paid-up capital, Surplus Fund
& Solvency
c. Filing with the Commissioner
d. Reserves
e. For foreign companies: Sufficient
capital and securities deposited with
the Commissioner
f. For foreign companies: Resident Agent
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g. For foreign companies: Surplus Fund,
Legal Reserves
a. Certificate of Authority
No insurance company shall transact any
insurance business in the Philippines until after
it shall have obtained a certificate of authority
for that purpose from the Commissioner upon
application therefor and payment by the
company concerned of the fees hereinafter
prescribed [Sec. 193]. This does not include
grounds for denial of certificate of authority by
the Commissioner.
The Commissioner may refuse to issue a
certificate of authority to any insurance
company if, in his judgment, such refusal will
best promote the interest of the people of this
country.
No such certificate of authority shall be granted
to any such company until the Commissioner
shall have satisfied himself by such
examination as he may make and such
evidence as he may require that such company
is qualified by the laws of the Philippines to
transact business therein, that the grant of
such authority appears to be justified in the light
of local economic requirements, and that the
direction and administration, as well as the
integrity and responsibility of the organizers
and administrators, the financial organization
and the amount of capital, reasonably assure
the safety of the interests of the policyholders
and the public [Sec. 193, par. 2].
Before issuing such certificate of authority, the
Commissioner must be satisfied that the name
of the company is not that of any other known
company transacting a similar business in the
Philippines, or a name so similar as to be
calculated to mislead the public. The
Commissioner may issue rules and regulations
on the use of names of insurance companies
and other supervised persons or entities [Sec.
193, par. 3].
b. Sufficient paid-up capital, Surplus
Fund & Solvency [Sec. 194, 197, 200]
No new domestic life or non-life insurance
company shall, in a stock corporation, engage
INSURANCE COMMERCIAL LAW
in business in the Philippines unless c. Filing with the Commissioner [Sec.
possessed of a paid-up capital equal to at 195]
least One billion pesos (P1,000,000,000.00):
Provided, that a domestic insurance company Every company must, before engaging in the
already doing business in the Philippines shall business of insurance in the Philippines, file
have: with the Commissioner the following:
1. By June 30, 2013 – P250,000,000.00 1. A certified copy of the last annual
net worth statement or a verified financial
2. By December 31, 2016 – An additional statement exhibiting the condition and
P300,000,000.00 in net worth; affairs of such company; and
3. By December 31, 2019 – An additional
P350,000,000.00 in net worth; and If A copy of the articles of
4. By December 31, 2022 – An additional incorporated incorporation and bylaws,
P400,000,000.00 in net worth [Sec. under the and any amendments to
194]. laws of the either, certified by the SEC
Philippines
Note: The President of the Philippines may
If 1. A certificate from the
order a periodic review every two (2) years the
incorporated SEC showing that it
capital structure set out above to determine the
under any is duly registered in
capital adequacy of the local insurance
laws other the mercantile
industry from and after the integration and
than those registry of that
liberalization of the financial services, including
of the Commission in
insurance, in the ASEAN Region.
Philippines accordance with the
Corporation Code
The Commissioner may also, as a pre-
2. If organized or
licensing requirement of a new insurance
formed under any
company, require:
law requiring such
1. The stockholders to pay in cash to the
to be filed: A copy
company in proportion to their
of the articles of
subscription interests a contributed
incorporation and
surplus fund of not less than
bylaws, and any
P100,000,000.00;
amendments to
2. The company to submit to him a
either
business plan showing the company’s
3. If not so organized:
estimated receipts and disbursements,
A copy of the law,
as well as the basis therefor, for the
charter or deed of
next succeeding three (3) years [Sec.
settlement under
194].
which the deed of
organization is
An insurance company doing business in the
made
Philippines shall always maintain the minimum
4. A certificate under
paid-up capital and net worth requirements as
the hand and seal of
prescribed by the Commissioner. Such
the proper officer of
solvency requirements shall be:
such state or
1. Based on internationally accepted
country that such
solvency frameworks; and
corporation or
2. Adopted only after due consultation
company is:
with the insurance industry
a. Organized
associations [Sec. 200].
under the laws
of such state or
country,
b. With the amount
of capital stock
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INSURANCE COMMERCIAL LAW

or assets and satisfactory to the Commissioner:

legal reserve Provided That
required by this a. At least fifty percent (50%) of
Code; such securities shall consist of
bonds or other instruments of
If not A certificate setting forth: debt of the Government of the
incorporated 1. The nature and Philippines, its political
and of character of the subdivisions and
foreign business, instrumentalities, or of GOCCs
domicile 2. The location of the and entities, including the
principal office, Bangko Sentral ng Pilipinas;
3. The name of the b. The total investment of a
individual or names foreign insurance company in
of the persons any registered enterprise shall
composing the not exceed twenty percent
partnership or (20%) of the net worth of said
association foreign insurance company nor
4. The amount of twenty percent (20%) of the
actual capital capital of the registered
employed or to be enterprise, unless previously
employed therein, authorized in writing by the
and Commissioner [Sec. 197].
5. The names of all
officers and persons Securities, for the purposes of this
by whom the requirement, consist of:
business is or may 1. Good securities of the Philippines,
be managed. 2. New issues of stock of registered
enterprises

d. Reserves f. For foreign companies: Resident

Agent
Every insurance company, other than life, shall
maintain a reserve for unearned premiums on The Commissioner must require as a condition
its policies in force, which shall be charged as
precedent to the transaction of insurance
a liability in any determination of its financial business in the Philippines by any foreign
condition [Sec. 219].
insurance company, that such company file in
his office:
e. For foreign companies: Sufficient 1. A written power of attorney:
capital and securities deposited with a. Designating some person who
the Commissioner [Sec. 197, 198] shall be a resident of the
Philippines as its general
No insurance company organized or existing agent on whom any notice
under the government or laws other than those provided by law or by any
of the Philippines shall engage in business in insurance policy, proof of loss,
the Philippines unless: summons and other legal
1. Possessed of unimpaired capital or processes may be served in all
assets and reserve of not less than actions or other legal
One billion pesos (P1,000,000,000.00) proceedings against such
2. It has deposited with the Commissioner company, and
for the benefit and security of the b. Consenting that service upon
policyholders and creditors of such such general agent shall be
company in the Philippines, securities admitted and held as valid as if

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served upon the foreign
company at its home office.
2. Agreement or stipulation, executed
by the proper authorities of said
company, which states that:
a. Service of any notice provided
by law, or insurance policy,
proof of loss, summons, or
other legal process may be
made upon the Insurance
Commissioner
b. Such service upon the
Insurance Commissioner shall
have the same force and effect
as if made upon the company if
at any time said company shall:
1. Leave the Philippines,
or
2. Cease to transact
business therein, or
3. Be without any agent in
the Philippines on
whom any notice, proof
of loss, summons, or
legal process may be
served, then in any
action or proceeding
arising out of any
business or transaction
which occurred in the
Philippines
c. Whenever such service of
notice, proof of loss, summons,
or other legal process shall be
made upon the Commissioner,
he must, within ten (10) days
thereafter, transmit by mail,
postage paid, a copy of such
notice, proof of loss, summons,
or other legal process to the
company at its home or
principal office [Sec. 196].
g. For foreign companies: Surplus
Fund, Legal Reserves [Sec. 196, 199]
The Commissioner may, as a pre-licensing
requirement of a new branch office of a foreign
insurance company, require the company to
have an additional surplus fund in an amount
to be determined by the Insurance Commission
[Sec. 197].
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Every foreign company doing business in the
Philippines shall:
1. Set aside an amount corresponding to
the legal reserves of the policies
written in the Philippines; and
2. Invest and keep the same therein in
accordance with the provisions of this
section [Sec. 199].
The legal reserve therein required to be set
aside shall be invested only in the classes of
Philippine securities described in Section 206:
Provided, however, That –
1. No investment in stocks or bonds of
any single entity shall, in the
aggregate, exceed 20% of the net
worth of the investing company or 20%
of the capital of the issuing company,
whichever is the lesser, unless
otherwise approved in writing by the
Commissioner.
2. The securities purchased and kept in
the Philippines under this section, shall
not be sent out of the territorial
jurisdiction of the Philippines without
the written consent of the
Commissioner [Sec. 199].
Rule as to Partnerships, Persons, or
Association of Persons
General Rule: No person, partnership, or
association of persons shall transact any
insurance business in the Philippines except as
agent of a person or corporation authorized to
do the business of insurance in the Philippines.
Exceptions: Such person, partnership, or
association of persons may transact insurance
business in the Philippines, provided that:
1. It is possessed of the capital and
assets required of an insurance
corporation doing the same kind of
business in the Philippines and
invested in the same manner;
2. The Commissioner granted it a
certificate to the effect that it has
complied with all the provisions of this
Code [Sec. 192].
INSURANCE
K. Insurance Commissioner and
Its Powers
1. Jurisdiction and Adjudicatory
Powers
The Insurance Commissioner exercises
exclusive administrative supervision over
insurance companies, mutual benefit
associations and trusts for charitable uses.
Under RA 9829, all pre-need companies are
now under the primary and exclusive
supervision and regulation by the Office of
Insurance Commission. He has the duty to see
that all laws relating to insurance companies
and other insurance matters are faithfully
executed [Carale].
In addition to administrative powers, the
Commissioner has the power to adjudicate
disputes relating to an insurance company’s
liability to an insured under a policy [Sec. 439].
A complaint or claim filed with such official is
considered an “action” or “suit” the filing of
which would have the effect of tolling the
suspending the running of the prescriptive
period.
Concurrent jurisdiction (with regular civil
courts) over cases where any single claim does
not exceed P5,000,000 involving liability
arising from:
a. Insurance contract;
b. Contract of suretyship;
c. Reinsurance contract;
d. Membership certificate issued by
members of mutual benefit association
[Sec. 439]
Primary and exclusive jurisdiction over claims
for benefits involving pre-need plans where the
amount of benefits does not exceed P100,000
[Sec. 55, RA 9829].
For the purpose of proceeding under its
adjudicatory powers under the Insurance
Code, the Commissioner or any officer thereof
designated by him, is empowered to administer
oaths and affirmation, subpoena witnesses,
compel their attendance, take evidence and
require the production of any books, papers,
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documents or contracts or other records which
are relevant or material to the inquiry [Sec.
439].
Note: However, the Insurance Commission
has no jurisdiction to decide the legality of a
contract of agency entered into between an
insurance company and its agent. The same is
not covered by the term “doing or transacting
insurance business” under Sec. 2, neither is it
covered by Sec. 439, which grants the
Commissioner adjudicatory powers [Sundiang
and Aquino].
Note: The Insurance Commissioner also has
regulatory powers such that it is their duty to
see that all laws relating to insurance are
faithfully executed, and reasonable rules and
regulations in connection thereto, are issued
[Sec. 437].
Note: 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
[Sec. 439].
2. Revocation of Certificate of
Authority
The Certificate of Authority issued to the
domestic or foreign company by the
Commission may be revoked or suspended by
the Insurance Commissioner for any of the
following grounds:
a. The company is in an unsound
condition
b. That it has failed to comply with the
provisions of law or regulations
obligatory upon it
c. That its condition or method of
business is such as to render its
proceedings hazardous to the public or
its policyholders
d. That its paid-up capital stock, in the
case of a domestic stock corporation,
or its available cash assets, in the case
of a domestic mutual company, or its
security deposits, in the case of a
foreign company, is impaired or
deficient
INSURANCE COMMERCIAL LAW
e. That the margin of solvency required of
such company is deficient [Sec. 254].

The Commissioner is authorized to suspend or

revoke all certificates of authority granted to
such insurance company, its officers and
agents, and no new business shall thereafter
be done by such company or for such company
by its agents in the Philippines while such
suspension, revocation, or disability continues
or until its authority to do business is restored
by the Commissioner [Sec. 254].

Before restoring such authority, the

Commissioner shall require the company
concerned to submit to him a business plan
showing the company’s estimated receipts and
disbursements, as well as the basis therefor,
for the next succeeding three years [Sec. 254].

3. Liquidation of Insurance Company

If the company is determined by the

Commissioner to be insolvent or cannot
resume business, he shall, if public interest
requires, order its liquidation [Sec. 256].

This should be distinguished from a situation

where a conservator is appointed when the
Commissioner finds that a company is in a
state of continuing inability or unwillingness to
maintain a condition of solvency or liquidity
adequate to protect the policyholders and
creditors. The conservator will take charge of
the management of the insurance company
[Sec. 255].

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LAW
COMMERCIAL LAW

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TRANSPORTATION LAW
II. TRANSPORTATION LAW
Note: The Transportation Law Reviewer does
not take into consideration the changes
introduced by RA 11659, which was signed into
law in March of 2022, as the 2022 Bar
Examinations will cover only laws, rules,
issuances, and jurisprudence as of June 30,
2021.
A. Common Carriers
1. Common Carriers
Contract of Transportation
A contract of transportation is one whereby a
certain person or association of persons
obligate themselves to transport persons,
things, or news from one to another for a fixed
price [Crisostomo v. CA, G.R. No. 138334
(2003)].
Parties
a. Shipper - one who gives rise to the
contract of transportation by agreeing
to deliver the things or news to be
transported, or to present his own
person or those of other/s in the case
of transportation of passengers.
b. Carrier (may sometimes be referred to
as conductor) - one who binds himself
to transport persons, things, or news,
or one employed in or engaged in the
business of carrying goods for others
for hire.
c. Consignee - The party to whom the
carrier is to deliver the things being
transported, or to whom the carrier may
lawfully make delivery in accordance
with its contract of carriage; the shipper
and the consignee may be the same
person.
Carriers are persons or corporations who
undertake to transport or convey goods,
property, or persons, from one place to
another, gratuitously or for hire, and are
classified as:
a. Private or special carriers, who
transport or undertake to transport in a
particular instance for hire or reward
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[Agbayani, Commercial Laws of the
Philippines (1987)]; and
b. Common or public carriers [Art. 1732,
Civil Code].
Common carriers are:
a. Persons, corporations, firms or
associations;
b. Engaged in the business of carrying or
transporting;
c. Passengers or goods or both,
d. By land, water, or air;
e. For compensation,
f. Offering their services to the public [Art.
1732, NCC].
Art. 1732, Civil Code makes no distinction:
a. 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
[Fabre v. CA, G.R. No. 111127 (1996)];
b. 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
[Loadstar Shipping Co., Inc. v. CA,
G.R. No. 131621 (1999)];
c. Between a carrier offering its services
to the general public and one who
offers services or solicits business only
from a narrow segment of the general
population [De Guzman v. CA, G.R.
No. L-47822 (1988)];
d. Between a carrier that maintains
terminals or issues tickets with fixed
and publicly known routes and one that
does not [Asia Lighterage and Shipping
v. CA, G.R. No. 147246 (2003)].
2. Test for a Common Carrier
Whether the undertaking is a part of the activity
engaged in by the carrier, which it has held out
to the public as its business or occupation.
a. Determined by the character of the
business carried on by the carrier; Not
the quantity or extent of the business
transacted [Bascos v. Court of
Appeals, G.R. No. 101089 (1993)].
b. If the undertaking is a single
transaction, not a part of the general
TRANSPORTATION LAW COMMERCIAL LAW
business or occupation engaged in, as (2003)].
advertised and held out to the general
public, the individual or the entity A beach resort may be regarded as a common
rendering such service is a private, not carrier when its ferry services are so
a common, carrier [Perena v. Nicolas, intertwined with its main business as to be
G.R. No. 157917 (2012)]. properly considered ancillary thereto. In this
case, the constancy of respondent’s ferry
Test for a Common Carrier services in its resort operations is underscored
a. He must be engaged in the business of by having its own boats [Cruz v. Sun Holidays,
carrying goods for others as a public G.R. No. 186312 (2010)].
employment and must hold himself out
as ready to engage in the Operators of a school bus service were: (a)
transportation of goods for persons engaged in transporting passengers generally
generally as a business and not a as a business, not just as a casual occupation;
casual occupation. (b) undertaking to carry passengers over
b. He must undertake to carry goods of establishing roads by the method by which the
the kind to which his business is business was conducted; and (c) transporting
confined. students for a fee [Teodoro v. Nicolas, G.R. No.
c. He must undertake to carry by the 157917 (2012)].
methods of which his business is
conducted and over his established 3. Common Carrier vs. Private Carrier
roads.
d. The transportation must be for hire Common Carrier Private Carrier
[Agbayani].
Availability
One engaged in the business of transporting
petroleum products from refineries via pipeline Holds himself out in Agrees in some
is a common carrier. It is engaged in the common, that is, to all special case with
business of transporting or carrying goods, i.e., persons who choose some private
petroleum products, for hire as a public to employ him, as individual to carry for
employment. It undertakes to carry for all ready to carry for hire.
persons indifferently, that is, to all persons who hire.
choose to employ its services, and transports
the goods by land and for compensation. The Binding Effect
fact that it has a limited clientele does not
exclude it from the definition of a common
Bound to carry all Not bound to carry
carrier [First Phil. Industrial v. CA, G.R. No.
who offer and tender for any reason, such
125948 (1998)].
reasonable goods as it is
compensation for accustomed to carry,
A customs broker may be regarded as a
carrying them. unless it enters into a
common carrier as long as a person holds itself
special agreement to
to the public for the purpose of transporting
do so.
goods as a business, regardless of if it owns
the vehicle used or has to hire one [Schmitz Diligence Required
Transport v. CA, G.R. No. 150255 (2005)].

A travel agency is not a common carrier. It is Extraordinary Ordinary diligence.

not an entity engaged in the business of diligence.
transporting either passengers or goods and is
therefore neither a private nor a common Governing Law
carrier. Its covenant with its customers is
simply to make travel arrangements on their Civil Code; Code of Law on obligations
behalf [Crisostomo v. CA, G.R. No. 138334 Commerce and and contracts.
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Note: A common carrier is not an insurer of the
special laws, if not
safety of its passengers and is not bound
regulated by the Civil
absolutely and at all events to carry them safely
Code (Art. 1766, Civil
and without injury [Yobido v. CA, G.R. No.
Code); law of the
113003 (1997)].
country to which the
goods are to be
transported, if b. Presumption of Negligence
regarding liability for
loss, destruction, or For Carriage of Goods
deterioration of The mere proof of:
goods (Art. 1753, 1. Delivery of goods in good order to a
Civil Code). carrier; and
2. Their arrival at the place of destination
Regulation in bad order
makes out a prima facie case against the
carrier, so that if no explanation is given as to
A public service, Not subject to how the injury occurred, the carrier must be
therefore subject to regulation as a held responsible [Ynchausti Steamship v.
provisions governing common carrier. Dexter and Unson, G.R. No. L-15652 (1920)].
common carriers and
public utilities. Effects of Presumption
1. Makes out a prima facie case against
It is not necessary that the carrier be issued a the carrier - i.e., the carrier is presumed
certificate of public convenience [Loadstar to have been at fault or to have acted
Shipping Co., Inc. v. CA, G.R. No. 131621 negligently;
(1999)]. 2. Makes it incumbent upon the carrier to
prove that the loss/death/injury was
4. Diligence Required of Common due to some other circumstance
inconsistent with its liability, or that it
Carrier
observed extraordinary diligence [Art.
1756, Civil Code; Ynchausti Steamship
a. Standard of Diligence v. Dexter and Unson, G.R. No. L-15652
(1920)].
Common carriers, from the nature of their
business and for reasons of public policy, are Burden of Proof
bound to observe extraordinary diligence, It is incumbent upon the carrier to prove that
according to all the circumstances of each the loss was due to accident or some other
case: circumstance inconsistent with its liability
1. In the vigilance over the goods, [Arts. [Ynchausti Steamship v. Dexter and Unson,
1734, 1735, and 1745, Nos. 5, 6, and G.R. No. L-15652 (1920)].
7, Civil Code] and
2. For the safety of the passengers Note: While delay in the delivery of goods is a
transported by them [Art. 1733, Civil breach of contract of carriage, it does not raise
Code]. the presumption of negligence because the
goods are not lost, deteriorated, or destroyed
Extraordinary Diligence [Art. 1735, Civil Code].
Requires carrying passengers safely:
1. As far as human care and foresight can
For Carriage of Passengers
provide;
In case of death of or injuries to passengers,
2. Using the utmost diligence of very
common carriers are presumed to have been
cautious persons;
at fault or to have acted negligently, unless they
3. With a due regard for all the
prove that they observed extraordinary
circumstances [Art. 1755, Civil Code].
diligence as prescribed in Arts 1733 and 1755

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[Art. 1756, Civil Code].
Note: Mere failure to reach one’s destination,
absent injury or death, does not raise the
presumption of negligence because it does not
involve safety of the passengers.
5. Liabilities of Common Carriers
The obligation of the common carrier consists
in the transportation of passengers or goods or
both [Art. 1732, Civil Code].
a. Principles Governing the Liability of
Common Carriers
1. The liability of a carrier is contractual
and arises upon breach of its
obligation.
a. There is breach if it fails to exert
extraordinary diligence
according to all circumstances
of each case;
2. A carrier is obliged to carry its
passenger with the utmost diligence of
a very cautious person, having due
regard for all the circumstances;
3. A carrier is presumed to be at fault or
to have acted negligently in case of
loss of goods and/or death of, or injury
to, passengers, it being its duty to
prove that it exercised extraordinary
diligence; and
4. The carrier is not an insurer against all
risks of travel [Isaac v. A.L. Ammen,
G.R. No. L-9671 (1957)].
b. Registered Owner Rule
The person who is the registered owner of a
vehicle is liable for any damage caused by the
negligent operation of the vehicle although the
same was already sold [Filcar Transport v.
Espinas, G.R. No. 174156 (2012)].
c. Kabit System
1. It is an arrangement whereby a person
who has been granted a certificate of
convenience allows another person
who owns motor vehicles to operate
under such franchise for a fee [Lita
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Enterprises, Inc. v. IAC, G.R. No. L-
64693 (1984)].
2. It is invariably recognized as being
contrary to public policy and therefore
void and inexistent under Art. 1409.
Thus, for the safety of passengers and
the public, 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 [Lim v. CA, G.R. No.
125817 (2002)].
3. 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 [Dizon v. Octavio (1955)].
4. However, one who has availed of the
kabit system is not precluded from filing
for damages against another who
caused the injury, as the policy against
the kabit system will not be defeated by
giving such person standing to sue
[Lim v. CA, G.R. No. 125817 (2002)].
d. Classification of Transport Network
Vehicle Services and Transport
Network Companies
1. Transport Network Company or TNC is
defined as an organization whether a
corporation, partnership, or sole
proprietor, that provides pre-arranged
transportation services for
compensation using an internet-based
technology application or a digital
platform technology to connect
passengers with drivers using their
personal vehicles [DOTC D.O. No.
2015-011].
2. Transport Network Vehicle Service or
TNVS refers to a TNC-accredited
private vehicle owner, which is a
common carrier, using the internet-
based technology application or digital
TRANSPORTATION LAW COMMERCIAL LAW
platform technology transporting services to willing public consumers
passengers from one point to another, and these services may be readily
for compensation. The TNVS cannot accessed by anyone who chooses to
operate as a common carrier outside of download the Angkas app. While they
or independent from the use of the may refuse to offer their service by
internet-based technology of the TNC simply not going online or not logging
or TNCs to which they are accredited in, when they do log in, they make their
[DOTr D.O. No. 2018-012]. services publicly available. As such,
DBDOYC (Angkas) is a transportation
TNVs and TNCs are expressly provider and its accredited drivers are
considered common carriers and are common carriers [LTFRB v.
classified as public utilities. They are Valenzuela and DBDOYC, Inc. G.R.
subject to full regulation and No. 242860 (2019)].
supervision by the LTFRB, including
but not limited to: B. Obligations and Liabilities
● Application and approval/ denial of
franchise,
1. Vigilance Over Goods
● Setting of fares, routes, operating
conditions, and
The liability of the common carrier with respect
● Imposition of fines, suspension,
to vigilance over goods, in general, are as
and cancellation of franchise.
follows:
a. Common carriers are responsible for
Note re: (b) setting of fares: In 2017,
the loss, destruction, or deterioration of
MyTaxi.PH, Inc. (GRAB) filed a case
the goods [Art. 1734, Civil Code]. In
before the LTFRB which did not reach
fact, they are liable even in those cases
the Supreme Court, LTFRB held that
where the cause of the loss or damage
under D.O. 2015-011 then in force, a
is unknown [Agbayani].
TNC is not granted unilateral authority
b. If the goods are lost, destroyed, or
to set fares as the same would be
deteriorated, common carriers are
constitutive of an undue delegation of
presumed to have been at fault or to
legislative authority. Subsequently,
have acted negligently [Art. 1735, Civil
D.O. 2017-011 and D.O. 2018-013
Code].
were issued, removing the “confusing
language” of D.O. 2015-011 and
Note: Two-pronged analysis in determining
explicitly stating that rate-fixing
liability:
authority shall be limited to the LTFRB
a. Whether or not the cause of the loss,
in accordance with the law [Case No.
destruction, or deterioration is included
CO-EB-2018-04-0039, Accreditation
under Art. 1734;
No. 2015-TNC-001].
b. If not, whether the common carrier
exercised extraordinary diligence or
The LTFRB shall grant the TNCs and
not.
their accredited TNVS a Certificate of
Public Convenience (CPC) upon full
a. Presumption of Negligence
compliance of jurisdictional
requirements, as may be determined
by LTFRB. The LTFRB shall also set General Rule: Common carriers are
responsible for the loss, destruction, or
the fare for the TNVS after public
hearing or in consultation with the deterioration of the goods.
TNCs and TNVS [DOTr D.O. No. 2018-
012]. Exception: Common carriers are not liable
when such loss, destruction, or deterioration is
Despite the limited market scope of its due to any of the following causes only:
1. Flood, storm, earthquake, lightning, or
app, Angkas’ bikers offer transportation
other natural disaster or calamity;
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2. Act of the public enemy in war, whether
international or civil;
3. Act of omission of the shipper or owner
of the goods;
4. The character of the goods or defects
in the packing or in the containers;
5. Order or act of competent public
authority [Art. 1734, Civil Code].
In all other cases of loss, destruction, or
deterioration, the common carrier is presumed
to have been at fault or to have acted
negligently, unless they prove that they
observed extraordinary diligence [Art. 1735,
Civil Code].
b. Exempting Causes
1. Natural Disaster or Calamity
Requisites:
a. The natural disaster must have been
the proximate and only cause of the
loss;
b. The common carrier must exercise due
diligence to prevent or minimize the
loss before, during and after the
occurrence of the flood, storm, or
natural disaster [Art. 1739, Civil Code];
and
c. The common carrier must not have
negligently incurred delay [Art. 1740,
Civil Code].
Fire may not be considered a natural disaster
or calamity because it arises almost invariably
from some act of man or by human means. It
does not fall within the category of an act of
God unless caused by lightning or by other
natural disaster or calamity [Eastern Shipping
Lines v. IAC, G.R. No. L-69044 (1987)].
2. Act of Public Enemy
Requisites
a. The act of the public enemy was
committed either in an international or
civil war [Art. 1734 (2), Civil Code];
b. The act of the public enemy must have
been the proximate and only cause;
and
c. The common carrier must exercise due
diligence to prevent or minimize the
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loss before, during and after the act of
the public enemy causing the loss,
destruction or deterioration of the
goods [Art. 1739, Civil Code].
Thieves, rioters, robbers, and insurrectionists,
though at war with social order, are not in a
legal sense classed as public enemies, but are
merely private depredators for whose acts a
carrier is answerable. Pirates on the high seas,
however, stand as an exception to this rule.
They are considered the enemies of all civilized
nations, and indeed of the human race, and
consequently their depredations on a common
carrier will excuse him from liability [Aquino].
3. Act or omission of shipper or owner
The act or omission of the shipper must have
been the proximate and only cause of the
loss, destruction, or deterioration of the goods.
If the shipper or owner merely contributed to
the loss, destruction or deterioration of the
goods, the proximate cause being the
negligence of the common carrier, the latter
shall be liable for the damages, which shall,
however, be equitably reduced [Art. 1741, Civil
Code].
4. Character of Goods
Requisites
a. The loss, destruction, or deterioration
of the goods is due to the character of
the goods or defects in the packing or
in the containers [Art. 1734 (4), Civil
Code]; and
b. The common carrier must exercise due
diligence to forestall or lessen the loss
[Art. 1742, Civil Code].
If the fact of improper packing is known to the
carrier or its servants or apparent upon
ordinary observation, but it accepts the goods
notwithstanding such condition, it is not
relieved of liability for loss or injury resulting
therefrom [Southern Lines v. CA, G.R. No. L-
16629 (1962)].
TRANSPORTATION LAW
5. Order of Competent Authority
Requisites
a. There must be an order or act of
competent public authority through
which the goods are seized or
destroyed [Art. 1734 (5), Civil Code];
and
b. The said public authority must have
had the power to issue the order [Art.
1743, Civil Code].
To be exempted from liability, the intervention
of the competent public authority must be of a
character that would render impossible the
fulfillment by the carrier of the obligation
[Ganzon v. CA, G.R. No. L-48757 (1988)].
6. Force Majeure
Force majeure – in general, has also been
invoked as an exempting cause based on Art.
1174, which states that no person shall be
responsible for a fortuitous event which could
not be foreseen, or which, though foreseen,
was inevitable.
A fortuitous event has 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
d. The obligor must be free from any
participation in the aggravation of the
injury resulting to the creditor.
Note: There must be an entire exclusion of
human agency from the cause of injury or loss.
A common carrier may not be absolved from
liability in case of force majeure or fortuitous
event alone. The common carrier must still
prove:
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a. That it was not negligent in causing the
death or injury resulting from an
accident [Yobido v. CA, G.R. No.
113003 (1997)];
b. That the loss or destruction of the
merchandise was due to accident and
force majeure and not fraud, fault, or
negligence on the part of the captain or
owner of the ship [Tan Chiong Sian v.
Inchausti, G.R. No. L-6092 (1912)].
Loss of a ship and of its cargo, in a wreck due
to accident or force majeure must, as a general
rule, fall upon their respective owners, except
in cases where the wrecking or stranding of the
vessel occurred through the malice,
carelessness, or lack of skill on the part of the
captain or because the vessel put to sea is
insufficiently repaired and prepared.
In order that the exemption due to force
majeure would apply, the carrier must prove
that the loss or destruction of the merchandise
was due to accident and force majeure and not
to fraud, fault, or negligence on the part of the
captain or owner of the ship [Tan Chiong Sian
v. Inchausti, G.R. No. L-6092 (1912)].
Requirement of Absence of Negligence
If the common carrier is found to have acted
negligently, it is precluded from invoking the
exempting causes under Art. 1734, and will be
liable for damages suffered by the goods it
carried if such damages arise from its
negligence [Agbayani].
The exempting circumstance should be the
proximate and only cause of the loss,
destruction, or deterioration of the goods for
the common carrier to be exempted from
liability on any of the ff. grounds:
a. Natural Disaster/Calamity
b. Act of Public Enemy
c. Character of the Goods [Art. 1739,
1742, Civil Code]
When the common carrier’s negligence is the
proximate cause of the loss, destruction, or
deterioration of the goods, the act or omission
of the shipper will only mitigate the carrier’s
liability [Art. 1741, Civil Code].
TRANSPORTATION LAW
Absence of Delay
To be free from responsibility on the ground of
natural disaster/calamity, the common carrier
should not have negligently incurred in delay
[Art. 1740, Civil Code].
Due Diligence to Prevent or Lessen the
Loss
The common carrier should have exercised
due diligence to prevent, forestall or lessen the
loss, destruction, or deterioration of the goods,
to be exempted from liability on any of the ff.
grounds:
a. Natural Disaster/Calamity
b. Act of Public Enemy
c. Character of the Goods [Art. 1739,
1742, Civil Code]
Meeting a typhoon head-on falls short of due
diligence required from a common carrier [Asia
Lighterage and Shipping Inc. v. CA, G.R. No.
147246 (2000)].
c. Contributory Negligence
The liability of the common carrier shall be
equitably reduced when the loss, destruction,
or deterioration of the goods when:
1. The negligence of the common carrier
was the proximate cause thereof; and
2. The shipper or owner merely
contributed to such loss, destruction, or
deterioration [Art. 1741, Civil Code].
d. Duration of Liability
Instances when carrier has responsibility to
exercise extraordinary diligence:
1. From the time the goods are
unconditionally placed in the
possession of, and received by the
carrier [Art 1736, Civil Code] or its
authorized agent [Compania Maritima
v. Insurance Co., G.R. No. L-18965
(1964)], until the same are delivered
actually and constructively by the
carrier to the consignee or to the
person who has a right to receive them;
2. When goods are temporarily unloaded
or stored in transit, unless the shipper
or owner has made use of the right of
stoppage in transitu [Art 1737, Civil
Code];
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3. During storage in a warehouse of the
carrier at the place of destination, until
consignee has been advised of the
arrival of the goods and has had
reasonable opportunity to remove or
dispose them [Art 1738, Civil Code].
In dealing with the contract of common carriage
of passengers, for purpose of accuracy, there
are two (2) aspects of the same, namely:
1. Contract ‘to carry (at some future
time),’ which contract is consensual
and is necessarily perfected by mere
consent; and
2. Contract ‘of carriage’ or ‘of common
carriage,’ which should be considered
as a real contract for not until the carrier
is used can the carrier be said to have
already assumed the obligation of a
carrier [Paras, Civil Code Annotated,
11th Ed].
Note: The distinction is important in
determining when the common carrier is
required to exercise extraordinary
responsibility. The birth of the contract is not
necessarily the birth of the duty to exercise
extraordinary responsibility.
1. Delivery of Goods to Common Carriers
Delivery means unconditionally placing the
goods in the possession of the carrier and the
carrier receiving them for transportation [Art.
1736, Civil Code].
Unconditionally placing the goods in the
possession of the carrier means the shipper
cannot get them back from the common carrier
at will.
Thus, the liability of the carrier as common
carrier and its duty of extraordinary diligence
begins with the actual delivery of the goods,
NOT:
a. When the common carrier received the
goods not for transportation but only for
safekeeping; or
b. When a receipt or bill of lading is
formally executed, since the issuance
of a bill of lading is not necessary to
complete delivery and acceptance
[Compania Maritima v. Insurance Co.,
G.R. No. L-18965 (1964)].
TRANSPORTATION LAW
2. Actual or Constructive Delivery
The extraordinary responsibility of the common
carrier ends when, subject to Art. 1738, the
goods are delivered actually or
constructively by the carrier to:
a. The consignee; or
b. The person who has a right to receive
them, such as agents, brokers, and the
like.
Art. 1738 provides that the extraordinary
liability of the common carrier continues to be
operative even during the time the goods are
stored in a warehouse of the carrier at the place
of destination, until the consignee has:
a. Been advised of the arrival of the
goods; and
b. Had reasonable opportunity thereafter
to remove them or otherwise dispose of
them.
Delivery of the cargo to the customs authorities
is not delivery to the consignee or “to the
person who has a right to receive them” as
contemplated in Art. 1736 because in such
case the goods are still in the hands of the
government and the owner cannot exercise
dominion over them. However, the parties may
agree to limit the liability of the carrier
considering that the goods still have to go
through the inspection of the customs
authorities before they are actually turned over
to the consignee. It is unfair that the carrier be
made responsible for what may happen during
the interregnum [Lu Do v. Binamira, G.R. No.
L-9840 (1957)].
It is settled in maritime law jurisprudence that
cargoes while being unloaded generally remain
under the custody of the carrier [Asian
Terminals, Inc. v. Philam Insurance Co., G.R.
No. 181163 (2013)].
The common carrier remains liable to the
consignee when the goods were lost because
the ports authorities released them to
unauthorized persons, absent a stipulation in
the bill of lading [Nedlloyd Lijnen B.V.
Rotterdam v. Glow Laks Enterprises, Ltd. G.R.
No. 156330 (2014)].
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3. Temporary Unloading or Storage
General Rule: Extraordinary diligence over the
goods remains even when the goods are
temporarily unloaded or stored in transit.
Exception: The duty to observe such diligence
ceases when shipper or owner makes use of
the right of stoppage in transitu [Art 1737,
Civil Code].
Stoppage in transitu is the act by which the
unpaid vendor of goods stops their progress
and resumes possession of them
constructively, while they are during transit
from him to the purchaser and not yet actually
delivered to the latter [Agbayani].
Basis: Under Art. 1530, when the buyer of the
goods becomes insolvent, the unpaid seller
who has parted with the possession of the
goods, at any time while they are in transit, may
resume the possession of the goods as he
would have had if he had never parted with the
possession.
When the right of stoppage in transitu is
exercised, the common carrier holds the goods
in the capacity of an ordinary bailee or
warehouseman upon the theory that the
exercise of the right of stoppage in transitu
terminates the contract of carriage. Hence,
only ordinary diligence is required
[Agbayani].
e. Stipulations for Limitation of Liability
There are two possible stipulations limiting the
liability of the common carrier:
1. Stipulation limiting the common
carrier’s liability as to the diligence
required;
2. Stipulation limiting the common
carrier’s liability as to the amount of
liability.
An agreement limiting the common carrier’s
liability for delay on account of strikes or riots is
also valid [Art. 1748, Civil Code].
As to Diligence Required
A stipulation between the common carrier and
the shipper or owner limiting the liability of the
TRANSPORTATION LAW
former for the loss, destruction, or deterioration
of the goods to a degree less than
extraordinary diligence shall be valid,
provided it be:
1. In writing, signed by the shipper or
owner;
2. Supported by a valuable consideration
other than the service rendered by the
common carrier; and
3. Reasonable, just and not contrary to
public policy [Art. 1744, Civil Code].
Void Stipulations
Any of the following or similar stipulations shall
be considered unreasonable, unjust and
contrary to public policy:
1. That the goods are transported at the
risk of the owner or shipper;
2. That the common carrier will not be
liable for any loss, destruction, or
deterioration of the goods;
3. That the common carrier need not
observe any diligence in the custody of
the goods;
4. 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;
5. That the common carrier shall not be
responsible for the acts or omission of
his or its employees;
6. 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;
7. 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 [Art. 1745, Civil Code];
8. That the common carrier is exempt
from any and all liability for loss or
damage occasioned by its own
negligence;
9. Stipulation providing for an unqualified
limitation of such liability to an agreed
stipulation [Heacock v. Macondray,
G.R. No. L-16598 (1921)];
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10. Stipulation which practically leaves the
date of arrival of the subject shipment
on the sole determination and the will
of the carrier [Maersk Line v. CA, G.R.
No. 94761 (1993)].
Note: Under Art. 1745 (6), Civil Code, a
common carrier cannot be held liable where
the thieves or robbers acted with grave or
irresistible threat, violence, or force [De
Guzman v. CA, G.R. No. L-47822 (1988)].
Limitation of Liability to Fixed Amount
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:
1. It is reasonable and just under
circumstances; and
2. It has been fairly and freely agreed
upon [Art. 1750, NCC].
While a passenger may not have signed the
plane ticket, he is nevertheless bound by the
provision thereof, regardless of the latter’s lack
of knowledge or assent to the regulation. It is
what is known as a contract of adhesion
wherein one party imposes a ready-made form
of contract on the other. The one who adheres
to the contract is free to reject it entirely. A
contract limiting liability upon an agreed
valuation does not offend against the policy of
the law forbidding one from contracting against
his own negligence [Ong Yiu v. CA, G.R. No.
L-40597 (1979)].
[However], the fact that the conditions are
printed at the back of the ticket stub in letters
so small that they are hard to read would not
warrant the presumption that the [shipper] was
not aware of those conditions such that he had
“fairly and freely agreed” to those conditions
[Shewaram v. PAL, G.R. No. L-20099 (1966)].
TRANSPORTATION LAW
Factors Affecting Agreement
The effect of these stipulations is subject to the
following provisions:
1. An agreement limiting the common
carrier’s liability may be annulled by the
shipper or owner if the common carrier
refuses to carry the goods unless the
former agreed to such stipulation [Art.
1746, Civil Code];
2. If the common carrier, without just
cause, delays the transportation of the
goods or changes the stipulated or
usual route, the contract limiting the
common carrier’s liability cannot be
availed of in case of the loss,
destruction, or deterioration of the
goods [Art. 1747, Civil Code];
3. 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 [Art.
1751, Civil Code];
4. Even when there is an agreement
limiting the liability of the common
carrier in the vigilance over the goods,
the common carrier is disputably
presumed to have been negligent in
case of their loss, destruction or
deterioration [Art. 1752, Civil Code].
5. An agreement limiting the common
carrier's liability for delay on account of
strikes or riots is valid [Art. 1748, Civil
Code].
Limitation of Liability in Absence of
Declaration of Greater Value
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 [Art. 1749,
Civil Code].
Where the liability has been limited due to a
stipulation written at the back of a ticket, to the
effect that the liability is limited to a certain
amount unless the passenger declares a
higher valuation, a passenger who did not
declare a higher valuation, or did not pay
additional charges, cannot increase the liability
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of the carrier [Ong Yiu v. CA, G.R. No. L-
40597(1979)].
f. Liability for Baggage of Passengers
Baggage are things that a passenger will bring
with him consistent with a temporary absence
from where he lives. Passenger’s baggage
must have a direct relationship with the
passenger who is traveling.
For instance, a balikbayan box or suitcase is a
passenger’s baggage. However, 500 boxes of
perfume are not considered as passenger
baggage. They are considered goods and are
not part of the contract of carriage [of the
passenger]. A separate contract of carriage [or
bill of lading] must be entered into to transport
them [Agbayani].
There are two kinds of passenger’s baggage,
which are governed differently:
1. Passenger baggage in the custody of
the passenger (or carry-on luggage);
and
2. Passenger baggage NOT in the
custody of the passenger (or checked-
in baggage).
The liability is greater for baggage that is in the
custody of the carrier (checked-in baggage) as
compared to those in the possession of the
passenger.
1. Checked-In baggage
The provisions of Arts. 1733-1753 shall not
apply to passenger’s baggage which is not in
his personal custody or in that of his employee
[Art. 1754, Civil Code].
In other words, the rules governing the
responsibility of a common carrier in the
transportation of goods apply. Thus,
extraordinary diligence is required.
2. Baggage in Possession of Passengers
As to baggage other than checked-in baggage,
they are governed by Arts. 1998 and 2000-
2003, concerning the responsibility of
hotelkeepers [Art. 1754, Civil Code].
TRANSPORTATION LAW
Art. 1998, as applied by analogy, the baggage
of passengers in their personal custody or in
that of their employees, while being
transported, are regarded as necessary
deposits. The common carriers are responsible
as depositaries, provided that:
a. Notice was given to them, or to their
employees, of the effects brought by
the passengers; and
b. The passengers take the precautions
which the common carrier advised
relative to the care and vigilance of
their baggage.
Note: In one case, the Court held that there
was sufficient notice under Art. 1998 when the
common carrier allowed the passenger to
board the vessel with his belongings without
any protest [Sulpicio Lines v. CA, G.R. No.
172682 (2016)].
In case of loss or injury to the baggage of
passengers in their personal custody, or in that
of their employees, while being transported,
the carrier is liable if the loss or injury is
caused by:
a. His servants;
b. His employees;
c. Strangers [Art. 2000, Civil Code]; or
d. A thief or robber, without the use of
arms or irresistible force [Art. 2001,
Civil Code].
The carrier is not liable if loss or injury is
caused by:
a. Force majeure [Art. 2000, Civil Code];
b. Theft or robbery with the use of arms or
irresistible force [Art. 2001, Civil Code];
c. The acts of the passenger, his family,
servants, or visitors;
d. The character of the baggage [Art.
2002, Civil Code].
The following provisions also figure in
determining the liability of the common carrier:
a. The fact that passengers are
constrained to rely on the vigilance of
the common carrier shall be
considered in determining the degree
of care required of him [Art. 2000, Civil
Code];
b. The common carrier cannot free
himself from responsibility by posting
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notices to the effect that he is not liable
for the articles brought by the
passenger;
c. Any stipulation whereby the
responsibility of the common carrier as
set forth in Arts. 1998-2001 is
suppressed or diminished shall be void
[Art. 2003, Civil Code].
2. Safety of Passengers
The liability of the common carrier with respect
to the safety of passengers, in general, are as
follows:
1. A common carrier is bound to carry the
passengers safely as far as human
care and foresight can provide, using
the utmost diligence of very cautious
persons, with a due regard for all the
circumstances [Art. 1755, Civil Code];
2. In case of death of 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 [Art. 1756, Civil Code].
Note: It is not enough that the accident was
caused by force majeure, the common carrier
must still prove that it was not negligent in
causing the injuries resulting from such
accident [Bachelor Express v. CA, G.R. No.
85691 (1990)]. Bachelor Express illustrates
that force majeure is not itself a defense; the
exercise of the diligence required by law is the
defense.
Certain instances wherein the common carrier
was held liable:
1. Defects in the automobile – passenger
has neither the choice nor control over
the selection and use of the carrier’s
equipment and appliances [Landingin
v. Pantranco, G.R. No. L-28014-15
(1970)].
2. Defect in an appliance purchased by
the carrier from a manufacturer – the
manufacturer is considered as an
agent of the common carrier [Necesito
v. Paras, G.R. No. L-10605 (1958)].
3. Injuries suffered by a crew member or
employee – utmost diligence is not only
for the safety of passengers, but also
TRANSPORTATION LAW COMMERCIAL LAW
for the members of the crew or the Convention, which applies to international air
complement operating the carrier [PAL carriage. It provides that the liability of a
v. CA, G.R. No. L-46558 (1981)]. common carrier for injury to the passenger
4. Injuries suffered by an individual whose lasts from embarkation to disembarkation,
presence was called for by the contract including the period when the passenger is on
of carriage (e.g. stevedore) [Sulpicio board the aircraft.
Lines v. CA, G.R. No. 106279 (1995)].
In maritime commerce, Art. 698, Code of
Note: A common carrier is not liable for its Commerce relates to the period of the voyage:
failure to deliver the passenger to the agreed
destination because of sovereign acts [JAL v. In case a voyage already begun should be
Asuncion, G.R. No. 161730 (2005)]. interrupted:
1. The passengers shall be obliged to pay
a. Void Stipulations the fare in proportion to the distance
covered; and
General Rule: The responsibility of a common 2. Have the following reliefs:
carrier for the safety of passengers cannot be Cause of Relief
dispensed with or lessened by stipulation by Interruption
the posting of notices, by statements on tickets,
or otherwise [Art. 1757, Civil Code]. An accidental cause Without right to
of force majeure recover for losses
Exception: When a passenger is carried and damages
gratuitously, a stipulation limiting the common
carrier’s liability for negligence is valid [Art. By the captain With a right to
1758, Civil Code]. exclusively indemnity

Exception to the exception: Even when a 1. Caused by 1. He may not

passenger is carried gratuitously, a stipulation the disability be required
limiting the common carrier’s liability for willful of the vessel to pay any
acts or gross negligence is invalid [Art. 1758, and increased
Civil Code]. 2. A passenger price of
should agree passage; but
The reduction of fare does not justify any to await the 2. His living
limitation of the common carrier’s liability [Art. repairs expenses
1758, Civil Code]. during the
stay shall be
b. Duration of Liability for his own
account.
As in the contract of carriage of goods, the In case of delay in the departure of the vessel,
perfection of the contract of carriage of the passengers have:
passengers does not necessarily coincide with 1. The right to remain on board
the commencement of the duty of extraordinary 2. If the delay is not due to a fortuitous
diligence. It may occur at the same time or event or force majeure, the right to be
later. furnished with food for the account of
the vessel;
Based on jurisprudence, the duty that the 3. If the delay should exceed ten days:
carrier of passengers owes to its patrons 4. Passengers requesting the same shall
extends to persons boarding the cars as well be entitled to the return of the fare; and
as those alighting therefrom [Del Prado v. 5. If it is due exclusively to the fault of the
Manila Electric Company, G.R. No. L-29462 captain or ship agent, they may also
(1929)]. demand indemnity for losses and
damages.
This is also reflected in Art. 17, Warsaw

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A vessel exclusively devoted to the
transportation of passengers must take them
directly to the port or ports of destination, no
matter what the number of passengers may be,
making all the stops indicated in its itinerary.
1. Waiting for Carrier or Boarding of
Carrier
The duty that the carrier of passengers owes to
its patrons extends to persons boarding the
cars as well as those alighting therefrom.
It is the duty of common carriers of passengers
to stop their conveyances at a reasonable
length of time to afford passengers an
opportunity to bard and enter:
a. Carriers are liable for injuries suffered
by boarding passengers resulting from
the sudden starting up or jerking of their
conveyances while they are doing so
[Dangwa Transportation v. CA, G.R.
No. 95582 (1991)].
b. However, a person boarding a moving
car must be taken to assume the risk of
injury from boarding the car under the
conditions open to his view.
Nonetheless, he cannot fairly be held
to assume the risk that the motorman,
having the situation in view, will
increase the peril by accelerating the
speed of the car before he is planted
safely on the platform [Del Prado v.
Manila Electric Company, G.R. No. L-
29462 (1929)].
The extraordinary responsibility of common
carriers commences:
a. With respect to carriage of passengers
by trains: The moment the person who
purchases the ticket from the carrier
presents himself at the proper place
and in a proper manner to be
transported with a bona fide intent to
ride the coach [Aquino citing Vda. De
Nueca, et . al. v. Manila Railroad
Company].
b. With respect to carriage of passengers
by sea: As soon as the person with
bona fide intention of taking passage
places himself in the care of the carrier
or its employees and is accepted as
passenger [Aquino].
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2. Arrival at Destination
The relation of carrier and passenger does not
cease at the moment the passenger flights
from the carrier’s vehicle at a place selected by
the carrier at the point of destination, but
continues until the passenger has had a
reasonable time or a reasonable opportunity to
leave the carrier’s premises.
What is a reasonable time or a reasonable
delay within this rule is to be determined from
all the circumstances such as the kind of
common carrier, the nature of its business, the
customs of the place, and so forth, and
therefore precludes a consideration of the time
element per se without taking into account
such other factors.
The primary factor to be considered is the
existence of a reasonable cause as will justify
the presence of the victim on or near the
petitioner’s vessel:
a. A person who, after alighting from a
train, walks along the station platform is
considered still a passenger;
b. A passenger, who has alighted at his
destination and is proceeding by the
usual way to leave the company’s
premises, but before actually doing so
is halted by the report that his brother,
a fellow passenger, has been shot, and
he in good faith, returns to relieve his
brother, is deemed reasonably and
necessarily delayed and thus
continues to be a passenger entitled as
such to the protection of the railroad
and company and its agents [La
Mallorca v. CA, G.R. No. L-20761
(1996)];
c. In the cases of a shipper, the
passengers of vessels are allotted a
longer period of time to disembark from
the ship than other common carriers
such as a passenger bus, since such
vessels are capable of accommodating
a bigger volume of both passenger and
baggage as compared to the capacity
of a regular commuter bus.
Consequently, a ship passenger will
need at least an hour as is the usual
practice, to disembark from the vessel
and claim his baggage [Aboitiz
TRANSPORTATION LAW
Shipping v. CA, G.R. No. 84458
(1989)];
d. The carrier necessarily would still have
to exercise extraordinary diligence in
safeguarding the comfort, convenience
and safety of its stranded passengers
until they have reached their final
destination [PAL v. CA, G.R. No. L-
82619 (1993)].
Note: Despite the Court’s pronouncement in
PAL v. CA, note that common carriers are
bound to observe extraordinary diligence in the
‘safety’ of its passengers. The law does not
mention the words ‘comfort’ and ‘convenience.’
c. Liability for Acts of Others
1. Employees
General Rule: 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.
This liability does not cease:
a. Even upon proof that they exercised all
the diligence of a good father of a
family in the selection and supervision
of their employees [Art. 1759, Civil
Code];
b. By stipulation, by the posting of
notices, nor by statements on the
tickets eliminating or limiting said
liability [Art. 1760, Civil Code].
Ratio: The servant is clothed with delegated
authority and charged with the duty to execute
the carrier’s undertaking to carry the passenger
safely [Agbayani]. Also, the defense of
diligence in the selection and supervision of
employees does not obtain because the liability
is not based on quasi-delict, but on culpa
contractual. However, there must be a
reasonable connection between the act and
the contract of carriage.
Note: The employee must be on duty at the
time of the act. It is enough that the assault
happens within the course of the
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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 [Maranan v. Perez, G.R. No. L-22272
(1967)].
Exception: A common carrier is not
responsible for acts falling under force
majeure. When a party is unable to fulfill his
obligation because of force majeure, he cannot
be held liable for damages for non-
performance [Japan Airlines v. CA, G.R. No.
118664 (1998)].
Note: In order to be exempted from liability due
to a fortuitous event, a common carrier must
still prove a complete exclusion of human
agency from the cause of injury or death.
Hence, it was held that the explosions of the
new tire may not be considered a fortuitous
event as there are human factors involved in
the situation [Yobido v. CA, G.R. No. 113003
(1997)].
2. Other Passengers and Strangers
General Rule: A common carrier is not liable
for injuries inflicted by strangers or co-
passengers.
Exception: 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
[Art. 1763, Civil Code].
Note: The law speaks of injuries suffered by the
passenger but not death. However, there
appears to be no reason why the common
carrier should not be held liable under such
circumstances. The word “injuries” should be
interpreted to include death [Agbayani].
Under Art. 1763, 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
TRANSPORTATION LAW
could have been foreseen and prevented by
them through the exercise of the diligence of a
good father of a family [Pilapil v. CA, G.R. No.
52159 (1989)].
Contributory Negligence
The passenger must observe the diligence of a
good father of a family to avoid injury to himself
[Art. 1761, Civil Code].
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
[Art. 1762, Civil Code].
However, when the negligence of the
passenger was the proximate cause of the
injury, the passenger is barred from recovery,
and the common carrier is exempted from
liability.
It is negligence per se to protrude one’s arm
voluntarily or inadvertently, hand, elbow, or any
other part of his body through the window of a
moving car beyond the outer edge of the
window or outer surface of the car, so as to
come in contact with objects or obstacles near
the track [Isaac v. A.L. Ammen, G.R. No. L-
9671 (1957)].
d. Liability for Delay in Commencement
of Voyage
A “delayed voyage” refers to a voyage
involving:
1. Late departure of the ship from its port
of origin; or
2. Late arrival thereof to its port of
destination for a period of time not
exceeding twenty-four (24) hours from
the CPC-authorized time of departure
or arrival of the ship [Maritime Industry
Authority Circular No. 2018-27].
In case of delayed voyages, passengers shall
have the following rights:
1. Right to Information
Within thirty (30) minutes of knowledge that the
voyage shall be delayed but not later than one
(1) hour before the CPC-authorized departure
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schedule, the operator shall inform the
passengers of:
a. The delay;
b. The cause of the delay;
c. The new departure or expected arrival
time [Maritime Industry Authority
Circular No. 2018-27].
2. Right to Refund or Revalidation
Should the delay be for more than three (3)
hours, the passenger shall be offered the
option to request a refund of the ticket price, or
for the revalidation of the ticket [Maritime
Industry Authority Circular No. 2018-27].
3. Right to Amenities
The operator shall provide, free of charge, the
passengers with the following:
a. Snacks or refreshment, or meals
during mealtime;
b. Free access to first aid/ relief medicine,
if necessary;
c. Free access to communication facilities
or services, if necessary;
d. Free, decent, and clean
accommodation located near or
accessible from the port;
e. Free transportation to and from the port
and the place of accommodation,
should the delay require a waiting time
of more than eight (8) but not
exceeding twenty-four (24) hours
[Maritime Industry Authority Circular
No. 2018-27].
4. Right to Compensation
As an alternative to providing accommodation
or whenever the same is not practicable, the
operator may offer the passengers
corresponding compensation:
a. In an amount equivalent to the
prevailing market price of a decent and
clean accommodation in the immediate
or adjacent locality of the ship’s point of
departure;
b. Subject to the limitation of a maximum
of three (3) nights per passenger
[Maritime Industry Authority Circular
No. 2018-27].
TRANSPORTATION LAW
5. Right to Remain on Board
In case the departure of the vessel is delayed
the passengers have a right to remain on board
and to be furnished with food for the account of
the vessel, unless the delay is due to an
accidental cause or to force majeure [Art. 698,
Code of Commerce].
6. Right to Return
If the delay should exceed ten days, the
passengers who request it shall be entitled to
the return of the passage [Art. 698, Code of
Commerce].
7. Right to Damages
If the delay were due exclusively to the captain
or agent, the passengers may furthermore
demand indemnity for losses and damages
[Art. 698, Code of Commerce].
e. Liability for Defects in Equipment and
Facilities
While a carrier is not an insurer of the safety of
the passengers, it should nevertheless be held
to answer for the flaws of its equipment and
mechanical defects if such flaws were at all
discoverable.
The manufacturer of the defective appliance is
considered in law, as the agent of the carrier,
and the good repute of the manufacturer will
NOT relieve the carrier from liability.
Ratio: The passenger has no privity with the
manufacturer of the defective equipment.
Hence, he has no remedy against him, while
the carrier usually has [Necesito v. Paras, G.R.
No. L-10605 (1958)].
f. Extent of Liability for Damages
Damages recoverable from common carriers,
both in cases of carriage of passengers and
goods, shall be awarded in accordance with
Title XVIII concerning Damages.
Art. 2206, on liability, in case of death, for loss
of earning capacity, support, and moral
damages for mental anguish, shall also apply
to the death of a passenger caused by the
breach of contract by a common carrier [Art.
1764, Civil Code].
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Thus, the damages recoverable are:
1. Actual or compensatory damages;
2. Moral damages;
3. Exemplary damages;
4. Nominal, temperate, and liquidated
damages;
5. Attorney’s fees
1. Actual or Compensatory Damages
Actual or compensatory damages refer to
adequate compensation for such pecuniary
loss suffered as duly proved [Art. 2199, Civil
Code].
Under Art. 2201, the liability for damages
Include:
In case the common carrier acted in good faith:
a. The natural and probable consequence
of the breach of the obligation; and
b. Those which the parties have foreseen
or could have reasonably foreseen at
the time the obligation was constituted;
In case of fraud, bad faith, malice or wanton
attitude, all damages which may be reasonably
attributed to the nonperformance of the
obligation.
In case of death, actual damages also include:
a. Loss of earning capacity, unless the
deceased had no earning capacity at
the time of death; and
b. Support for a period not exceeding five
years [Art. 2206, Civil Code].
In the absence of a showing that common
carrier’s attention was called to the special
circumstances requiring prompt delivery of a
passenger’s luggage, the common carrier
cannot be held liable for the cancellation of
passenger’s contracts [for exhibition of films]
as it could not have foreseen such an
eventuality when it accepted the luggage for
transit [Pan-Am World Airways v. IAC, G.R. No.
70462 (1988)].
Note: Only substantiated and proven expenses
or those that appear to have been genuinely
incurred in connection with the death, wake, or
burial of the victim will be recognized [Victory
Liner, Inc v. Gammad, G.R. No. 159636
(2004)].
TRANSPORTATION LAW
2. Moral Damages
Moral damages, though incapable of pecuniary
computation, if they are the proximate result of
the common carrier’s wrongful act or omission,
may be recovered [Art. 2217, Civil Code].
In cases of breach of contract of carriage,
moral damages may be recovered where:
a. The common carrier acted fraudulently;
b. The common carrier acted in bad faith
[Art. 2220, Civil Code];
c. Death of a passenger resulted even in
the absence of bad faith or fraud [Art.
2206, Civil Code].
Bad faith contemplates a state of mind
affirmatively operating with furtive design or
with some motive of self-interest or will or for
ulterior purpose [Air France v. Carrascoso,
G.R. No. L-21438 (1966)].
Inattention and lack of care on the part of the
carrier, resulting in the failure of the passenger
to be accommodated in the class contracted
for, amounts to bad faith or fraud which entitles
the passenger to the award of moral damages
in accordance with Art. 2220 [Ortigas v.
Lufthansa, G.R. No. L-28773 (1975)].
Willful and deliberate overbooking on the part
of the airline carrier constitutes bad faith. Under
Section 3, Economic Regulations No. 7 of the
Civil Aeronautics Board, overbooking, which
does not exceed ten percent, is not considered
as deliberate and therefore does not amount to
bad faith [United Airlines v. CA, G.R. No.
124110 (2001)].
3. Exemplary Damages
In a contract of carriage, exemplary damages
may be awarded if the common carrier acted in
a wanton, fraudulent, reckless, oppressive, or
malevolent manner [Art. 2232, Civil Code].
Exemplary damages serve as an instrument to
serve the ends of law and public policy by
reshaping socially deleterious behaviors,
specifically, in the case, to compel the common
carrier to control their employees, to tame their
reckless instincts, and to force them to take
adequate care of human beings and their
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property [Mecenas v. CA, G.R. No. 88052
(1989)].
4. Nominal, Temperate, and Liquidated
Damages
Nominal damages are adjudicated in order
that a right of the plaintiff, which has been
violated by the defendant, may be vindicated,
or recognized, not for the purpose of
indemnifying the plaintiff for any loss suffered
by him [Art. 2221, NCC]. It may be awarded in
case of breach of contract of carriage and in
every case where any property right has been
invaded [Art. 2222, Civil Code].
A violation of the passenger’s right to be
treated with courtesy in accordance with the
degree of diligence required by law to be
exercised by every common carrier entitles the
passenger to nominal damages [Saludo v. CA,
G.R. No. 95536 (1922)].
Instances where nominal damages have been
awarded:
a. Misplacement of the passenger’s
baggage and failure to deliver at the
time appointed [Alitalia v. IAC, G.R. No.
71929 (1990)].
b. Violation of the passenger’s right to be
traded with courtesy [Saludo v. CA,
G.R. No. 95536 (1992)].
c. Failure to make the necessary
arrangements to transport the
passengers on the first commercial
flight available after cancellation
[Japan Airlines v. CA, G.R. No. 118664
(1998)].
d. Rerouting the flight without the
passenger’s consent and failure to
allege the necessity to justify the
change [Savellano v. Northwest
Airlines, G.R. No. 151783 (2003)].
Temperate or moderate damages, which are
more than nominal but less than compensatory
damages, may be recovered when some
pecuniary loss has been suffered but its
amount cannot, from the nature of the case, be
proved with certainty [Art. 2224, Civil Code].
In the case of Philtranco v. Paras [G.R. No.
161909 (2012)], the Supreme Court upheld the
TRANSPORTATION LAW
award of temperate damages by the CA. Paras
failed to show receipts of at least two surgeries
as well as rehabilitative therapy. Nonetheless,
the CA was convinced that Paras should not
suffer from the lack of definite proof of his
actual expenses for the surgeries and
rehabilitative therapy. Thus, the CA awarded to
him temperate damages of P50,000.00 in the
absence of definite proof of his actual
expenses towards that end.
Liquidated damages are those damages
agreed upon by the parties to a contract, to be
paid in case of breach thereof [Art. 2226, Civil
Code].
5. Attorney’s Fees
Under Art. 2208, as applicable to a contract of
carriage, attorney’s fees and expenses of
litigation may be recovered in the following
cases:
a. When exemplary damages are
awarded;
b. When the common carrier’s act or
omission has compelled the plaintiff to
litigate with third persons or to incur
expenses to protect his interest;
c. Where the common carrier acted in
gross and evident bad faith in refusing
to satisfy the plaintiff’s valid, just and
demandable claim;
d. In any other case where the court
deems it just and equitable that
attorney’s fees and expenses of
litigation should be recovered.
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C. Bill of Lading
Definition
A Bill of Lading is a written acknowledgement,
signed by the master of a vessel or other
authorized agent of the carrier, that he has
received the described goods from the shipper:
a. To be transported on the expressed
terms to the described place of
destination; and
b. To be delivered there to the designated
consignee or parties [70 Am. Jur. 2d
924].
Note: It is not, however, indispensable for the
creation of a contract of carriage [Compania
Maritima v. Insurance Co., G.R. No. L-18965
(1964)].
In the absence of a bill of lading, disputes shall
be determined by the legal proofs which the
parties may present in support of their
respective claims, according to the general
provisions established in the Code of
Commerce for commercial contracts [Art. 354,
Code of Commerce].
Effectivity
The bill of lading becomes effective usually
upon its delivery to and acceptance by the
shipper [Aquino].
In the absence of fraud, concealment, or
improper conduct, it is presumed that the
stipulations of the bill are known to the shipper,
and he is generally bound by his acceptance
whether he reads the bill or not [Magellan Mfg.
Marketing Corp. v. CA, G.R. No. 95529
(1991)].
1. Three-Fold Character
A Bill of Lading operates as a:
a. Receipt as to the quantity and
description of the goods shipped;
b. Contract to transport and deliver the
goods to the consignee or other person
therein designated, on the terms
specified in such instrument; and
c. Document of title, which makes it a
symbol of the goods.
TRANSPORTATION LAW
General Rule: The bill of lading constitutes
the legal evidence of the contract of
transportation, and all disputes between the
parties regarding the execution and
performance of the contract shall be decided
by the contents of the bill of lading issued by
the carrier.
COMMERCIAL LAW
As to route:
General Rule: The carrier must follow the
route stipulated (or else shall be liable for
losses + payment of damage).
Exception: Force Majeure [Art. 359, Code of
Commerce].

It is covered by the Parole Evidence Rule in As to degree of care:

which the terms of the contract are rendered General Rule: Merchandise shall be
conclusive upon the parties. transported at the risk and venture of the
shipper.
Evidence aliunde is not admissible to vary or
contradict a complete and enforceable Exception:
agreement embodied therein [Magellan Mfg. a. Express stipulation
Marketing Corp. v. CA, G.R. No. 95529 b. Losses and damages arose through
(1991)]. his negligence or failure to take
precautions [Art. 362, Code of
The value of the goods stated in the bill of Commerce].
lading is conclusive between the parties, and
the shipper is not allowed to prove a higher The goods shipped shall be delivered in the
value [Art. 372, Code of Commerce]. same condition in which they were found at the
time they were received without damage or
It is only when the carrier’s fault is so gross as impairment, according to the bill of lading [Art.
to amount to actual fraud that the actual 363, Code of Commerce].
amount of the losses and damages suffered
may be proved by the shipper against the a. Period of Delivery
carrier.
Period for the delivery of goods
Exception: The contents of the bill of lading
are not controlling when there is falsity and Period of delivery is Delivery must be
stipulated in the Bill made within period
material error in its drafting [Art. 353, Code of
of Lading fixed [Art. 370, Code
Commerce].
of Commerce].
2. Delivery of Goods Period of delivery is Delivery must be
The goods should be delivered to the NOT stipulated made through the
consignee or any other person to whom the bill first shipment of the
of lading was validly transferred or negotiated. same or similar
merchandise to the
The carrier is duty bound to deliver the goods point of delivery. If
in the same condition in which, according to the not made on such
bill of lading, they were at the time of their first shipment, delay
receipt, without damage or impairment [Art. arises [Art. 358,
363, Code of Commerce]. Code of Commerce].

As to commencement: The responsibility of

the carrier shall commence from the moment Liability in case of delay in delivering goods
he receives the merchandise, personally or Indemnity for delay Delivery must be
through a person charged for the purpose, at NOT fixed made within period
the place indicated for receiving them [Art 355, fixed [Art. 370, Code
Code of Commerce]. of Commerce].

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Indemnity for delay Liable for all
NOT fixed damages which may
have been caused by
the delay [Art. 370,
Code of Commerce].
b. Delivery without Surrender of Bill of
Lading
After the contract has been complied with:
1. The bill of lading which the carrier has
issued shall be returned to him; and
2. The respective obligations and actions
shall be considered cancelled by virtue
of the exchange of this title with the
thing transported.
Unless in the same act, the claim which the
parties may wish to reserve be reduced to
writing.
Exception being made of the provisions of Art.
366, on period for filing claims [Art. 353, par. 2,
Code of Commerce].
If the consignee CANNOT return the bill of
lading subscribed by the carrier, upon receiving
the merchandise, in case of loss or for any
other reason whatsoever: The consignee shall
give said carrier a receipt for the goods
delivered.
This receipt produces the same effects as the
return of the bill of lading [Art. 353, par. 3, Code
of Commerce].
If surrender of the original bill of lading is not
possible, acknowledgment of the delivery by
signing the delivery receipt suffices for a
common carrier to be discharged of its
contractual obligation [National Trucking and
Forwarding Corp v. Lorenzo Shipping Corp,
G.R. No. 153563 (2005)].
c. Refusal of Consignee to Take
Delivery
The consignee may refuse to take delivery in
the following cases:
1. If only part of the goods transported
should be delivered, when he proves
that he cannot make use thereof
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without the others [Art. 363, Code of
Commerce];
2. When the goods are rendered useless
for purposes of sale or consumption in
the use for which they are properly
destined, in which case the consignee
may demand payment of the goods at
current market prices [Art. 365, Code of
Commerce];
3. In case part of the goods is in good
condition and separation is possible,
the consignee may refuse to receive
only the damaged goods [Art. 365,
Code of Commerce];
4. Where the delay is through the fault of
the carrier [Art. 371, Code of
Commerce].
In case of dispute as to the condition of the
goods, the same shall be examined by experts
appointed by the parties, and in case of
disagreement, appointed by the judicial
authority.
If the persons interested should not agree with
the report, said judicial authority shall order the
deposits of the merchandise in a safe
warehouse, and the parties interested shall
make use of their rights in the proper manner
[Art. 367, Code of Commerce].
Horses, vehicles, vessels, and equipment used
by the carrier serve as liens for the payment of
the value of the goods, which the carrier must
pay in case of loss or misplacement [Art. 372,
Code of Commerce].
3. Period for Filing Claims
A claim, on account of damage found upon
opening the packages, must be made against
the carrier:
a. Within 24 hours, if the indications of the
damage cannot be ascertained from
the exterior of the packages (i.e., latent
damage); or
b. At the time of receipt, if the indications
damage can be so ascertained (i.e.,
patent damage) [Art. 366, Code of
Commerce].
No claim whatsoever shall be admitted against
the carrier with regard to the condition in which
TRANSPORTATION LAW COMMERCIAL LAW
the goods transported were delivered: apparent not apparent
a. After the periods mentioned have
elapsed; or Filing of the claim is Filing of the claim is
b. After the transportation charges have mandatory; condition not mandatory
been paid. precedent for filing of
action for damages
The periods mentioned commence upon
delivery of cargo to the consignee at the place Prescriptive period to Prescriptive period
of destination. file an action: to file an action:
10 years from breach 1 year from
Thus, Art. 366 is limited to cases of claims for if bill of lading/written discharge of goods,
damage to goods actually turned over by the receipt/contract is or date when they
carrier and received by the consignee. It does issued. 6 years from should have been
not apply to misdelivery of goods. breach if only through delivered. The 1-
oral contract year period may be
Failure to file a claim bars recovery [Aquino]. extended by
stipulation.
Ratio: The rule protects the carrier by affording
it an opportunity to make an investigation of a
claim while the matter is still fresh and easily The parties to a contract of carriage may fix, by
investigated to safeguard itself from false and agreement, a shorter time for the bringing of
fraudulent claims [UCPB General Ins. Co., Inc. suit on a claim for the loss of or damage to the
v. Aboitiz Shipping, G.R. No. 168433 (2009)]. shipment than that provided by the statute of
limitations.
However, provisions specifying a time to give a. In the absence of any statutory
notice of damage to common carriers are limitation; and
ordinarily to be given a reasonable and b. Subject to the requirement on the
practical, rather than a strict construction. reasonableness of the stipulated
Thus, considering the peculiar circumstances period.
in this case, the Court made a pro hac vice
ruling, in that even if the notice was given more Ratio: Such stipulation merely affects the
than 24 hrs after the receipt of the goods, the shipper’s remedy and does not affect the
notice requirement was held nevertheless to liability of the carrier [PHILAMGEN v. Sweet
have been complied with [Aboitiz v. Insurance Lines, Inc., G.R. No. 87434 (1992)].
Company of North America, G.R. No. 168402
(2008)]. 4. Period for Filing Actions

Code of Commerce COGSA

a. Overland Transportation and
Coastwise Shipping
Primarily governs Applicable law for
domestic transport, all contracts for The general rules under the Civil Code on
but nothing stops carriage of goods extinctive prescription apply. Thus, action for
parties from by sea to Philippine damages must be filed in court:
stipulating that ports in foreign 1. Within 6 years, if a bill of lading was not
COGSA applies in trade issued [Art. 1145, Civil Code];
their contract 2. Within 10 years, if a bill of lading was
issued [Art. 1146, Civil Code].
File claim for apparent loss: upon receipt
b. International Carriage of Goods by
File claim within 24 File claim within 3 Sea
hours from delivery if days from delivery if Suit must be brought within one year:
damage or loss is not damage or loss is 1. After delivery of the goods; or

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2. From the date when the goods should D. Maritime Commerce
have been delivered.
Vessel
Otherwise, the carrier and the ship shall be Vessels are those engaged in navigation,
discharged from all liability in respect of loss or whether coastwise or on the high seas
damage. destined for the services of the industry or
maritime commerce.
The absence of notice shall not affect or
prejudice the right of the shipper to bring suit The word ‘vessel’ used in the Code of
within one year after the delivery of the goods Commerce was not intended to include all
or the date when the goods should have been ships, craft, or floating structures of every kind
delivered [Section 3(6), COGSA]. without limitation [Lopez v. Duruelo, G.R. No.L-
29166 (1928)].
The COGSA, as adopted and embodied in CA
No. 65, applies because it is a special law, and, Vessels are considered personal or movable
as such, prevails over the general provisions of property [Art. 585, Code of Commerce]; but
the Civil Code on prescription of actions they partake to a certain extent, of the nature
[Maritime Agencies & Services, Inc. v. CA, and conditions of real property, on account of
G.R. No. 77638 (1990)]. their value and importance in the world of
commerce.
e. Effects of Stipulations
The acquisition of a vessel must appear in a
Three kinds of limiting stipulations often made written instrument, which shall not produce any
in bill of lading: effect with respect to third persons if not
Effect Valid/Invalid inscribed in the registry of vessels (i.e.
MARINA) [Art, 573, Code of Commerce in
No Exempts the INVALID relation to RA 9295, Sec 10(1)].
liability carrier from any
and all liability With respect to 2 purchases, whichever of
for loss or them first registered his acquisition of the
damage vessel is the one entitled to enjoy the protection
occasioned by of the law and is also the one who is considered
its own as the absolute owner. The purchased boat is
negligence considered free of all encumbrances and all
claims by strangers [Rubiso v. Rivera, G.R. No.
Limited Unqualified INVALID L-11407 (1917)].
liability limitation of such
liability to an 1. Charter Parties
agreed valuation
Charter party – a contract by virtue of which
Qualified Limits the VALID and the owner or agent of a vessel binds himself to
liability liability of the enforceable transport merchandise or persons for a fixed
carrier to an price.
agreed valuation Liabilities arising from breach of a charter party
unless the are identical to overland transport.
shipper declares
a higher value Towage is not a charter party. It is a contract
and pays a for the hire of services by which a vessel is
higher rate of engaged to tow another vessel from one port to
freight another for consideration.
[H.E. Heacock Company v. Macondray &
Company, Inc., G.R. No. L-16598, Oct. 3,
1921].
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Bill of Lading distinguished from d. Compliance with the formal requisites
Charter Party under Article 652 of the Code of
Commerce which include the
Bill of Lading Charter Party requirement that the charter party must
be in (a) writing, (b) drawn in duplicate,
A private receipt A complete and (c) signed by the parties [Aquino].
which the captain contract, whereby
gives to accredit that the whole or part of In modern maritime law and usage, there are
such goods belong to the ship is let by the three distinguishable types of charter parties:
such persons. owner to a merchant a. Bareboat or demise charter;
or other person for a b. Time charter; and
specified time or c. Voyage or trip charter [Litonjua
use for the Shipping, Inc. v. National Seamen
conveyance of Board, G.R. No. L-51910 (1989)].
goods, in
consideration of the Note: Both time and voyage charters are said
payment of freight to be contracts of affreightment, where a
[Caltex v. Sulpicio common or public carrier is not converted into
Lines, G.R. No. a private carrier.
131166 (1999)].
Contract of affreightment – one in which the
A real contract which A consensual
owner of the vessel leases part or all its space
exists only after contract which can
to haul goods for others.
delivery of the goods be dissolved by
to be transported is means of indemnity
It is a contract for special service, wherein the
made. for losses and
general owner retains the possession,
damages.
command, and navigation of the ship.

Persons who make a charter:
a. Owner or owners of the vessel, either
in whole or in part, who have legal
control and possession of the vessel;
b. Charterer may subcharter entire vessel
to 3rd person only if not prohibited in
original charter [Art 679, Code of
Commerce];
c. Ship agent if authorized by the owner/s
or given such power in the certificate of
appointment [Art 598, Code of
Commerce]; or
d. Captain in the absence of the ship
agent or consignee and only if he acts
in accordance with the instructions of
the agent or owner and protects the
latter’s interest [Art 609, Code of
Commerce].
The charterer or freighter merely has use of the
space in the vessel in return for his payment of
the charter hires.
The rights, responsibilities of ownership rest on
the owner, and the charterer is usually free
from liability to third persons in respect of the
ship [Puromines Inc. v. CA, G.R. No. 91228
(1993)].
a. Bareboat or Demise Charter
In a bareboat or demise charter, the ship owner
leases to the charterer the whole vessel.
The owner relinquishes, completely and
exclusively, the possession, command, and
navigation of the vessel.

Requisites for a valid charter party:
a. Consent of the contracting parties;
b. Existing vessel which should be placed
at the disposition of the shipper;
c. Freight; an
Anything short of such a complete transfer is a
contract of affreightment or not a charter party
at all.
The master and crew of the vessel thereby
become the charterer’s “servants” [Aquino].

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Thus, the charterer, by virtue of a demise
charter, is considered the owner pro hac vice.
He mans and equips the vessel and assumes
all responsibility for navigation, management,
and operation.
He thus acts as the owner of the vessel in all
important aspects during the duration of the
charter [Puromines Inc. v. CA, G.R. No. 91228
(1993)].
Bareboat distinguished from a contract
of affreightment
In a bareboat or demise charter, the common
carrier is converted to private carrier.
Although a charter party may transform a
common carrier into a private one, the same,
however, is not true in a contract of
affreightment on account of the distinctions
between a contract of affreightment and a
demise or bareboat charter [Puromines Inc. v.
CA, G.R. No. 91228 (1993)].
COMMERCIAL LAW
b. Time Charter
Time charter – a contract for the use of a
vessel for a specified period or for the duration
of one or more specified voyages.
The owner of a time-chartered vessel retains
possession and control through the master and
crew, who remain his employees.
The time charterer acquires the right to:
1. Utilize the carrying capacity and
facilities of the vessel; and
2. Designate her destinations during the
term of the charter [Litonjua Shipping
Co., Inc. v. National Seamen Board,
G.R. No. L- 51910 (1989)].
c. Voyage or Trip Charter
In a voyage charter, the vessel is leased for a
single or particular voyage.
The vessel is chartered for a carriage of goods
from one or more ports of loading to one or
more ports of unloading.

Demise or Bareboat Contract of The master and crew remain the employ of the
Affreightment owner of the vessel [Litonjua Shipping Co., Inc.
v. National Seamen Board, G.R. No. L-51910
Charterer becomes Owner remains (1989)].
liable to others for liable as carrier and
any breach caused must answer for any The owner who retains possession of the ship
by its negligence. breach of duty remains liable as carrier and must answer for
loss or non-delivery of the goods received for
Charterer regarded Charterer is not transportation [Cebu Salvage Corp. v.
as owner pro hac vice regarded as owner Philippine Home Assurance Corp., G.R. No.
for the voyage 150403 (2007)].

Owner of vessel The vessel owner 2. Liability of Ship Owners and

relinquishes retains possession, Shipping Agents
possession, command, and
command, and navigation of the The persons participating in maritime
navigation to ship commerce are the following:
charterer a. Ship owners or ship agents;
b. Captains and masters;
Common carrier is Common carrier is c. Other officers and crew;
converted to private not converted to d. Supercargoes.
carrier private carrier Ship Owner - has possession, control and
management of the vessel.
a. He has the consequent right to direct
her navigation and receive freight

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earned and paid, while his possession
continues;
b. He is the person who is PRIMARILY
liable for damages sustained in the
operation of the vessel, based on the
provisions of the Code of Commerce.
Ship Agent - the person entrusted with the
provisioning of a vessel, or who represents her
in the port in which she happens to be [Art. 586,
Code of Commerce].
a. The ship agent is SOLIDARILY liable
with the owner;
b. The joint and several liability applies
both for breach of contract and extra-
contractual obligation such as tort;
c. The shipowner or ship agent will not be
liable if the captain exceeds the powers
and privileges pertaining to him;
d. Nevertheless, the responsibility shall
devolve upon the shipowner or agent if
the amounts claimed were invested for
the benefit of the vessel [Art. 588, Code
of Commerce];
e. The ship agent, even though he is not
the owner, is liable in every way to the
creditor for losses and damages,
without prejudice to the right of the
owner, the vessel and its equipment
and freight [Aquino].
Captains - those who govern vessels that
navigate the high seas or ships of large
dimensions and importance, although they
may be engaged in coastwise trade.
Masters - those who command smaller ships
engaged exclusively in coastwise trade. In
maritime commerce, masters and captains are
the same.
Crew - a person on board who is involved in
highly technical tasks and in the manning of the
vessel (e.g. master, mate).
Complement - a person, not a crew, who is not
directly involved in the manning of the vessel
(e.g. cook).
Supercargo - a person on board the vessel,
who:
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a. Functions as an agent of the owner of
the goods shipped as cargo on a
vessel;
b. Has charge of the cargo on board;
c. Sells the cargo to the best advantage
in the foreign markets;
d. Buys cargo to be brought back on the
return voyage of the ship, and come
home with it.
The ship owner or ship agent is liable:
a. For the acts of the captain, unless the
latter exceeds his authority [Art. 586,
Code of Commerce];
b. For contracts entered into by the
captain to repair, equip and provision
the vessel, provided that the amount
claimed was invested for the benefit of
the vessel [Art. 586, Code of
Commerce];
c. For the indemnities in favor of third
persons which may arise from the
conduct of the captain in the care of the
goods transported, as well as for the
safety of passengers transported [Art.
587, Code of Commerce];
d. For damages to third persons for tort or
quasi-delict committed by the captain,
except collision with another vessel
[Art. 1759, Civil Code];
e. For damages in case of collision due to
the fault, negligence, or want of skill of
the captain, sailing mate, or any other
member of the complement [Art. 826,
Code of Commerce].
a. Liability for Acts of Captain
Three (3) distinct roles of a captain:
1. General agent of the ship owner;
2. Commander and technical director of
the vessel;
3. Representative of the country under
whose flag he navigates [Inter-Orient
Marine Enterprises v. NLRC, G.R. No.
115286 (1994)].
The captain shall be liable to the agent, and the
latter to third persons [Art. 618, Code of
Commerce]:
1. For all the damages suffered by the
vessel and his cargo by reason of want
of skill or negligence on his part;
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2. For all the thefts committed by the
crew, reserving his right of action
against the guilty parties;
3. For the losses, fines, and confiscations
imposed on account of violation of the
laws and regulations of customs,
police, health, and navigation;
4. For the losses and damages caused by
mutinies on board the vessel, or by
reason of faults committed by the crew
in the service and defense of the same,
if he does not prove that he made full
use of his authority to prevent or avoid
them;
5. For those arising by reason of an
undue use of powers and non-
fulfillment of the obligations which are
his;
6. For those arising by reason of his going
out of his course or taking a course
which he should not have taken without
sufficient cause, in the opinion of the
officers of the vessel at a meeting with
the shippers or supercargoes who may
be on board;
7. For those arising by reason of his
voluntarily entering a port other than
that of his destination;
8. For those arising by reason of
nonobservance of the provisions
contained in the regulations on
situation of lights and maneuvers for
the purpose of preventing collisions.
b. Exceptions to Limited Liability
The Doctrine of Limited Liability
(Hypothecary Rule)
The real and hypothecary nature of maritime
law simply means that the liability of the carrier
in connection with losses related to maritime
contracts is confined to the vessel, which is
hypothecated for such obligations, or which
stands as the guaranty for their settlement.
The liability of the vessel owner and agent
arising from the operation of such vessel is
confined to the vessel itself, its equipment,
freight, and insurance, if any.
Originated by reason of the conditions and
risks attending maritime trade in its earliest
years when such trade was replete with
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innumerable and unknown hazards since
vessels had to go through largely uncharted
waters to ply their trade.
Ratio: Such limitation of liability was designed
to
1. Offset adverse conditions;
2. Encourage people and entities to
venture into maritime commerce
despite the risks and the prohibitive
cost of shipbuilding; and
3. Induce capitalists into effectively
wagering their resources against the
consideration of the large profits
attainable in the trade [Aboitiz Shipping
Corp. v. General Accident Fire and Life
Assurance Corp., G.R. No. 100446
(1993)].
Thus, under the doctrine of abandonment:
1. The agent shall be civilly liable for the
indemnities in favor of third persons
which arise from the conduct of the
captain in the care of the goods which
the vessel carried, but he may exempt
himself therefrom by abandoning the
vessel with all her equipment and the
freight he may have earned during the
voyage [Art. 587, Code of Commerce];
2. The owners of a vessel shall be civilly
liable in the proportion of their
contribution to the common fund, for
the results of the acts of the captain,
referred to in Art. 587. Each part owner
may exempt himself from this liability
by the abandonment before a notary of
the part of the vessel belonging to him
[Art. 590, Code of Commerce];
3. In case of collision, the liability of the
ship owner shall be understood as
limited to the value of the vessel with all
her appurtenances and all the freight
earned during the voyage [Art. 837,
Code of Commerce];
4. If the vessel and her freight should be
totally lost, by reason of capture or
wreck, all rights of the crew to demand
any wages whatsoever shall be
extinguished, as well as the agent for
the recovery of the advances made
[Art. 643, Code of Commerce].
If the ship owner or agent may in any way be
TRANSPORTATION LAW
held civilly liable at all for injury to or death of
passengers arising from the negligence of the
captain in cases of collisions or shipwrecks, his
liability is merely co-extensive with his interest
in the vessel such that a total loss thereof
results in its extinction [Yangco v. Laserna,
G.R. No. L-47447 (1941)].
Exceptions to the Limited Liability Rule
1. Claims under the Workmen’s
Compensation Act [Abueg v. San
Diego, G.R. No. L-773 (1946)];
2. Expenses for repairing, provisioning
and equipping the vessel [Government
v. Insular Maritime, G.R. No. L-21495
(1924)];
3. There is an actual finding of negligence
on the part of the vessel owner or agent
[Aboitiz Shipping v. General Accident
Fire and Life Assurance Corp., G.R.
No. 100446 (1993)];
4. Vessel is insured, to the extent of the
insurance proceeds [Vasquez v. CA,
G.R. No. L-42926 (1985)];
5. There was no total loss, and the vessel
is not abandoned [Yangco v. Laserna,
G.R. No. L-47447 (1941)];
6. Collision between two negligent
vessels;
7. Vessel operating with unlicensed
officers (e.g. master);
8. Assumption of full risk and
responsibility for all the consequences
of the operation of the vessel [Manila
Steamship Co Inc v. Insa Abdulhaman,
G.R. No. L-9534. (1956)].
3. Accidents and Damages in
Maritime Commerce
a. General Average
Averages pertain to expenses and damages:
1. Expense – to constitute an average, an
expense must be:
a. Extraordinary or accidental;
b. Incurred during the voyage;
and
c. Incurred to preserve the
vessel, cargo, or both.
2. Damages or Deterioration – to
constitute an average, it must:
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a. Have been suffered by the
vessel from the time the vessel
put to sea from the port of
departure until it casts anchor
in the port of destination; and
b. Have been suffered by the
merchandise from the time
they are loaded in the port of
shipment until they are
unloaded in the port of
consignment [Art. 806, Code of
Commerce].
There are two kinds of averages:
1. Particular or simple average; and
2. Gross or general average.
Particular Average
Particular or simple averages shall include all
damages and expenses caused to the vessel
or cargo that did not inure to the common
benefit and profit of all persons interested in
the vessel and her cargo [Art. 809, Code of
Commerce].
The owner of the goods which gave rise to the
expense or suffered the damage shall bear this
average [Art. 810, Code of Commerce].
General Average
General or gross averages shall include all the
damages and expenses which are deliberately
caused in order to save the vessel, her cargo,
or both at the same time, from a real and known
risk [Art. 811, Code of Commerce].
The gross or general average shall be borne by
those who benefited from the sacrifice. These
include the ship owner and the owners of the
cargoes that were saved. Contribution may
also be imposed on the insurers of the vessel
or cargoes that were saved, as well as lenders
on bottomry or respondentia.
Requisites
1. There must be a common danger;
2. That for the common safety, part of the
vessel or of the cargo or both is
sacrificed deliberately;
3. That from the expenses or damages
caused follows the successful saving of
the vessel and cargo; and
TRANSPORTATION LAW
4. That the expenses or damages should
have been incurred or inflicted after
taking proper legal steps and authority
[Magsaysay, Inc. v. Agan, G.R. No. L-
6393 (1955)].
Common danger means both the ship and the
cargo, after it has been loaded, are subject to
the same danger.
1. Whether during the voyage, or in the
port of loading or unloading;
2. Whether the danger arises from the
accidents of the sea, dispositions of the
authority, or faults of men;
3. Provided that the circumstances
producing the peril may rationally be
said to be certain and imminent;
4. Excludes measures undertaken
against a distant peril [Magsaysay, Inc.
v. Agan, G.R. No. L-6393 (1955)].
Note: When a vessel is stranded
unintentionally, the damages incurred cannot
constitute general averages.
Cases of general average
1. The goods or cash invested in the
redemption of the vessel or cargo
captured by enemies, privateers, or
pirates, and the provisions, wages, and
expenses of the vessel detained during
the time the arrangement or
redemption is taking place;
2. The goods jettisoned to lighten the
vessel, whether they belong to the
vessel, to the cargo, or to the crew, and
the damage suffered through said act
by the goods kept;
3. The cables and masts which are cut or
rendered useless, the anchors and the
chains which are abandoned in order to
save the cargo, the vessel, or both;
4. The expenses of removing or
transferring a portion of the cargo in
order to lighten the vessel and place
her in condition to enter a port or
roadstead, and the damage resulting
therefrom to the goods removed or
transferred;
5. The damage suffered by the goods of
the cargo through the opening made in
the vessel in order to drain her and
prevent her sinking;
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6. The expenses caused through floating
a vessel intentionally stranded for the
purpose of saving her;
7. The damage caused to the vessel
which is necessary to break open,
scuttle, or smash in order to save the
cargo;
8. The expenses of curing and
maintaining the members of the crew
who may have been wounded or
crippled in defending or saving the
vessel;
9. The wages of any member of the crew
detained as hostage by enemies,
privateers, or pirates, and the
necessary expenses which he may
incur in his imprisonment, until he is
returned to the vessel or to his
domicile, should he prefer it;
10. The wages and victuals of the crew of
a vessel chartered by the month during
the time it should be embargoed or
detained by force majeure or by order
of the Government, or in order to repair
the damage caused for the common
good;
11. The loss suffered in the value of the
goods sold at arrivals under stress in
order to repair the vessel because of
gross average;
12. The expenses of the liquidation of the
average [Art. 811, Code of Commerce];
13. If in lightening a vessel on account of a
storm, in order to facilitate her entry into
a port or roadstead, part of her cargo
should be transferred to lighters or
barges and be lost, the owner of said
part shall be entitled to indemnity, as if
the loss has originated from a gross
average [Art. 817, Code of Commerce];
14. If, as a necessary measure to
extinguish a fire in a port; roadstead;
creek, or bay, it should be decided to
sink any vessel, this loss shall be
considered gross average, to which the
vessels saved shall contribute.
15. Jettison of goods (e.g. petroleum),
even if it is carried on deck [Standard
Oil v. Castelo, G.R. No. L-13695
(1921)].
Note: However, Art. 811, Code of Commerce
provides that the losses suffered by the
TRANSPORTATION LAW
merchandise loaded on deck are classified as
simple/particular average, except in coastwise
navigation, if the marine ordinances allow it.
Jettison – The act of throwing overboard part
of a vessel’s cargo or hull in hopes of saving a
ship from sinking.
The captain shall direct the jettison, and shall
order the goods cast overboard in the following
order:
1. Goods on deck - beginning with those
which embarrass the maneuver or
damage the vessel, preferring, if
possible, the heaviest ones with the
least utility and value;
2. Goods below the upper deck - always
beginning with those of the greatest
weight and smallest value to the
amount and number indispensable
[Art. 815, Code of Commerce].
To include the goods jettisoned in the general
or gross average, the existence of the cargo or
goods must be proved:
1. For cargo – by means of bill of lading;
2. For good belonging to the vessel – by
means of the inventory prepared prior
to departure [Art. 816, Code of
Commerce].
Jason clause
Jason clause is a provision in the contract of
carriage that requires the cargo owners to
contribute in the general average, though the
event which gave rise to the sacrifice or
expenditure may have been due to the fault of
one of the parties to the adventure [Rule D,
York Antwerp Rules].
Note: This shall not prejudice any remedies or
defenses which may be open against or to that
party in respect of such fault.
Procedure for recovery
1. Assembly and deliberation with the
sailing mate and other officers;
2. Resolution of the captain adopted;
3. Hearing of the persons interested. In
case an interested person should not
be heard, he shall not contribute to the
gross average [Art. 813, Code of
Commerce];
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4. Resolution to be entered in the
logbook, stating the motives and
reason therefore as well as the votes
and reason for disagreement [Art. 814,
Code of Commerce];
5. Minutes to be signed by all the persons
present or in urgent cases, the captain;
6. Captain shall deliver one copy of the
minutes to the maritime judicial
authority of the first port he may make
within 24 hours [Art. 814, Code of
Commerce];
7. Captain shall ratify the minutes under
oath [Art. 814, Code of Commerce].
b. Collisions and Allisions
Collision is an impact or sudden contact
between two moving vessels [Aquino].
Allision is the striking of a moving vessel
against one that is stationary.
In collision between vessels, there exists 3
divisions of time or zones:
1. Up to the moment when the risk of
collision may be said to have begun:
Each vessel is free to direct its course
2. Between the moment when the risk of
collision begins and the moment when
it has become a practical certainty:
Burden is on the vessel required to
keep away and avoid danger
3. Between the moment when collision
has become a practicable certainty and
the moment of actual contract
(including errors in extremis): Vessel
which forced the privileged vessel into
danger is responsible, even if the
privileged vessel committed an error
Collision between a Steam and a Sail
Vessel
General Rule: When meeting a sailing vessel,
whether close hauled or with the wind free, the
sail vessel has a right to keep her course, and
it is the duty of the steamer to adopt
precautions as will avoid the sail vessel.
In a collision between a steam vessel and a sail
vessel, the presumption is against the steam
vessel.
TRANSPORTATION LAW
The steam vessel must show that she took the
proper measures to avoid a collision.
Ratio: The steamer’s greater facility of
maneuvering over a sail vessel means it has
the greater ability to avoid collisions [G. Urrutia
& Co. v. Baco River Plantation Co, G.R. No. L-
7675. (1913)].
Collision between Two Power-Driven
Vessels
General Rule: When two power-driven vessels
are meeting head on, or nearly head on, so as
to involve risk of collision, each shall alter her
course to starboard (right side).
Ratio: So that each may pass on the port (left)
side of the other [Smith Bell and Co. v. CA,
G.R. No. L-56294 (1991)].
Liability in Collision Cases
Liability in collision cases is negligence-based.
Courts are called upon to determine the
negligence of the persons involved to impose
liability.
The person who caused the injury is both civilly
and criminally liable [Aquino].
Nevertheless, the rules that apply to quasi-
delict cannot be applied to collision cases.
The doctrine of last clear chance and the rules
on contributory negligence cannot be applied in
collision cases.
This is in accordance with Art. 827 of the Code
of Commerce.
Thus, if both vessels were negligently
operated, each must suffer its own damage
even if the other has the last clear chance of
avoiding the injury [C.B. Williams v. Yangco,
G.R. No. L-8325 (1914)].
Similarly, proof that the plaintiff was negligent
will bar recovery from the defendant in collision
cases even if the plaintiff’s negligence can be
classified as merely contributory [Gorgonio De
Sarasola v. Yu Biao Sontua, G.R. No. L-22630
(1925)].
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Classes of Collision
1. Fortuitous - none was at fault;
2. Culpable - one or more vessels were at
fault;
3. Inscrutable Fault - it cannot be
determined which of the vessels was at
fault.
Fortuitous
When collision is due to a fortuitous event or
force majeure, each vessel and its cargo shall
bear its own damages [Art. 830, Code of
Commerce].
When, by reason of force majeure, a vessel
properly anchored and moored collides with
another, the injury occasioned shall be looked
upon as average to the vessel run into [Art.
832, Code of Commerce].
Culpable
When only one vessel is at fault, the owner of
the vessel at fault shall indemnify the losses
and damages suffered, after an expert
appraisal.
When both vessels are at fault, each shall
suffer its own damages, and both shall be
solidarily responsible for the losses and
damages occasioned to their cargoes [Art. 826,
Code of Commerce].
Note: The ship owners cannot successfully
maintain an action against the other for the loss
or injury to his vessel.
When a third vessel is at fault, the owner of the
third vessel shall indemnify the losses and
damages caused, the captain thereof being
civilly liable to said owner [Art. 831, Code of
Commerce].
Inscrutable Fault
In case of inscrutable fault, that is, if it cannot
be decided which of the two vessels was the
cause of the collision, each shall bear his own
damage and both shall be jointly responsible
for the losses and damages suffered by their
cargoes [Art. 828, Code of Commerce].
TRANSPORTATION LAW COMMERCIAL LAW
4. Carriage of Goods by Sea Act should file the claim with the carrier within three
(COGSA) days from delivery.

a. Application Under Section 3(6), COGSA, a failure to file a

notice of claim within three (3) days will not bar
COGSA (Commonwealth Act No. 65) is a recovery if it is nonetheless filed within one
special law that governs all contracts of year.
carriage of goods by sea between or to and
from the Philippine ports. This one-year prescriptive period also applies
Its application is according to the following to the shipper, the consignee, the insurer of the
scheme: goods or any legal holder of the bill of lading.
Inasmuch as neither the Civil Code nor the
Common Carrier Private Carrier Code of Commerce states a specific
prescriptive period on the matter, the COGSA
Coming to the Philippines from foreign may be applied [Belgian Overseas Chartering
trade* and Shipping v. Philippine First Ins. Co, G.R.
No. 143133 (2002)].
New Civil Code COGSA, Code of
(Common Carriers), Commerce, New Note: In the Warsaw Convention, as well as the
COGSA, Code of Civil Code Code of Commerce, the notice requirement is
Commerce (Provisions NOT on a condition precedent for the right of action
common carriers, i.e. against the shipowner to accrue.
torts, contracts)
c. Period of Prescription
From Philippines to foreign country
The carrier and the ship shall be discharged
Apply laws of such foreign country [Art. from all liability in respect of loss or damage
1753, Civil Code]. unless suit is brought within one year after
delivery of the goods or the date when the
*Nothing stops parties from stipulating that
goods should have been delivered.
COGSA shall primarily apply; even domestic
carriers can stipulate such. With respect to
The absence of a notice shall not affect or
vessels destined for foreign ports, the COGSA
prejudice the right of the shipper to bring suit
does not apply unless parties make it
within one year after the delivery of the goods
applicable.
or the date when the goods should have been
delivered [Section 3 (6), COGSA].
Under Art. 1766, in all matters not regulated by
the Civil Code, the rights and obligations of
COGSA, as a special law, prevails over the
common carriers shall be governed by the
general provisions of the Civil Code on
Code of Commerce and special laws. Thus,
prescription of actions [Maritime Agencies &
although a special law, COGSA only applies
Services, Inc. v. CA, G.R. No. 77638 (1990)].
when the Civil Code has no provision dealing
with the matter.
d. Limitation of Liability
b. Notice of Loss or Damage
Under Section 4(5), COGSA, the limit is set at
a maximum of $500 per package or customary
Notice of claim and the general nature of the
freight unit.
loss or damage must be given in writing to the
carrier or his agent at the port of discharge
This is deemed incorporated in the bill of lading
before or at the time of the removal of the
even if not mentioned therein [Eastern
goods [Section 3(6), COGSA].
Shipping Lines v. IAC, G.R. No. L-69044
(1987)].
If damage is not patent or cannot be
ascertained from the package, the shipper
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The declaration made by the shipper stating an
amount bigger than $500 per package will
make the carrier liable for such bigger amount,
but only if the amount so declared is the real
value of goods [Aquino].
The Civil Code does not limit the liability of the
common carrier to a fixed amount per package.
Thus, the COGSA, supplements the Civil Code
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
[Belgian Overseas Chartering and Shipping v.
Philippine First Ins. Co, G.R. No. 143133
(2002)].
E. Public Service Act
1. Definition of Public Utility
A public utility is a business or service
engaged in regularly supplying the public with
some commodity or service of public
consequence such as electricity, gas, water,
transportation, telephone, or telegraph service
[National Power Corporation v. Court of
Appeals, G.R. No. 112702 (1997)].
A mere owner and lessor of the facilities used
by a public utility is not a public utility. The right
to operate a public utility may exist
independently and separately from the
ownership of the facilities thereof [Tatad v.
Garcia, G.R. No. 114222 (1995)].
Elements of a Public Utility
a. There must be public interest or
consequence;
b. Private property devoted to public use;
c. Offers to the public indiscriminately;
d. For hire/ compensation.
2. Necessity for Certificate of Public
Convenience
No public service as herein defined shall
operate in the Philippines without having first
secured from the Commission a certificate,
which shall be known as Certificate of Public
Convenience (CPC) or as Certificate of Public
Convenience and Necessity (CPCN) [Section
15, Public Service Act].
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a. Requisites
The following are the requisites before a
Certificate of Public Convenience (CPC) may
be granted:
1. The applicant must be a citizen of the
Philippines, or a corporation or co-
partnership, association or joint stock
company constituted and organized
under the laws of the Philippines, 60
per centum at least of the stock or paid-
up capital of which belong entirely to
citizens of the Philippines;
2. 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;
3. The applicant must be financially
capable of undertaking the proposed
service and meeting the
responsibilities incident to its
operations [Vda. De Lat v. Public
Service Commission, G.R. No. L-
34978 (1988)].
1. Citizenship
No franchise, certificate, or any other form of
authorization for the operation of a public utility
shall be granted except to:
a. Citizens of the Philippines; or
b. Corporations or associations organized
under the laws of the Philippines at
least sixty per centum of whose capital
is owned by such citizens [Section 11,
Article XII, 1987 Constitution].
For purposes of determining compliance [with
Sec. 11, Art. XII of the 1987 Constitution], the
required percentage of Filipino ownership shall
be applied to both:
a. The total number of outstanding shares
of stock entitled to vote in the election
of directors AND
b. The number of outstanding shares of
stock, whether entitled to vote in the
election of directors [SEC
Memorandum Circular No.8, Series Of
2013].
TRANSPORTATION LAW
2. Promotion of Public Interests
Property becomes clothed with a public interest
when used in a manner to make it of public
consequence and affect the community at
large.
When one devotes his property to a use in
which the public has an interest, he, in effect,
grants to the public an interest in that use, and
must submit to be controlled by the public for
the common good, to the extent of the interest
he has thus created [North Negros Sugar Co.
v. Hidalgo, G.R. No. L-42334 (1936)].
3. Financial Capability
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 [Dizon v. Octavio, 51 O.G.
4059 (1955)].
b. Prior Operator Rule
The first licensee should have more or less of
a vested and preferential right over a person
who seeks to acquire another and a later
license over the same route, so long as the first
licensee:
1. Keeps and performs the terms and
conditions of its license; and
2. Complies with the reasonable rules
and regulations of the Commission and
meets the reasonable demands of the
public.
Ratio: Without such preferential right, the first
licensee would not have protection on his
investment and would be subject to ruinous
competition and thus defeat the very purpose
and intent for which the Public Service
Commission was created [Batangas
Transportation Co., G.R. No. L-28865 (1928)].
Exceptions:
1. Where public interest and convenience
would be better served by the new
operator;
2. Where the old operator failed to make
an offer to meet the increase in traffic;
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3. Where the CPC granted to the new
operator is a maiden franchise;
4. When the application of the rule would
be conducive to monopoly [Mandbusco
Inc. v. Francisco, G.R. No. L-23688
(1970)].
Ruinous Competition
There is ruinous competition if:
1. The operator would be deprived of their
profits on the capital invested in its
business;
2. The business would not have sufficient
gains to pay a fair rate of interest on its
capital investments.
In order that the opposition based on ruinous
competition may prosper, it must be shown that
the opponent would be deprived of their profits
on the capital invested in its business.
1. The mere possibility of reduction in the
earnings of a business is not sufficient
to prove ruinous competition.
2. It must be shown that the business
would not have sufficient gains to pay
a fair rate of interest on its capital
investments [Vda. De Lat v. Public
Service Commission, G.R. No. L-
34978 (1988)].
3. Fixing of Rate
Rationale for control by the government
The investor agrees, by embarking capital in a
utility, that its charges to the public shall be
reasonable. His company is the substitute for
the State in the performance of the public
service, thus becoming a public servant. The
compensation which the Constitution
guarantees an opportunity to earn is the
reasonable cost of conducting the business
[Republic of the Philippines v. Manila Electric
Company, G.R. No. 141314 (2002)].
Standard for 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.
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
TRANSPORTATION LAW
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 [Republic of the
Philippines v. Manila Electric Company, G.R.
No. 141314 (2002)].
a. Rate of Return
In determining the just and reasonable rates
to be charged by a public utility, three major
factors are considered by the regulating
agency:
1. rate of return;
2. rate base; and
3. 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.
1. The rate of return of a public utility is
not prescribed by statute but by
administrative and judicial
pronouncements.
2. The Supreme Court has consistently
adopted a 12% rate of return for public
utilities [Republic of the Philippines v.
Manila Electric Company, G.R. No.
141314 (2002)].
b. Exclusion of Income Tax as Expense
Income derived from any public utility or from
the exercise of any essential government
function accruing to the Philippine government
or to any political subdivision is excluded from
gross income [Sec. 32(B)(7)(b), NIRC].
4. Unlawful Arrangements
a. Boundary System
Under the boundary system, the driver:
1. Rents the vehicle, typically a jeepney,
from the owner or operator by paying a
fee called the “boundary” fee;
2. Pays for fuel and maintenance of the
vehicle.
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Whatever the driver earns from passenger
fares more than the boundary fee is his income
[Paguio Transport Corp. v. National Labor
Relations Commission, G.R. No. 11950
(1998)].
b. Kabit System
The kabit system is an arrangement “whereby
a person, who has been granted a CPC allows
another person, who owns motor vehicles. to
operate under such franchise for a fee” [Teja
Marketing v. Intermediate Appellate Court,
G.R. No. L-65510 (1987)].
Rationale against the Kabit System
1. it is an abuse of the certificate of public
convenience, a special privilege
conferred by the government;
2. it is one of the root causes of the
prevalence of graft and corruption in
the government transportation offices;
3. it is contrary to public policy, and is
therefore void and inexistent [Teja
Marketing v. Intermediate Appellate
Court, G.R. No. L-65510 (1987)].
Effect of the Kabit System
1. Although not outrightly penalized as a
criminal offense, the kabit system is
invariably recognized as being contrary
to public policy and, therefore, void and
in existent [Art. 1409, Civil Code].
a. It is a fundamental principle
that the court will not aid either
party to enforce an illegal
contract, but will leave both
where it finds them [Art. 1412,
Civil Code];
b. Courts will not grant affirmative
relief to parties in cases where
they set up a Kabit system.
They are in pari delicto and the
Court will simply leave them
where it found them [Lita
Enterprises, Inc. v. IAC, G.R.
No. 64693 (1984)].
2. The operator of record is considered
the operator of the vehicle in
contemplation of law as regards the
public and third persons, even if the
vehicle involved in the accident had
TRANSPORTATION LAW
been sold to another [Santos v. Sibug,
G.R. No. L-26815 (1981)].
a. Where such sale had not been
approved by the then Public
Service Commission (PSC).
5. Approval of Sale, Encumbrance or
Lease of Property
Before the sale, encumbrance, or lease of
public utility property or assets, the Public
Service Act requires the approval of the PSC.
1. There should be a public hearing, with
notice to all interested parties before
the approval is granted;
2. The PSC must first determine if there
are good and reasonable grounds
justifying the transfer or lease of the
property covered by the franchise, or if
the sale or lease is detrimental to public
interest.
Ratio: A franchise is personal in nature. Any
transfer or lease thereof should be notified to
the PSC so that the latter may take proper
safeguards to protect the interest of the public.
If the property covered by the franchise is
transferred or leased to another without
obtaining the requisite approval:
1. The transfer is not binding against the
Public Service Commission; and
2. The grantee continues to be
responsible under the franchise in
relation to the Commission and to the
public [Montoya v. Ignacio, G.R. No. L-
5868 (1953)].
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F. The Warsaw Convention
1. Applicability
The Warsaw Convention applies to:
a. All international carriage of persons,
baggage, or cargo performed by
aircraft for reward;
b. Gratuitous carriage by aircraft
performed by an air transport
undertaking [Art. 1(1), Warsaw
Convention].
International air carriage or international air
transport means transportation by air between
points of contact of two high contracting
parties, or those countries that have acceded
to the Warsaw Convention, wherein the place
of departure and the place of destination are
situated:
a. Within the territories of two high
contracting parties, regardless of
whether or not there be a break in the
transportation or a transshipment; or
b. Within the territory of a single high
contracting party, if there is an agreed
stopping place within a territory subject
to the sovereignty, mandate or
authority of another power, even
though the power is not a party to the
Convention [Art. 1(2), WC].
A carriage to be performed by several
successive air carriers is deemed, for the
purposes of the Convention, to be one
undivided carriage, if it has been regarded by
the parties as a single operation, whether it had
been agreed upon under the form of a single
contract or of a series of contracts [Art. 1(3),
WC].
The carrier is liable for damages for:
a. Death or injury of a passenger if the
accident causing it took place:
1. On board the aircraft;
2. In the course of the operations
of embarking or disembarking;
or
3. When there was delay [Arts. 17
and 19, WC].
b. Destruction, loss, or damage to any
registered baggage, if damage
occurred:
TRANSPORTATION LAW
1. During the transportation by air
[Art. 18 (1), WC as amended by
Additional Protocol No. 4
(1975)]; or
2. When there was delay [Arts. 18
and 19, WC].
c. Destruction, loss or damage to cargo if
the damage occurred only during the
carriage by air [Art. 18(2), WC as
amended by Additional Protocol No. 4
(1975)].
Exceptions:
1. Inherent defect, quality or vice
of that cargo;
2. Defective packing of that cargo
performed by a person other
than the carrier or his servants
or agents;
3. An act of war or an armed
conflict;
4. An act of public authority
carried out in connection with
the entry, exit or transit of the
cargo [Art. 18(3), WC as
amended by Additional
Protocol No. 4 (1975)].
d. Delay in the transport by air of
passengers, baggage, or goods [Art.
19, WC].
The carriage by air contemplated comprises
the period in which the baggage or goods
oversee the carrier, whether in an airport or on
board an aircraft, or, in the case of a landing
outside an airport, in any place whatsoever.
It does not cover any transportation by land, by
sea, or by river performed outside an airport.
If transportation takes place in the performance
of a contract by air, for the purpose of loading,
delivery, or transshipment, any damage is
presumed, subject to proof to the contrary, to
have been the result of an event which took
place during the transportation by air [Art. 18,
WC].
The Warsaw Convention does not provide for
an exclusive enumeration of instances when
the carrier is liable.
a. It does not provide an absolute limit of
liability and it does not preclude the
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application of the Civil Code and other
pertinent local laws in the
determination of the extent of liability of
the common carrier [Philippine Airlines
v. CA, G.R. No. G.R. No. 119706
(1996)].
b. Hence, a complaint for quasi-delict can
still be filed even if the filing is beyond
the prescriptive period provided for
under the Convention so long as it is
within the prescriptive period of four
years under the Civil Code
[Villanueva].
Notice of Claim
Notice of claim with the international carrier is
a mandatory or condition precedent under the
Warsaw Convention.
a. Baggage: within 7 days from receipt.
b. Cargo: within 14 days from receipt
Note: In case of delay, within 21 days from the
date on which the baggage or cargo have been
placed at his disposal [Art. 26 (2), WC as
amended by the Hague Protocol (1955)].
In case of an action for damage to passenger
baggage, the case must be filed in court within
two years.
2. Limitation of Liability
General Rule: Any provision tending to relieve
the carrier of liability or to fix a lower limit than
that which is laid down shall be null and void,
but the nullity of any such provision does not
involve the nullity of the whole contract [Art.
23(1), WC as amended by the Hague Protocol
(1955)].
Exception: When the loss or damage resulted
from the inherent defect, quality or vice of the
cargo carried [Art. 23(2), WC as amended by
the Hague Protocol (1955)].
a. Liability to Passengers
General Rule: In the carriage of passengers,
the liability of the carrier for each passenger is
limited to “100,000 Special Drawing Rights
for the aggregate of the claims” in respect of
damage suffered because of death or personal
injury to each passenger [Art. 22(1), WC as
TRANSPORTATION LAW
amended by Additional Protocol No. 3 (1975)].
Exception: By special contract, the carrier and
the passenger may agree to a higher limit [Art.
22(1), WC].
● This exception has been repealed by
the amendment introduced by
Additional Protocol No. 3(1975).
Note: Special drawing rights are
supplementary foreign exchange reserve
assets defined and maintained by the
International Monetary Fund.
In case of delay in the carriage of persons, the
liability is limited to 4,150 Special Drawing
Rights [Art. 22(1)(b), WC as amended by
Additional Protocol No. 4 (1975)].
When limitation unavailable to the carrier:
1. Passenger embarks without a limit of liability only in those cases where:
passenger ticket, with the consent of
the carrier
2. If the ticket does not include a notice a
notice to the effect that, if the
passenger's journey involves an
ultimate destination or stop in a country
other than the country of departure, the
Warsaw Convention may be applicable
and that the Convention governs and in
most cases limits the liability of carriers
for death or personal injury and in
respect of loss of or damage to
baggage [Art. 3(2), WC as amended by
the Hague Protocol (1955)].
b. Liability for Checked Baggage
General Rule: In the carriage of cargo, the
liability of the carrier is limited to a sum of 17
Special Drawing Rights per kilogram [Art.
22(2)(a)].
Exception: The limit does not apply when the
consignor has made, at the time when the
package was handed over to the carrier, a
special declaration of the value at delivery and
has paid a supplementary sum if the case so
requires.
In that case, the carrier will be liable to pay a
sum not exceeding the declared sum, unless
he proves that that sum is greater than the [Art
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consignor’s actual interest in delivery at
destination [Art 22(2)(a), WC].
c. Liability for Hand-Carried Baggage
As regards hand-carried baggage, the liability
of the carrier is limited to “332 Special
Drawing Rights per passenger” [Art. 22(3)
WC, as amended by Additional Protocol No. 2
(1975)].
The Guatemala Protocol of 1971 increased the
limit for passengers to $100,000 and for
baggage to $1,000. However, the Supreme
Court noted in Santos III v. Northwest Orient
Airlines [G.R. No. 101538(1992)], that the
Guatemala Protocol is still ineffective
[Sundiang and Aquino].
The Warsaw Convention should be deemed a
1. The cause of death or injury to person,
or destruction, loss or damage to
property or delay in its transport is not
attributable to or attended by:
a. Any willful misconduct, bad
faith, recklessness; or
b. Otherwise, improper conduct
on the part of any official or
employee for which the carrier
is responsible; and
2. There is otherwise no special or
extraordinary form of resulting injury
[Alitalia v. IAC, G.R. No. 71929 (1990)].
Note: The Montreal Convention 1999
changed the limits of liability in relation to delay,
baggage and cargo as follows:
1. In the case of damage caused by delay
as specified in Article 19 in the carriage
of persons, the liability of the carrier for
each passenger is limited to 4,150
Special Drawing Rights;
2. In the carriage of baggage, the liability
of the carrier in the case of destruction,
loss, damage or delay is limited to
1,000 Special Drawing Rights for each
passenger x x x;
3. In the carriage of cargo, the liability of
the carrier in the case of destruction,
loss, damage or delay is limited to a
sum of 17 Special Drawing Rights per
TRANSPORTATION LAW COMMERCIAL LAW
kilogramme x x x [Art. 22, Montreal
Convention].

3. Willful Misconduct

A common carrier may not avail of the limitation

in the following cases:
a. Willful misconduct;
b. Default amounting to willful misconduct
[Art. 25, WC];
c. Accepting passengers without ticket
[Art. 3(2), WC];
d. Accepting goods without airway bill or
baggage without baggage check.

Receipt by the person entitled to the delivery of

baggage or cargo without complaint is prima
facie evidence that the same has been
delivered in good condition and in accordance
with the document of carriage [Art. 26, WC].

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COMMERCIAL LAW

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III. CORPORATION LAW
A. General Principles
1. Definition of 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 incident to its
existence [Sec. 2, unless otherwise
indicated, all sections cited herein are from
RA 11232, or the Revised Corporation
Code].
2. Attributes of a Corporation
a. An Artificial Being
A corporation is a juridical entity that exists
apart from its stockholders. It has its own set of
rights and obligations as provided for by law.
Technically, it has no physical existence
although it occupies a principal place of
business.
Being only a juridical entity, the physical acts of
the corporation, like the signing of documents,
can be performed only by natural persons duly
authorized for such purpose by corporate by-
laws or by a special act of the Board of
Directors (BOD) [Swedish Match Philippines,
Inc. v. Treasurer of the City of Manila, G.R. No.
181277 (2013)].
A corporation, upon coming into existence, is
invested by law with a personality separate and
distinct from those persons composing it as
well as from any other legal entity to which it
may be related [Yutivo Sons Hardware v. CTA,
G.R. No. L-13203 (1961)].
b. Created by Operation of Law
Mere consent of the parties to form a
corporation is not sufficient. The State must
give its consent either through a special law (in
case of government corporations) or a general
law (i.e., Revised Corporation Code in case of
private corporations).
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A corporation comes into existence upon the
issuance of the certificate of incorporation.
Then, and only then, will it acquire juridical
personality to sue and be sued, enter
contracts, hold or convey property or perform
any legal act in its own name.
c. Has the Right of Succession
Since one of the attributes of a corporation is
that it is an artificial being with a distinct
personality, the corporation’s existence is
unaffected by a change in the composition of
stockholders. Its existence is limited only by the
Articles of Incorporation (AOI), may be subject
to Quo Warranto proceedings (Rule 66 of the
Rules of Court), and may be shortened by
dissolution (Title XIV).
d. Has the Powers, Attributes, and
Properties Expressly Authorized by
Law or Incident to Its Existence
A corporation has no power except those
expressly conferred on it by the Revised
Corporation Code and by its articles of
incorporation, those which may be incidental to
such conferred powers, those that are implied
from its existence, and those reasonably
necessary to accomplish its purposes. In turn,
a corporation exercises said powers through its
BOD and/or its duly authorized officers and
agents [Monfort Hermanos Agricultural Dev.
Corp. v. Monfort III, G.R. No. 152542 (2004)].
Being a creature of the law, its powers are
limited by:
1. The law (see Sec. 35 for general
powers and Secs. 36 to 43 for specific
powers);
2. By the express terms of its AOI as well
those essential or necessary to carry
out its purpose or purposes under such
Articles (see Sec. 35, last par.); and
3. By those necessary or incidental to its
powers so conferred (see Sec. 44)
3. Classes of Corporations
a. Stock Corporation
Stock corporations – corporations which
have capital stock divided into shares AND are
CORPORATION LAW COMMERCIAL LAW
authorized to distribute to the holders of such
such shares, shall, when
shares, dividends, or allotments of the surplus dividends or necessary or
profits based on shares held [Sec. 3]. It is allotments of proper, be
organized for profit. surplus profits used for the
on the basis furtherance of
The governing body of a stock corporation is of the shares its purpose or
usually the BOD (except in certain instances, held [Sec. 3] purposes
e.g. one person corporations, close [Sec. 86]
corporations).
Composition Composed of Composed of
Note: A corporation is considered a stock stockholders members
corporation if they have the power to declare
dividends. So long as the corporation has Profit It is for profit It is not for
capital stock and unrestricted retained profit [Sec.
87]
earnings and there is no prohibition in its
Articles of Incorporation or in its by-laws for it
to declare dividends, such corporation is a Other distinctions
stock corporation [Sec. 42].
Stock Non-stock
b. Non-stock Corporation Cumulative Cumulative Cumulative
Voting voting in voting in
All other corporations are non-stock election of election of
corporations [Sec. 3]. directors is trustees is
provided by only available
Non-stock corporations – One where no part law [Sec. 23] if provided in
of the income is distributable as dividends to its AOI or BL
members, trustees, or officers, subject to the [Sec. 23]
provisions of the Code on dissolution [Sec. 86].
It is not organized for profit. Number of Maximum of May be more
Board 15 directors than 15
Its governing body is usually the Board of Members except in [Secs. 13(f) &
merger or 91]
Trustees (BoT). However, non-stock
consolidation
corporations may, through their articles of
of banks
incorporation or their by-laws, designate their
[Sec. 13(f)]
governing boards by any name other than as
board of trustees [Sec. 174]. Term Term of Maximum
director is 1 term of a
Stock Non-Stock year [Sec. 22] trustee is 3
years [Sec.
Have capital No part of its 91]
stock divided income is
into shares distributable Place of Stockholders’ May be
[Sec. 3] as dividends Meetings meetings anywhere
to its must be in the within
members, principal Philippine
trustees, or office as set territory as
officers [Sec. forth in the provided by
86] AOI or, if not BL [Sec. 92]
practicable, in
Distribution Are Any profit the city or
of Profits authorized to may obtain as municipality
distribute to an incident to where the
the holders of its operations principal
office is
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located [Sec. stock

50] certificate,
and must not
Election of BOD elects BOT elects be more
Officers officers [Sec. officers, but onerous than
24] they may also the right of
be directly first refusal
elected by [Sec. 97].
members
[Sec. 91] Note:
Transfer
Voting One class of Right to vote restrictions
Rights shares must of members imposed in a
always have of any class Shareholders
complete may be Agreement
voting rights denied in the may be
[Sec. 6]. AOI or BL binding upon
There are [Sec. 88] the
specific stockholders
instances who are
where even parties
non-voting thereto, since
shares have they are
the right to chargeable
vote. with notice,
unless
Transfer of There is free Transfer of palpably
Membership transfer of membership unreasonable
shares. cannot be under the
Membership made without circumstance
is not consent of the s (SEC
personal to corporation Opinion,
the [Sec. 89] [June 8,
stockholder. Membership 1995])
Note: Subject is personal.
to provisions
on close Distribution Residual Generally,
corporations of Assets assets are to members are
be distributed not allowed to
Proxy Vote May always Vote by proxy to the participate in
vote by proxy can be denied stockholders distribution of
[Sec. 57] in the AOI or upon assets.
BL [Sec. 88] dissolution, Assets are to
after payment be distributed
Termination Upon transfer Membership of creditors. to such
of share, may be Dissolution is persons,
seller is no terminated effected societies,
longer part of according to through the organizations
corporation. causes methods , or
Transfer may provided in provided in corporations
only be the AOI or BL the Code as may be
subject to [Sec. 90]. [Sec. 139]. specified in a
restrictions plan of
noted down in distribution
AOI, BL, and [Sec. 93].

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c. One Person Corporations
One Person Corporations - A corporation
with a single stockholder. Only a natural
person, trust, or an estate may form a One
Person Corporation.
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 One Person Corporations.
A natural person who is licensed to exercise a
profession may not organize as a One Person
Corporation for the purpose of exercising such
profession except as otherwise provided under
special laws [Sec. 116].
d. Other Corporations
1. Public Corporation
Public corporation – One formed or
organized for the government of a portion of the
state. Its purpose is for the general good and
welfare [Sec. 3, Act 1456].
Beyond cavil, a GOCC has a personality of its
own, distinct and separate from that of the
government, and the intervention in a
transaction of the Office of the President
through the Executive Secretary does not
change the independent existence of a
government entity as it deals with another
government entity [Polytechnic University of
the Phils. v. CA, G.R. No. 143513 (2001)].
Government-Owned and Controlled
Corporation (GOCC)
A GOCC is an entity is considered a
government-owned or controlled corporation if
all three (3) attributes are present:
a. the entity is organized as a stock or
non-stock corporation;
b. its functions are public in character;
and
c. it is owned or, at the very least,
controlled by the government.
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Chartered GOCCs vs. Non-chartered
GOCCs
GOCCs may be created under special laws
(chartered GOCCs) or created under the RCC
and registered with the SEC (non-chartered
GOCC).
GOCCs, whether with or without an original
charter, is under the audit jurisdiction of the
Commission on Audit [Oriondo v. COA, G.R.
No. 211293 (2019)].
A non-stock corporation may be government-
owned or controlled. There is nothing in the law
which provides that GOCCs are always
created under an original charter or special
law. As held in Feliciano, there are GOCCs
without an original charter, that is, those
created under the Corporation Code [Oriondo
v. COA, G.R. No. 211293 (2019)].
Corporations which are not GOCCs cannot
ipso facto be considered private corporations
as there exists another distinct class of
corporations or chartered institutions which are
otherwise known as “public corporations.”
These corporations are treated by law as
agencies or instrumentalities of the
government which are not subject to the
tests of ownership or control and economic
viability but to different criteria relating to
their public purposes/interests or
constitutional policies and objectives and
their administrative relationship to the
government or any of its departments or
Offices [Boy Scouts of the Philippines v. COA,
G.R. No. 177131 (2011)].
2. Private Corporation
Private corporation – One formed for some
private purpose, benefit, aim or end [Sec. 3, Act
1456]; it may be either stock or non-stock,
government-owned or controlled or quasi-
public.
3. Close Corporation
Close corporation ­– One whose articles of
incorporation provide that:
CORPORATION LAW COMMERCIAL LAW
a. All issued stock, exclusive of treasury
close corp.
shares, shall be held by persons not
cannot own
exceeding 20;
more than
b. All issued stock shall be subject to one
75% of the
or more specified restrictions on
outstanding
transfer; and
capital stock
c. The corporation shall not list in any
stock exchange or make any public Number of No limit to Not more
offering of any of its stock of any class. Corporators number of than 20,
corporators according to
Notwithstanding the foregoing, a corporation allowed by AOI
shall not be deemed a close corporation when authorized
at least 2/3 of its voting stock or voting rights is shares
owned or controlled by another corporation
which is not a close corporation [Sec. 95]. Stock May list in May not list
Exchange Philippine on PSE
Any corporation may be incorporated as a Listing Stock
close incorporation, except: Exchange
a. Mining or oil companies; (PSE)
b. Stock exchanges;
c. Banks; Businesses In general, all Mining, Oil,
d. Insurance companies; businesses Stock
e. Public utilities; may be Exchange,
f. Educational institutions; and carried out Banks
g. Corporations declared to be vested by Insurance,
with public interest [Sec. 95]. corporation Public Utility,
Educational,
Ordinary Close Public
Stock Corporation Interest
Corporation cannot be
organized as
AOI Has an AOI AOI must close
with a provide: corporation
general a. Not to be
template held by more Exercise of Powers Stockholders
[Sec. 14] than a Powers exercised by may manage
certain board, affairs
number of elected by directly,
Stockholders stockholders subject to the
, not to same rights
exceed 20 and liabilities
of directors
b. Transfer
Pre-emptive Pre-emptive No limit to
restrictions
Right right subject pre-emptive
allowed
to Sec. 38 rights. Thus,
limitations includes sale
c. Shall not
of treasury
be listed, and
shares and
shall not
for
publicly offer
acquisition of
Further, a
properties
corporation
which is not a
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Appraisal Appraisal Any Unrestricted Must have Corporation

Right right must be stockholder Retained URE to buy can be
for reasons may, compel Earnings own shares compelled to
listed in the the buy back its
Code corporation own shares
to purchase even without
or buy back URE, in the
his/her following
shares for cases: (a) by
any cause, a stockholder
and for any
regardless of reason [Sec.
existence of 104] or by
unrestricted the SEC in
retained case of a
earnings deadlock
(URE), so [Secs. 103 &
long as the 104]
corporation
would not Arbitration An arbitration Arbitration
thereby agreement allowed
become may be
insolvent provided in
[Sec. 104] the AOI/BL of
unlisted
DIssolution Dissolution Any corporations
must comply stockholder [Sec. 181]
with all the may petition
requirements for
4. Educational Corporation
dissolution
for stated
Educational corporation – One organized for
grounds
educational purposes [Sec. 105].
SEC SEC may not SEC may
Regulation regulate if intervene in
purpose not management If organized as a non-stock corporation
illegal of corp. in Trustees of educational institutions organized
case of as non-stock corporations shall not be less
deadlocks than five (5) nor more than fifteen (15).
Provided, however, that the number of trustees
Classificatio No May classify shall be in multiples of five (5). They shall
n of classification directors classify themselves in such a way that the term
Directors of directors of 1/5 of them expires every year, unless
otherwise provided by the AOI or BL [Sec. 106].
Election of BOD elects Shareholder
Officers officers s, as If organized as a stock corporation
directors, For institutions organized as stock
directly elect corporations, the number and term of directors
officers, if shall be governed by the provisions on stock
provided by corporations [Sec. 106].
AOI

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5. Religious Corporation
Classes of Religious Organization
a. Corporation Sole – incorporated by
one person; and
b. Religious Societies – incorporated by
more than one person [Sec. 107].
Corporation sole – One formed for the
purpose of administering and managing, as
trustee, the affairs, property and temporalities
of any religious denomination, sect, or church,
by the chief archbishop, bishop, priest, rabbi,
or other presiding elder of such religious
denomination, sect or church [Sec. 108].
A corporation sole has no nationality but for the
purpose of applying nationalization laws,
nationality is determined not by the nationality
of its presiding elder but by the nationality of its
members constituting the sect in the
Philippines. Thus, the Roman Catholic Church
can acquire lands in the Philippines even if it is
headed by the Pope [Roman Catholic
Apostolic, etc v. Register of Deeds of Davao
City, G.R. No. L-8451 (1957)].
Religious Society (Corporation Aggregate)
Corporation aggregate – A religious
corporation incorporated by more than one
person.
6. Eleemosynary Corporation
Eleemosynary corporation – One organized
for a charitable purpose.
7. Domestic Corporation
Domestic corporation – One formed,
organized, or existing under the laws of the
Philippines
8. Foreign Corporation
Foreign corporation – One formed,
organized, or existing under any laws other
than those of the Philippines and whose law
allows Filipino citizens and corporations to do
business in its own country and state [Sec.
140].
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9. Corporation Created by Special Laws
or Charter
Corporation created by special laws or
charter - Corporations which are governed
primarily by the provisions of the special law or
charter creating them. Corporation Code has
suppletory application [Sec. 4].
10. Subsidiary Corporation
Subsidiary corporation – One in which
control, in the form of ownership of majority of
its shares, is in another corporation (the parent
corporation).
11. Parent Corporation
Parent corporation – Its control lies in its
power, directly or indirectly, to elect the
subsidiary’s directors thus controlling its
management policies
Holding company – A parent company which
has no other business aside from the holding
of the shares of its subsidiaries, which it
controls.
A “holding company” is “organized” and is
basically conducting its business by investing
substantially in the equity securities of another
company for the purpose of controlling their
policies (as opposed to directly engaging in
operating activities) and “holding” them in a
conglomerate or umbrella structure along with
other subsidiaries [City of Davao v. Randy
Allied Ventures, G.R. No. 241697 (2019)].
Investment company – A stock corporation
primarily engaged or holds itself out as being
engaged primarily, or proposes to engage, in
the business of investing, reinvesting and
trading in securities [IRR of RA 2629 or the
Investment Company Act].
12. Corporation De Jure
Corporation de jure – A corporation
organized in accordance with the requirements
of the law [Campos]. If the Commission finds
that the submitted documents and information
are fully compliant with the requirements of the
RCC, other laws, rules, and regulations, the
CORPORATION LAW
Commission shall issue the certificate of
incorporation [Sec. 18].
13. De Facto Corporation
De facto corporation – A corporation where
there exists a flaw in its incorporation.
14. Corporation by Estoppel
Corporation by estoppel – All persons who
assume to act as a corporation knowing it to be
without authority shall be liable as general
partners for all debts, liabilities and damages.
Also, a third party who had dealt with an
unincorporated association as a corporation is
precluded from denying its corporate existence
on a suit brought by the alleged corporation on
the contract.
4. Nationality of Corporations
The nationality of a corporation serves as a
legal basis for subjecting an enterprise or its
activities to the laws, the economic and fiscal
powers, and the various social and financial
policies of the State to which it is supposed to
belong [SEC OGC Opinion No. 22-07].
a. Place of Incorporation Test
Under the incorporation theory, a corporation is
a national of the country under whose laws it is
organized or incorporated.
1. Domestic Corporations
Domestic corporations – One organized and
governed under and by Philippine laws.
2. Foreign Corporations
Foreign corporations – 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. It shall
have the right to transact business in the
Philippines after obtaining a license for that
purpose [Sec. 140].
While the incorporation test serves as the
primary test under Philippine jurisdiction, other
tests such as the Control Test and the
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Grandfather Rule must also be applied in
determining compliance with the provisions of
the Constitution and of other laws on nationality
requirements [SEC OGC Opinion No. 11-42].
b. Control Test
The nationality of the private corporation is
determined by the citizenship of the controlling
stockholders.
Under the “liberal” Control Test, there is no
need to further trace the ownership of the 60%
(or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at
least 60% Filipino-owned is considered as
Filipino [Narra Nickel Mining & Development
Corp. v. Redmont Consolidated Mines Corp.,
G.R. No. 195580 (2014)].
Absent any doubt, the Control Test shall be
used in determining the nationality of a
corporation specially in cases where foreign
ownership restrictions apply [SEC OGC
Opinion No. 16-19].
Control Test is applied in the following:
1. Exploitation of natural resources -
Only Filipino citizens or corporations
whose capital stock is at least 60%
owned by Filipinos can qualify to
exploit natural resources [Sec. 2, Art.
XII, Const.]
2. Public Utilities - 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 60% of whose capital is owned by
such citizens [Sec. 11, Art. XII, Const.].
3. Mass Media [Note: Control test DOES
NOT apply to Mass Media. Grandfather
Rule applies]
4. Advertising industry (70%) – “Only
Filipino citizens or corporations or
associations at least seventy per
centum of the capital of which is owned
by such citizens shall be allowed to
engage in the advertising industry”
[Sec. 11, Art. XVI, Const.]
CORPORATION LAW
5. Any industry or activity where foreign
ownership is prohibited or restricted
under the Foreign Investment Negative
List.
The "control test" is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2,
Art. XII of the 1987 Constitution, entitled to
undertake the exploration, development and
utilization of the natural resources of the
Philippines. When in the mind of the Court,
there is doubt, based on the attendant facts
and circumstances of the case, in the 60-40
Filipino equity ownership in the corporation,
then it may apply the "grandfather rule" [Narra
Nickel Mining & Development Corp. v.
Redmont Consolidated Mines Corp., G.R. No.
195580 (2014)].
The Gamboa Rulings
2011 Gamboa Ruling
The term "capital" in Sec. 11, Article XII of the
1987 Constitution refers only to shares of stock
entitled to vote in the election of directors, and
thus in the present case only to common
shares, and not to the total outstanding capital
stock [common and non-voting preferred
shares].
For stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights
is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to
aliens, cannot be considered held by Philippine
citizens or Philippine nationals [Gamboa v.
Teves, G.R. No. 176579 (2011)].
2012 Gamboa Ruling
In 2012, the Supreme Court modified its ruling,
stating now that:
The term “capital” is not limited to voting shares
since the constitutional requirement of at least
60% Filipino ownership applies not only to
voting control of the corporation, but also to the
beneficial ownership of the corporation. It is
therefore imperative that such requirement
apply uniformly and across the board to all
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classes of shares, regardless of nomenclature
and category, comprising the capital of a
corporation.
Preferred shares, denied the right to vote in the
election of directors, are still entitled to vote on
the eight specific corporate matters under Sec.
6. of the Corporation Code [Note: Still Sec. 6
under the RCC] [Gamboa v. Teves, G.R. No.
176579 (2012)].
2017 Gamboa Ruling (Roy III v. Herbosa)
However, in 2017, the Supreme Court
explained its ruling in the 2012 Gamboa
decision. It stated that the resolution of the
2012 Gamboa resolution, specifically its
dispositive portion, did not modify the 2011
Gamboa decision.
The Supreme Court clarified that the Gamboa
Decision already held, in no uncertain terms,
that what the Constitution requires is full and
legal beneficial ownership of 60% of the
outstanding capital stock, coupled with 60% of
the voting rights must rest in the hands of
Filipino nationals. Thus, for purposes of
determining compliance with the
constitutional or statutory ownership, the
required percentage of Filipino ownership
shall be applied to both the (a) total number
of outstanding shares of stock entitled to
vote in the election of directors; and (b) the
total number of outstanding shares of
stock, whether entitled to vote or not [Jose
M. Roy III v. Chairperson Teresita Herbosa,
G.R. No. 207246 (2017)].
The Supreme Court further said that the
statement in Gamboa that the 60% ownership
percentage must be computed on to BOTH
classes of common and preferred shares is
OBITER.
SEC Memorandum Circular No. 8 dated 20
May 2013
All corporations engaged in identified areas of
activities or enterprises specifically reserved,
wholly or partly, to Philippine Nationals by the
Constitution, the FIA, and other existing laws,
shall, at all times, observe the constitutional or
statutory ownership requirement. For
purposes of determining compliance
therewith, the required percentage of Filipino
CORPORATION LAW
ownership shall be applied to both:
1. The total number of outstanding shares
of stock entitled to vote in the election
of directors; AND
2. The total number of outstanding shares
of stock, whether or not entitled to vote
in the election of directors [Sec. 1-2,
SEC MC No. 8].
Note: This was the SEC Memorandum that
was put in question in the Roy III v. Herbosa
case, and subsequently upheld by the Court as
constitutional. Thus, the 60% Filipino
ownership requirement is NOT needed for
EACH AND EVERY CLASS (i.e., common and
preferred) of shares.
c. Grandfather Rule
The Grandfather Rule is a method of
determining the nationality of a corporation,
which is owned in part by another corporation,
by breaking down the equity structure of the
shareholder corporation [De Leon].
The Grandfather Rule is applied if doubt
exists as to the locus of the “beneficial
ownership” and “control” of a corporation, even
if the 60-40 Filipino to foreign equity ratio is
apparently met by the subject or investee
corporation [Narra Nickel Mining & Filipino) [Narra Nickel Mining and Dev. Corp v.
Development Corp. v. Redmont Consolidated
Mines Corp., G.R. No. 195580 (2014)].
It involves the computation of Filipino
ownership of a corporation in which another
corporation, of partly Filipino and partly-foreign
equity, owns capital stock. The percentage of
shares held by the second corporation in the
first is multiplied by the latter’s own Filipino
equity, and the product of these percentages is
determined to be the ultimate Filipino
ownership of the subsidiary corporation.
The Grandfather Rule must be applied to
accurately determine the actual participation,
both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity
or business [SEC Opinion re: Silahis Int’l Hotel
(1987)].
“Doubt”
"Doubt" refers to various indicia that the
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"beneficial ownership" and "control" of the
corporation do not in fact reside in Filipino
shareholders, but in foreign stakeholders. The
following are indicators of doubt:
1. That the foreign investors provide
practically all the funds for the joint
investment undertaken by these
Filipino businessmen and their foreign
partner;
2. That the foreign investors undertake to
provide practically all the technological
support for the joint venture;
3. That the foreign investors, while being
minority stockholders, manage the
company and prepare all economic
viability studies [Narra Nickel Mining
and Dev. Corp v. Redmont
Consolidated Mines Corp., G.R. No.
195580 (2014)].
The Grandfather Rule applies: (i) in
enterprises where the Filipino ownership
requirement is 100% (mass media) or (ii) in
other instances, when the 60-40 Filipino
foreign equity ownership is in doubt (i.e. in
cases where the joint venture corporation with
Filipino and foreign stockholders with less than
60% Filipino stockholdings [or 59%] invests in
another joint venture corporation, which is
either 60-40% Filipino-alien or the 59% less
Redmont Consolidated Mines Corp., G.R. No.
195580 (2014)].
Successive Application of the Tests
The Control Test can be applied jointly with the
Grandfather Rule to determine the observance
of foreign ownership restriction in nationalized
economic activities. They are not incompatible
ownership-determinant methods that can only
be applied alternatively to each other.
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 there is doubt, based
on the Control Test, that the Grandfather
Rule is applied.
CORPORATION LAW
● If the subject corporation’s Filipino
equity falls below the threshold 60%,
the corporation is immediately
considered foreign-owned, in which
case, the need to resort to the
Grandfather Rule disappears.
● If a corporation that complies with the
60-40 Filipino to foreign equity
requirement, it can be considered a
Filipino corporation, and if there is no
doubt as to who has the “beneficial
ownership” and “control” of the
corporation, there is no need for the
application of the Grandfather Rule.
● However, if there is doubt as to who
has the “beneficial ownership” and
“control” of the corporation (e.g. the
Filipino-Owned corporation subscribed
to 60% of the capital and the foreign
corporation subscribed to 40%, but the
subscription of the former is only
nominally paid-up and such
corporation entered into a financial
assistance agreement with the foreign-
owned corporation), the application of
the grandfather rule is necessary
[Narra Nickel Mining and Dev. Corp v.
Redmont Consolidated Mines Corp.,
G.R. No. 195580 (2015)].
5. Corporate 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 [Sec. 18].
Persons desiring to incorporate must submit to
the SEC:
a. The intended corporate name for
verification, and
b. The articles of incorporation and
bylaws [Sec. 18].
Note: One person corporations are not
required to submit and file bylaws [Sec. 119].
a. Doctrine of separate juridical
personality
Concept
A corporation has a personality separate and
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distinct from that of its stockholders and
members and is not affected by the personal
rights, obligations, and transactions of the
latter.
General Rule: Due the corporation’s separate
juridical personality, a stockholder may not be
made to answer for acts or liabilities of said
corporation, and vice-versa [Land Bank of the
Philippines v. CA, G.R. No. 127181 (2001)].
Exceptions: The corporation’s separate
juridical personality cannot be invoked to
escape liability when:
1. This legal fiction is used for ends
subversive to the policy and purpose
behind its creation or which could not
have been intended by law to which it
owes its being (i.e. to defeat public
convenience, justify wrong, protect
fraud, defend crime, confuse legitimate
legal or judicial issues, used as a
vehicle for the evasion of an existing
obligation, perpetrate deception or
otherwise circumvent the law).
2. The corporate entity is a mere alter
ego, adjunct, or business conduit for
the sole benefit of the stockholders or
of another corporate entity [Land Bank
of the Philippines v. CA, G.R. No.
127181 (2001)]. The corporation is
merely a farce, as it 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 [Lanuza
et al v. BF Corporation, et al, G.R. No.
174938 (2014)].
Property
Corporate property is owned by the corporation
as a juridical person, and the stockholders
have no claim on corporate property as
owners. The latter only have a mere
expectancy or inchoate right to the same upon
dissolution of the corporation and after all
corporate creditors have been paid. Such right
is limited only to their equity interest.
Although a stockholder’s interest in the
corporation may be attached by his personal
creditor, corporate property cannot be used to
satisfy his claim [Wise and Co. v. Man Sun
CORPORATION LAW
Lung, G.R. No. 46997 (1940)].
A stockholder cannot bring an action for
replevin to recover property of the corporation.
The corporation, as an artificial person, must
purchase, hold, grant, sell, and convey the
corporate property, and do business, sue and
be sued, plead and be impleaded, for corporate
purposes, in its corporate name [Button v.
Hoffman, 61 Wis. 20 (1884)].
Corporations are entitled to due process and
equal protection, but subject to the police
power of the state. insofar as their properties
are concerned [Smith, Bell & Co. v. Natividad,
40 Phil. 144 (1920)]. They are also entitled to
protection against unreasonable searches and
seizures [Bache & Co. v. Ruiz, 37 SCRA 823
(1971)]. They are not, however, entitled to the
privilege against self-incrimination [Bataan
Shipyard & Engineering v. PCGG, 150 SCRA
181 (1987)].
1. Liability of Tort and Crime
Being an entity with a separate juridical
personality, a corporation can be held liable for
torts committed by its officers under express
direction from the stockholders or directors,
acting as a body [PNB v. CA G.R. No. L-27155
(1978)].
The corporation itself cannot be arrested and
imprisoned; thus, it cannot be penalized for a
crime punishable by imprisonment. However, a
corporation may be charged and prosecuted
for a crime if the imposable penalty is a fine
[Ching v. Secretary of Justice,¸G.R. No.
164317 (2006)].
Note: Sec. 170 of the RCC provides that for
violations of the Code, if it is committed by a
corporation, the same may, after notice and
hearing, be dissolved in appropriate
proceedings before the Commission.
Since a corporation as a person is a mere legal
fiction, it cannot be proceeded against
criminally because it cannot commit a crime in
which personal violence or malicious intent is
required. Criminal action is limited to the
corporate agents guilty of an act amounting
to a crime and never against the
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corporation itself [Time Inc. v. Reyes, G.R.
No. L-28882 (1971)].
2. Recovery of Moral Damages
General Rule: A corporation, being an artificial
person, has no feelings, emotions nor senses;
therefore, it cannot experience physical
suffering and mental anguish, which are bases
for moral damages under Art. 2217 of Civil
Code [Manila Electric Co. v. Nordec
Philippines, 861 SCRA 515 (2018)].
Exception: The only exception to this rule is
when the corporation has a reputation that is
debased, resulting in its humiliation in the
business realm. But in such a case, it is
imperative for the claimant to present proof to
justify the award. It is essential to prove the
existence of the factual basis of the damage
and its causal relation to the petitioner's acts
[Manila Electric Company v. T.E.A.M
Electronics Corporation, G.R. No. 131723
(2007), as quoted in Manila Electric Co. v.
Nordec Philippines].
b. Doctrine of piercing the corporate
veil
A corporation will be looked upon as a legal
entity as a general rule, and until sufficient
reason to the contrary appears but when the
notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or
defend crime, the law will regard the
corporation as an association of persons.
Piercing the veil of corporate entity is an
equitable remedy developed to address
situations where the separate corporate
personality of a corporation is abused or used
for wrongful purposes [PNB v. Ritratto Group,
G.R. No. 142616 (2001)].
Note: Doctrine of Limited Liability and Piercing
the Corporate Veil also applies to a One
Person Corporation. Single stockholder must
prove that the property of the One Person
Corporation is independent of the stockholder's
personal property, otherwise the stockholder
shall be jointly and severally liable for the debts
and other liabilities of the One Person
Corporation [Sec. 130].
CORPORATION LAW
Effect of Piercing the Corporate Veil
The corporation will be considered as a mere
association of persons. Thus, the liability will
directly attach to the stockholders or to the
other corporation [China Banking v. Dyne-
Sem, G.R. No. 149237 (2006)].
For the juridical personality of a corporation to
be disregarded, the wrongdoing must be
clearly and convincingly established, and
cannot be presumed [Del Rosario v. NLRC,
G.R. No. 85416 (1990)].
Procedural Considerations
One cannot pierce the veil to acquire
jurisdiction over a party [Pacific Rehouse Corp.
v. CA, G.R. No. 199687 (2014)].
General Rule
1. Both the individual sought to be held
liable and the corporation must be
impleaded at the first instance;
2. The court must first acquire jurisdiction
over the corporation or corporations
involved before its or their separate
personalities are disregarded; and
3. The doctrine of piercing the veil of
corporate entity can only be raised
during a full-blown trial over a cause of
action duly commenced involving
parties duly brought under the authority
of the court by way of service of
summons or what passes as such
service [Kukan v. Reyes, G.R. No.
182729 (2010)].
Exception: When an aggrieved laborer is
unable to attach the properties of the
corporation, the Labor Arbiter may thereafter
“amend” its decision by ordering that the
individuals responsible be impleaded and their
properties levied. Provided that such
individuals were impleaded and had the
opportunity to be heard [Guillermo v. Uson,
G.R. No. 198967 (2016)].
A sheriff may not pierce the corporate veil,
because such power only belongs to the court
[Cruz v. Dalisay, A.M. No. R-181-P (1987)].
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1. Grounds for Application of Doctrine
The veil of separate corporate personality may
be lifted/pierced:
a. When such personality is used to
defeat public convenience, to justify
wrong, to protect fraud or defend crime,
or as a shield to confuse the legitimate
issues;
b. When the corporation is merely an
adjunct, a business conduit or an alter
ego of another corporation; or
c. 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; or
d. When the corporation is used as a
cloak or cover for fraud or illegality, or
to work injustice, or
e. Where necessary to achieve equity or
for the protection of the creditors
[China Banking v. Dyne-Sem, G.R. No.
149237 (2006)].
Note: Aside from this general guideline, no
hard and fast rule can be laid down to cover all
cases where the corporate entity theory cannot
be availed of, and each case will have to be
considered on its merits [Campos].
The Court has pierced the veil of corporate
fiction when it was used:
a. To defraud the government of taxes
due it;
b. To evade payment of civil liability;
c. By a corporation which is merely a
conduit or alter ego of another
corporation;
d. To evade compliance with contractual
obligations;
e. To evade financial obligation to its
employees;
f. To ward off a judgment credit;
g. To avoid inclusion of corporate assets
as part of the estate of the decedent;
and
h. To cover up an otherwise blatant
violation of the prohibition against
forum shopping.
Only in these and similar instances may the veil
be pierced and disregarded [PNB v. Andrada
CORPORATION LAW
Electric and Engineering Co., G.R. No. 142936
(2002)].
. 2. Such control must have been used by
2. Test in Determining Applicability
The doctrine has been applied in the following
contexts:
a. When the liability belongs to the
corporations, but the plaintiff seeks to hold
the individual liable.
Mere controlling interest is not enough. There
must be a clear showing that the corporate
fiction is used to defeat public convenience,
justify wrong, protect fraud, or defend crime
[Koppel Phil v. Yatco, G.R. No. L-47673
(1946)].
Note the following badges of fraud:
1. Used as a shield to further an end
subversive of justice; or
2. For purposes that could not have been
intended by the law that created it; or (
3. To defeat public convenience;
4. Justify wrong;
5. Protect fraud; or
6. Defend crime; or
7. To perpetuate fraud or confuse
legitimate issues; or
8. To circumvent the law or perpetuate
deception.
b. Where the liability is personal to the
individual and he seeks to evade it by
hiding behind a corporate vehicle.
The veil of corporate fiction must be pierced
where the main purpose in forming the
corporation was to evade the incorporator’s
subsidiary civil liability resulting from the
conviction of one of his employees [Palacio v.
Fely Transportation, G.R. No. L-15121 (1962)].
c. The instrumentality or alter ego rule.
The elements of this modality are
1. 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
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had at the time no separate mind, will
or existence of its own;
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 rights;
and
3. The aforesaid control and breach of
duty must proximately cause the
injury or unjust loss complained of
[WPM International v. Labayen, G.R.
No. 182770 (2014)].
Circumstances rendering a subsidiary an
instrumentality
1. The parent corporation owns all or
most of the subsidiary’s capital stock;
2. The parent and subsidiary corporations
have common directors or officers;
3. The parent corporation finances the
subsidiary
4. The parent corporation subscribes to
all the capital stock of the subsidiary or
otherwise causes its incorporation;
5. The subsidiary has grossly inadequate
capital;
6. The parent corporation pays the
salaries and other expenses or losses
of the subsidiary;
7. The subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent
corporation;
8. In the papers of the parent corporation
or in the statements of its officers, the
subsidiary is described as a
department or division of the parent
corporation or its business or financial
responsibility is referred to as the
parent corporation’s own;
9. The parent corporation uses the
property of the subsidiary as its own;
10. The directors or executives of the
subsidiary do not act independently in
the interest of the subsidiary but take
their orders from the parent corporation
in the latter’s interest; and
11. The formal ledger requirements of the
subsidiary are not observed [PNB v.
CORPORATION LAW
Ritratto Group, G.R. No. 142616
(2001)].
d. Successor corporation rule
Where a corporation feigns dissolution or
cessation but really continues in existence
organized under another name.
The application of the rule figures prominently
in labor cases where the prior entity seeks to
evade its obligations to its laborers. Some
telltale signs exhibited in Claparols v. CIR [G.R.
No. L-30822 (1975)] include:
Consecutive date of cessation and
commencement of subsequent entity;
1. Ownership and control by former
controlling stockholder;
2. Turnover of assets.
On the other hand, in Livesey v. Binswanger
[G.R. No. 177493 (2014)], the court pointed to
the following:
1. Same officers;
2. Same office; and
3. Continuation of the business.
Note: SME v. De Guzman, G.R. No. 184517
(2013) allows for the defense of good faith in
case of assets sales between a predecessor
and successor corporation:
In asset sales or when the assets of the selling
corporation are transferred to another entity,
the rule is that –
1. The seller in good faith is authorized to
dismiss the affected employees, but is
liable for the payment of separation pay
under the law
2. The buyer in good faith is not obliged to
absorb the employees affected by the
sale, nor is it liable for the payment of
their claims. The most that it may do,
for reasons of public policy and social
justice, is to give preference to the
qualified separated personnel of the
selling firm.
In stock sales, which takes place at the
shareholder level, the rule is that –
1. A shift in the composition of its
shareholders will not affect its
existence and continuity because the
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corporation possesses a personality
separate and distinct from that of its
shareholders
2. The corporation continues to be the
employer of its people and continues to
be liable for the payment of their just
claims.
3. The corporation or its new majority
shareholders are not entitled to lawfully
dismiss corporate employees absent a
just or authorized cause
Note: This overturns the ruling in Manlimos v.
NLRC (1995) allowing for the defense of good
faith in stock sales.
Note: Existence of interlocking directors,
corporate officers and shareholders is also not
enough justification to pierce the veil of
corporate fiction in the absence of fraud or
other public policy considerations [PNB v.
Hydro Resources Contractors Corp., G.R. No.
16570 (2013)].
B. De Facto Corporations vs.
Corporations by Estoppel
1. De facto corporations
De facto corporation – A corporation where
there exists a flaw in its incorporation.
Rule on De Facto Corporations
The due incorporation of any corporation
claiming in good faith to be a corporation under
this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in
any private suit to which such corporation may
be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding
[Sec. 19].
General Rule: The defect in the juridical
personality of a corporation cannot be inquired
into by private individuals, much less used as a
defense to avoid claims.
Exception: In quo warranto proceedings
brought on behalf of the State where the main
action is to question the validity or existence of
such juridical personality [Villanueva].
CORPORATION LAW
Requisites
a. There is an apparently valid statute
under which the corporation may be
formed;
b. There has been colorable
compliance with the legal
requirements in good faith; and
c. There has been use of corporate
powers, i.e. the transaction of
business as if it were a corporation
[Campos; Seventh Day Adventist
Conference Church of Southern
Philippines, Inc. v. SDA-NEMM, G.R.
No. 150416 (2006)].
An association of persons cannot claim to be a
corporation if it has not been issued a
certificate of incorporation since that fact belies
the claim of good faith compliance with the
requirements of the law [Hall v. Piccio, G.R. No.
L-2598 (1950)].
COMMERCIAL LAW
was in fact no corporation [Sec. 20].
The doctrine of estoppel applies to a third party
only when he tries to escape liability on a
contract from which he has benefited on the
ground of defective incorporation. It does not
apply to a third party who is not trying to escape
liability from the contract, but rather is the one
claiming from the contract [International
Express Travel v. CA, G.R. No. 119002
(2000)].
Comparison with Sec. 15, Rule 3 of the ROC
Corporation by Sec.15, Rule 3
Estoppel
Clothes a non-entity with The
personality to sue a third unincorporated
person who seeks to entity may only be
evade liability in favor of sued but has no
the former personality to sue

2. Corporations by estoppel
Merely creates a fiction Does not
Corporation by estoppel – Where a group of whereby an association concede to the
persons misrepresent themselves as a of persons is treated as association of
a corporation only for persons the cover
corporation, they are subsequently estopped
purposes of of a corporate
from claiming lack of corporate life to avoid
liability. Also, a third party who had dealt with exacting/enforcing entity even for
liability such purposes of
an unincorporated association as a corporation
is precluded from denying its corporate litigation
existence on a suit brought by the alleged For purposes of both Procedural
corporation on the contract. protecting, as well as remedy for
imposing liability drawing out the
Effects of Corporation by Estoppel against, third parties persons who will
truly answer for
As to liability the liability
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, De facto Corporation vs. Corporation By
liabilities and damages incurred or arising as a Estoppel
result thereof [Sec. 20]. De facto Estoppel

As to the defense of lack of corporate

Where all the If any of the
personality
requisites of a de facto requisites are
When such ostensible corporation is sued, it
corporation are absent, then the
shall not be allowed to use its lack of corporate
present, then the estoppel doctrine
personality as a defense [Sec. 20].
defectively formed may be applied only
corporation will have if any of the parties is
As to third party
the status of a de jure estopped from
Anyone who assumes an obligation to an
corporation in all defending:
ostensible corporation as such cannot resist
cases brought by or a. The
performance thereof on the ground that there

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against it, except only defendant whether within or beyond the scope of
as to the State in a association his ordinary powers.
direct proceeding is estopped
from It requires presentation of evidence of similar
defending on act(s) executed either in its favor or in favor of
the ground of other parties. It is not the quantity of similar acts
its lack of which establishes apparent authority, but the
capacity to vesting of a corporate officer with the power to
be sued, or bind the corporation.
b. The
defendant If a corporation knowingly permits one of its
third party officers, or any other agent, to act within the
had dealt scope of an apparent authority, it holds him out
with the to the public as possessing the power to do
plaintiff as a those acts and thus, the corporation will, as
corporation against anyone who has in good faith dealt with
and is it through such agent, be estopped from
deemed to denying the agent's authority [People’s
have Aircargo and Warehousing Co., Inc. v. CA,
admitted its G.R. No. 117847 (1998)].
existence.
C. Corporate Powers
3.Doctrine of Apparent Authority
1. How powers are exercised
Doctrine of Apparent Authority
The doctrine of apparent authority provides a. By the Shareholders or Members
that a corporation will be estopped from
denying the agent's authority if it knowingly Corporate Acts Requiring All (Voting and
permits one of its officers or any other agent to Non-Voting) Shareholders’ Approval
act within the scope of an apparent authority, General Rule: Vote necessary to approve a
and it holds him out to the public as possessing particular corporate act as provided in this
the power to do those acts [Georg v. Holy Code shall be deemed to refer only to stocks
Trinity College, G.R. No. 190408 (2016)]. with voting rights [Sec. 6].

General Rule: Prior board authorization is Exceptions [Sec. 6]:

required before a corporate officer may enter a
contract on behalf of a corporation.
Exception: Doctrine of Apparent Authority
How Ascertained
Apparent authority is derived not merely from
practice. Its existence may be ascertained
through:
a. the general manner in which the
corporation holds out an officer or
agent as having the power to act or, in
other words, the apparent authority to
act in general, with which it clothes him;
or
b. the acquiescence in his acts of a
particular nature, with actual or
constructive knowledge thereof,
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Voting and non-voting shares shall be entitled
to vote in the following cases:
1. Amendment of Articles of Incorporation
[Sec. 15]
2. Adoption, Amendment and Repeal of
By-Laws [Sec. 47]
3. Sale, Lease, Mortgage or Other
Disposition of Substantially all
corporate assets [Sec. 39]
4. Incurring, Creating or Increasing
Bonded Indebtedness [Sec. 37]
5. Increase or Decrease of Capital Stock
[Sec. 37]
6. Merger and Consolidation [Sec. 76-79]
7. Investment of funds in another
corporation or business or for any
purpose other than the primary
CORPORATION LAW
purpose for which it was organized
[Sec. 41]
8. Dissolution of the Corporation [Secs.
133-138]
Some Corporate Acts Requiring Voting
Shareholders’ Approval
1. Declaration of Stock Dividends [Sec.
42]
2. Management Contracts [Sec. 43]
3. Fixing the Consideration of No-Par
shares [Sec. 61]
4. Fixing the Compensation of Directors
[Sec. 29]
5. Under certain conditions, instances
involving contracts with Directors, or
Officers or contracts between
corporations with interlocking directors
[Secs 31 & 32]
6. Under certain conditions, material
contracts entered by corporations
vested with public interest [Sec. 31].
b. By the Board of Directors
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11. Approval of the plan of merger or
consolidation
12. Dissolution of the corporation
2. Ultra Vires Doctrine
Ultra Vires Acts
Those acts which a corporation is not
empowered to do or perform because they are
outside or beyond the express and implied
powers conferred by its Articles of
Incorporation or by the Revised Corporation
Code, or not necessary or incidental to the
exercise of the powers so conferred [Sec. 44].
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. Ultra Vires acts of officers and not of
the corporation
c. Acts or contracts, which are per se
illegal as being contrary to law
[Villanueva].

Unless otherwise provided in this Code, the
board of directors or trustees shall exercise
the corporate powers, conduct all business,
and control all properties of the corporation
[Sec. 22].
Kinds of Ultra Vires acts by reason
a. By reason of Lack of Authority (ultra
vires acts)
b. By reason of Illegality (illegal acts)

Majority vote of the Board is needed in the Basis Ultra Vires Illegal Acts
exercise of the ff. powers: Acts
1. Filling of vacancies in the board, except
Lawfulness Lack of Illegality;
when it is due to removal by the
authority; Unlawful;
stockholders/members or by expiration
Not necessarily against law,
of term
unlawful, but morals,
2. Extension or shortening of the
outside the public policy,
corporate term
powers of the and public
3. Increase or decrease of capital stock or
corporation order
the creation of bonded indebtedness
4. Sale or other disposition of all or Ratification Can be ratified Cannot be
substantially all assets ratified
5. Acquisition of its own shares
6. Investment of corporate funds in any Binding Can bind the Cannot bind
corporation or business or for any power parties if wholly the parties
purpose other than its primary purpose or partly
7. Declaration of cash, property, and executed
stock dividends
Enforceabil Voidable, and Void and
8. Entering into management contracts
ity may be cannot be
9. Amendment of AOI
enforced by validated
10. Amendment of the by-laws
performance,

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ratification, or by stockholders [Montelibano v. Bacolod-

estoppel Murcia Milling Co., Inc., G.R. No. L-15092
(1962)].

Consequences of Ultra Vires Acts with

respect to contracts:
Examples 1. Acts done Acts or a. Executed contract – courts will not set
beyond the contracts, aside or interfere with such contracts;
powers of the which are per b. Executory contracts – no
corporation as se illegal as enforcement even at the suit of either
provided in the being party (void and unenforceable);
law or its contrary to c. Partly executed and partly
articles of law. executory – principle of “no unjust
incorporation; enrichment at expense of another”
2. Ultra Vires shall apply;
acts of officers d. Executory contracts apparently
and not of the authorized but Ultra Vires – the
corporation principle of estoppel shall apply.

Applicability of the Ultra Vires Doctrine Remedies in case of Ultra Vires Acts
The application of the Ultra Vires Doctrine is a a. State
question, in each case, of the logical relation of 1. Dissolution of the corporation
the act to the corporate purpose expressed in thru a quo warranto proceeding
the charter. 2. Injunction
3. Suspension or revocation of
It may fairly be considered within the charter the certificate of registration by
powers if: the SEC
a. The act is one which is lawful in itself, b. Stockholders
and not otherwise prohibited; 1. Injunction
b. The act is done for the purpose of 2. Derivative sui
serving corporate ends; AND 3. Ratification (except when a 3rd
c. The act reasonably tributary to the party is prejudiced or the act is
promotion of those ends, in a illegal)
substantial, and not in a remote and c. Creditors - Nullification of contract in
fanciful sense. fraud of creditors

The test to be applied is whether the act in 3. Trust fund doctrine

question is in direct and immediate furtherance
of the corporation’s business, incident to the
express powers and reasonably necessary to
their exercise. If so, the corporation has the
power to do it; otherwise, not [Montelibano v.
Bacolod-Murcia Milling Co., Inc., G.R. No. L-
15092 (1962)].
Consequences of Ultra Vires Acts
Ultra vires acts, which are per se illegal are
generally void.
While ultra vires acts which are not illegal but
are within the scope of the articles of
incorporation, are merely voidable and may
become binding and enforceable when ratified
The Trust Fund Doctrine states that the capital
stock, properties, and other assets of a
corporation are regarded as equity in trust for
the payment of corporate creditors.
a. All funds received by the corporation in
payment of the shares of stock shall be
held in trust for the corporate creditors
and other stockholders of the
corporation.
b. No fund shall be used to buy back the
issued shares of stock except only in
instances specifically allowed by the
Corporation Code [Boman
Environmental Development

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Corporation v. CA, G.R. No. 77860
(1988)].
Effects of the trust fund doctrine
a. Dividends must never impair the
subscribed capital stock and must only
be declared out of unrestricted retained
earnings (URE) [Philippine Trust Co. v.
Rivera, G.R. No. L-19761 (1923)].
b. Subscription commitments cannot be
condoned or remitted.
General Rule: The corporation cannot buy its
own shares using the subscribed capital as the
consideration therefore [NTC v. CA. G.R. No.
127937 (1999)].
Exceptions:
a. Redeemable shares may be acquired
even without surplus profit for as long
as it will not result to the insolvency of
the Corporation;
b. In cases that the corporation conveys
its stocks in payment of a Debt; or
c. In a Close corporation, a stockholder
may demand the payment of the fair
value of shares regardless of existence
of retained earnings for as long as it will
not result to the insolvency of the
corporation
d. Rescission of a subscription
agreement is not allowed since it will
effectively result in the unauthorized
distribution of the capital assets and
property of the corporation [Ong Yong
v. Tiu, G.R. No. 144476 (2003)].
Note: Rescission of a subscription agreement
is not one of the instances when distribution of
capital assets and property of the corporation
is allowed (Ibid).
Exceptions to the Trust Fund Doctrine ---
When Distribution of Corporate Capital is
Allowed
The Trust Fund Doctrine, first enunciated by
this Court in the 1923 case of Philippine Trust
Co. v. Rivera is the underlying principle in the
procedure for the distribution of capital assets,
embodied in Corporation Code, which allows
the distribution of corporate capital only in three
instances:
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a. Amendment of the AOI to reduce the
authorized capital stock,
b. Purchase of redeemable shares by the
corporation, regardless of the
existence of unrestricted retained
earnings, and
c. Dissolution and eventual liquidation of
the corporation.
The creditors of a corporation have the right to
assume that so long as there are debts and
liabilities, the BOD will not use corporate
assets to purchase its own shares of stock or
to declare dividends to its stockholders when
the corporation is insolvent [Steinberg v.
Velasco, G.R. No. L-30460 (1929)].
Scope of the Trust Fund Doctrine
The trust fund doctrine is NOT limited to
reaching the stockholder’s unpaid
subscriptions.
a. A corporation has no legal capacity to
release an original subscriber to its
capital stock from the obligation of
paying for his shares, in whole or in
part, without a valuable consideration,
or fraudulently, to the prejudice of
creditors.
b. The creditor is allowed to maintain an
action upon any unpaid subscriptions
and thereby steps into the shoes of the
corporation for the satisfaction of its
debt.
The scope of the doctrine when the corporation
is insolvent also encompasses other property
and assets generally regarded in equity as a
trust fund for the payment of corporate debts.
All assets and property belonging to the
corporation held in trust for the benefit of
creditors that were distributed or in the
possession of the stockholders, regardless of
full payment of their subscriptions, may be
reached by the creditor in satisfaction of its
claim.
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 unpaid balances upon
their subscriptions, it is only necessary to
establish that the stockholders have not in
CORPORATION LAW
good faith paid the issue price of the stocks of
the corporation [Donnina Halley v. Printwell,
Inc., G.R. No. 157549 (2011)].
D. Board of Directors and
Trustees
1. Basic principles
a. Doctrine of centralized management
Board is Seat of Corporate Powers
General Rule: Unless otherwise provided in
this Code, the board of directors or trustees
shall exercise the corporate powers, conduct
all business, and control all properties of the
corporation [Sec. 22].
Governing Body of the Corporation
It is well established in corporation law that the
corporation can act only through its board of
directors in the case of stock corporations, or
board of trustees in the case of non-stock
corporations [De Leon].
Exceptions:
1. In case of an Executive Committee duly
authorized in the by-laws [Sec. 34];
Exception to Exception: The following may
not be delegated to the executive committee:
a. Approval of any action for which
shareholders' approval is also
required;
b. The filing of vacancies in the board;
c. The amendment or repeal of by-laws or
the adoption of new by-laws;
d. The amendment or repeal of any
resolution of the board which by its
express terms is not so amendable or
repealable; and
e. A distribution of cash dividends to the
shareholders [Sec. 34].
2. In case of a contracted manager which
may be an individual, a partnership, or
another corporation
Note: In case the contracted manager is
another corporation, the special rule in Sec. 43
applies.
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3. In case of close corporations, the
stockholders may manage the business of
the corporation rather than by a BOD, if the
Articles of Incorporation so provide [Sec.
96]
The power to purchase real property is vested
in the BOD or trustees. While a corporation
may appoint agents to negotiate for the
purchase of real property needed by the
corporation, the final say will have to be with
the board, whose approval will finalize the
transaction [Spouses Constantine Firme v.
Bukal Enterprises and Development
Corporation, G.R. No. 146608 (2003)].
Indisputably, one of the rights of a stockholder
is the right to participate in the control or
management of the corporation. This is
exercised through his vote in the election of
directors because it is the BOD that controls or
manages the corporation [Gamboa v. Teves,
G.R. No. 176579 (2011)].
Limitations on powers of BOD/BOT
a. Limitations imposed by the
Constitution, statutes, articles of
incorporation or by-laws;
b. Certain acts of the corporation that
require joint action of the stockholders
and BOD:
1. Removal of director [Sec. 27]
2. Amendments of Articles of
Incorporation [Sec. 15]
3. Fundamental changes [Sec.
37]
4. Declaration of stock dividends
[Sec. 42]
5. Entering into management
contracts [Sec. 43]
6. Fixing of consideration of no-
par shares [Sec. 61]
7. Fixing of compensation of
directors [Sec. 29]
c. Cannot exercise powers not
possessed by the corporation.
Principle on Delegation of Board Power
Under Sec. 23 (now Sec. 22, RCC), the power
and the responsibility to decide whether the
corporation should enter a contract that will
bind the corporation is lodged in the board,
subject to the articles of incorporation, by-laws,
CORPORATION LAW COMMERCIAL LAW
or relevant provisions of law. Holdover Principle
Upon failure of a quorum at any meeting of the
However, just as a natural person may stockholders or members called for an election,
authorize another to do certain acts for and on the directorate naturally holds over and
his behalf, the BOD may validly delegate some continues to function until another directorate
of its functions and powers to officers, is chosen and qualified.
committees, or agents. The authority of such
individuals to bind the corporation is generally Each director and trustee shall hold office until
derived from law, corporate by-laws or the successor is elected and qualified [Sec.
authorization from the board, either expressly 22].
or impliedly by habit, custom or acquiescence
in the general course of business [People’s The failure to elect does not terminate the
Aircargo v. CA, G.R. No. 117847 (1998)]. terms of incumbent officers nor dissolve the
corporation.
Corporate powers may be directly conferred
upon corporate officers or agents by statute, Term v. Tenure
the articles of incorporation, the by-laws, or by Term Tenure
resolution or other act of the board of directors
[Citibank, N.A. v. Chua, 220 SCRA 75 (1993)]. Time during which The period within
the officer may claim which the director
b. Business judgment rule to hold the office as of holds office, including
right and fixes the the holdover period
As a general rule, when a wrong is committed interval after which after the end of his
against a corporation, whether to bring the suit the several term
or not primarily lies within the discretion and incumbents shall
exercise of business judgment of the BOD. succeed one another.
1. But where corporate directors are guilty
of a breach of trust, not of mere error of Not affected by the Includes holdover
judgment or abuse of discretion, and holdover
inta-corporate remedy is futile or Fixed by statute, and May be shorter or
useless, a shareholder may institute a it does not change longer (in case of a
derivative suit in behalf of himself and simply because the holdover) than the
other stockholders and for the benefit office may have term for reasons
of the corporation, become vacant, nor within or beyond the
2. The purpose of the suit is to bring about because the power of the
a redress of the wrong inflicted directly incumbent holds over incumbent
upon the corporation and indirectly in office beyond the
upon the stockholders [Bitong v. C.A., end of the term due to
G.R. No. 123553 (1998)]. the fact that a
successor has not
2. Tenure and qualifications of been elected and has
directors or trustees failed to qualify.
[Valle Verde Country Club v. Africa, G.R. No.
a. Tenure 151969 (2009)]
Directors – Term of 1 year from among the
holders of stocks registered in the corporation’s Permanent representation not allowed in
books [Sec. 22]. BOD
The board of directors of corporations must be
Trustees – Term not exceeding 3 years from elected from among the stockholders or
among the members of the corporation [Sec. members directors every year. Estoppel does
22]. not set in to legitimize what is wrongful (Grace
Christian High School v. CA, G.R. No. 108905,
October 23, 1997).
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b. Qualifications and Disqualifications
1. Qualifications
a. Director: Must own at least one (1)
share of stock.
Trustee: Must be a member of the
corporation.
A director who ceases to own at least
one (1) share of stock or a trustee who
ceases to be a member of the
corporation shall cease to be such
[Sec. 22].
To be eligible as a director, what is
material is the legal title to, not
beneficial ownership of, the stock as
appearing on the books of the
corporation [Lee v. CA, G.R. No. 93695
(1992)].
b. Must be a natural person, of legal age,
possess full legal capacity
c. Must not be convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding 6
years [Sec. 26]
d. Other qualifications as may be
prescribed in the by-laws of the
corporation [Sec. 46].
While additional qualifications may be
prescribed, this cannot conflict with the
requirements as set by the RCC.
Note: The RCC removed the requirement that
majority of the directors or trustees must be
residents of the Philippines.
2. Disqualifications
A person shall be disqualified from being a
director, trustee, or officer of any corporation if,
within five (5) years prior to the election or
appointment as such, the person was:
a. Convicted by final judgment:
1. Of an offense punishable by
imprisonment for a period
exceeding six (6) years;
2. For violating this Code; and
3. For violating Republic Act No.
8799, otherwise known as “The
Securities Regulation Code”;
b. Found administratively liable for any
offense involving fraud acts; and
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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 [Sec. 26].
Note: The foregoing is without prejudice to
qualifications or other disqualifications, which
the Commission, 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.
An amendment to the corporation’s by-laws
which renders a stockholder ineligible to be a
director, if he be also a director in a corporation
whose business is in competition with that of
the other corporation, has been sustained as
valid. This is based upon the principle that
where the director is so employed in the service
of a rival company, he cannot serve both, but
must betray one or the other. Such an
amendment "advances the benefit of the
corporation and is good" [Gokongwei, Jr. v.
SEC, G.R. No. L-45911 (1979)].
Note: See Sec. 160
Requirement of Independent Directors
Independent Directors
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 [Sec. 22].
Requirement for Independent Directors
Corporations vested with public interest are
now required to have independent directors
constituting at least twenty percent (20%) of
the board [Sec. 22]. This is to promote good
governance.
These corporations include:
a. Corporations covered by the Securities
Regulation Code, namely:
CORPORATION LAW
1. Those whose securities are
registered with the
Commission;
2. Corporations listed with an
exchange or with assets of at
least Fifty million pesos
(P50,000,000.00); and
3. Having two hundred (200) or
more holders of shares, each
holding at least one hundred
(100) shares of a class of its
equity shares;
b. Banks and quasi-banks, NSSLAs,
pawnshops, corporations engaged in
money service business, pre-need,
trust and insurance companies, and
other financial intermediaries;
c. Other corporations engaged in
business vested with public interest like
the above, as may be determined by
the Commission [Sec. 22].
Manner of Election
Independent directors must be elected by the
shareholders present or entitled to vote in
absentia during the election of directors [Sec.
22].
Independent directors shall be subject to rules
and regulations governing their:
● Qualifications, disqualifications, voting
requirements, duration of term and
term limit, maximum number of board
memberships; and
● Other requirements that the
Commission will prescribe to
strengthen their independence and
align with international best practices
[Sec. 22].
c. Election and removal of directors or
trustees
1. Number of Directors and Trustees
Directors: Not more than fifteen (15)
Trustees: May be more than fifteen (15) [Sec.
13 and 91]
The RCC removed the minimum number of
directors which stood at five (5) under the old
code [Sec. 14, Old Corporation Code].
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Election of Directors or Trustees [Sec.
23]
Methods of Voting
a. Straight voting
b. Cumulative voting for one candidate
c. Cumulative voting by distribution
Rules Governing all Methods of Voting
a. 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
b. No delinquent stock shall be voted
[Sec. 23].
Straight Voting
Every stockholder may vote such number of
shares for as many persons as there are
directors to be elected [Sec. 23].
Cumulative Voting
Cumulative Voting for One Candidate
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 [Sec. 23].
Illustration:
If there are 5 directors to be elected and Pedro,
as shareholder, has 100 shares, Pedro can
give 500 (5 x 100 shares) votes to just one
candidate.
Cumulative Voting by Distribution
A stockholder may cumulate his shares by
multiplying 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 [Sec. 23].
Illustration:
In the illustration above, Pedro instead may
choose to give 100 votes to candidate 1, 100
votes to candidate 2, 100 votes to candidate 3,
150 votes to candidate 4, and 50 votes to
candidate 5.
Quorum
At all elections of directors or trustees, there
must be present, either in person or through a
CORPORATION LAW
representative authorized to act by written
proxy:
a. Stock Corporations: The owners of
majority of the outstanding capital
stock
b. Non-Stock Corporations: A majority
of the members entitled to vote [Sec.
23].
It is necessary that there be a quorum. An
election without quorum is invalid.
If the owners of the 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, such
meeting may be adjourned [Sec. 23].
See subheading “When No Election is Held”
under h. Election of Directors or Trustees
under 6. Incorporation and Organization
Election Contests
All matters affecting the manner and conduct of
the election of directors are properly
cognizable by the regular courts. Otherwise,
these matters may be brought before the SEC
for resolution based on the regulatory powers it
exercises over corporations, partnerships, and
associations [SEC v. CA, 739 SCRA 99
(2014)].
3. Duties, responsibilities, and
liabilities for unlawful acts
a. Duties and Responsibilities
Three-Fold Duty
In this jurisdiction, the members of the BOD
have a three-fold duty: duty of obedience, duty
of diligence, and duty of loyalty.
1. Duty of Obedience - shall direct the
affairs of the corporation only in
accordance with the purposes for
which it was organized;
2. Duty of Diligence - shall not willfully
and knowingly vote for or assent to
patently unlawful acts of the
corporation or act in bad faith or with
gross negligence in directing the affairs
of the corporation; and
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3. Duty of Loyalty - shall not acquire any
personal or pecuniary interest in
conflict with their duty as such directors
or trustees [Strategic Alliance
Development Corp v. Radstock
Securities Ltd., G.R. No. 178158
(2009)].
Duty of Obedience
The Directors or Trustees and Officers should
direct the affairs of the corporations only in
accordance with the purposes for which it was
organized.
Duty of Diligence
The directors should not willfully and knowingly
vote for or assent to patently unlawful acts of
the corporation or act in bad faith or with gross
negligence in directing the affairs of the
corporation [Sec. 30].
Note: The conditions for the application of Sec.
31 (now Sec. 30, RCC) of the Corporation
Code require factual foundations to be first laid
out in appropriate judicial proceedings. Hence,
concluding that a person breached fiduciary
duties as an officer and member of the BOD of
a corporation without competent evidence
thereon would be unwarranted and
unreasonable [Republic of the Philippines v.
Sandiganbayan (First Division) et al., G.R. No.
166859 (2011)].
Duty of Loyalty
General Rule: Where a director, by virtue of
such office, acquires a business opportunity
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, the director must account for
and refund to the latter all such profits.
Exception: Unless the act has been ratified by
a vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock [Sec. 33].
b. Liabilities
Solidary Liability for Damages
The directors and trustees are solidarily liable
for damages arising from the ff.
CORPORATION LAW COMMERCIAL LAW
1. Willfully and knowingly voting for and because they are in-charge of day-to-day
assenting to patently unlawful acts of activities [Campos].
the corporation [Sec. 30];
2. Gross negligence or bad faith in The provisions on seizing corporate
directing the affairs of the corporation opportunity and disloyalty [Secs. 30 and 33]
[Sec. 30]; shall also apply to corporate officers [Price v.
3. Acquiring any personal or pecuniary Innodata Phils., Inc., G.R. No. 178505 (2008)].
interest in conflict of duty [Sec. 30];
4. Consenting to the issuance of watered Doctrine of Limited Doctrine of
stocks, or, having knowledge thereof, Liability Immunity
failing to file objections with secretary
[Sec. 64]; Shields the Protects a person
5. Agreeing or stipulating in a contract to shareholders from acting for and in
hold himself liable with the corporation; corporate liability behalf of the
or beyond their agreed corporation from
6. By virtue of a specific provision of law. contribution to the being himself
capital or personally liable for
Liability for Watered Stocks shareholding in the his authorized
Watered Stocks – stocks issued for a corporation actions
consideration less than its par or issued value
or for a consideration in any form other than
Strains in Labor Law
cash, valued more than its fair value.
The Supreme Court appears to have different
views regarding the personal liability of officers
Any director or officer of a corporation shall be
when it comes to labor law violations:
solidarily liable with the stockholder
a. Absent proof that the manager
concerned to the corporation and its creditors
exceeded his authority in dealing as
for the difference in value for: regards the employee, he cannot be
1. Consenting to the issuance of watered held personally liable for the said
stocks or;
employee’s monetary compensation
2. Failing express his objection in writing
[Nicario v. NLRC, GR No. 125340
and file the same with the corporate
(1998)].
secretary despite having knowledge
b. Officers can be held personally liable
thereof of such issuance [Sec. 64].
for 13th month pay of employees after
the corporation has ceased to exist.
Personal Liabilities
This is because the officers are
General rule: Members of the Board, who deemed to have acted on behalf of the
purport to act in good faith for and on behalf of
corporation [Restaurante Las Conchas
the corporation within the lawful scope of their v. Llego, 372 Phil 697 (1999)].
authority, are not liable for the consequences
of their acts. When the acts are of such nature Responsibility for Crimes
and done under those circumstances, they are
Since a corporation is a person by mere legal
attributed to the corporation alone and no
fiction, it cannot be proceeded against
personal liability is incurred [Price v.
criminally because it cannot commit a crime in
Innodata Phils., Inc., G.R. No. 178505 (2008)]. which personal violence or malicious intent is
required.
Exception: When sufficient proof exists on
record that the officers acted fraudulently, Note: However, violations of the Code, if it is
beyond his authority or when the officer agrees
committed by a corporation, the same may,
to be personally liable on behalf of the after notice and hearing, be dissolved in
corporation.
appropriate proceedings before the
Commission [Sec. 170].
Note: Members of the BOD who are also
officers are held to a more stringent liability If the offender is a corporation, the penalty
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may, at the discretion of the court, be imposed
upon:
a. Such corporation and/or upon its
directors, trustees, stockholders,
members, officers, or employees
responsible for the violation or
indispensable to its commission; or
b. Anyone who shall aid, abet, counsel,
command, induce, or procure any
violation of this Code, or any rule,
regulation, or order of the Commission
[Sec. 171-172].
Criminal Liability of Corporate Agents
Criminal action is limited to the corporate
agents guilty of an act amounting to a crime
and never against the corporation itself.
Since the BOD is the repository of corporate
powers and acts as the agent of the
corporation, the directors may be held
criminally liable [Time Inc. v. Reyes, G.R. No.
L-28882 (1971)].
Corporations, partnerships, associations, and
other juridical entities cannot be put to jail.
Hence, the criminal liability falls on the human
agent responsible for the violation of the Trust
Receipts Law [Ong v. CA, G.R. No. 119858
(2003); see also Sec. 13, P.D. 115].
E. Stockholders and Members
1. Rights and obligations of
stockholders and members
a. Doctrine of equality of shares
The doctrine of equality of shares states that all
stocks issued by the corporation are presumed
equal with the same privileges and liabilities,
provided that the Articles of Incorporation is
silent on such differences [Sec. 6].
There is a presumption of equality of the rights
and features of shares when nothing is
expressly provided to the contrary.
1. Although a corporation has the power
to classify its shares of stock, provide
for preferences and other conditions,
no presumption should exist to
distinguish one share from another.
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2. Sec. 6 of the RCC now requires that the
distinguishing features be stated also
in the Certificate of Stock.
b. Participation in management
1. Proxy
Stockholders and members may vote in person
or by proxy in all meetings [Sec. 57].
The word “proxy” may be understood in two
ways:
a. First, it may refer to the person duly
authorized by a stockholder to vote in
his behalf in a stockholder’s meeting.
b. Secondly, it may refer to the document
which evidences this authority
[Campos].
Right to Issue a Proxy
The right to issue a proxy is vested with public
interest when it comes to stock corporations.
a. Although it may be regulated under the
by-laws, it cannot be denied, since it is
an aspect of ownership interest of
stockholders.
b. However, the right of members to vote
by proxy may be denied under the
articles of incorporation or bylaws of a
non-stock corporation [Sec. 88;
Campos].
Requisites for a Valid and Enforceable
Proxy:
a. It must be in writing;
b. Signed by the stockholder or member
of record; and
c. Filed with the corporation before the
scheduled meeting with the Corporate
Secretary [Sec. 57].
Period of Effectivity
Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is
intended. No proxy shall be valid and effective
for a period longer than five (5) years at any
one time [Sec. 57].
Procedural Matters Relating to Proxies:
a. “Proxy solicitation” involves the
securing and submission of proxies,
CORPORATION LAW
while “proxy validation” concerns the
validation of such secured and
submitted proxies;
b. The SEC’s power to pass upon the
validity of proxies in relation to election
controversies has effectively been
withdrawn, tied as it is to its abrogated
quasi-judicial powers, and has been
transferred to the RTC Special
Commercial Courts pursuant to the
terms of Sec. 5.2 of the Securities
Regulation Code;
Note: The SEC has the power to
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 [Sec. 179].
c. Nevertheless, although an intra-
corporate controversy may animate a
disgruntled shareholder to complain to
the SEC a corporation’s violations of
SEC rules and regulations, that motive
alone should not be sufficient to
deprive the SEC of its investigatory and
regulatory powers, especially so since
such powers are exercisable on a
motu proprio basis.
The fact that the jurisdiction of the RTC
Special Commercial Courts is confined
to the voting on election of officers, and
not all matters which may be voted
upon by stockholders, elucidates that
the power of the SEC to regulate
proxies remains extant and could very
well be exercised when stockholders
vote on matters other than the election
of directors [GSIS v. C.A., G.R. No.
183905 (2009)].
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2. Voting Trust
Voting Trust — An arrangement created by
one or more stockholders:
1. For the purpose of conferring upon a
trustee or trustees the right to vote and
other rights pertaining to the shares;
2. For a period not exceeding 5 years at
any time [Sec. 58].
Under a voting trust agreement, a stockholder
of a stock corporation parts with the naked or
legal title, including the power to vote, of the
shares and only retains the beneficial
ownership of the stock.
Voting trustee — A share owner vested with
colorable and naked title of the shares covered
for the primary purpose of voting upon stocks
that he does not own.
A voting trust agreement shall be ineffective
and unenforceable unless:
1. It is in writing and notarized;
2. It specifies the terms and conditions
thereof; and
3. A certified copy of such agreement is
filed with the corporation and with the
SEC [Sec. 58].
Period of Effectivity
General Rule: Voting trust agreements shall
not exceed five (5) years at any one time.
Exception: Voting trust agreements may be
for a period exceeding five (5) years if it is
specifically required as a condition in a loan
agreement.
1. This envisions a situation where a
corporation obtains a loan from a bank,
but as a condition of the loan, the
majority stockholders would be
required to execute voting trust
agreements to ensure that the lending
institution would have a controlling
interest in the corporate votes to be
taken that may affect the ability of the
borrowing corporation to pay. The
voting trust agreement therefore
constitutes further security to the
lending institution [Villanueva].
2. Such voting trust agreement
conditioned upon a loan agreement,
CORPORATION LAW COMMERCIAL LAW
however, shall automatically expire Proxy exercises Trustee exercises
upon full payment of the loan [Sec. 58]. voting rights only for a absolute voting rights
specific meeting continuously, subject
Unless the agreement is expressly renewed, all (unless otherwise only to fiduciary duty
rights granted in the agreement shall provided)
automatically expire at the end of the agreed
period [Sec. 58]. Proxy cannot be Trustee can be
director director because he
Right to Inspect holds legal title over
The voting trust agreement filed with the the shares
corporation shall be subject to examination by
Revocable at will in Irrevocable, as long
any stockholder in the same manner as any
any manner, as no misconduct or
other corporate record [Sec. 58].
EXCEPT if coupled fraud
with an interest
Both the trustor and trustee may exercise the
right of inspection of all corporate books and Max of 5 years at a Max of 5 years at a
records in accordance with the provisions of time time (unless the
the RCC [Sec. 58]. voting trust is
specifically required
Limitation of a Voting Trust Agreement as a condition in a
No voting trust agreement shall be entered into loan agreement)
for the purposes of circumventing the laws
against: SEC can pass on validity
1. Anti-competitive agreements;
2. Abuse of dominant position;
3. Anti-competitive mergers and c. Cases when stockholders’ action is
acquisitions; required
4. Violations of nationality and capital
requirements; or Right to Vote in Stock Corporations
5. Fraud [Sec. 58]. General Rule: Each share of stock is entitled
to vote [Sec. 6].
Proxy vs. Trustee 1. The stockholder of record has the right
Proxy Trustee to participate and to vote [Villanueva].
2. Executors, administrators, receivers,
and other legal representatives duly
Principal-agent Trustee-beneficiary appointed by the court may attend or
vote in behalf of stockholders without
Proxy cannot exceed The only limit to need of any written proxy [Sec. 54].
delegated authority authority is that the
act must be for the Exception: Unless otherwise provided in the
benefit of the trustor articles of incorporation or declared delinquent
(fiduciary obligation) under Sec. 66 [Sec. 6].

Must be in writing Must be in writing and Note: “Outstanding capital stock” means stocks
notarized entitled to VOTE.
Copy must be filed Copy must be filed
with the corporation with SEC and the Nevertheless, ALL stockholders, regardless of
corporation classification as voting or non-voting, are
entitled to vote in the following matters:
No transfer Transfer of legal title a. Amendment of the articles of
to trustee incorporation;
b. Adoption and amendment of by-laws;
c. Sale, lease, exchange, mortgage,

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pledge, or other disposition of all or 55].
substantially all of the corporate
property;
d. Incurring, creating, or increasing
bonded indebtedness;
Pledged or Pledgor or mortgagor
e. Increase or decrease of capital stock;
mortgaged shares shall have the right to
f. Merger or consolidation;
attend and vote,
g. Investment of corporate funds in
unless the pledgee or
another corporation or business; and
mortgagee is
h. Dissolution of the corporation [Sec. 6].
expressly given such
right in writing which
Right to Vote in Non-Stock Corporations
is recorded on the
In non-stock corporations, the voting rights
appropriate corporate
attach to membership. Members vote as
books [Sec. 54].
persons, in accordance with the law and the by-
laws of the corporation. Treasury shares No voting rights as
long as such stock
General Rule: Each member shall be entitled remains in the
to one vote [Sec. 88]. treasury.
● Executors, administrators, receivers,
and other legal representatives duly
appointed by the court may attend or 1. By a majority vote
vote in behalf of stockholders without
need of any written proxy [Sec. 54]. a. Power to enter into management
contracts [Sec. 43]
Exception: Unless the right to vote is limited,
broadened, or denied in the articles of General Rule: Requires approval by —
1. Majority of the BOD/BOT; and
incorporation or by-laws.
2. Stockholders owning at least the
● When the principle for determining the
majority of the outstanding capital
quorum for stock corporations is
applied by analogy to non-stock stock/majority of members of both the
corporations, only those who are actual managing and the managed
members with voting rights should be corporation.
counted [Sec. 88].
Exceptions: In the ff. cases, at least 2/3 votes
of the outstanding capital stock/membership of
Limitations on the Right to Vote
the managed corporation are required. BUT
Type of Shares Manner of Voting only majority vote is required for the managing
corporation:
Shares of stock The consent of all the 1. Where a stockholder/s representing
owned jointly by two co-owners shall be the same interest of both the managing
(2) or more persons necessary, unless and the managed corporations own or
there is a written control more than one-third (1/3) of the
proxy signed by all total outstanding capital stock entitled
the co-owners to vote of the managing corporation; or
authorizing the 2. Where a majority of the members of the
person to vote such managing corporation’s BOD also
share or shares [Sec. constitute a majority of the managed
55]. corporation’s BOD.

Shares owned in an Any of the joint

and/or capacity owners can vote said
shares or appoint a
proxy therefor [Sec.
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b. Amendments to by-laws [Sec. 47]
Requires approval by:
1. Majority of the BOD/BOT; and
2. Stockholders owning at least the
majority of the outstanding capital
stock/majority of members.
Includes all stockholders with or without
voting rights.
c. Revocation of delegation to the BOD of
the power to amend or repeal or adopt by-
laws [Sec. 47]
Requires approval by stockholders owning at
least the majority of the outstanding capital
stock/majority of members.
d. Granting compensation other than per
diems to directors [Sec. 29]
Compensation other than per diems may be
granted to directors by the vote of the
stockholders representing at least a majority
of the outstanding capital stock.
e. Fixing the consideration for no-par
shares [Sec. 61]
When the Articles of Incorporation or the BOD
does not provide for the value of no-par shares,
the value of such shares shall be determined
by the stockholders representing at least
majority of the outstanding capital stock.
f. Voluntary dissolution of a corporation
where no creditors are affected [Sec. 134]
If dissolution of a corporation DOES NOT
prejudice the rights of any creditor having a
claim against it, the dissolution may be effected
by:
1. Majority vote of the BOD/BOT; and
2. A resolution adopted by the affirmative
vote of the stockholders owning at least
majority of the outstanding capital
stock/membership.
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g. Revocation of Delegation to the Board of
the Power to Amend/Repeal/Adopt By-laws
[Sec. 47]
Any power delegated to the board of directors
or trustees to amend or repeal the by-laws or
to adopt new by-laws shall be considered
revoked when stockholders representing a
majority of the outstanding capital stock, or a
majority of the members shall so vote at a
regular or special meeting.
h. Calling a Meeting to Remove Directors or
Trustees [Sec. 27]
A special meeting for the purpose of removing
any director or trustee must be called:
1. By the secretary on order of the
president; or
2. Upon written demand of stockholders
representing or holding at least a
majority of the outstanding capital
stock, or a majority of the members
entitled to vote [Sec. 27].
2. By a two-thirds vote
a. Removal of directors or trustees [Sec. 27]
Any director or trustee of a corporation may be
removed from office by a vote of —
1. The stockholders holding or
representing at least two-thirds (2/3) of
the outstanding capital stock; or
2. At least two-thirds (2/3) of the members
entitled to vote in a non-stock
corporation.
Note: Such removal shall take place —
1. Either at a regular meeting of the
corporation or at a special meeting
called for the purpose; and
2. In either case, after previous notice to
stockholders or members of the
corporation of the intention to propose
such removal at the meeting.
b. Amendment of AOI [Sec. 15]
Amendment of the AOI may be made by:
1. A majority vote of the BOD/BOT; and
2. The vote or written assent of the
stockholders representing at least two-
CORPORATION LAW
thirds (2/3) of the outstanding capital
stock, or by the vote or written assent
of at least two-thirds (2/3) of the
members.
Note: Includes all stockholders with or without
voting rights.
Amendment of Articles of Incorporation of
close corporations [Sec. 102]
An affirmative vote of at least two-thirds (2/3) of
the outstanding capital stock, whether with or
without voting rights, at a meeting duly called
for the purpose is required to make any
amendment to the AOI which seeks to:
1. Delete or remove any provision; or
2. Reduce a quorum of the voting
requirement stated in the articles shall
require.
c. Delegating the power to amend or repeal
by-laws or adopt new by-laws [Sec. 47]
Delegation to the BOD/BOT of the power to
amend or repeal by-laws or adopt new by-laws
requires approval by at least 2/3 of the
outstanding capital stock/membership.
Note: Revocation of the delegation requires
only majority vote of the outstanding capital
stock/membership.
d. Extending/shortening corporate term
[Sec. 36]
1. Requires approval by a majority vote of
the BOD/BOT and approval by at least
2/3 of the outstanding capital
stock/membership.
2. Includes all stockholders with or
without voting rights.
e. Increasing/decreasing capital stock [Sec.
37]
Requires approval by:
1. A majority vote of the BOD; and
2. At least 2/3 of the outstanding capital
stock.
Includes all stockholders with or without voting
rights.
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f. Incurring, creating, increasing bonded
indebtedness [Sec. 37]
1. Requires approval by a majority vote of
the BOD and approval by at least 2/3 of
the outstanding capital stock.
2. Includes all stockholders with or
without voting rights.
g. Issuance of shares not subject to pre-
emptive right [Sec. 38]
Shares in good faith in exchange for property
or previously incurred indebtedness with the
approval of the stockholders representing 2/3
of the outstanding capital stock are not subject
to pre-emptive rights.
h. Sale/disposition of all or substantially all
corporate assets [Sec. 39]
A sale of all or substantially all the corporation’s
properties and assets, including its goodwill
must be authorized by the vote of:
1. The stockholders representing at least
2/3 of the outstanding capital stock; or
2. At least 2/3 of the members, in a
stockholders’ or members’ meeting
duly called for the purpose.
Note: In non-stock 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.
i. Investment of funds in another business
[Sec. 41]
Requires approval by:
1. A majority vote of the BOD/BOT; and
2. At least 2/3 of the outstanding capital
stock/membership.
Includes all stockholders with or without voting
rights.
However, where the investment by the
corporation is reasonably necessary to
accomplish its primary purpose as stated in the
articles of incorporation, the approval of the
stockholders or members shall not be
necessary.
CORPORATION LAW
j. Stock Dividend declaration [Sec. 42]
Requires approval by:
1. A majority vote of the BOD; and
2. At least 2/3 of the outstanding capital
stock.
Note: Declaration of cash and property
dividends only requires BOD/BOT approval.
k. Power to enter into management
contracts [Sec. 43]
General Rule: Requires approval by —
1. Majority of the BOD/BOT; and
2. Stockholders owning at least the
majority of the outstanding capital
stock/majority of members of both the
managing and the managed
corporation.
Exceptions: In the ff. cases, at least 2/3 votes
of the outstanding capital stock/membership of
the managed corporation are required. BUT
only majority vote is required for the managing
corporation:
1. Where a stockholder/s representing
the same interest of both the managing
and the managed corporations own or
control more than one-third (1/3) of the
total outstanding capital stock entitled
to vote of the managing corporation; or
2. Where a majority of the members of the
managing corporation’s BOD also
constitute a majority of the managed
corporation’s BOD.
l. Ratifying contracts with respect to
dealings with directors/trustees [Sec. 31]
A contract of the corporation with one or more
of its directors is voidable, at the option of such
corporation, unless all of the following
conditions are present:
1. The presence of such director/trustee
in the board meeting in which the
contract was approved was not
necessary to constitute a quorum for
such meeting;
2. The vote of such director or trustee was
not necessary for the approval of the
contract;
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3. The contract is fair and reasonable
under the circumstances;
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 majority of the
independent directors voting to approve the
material contract; and
In case of an officer, the contract has been
previously authorized by the BOD.
Note: Where any of the first 3 conditions in
the preceding paragraph is absent, in the
case of a contract with a director/trustee, the
contract may be ratified by the vote of the
stockholders representing 2/3 of the
outstanding capital stock or at least 2/3 of the
members in a meeting called for that purpose.
Full disclosure of the adverse interest of the
directors/trustees involved is made at such
meeting and the contract is fair and reasonable
under the circumstances [Sec 31].
m. Ratifying acts of disloyalty of a director
[Sec. 33]
General Rule: Where a director, by virtue of
such office, acquires a business opportunity,
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, the director must account for
and refund to the latter all such profits.
Exception: His act may be ratified by a vote of
the stockholders owning or representing at
least 2/3 of the outstanding capital stock.
n. Plan of merger or consolidation [Sec. 76]
Requires approval by:
1. Majority of each of the BOD/BOT of the
constituent corporations of the plan of
merger or consolidation; and
2. At least 2/3 of the outstanding capital
stock/membership of each corporation
at separate corporate meetings duly
called.
Amendments to the plan of the merger or
consolidation also requires approval by
majority vote of each of the BOD and 2/3 vote
CORPORATION LAW
of the outstanding capital stock/membership of
each corporation voting separately.
Includes all stockholders with or without voting
rights.
o. Plan of distribution of assets in non-
stock corporations [Sec. 94]
The BOT shall, by majority vote, adopt a
resolution recommending a plan of distribution
which shall be approved by at least 2/3 of the
members with voting rights.
p. Incorporation of a religious society [Sec.
114]
General Rule: Any religious society or
religious order, or any diocese, synod, or
district organization of any religious
denomination, sect, or church, may incorporate
— Members of a non-stock corporation may cast
1. Upon written consent and/or by an
affirmative vote at a meeting called for
the purpose of at least 2/3 of its
membership;
2. For the administration of its
temporalities or for the management of
its affairs, properties, and estate
COMMERCIAL LAW
3. By cumulative voting
Election of Directors or Trustees [Sec. 23]
Stockholders entitled to vote may:
a. Vote such number of shares for as
many persons as there are directors to
be elected [Straight Voting];
b. Cumulate said shares and give 1
candidate as many votes as the
number of directors to be elected
multiplied by the number of the shares
owned [Cumulative Voting for 1
Candidate]; or
c. Distribute them on the same principle
among as many candidates as may be
seen fit [Cumulative Voting by
Distribution].
Note: No delinquent stock shall be voted [Sec.
23].
as many votes as there are trustees to be
elected but may not cast more than 1 vote for
1 candidate.
Nominees for directors or trustees receiving
the highest number of votes shall be declared
elected

Exception: Unless forbidden by the

Constitution, rules, regulations or discipline of
the religious denomination, sect, or church of
which it is a part, or by competent authority.

q. Voluntary dissolution of a corporation

where creditors are affected [Sec. 135]

If dissolution of a corporation may prejudice

the rights of any creditor having a claim against
it, the dissolution may be effected by:
1. Majority vote of the BOD/BOT; and
2. A resolution adopted by the affirmative
vote of the stockholders representing
at least 2/3 of the outstanding capital
stock/membership.

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Vote Requirements for Acts Requiring Approval of Stockholder/Members
Corporate Act
Amendment of AOI [Secs. 6 & Majority vote of the BOD/BOT
15]
Election of directors [Sec. 23] -
Removal of director/trustee
[Sec. 27]
Filling of vacancy other than
removal by stockholders,
expiration of term and
increase of seats [Sec. 28]
Granting of compensation to
directors other than
reasonable per diems [Sec.
29]
Ratification of contract with
director [Sec. 31]
Ratification of contracts
between interlocking
directors [Sec. 32]
Ratification of act of director
acquiring interest [Sec. 33]
Extend or shorten corporate
term [Secs. 6 & 36]
Increase or decrease capital
stock, create or increase
bonded indebtedness [Secs.
6 & 37]
Sale or disposition of other
asserts [Secs. 6 & 39]
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COMMERCIAL LAW
Board of Directors/Trustees Stockholders/Members
2/3 of ALL shares (voting and
non-voting)
Plurality vote of the outstanding
capital stock/members.
Cumulative Voting in case of
stock corporations
- 2/3 outstanding capital stock
Majority of the remaining
BOD/BOT, if there is still
quorum.
If vacancy prevents the quorum
and emergency action is
required, may be filled by
unanimous vote of the remaining
BOD/BOT.
- Majority vote of outstanding
capital stock
- 2/3 outstanding capital stock to
the extent that shareholder
approval is needed
- 2/3 outstanding capital stock to
the extent that shareholder
approval is needed
- 2/3 outstanding capital stock
Majority vote of the BOD/BOT 2/3 of ALL shares (voting and
non-Voting)
Majority vote of the BOD 2/3 of ALL shares (voting and
non-Voting)
Majority vote of BOD/BOT 2/3 of ALL shares (voting and
non-Voting)
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Vote Requirements for Acts Requiring Approval of Stockholder/Members

Invest corporate funds in Majority vote of BOD/BOT 2/3 of ALL shares (voting and
another corporation or non-Voting)
business not in line with
primary purpose [Secs. 6 &
41]

Declaration of dividends Majority vote of BOD 2/3 outstanding capital stock

[Sec. 42] (required only in the case of
issuance of stock dividend)

Enter into a management Majority of the quorum of the General Rule: Majority of the
contract [Sec. 43] BOD/BOT outstanding capital
stock/members of both
managing and managed
corporation

Exception: 2/3 of outstanding

capital stock/members required
for the managed corporation:
a. Where a stockholder
representing the
same interest of both
the managing and the
managed
corporations own or
control more than 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
BOD of the maging
corporation also
constitute a majority of
the members of the
BOD of the managed
corporation
Approval of by-laws [Secs. 6 - Majority of ALL shares (voting
& 45] and non-Voting)

Amendment or repeal of by- Majority vote of BOD/BOT Majority of ALL shares (voting
laws [Secs. 6 & 47] and non-Voting)

Delegation to the BOD the - 2/3 of the outstanding capital

power to amend, repeal or stock/members
adopt by-laws [Sec. 47]

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Vote Requirements for Acts Requiring Approval of Stockholder/Members

Revocation of the power
delegated to the BOD to
amend, repeal or adopt by-
laws [Sec. 47]
Fix the issued price of no-par
value shares [Sec. 62]
- Majority of the outstanding
capital stock/members
General Rule: Fixed in the AOI Exception: Majority of the
or by majority of the quorum of outstanding capital stock in the
the BOD pursuant to authority absence of provisions in the AOI
under the AOI

Merger or consolidation Majority of each BOD/BOT 2/3 of ALL shares (voting and
[Secs. 6 & 77] non-Voting)

Amendment to the plan of Majority of each BOD/BOT 2/3 of ALL shares (voting and
merger or consolidation non-Voting)
[Secs. 6 & 77]

Plan of distribution of assets Majority vote of BOT 2/3 of the membership

of non-stock corporations
[Sec. 95]
Amendment of AOI of close - 2/3 of ALL shares (voting and
corporations to delete any non-Voting)
required provision or to
reduce a quoru or voting
requirement as stated in the
AOI [Secs. 6 & 103]

Voluntary dissolution where Majority vote of the BOD/BOT 2/3 of ALL shares (voting and
creditors are affected [Secs. 6 non-Voting)
& 134]

Voluntary dissolution where Majority of the BOD/BOT Majority of ALL shares (voting
no creditors are affected and non-Voting)
[Secs. 6 & 135]

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4. Proprietary rights
a. Right to Dividends
Concept of Dividends
A dividend is —
1. That portion of the profits of the
corporation set aside, declared and
ordered by the directors to be paid
ratably to the stockholders on demand
or at a fixed time.
2. Payment to the stockholders as a
return upon their investment
[Villanueva].
Discretion of Board to Declare Dividends
General Rule: The board of directors of a stock
corporation may declare dividends out of the
unrestricted retained earnings to all
stockholders on the basis of outstanding stock
held by them [Sec. 42].
● Upon lawful declaration of dividends by
the BOD, dividends become a debt
owing to the shareholders. No
revocation can be made.
Exceptions:
1. Dividends are revocable if NOT yet
announced or communicated to the
stockholders.
2. Stock dividends, even if already
declared, may be revoked prior to
actual issuance since these are not
distributions but merely
representations of changes in the
capital structure.
3. Such declaration is essentially within
the business judgment of the board
of directors.
4. The fact that profits have accrued in the
prosecution of the corporate business
does not necessarily impose upon the
directors the duty to declare them as
dividends [Villanueva].
Exception: Stock corporations are prohibited
from retaining surplus profits in excess of 100%
of their paid-in capital stock.
Exception to the exception: Stock
corporations may retain surplus profits in
excess of 100% of their paid-in capital stock:
1. When justified by definite corporate
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expansion projects or programs
approved by the board of directors; or
2. 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
3. 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 [Sec. 42].
Note: Right to dividends vests upon declaration
so whoever owns the stock at the record date
fixed by the board owns the dividends.
Subsequent transfer of stock would not carry
with it the right to dividends UNLESS agreed
upon by the parties.
Unrestricted Retained Earnings
The board of directors of a stock corporation
may declare dividends out of the unrestricted
retained earnings [Sec. 42].
Retained Earnings
Represents the accumulation of net profits of
the corporation over the years and likewise
losses sustained, as well as deductions
made upon previous dividends declared.
Restricted Unrestricted
Retained Earnings Retained Earnings
That portion of the That portion which is
retained earnings free and can be
specifically declared as
earmarked or set- dividends to
aside for specific stockholders.
purposes.
[Villanueva]
In case of no-par value shares, the entire
consideration received by the corporation for
its no-par value shares shall be treated as
capital and shall not be available for distribution
as dividends [Sec. 6].
CORPORATION LAW
b. Appraisal Right
Appraisal Right — The right to withdraw from
the corporation and demand payment of the
fair value of the shares after dissenting from
certain corporate acts involving fundamental
changes in corporate structure [Sec. 80].
Who is Entitled to Exercise
A prejudiced stockholder who dissented in the
meeting where the proposal was approved.
Mere silence or abstention does not suffice.
The stockholder must have voted against the
corporate action [Villanueva].
Amount Paid to Dissenting Stockholder
Provided that the corporation has sufficient
unrestricted retained earnings, the amount
paid to the stockholder is the fair value of his
shares as of the day prior to the date on which
the vote was taken, excluding any appreciation
or depreciation in anticipation of the corporate
action [Sec. 81].
1. When Available [Sec. 80]
a. If amendment of AOI results in:
1. Changing or restricting the
rights of any stockholder or
class of shares; or
2. Authorizing preferences in any
respect superior to those of
outstanding share of any class
[Sec. 80];
b. Extension of the term of corporate
existence [Sec. 80], including
Voluntary Dissolution (by Petition or by
shortening corporate term); [Secs. 134-
136]
c. Extension and shortening of corporate
term, which is an error carried over
from the old Corporation Code.
d. Sale, lease, exchange, transfer,
mortgage, pledge or other disposition
of all or substantially all of the corporate
property and assets [Sec. 80];
e. Merger or consolidation [Sec. 80];
f. Investment of corporate funds for any
purpose other than the primary
purpose of the corporation [Sec. 80];
g. Increasing or decreasing capital stock.
Note: Can be exercised only if the
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increase of capital stock results in or
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 [Sec.
80(a)].
See “SUMMARY OF SPECIFIC POWERS”
table under “7. Corporate Powers”.
2. Manner of Exercise of Right
Requirements for Exercise of Appraisal
Right [Secs. 81 & 85]
a. Stockholder must have voted against
the corporate act.
b. Stockholder must make a written
demand on the corporation within 30
days after the vote was taken for
payment of the fair value of his shares.
● Failure to make demand within
such period shall be deemed
waiver of the appraisal right.
c. Stockholder must submit his certificate
of stock to the corporation for notation
within 10 days after demand for
payment.
● Otherwise, right to appraisal
may be terminated at the
option of corporation.
Effect of Demand for Payment [Sec. 82]
a. ALL rights accruing to such shares,
including voting and dividend rights,
shall be suspended, EXCEPT the right
of such stockholder to receive payment
of the fair value thereof.
b. There is RESTORATION of voting and
dividend rights if the dissenting
stockholder is not paid the value of his
shares within 30 days after the award.
Note: The award shall be —
a. Agreed upon by the dissenting
stockholder and corporation; or
b. Determined and appraised by 3
disinterested persons, if they fail to
agree within 60 days from the date
when the corporate action was
approved, these 3 persons shall be;
1. One named by the
shareholder;
2. One named by the corporation;
CORPORATION LAW
3. One chosen by 1 & 2.
The findings of the majority of the
appraisers shall be final [Sec. 81].
c. If shares represented by the
certificates bearing a notation that such
shares are dissenting shares are
transferred, and the certificates
consequently cancelled:
1. The rights of the transferor as a
dissenting stockholder under
this Title [Appraisal Right] shall
cease; and
2. The transferee shall have all
the rights of a regular
stockholder; and all dividend
distributions which would have
accrued on such shares shall
be paid to the transferee [Sec.
85].
When Right to Payment Ceases [Sec. 83,
generally]
General Rule: No demand for payment may
be withdrawn.
Exceptions: The right may be extinguished in
the following instances —
a. Withdrawal of demand by the
stockholders WITH CONSENT of the
corporation
b. Abandonment of the proposed
corporate action
c. Disapproval by SEC of the proposed
corporate action where such approval
is necessary
d. Where SEC determines that such
stockholder is not entitled to appraisal
right
e. Failure to submit the certificates of
stock representing his shares to the
corporation for notation as dissenting
shares within 10 days after demand for
payment, at the option of the
corporation [Sec. 85].
Effect of Extinguishment of Right
a. Right of dissenting stockholder to be
paid for the fair value of his shares shall
cease;
b. His status as a stockholder shall
thereupon by restores; and
c. All dividend distributions which would
have accrued on his shares shall be
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paid to him [Sec. 83].
c. Right to Inspect
Basis of Right
As the beneficial owners of the business, the
stockholders have the right to know the
financial condition and management of
corporate affairs.
A stockholder’s right of inspection is based on
his ownership of the assets and property of the
corporation. Therefore, it is an incident of
ownership of the corporate property, whether
this ownership or interest is termed an
equitable ownership, a beneficial ownership, or
quasi-ownership. Such right is predicated upon
the necessity of self-protection [Gokongwei Jr.
v. SEC, G.R. No. L-45911 (1979)].
Records Subject to Inspection [Sec. 73]
Every corporation shall keep and carefully
preserve at its principal office all information
relating to the corporation including, but
not limited to:
a. The AOI and by-laws 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 BOD or BOT and the
executive officers;
d. A record of all business transactions;
e. A record of the resolutions of the BOD
or BOT and of the stockholders or
members;
f. Copies of the latest reportorial
requirements submitted to the
Commission; and
g. The minutes of all meetings of
stockholders or members, or of the
BOD/BOT, which shall set forth –
1. Time and place of the meeting
held;
2. How meeting was authorized;
3. Notice given;
4. Agenda;
5. Whether meeting was regular
or special (its object, if special)
CORPORATION LAW
6. Those present and absent
7. Every act done or ordered
done at the meeting
h. Upon demand of the
BOD/BOT/stockholder or member –
1. Time when any director,
trustee, stockholder or member
entered or left the meeting
must be noted in the minutes;
2. The yeas and nays must be
taken on any motion or
proposition, and a record
thereof carefully made;
3. The protest of a director,
trustee, stockholder or member
on any action or proposed
action
Requirements for the exercise of the right
of inspection [Sec. 73]
a. The records are open to inspection
only by any director, trustee,
stockholder, or member of the
corporation in person or by a
representative.
b. Must be done at reasonable hours on
business days.
c. A demand in writing may be made by
the director, trustee, or stockholder at
their expense, for such records or
excerpts from the records.
d. The inspecting or reproducing party
shall remain bound by confidentiality
rules under prevailing laws such as
1. Intellectual Property Cod
2. Data Privacy Act
3. Securities Regulation Code
4. Rules of Court
Test to Determine Whether the Purpose of
Inspection is Legitimate
A legitimate purpose is one which is genuine to
the interests of the stockholders as such and
not contrary to the interests of the corporation
[Gokongwei Jr. v. SEC, G.R. No. L-45911
(1979)].
Legitimacy of purpose is always assumed, and
it is up to the corporation or officer to claim and
prove otherwise
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Valid defenses of the officer or agent of the
corporation who refuses to allow
inspection and/or reproduction of records:
a. 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;
b. The person was not acting in good
faith;
c. The person was not acting for a
legitimate purpose in making the
demand to examine or reproduce
corporate records;
d. The person is a competitor, director,
officer, controlling stockholder or
otherwise represents the interests of a
competitor [Sec. 73].
Remedies when inspection is refused
a. Mandamus
Under the Rules of Court, the writ of
mandamus should be granted only if
the court is satisfied that justice so
requires [Sec. 8, Rule 65].
b. Injunction
c. Action for damages [Sec. 73]
d. File an action under Sec. 161 to impose
a penal offense by fine
The unjustified failure or refusal by the
corporation, or by those responsible for
keeping and maintaining corporate
records, to comply with the pertinent
rules and provisions of the RCC on
inspection and reproduction of records
shall be punished with a fine ranging
from P10,000.00 to P200,000.00, at
the discretion of the Court
When the violation of this provision is
injurious or detrimental to the public,
the penalty is a fine ranging from
P20,000.00 to P400,000.00 [Sec. 161]
e. Summary investigation by SEC [Sec.
73]
CORPORATION LAW COMMERCIAL LAW
d. Preemptive Right Purpose of Pre-emptive Right
The purpose is to enable the shareholder to
Definition retain his proportionate control in the
Pre-emptive right — An option or privilege of corporation and to retain his equity in the
an existing stockholder to subscribe to a surplus.
proportionate part of shares subsequently
issued by the corporation before the same can Scope of Pre-emptive Right
be disposed of in favor of others. The broad phrase “all issues or disposition of
● This right includes all issues and shares of any class” is construed to include:
disposition of such shares any class. 1. New shares issued in pursuance of
● It is a common law right and may be increase in capital stock or from the
exercised by stockholders even without unissued shares which form part of the
legal provision. ACS; and also
2. Treasury shares
Basis of Preemptive Right: Preservation of a. Treasury shares would come
the existing proportional rights of the under the term “disposition”
stockholders [Campos]. b. Likewise considering that it is
not included among the
Distinguished from Right of First Refusal exceptions enumerated
therein, where pre-emptive
Pre-emptive Right Right of First
right shall not extend, the
Refusal
intention is to include it in its
application [SEC Opinion, 14
Grants stockholders Grants the existing January 1993].
the option to stockholders or the
subscribe to all new corporation the Limitations to Exercise of Pre-emptive right
issues or disposition option to purchase [Sec. 38]
of shares of any the issued and 1. Such pre-emptive right shall NOT
class, in proportion to outstanding shares extend to shares to be issued in
their respective of the transferring compliance with laws requiring stock
shareholdings [Sec. stockholder [Sec. offerings or minimum stock ownership
38]. 97]. by the public;
2. It shall also NOT extend to shares to be
All stockholders of a Arises only by virtue issued in good faith with the approval
stock corporation of contract of the stockholders representing 2/3 of
shall enjoy the pre- stipulations, by which the outstanding capital stock, in
emptive right to the right is strictly exchange for property needed for
subscribe to all construed against corporate purposes or in payment of a
issues or disposition the right of person to previously contracted debt;
of shares of any dispose or deal with 3. It shall not take effect if denied in the
class, in proportion to their property. AOI or an amendment thereto;
their respective 4. If one shareholder does not want to
shareholdings [Sec. exercise his pre-emptive right, the
38]. other shareholders are not entitled to
purchase the corresponding shares of
A right claimed A right exercisable
against the against another the shareholder who declined. But if
corporation on stockholder on his nobody purchased the same and later
unissued shares of shares of stock on the board re-issued the shares, the
its capital stock, and [Villanueva]. pre-emptive right applies [Sundiang
likewise on treasury and Aquino].
shares held by the
corporation
[Villanueva].
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Exceptions to the Pre-emptive Right
1. When such right is denied by the
articles of incorporation or an
amendment thereto; and
2. Shares to be issued:
a. In compliance with laws
requiring stock offerings or
minimum stock ownership by
the public; or
b. To shares to be issued in good
faith with the approval of the
stockholders representing ⅔ of
the outstanding capital stock in
exchange for:
1. Property needed for
corporate purposes; or
2. In payment of a
previously contracted
debt [Sec. 38].
Remedies in case of unwarranted denial
1. Injunction
2. Mandamus
3. The suit should be individual and not
derivative because the wrong done is
to the stockholders individually
4. SEC can cancel shares if the 3rd party
is not innocent
Waiver/Denial of Preemptive Right
Allowed by the Code provided that it is made in
the AOI
1. Denial made through AOI would bind
present and subsequent shareholders;
2. 2/3 vote of all voting and non-voting
shares is necessary before waiver is
binding;
3. Result of non-placement of waiver
clause in AOI: Waiver shall not bind
future stockholders but only those who
agreed to it.
The shareholders must be given reasonable
time within which to exercise their preemptive
rights.
1. Upon expiration of such period, any
shareholders who did not exercise
such will be deemed to have waived it.
2. This is necessary so as to not hinder
future financing plans of the
corporation. Some new investors may
be willing to invest only if all the new
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shares will be issued to them
[Campos].
e. Right to Vote
Nature of the Right to Vote
The right to vote is inherent and incidental to
the ownership of corporate stocks [Tan v.
Sycip, 499 SCRA 216 (2016)].
It represents the right of a stockholder to
participate in the control and management of
the corporation. However, it is subject to the
rule of the majority [Villanueva].
General Rule: No share may be deprived of
voting rights.
Exception: Shares classified and issued as
“preferred” or “redeemable” may be deprived of
voting rights: Provided, that there shall always
be a class or series of shares with complete
voting rights [Sec. 6].
Non-Voting Shares
Non-voting shares are not entitled to vote,
except as provided for in par. 3 of Sec. 6.
Holders of nonvoting shares shall nevertheless
be entitled to vote on the following matters:
a. Amendment of the articles of
incorporation;
b. Adoption and amendment of bylaws;
c. Sale, lease, exchange, mortgage,
pledge, or other disposition of all or
substantially all of the corporate
property;
d. Incurring, creating, or increasing
bonded indebtedness;
e. Increase or decrease of authorized
capital stock;
f. Merger or consolidation of the
corporation with another corporation or
other corporations;
g. Investment of corporate funds in
another corporation or business in
accordance with this Code; and
h. Dissolution of the corporation.
Except in the above cases, the vote necessary
to approve a particular corporate act shall be
deemed to refer only to stocks with right to vote
[Sec. 6].
CORPORATION LAW
Rules Applicable to Certain Kinds of Shares
a. Preferred or redeemable shares may
be deprived of the right to vote [Sec. 6].
b. Fractional shares of stock cannot be
voted.
c. Treasury shares have no voting rights
as long as they remain in the treasury.
d. No delinquent stock shall be voted
[Sec. 70].
e. A transferee of stock cannot vote if
his transfer is not registered in the
stock and transfer book of the
corporation.
f. In case a stockholder grants security
interest in his or her shares in stock
corporations, the stockholder-grantor
shall have the right to attend and vote
at meetings of stockholders.
Exception: The secured creditor is
expressly given by the stockholder-
grantor such right in writing which is
recorded in the appropriate corporate
books [Sec. 54]
g. The sequestration of shares does not
entitle the government to exercise acts
of ownership over the shares. Even
sequestered shares may be voted
upon by the registered stockholder of
record [Cojuangco, Jr. v. Roxas, 195
SCRA 797 (1991)].
Exception: The PCGG may exercise
the voting right on sequestered shares
whenever it is able to comply with the
“two-tiered” or “public character” tests:
1. The two-tiered test is satisfied
when:
a. Prima facie evidence show
that the wealth and/or the
shares are indeed ill-
gotten; and
b. There is demonstrated
imminent danger of
dissipation of the assets.
2. The two-tiered test does not
apply when the funds are prima
facie public in character or, at least,
affected with public interest
[Republic v. COCOFED, 372
SCRA 462 (2001)].
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h. When shares are jointly owned by
two or more persons, the consent of all
the co-owners shall be necessary.
Exception: There is a written proxy,
signed by all the co-owners,
authorizing one or some of them or any
other person to vote such share or
shares: Provided, That when the
shares are owned in an “and/or”
capacity, any one of the joint owners
can vote said shares or appoint a
proxy therefor [Sec. 55].
f. Right of First Refusal
Right of First Refusal — Obligates a
stockholder who may wish to sell or assign his
shares to first offer the shares to the
corporation or to the other existing
stockholders under terms and conditions which
are reasonable.
● Grants the existing stockholders or the
corporation the option to purchase the
shares of the transferring stockholder
[Sec. 97].
● Only when the corporation or the other
stockholders do not or fail to exercise
their option, is the offering stockholder
at liberty to dispose of his shares to
third parties.
An agreement entered into between the two
majority stockholders of a corporation,
whereby they mutually agreed not to sell,
transfer, or otherwise dispose of any part of
their shareholdings till after one year from the
date of the agreement is valid [Lambert v. Fox
G.R. No. L-7991 (1914)].
Nature of the Right of First Refusal
The right of first refusal is primarily an attribute
of ownership, and consequently can be
effected only through a contractual
commitment by the owner of the shares.
Consequently, the waiver of a right of first
refusal when duly constituted can be effected
only by the registered owner [PCGG v. SEC,
G.R. No. 82188 (1988)].
CORPORATION LAW
5. Remedial Rights
a. Individual Suit
A suit brought by the shareholder in his own
name against the corporation when a wrong is
directly inflicted against him.
Where a stockholder or member is denied the
right of inspection, his suit would be individual
because the wrong is done to him personally
and not to the other stockholders or the
corporation [Ago Realty & Development
Corporation v. Dr. Angelita F. Ago, G.R. No.
211203 (2019)].
b. Class or Representative Suit
A suit brought by the stockholder in behalf of
himself and all other stockholders similarly
situated when a suit brought by the
shareholder in his own name against the
corporation when a wrong is directly inflicted
against him or a wrong is committed against a
group of stockholders.
Where the wrong is done to a group of
stockholders, as where preferred stockholders'
rights are violated, a class or representative
suit will be proper for the protection of all
stockholders belonging to the same group [Ago
Realty & Development Corporation v. Dr.
Angelita F. Ago, G.R. No. 211203 (2019)].
c. Derivative Suit
The right of stockholders to bring derivative
suits is not based on any provision of the
Corporation Code or the Securities Regulation
Code but is a right that is implied by the
fiduciary duties that directors owe corporations
and stockholders. Derivative suits are,
therefore, grounded not on law, but on equity
[Ago Realty & Development Corporation v. Dr.
Angelita F. Ago, G.R. No. 211203 (2019)].
Definition
A suit brought by a stockholder for and on
behalf of the corporation for its protection from
the wrongful acts committed by the
directors/trustees of the corporation, when the
stockholder finds that he has no redress
because the directors/trustees, are the ones
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vested by law to decide whether or not to sue.
● It is an action brought by minority
shareholders in the name of the
corporation to redress wrongs
committed against the corporation, for
which the directors refuse to sue.
● It is a remedy designed by equity and
has been the defense of minority
shareholders against abuses by the
majority [Villanueva].
An individual stockholder is permitted to
institute a derivative suit on behalf of the
corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever
officials of the corporation refuse to sue or are
the ones to be sued or hold the control of the
corporation. In such actions, the suing
stockholder is regarded as the nominal party,
with the corporation as the party in interest
[Ago Realty & Development Corporation v. Dr.
Angelita F. Ago, G.R. No. 211203 (2019)].
Derivative Suit as Defined in Jurisprudence
It is a suit by a shareholder to enforce a
corporate cause of action.
● It is a condition sine qua non that the
corporation be impleaded as a party
because not only is the corporation an
indispensable party, but it is also the
present rule that it must be served with
process.
● The judgment must be made binding
upon the corporation in order that the
corporation may get the benefit of the
suit and may not bring subsequent suit
against the same defendants for the
same cause of action [Chua v. C.A.,
G.R. No. 150793 (2004)].
It is a suit brought by one or more
stockholders/members in the name and on
behalf of the corporation to redress wrongs
committed against it or protect/vindicate
corporate rights whenever the officials of the
corporation refuse to sue, or the ones to be
sued, or has control of the corporation
[Sundiang and Aquino].
The institution of a derivative suit need not be
preceded by a board resolution.
● Since the board is guilty of breaching
the trust reposed in it by the
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stockholders, it is but logical to
dispense with the requirement of
obtaining from it authority to institute
the case and to sign the certification
against forum shopping [Ago Realty &
Development Corporation v. Dr.
Angelita F. Ago, G.R. No. 211203
(2019)].
Business Judgment Rule
As a general rule, when a wrong is committed
against a corporation, whether to bring the suit
or not primarily lies within the discretion and
exercise of business judgment of the BOD.
But where corporate directors are guilty of a
breach of trust, not of mere error of judgment
or abuse of discretion, and intra-corporate
remedy is futile or useless, a shareholder may
institute a derivative suit in behalf of himself
and other stockholders and for the benefit of
the corporation.
The purpose of the suit is to bring about a
redress of the wrong inflicted directly upon the
corporation and indirectly upon the
stockholders [Bitong v. C.A., G.R. No. 123553
(1998)].
Parties to a Derivative Suit
In a derivative suit, the suing stockholder is
merely a nominal party, while the corporation is
the real party in interest. Thus, the action must
be brought for the benefit and in the name of
the corporation [Villanueva].
The corporation is an unwilling co-plaintiff [Rule
3 Section 10, Rules of Court].
● The corporation should be made a
party to the suit, either as plaintiff or
defendant, for res judicata to apply.
● BUT the personal injury suffered by the
stockholder cannot disqualify him from
filing a derivative suit in behalf of the
corporation. It merely gives rise to an
additional cause of action for damages
7. The cause of action devolves on the
corporation, the wrongdoing or harm
having been, or being caused to the
corporation and not to the particular
stockholder bringing the suit [Lisam
Enterprises, Inc., represented by Lolita
A. Soriano and Lolita A. Soriano v.
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against the erring corporate officers
[Gochan v. Young, G.R. No. 131889
(2001)].
Proper Forum for Derivative Suits
The Regional Trial Courts exercise jurisdiction
over derivative suits [Sec. 5.2., Securities
Regulation Code].
Requisites of Derivative Actions
1. That the person instituting the action be
a stockholder or member at the time
the acts or transactions subject of the
action occurred and the time the action
was filed;
2. That the stockholder or member
exerted all reasonable efforts, and
alleges the same with particularity in
the complaint, to exhaust all remedies
available under the AOI, by-laws, laws
or rules governing the corporation or
partnership to obtain the relief he
desires;
3. That there is no appraisal right
available for the act(s) complained of;
4. That the suit is not a nuisance or
harassment suit; [Rule 8, Interim Rules
of Procedure for Intra-Corporate
Controversies]
5. The action brought by the
stockholder/member must be “in the
name of the corporation or association”
[implied from 1st par. of Rule 8, Sec. 1
of the Interim Rules; see also Florete v.
Florete, G.R. No. 174909 (2016)].
The action brought by the shareholder
or member must be in the name of the
corporation or association [Villamor v.
Umale, G.R. No. 172843 (2014)].
6. Exhaustion of intra-corporate
remedies, i.e., has made a demand on
the BOD for the appropriate relief but
the latter has failed or refused to heed
his plea; and
Banco de Oro Unibank, Inc. et al., G.R.
No. 143264 (2012)].
Note: The “wrong” contemplated in a derivative
suit is one in which the injury alleged be indirect
as far as the stockholders are concerned and
direct only insofar as the corporation is
CORPORATION LAW
concerned [de Leon]. The reliefs sought pertain
to the corporation [Symaco Trading Corp. v.
Santos, G.R. No. 142474 (2005)].
Stockholder may commence a derivative suit
“for mismanagement, waste or dissipation of
corporate asset because of a special injury to
him for which he is otherwise without redress
[Yu v. Yukayguan, G.R. No. 177549 (2009)].
Exhaustion of Administrative Remedies
General Rule: A derivative suit can only be
filed when there has been a showing of
exhaustion of intra-corporate remedies.
Exception: But where corporate directors are
the ones guilty of a breach of trust, and intra-
corporate remedy is futile or useless,
shareholders may institute a derivative suit for
the benefit of the corporation without having to
exhaust intra-corporate remedies in order to
bring about a redress of the wrong inflicted
directly upon the corporation and indirectly
upon the stockholders [Villanueva].
Requisites of a Derivative Suit according to
Jurisprudence [SMC v. Kahn, G.R. No. 85339
(1989)]
a. The party bringing the suit should be a
shareholder as of the time of the act or
transaction complained of the number
of his shares not being material;
b. He has tried to exhaust intra-corporate
institute the relevant suit against the
erring parties.
6. Intra-corporate disputes
Intra-Corporate Disputes
Refer to civil cases involving the following:
a. Devices or schemes employed by, or
any act of the board of directors,
business associates, officers or
partners amounting to fraud or
misrepresentation which may be
detrimental to the interest of the public
and/or of the stockholders, partners or
members of any corporation,
partnership, or association
b. Controversies arising out of intra-
corporate partnership, or association
relations, between and among
stockholders, members, or associates;
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and between, any or all of them and the
corporation, partnership, or association
of which they are stockholders,
members, or associates, respectively
c. Controversies in the election or
appointment of directors, trustees,
officers, or managers of corporations,
partnerships, or management
associations
d. Derivative suits
e. Inspection of corporate books [Rule 1,
Sec 1(a), Interim Rules of Procedure
for Intra-Corporate Controversies]
The President of a corporation is considered a
corporate officer. The dismissal of a corporate
officer is considered an intra-corporate dispute,
not a labor dispute [Malcaba v. Prohealth
Pharma, G.R. No. 209085 (2018)].
Jurisdiction
Jurisdiction over intra-corporate disputes now
fall within the jurisdiction of the RTC acting as
Special Commercial Court [Sec 5.2, RA 8799]
● The transfer of jurisdiction is
prospective, with the SEC retaining
jurisdiction over pending cases
involving intra-corporate disputes [Sec
5.3, RA 8799].
● Intra-corporate disputes may also be
settled by arbitration if stipulated in the
AOI or bylaws.
Tests to Determine
1. Relationship Test
The existence of any intra-corporate relations
makes the case intra-corporate.
Intra-corporate relationships are those
between the following:
a. Between or among shareholders or
members, whether controlling,
majority, minority, nominal, legal and/or
beneficial owners
b. Between shareholders and the
corporation, as represented by the
directors or trustees
c. Between the corporation and/or
shareholders and stakeholders,
including employees, creditors,
suppliers, contractors and other third
CORPORATION LAW
parties
d. Between the corporation and the State
[Medical Plaza Makati Condominium
Corp v. Cullen, G.R. No. 181416
(2013)]
2. Nature of the Controversy
Disagreement must not only be rooted in the
existence of an intra-corporate relationship
a. Must also pertain to the enforcement of
the parties’ correlative rights and
obligations under the RCC and the
internal and intra-corporate rules of the
corporation
b. In other words, jurisdiction should be
determined by considering both the
relationship of the parties as well as the
nature of the question involved.
If the relationship is merely incidental to
the controversy, or if there will still be
conflict even if the relationship does not
exist, there is no intra-corporate
controversy [Id.].
Jurisdiction over Intra-corporate Disputes
Jurisdiction lies with the RTC, acting as a
special commercial court
● Effect of Transfer of Jurisdiction -
transfer of jurisdiction over intra-
corporate disputes from the SEC to the
RTC did not deprive the SEC of its
jurisdiction to determine if
administrative rules are violated [SEC
v. Subic Bay Golf and Country Club,
Inc., G.R. No. 179047 (2015)].
Election Contests
Any controversy or dispute involving title to
claim to any elective office in a stock or non-
stock corporation, the validation of proxies, the
manner and validity of elections, and the
qualifications of candidates [Rule 6, Sec 3,
Interim Rules of Procedure for Intra-Corporate
Controversies].
● Includes the proclamation of winners,
to the office of director, trustee or other
officer directly elected by the
stockholders in a close corporation or
by members of a non-stock corporation
where the articles of incorporation or
by-laws so provide [Rule 6, Sec 3,
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Interim Rules of Procedure for Intra-
Corporate Controversies].
Test
The power of the SEC to investigate violations
of its rules on proxy solicitation is unquestioned
when proxies are obtained to vote on manners
unrelated to the cases enumerated under Sec
5, PD 902-A. However, when proxies are
solicited in relation to the election of corporate
directors, the resulting controversy should be
considered an intra-corporate dispute within
the RTC’s jurisdiction [SEC v. CA, Omico
Corp., G.R. No. 187702 (2014)].
Proxy violations relating to the determination of
the existence of a quorum for the election of
directors are also within the RTC’s jurisdiction
[Id.].
Inspection of Corporate Books and
Records
Power to Inspect
If the corporation denies or does not act on a
demand for inspection and/or reproduction, the
aggrieved party may report such inaction or
denial to the SEC, which may order a summary
investigation and issue an order directing the
inspection or reproduction of such records [Sec
73]
● It is the SEC that has jurisdiction over
disputes on the proper exercise of the
right of shareholders or members to
inspect or reproduce corporate books
and records.
Over Rehabilitation Cases
Regular courts have jurisdiction over
rehabilitation cases.
● The SEC shall retain jurisdiction over
pending suspension of
payment/rehabilitation cases filed as of
June 30, 2000, until finally disposed
[Sec. 5.2, RA 8799].
● The SEC has authority to dissolve a
corporation, but it does not have
jurisdiction over disputes arising from
liquidation.
○ Any dispute arising from
liquidation is an intra-corporate
dispute cognizable by the
commercial court [Herbosa].
CORPORATION LAW
To the COMELEC
The powers, authorities, and responsibilities of
the Commission involving party-list
organizations are transferred to the
Commission on Elections (COMELEC).
Within six (6) months after the effectivity of this
Act, the monitoring, supervision, and regulation
of such corporations shall be deemed
automatically transferred to the COMELEC.
For this purpose, the COMELEC, in
coordination with the Commission, shall
promulgate the corresponding implementing
rules for the transfer of jurisdiction over the
above-mentioned corporations [Sec. 182].
No Injunction Rule
The CA cannot issue a restraining order or writ
of injunction on any matter falling within the
SEC’s jurisdiction.
● The SEC is regarded to have the same
level as regular courts and should not
be enjoined by co-equal courts
[Herbosa].
Appeal
Modes of Appeal from SEC
1. To the CA under Rule 43 (2019 Rules of
Civil Procedure): Applies to appeals from
judgments or final orders of the Court of Tax
Appeals and from awards, judgments, final
orders, or resolutions of or authorized any
quasi-judicial agency in the exercise of its
quasi-judicial functions.
● Among these quasi-judicial agencies is
the Securities and Exchange
Commission [Sec. 1, Rule 43, 2019
Rules of Civil Procedure].
2. To the SC under Rule 45: When the dispute
involves pure questions of law.
● A party desiring to appeal by certiorari
from a judgment, final order, or
resolution of the Court of Appeals, the
Sandiganbayan, the Court of Tax
Appeals, the Regional Trial Court or
other courts, whenever authorized by
law, may file with the Supreme Court a
verified petition for review on certiorari.
● The petition may include an application
for a writ of preliminary injunction or
other provisional remedies and shall
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raise only questions of law which
must be distinctly set forth [Sec. 1,
Rule 45, 2019 Rules of Civil
Procedure].
Arbitration for Corporations [Sec. 181]
An arbitration agreement may be provided in
the AOI or BL of a corporation. When such
agreements are in place, disputes between the
corporation, its stockholders, or members,
which arise from the implementation of the AOI
or the BL, or from intra-corporate relations shall
be referred to arbitration.
To be enforceable, the agreement must
indicate:
a. The number of arbitrators
b. The procedure for their appointment
Non-Arbitrable disputes:
a. Criminal offenses
b. interests of third parties
The arbitral tribunal shall have the power to
grant interim measures necessary to ensure
enforcement of the award, prevent a
miscarriage of justice, or otherwise protect the
rights of the parties
When an intra-corporate dispute is filed with a
Regional Trial Court, the court shall dismiss the
case before the termination of the pretrial
conference, if it determines that an arbitration
agreement is written in the corporation’s
articles of incorporation, bylaws, or in a
separate agreement.
A final arbitral award shall be executory after
the lapse of 15 days from receipt thereof by the
parties and shall be stayed only by the filing of
a bond or the issuance by the appellate court
of an injunctive writ.
CORPORATION LAW
Meetings
1. Regular or Special
Kinds of Meetings
Meetings of directors, trustees, stockholders,
or members may be regular or special [Sec.
48].
a. When and Where
When [Sec. 52]
Regular meetings of directors or trustees shall
be held monthly unless the by-laws provide
otherwise.
Special meetings of the BOD or trustees may
be held at any time upon the call of the
president or as provided in the by-laws.
Where [Sec. 53]
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines unless the by-laws
provide otherwise.
b. Notice
Notice of regular or special meetings stating
the date, time and place of the meeting must
be sent to every director or trustee at least two
(2) days* prior to the scheduled meeting,
unless a longer time is provided by the by-laws.
Note: This was previously just one day, under
the old corporation code.
A director or trustee may waive this
requirement, either expressly or impliedly [Sec.
52].
c. Attendance in Meetings
In the old corporation code, directors or
trustees cannot be represented or voted by
proxies at board meetings [Sec. 25, CC].
Allowable Alternative Modes of Attendance
Directors or trustees who cannot physically
attend or vote at board meetings can
participate and vote through:
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● Remote communication such as
videoconferencing, teleconferencing;
or
● Other alternative modes of
communication that allow them
reasonable opportunities to participate
[Sec. 52].
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 [SEC Memo. Circ. No. 6, s. 2020].
Attendance and Voting by Proxy
Directors or trustees cannot attend or vote by
proxy at board meetings [Sec. 52].
In the Philippines, teleconferencing and
videoconferencing of members of BOD of
private corporations is a reality, in light of
Republic Act No. 8792. The Securities and
Exchange Commission issued SEC
Memorandum Circular No. 15, series of 2001,
on November 30, 2001, providing the
guidelines to be complied with in relation to
such conferences [Expertravel and Tours, Inc.
v. CA, G.R. No. 152392 (2005)].
Mandatory Recusal
A director or trustee who has a potential
interest in any related party transaction must
recuse from voting on the approval of the
related party transaction without prejudice to
compliance with the requirements of Section
31 of this Code [Sec. 52].
Who Presides
The chairman, or in his absence, the president
shall preside at all meetings of the directors or
trustees as well as of the stockholders or
members, unless the bylaws provide otherwise
[Sec. 53].
CORPORATION LAW COMMERCIAL LAW
Quorum acquiesce in the action taken by those who
voted affirmatively. Neither, for that matter, can
Quorum to Transact Corporate Business such inference be drawn from the abstention
General Rule: Majority of the directors or that he was abstaining because he was not
trustees as stated in the articles of then ready to make a decision [Lopez v. Ercita,
incorporation, shall constitute a quorum to G.R. No. L-32991 (1972)].
transact corporate business [Sec. 52].
Summary of Board Meetings
Exception: Unless the articles of incorporation Regular Special
or the by-laws provide for a GREATER Meeting Meeting
majority.

Decisions Reached by Majority of Quorum Description Meetings Meetings

General Rule: Every decision reached by at that are fixed that are
least a majority of the directors or trustees by law or as called for a
constituting a quorum shall be valid as a provided by special
corporate act. the by-laws purpose

Date and Held Held anytime

Exception: A vote of a majority of all the
time monthly, upon call
members of the board is required in case of
unless
election of officers [Sec. 52] and in other
otherwise
instances provided for in the Revised
provided by
Corporation Code, such as, amendment to the
the by-laws
articles of incorporation and by-laws, and other
instances set forth in Secs. 36, 37, 39, and 41. Venue Anywhere in and outside the
Philippines, unless otherwise
In Case of Death of Board Members provided by by-laws
In stock corporations: Shareholders may
generally transfer their shares. Thus, on the
death of a shareholder, the executor or Notice Date, time, and place of the
administrator duly appointed by the Court is meeting must be sent to
vested with the legal title to the stock and every member at least two
entitled to vote it. Until a settlement and (2) days prior to the
division of the estate is effected, the stocks of scheduled meeting, unless a
the decedent are held by the administrator or longer time is provided in
executor. the by-laws

In non-stock corporations: Membership in This requirement may be

and all rights arising from a non-stock waived
corporation are personal and non-transferable,
Attendance Proxy not allowed
unless the articles of incorporation or the
bylaws of the corporation provide otherwise. In
Voting through remote
other words, the determination of whether or
communication is allowed
not “dead members” are entitled to exercise (videoconferencing,
their voting rights (through their executor or teleconferencing, etc.)
administrator), depends on the Articles of
Incorporation or by-laws [Tan v. Sycip, G.R. Who The chairman and in his
No. 153468 (2006)]. Presides absence, the president

Rule on Abstention
No inference can be drawn in a vote of
abstention. When a director or trustee
abstains, it cannot be said that he intended to

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Quorum General Rule: Majority of
the directors or trustees, as
stated in the AOI
Exception: Unless the AOI
or the by-laws provide for a
GREATER majority
F. Capital Structure
1. Shares of Stock
a. Nature of Shares of Stock
Shares of stock are units into which the capital
stock is divided. A share of stock represents
interest of the holder thereof to participate in
the management of the corporation, to share
proportionally in the profits of the business and,
upon liquidation, to obtain an aliquot part of
corporate assets after all corporate debts have
been paid [Campos].
Classes of Shares of Stock
The shares in stock corporations may be
divided into classes or series of shares, or both.
The rights, privileges, or restrictions, and the
stated par value of the class or series of shares
must be indicated in the Articles of
Incorporation [Sec. 6].
General Rule: No share may be deprived of
voting rights [Sec. 6].
Exceptions:
1. Preferred non-voting shares
2. Redeemable shares,
3. Provided by the Code (e.g. Treasury
shares)
There shall always be a class/series of shares
which have COMPLETE VOTING RIGHTS
[Sec. 6].
Doctrine of Equality Shares
Each share shall be EQUAL in ALL respects to
every other share, except as otherwise
provided in the Articles of Incorporation and
stated in the certificate of stock [Sec. 6].
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b. Consideration for Stocks
Stocks shall not be issued for a consideration
less than the par or issued price thereof.
Consideration for the issuance of stock may
be:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, which
must be:
a. Actually received by the
corporation; and
b. Necessary or convenient for its
use and lawful purposes
c. At a fair valuation equal to the
par or issued value of the stock
issued;
3. Labor performed for or services
actually rendered to the corporation
4. Previously incurred indebtedness of
the corporation;
5. Amounts transferred from unrestricted
retained earnings to stated capital;
6. Outstanding shares exchanged for
stocks in the event of reclassification or
conversion;
7. Shares of stock in another corporation;
and/or
8. Other generally accepted form of
consideration [Sec. 61].
Invalid Consideration
The following cannot be exchanged for the
issuance of shares of stock [Sec. 61]:
1. Promissory notes
2. Future service
In case a subscription contract contemplates
unlawful consideration exchanged for shares of
stock:
1. The subscription contract would be
valid and binding on both the
corporation and subscriber
2. But the provision on such unlawful
consideration is deemed void, such
that the subscription agreement would
be construed to be for cash, and the
unpaid amount treated as part of
subscription receivables
It would not be in consonance with the trust
fund doctrine to consider the subscription
contract void [Villanueva].
CORPORATION LAW
Valuation of Consideration
Where the consideration is other than actual
cash, or consists of intangible property, the
valuation thereof shall initially be determined
by the stockholders or the board of directors,
subject to the approval of the Commission
[Sec. 61].
c. Watered stock
Definition
Watered stock are shares issued as fully paid
when in truth —
1. No consideration is paid in any form; or
2. The consideration received is known to
be less than the par value or issued
value of the shares [Sec. 64, RCC].
Watered stocks can either be par or no-par
value shares.
A watered stock is a stock issued in exchange
for:
1. A consideration less than its par value
or issued price; and
2. A non-cash consideration valued in
excess of its fair value [Herbosa, 2019].
Scope
Watered stocks include the following:
1. Issued without consideration (bonus
share)
2. Issued as fully paid when the
corporation has received less sum of
money than its par or issued value
(discounted share)
3. Issued for consideration other than
actual cash (i.e., property or services),
the fair valuation of which is less than
its par or issued value
4. Issue stock dividend when there are no
sufficient retained earnings or surplus
profit to justify it.
Note: Subsequent increase in the value of the
property used in paying the stock does not do
away with the watered stocks, nor cure the
defect in issuance. The existence of watered
stocks is determined at the time of issuance of
the stock.
Rationale Behind Prohibition
Stock watering is prohibited because:
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1. Corporation is deprived of needed
capital and the opportunity to market its
securities to its own advantage
2. Existing and future stockholders who
are also injured by the dilution of their
proportionate interests in the
corporation
3. Present and future creditors who are
injured as the corporation is deprived of
the assets or capital and reduces the
value of the corporate assets, which
stand as a substitute for the
stockholders’ personal liability to them
4. Persons who deal with it or purchase
its securities who are deceived
because stock watering is invariable
accompanied with misleading
corporate accounts and financial
statements
Liability of directors or officers [Sec. 64]
Any director or officer of a corporation who:
1. Consents to the issuance of stocks for
a consideration less than its par or
issued value;
2. Consents to the issuance of stocks for
a consideration other than cash, valued
in excess of its fair value; or
3. Having knowledge of the insufficient
consideration, does not file a written
objection with the corporate secretary.
The director or officer shall be liable to the
corporation or its creditors, SOLIDARILY with
the stockholder concerned to the corporation
and its creditors for the difference in value [Sec.
64].
Value received at time of Php XXX
issuance of the stock
Par or issued value (XXX)
Liability for watered stock Php XXX
Personal liability of corporate directors,
trustees or officers attaches when they consent
to the issuance of watered-down stocks or
when, having knowledge of such issuance, do
not file with the corporate secretary their written
objection [SPI Technologies Inc. V. Mapua,
G.R. No. 191154 (2014)].
CORPORATION LAW
Trust Fund Doctrine for Liability for
Watered Stocks
Where the corporation issues watered stock
and thereby assumes an ostensible
capitalization in excess of its real assets, the
transaction necessarily involves —
1. The misleading of subsequent
creditors; and
2. A constructive fraud upon creditors,
whether done with that purpose in mind
or not
Hence, it is held that recovery may be had by a
creditor in such case, even though the
corporation itself has no cause of action
against the stockholders.
1. Some of the earlier decisions put the
right of recovery in such a case upon
the so-called “trust fund doctrine.”
2. The creditors’ right of action to compel
the making good of the representation
as to the corporation’s capital is based
on fraud, and the trust fund doctrine is
only another way of expressing the
same underlying idea [De Leon].
Despite the view of foreign authors that the
fraud theory is the prevailing view, in the
Philippine jurisdiction, the trust fund doctrine
on watered stock prevails.
d. Situs of shares of stock
General Rule: The situs of shares of stock is
the country where the corporation is domiciled
[Wells Fargo Bank v. CIR, G.R. No. L-46720
(1940)].
It is not the domicile of the owner of a certificate
but the domicile of the corporation which is
decisive [Chua Guan v. Samahang
Magsasaka, Inc. (1935)].
The residence of the corporation is the place
where the principal office of the corporation is
located as stated in its AOI, even though the
corporation has closed its office therein and
relocated to another place [Hyatt Elevators and
Escalators Corp. v. Goldstar Elevator Phils.,
Inc., G.R. No. 161026 (2005)].
Exception: In property taxation – the situs of
intangible property, such as shares of stocks,
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is at the domicile or residence of the owner.
Exception to the Exception:
1. When a nonresident alien has shares
of stock in a domestic corporation, then
the situs will be in the Philippines; and
2. For purposes of the estate tax, the
gross estate of a resident decedent,
whether citizen or alien, or a citizen
decedent, whether resident or
nonresident, includes his intangible
personal property wherever situated
[De Leon].
e. Classes of shares of stock
Classification of shares:
1. Preferred Shares vs. Common Shares
2. Scope of Voting Rights Subject to
Classification
3. Founders’ Shares
4. Redeemable Shares
5. Treasury Shares
6. Par value shares vs. No-par value
shares
1. Preferred Shares vs. Common Shares
Preferred Shares
Stocks which are given, by the issuing
corporation:
a. Preference in dividends
b. Preference in the distribution of assets
of the corporation in case of liquidation,
or
c. Preference in both dividends and
distribution, or
d. Such other preferences as may be
stated in the Articles of Incorporation
which do not violate the Corporation
Code.
Note: Preferred shares may be issued only with
a stated par value [Sec. 6].
Unless the right to vote is clearly withheld, a
preferred stockholder would have such right as
it is an incident to stock ownership. The Board
of Directors may fix the terms and conditions
only when so authorized by the Articles of
Incorporation and such terms and conditions
shall be effective upon filing a certificate
thereof with the SEC [Sec. 6].
CORPORATION LAW COMMERCIAL LAW
Kinds of Preferred Shares Participating and Non-participating
a. Preferred Shares as to Assets vs. Unless otherwise provided, preferred stocks
Preferred Shares as to Dividends are non-participating.
b. Cumulative vs. Non-Cumulative a. Participating - those which, after
c. Participating vs. Non-participating getting their fixed dividend preference,
share with common stocks the rest of
Preferred Shares as to Assets vs. Preferred the dividends
Shares as to Dividends b. Non-participating – those which, after
a. Preferred shares as to assets –gives getting their fixed dividend preference,
the holder preference in the distribution have no more right to share in the
of the assets of the corporation in case remaining dividends with the common
of liquidation. stocks.
b. Preferred shares as to dividends -
entitled to receive dividends on said Common shares
share to the extent agreed upon before A common stock represents the residual
any dividends at all are paid to the ownership interest in the corporation. It is a
holders of common stock. basic class of stock ordinarily and usually
issued without extraordinary rights or privileges
Cumulative vs. Non-cumulative and entitles the shareholder to a pro rata
a. Cumulative - regardless of lack of division of profits” [CIR v. CA, 301 SCRA 152
profits in any given year, and lack of (1999)].
declaration of dividends, the arrears for
such year must be paid to the preferred The owners thereof are entitled to
stocks in a subsequent year (once management (via exclusive right to vote) of the
profits are made) before any dividends corporation and to equal pro-rata division of
can be paid to the common stocks. profits.
b. Non-Cumulative – entitlement to
receipt of dividends essentially Comparison
depends on declaration of such; types:
Common Preferred
1. Discretionary – right to
dividends in a particular year
depends on the discretion of Definition Stock which Stock which
the board, even if the entitles the entitles the
corporation has profits. owner to an holder to some
2. Mandatory – a positive duty is equal pro rata preference,
imposed to declare preferred division of either in the
dividends every year that profits dividends, or in
unrestricted retained earnings the distribution
are available. of assets, or
3. Earned cumulative or dividend both
credit – board has discretion
Value Depends if it is Stated par
not to declare dividends,
a par or no-par value [Sec. 6]
however, once the board
value share
decides that dividends will be
declared, the preferred
Voting Usually vested May be
stockholders have a right to
Rights with the deprived of
arrears in dividends for the exclusive right voting rights
years when there were to vote except for the
unrestricted retained earnings instances
are available but no dividend provided in
was declared. Section 6
[Sec. 6]

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Preference No advantage, May have first must be for a limited period not to exceed 5
upon priority or crack at years, subject to approval by SEC The 5-year
Liquidation preference dividends/profi period shall commence from date of approval
over any other ts/ distribution by SEC.
stockholder in of assets
the same class depending on Founder’s shares given the exclusive right to
the features of vote and be voted for are not allowed to
the shares exercise that right in violation of the Anti-
Dummy Law and the Foreign Investment Act
[Sec. 7].
2. Scope of Voting Rights Subject to
Classification
4. Redeemable Shares
Only preferred and redeemable shares may be
Redeemable Shares are shares which may be
deprived of the right to vote [Sec. 6], except as
purchased by the corporation from the holders
otherwise provided in the Revised Corporation
of such shares upon the expiration of a fixed
Code.
period, regardless of the existence of
unrestricted retained earnings in the books of
General Rule: Non-Voting Shares are not
the corporation.
entitled to vote. The law only authorizes the
denial of voting rights in the case of
The RCC made the redemption subject to the
redeemable shares or preferred shares,
rules and regulations that may be issued by
provided that there shall always be a class or
SEC, in addition to what may be stipulated in
series of shares which have complete voting
the AOI and Certificate of Stock [Sec. 8].
rights [Sec. 6].
Limitations
Exception: Shares whose voting rights are
a. Redeemable shares may be issued
denied, shall nevertheless be entitled to vote
only when expressly provided for in the
on the following fundamental matters:
AOI [Sec. 8].
a. Amendment of the Articles of
b. The terms and conditions affecting said
Incorporation;
shares must be stated both in the AOI
b. Adoption and amendment of by-laws;
and in the certificate of stock [Sec. 8].
c. Sale, lease, exchange, other
c. Redeemable or preferred shares may
disposition of all or substantially all of
be deprived of voting rights in the AOI
the corporate property;
[Sec. 6].
d. Incurring, creating or increasing
d. The corporation is required to maintain
bonded indebtedness;
a sinking fund to answer for redemption
e. Increase or decrease of capital stock;
price if the corporation is required to
f. Merger and consolidation;
redeem [SEC-OGC Opinion No. 07-
g. Investment of corporate funds in
03].
another corporation or business;
e. The redeemable shares are deemed
h. Dissolution of the corporation
retired upon redemption, unless
otherwise provided in the AOI (i.e., if
3. Founders’ Shares the AOI allows for reissuance of such
shares) [SEC Rules Governing
Founders’ Shares are shares classified as Redeemable and Treasury Shares, 26
such in the AOI, which are given certain rights April 1982].
and privileges not enjoyed by the owners of f. Unrestricted retained earnings are
other stocks. These may be given special NOT necessary before shares can be
preference in voting rights and dividend
redeemed, but there must be sufficient
payments. assets to pay the creditors and to
answer for operations [Republic
Where exclusive right to vote and be voted for
in the election of directors is granted, such right
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Planters Banks v. Agana, G.R. No.
51765 (1997)] See also Sec. 8.
g. Redemption cannot be made if such
redemption will result in insolvency or
inability of the corporation to meet its
obligations [SEC Opinion, 24 Aug
1987].
Kinds of redeemable shares
a. Compulsory - the corporation is
required to redeem the shares.
b. Optional - the corporation is not
mandated to redeem the shares.
5. Treasury Shares
Treasury Shares are shares which have been
issued and fully paid for, but subsequently re-
acquired by the issuing corporation by
purchase, redemption, donation or through
some other lawful means. Such shares may
again be disposed of for a reasonable price
fixed by the BOD [Sec. 9].
Shares may be reacquired without impairing
the corporate trust fund. Reacquisition of
shares is allowed, provided the corporation will
use assets up to the extent of its unrestricted
retained earnings [SEC Rules Governing
Redeemable and Treasury Shares, Sec 3, par
(1)(a)].
It should be recalled that corporate earnings
are not part of the corporate trust fund
[Herbosa, 2019]. They are excluded from the
definition of outstanding capital stock.
Pre-emptive right of stockholders in close
corporations shall extend to reissuance of
treasury shares, unless otherwise provided in
the AOI [Sec. 101].
Delinquent stocks, which are stocks that have
not been fully paid, may become treasury
stocks upon bid of the corporation in absence
of other bidders [Sec. 67].
Limitations on treasury shares
a. They may be re-issued or sold again as
long as it is for a reasonable price fixed
by the BOD.
b. Cannot participate in dividends.
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c. It has no voting right as long as such
shares remain in the Treasury [Sec.
56].
d. It cannot be represented during
stockholder’s meetings.
e. The amount of URE equivalent to the
cost of treasury shares being held shall
be restricted from being declared and
issued as dividends.
Note: When treasury shares are sold below its
par or issued value, there can be no watering
of stock because such watering of stock
contemplates an original issuance of shares.
For both stock corporations and close
corporations, the pre-emptive right of
stockholders extends to the re-issuance or sale
treasury shares, unless the articles of
incorporation provide otherwise [Sec. 38 and
101; SEC Opinion, 14 January 1993].
Treasury Shares are not Retired Shares
Treasury shares do not revert to the unissued
shares of the corporation, but are regarded as
property acquired by the corporation, which
may be reissued or resold at a price to be fixed
by the Board of Directors [SEC Rules
Governing Redeemable and Treasury Shares,
CCP No. 1-1982].
Note: Under the SEC Rules, the redemption of
redeemable shares does not necessarily make
them as treasury shares. Instead, it leads to
their automatic retirement or cancellation,
unless the contrary is specifically stipulated.
The articles thus provide advance notice to
ordinary shareholders that the board may, at its
own discretion, reissue redeemable shares
with the same features.
Treasury shares distributed by way of
dividends
Treasury shares may also be distributed as
property dividends. In order for treasury shares
to be distributed as property dividends, the
amount of the retained earnings previously
used to support their acquisition must not have
been impaired by losses. Further, such
retained earnings must not be used to justify
the distribution of treasury shares as property
dividends. They may only be distributed out of
the other earnings of the corporation [SEC-
CORPORATION LAW
OGC Opinion No. 12-06, dated April 20, 2012].
Note: Treasury shares are treated as assets of
the corporation [Herbosa, 2019]. Since a
treasury share is a fully paid share re-acquired
by the corporation, it is not outstanding and
may be re-issued and resold. It cannot receive
dividends before the resale because the
corporation cannot grant dividends to itself
[CIR v. Manning].
6. Par Value Shares vs. No-Par Value
Shares
Par value shares
These are shares with a stated or fixed value
set out in the Articles of Incorporation, which
remains the same regardless of the profitability
of the corporation. This gives rise to financial
stability, and is the reason why banks, trust
corporations, insurance companies and
building and loan associations must always be
organized with par value shares.
Par value is minimum issue price of such share
in the Articles of Incorporation which must be
stated in the certificate [Sec 61].
No par value shares
These are shares without a stated value in the
AOI. They are without nominal value. They
may be issued for the amount stipulated in the
AOI or fixed by the Board [Sec 61].
Limitations on no par value shares [Sec. 6]
a. Cannot have an issue price of less than
P5.00 per share;
b. Once issued, they shall be deemed
fully paid and non-assessable, and the
holders of such shares shall not be
liable to the corporation or to its
creditors in respect thereto;
c. Entire consideration received by the
corporation shall be treated as capital
and shall not be available for
distribution as dividends;
d. The AOI must state the fact that the
corporation issues no-par shares and
the number of shares;
e. Cannot be issued as preferred stock;
f. Cannot be issued by banks, insurance
companies, public utilities and building
and loan associations;
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g. Cannot be issued by all corporations
authorized to obtain or access funds
from the “public”.
Note: A new addition in the Revised
Corporation Code is the prohibition on the
issuance of no-par shares being imposed on all
corporations authorized to obtain or access
funds from the “public.” This prohibition is not
anymore limited to banks, insurance
companies, public utilities and building and
loan associations.
2. Certificate of stock
a. Nature of the certificate
Shares of stock so issued are personal
property and may be transferred by delivery of
the certificate or certificates indorsed by the
owner, his attorney-in-fact, or any other person
legally authorized to make the transfer [Sec.
62, RCC].
A certificate of stock is —
An instrument formally issued by the
corporation with the intention that the same
constitute the best evidence of the rights and
status of a shareholder
An instrument signed by the proper corporate
officer acknowledging that the person named in
the document is the owner of a designated
number of shares of stock. It is prima facie
evidence that the holder is a shareholder of a
corporation [Lao v. Lao, 567 SCRA 558,
2008)].
The paper representative or tangible evidence
of the stock itself and of the various interests
therein.
It is merely evidence of the holder’s interest
and status in the corporation, his ownership of
the share represented thereby.
It expresses the contract between the
corporation and the stockholder [Makati Sports
Club v. Cheng, G.R. No. 178523 (2010)].
A certificate of stock is NOT —
1. A condition precedent to the acquisition
of the rights and status of a shareholder
CORPORATION LAW
2. A stock in the corporation
3. The equivalent of ownership of the
share it represents
4. Essential to the existence of a share of
stock or the nature of the relation of
shareholder to the corporation [Makati
Sports Club v. Cheng, G.R. No.
178523 (2010)].
b. Uncertificated shares
An uncertificated share is a subscription duly
recorded in the corporate books but has no
corresponding certificate of stock yet issued.
Uncertificated shares or securities are those
evidenced by electronic or similar records [Sec.
3.14, Securities Regulation Code].
Added provision in Sec. 62 of the Revised
Corporation Code:
The Commission 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
Commission.
Notwithstanding Sec. 62, RCC (Certificate of
Stock and Transfer of Shares), a corporation
whose securities are registered pursuant to the
SRC or listed on securities exchange may:
● If so resolved by the BOD and
agreed by a shareholder, investor
or securities intermediary, issue
shares to, or record the transfer of
some or all its shares into the name
of such shareholders, investors or,
securities intermediary in the form
of uncertified securities.
The use of uncertified securities in these
circumstances shall be without prejudice to the
rights of the securities intermediary
subsequently to require the corporation to
issue a certificate in respect of any shares
recorded in its name; and
If so provided in its articles of incorporation and
by-laws, issue all of the shares of a particular
class in the form of uncertificated securities
and subject to a condition that investors may
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not require the corporation to issue a certificate
in respect of any shares recorded in their name
[Sec. 43, Securities Regulation Code].
Transfers of Uncertificated Securities; How
Made
Valid as between parties - validly made and
consummated by appropriate book-entries in
the securities intermediaries, or in the stock
and transfer book held by the corporation or the
stock transfer agent.
A transfer made pursuant to the foregoing has
the effect of delivery of a security in bearer form
or duly indorsed in blank representing the
amount of security or right transferred,
including the unrestricted negotiability of that
security by reason of such delivery.
Valid as to corporation – when the transfer is
recorded in the books of the corporation so as
to show the names of the parties to the transfer
and the number of shares transferred [Sec.
43.3, Securities Regulation Code].
c. Negotiability; requirements for valid
transfer of stocks
Theory of Quasi-Negotiability
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:
1. The holder thereof takes it without
prejudice to such rights or defenses as
the registered owner or creditor may
have under the law
2. Except insofar as such rights or
defenses are subject to the limitations
imposed by the principles governing
estoppels [Republic v. Sandiganbayan,
G.R. Nos. 107789 & 147214, April 30,
2003].
Certificates of stock are not negotiable
instruments. Consequently —
1. A transferee under a forged
assignment acquires no title which can
be asserted against the true owner
unless the latter’s negligence has been
such as to create an estoppel against
him.
CORPORATION LAW
2. If the owner of the certificate has
endorsed it in blank, and it is stolen
from him, no title is acquired by on
innocent purchaser for value [De los
Santos v. Republic, G.R. No. L-4818
(1955)].
Street Certificate
When a stock certificate is endorsed in blank
by the owner thereof, it constitutes what is
termed as street certificate.
Upon its face, the holder is entitled to demand
its transfer into his name from the issuing
corporation.
Such certificate is deemed quasi-negotiable,
and as such the transferee thereof is justified
in believing that it belongs to the holder and
transferor [Santamaria v. Hongkong and
Shanghai Banking Corporation, 89 Phil. 780,
788-789 (1951)].
Requirements for Valid Transfer of Stocks
For a valid transfer of stocks, the requirements
are as follows:
1. There must be delivery of the stock
certificate;
2. The certificate must be endorsed by
the owner or his attorney-in-fact or
other persons legally authorized to
make the transfer; and
3. To be valid against third parties, the
transfer must be recorded in the books
of the corporation (i.e., 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) [Sec. 62,
RCC] [Bitong v. CA, G.R. No. 123553
(1998)].
No shares of stock against which the
corporation holds an unpaid claim shall be
transferable in the books of the corporation
[Sec. 62, RCC].
The Revised Corporation Code acknowledges
that the delivery of a duly indorsed stock
certificate is sufficient to transfer ownership of
shares of stock in stock corporations. Such
mode of transfer is valid between the parties.
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In order to bind third persons, however, the
transfer must be recorded in the books of the
corporation. Clearly then, the absence of a
deed of assignment is not a fatal flaw which
renders the transfer invalid.
Requisites for a valid transfer per Sec. 62,
RCC:
1. Between the parties:
2. Delivery
3. Indorsement
4. To be valid as to third persons:
Recorded in the books of the
corporation [Republic v. Estate of
Hans Menzi, G.R. No. 152578
(2005)].
The execution of a deed of sale does not
necessarily make the transfer effective. The
delivery of the stock certificate duly indorsed by
the owner is the operative act that transfers the
shares. The absence of delivery is a fatal
defect which is not cured by mere execution of
a deed of assignment [Rural Bank of Lipa City
v. CA, G.R. No. 124535 (2001)].
The stock and transfer book is the basis for
ascertaining the persons entitled to the rights
and subject to the liabilities of a stockholder.
Where a transferee is not yet recognized as a
stockholder, the corporation is under no
specific legal duty to issue stock certificates in
the transferee’s name [Ponce v. Alsons
Cement Corp., G.R. NO. 139802 (2002)].
Citing Hager v. Bryan (1911): A mandamus
should not issue to compel the secretary of a
corporation to make a transfer of the stock on
the books of the company, unless it
affirmatively appears that he has failed or
refused so to do, upon the demand either:
1. Of the person in whose name the stock
is registered, or
2. Of some person holding a power of
attorney for that purpose from the
registered owner of the stock.
The purpose of registration is two-fold:
1. To enable the transferee to exercise all
the rights of a stockholder, including
the right to vote and to be voted for, and
2. To inform the corporation of any
change in share ownership so that it
CORPORATION LAW
can ascertain the persons entitled to
the rights and subject to the liabilities of
a stockholder [Batangas Laguna
Tayabas Bus Co. v. Bitangas, G.R. No.
137934 (2001)].
Until challenged in a proper proceeding, a
stockholder of record has a right to participate
in any meeting.
His vote can be properly counted to determine
whether a stockholders’ resolution was
approved, despite the claim of the alleged
transferee.
On the other hand, a person who has
purchased stock, and who desires to be
recognized as a stockholder for the purpose of
voting, must secure such a standing by having
the transfer recorded in the corporate books.
Until the transfer is registered, the transferee is
not a stockholder, but an outsider.
d. Issuance
1. Full payment
General Rule: 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 [Sec. 63, RCC].
Exception: Where it was the practice of the
corporation since its inception to issue
certificates of stock to its individual
stockholders for unpaid shares of stock and to
give full voting power to shares fully paid
[Baltazar v. Lingayen Gulf Electric Power
Company, G.R. No. L-16236 (1965)].
2. Payment pro-rata
The entire subscription must be paid first
before the certificates of stock can be issued.
Partial payments are to be applied pro rata to
each share of stock subscribed [Nava v. Peers
Mktg. Corp., G.R. No. L-28120 (1976)].
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e. Lost or destroyed certificates
Procedure for re-issuance in case of loss,
stolen or destroyed certificates:
Filing of an affidavit of loss with the corporation
by the registered owner.
Verifying the affidavit and other information and
evidence with the books of the corporation by
the corporation.
1. Publishing by the corporation of a
notice of loss in a newspaper of general
circulation published —
a. In the place, where the
corporation has its principal
office;
b. Once a week for 3 consecutive
weeks;
c. At the expense of the owner of
the certificate of stock.
2. Cancellation of the certificate in the
books of the corporation and issuance
of new certificates, after the expiration
of 1 year from the date of the last
publication and there is no contest. The
right to make such contest shall be
barred after the expiration of the one-
year period.
3. Issuance by the corporation of new
certificates before 1 year period if the
registered owner files a bond and there
is no pending contest regarding the
ownership of said certificates [Sec. 72,
RCC].
Note: Except in cases of fraud, bad faith, or
negligence on the part of the corporation and
its officers, no action may be brought against
the corporation which shall have issued
certificates of stock in lieu of those lost, stolen,
or destroyed pursuant to the above procedure.
3. Disposition and encumbrance of
shares
a. Sale of Shares
1. Allowable restrictions on the sale of
shares
General Rule: Free Transferability of Shares
Shares of stock so issued are personal
property and may be transferred [Sec. 62].
CORPORATION LAW
Exception: In CLOSE corporations,
restrictions on the right to transfer shares may
be provided in the Articles of Incorporation, by-
laws, and certificates [Sec. 97].
Note: The SEC has allowed corporations other
than close corporations to provide for
restrictions on the right to transfer shares.
2. Sale of partially paid shares
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation
[Sec. 62].
A corporation may refuse to acknowledge and
register a sale or assignment of shares which
are not fully paid and may continue to hold the
original subscriber liable on the payment of the
subscription.
a. However, the above principle in
Section 62 cannot be utilized by the
corporation to refuse to recognize
ownership over pledged shares
purchased at public auction.
b. The term “unpaid claims” refers to “any
unpaid claims arising from unpaid
subscription, and not to any
indebtedness which a subscriber or
stockholder may owe the corporation
arising from any other transactions
[China Banking Corp. v. CA, G.R. No.
117604 (1997)].
3. Sale of a portion of shares not fully
paid
The SEC has opined on several occasions that
a stockholder who has not paid the full amount
of his subscription cannot transfer part of his
subscription in view of the indivisible nature of
a subscription contract.
Rationale Behind Prohibition
The reason behind the principle of disallowing
transfer of not fully paid subscription to several
transferee is that it would be difficult to
determine:
1. Whether or not the partial payments
made should be applied as —
a. Full payment for the
corresponding number of
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shares which can only be
covered by such payment; or
b. Proportional payment to each
and all of the entire number of
subscribed shares
2. The unpaid balance to be assumed by
each transferee [Villanueva].
4. Sale of all of shares not fully paid
The SEC has opined that the entire
subscription, although not yet fully paid, may
be transferred to a single transferee, who
because of the transfer must assume the
unpaid balance.
It is necessary, however, to secure the consent
of the corporation, since the transfer of
subscription rights and obligations
contemplates a novation of contract which
under Article 1293 of the Civil Code cannot be
made without the consent of the creditor
[Villanueva].
5. Sale of fully paid shares
Shares of stock so issued are personal
property and may be transferred by the delivery
of the stock certificate or certificates, indorsed
by —
● The owner; or
● The owner’s attorney-in-fact; or
● Other person legally authorized to
make the transfer [Sec. 62].
6. Requisites of a valid transfer
Same as requirements for valid transfer of
stocks.
No transfer shall be valid, except as between
the parties, until the transfer is recorded in the
books of the corporation showing:
a. The names of the parties to the
transaction
b. The date of the transfer
c. The number of the certificate or
certificates and
d. The number of shares transferred [Sec.
62].
The failure to register a sale or disposition of
shares of stock in the books of the corporation
CORPORATION LAW COMMERCIAL LAW
would render the same invalid to all persons, corporations, the stockholder-grantor shall
including the attaching creditors of the seller have the right to attend and vote at meetings of
[Uson v. Diosomito, 61 Phil. 535 (1935)]. stockholders

See: iii. Negotiability; requirements for valid Exception: Unless the secured creditor is
transfer of stocks under a. Certificate of stock expressly given by the stockholder-grantor
such right in writing which is recorded in the
7. Involuntary dealings appropriate corporate books [Sec. 54].

Right to Encumber Shares Executors, administrators, receivers, and other

Shares of stock are personal property, and the
owner has an inherent right, as incident of
ownership to transfer the same at will, which
would include the power to encumber the
shares.
The right of a stockholder to pledge, mortgage
or otherwise encumber his shares is
recognized under Sec. 54 of the RCC which
regulates the manner of voting on pledged or
mortgaged shares.
Restrictions on the Right to Encumber
Shares
Restriction Valid/Invalid
legal representatives duly appointed by the
court may attend and vote on behalf of the
stockholders or members without need of any
written proxy [Sec. 54].
Attachment, Execution and Other
Involuntary Dealings on Shares
Attachments of shares of stock are not
included in the term “transfer” as provided in
[Section 62, RCC]. Both the Revised Rules of
Court and [Revised Corporation Code] do not
require annotation in the corporation’s STB for
the attachment of shares to be valid and
binding on the corporation and third parties
[Chemphil Export & Import Corp. v. CA, 251
SCRA 257 (1995)].

Absolutely prohibits INVALID A bona fide transfer of shares, not registered in

the stockholders the corporate books, is not valid as against a
from pledging or It would be violative subsequent lawful attachment of said shares,
mortgaging their of the statutory right regardless of whether the attaching creditor
shares without the of the stockholders to had actual notice of said transfer or not. All
consent of the BOD encumber shares of transfers not so entered on the books of the
stock as allowed in corporation are absolutely void as against third
Sec. 54. parties; not because they are without notice or
fraudulent in law or fact, but because they are
Merely allows the VALID and binding made so void by statute [Garcia v. Jomouad,
corporation or 323 SCRA 424 (2000)].
existing stockholders
to accept the offer Bias Against Voluntary Sales
within the option By the strict application of Sec. 63 of the
period, and Corporation Code [now Sec. 62, RCC] to cover
thereafter, if no one only the sale, assignment, or absolute
accepts the offer, the disposition of shares of stock, the SC has
stockholder is free to placed a bias against voluntary sales,
pledge or mortgage assignments or dispositions of shares of stock
his shares in favor of vis-à-vis pledges, mortgages, attachment or
any 3rd party levy thereof.
a. To be valid and binding on third parties,
Right to Vote of Secured Creditors and the voluntary sale, assignment or
Administrators disposition of shares requires the
General Rule: In case a stockholder grants essential element of registration in the
security interest in his or her shares in stock stock and transfer book;

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b. Otherwise the sale, assignment or G. Dissolution and Liquidation
disposition is considered void as to
third parties, even when they have
1. Modes of dissolution
actual notice.
Based on jurisprudence, the methods of
In contrast, when it comes to pledge,
effecting dissolution as prescribed by law are
mortgage, encumbrance, attachment or levy of
exclusive, and a corporation cannot be
shares, registration thereof in the stock and
dissolved except in the manner prescribed by
transfer book is not essential either for validity
law [De Leon].
or as a species of notifying third parties
[Villanueva].
Dissolutions may be either 1) voluntary or 2)
involuntary.
The doctrine of equality of shares states that
all stocks issued by the corporation are Voluntary Involuntary
presumed equal with the same privileges and
liabilities, provided that the Articles of Voluntary surrender Expiration of the
Incorporation is silent on such differences [Sec. of its charter by the shortened corporate
6]. vote of the BOD/T term [Sec 36]
and the
There is a presumption of equality of the rights stockholders/membe
and features of shares when nothing is rs where no creditors
expressly provided to the contrary. are affected [Sec
a. Although a corporation has the power 134]
to classify its shares of stock, provide
for preferences and other conditions, By the judgment of By legislative
no presumption should exist to the SEC after enactment
distinguish one share from another. hearing of petition for
b. Sec. 6 of the RCC now requires that the voluntary dissolution,
distinguishing features be stated also where creditors are
in the Certificate of Stock. affected
b. Participation in management
Amending the AOI to Failure to organize
shorten its term [Sec and commence
1. Participation in Management 136] business within 2
years from
Proxy incorporation [Sec
Stockholders and members may vote in person
21]
or by proxy in all meetings [Sec. 57].
The word “proxy” may be understood in two In case of a Cessation of
ways: corporation sole, by business for 5 years
a. First, it may refer to the person duly submitting [Sec 21]
authorized by a stockholder to vote in to the SEC a verified
his behalf in a stockholder’s meeting. declaration of the
b. Secondly, it may refer to the document dissolution for
which evidences this authority approval
[Campos].
By merger or By order of the
consolidation SEC on grounds
under existing laws
[Sec 138]

By order of the
Courts following a
quo warranto

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dissolution
proceeding, a
b. the form, manner, and
proceeding
time when the notices
involving a
were given
financially
c. names of the
distressed
stockholders and
corporation, or for
directors or members
grounds under
and trustees who
existing laws.
approved of the
dissolution
Note: Where the veil of corporate fiction is d. the date, place, and
pierced, it does not operate as a cause for the time of the meeting in
dissolution of the corporation. which the vote was
made,
a. Voluntary and involuntary dissolution e. date of publication
2. Copy of the resolution certified
1. Where no creditors are affected [Sec. by the majority of the BOD/T
134] and countersigned by the
This type of dissolution is initiated by the secretary.
corporation. It does not prejudice, or is not 3. Proof of publication
consented by creditors. 4. Favorable recommendation
from the appropriate regulatory
Procedure agency, when necessary
If dissolution of a corporation does not 5. The signed and countersigned
prejudice the rights of any creditor (Sec. 134): copy will be filed with the SEC
a. Notice of the meeting should be given and the latter will issue the
to the stockholders or members by certificate of dissolution.
personal delivery, registered mail, or by
any means authorized under its by- Withdrawal of the request [Sec. 137]
laws at least 20 days prior to the The corporation may withdraw its verified
meeting. request for dissolution within 15 days from
b. The notice of meeting should also be receipt by the SEC. Otherwise, the SEC shall
published once prior to the meeting approve the request and issue the certificate of
1. Notice shall contain the time, dissolution.
place and object of the meeting
2. in a newspaper published in Effectivity of the dissolution [Sec. 134]
the place where the principal Dissolution shall take effect upon the issuance
office of said corporation is of the certificate of dissolution by the SEC.
located, or if no newspaper is
published in such place, then in Favorable recommendation by the
a newspaper of general appropriate agency required [Sec. 134]
circulation in the Philippines. No application of dissolution will be approved
c. The resolution to dissolve must be without the favorable recommendation of the
approved by the majority of the BOD/T appropriate government agency for:
and approved by at least the majority of 1. Banks,
the Outstanding Capital Stock or 2. banking and quasi-banking institutions,
majority of the members. 3. pre-need, insurance and trust
d. The corporation must submit the companies,
following to the SEC: 4. non-stock savings and loans
1. A verified request for associations (NSSLA),
dissolution stating the 5. pawnshops, and
following: 6. other financial intermediaries
a. the reason for the

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2. Where creditors are affected [Sec. 135]
This covers a case where the corporation
petitions for its dissolution which may prejudice
the rights of creditors or are not consented by
all of them. Here, the corporation is not under
financial distress or in a state of insolvency. In
those cases, the corporation must file a petition
for rehabilitation or liquidation in court
[Herbosa, 2019].
a. A petition shall be filed with the SEC
containing the following:
1. signature by a majority of its
BOD/T or other officers having
management of its affairs;
2. verified by its president, or
secretary or one of its director
or trustees;
3. all claims and demands against
the corporation; and
4. resolved upon by affirmative
vote of the stockholders
representing at least ⅔ of the
Outstanding Capital Stock or ⅔
of members;
b. The corporation must submit the
following to the SEC.
1. The petition for dissolution
stating the following:
a. the reason for the
dissolution;
b. the form, manner, and
time when the notices
were given;
c. the date, place and
time of the meeting in
which the vote was
made
2. A copy of the resolution
authorizing the dissolution,
certified by the majority of the
BOD/T and countersigned by
the secretary.
3. A list of all its creditors
c. If the petition is sufficient in form and
substance, the SEC shall issue an
order fixing the date on or before which
objections to the petition may be filed.
Such date shall not be less than 30
days nor more than 60 days after the
entry of the order.
d. A copy of the order shall be published
at least once a week for 3 consecutive
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weeks in a newspaper of general
circulation published in the municipality
or city of the corporation’s principal
office. If none, in a newspaper of
general circulation in the Philippines. A
similar copy shall be posted for 3
consecutive weeks in 3 public places in
such municipality or city.
e. A hearing of any issue or objections
raised shall be conducted 5 days after
the lapse of the expiration of the time to
file objections.
f. If the objections are insufficient or the
material facts in the petition are true,
judgment shall be rendered dissolving
the corporation and directing the
disposition of assets. The judgment
may include the appointment of a
receiver.
a. As long as 2/3 vote is obtained, no
member/ stockholder can prevent
such dissolution unless the
majority stockholders acted in bad
faith. The latter may be held liable
for damages [Campos].
b. Even where there are creditors of
the corporation who may be
prejudiced by the dissolution, it is
still possible for the corporation to
terminate its existence prior to the
expiration of its term, provided
said creditors are given the
opportunity to present their claims
and objections so that their
interests may be protected
[Campos].
3. By shortening of corporate term [Sec.
136]
A voluntary dissolution may be effected by
amending the AOI to shorten the corporate
term under Sec 16.
Ipso Facto Dissolution
Upon approval of the expired shortened term,
the corporation shall be deemed dissolved
without any further proceedings. The
corporation shall be deemed dissolved without
any further proceedings, taking effect on the
day following the last day of the corporate term.
Shortening vs. Expiration
CORPORATION LAW COMMERCIAL LAW

Shortening of the Expiration of the

5. Involuntary dissolution
Corporate Term Original Term
By Expiration of Corporate Term
Has the effect of Where a corporation The RCC provides that a corporation shall
dissolving the elects to retain its have perpetual existence. The AOIs of existing
corporation, ipso corporate term, and corporations shall be deemed amended to
facto, once the such term has reflect their perpetual term. The exception is
shortened term has expired, the when the AOIs of corporations created under
arrived corporation may file the effectivity of this Code provide for a specific
a petition for revival period [Sec 11].
of corporate
existence. An existing corporation may opt out of the rule
on perpetual existence by notifying the
[Divina] Commission, provided it was approved by
shareholders, and without prejudice to the
4. Withdrawal of Dissolution [Sec. 137] appraisal right of dissenting stockholders
[Herbosa, 2019].
A withdrawal of the request for dissolution shall
be: When such term has expired, a petition for
a. Made in writing; revival of corporate existence may be filed
b. Duly verified by any incorporator, [Divina].
director, trustee, shareholder, or
member; Legislative Dissolution
c. Signed by the same number of The inherent power of Congress to make laws
incorporators, directors, trustees, carries with it the power to amend or repeal
shareholders, or members necessary them. Involuntary corporate dissolution may be
to request for dissolution as set forth in effected through the amendment or repeal of
Sec. 133-136; the Revised Corporation Code [implied from
d. Submitted no later than fifteen (15) Sec. 184, De Leon].
days from receipt by the Commission
of the request for dissolution. The limitations on the power to dissolve
corporations by legislative enactment are as
A withdrawal of the petition for dissolution shall follows:
be in the form of a motion and similar in a. Under the Constitution, the
substance to a withdrawal of request for amendment, alteration, or repeal of the
dissolution but shall be verified and filed prior corporate franchise of a public utility
to publication of the order setting the deadline shall be made only “when the common
for filing objections to the petition. good so requires”;
b. Under Sec. 84 of the Code, it is
SEC Action provided that: “No right or remedy in
Upon receipt of a withdrawal of request for favor of or against any corporation, its
dissolution, the Commission shall withhold stockholders, members, directors,
action on the request for dissolution and shall, trustees, or officers, nor any liability
after investigation: incurred by any such corporation,
a. Make a pronouncement that the stockholders, members, directors,
request for dissolution is deemed trustees, or officers, shall be removed
withdrawn; or impaired either by the subsequent
b. Direct a joint meeting of the board of dissolution of said corporation or by
directors or trustees and the any subsequent amendment or repeal
stockholders or members for the of this Code or of any part thereof”;
purpose of ascertaining whether to c. While Congress may provide for the
proceed with dissolution; or dissolution of a corporation, it cannot
c. Issue such other orders as it may deem impair the obligation of existing
appropriate.
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contracts between the corporation and
third persons or take away the vested
rights of its creditors [De Leon].
Note: Thus, except for the expiration of
its term, no dissolution can be effective
without some act of the State [Daguhoy
Enterprises v. Ponce, G.R. No. L-6515
(1954)].
Non-Use of Corporate Charter [Sec 21; Sec
138(a)]
If a corporation fails to formally organize and
commence the transaction of its business or
construction of its works within 5 years, its
certificate of incorporation shall be deemed
revoked, its corporate powers shall cease, and
the corporation shall be deemed dissolved
[Sec. 21].
Dissolution in this case is automatic [Campos].
Formal organization includes not only the
adoption of the by-laws but also the
establishment of the body which will administer
the affairs of the corporation and exercise its
powers
● By-laws should be adopted within one
month of receipt of official notice of the
issuance of the certificate of
incorporation, otherwise the certificate
may be suspended or revoked [PD
902-A, Sec. 6 (i)(5)].
Continuous Inoperation of Corporation
[Sec 21; 138(b)]
If a corporation commenced its business but
fails to continue operations after least 5
consecutive years, the corporation is first
placed on delinquent status, after due notice
and hearing.
● The delinquent corporation is given 2
years to resume operations and
comply with all the requirements that
the SEC shall prescribe.
● Otherwise, the SEC will prescribe its
dissolution. The corporation may have
the revocation reconsidered.
Otherwise, the SEC may proceed to
involuntary dissolution with notice and
hearing.
Dissolution in this case is not automatic
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[Campos].
Dissolution by the SEC on Grounds Under
the Code and Other Existing Laws
The Revised Corporation Code also introduced
a number of changes on involuntary
dissolution. Sec. 138 codified the grounds that
may lead to involuntary dissolution by the
Commission motu proprio or upon filing of a
verified complaint by any interested party.
Grounds for dissolution [Sec. 21; Sec 138]
a. Non-use of corporate charter [Sec. 21];
b. Continuous inoperation of a
corporation [Sec. 21];
c. Upon receipt of a lawful court order
dissolving the corporation;
d. Upon finding by final judgment that the
corporation procured its incorporation
through fraud;
e. Upon finding by final judgment that the
corporation:
1. Was created for the purpose of
committing, concealing or
aiding the commission of
securities violations,
smuggling, tax evasion, money
laundering, or graft and corrupt
practices;
2. Committed or aided in the
commission of securities
violations, smuggling, tax
evasion, money laundering, or
graft and corrupt practices, and
its stockholders knew; and
3. Repeatedly and knowingly
tolerated the commission of
graft and corrupt practices or
other fraudulent or illegal acts
by its directors, trustees,
officers, or employees.
Non-use of corporate charter and
continuous inoperation
The grounds for dissolution under (a) and (b)
as discussed above, 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.
Upon receipt of a lawful court order
dissolving the corporation
The ground under (c) may involve or arise from
CORPORATION LAW COMMERCIAL LAW
a quo warranto proceeding involving a de facto Difference Between Liquidation and
corporation (Sec 19, RCC) or a liquidation Rehabilitation
proceeding involving an insolvent debtor under
Liquidation Rehabilitation
FRIA (infra).
The winding up of a Contemplates a
Upon finding by final judgment that the corporation so that continuance of
corporation procured its incorporation assets are corporate life and
through fraud distributed to those activities in an effort
The ground under (d) constitutes cases where entitled to receive to restore and
a corporation misrepresented its purpose of them. It is the reinstate the
incorporation, or when the incorporators used process of reducing corporation to its
fictitious names, there was then fraud in the assets to cash, former position of
procurement of the certificate. discharging liabilities successful operation
and dividing surplus and solvency. Both
Upon finding by final judgment that the or loss cannot be
corporation was created for an unlawful undertaken at the
purpose same time
The ground under (e) is a new provision. Here,
a corporation found by final judgment to have [Phil. Veterans Bank v. Employees Union, G.R.
been created for the purpose of committing, No. 105364 (2001)].
concealing, or aiding the commission of
securities violations, smuggling, tax evasion, Winding up of corporate affairs
money laundering, or graft and corrupt Under Sec. 139 of the RCC, a corporation
practices, may be subjected to involuntary loses its juridical personality and can no longer
dissolution by the SEC, motu proprio or upon enter into transactions that have the effect of
filing of a verified complaint by any interested. continuing its business. The only exception to
this is the “winding-up” period which takes
2. Methods of liquidation place for 3 years after the loss of the
corporation’s juridical personality.
Liquidation is the process by which all the ● It continues to be a body corporate for
assets of the corporation are converted into purposes of prosecuting and defending
liquid assets (cash) in order to facilitate the suits by and against it and to enable it
payment of obligations to creditors, and the to settle and close its affairs,
remaining balance if any is to be distributed to culminating in the disposition and
the stockholders. distribution of its remaining assets.
● Among corporate creditors, the rules ● It may, during the 3-year term, appoint
on concurrence and preference of a trustee or a receiver who may act
credits apply. beyond that period.
● It is a proceeding in rem.
A corporation in the process of liquidation has
The end of corporate relations does not result no legal authority to engage in any new
in the immediate termination of corporate business, even if the same is in accordance
existence. A corporation shall have the with the primary purpose stated in its article of
extended term of 3 years to wind up its incorporation.
corporate affairs and liquidate its assets ● It may not acquire new rights or incur
[Herbosa]. new obligations.
● It may only have rights as may be
The RCC provides that any distributable asset required by the process of liquidation
to an unknown creditor or corporator shall be [Herbosa].
escheated in favor of the national government.
This was previously in favor of the LGU where Pending actions against the corporation are not
such assets are located, under the old Code. extinguished

Pending actions against the corporation may

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still be prosecuted against the corporation even
beyond the 3-year period.
General Rule: The creditors of the corporation
who were not paid within the 3-year period may
follow the property of the corporation that may
have passed to its stockholders
Exceptions:
● Unless the action is barred by
prescription or laches; or
● Unless there was a disposition of said
property in favor of a purchaser in good
faith.
Suits not brought against the corporation
within the 3-year period may still be
prosecuted against the corporation, since there
is nothing in Sec. 122, par. 1 which bars action
for the recovery of the debts of the corporation
against the liquidator thereof after the lapse of
the winding up period of 3 years [Republic of
the Philippines v. Marsman Dev. Co., G.R. No.
L-175109 (1972)].
Right of the corporation to appeal a
judgment is not extinguished by the
expiration of the 3-year period
Corporations whose certificate of registration
was revoked by the SEC may still maintain
actions in court for the protection of its rights
which includes the right to appeal [Paramount
Insurance Corp. v. A.C. Ordonez Corp., G.R.
No. 175109 (2008)].
Methods of Liquidation
a. By the corporation itself or its board of
directors or trustees (Sec. 139[1],
RCC)
b. By conveyance to a trustee within a
three-year period (Sec. 139[2], RCC;
Board of Liquidators v. Kalaw, G.R. No.
L-18805, 1967)
c. By a management committee or
rehabilitation receiver appointed by
SEC (Sec. 119, RCC)
d. By liquidation after three years
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a. By the Corporation Itself
The liquidation and distribution of the assets of
a dissolved corporation is a matter of internal
concern of the corporation and falls within the
power of the directors and stockholders or duly
appointed liquidation trustee [SEC Opinion,
July 23, 1996].
The corporation through its board and/or
executive officers are in charge for this method
of liquidation.
● The Legislature intended to let the
shareholders have the control of the
assets of the corporation upon
dissolution in winding up its affairs.
● The normal method of procedure is for
the directors and executive officers to
have charge of the winding up
operations, though there is the
alternative method of assigning the
property of the corporation to trustees
for the benefit of its creditors and
shareholders [China Banking Corp. V.
M. Michelin & Cie, 58 Phil. 261 (1933)].
The termination of the life of a corporate entity
does not by itself cause the extinction or
diminution of the rights and liabilities of such
entity.
● If the 3-year extended life has expired
without a trustee or receiver having
been expressly designated by the
corporation, within that period, the
BOD (or trustees) itself, may be
permitted to so continue as "trustees"
by legal implication.
● Such designation as “trustees” is for
the purpose of completing the
corporate liquidation [Pepsi-Cola
Products Philippines, Inc. v. CA, G.R.
No. 145855 (2004)].
A corporation under liquidation may not amend
its articles of incorporation to extend its
lifespan.
● When a corporation is liquidating
pursuant to the statutory period of 3
years to liquidate, it is only allowed to
continue for the purpose of final closure
of its business and no other purposes.
● In fact, within that period, the
corporation is enjoined from
CORPORATION LAW
“continuing the business for which it
was established” [Alhambra Cigar and
Cigarette Mfg. v. SEC, G.R. No. L-
23606 (1968)]
b. Conveyance to A Trustee Within A 3-
Year Period
Liquidation may also be placed in the hands of
a trustee or assignee. All the corporate assets
are conveyed to such trustee or assignee by a
resolution of stockholders at any time during
the 3-year period [Sec. 139].
In this method, the 3-year limitation DOES
NOT apply, provided that the designation of the
trustees is made within the period.
General Rule: There is no time limit within
which the trustee must finish the liquidation,
and he may sue and be sued as such even
beyond the 3-year period.
Exception: The trusteeship is limited in its
duration by the deed of trust.
Trustees to whom the corporate assets have
been conveyed pursuant to liquidation may sue
and be sued as such in all matters connected
with the liquidation [National Abaca v. Pore,
G.R. No. L-16779 (1961)]. The trustee of a
dissolved corporation may commence a suit
that can proceed to final judgment even
beyond the 3-year period of liquidation
[Reburiano v. CA, G.R. No. 102965 (1999)].
Unless the trusteeship is limited in its duration
by the deed of trust, there is no time limit within
which the trustee must finish liquidation [Board
of Liquidators v. Kalaw, G.R. No. L-18805
(1967)].
Any corporate creditor, shareholder, member,
or other person-in-interest may petition the
courts for the appointment of a different
trustee//s in liquidation [Clemente et.al. v. CA,
G.R. No. 82407 (1995), citing Gelano v. CA,
103 SCRA 90].
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c. By Management Committee or
Rehabilitation Receiver
In SEC’s judgment dissolving the corporation
and directing disposition of its assets as justice
requires, it may appoint a receiver to collect
such assets and pay the debts of the
corporation [Sec. 135].
In the exercise of its jurisdiction, the
Commission possesses the following powers:
1. To appoint one or more receivers of the
property, real and personal, which is
the subject of the action pending before
the Commission in such other cases
whenever necessary in order to
preserve the rights of the parties-
litigants and/or protect the interest of
the investing public and creditors;
2. To create and appoint a management
committee, board, or body upon
petition or motu propio to undertake the
management of corporations,
partnerships or other associations not
supervised or regulated by other
government agencies in appropriate
cases [PD 902-A, as amended by PD
1799, Sec. 6].
While the SEC has the authority to dissolve a
corporation, it does not have the authority to
settle disputes arising from its liquidation. A
commercial court is in the best position to
convene all stakeholders, including creditors,
to ascertain their claims and determine their
preferences [Consuelo Metals Corporation v.
Planters Development Bank G.R. No. 152580
(2008)].
Who is a Rehabilitation Receiver
● A rehabilitation receiver is a natural or
juridical person appointed by the court
pursuant to RA 10142 or the Financial
Rehabilitation and Insolvency Act
(FRIA) of 2010, whenever necessary in
order to preserve the rights of the
parties-litigants and/or protect the
interest of the investing public and
creditors.
● The receiver’s principal duty is to:
○ Preserve and maximize the
value of the assets of the
debtor during the rehabilitation
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proceedings;
○ Assess the viability of
rehabilitation, and implement a
Rehabilitation Plan
● Unless appointed by the court, the
rehabilitation receiver shall not take
over the management and control of
the debtor but may recommend the
appointment of a management
committee over the debtor in the cases
provided by the FRIA [Sec. 31, FRIA].
What is a Management Committee
The management committee is the body
appointed by the court who shall take the place
of the management and the governing body of
the debtor corporation and assume their rights
and responsibilities. A rehabilitation receiver
may also be appointed to assume the
management of the corporation [Sec. 36,
FRIA].
A management committee may be appointed in
the following cases:
1. Actual or imminent danger of
dissipation, loss, wastage
destruction of the debtor’s assets or
other properties;
2. Paralyzation of the business
operations of the debtor; or
3. Gross mismanagement of the debtor,
or fraud or other wrongful conduct on
the part of, or gross or willful violation
of the FRIA by existing management of
the debtor or the owner, partner,
director, officer or representative/s in
management of the debtor [Sec. 36,
FRIA].
Effects of Appointing a Receiver
The appointment of a receiver suspends the
authority of the corporation, as well as its
directors and officers, over the properties of the
corporation.
● The receiver shall act as the
representative of the corporation.
● The receivership shall exist indefinitely
until the complete settlement and
liquidation of the corporation, unless
otherwise limited [Herbosa].
The mere appointment of a receiver, without
anything more, does not result in the
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dissolution of the corporation, nor bar it from
the exercise of its corporate rights [Leyte
Asphalt and Mineral Oil Co. Ltd., v. Block
Johnston and Breenbrawn, G.R. No. 9755
(1928)].
While the appointment of a receiver rests within
the sound judicial discretion of the court, such
discretion must, however, always be exercised
with caution and governed by legal and
equitable principles, the violation of which will
amount to its abuse, and in making such
appointment the court should take into
consideration all the facts and weigh the
relative advantages and disadvantages of
appointing a receiver to wind up the corporate
business [China Banking Corp. v. M. Michelin
& Cie, 58 Phil. 261 (1933)].
Receivership vs. Trusteeship
Receivership Trusteeship
Receivership is Trusteeship is a
created by judicial contractual
appointment of a relationship that can
or rehabilitation be created by a
receiver and/or corporation through
management its Board of
committee Directors.
Both involve transfers of legal/naked title
from the corporation to the trustee, receiver,
or management committee.
From the time the assets of the corporation
are transferred to a trustee or receiver
pursuant to liquidation, all such assets are
then held by and in the name of the trustee
or receiver who can lawfully proceed with
liquidation even if the corporation no longer
exists, because he has title to the assets.
The receiver and The trustee in
management liquidation is
committee members accountable
are deemed officers under the terms of
of the court and must the trust agreement.
therefore be
accountable to the
court by provision of
law.

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Both are not subject to the 3-year period
because the corporation is substituted in
either case by the trustee or the receiver who
may sue or be sued even after the expiration
of the 3-year period.
However, in the case of trusteeship, the
trustee must have been designated within
the 3-year period.
3-Year Period Does Not Apply
When the liquidation of a dissolved corporation
has been placed in the hands of a receiver or
assignee:
● The 3-year period prescribed by law for
liquidation cannot be made to apply,
and
● The receiver or trustee may institute all
actions leading to the liquidation of the
assets of the corporation even after the
expiration of said period [Sumera v.
Valencia, 67 Phil. 721 (1939)].
d. Liquidation after three years
Under Sec. 139, after the expiration of the 3-
year winding-up period, pending actions by or
against the corporation are abated.
● It should not, however, be construed as
to prevent a corporation from pursuing
activities which would complete the
final liquidation of a dissolved
corporation.
● In this case, Northern Luzon
Corporation Inc. which term has long
expired, was unable to dispose of its
remaining assets even during the 3-
year period granted it by Sec. 122 [now
Sec. 139, RCC].
○ Accordingly, it should be
allowed to continue liquidating
its remaining assets in order to
complete the process of
dissolving the corporation.
○ Likewise, it should be allowed
to distribute the proceeds from
said disposition to its
stockholders or creditors if any.
A contrary interpretation would
have unjust and absurd results.
SEC-OGC Opinion No. 15-07
(2015) citing SECAC No. 347
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(1991).
Directors as Trustees
If full liquidation can only be effected after the
3-year period and there is no trustee, the
directors may be permitted to complete the
liquidation by continuing as trustees by legal
implication [Reburiano v. CA, G.R. No. 102965
(1999)].
● A corporation’s BOD is not rendered
functus officio by its dissolution.
● Sec. 122 [now Sec 139] 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
[Aguirre v. FQB+, Inc., G.R. No.
170770 (2013)].
Continuation of Pending Suits
The trustee of a corporation may continue to
prosecute a case commenced by the
corporation within 3 years from its dissolution
until rendition of the final judgment, even if such
judgment is rendered beyond the 3-year period
allowed by Sec 139, RCC.
● However, an already defunct
corporation is barred from initiating a
suit after the lapse of the said 3-year
period.
● If a petition is filed after the corporate
existence, the effect is that petitioner
lacks the capacity to sue as a
corporation.
● To allow such petition to prosper, on
the ground that it is for the sole purpose
of liquidating the corporation’s assets,
would be to circumvent the provisions
of Sec. 122 of the Corporation Code
(now Sec. 139, RCC) [Alabang
Development Corporation v. Alabang
Hills Village Association and Rafael
Tinio, G.R. No. 187456 (2014)].
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H. Other corporations
1. Close corporations
Statutory Definition
A close corporation is –
a. One whose AOI provides that:
1. 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 twenty (20);
2. All the issued stock of all
classes shall be subject to one
or more specified restrictions
on transfer permitted by this
Title; and
3. The corporation shall not list in
any stock exchange or make
any public offering of its stocks
of any class.
b. One where two-thirds (2/3) or more of
its voting stock or voting rights is NOT
owned or controlled by another
corporation, which is not a close
corporation within the meaning of this
Code [Sec. 95, RCC].
A narrow distribution of ownership does not, by
itself, make a close corporation. When a
corporation’s AOI does not contain the
provisions enumerated under Sec. 96 of the
Code [now Sec. 95, RCC], such corporation is
not a “close corporation”. It does not become
one either, just because only a few individuals
owned 99.866% of its subscribed capital stock
[San Juan Structural and Steel Fabricators v.
CA, G.R. No. 129459 (1998)].
“Incorporated Partnership”
A close corporation embodies what
businessmen perceive to be the best features
of a partnership and a corporation, such as –
● Corporation: separate personality,
limited liability, and the right of
succession
● Partnership: delectus personae (the
selection of a person satisfactory to
oneself for a position), and general
management by all partners of
business affairs [Villanueva].
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Incorporating a Close Corporation
General Rule: Any corporation may be
incorporated as a close corporation.
Exceptions: The following cannot be
incorporated as a close corporation –
a. Mining or oil companies
b. Stock exchanges
c. Banks
d. Insurance companies
e. Public utilities
f. Educational institutions;
g. Corporations declared to be vested
with public interest in accordance with
the provisions of this Code [Sec. 95,
RCC].
Applicability of RCC Provisions
The provisions of Title XII (Close Corporations)
primarily govern close corporations, while other
Titles of the RCC apply suppletory, except as
otherwise provided under Title XII [Sec. 95,
RCC].
a. Characteristics of a Close
Corporation
Direct Management by Stockholders
The AOI 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
[Sec. 96, RCC].
The feature of a close corporation, whereby
there is a merger of stock ownership and active
management is what significantly distinguishes
it from other corporations [Villanueva].
Identity of Stock Ownership and Active
Management
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 [Campos].
Stockholders’ Meeting Unnecessary
So long as the abovementioned AOI provision
continues in effect, no meeting of stockholders
need be called to elect directors.
Provided, that the stockholders of the
corporation shall be:
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1. Deemed to be directors for the purpose
of applying the provisions of this Code;
and, unless the context clearly requires
otherwise
2. Subject to all liabilities of directors
[Sec. 96, RCC].
Identity and Number of Stockholders
1. Stockholders of record not more than
20
2. Stocks not publicly listed
3. Restricted transfer of ownership of
stocks [Sec. 95, RCC].
Voting Stock or Voting Rights Not Held by
Another Corporation
A corporation cannot be deemed as 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 this
Code [Sec. 95, RCC].
b. Validity of restrictions on transfer of
shares
In order to be binding on any purchaser in good
faith, restrictions on the right to transfer shares
must appear in the:
1. AOI;
2. By-laws; and
3. Certificate of stock [Sec. 97, RCC].
Right of First Refusal
Restrictions on transfer shall not be more
onerous than granting the existing
stockholders or the corporation the option to
purchase the shares of the transferring
stockholder.
● Said option is subject to such
reasonable terms, conditions or period
stated in the AOI, by-laws, and
certificate of stock.
● If upon the expiration of 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 [Sec.
97, RCC].
The right of first refusal, as discussed above, is
the most onerous transfer restriction allowed.
● Such right is a control scheme
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essential to a close corporation.
● It allows the existing stockholders the
power to maintain the character of
delectus personae by preventing an
outsider from coming into and
interfering with the affairs of the close
corporation [Villanueva].
A transfer restriction should NOT amount to a
deprivation of a stockholder’s right to ultimately
dispose of his shareholdings [Rural Bank of
Salinas v. CA, 210 SCRA 510 (1992)].
c. Issuance or Transfer of Stock in
Breach of Qualifying Conditions
Subject to certain requirements, the person to
whom stock is issued or transferred shall be
conclusively presumed to have notice of the
fact of the breach of the ff. qualifying
conditions:
1. Eligibility of Stockholder
2. Number of Stockholders of Record
3. Stock Transfer Restrictions [Sec. 98
(a)- (c), RCC]
Note: The term “transfer”, as used in Sec. 98,
is not limited to a transfer for value [Sec. 98(f),
RCC].
Breach: Ineligibility of Stockholder
The transferee is conclusively presumed to
have notice of the fact of the ineligibility to be a
stockholder:
1. If a stock of a close corporation is
issued or transferred to any person
who is not eligible thereof under any
provision of the AOI; and
2. If the certificate for such stock
conspicuously shows the qualifications
of the persons entitled to be holders of
record thereof [Sec. 98(a), RCC].
Breach: Exceeding the Number of
Stockholders of Record
The transferee is conclusively presumed to
have notice of the fact that the issuance or
transfer of stock to any person would cause the
stock to be held by more than the number
stated in the AOI:
1. If the AOI of a close corporation states
the number of persons, not exceeding
twenty (20), who are entitled to be
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stockholders of record; and
2. If the certificate for such stock
conspicuously states such number;
and
3. The issuance or transfer of stock to any
person would cause the stock to be
held by more than such number of
person [Sec. 98(b), RCC].
Breach: Violation of Stock Transfer
Restriction
The transferee is conclusively presumed to
have notice of the fact that the stock was
acquired in violation of the transfer restriction:
1. If a stock certificate of a close
corporation conspicuously shows a
restriction on transfer of the
corporation’s stock; and
2. The transferee acquires the stock in
violation of such restriction [Sec. 98(c),
RCC].
Effect of Conclusive Presumption
General Rule: Whenever a person to whom
stock of a close corporation has been issued or
transferred is conclusively presumed to have
notice of the breach of qualifying conditions,
the corporation may, at its option, refuse to
register the transfer in the name of the
transferee [Sec. 98(d), RCC].
Exceptions:
1. If the transfer of stock, though in breach
of the qualifying conditions, has been
consented to by ALL the stockholders
of the close corporation; or
2. If the close corporation has amended
its articles of incorporation in
accordance with Title XII [Sec. 98(e),
RCC].
Option to Rescind or Recover
The provisions of Sec. 98 shall not impair any
right which the transferee may have to either:
1. Rescind the transfer; or
2. Recover the stock under any express
or implied warranty [Sec. 98(g), RC
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d. When board meeting is unnecessary
or improperly held
Board Must Act as a Body to Bind the
Corporation
Generally, under the doctrine of centralized
management, the exercise of powers by the
BOD is done through the adoption of a board
resolution in a board meeting called for the
purpose [Villanueva].
When Board Meeting is Unnecessary
However, in a close corporation, unless the
bylaws provide otherwise, any action taken by
the directors without a meeting called properly
and with due notice shall nevertheless be
deemed VALID if:
1. Before or after such action is taken,
written consent thereto is signed by all
the directors; or
2. All the stockholders have actual or
implied knowledge of the action and
make no prompt objection in writing; or
3. The directors are accustomed to take
informal action with the express or
implied acquiescence of all the
stockholders; or
4. All the directors have express or
implied knowledge of the action in
question and none of them makes a
prompt objection in writing [Sec. 100,
RCC].
In a close corporation, a board resolution
authorizing the sale or mortgage of the subject
property is not necessary to bind the
corporation for the action of its president
[Manuel R. Dulay Enterprises v. CA, G.R. No.
91889 (1993)].
When Board Meeting is Improperly Held
General Rule: An action within the corporate
powers taken at a meeting held without proper
call or notice, is deemed ratified by a director
who failed to attend.
Exception: Unless after having knowledge
thereof, the director promptly files his written
objection with the secretary of the corporation
[Sec. 100, RCC].
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e. Pre-emptive Right
Definition
The preemptive right is a right granted to
stockholders to subscribe to all issues or
disposition of shares of any class, in proportion
to their respective shareholdings [Sec. 38,
RCC].
Scope of Pre-emptive Right in Ordinary
Corporations
In ordinary corporations, the pre-emptive right
shall not extend to –
1. Shares issued in compliance with laws
requiring stock offerings or minimum
stock ownership by the public; or
2. Shares issued in good faith with the
approval of the stockholders
representing two-thirds (2/3) of the
outstanding capital stock, in exchange
for property needed for corporate
purposes or in payment of a previously
contracted debt [Sec. 38, RCC].
Section 101 provides that the pre-emptive
rights of stockholders in close corporations
shall extend to ALL stocks to be issued,
whether for money, property, or in payment of
corporate debts, UNLESS the articles of
incorporation provide otherwise.
Scope of Pre-emptive Right in Close
Corporations
General Rule: The pre-emptive right of
stockholders in close corporations shall extend
to ALL stock to be issued, including reissuance
of treasury shares, whether:
1. For money, property or personal
services; or
2. In payment of corporate debts
Exception: Unless the AOI provide otherwise
[Sec. 101, RCC].
Contents of the AOI of Close Corporations
Mandatory Provisions
The AOI of a close corporation must provide
that:
1. 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 twenty (20);
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2. All the issued stock of all classes shall
be subject to one or more specified
restrictions on transfer permitted by
this Title; and
3. The corporation shall not list in any
stock exchange or make any public
offering of its stocks of any class [Sec.
95, RCC].
Optional Provisions
The AOI of a close corporation may provide for:
1. A classification of shares or rights,
a. The qualifications for owning or
holding the same, and
b. Restrictions on their transfers,
subject to the provisions of the
following section;
2. A classification of directors into one (1)
or more classes
a. Each of whom may be voted for
and elected solely by a
particular class of stock
3. Greater quorum or voting requirements
in meetings of stockholders or directors
than those provided in this Code,
4. The management by the stockholders
of the business of the corporation,
rather than by a board of directors; and
5. The election or appointment by the
stockholders of all officers or
employees, or specified officers or
employees, instead of by the board of
directors [Sec. 96, RCC].
Amendments
Any amendment to the AOI, which seeks:
1. To delete or remove any provision
required by this Title; or
2. To reduce a quorum or voting
requirement stated in said articles of
Incorporation
Shall require, at a meeting duly called for the
purpose, the affirmative vote –
1. Of at least two-thirds (2/3) of the
outstanding capital stock, whether with
or without voting rights; or
2. Of such greater proportion of shares as
may be specifically provided in the AOI
for amending, deleting, or removing
any of the aforesaid provisions [Sec.
102, RCC].
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f. Deadlocks
Definitions
A deadlock is a situation when the directors or
stockholders are so divided on the
management of the corporation’s business and
affairs that:
1. The votes required for a corporate
action cannot be obtained;
2. With the consequence that the
business and affairs of the corporation
can no longer be conducted to the
advantage of the stockholders
generally [Sec. 103, RCC].
Effect of the Existence of a Deadlock
General Rule: The SEC, upon written petition
by any stockholder, shall have the power to
arbitrate the dispute.
Exception: Contrary provision in the close
corporation’s articles of incorporation, bylaws,
or stockholders’ agreement [Sec. 103, RCC].
Exercise of Power to Arbitrate by the SEC
In the exercise of such power, the Commission
shall have authority to make appropriate
orders, such as:
1. Canceling or altering any provision
contained in the articles of
incorporation, bylaws, or any
stockholder’s agreement;
2. Canceling, altering or enjoining a
resolution or act of the corporation or
its board of directors, stockholders, or
officers;
3. Directing or prohibiting any act of the
corporation or its board of directors,
stockholders, officers, or other persons
party to the action;
4. 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;
5. Appointing a provisional director;
6. Dissolving the corporation; or
7. Granting such other relief as the
circumstances may warrant [Sec. 103,
RCC].
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Appointment of a Provisional Director
Qualifications
A provisional director shall be an impartial
person:
1. Who is neither a stockholder, nor a
creditor of the corporation or any of its
subsidiaries or affiliates; and
2. Whose further qualifications, if any,
may be determined by the Commission
[Sec. 103, RCC].
Powers, Rights, Compensation
A provisional director shall have all the rights
and powers of a duly elected director.
1. This includes the right to be notified of,
and to vote at meetings of directors
until removed by order of the
Commission or by all the stockholders.
2. However, the provisional director is not
a receiver of the corporation and does
not have the title and powers of a
custodian or receiver [Sec. 103, RCC].
The compensation of the provisional director
shall be determined by agreement between
such director and the corporation, subject to
approval of the Commission.
The SEC may fix the compensation, absent an
agreement or in the event of disagreement
between the provisional director and the
corporation [Sec. 103, RCC].
Buy-Back Order & Right to Withdraw
In the exercise of its power to arbitrate a
deadlock situation, the SEC can require the
purchase, at their fair value, of shares of any
stockholder, either by:
1. The corporation regardless of the
availability of unrestricted retained
earnings in its books; or
2. The other stockholders [Sec. 103(d),
RCC].
The stockholder of a close corporation has a
counterpart right to compel the corporation, for
any reason, to purchase shares held at fair
value.
1. Such purchase shall not be less than
the par or issued value.
2. Such purchase shall take place only
when the corporation has sufficient
assets in its books to cover its debts
CORPORATION LAW
and liabilities exclusive of capital stock
[Sec. 104, RCC].
Dissolution Order & Right to Dissolve
In the exercise of its power to arbitrate a
deadlock situation, the SEC can order the
dissolution of a corporation [Sec. 103(f), RCC].
The stockholder of a close corporation has a
counterpart right to compel the dissolution of
such corporation by written petition to the
Commission:
1. Whenever any of 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
2. Whenever corporate assets are being
misapplied or wasted [Sec. 104, RCC].
Rationale Behind Deadlock Provisions
The deadlock provisions, through the threat of
dissolution or repurchase of shares, provide a
strong incentive for the controlling group to
manage equitably, or otherwise face the
likelihood that the enterprises would be folded
up by the SEC.
1. A close corporation setting does not
allow a stockholder to “cash-in” on his
equity because there is no market for
his shares (i.e. right of first refusal)
2. Deadlocks arise often because some
members feel that the managing group
has been able to corner profits through
schemes that are inequitable to the
other parties [Villanueva].
2. Non-stock corporations
a. Definition
A non- stock corporation is one where no part
of its income is distributable as dividends to its
members, trustees, or officers [Sec. 86, RCC].
Essence of a Non-Stock Corporation
It is legally possible for a corporation having
capital stock to still be considered a non-stock
corporation.
For this reason, the essence of a non-stock
corporation is NOT the non-existence of shares
of stock, but that:
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1. Its primary purpose should be
eleemosynary in nature; and
2. There is a prohibition in its AOI and by-
laws that no part of the income or any
form of dividend is distributable to the
members, trustees, or officers of the
corporation [Villanueva].
b. Purposes
Non-stock corporations may be formed or
organized for the ff. purposes:
1. Charitable,
2. Religious,
3. Educational,
4. Professional,
5. Cultural,
6. Fraternal,
7. Literary,
8. Scientific,
9. Social,
10. Civic service,
11. Similar purposes, like trade, industry,
agricultural and like chambers; or
12. Any combination thereof, subject to the
special provisions of this Title
governing particular classes of non-
stock corporations [Sec. 87, RCC].
A non-stock corporation may not include in its
AOI a purpose which would change or
contradict its nature as such [Sec. 13(b), RCC].
A nonstock corporation may not engage in an
investment business, where profit is the main
or underlying purpose [People v. Menil, 340
SCRA 125 (2000)].
c. Treatment of Profits
Any profit which a non-stock 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, subject
to the provisions of this Title [Sec. 86, RCC].
A non-stock corporation holds its funds in trust
for the carrying out of the objectives and
purposes expressed in its AOI. Thus, if it were
to be converted to a stock corporation, it must
be dissolved first, otherwise, such
transformation would be tantamount to an
CORPORATION LAW COMMERCIAL LAW
unauthorized distribution of its assets or
Type of Asset How Distributed
income to its members [Villanueva].
Assets held by the Returned,
Earning of Profits Merely Incidental corporation upon a transferred or
It is not inconsistent with the nature of a condition requiring conveyed in
nonstock corporation to incidentally earn profits return, transfer or accordance with
in pursuing its eleemosynary purpose [CIR v. conveyance, and such
University of Visayas, 1 SCRA 669 (1961)]. which condition requirements;
occurs by reason of
The incurring of profit or losses does not the dissolution
determine whether an activity is for profit or
non-profit, what the courts will consider is: Assets received and Transferred or
1. Whether dividends have been held by the conveyed to one or
declared; or corporation subject more corporations,
2. Whether its profit was ever used for to limitations societies or
personal or individual gain, and not for permitting their use organizations:
the purpose of carrying out the only for charitable, 1. Engaged in
objectives of the enterprise [Manila religious, activities in the
Sanitarium and Hospital v. Gabuco, 7 benevolent, Philippines
SCRA 14 (1963)] educational or similar substantially
purposes, but NOT similar to those
d. Plan and distribution of assets upon held upon a condition of the dissolving
dissolution requiring return, corporation
transfer or 2. According to a
Applicability conveyance by plan of
The subsequent rules of distribution of assets reason of the distribution
are applicable only when the nonstock dissolution adopted
corporation undergoing dissolution was pursuant to this
dissolved for reasons other than those set forth Chapter;
in Section 139 [Sec. 93, RCC].
Assets other than Distributed in
Note: Reasons for Dissolution under Sec. 139 those mentioned in accordance with the
1. Charter expires pursuant to its AOI, the preceding provisions of the AOI
2. Charter is annulled by forfeiture, or paragraphs, if any or the bylaws to the
3. Corporate existence is terminated in extent that the AOI or
any other manner [Sec. 139, RCC] the bylaws:
1. Determine the
Rules of Distribution of Assets Upon distributive rights
Dissolution of members or
The assets of a nonstock corporation any class or
undergoing the process of dissolution for classes of
reasons other than those set forth in Section members; or
139, shall be applied and distributed as follows: 2. Provide for
1. All liabilities and obligations of the distribution
corporation shall be paid, satisfied and
discharged, or adequate provision shall Assets, in any other Distributed to such
be made therefor; case persons, societies,
2. For the assets of the corporation – organizations or
corporations,
whether or not
organized for profit,
as may be specified
in a plan of

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distribution adopted
pursuant to this
Chapter
[Sec. 93, RCC]
Plan of Distribution of Assets Upon
Dissolution
A plan providing for the distribution of assets
may be adopted by a non-stock corporation in
the process of dissolution in the following
manner:
1. The board of trustees shall, by majority
vote, adopt a resolution:
a. Recommending a plan of
distribution and b. Directing the
submission thereof to a vote at
a regular or special meeting of
members having voting rights;
Summary: Stock vs. Non-Stock Corporations
Stock
Stock corporations are those which have capital
stock divided into shares and are authorized to
distribute to the holders of such shares,
dividends, or allotments of the surplus profits
based on the shares held [Sec. 3, RCC].
Purpose
Primarily to make profits for its shareholders.
Distribution of Profits
Profit is distributed to shareholders.
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2. Each member entitled to vote shall be
given in the manner provided in this
Code for the giving of notice of
meetings, a written notice setting forth:
a. The proposed plan of
distribution or a summary
thereof
b. The date, time, and place of
such meeting within the time;
and
3. 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 [Sec. 94, RCC].
Non-Stock
All other corporations [Sec. 3, RCC]. One where
no part of its income is distributable as dividends
to its members, trustees, or officers [Sec. 87,
RCC].
Non-stock corporations 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 of this Title
governing particular classes of non-stock
corporations [Sec. 87, RCC].
A nonstock corporation is one where no part of
its income is distributable as dividends to its
members, trustees, or officers: Provided, that
any profit which a non-stock 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, subject to the
CORPORATION LAW COMMERCIAL LAW

Summary: Stock vs. Non-Stock Corporations

provisions of this Title [Sec. 86, RCC].

Scope of Voting Rights

Each stockholder votes according to the Each member, regardless of class, is entitled to
proportion of his shares in the corporation. No one (1) vote UNLESS such right to vote has been
share may be deprived of voting rights except limited, broadened, or denied in the AOI or by-
those classified and issued as “preferred” or laws [Sec. 88, RCC].
“redeemable” shares, unless otherwise provided
in this Code: Provided, That there shall always
be a class or series of shares with complete
voting rights [Sec. 6, RCC].

Voting by Proxy

Stockholders and members may vote in person May be denied by the AOI or the by-laws [Sec.
or by proxy in all meetings of stockholders or 88, RCC]
members.

When so authorized in the by-laws or by a

majority of the board of directors, the
stockholders or members of corporations may
also vote through remote communication or in
absentia: Provided, That the votes are received
before the corporation finishes the tally of votes
[Sec. 57, RCC].

Who Exercises Corporate Power

Board of Directors or Trustees [Sec. 22, 92, Board of Trustees, which may or may not be
RCC]. more than 15 trustees, as provided by the AOI or
by-laws [Sec. 23, 91, RCC].

Term of Directors of Trustees

Directors / trustees shall hold office for 1 year Directors/trustees shall hold office for not more
and until their successors are elected and than 3 years [Sec. 91].
qualified [Sec. 23].

Election of Officers

Directors shall be elected for a term of one (1) Trustees shall be elected for a term not
year from among the holders of stocks registered exceeding three (3) years. Except with respect to
in the corporation’s books Each director and independent trustees of nonstock corporations
trustee shall hold office until the successor is vested with public interest, only a member of the
elected and qualified [Sec. 22, RCC]. corporation shall be elected as trustee [Sec. 91,
RCC].
The articles of incorporation may provide that all
officers or employees or that specified officers or Officers may directly be elected by the members

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Summary: Stock vs. Non-Stock Corporations

employees shall be elected or appointed by the UNLESS the AOI or by-laws provide otherwise
stockholders, instead of by the board of directors [Sec. 91, RCC].
[Sec. 97].

Transferability of interest or membership

Transferable. Generally non-transferable since membership

and all rights arising therefrom are personal.
However, the AOI or by-laws can provide
otherwise [Sec. 89, RCC].

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3. Educational Corporations quorum for the transaction of business [Sec.
106, RCC].
Definition
Educational corporation – A stock or nonstock Constitutional Provisions Related to
corporation organized for educational Educational Corporations
purposes [De Leon, Corporation Code]. Educational institutions, other than those
established by religious groups and mission
Educational corporations shall be governed by boards, shall be owned solely by citizens of the
special laws and by the general provisions of Philippines or corporations or associations at
this Code [Sec. 105, RCC]. least sixty per centum of the capital of which is
owned by such citizens. The Congress may,
Composition of the Board however, require increased Filipino equity
participation in all educational institutions. The
Non-Stock Stock control and administration of educational
institutions shall be vested in citizens of the
Trustees of For institutions
Philippines [CONST, Art. XIV, Sec. 4(2), par.
educational organized as stock
1].
institutions organized corporations, the
as non-stock number, and term of
No educational institution shall be established
corporations shall directors shall be
exclusively for aliens and no group of aliens
not be less than five governed by the
shall comprise more than one-third of the
(5) nor more than provisions on stock
enrollment in any school. The provisions of this
fifteen (15). corporations [Sec.
subsection shall not apply to schools
Provided, however, 106, RCC].
established for foreign diplomatic personnel
that:
and their dependents and, unless otherwise
a. The number The powers and
provided by law, for other foreign temporary
of trustees authority of trustees
residents [CONST, Art. XIV, Sec. 4(2), par. 1].
shall be in shall be defined in
multiples of the bylaws.
five; 4. Religious Corporations
b. They shall
classify Classification
themselves Religious corporations may be incorporated by
in such a one or more persons. Such corporations may
way; and be classified into:
c. The term of a. Corporations sole; and
1/5 of them b. Religious societies [Sec. 107, RCC].
expires every
year Religious corporations shall be governed by
[Sec. 106, RCC]. Title XIII, and by the general provisions on
nonstock corporations insofar as applicable
[Sec. 107, RCC].
Rules as to Vacancies
Trustees thereafter elected to fill vacancies, a. Corporation sole
occurring before the expiration of a particular
term, shall hold office only for the unexpired A corporation sole may be formed by the chief
Period. archbishop, bishop, priest, minister, rabbi, or
other presiding elder of such religious
Trustees elected thereafter to fill vacancies denomination, sect, or church [Sec. 108, RCC].
caused by expiration of term shall hold office
for five (5) years [Sec. 106, RCC]. A corporation sole consists of only one person
and his successors (who will always be one at
Quorum a time), in some particular station [Roman
A majority of the trustees shall constitute a Catholic Apostolic Adm. of Davao v. LRC, 102
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CORPORATION LAW
Phil. 596 (1957)].
Purpose
A corporation sole is incorporated for the
purpose of administering and managing, as
trustee, the affairs, property and temporalities
of any religious denomination, sect or church
[Sec. 108, RCC].
A corporation sole is not the owner of the
properties that he may acquire, but merely the
administrator thereof [Roman Catholic
Apostolic Adm. of Davao v. LRC, 102 Phil. 596
(1957)].
Nationality
A corporation sole has no nationality, but for
the purpose of applying nationalization laws,
nationality is determined not by the nationality
of its presiding elder but by the nationality of its
members constituting the sect in the
Philippines.
Thus, the Roman Catholic Church can acquire
lands in the Philippines even if it is headed by
the Pope [Roman Catholic Apostolic, etc v.
Register of Deeds of Davao City, G.R. No. L-
8451 (1957)].
Incorporation Contents of the AOI
The AOI of the corporation sole must set forth
the following:
1. That the applicant chief archbishop,
bishop, priest, minister, rabbi, or
presiding elder represents the religious
denomination, sect, or church who
desires to become a corporation sole;
2. 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;
3. That such chief archbishop, bishop,
priest, minister, rabbi, or presiding
elder is charged with:
4. The administration of the temporalities
and
5. The management of the affairs, estate
and properties of the religious
denomination, sect, or church within
the territorial jurisdiction, so described
succinctly in the AOI;
6. The manner by which any vacancy
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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
7. 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 [Sec. 109, RCC].
Submission of the AOI The chief
archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious
denomination, sect or church must file
the AOI with the Commission [Sec.
109, RCC].
The articles of incorporation must be:
1. Verified, by affidavit or affirmation of
the chief archbishop, bishop, priest,
minister, rabbi, or presiding elder, as
the case may be; and
2. Accompanied by a copy of the
commission, 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 [Sec.
110, RCC].
From and after filing with the Commission of
the said AOI:
1. Such chief archbishop, bishop, priest,
minister, rabbi, or presiding elder shall
become a corporation sole; and
2. 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.
a. For the use, purpose, exclusive
benefit and on behalf of the
religious denomination, sect, or
church.
b. This includes hospitals,
schools, colleges, orphan
asylums, parsonages, and
cemeteries thereof [Sec. 110,
RCC].
CORPORATION LAW
Power to Amend AOI
Note that Sec. 107 allows the application to
religious corporations of the general provisions
governing non-stock corporations, insofar as
applicable.
For non-stock corporations, the power to
amend its Articles of Incorporation lies in its
members. The code requires two-thirds of their
votes for the approval of such an amendment.
So how will this requirement apply to a
corporation sole that has technically but one
member (the head of the religious
organization) who holds in his hands its broad
corporate powers over the properties, rights,
and interests of his religious organization?
● Although a non-stock corporation has a
personality that is distinct from those of
its members who established it, its AOI
cannot be amended solely through the
action of its BOT. The amendment
needs the concurrence of at least 2/3
of its membership.
● If such approval mechanism is made to
operate in a corporation sole, its one
member in whom all the powers of the
corporation technically belong, needs
to get the concurrence of 2/3 of its
membership. The one member is but a
trustee of its membership.
● There is no point to dissolving the
corporation sole of one member to
enable the corporation aggregate to
emerge from it. The one member, with
the concurrence of two-thirds of the
membership of the organization for
whom he acts as trustee, can self-will
the amendment. He can, with
membership concurrence, increase the
technical number of the members of
the corporation from “sole” or one to the
greater number authorized by its
amended articles [Iglesia Evangelica
Metodista En Las Filipinas
(Corporation Sole) Inc., et al v. Bishop
Nathanael Lazaro, et al, G.R. No.
184088 (2010)].
Filing of Vacancies
The successors in office of any chief
archbishop, bishop, priest, minister, rabbi, or
presiding elder in a corporation sole:
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1. Shall become the corporation sole on
their accession to office; and
2. (2) Shall be permitted to transact
business as such upon filing a copy of
their commission, certificate of
election, or letters of appointment, duly
certified by any notary public with the
Commission [Sec. 112, RCC].
During any vacancy in the office, all the powers
and authority of the corporation sole during
such vacancy shall be exercised by the person
or persons authorized by the rules, regulations
or discipline of the religious denomination,
sect, or church represented by the corporation
sole to:
1. Administer the temporalities and
2. Manage the affairs, estate, and
properties of the corporation sole [Sec.
112, RCC].
Acquisition of Property
A corporation sole may:
1. Purchase and hold real estate and
personal property for its church,
charitable, benevolent, or educational
purposes; and
2. Receive bequests or gifts for such
purposes [Sec. 111, RCC].
Alienation of Property
A corporation sole may sell, or mortgage real
property held by it by:
1. Obtaining an order for that purpose
from the Regional Trial Court of the
province where the property is situated
2. Adducing proof that: The notice of the
application for leave to sell or mortgage
has been made through publication or
as directed by the Court; and
Alienation of Property
A corporation sole may sell or mortgage real
property held by it by:
1. Obtaining an order for that purpose
from the Regional Trial Court of the
province where the property is situated
2. Adducing proof that:
a. The notice of the application for
leave to sell or mortgage has
been made through publication
or as directed by the Court; and
b. It is in the interest of the
CORPORATION LAW
corporation that leave to sell, or
mortgage be granted.
The application for leave to sell or mortgage:
1. Must be made by petition, duly verified,
by the chief archbishop, bishop, priest,
minister, rabbi, or presiding elder
acting as corporation sole, and;
2. May be opposed by any member of the
religious denomination, sect, or church
represented by the corporation sole.
Provided, that in cases where the rules,
regulations, and discipline of the religious
denomination, sect, or church, religious
society, or order concerned represented by
such corporation sole regulate the method of
acquiring, holding, selling, and mortgaging real
estate and personal property:
1. Such rules, regulations and discipline
shall control; and
2. The intervention of the courts shall not
be necessary [Sec. 111, RCC].
Voluntary Dissolution
A corporation sole may be dissolved and its
affairs settled voluntarily by submitting to the
Commission a verified declaration of
dissolution, setting forth:
1. The name of the corporation;
2. The reason for dissolution and winding
up;
3. The authorization for the dissolution of
the corporation by the particular
religious denomination, sect or church;
4. The names and addresses of the
persons who are to supervise the
winding up of the affairs of the
corporation [Sec. 113, RCC].
Upon approval of such declaration of
dissolution by the Commission, the corporation
shall cease to carry on its operations except for
the purpose of winding up its affairs [Sec. 113,
RCC].
b. Religious Societies
Definition
A religious corporation incorporated by more
than one person. Also called “corporation
aggregate.”
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Incorporation
General Rule: Any religious society, religious
order, diocese, synod, or district organization
of any religious denomination, sect, or church,
may incorporate for the administration of its
temporalities or for the management of its
affairs, properties, and estate –
1. Upon written consent of at least two-
thirds (2/3) of its membership; and/or
2. By an affirmative vote at a meeting
called for the purpose of at least two-
thirds (2/3) of its membership
Exception: Unless forbidden by competent
authority, the Constitution, pertinent rules,
regulations, or discipline of the religious
denomination, sect, or church of which it is a
part [Sec. 114, RCC].
Filing and Contents of the AOI
The AOI must be:
1. 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; and
2. Filed with the Commission [Sec. 114,
RCC].
The AOI must set forth the following:
1. That the religious society or religious
order, or diocese, synod, or district
organization is a religious organization
of a religious denomination, sect or
church;
2. 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;
3. That the incorporation of the religious
society or religious order, 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;
4. That the religious society or religious
order, diocese, synod, or district
organization desires to incorporate for
the administration of its affairs,
properties and estate;
CORPORATION LAW
5. The place within the Philippines where
the principal office of the corporation is
to be established and located; and
6. The names, nationalities, and
residence addresses of the trustees,
not less than five (5) nor more than
fifteen (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 [Sec. 114, RCC].
5. Foreign corporations
Definition
Those 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 [Sec. 140].
a. What constitutes “doing business”
Doctrine of “Doing Business”
When a foreign corporation undertakes
business activities within the territorial
jurisdiction of a host state, then it ascribes to
the host state standing to enforce its laws,
rules, and regulations [Villanueva].
Said business activities serves as the basis by
which a host state is deemed to have authority
over a foreign corporation within its territorial
jurisdiction [Villanueva].
Concept of “Doing Business”
The concept of "doing business" implies a
continuity of commercial dealings and
arrangements and the performance of
acts/works/exercise of some of the functions
normally incident to the purpose or object of a
foreign corporation’s organization
[Mentholatum Co., Inc. v. Mangaliman, 72 Phil.
525 (1941)].
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It is the crucial point to determine:
1. Whether foreign corporations and
multinational enterprises have come
within the territorial jurisdictions of the
host countries; and
2. To what extent they are bound to obtain
licenses within various host countries
before they can sue with local courts
and administrative bodies [Villanueva].
Jurisprudential Tests of “Doing Business in
the Philippines”
1. Twin Characterization Test
Continuity Test: Doing business
implies a continuity of commercial
dealings and arrangements, or
performance of acts normally incidental
to the purpose and object of the
organization.
Substance Test: Doing business
implies that a foreign corporation is
continuing the body or substance of the
enterprise of business for which it was
organized [Agilent Technologies v.
Integrated Silicon Technology, G.R.
No. 154618 (2004)].
2. Contract Test: A foreign corporation is
doing business in the Philippines if the
contracts entered into by the foreign
corporation or by an agent acting under
the control and direction of the foreign
corporation are consummated in the
Philippines [Pacific Vegetable Oil v.
Singson, G.R. No. L-7917 (1955)].
b. Necessity of a license to do business
Every foreign corporation, which on the date of
the effectivity of this Code, is authorized to do
business in the Philippines under a license
issued to it, shall continue to have such
authority under the terms and conditions of its
license, subject to the provisions of this Code
and other special laws [Sec. 141, RCC].
c. Requisites for issuance of a license
A foreign corporation shall submit:
1. A copy of its articles of incorporation
and bylaws, certified in accordance
with law, and
2. Their translation to an official language
CORPORATION LAW
of the Philippines, if necessary [Sec
142, RCC].
The application shall be under oath and, unless
already stated in its articles of incorporation,
shall specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street
number, of the principal office of the
corporation in the country or State of
incorporation;
3. 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;
4. The place in the Philippines where the
corporation intends to operate; The
specific purpose or purposes which the
corporation intends to pursue in the
transaction of its business in the
Philippines:
a. Provided, That said purpose or
purposes are those specifically
stated in the certificate of
authority issued by the
appropriate government
agency;
5. The names and addresses of the
present directors and officers of the
corporation;
6. 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;
7. 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;
8. A statement of the amount actually
paid in; and
9. Such additional information as may be
necessary or appropriate in order to
enable the Commission to determine
whether such corporation is entitled to
a license to transact business in the
Philippines, and to determine and
assess the fees payable [Sec. 142,
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RCC].
Issuance of a 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:
1. surrendered,
2. revoked,
3. suspended, or
4. annulled in accordance with this Code
or other special laws [Sec. 143, RCC].
Deposit of Securities
Within 60 days, the licensee, except foreign
banking or insurance corporations, shall
deposit with the Commission for the benefit of
present and future creditors of the licensee in
the Philippines, securities satisfactory to the
Commission, consisting of:
1. Bonds or other evidence of
indebtedness of the Government of the
Philippines, its political subdivisions
and instrumentalities, or of
government-owned or - controlled
corporations and entities;
2. Shares of stock or debt securities that
are registered under RA 8799 (The
Securities Regulation Code);
3. Shares of stock in domestic
corporations listed in the stock
exchange;
4. Shares of stock in domestic insurance
companies and banks, any financial
instrument determined suitable by the
Commission, or;
5. Any combination thereof with an actual
market value of at least Five hundred
thousand (P500,000.00) pesos or such
other amount that may be set by the
Commission [Sec. 143, RCC].
Within 6 Months After Each Fiscal Year of the
License, the Commission shall require:
1. The licensee to deposit additional
securities or financial instruments
equivalent in actual market value to 2%
of the amount by which the licensee’s
gross income for that fiscal year
exceeds P10,000,000.00.
CORPORATION LAW COMMERCIAL LAW
2. The deposit of additional securities or must show proof of good standing)
financial instruments if the actual lawfully transacting business in the
market value of the deposited Philippines [Sec. 144, RCC]
securities or financial instruments has
decreased by at least 10% of their The foreign corporation shall file a written
actual market value at the time they power of attorney:
were deposited [Sec. 143, RCC]. 1. Designating a person (Philippine
resident), on whom summons and
The Commission may: other legal processes may be served in
1. At its discretion, release part of the all actions or other legal proceedings
additional deposit if the gross income against such corporation; and
of the licensee has decreased, or if the 2. Consenting that service upon such
actual market value of the total deposit resident agent shall be admitted and
has increased, by more than ten (10%) held as valid, as if served upon the duly
percent of their actual market value at authorized officers of the foreign
the time they were deposited. corporation at its home office [Sec.
2. Allow the licensee to make substitute 144, RCC].
deposits for those already on deposit
as long as the licensee is solvent [Sec It shall be the duty of the resident agent to
143, RCC]. immediately notify the Commission in writing of
any change in the resident agent’s address
In the event the licensee ceases to do business [Sec. 144, RCC].
in the Philippines, its deposits shall be
returned: e. Personality to sue and suability
1. Upon the licensee’s application
therefore; and Summary of Rules
2. Upon proof to the satisfaction of the
Status Consequence
Commission that the licensee has no
liability to Philippine residents,
Doing Business in Can sue and be sued
including the Government of the
the PH, WITH a
Republic of the Philippines [Sec. 143,
license
RCC].
Doing Business in General Rule:
Amendment of License the PH, WITHOUT a Cannot sue, but
A foreign corporation shall obtain an amended license may be sued in the
license in the event it changes its corporate PH
name, or desires to pursue other or additional
purposes in the Philippines Exception: Capacity
to sue
Said amendment may be made by submitting may not be
an application with the Commission, endorsed questioned if the
by the appropriate government agency [Sec. other party is
148, RCC]. estopped

d. Resident agent NOT doing business May sue

in the PH, on isolated May be sued
Definition transactions
A resident agent may be either:
1. An individual residing in the Philippines
(must be of good moral character and Capacity to Sue
Foreign corporations which conduct regular
sound financial standing) or
business should be denied any access to
2. A domestic corporation (must likewise
courts until they secure a license to ensure that
be of sound financial standing and
they will abide by the decisions of the local
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CORPORATION LAW
courts [Eriks Ltd. v. CA, 267 SCRA 567 (1997)].
A foreign corporation transacting business in
the Philippines is required to secure a license
to have the personality to sue before, or
intervene in, any court or administrative
proceeding [Sec. 150, RCC; Campos].
By filing an action before Philippine courts, a
foreign corporation puts itself under their
jurisdiction [Communication Materials v. CA,
260 SCRA 673 (1996)].
By estoppel: One who has dealt with a
corporation of foreign origin as a corporate
entity is estopped to deny its corporate
existence and capacity: The principle will be
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 [Communications
Materials and Design, Inc. v. Court of Appeals,
260 SCRA 673 (1996)].
Capacity to be Sued
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.
Nevertheless, such corporation may be sued or
proceeded against before Philippine courts or
administrative tribunals on any valid cause of
action recognized under Philippine laws [Sec.
150, RCC].
A foreign corporation cannot claim exemption
from being sued in Philippine courts for acts
done against a person or persons in the
Philippines [Facilities Management
Corporation v. De La Osa, G.R. No. L-38649
(1979)].
Doctrine of Isolated Transactions -
instances when Unlicensed Foreign
Corporations may be allowed to sue
Foreign corporations are not required to obtain
a license to obtain relief from local courts or
agencies [Villanueva].
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In an isolated transaction, there is no intent on
the part of the foreign corporation to engage in
a progressive pursuit of the purpose of a
business transaction [Eriks Ltd. v. CA, 267
SCRA 567 (1997)].
General Rule: 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;
Exceptions:
1. But such may be sued or proceeded
against before Philippine courts or
administrative tribunals on any valid
cause of action recognized under
Philippine laws [Sec. 150, RCC].
2. One who has dealt with a corporation
of foreign origin as a corporate entity is
estopped to deny its corporate
existence and capacity
[Communications Materials and
Design, Inc. v. Court of Appeals, 260
SCRA 673 (1996)].
3. 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 [Agilent
Technologies v. Integrated Silicon,
G.R. No. 154618 (2004)].
6. One-person corporations
One Person Corporation (OPC) – A
corporation with a single stockholder [Sec. 116,
RCC].
Who May Form OPCs
Only the ff. may form OPCs:
a. A natural person;
b. A trust; or
c. An estate.
Note: A natural person who is licensed to
exercise a profession may not organize as a
OPC for the purpose of exercising such
profession, except as otherwise provided
under special laws [Sec. 116, RCC].
CORPORATION LAW COMMERCIAL LAW
Sole Proprietorship v. OPC c. Articles of incorporation and by-laws
Sole Proprietorship OPC
Articles of Incorporation
Has no separate Has a legal A One Person Corporation shall file articles of
legal personality personality separate incorporation in accordance with the
from the proprietor and distinct from the requirements under Section 14 of this Code. It
conducting the sole stockholder of shall likewise substantially contain the
business the corporation. following:
1. If the single stockholder is a trust or an
The assets of the The assets of the estate –
sole proprietorship OPC are not owned a. The name, nationality, and
are similarly owned by its sole residence of the trustee,
by the proprietor stockholder unless administrator, executor,
conducting the the OPC is not guardian, conservator,
business. adequately financed custodian, or other person
and/or the assets. exercising fiduciary duties
b. Proof of such authority to act on
The obligations that The obligations of behalf of the trust or estate; and
the sole the corporation 2. Name, nationality, residence of the
proprietorship cannot be enforced nominee and alternate nominee, and
incurred in against its sole the extent, coverage and limitation of
conducting the stockholder unless the authority [Sec. 118, RCC].
business may be the situation
enforced against the warrants piercing By-Laws
proprietor. the veil of corporate The OPC is not required to submit and file
fiction. corporate by-laws [Sec. 119, RCC].

Registered with the Registered with the d. Corporate Structure

DTI. SEC.
[Divina, “Highlights of the Revised Corporation Corporate name
Code”] A One Person Corporation shall indicate the
letters “OPC” either below or at the end of its
a. Extended Corporations corporate name [Sec. 120, RCC].

The following may NOT incorporate as OPCs:
1. Banks and quasi-banks
2. Pre-need, trust, insurance, public and
publicly-listed companies; and
3. Non-chartered GOCCs [Sec. 116,
RCC].
e. Corporate structure and officers
Single Stockholder as Director, President
The single stockholder shall be the sole
director and president of the One Person
Corporation [Sec. 121, RCC].

b. Capital stock requirement Treasurer, Corporate Secretary, and Other

Officers
A One Person Corporation shall not be Within fifteen (15) days from the issuance of its
required to have a minimum authorized capital certificate of incorporation, the OPC shall
stock, except as otherwise provided by special appoint:
law [Sec. 117, RCC]. 1. A treasurer;
2. A corporate secretary; and
3. Other officers as it may deem
necessary

Note: The single stockholder may NOT be

appointed as the corporate secretary.
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Within five (5) days from appointment, the OPC
shall notify the Commission thereof [Sec. 122,
RCC].
Treasurer’s Bond
A single stockholder who is likewise the self-
appointed treasurer of the corporation, shall
give a bond to the Commission in such a sum
as may be required: Provided, that –
1. The said stockholder/treasurer shall
undertake in writing:
a. To faithfully administer the
OPC’s funds to be received as
treasurer, and
b. To disburse and invest the
same according to the articles
of incorporation as approved
by the Commission.
2. The bond shall be renewed every two
(2) years or as often as may be
required [Sec. 122, RCC].
Corporate Secretary’s Special Functions
In addition to the functions designated by the
OPC, the corporate secretary shall:
1. Be responsible for maintaining the
minutes book and/or records of the
corporation;
2. Notify the nominee or alternate
nominee of the death or incapacity of
the single stockholder
a. Such notice shall be given no
later than five (5) days from
such occurrence;
3. Notify the Commission of the death of
the single stockholder within five (5)
days from such occurrence and stating
in such notice:
a. The names, residence
addresses, and contact details
of all known legal heirs; and
4. Call the nominee or alternate nominee
and the known legal heirs to a meeting
and advise the legal heirs with regard
to, among others:
a. The election of a new director;
b. Amendment of the AOI; and
c. Other ancillary and/or
consequential matters [Sec.
123, RCC].
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f. Nominee
The single stockholder shall designate in the
AOI a nominee and an alternate nominee who
shall, in the event of the single stockholder’s
death or incapacity:
1. Take the place of the single
stockholder as director; and
2. Manage the corporation’s affairs [Sec.
124, RCC].
Consent of Nominee and Alternate Nominee
The written consent of the nominee and
alternate nominee shall be attached to the AOI.
Such consent may be withdrawn in writing any
time before the death or incapacity of the single
stockholder [Sec. 124, RCC].
Term of Nominee
When the single stockholder is temporarily
incapacitated:
1. The nominee shall sit as director and
manage the affairs of the OPC
2. The nominee shall serve only until the
stockholder, by self-determination,
regains the capacity to assume such
duties [Sec. 125, RCC].
In case of death or permanent incapacity of the
single stockholder:
1. The nominee shall sit as director and
manage the affairs of the OPC
2. The nominee shall serve until:
a. The legal heirs of the single
stockholder have been lawfully
determined; and
b. The heirs have designated one
of them or have agreed that the
estate shall be the single
stockholder of the OPC [Sec.
125, RCC].
Term of Alternate Nominee
In case of the nominee’s inability, incapacity,
death, or refusal to discharge the functions as
director and manager of the corporation:
1. The alternate nominee shall sit as
director and manage the One Person
Corporation; and
2. The alternate nominee shall serve only
for the same term, and under the same
conditions applicable to the nominee
[Sec. 125, RCC].
CORPORATION LAW
Change of Nominee or Alternate Nominee
The single stockholder may, at any time,
change its nominee and alternate nominee by
submitting to the Commission:
1. The names of the new nominees; and
2. The new nominees’ corresponding
written consent. Note: For this purpose,
the AOI need not be amended [Sec.
126, RCC].
g. Minutes and Records
Minutes Book
A One Person Corporation shall maintain a
minutes book which shall contain all its actions,
decisions, and resolutions [Sec. 127, RCC].
The corporate secretary shall be responsible
for maintaining the minutes book and/or
records of the corporation [Sec. 123(a), RCC].
Records in Lieu of Meetings
When action is needed on any matter, it shall
be sufficient to prepare a written resolution:
1. Signed and dated by the single
stockholder; and
2. Recorded in the minutes book of the
One Person Corporation [Sec. 128,
RCC].
The date of recording in the minutes book shall
be deemed to be the date of the meeting for all
purposes under this Code [Sec. 128, RCC].
h. Liability
Limited Liability
An important advantage of the corporation is
the limitation of an investor’s liability to the
amount of investment, which flows from the
legal theory that a corporate entity is separate
and distinct from its stockholders [San Juan
Structural and Steel, Inc. v. CA, 296 SCRA 631
(1998)].
Liability of Single Shareholder
A sole shareholder claiming limited liability has
the burden of affirmatively showing that the
corporation was adequately financed.
Where the single stockholder cannot prove that
the property of the OPC is independent of the
stockholder’s personal property, the
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stockholder shall be jointly and severally liable
for the debts and other liabilities of the OPC.
Applicability of the Doctrine of Piercing the
Corporate Veil
The principle of piercing the corporate veil
applies with equal force to OPCs, as with other
corporations [Sec. 130, RCC]. When the veil of
corporate fiction is pierced the corporation will
be considered as a mere association of
persons; and the liability will directly attach to
the stockholders or to the other corporation.
i. Conversion of corporation to One
Person Corporations (OPC) and vice-
versa
Conversion from an Ordinary Corporation
to an OPC
When a single stockholder acquires ALL the
stocks of an ordinary stock corporation, the
latter may apply for conversion into a One
Person Corporation, subject to the submission
of such documents as the Commission may
require.
If the application for conversion is approved:
1. The Commission shall issue certificate
of filing of amended articles of
incorporation reflecting the conversion
2. 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 [Sec. 131,
RCC].
Conversion from a OPC to an Ordinary
Stock Corporation
A One Person Corporation may be converted
into an ordinary stock corporation after:
1. Due notice to the Commission of such
fact and of the circumstances leading
to the conversion; and
a. Such notice shall be filed with
the Commission within sixty
(60) days from the occurrence
of the circumstances leading to
the conversion into an ordinary
stock corporation
2. Compliance with all other requirements
for stock corporations under this Code
and applicable rules.
CORPORATION LAW COMMERCIAL LAW
If all requirements have been complied with, I. Mergers and Consolidations
the Commission shall issue an amended
certificate of incorporation reflecting the
1. Concept
conversion [Sec. 132, RCC].
Definitions
In case of death of the single stockholder:
Merger - A corporation absorbs the other and
1. Within seven (7) days from receipt of
remains in existence while the others are
either an affidavit of heirship or self-
dissolved [Sec.75, RCC].
adjudication executed by a sole heir, or
any other legal document declaring the
Mergers may be horizontal (between
legal heirs of the single stockholder,
competing firms), vertical (if a corporation
the nominee or alternate nominee
acquires another which uses or distributes its
shall:
products) or conglomerate (neither competing
a. Transfer the shares to the duly
nor related in the chain of production or
designated legal heir or estate;
distribution) [Campos].
and
b. Notify the Commission of the
Consolidation – a new corporation is created,
transfer.
and consolidating corporations are
2. Within sixty (60) days from the transfer
extinguished [Sec.75, RCC].
of the shares, the legal heirs shall notify
the Commission of their decision to
either: Merger Consolidation
a. Wind up and dissolve the One
Person Corporation; or One or more Union of 2 or more
b. Convert it into an ordinary corporations are corporations to form a
stock corporation. absorbed by another new corporation
which survives and
The ordinary stock corporation converted from continues the
a One Person Corporation shall succeed the combined business
latter and be legally responsible for all the
latter’s outstanding liabilities as of the date of One of the All constituent
conversion [Sec. 132, RCC]. constituent corporations
corporations remains disappear with the
as an existing emergence of a new
juridical person, corporate entity
whereas the other
corporation shall
cease to exist.
The surviving The new corporate
corporation shall entity shall obtain all
acquire all the assets, the assets of the
rights of action, and disappearing
assuming all the corporations, and
liabilities of the likewise shall assume
disappearing all their liabilities.
corporation/s.
There is no liquidation of the assets of the
dissolved corporation, all rights, properties
and franchises are acquired by the
surviving/new corporation.

Merger and consolidation involve fundamental

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changes in the corporation, the rights of Contents
stockholders and creditors. There must be an The Articles must contain the following:
express provision of law that authorizes them. a. Plan of the merger/consolidation
Otherwise, such combinations are ultra vires. b. As to stock corporations, the number of
With the approval of the Corporation Code, shares outstanding, or in the case of
such express authority has been granted non-stock corporations, the number of
[Campos]. members;
c. As to each corporation, the number of
Distinguish: Constituent and Consolidated shares or members voting for or
Corporation against such plan, respectively;
Constituent Consolidated Surviving
d. the carrying amounts and fair values of
Corporation Corporation Corporation the assets and liabilities of the
respective companies as of the agreed
The parties to The new One of the cut-off date
a merger or single constituent e. The method to be used in the merger
consolidation corporation corporations or consolidation of accounts of the
created which remain companies;
through in existence f. The provisional or pro-forma values, as
consolidation after the
merged or consolidated, using the
merger
accounting method; and
g. Such other information as may be
prescribed by the Commission [Sec.
Plan of Merger or Consolidation 77, RCC].
Each of the constituent corporations must draw
up a Plan of Merger or Consolidation which a. Procedure
shall set forth:
a. Names of the corporation involved; 1. Approval of Plan of Merger or
b. Terms and mode of carrying it to effect; Consolidation by BOD and Stockholders
c. Statement of changes, if any, in the of Constituent Corporations [Sec. 76,
present articles of the surviving RCC]
corporation to be formed in the case of
merger; and with respect to the
a. Approval by majority vote of each of the
consolidated corporation in case of board of directors or trustees of the
consolidation
constituent corporations of the plan of
merger or consolidation.
The Plan must be approved by the board of b. Approval by the stockholders or
directors or trustees of each constituent members of each of such corporations
corporation by majority vote [Sec. 75, RCC]. at separate corporate meetings duly
called for that purpose.
Articles of Merger or Consolidation 1. The affirmative vote of
The Articles of Merger or Consolidation: stockholders representing at
a. take the place of the AOI of the least two-thirds (2/3) of the
consolidated corporation; or outstanding capital stock of
b. amend the Articles of Incorporation of each corporation in the case of
the surviving corporation [Sec. 77,
stock corporations or at least
RCC]. two-thirds (2/3) of the members
in the case of non-stock
Requisites
corporations shall be
a. Executed by each of the constituent necessary for the approval of
corporations such plan.
b. Signed by the president/vice-president 2. Holders of non-voting shares
c. Certified by the secretary/assistant are entitled to vote on the plan
secretary of each corporation [Sec. 77, [Sec. 6, par. 6(6)].
RCC].
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c. Notice of such meetings shall be given
to all stockholders or members in the
same manner as giving notice of
regular or special meetings under
Section 49. The notice shall state the
purpose of the meeting and include a
copy or a summary of the plan of
merger or consolidation.
Any dissenting stockholder in stock
corporations may exercise his appraisal right in
accordance with the Code. Provided, that if
after the approval by the stockholders of such
plan, the board of directors decides to abandon
the plan, the appraisal right shall be
extinguished.
Amendment to the plan of merger or
consolidation
An amendment to the Plan may be made by
approval of the majority vote of the respective
boards of directors or trustees of all the
constituent corporations and ratified by the
affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital
stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such
plan, together with any amendment, shall be
considered as the agreement of merger or
consolidation.
2. Execution of Articles of Merger or
Consolidation
Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent
corporations.
3. Submission to SEC of the Articles
Submission of the Articles of Merger or Articles
of Consolidation to the SEC for approval.
Mergers and consolidations of corporations
governed by special laws require a
recommendation from the appropriate
government agency [Sec. 78 (1), RCC].
4. Action by SEC
Conduct hearing or issue certificate [Sec. 78,
RCC]
a. If necessary, the SEC shall set a
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hearing, notifying all corporations
concerned at least 2 weeks before.
b. SEC shall issue a certificate approving
the articles and plan of merger or of
consolidation.
5. Effectivity
Upon issuance of the certificate of merger or
consolidation, such merger or consolidation
shall become effective [Sec. 78, RCC].
Merger or consolidation does not become
effective by mere agreement of the constituent
corporations. The approval of the SEC is
required [PNB v. Andrada Electric and Engr.
Co., Inc. (2002)].
Notwithstanding Sec. 79 (now, sec. 78, RCC),
parties may stipulate a specific effective date of
merger (or consolidation) where no 3rd party
will be prejudiced [SEC Opinion No. 09-13, July
1, 2009].
2. Effects and limitations
a. Limitations
Consent of appropriate government
agency:
In the case of merger or consolidation of banks
or banking institutions, building and loan
associations, trust companies, insurance
companies, public utilities, educational
institutions, and other special corporations
governed by special laws, the favorable
recommendation of the appropriate
government agency shall first be obtained
[Sec. 78, RCC].
b. Effects
As enumerated in the RCC, the following are
the legal effects of merger/consolidation:
1. 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;
2. The separate existence of the
constituent corporations shall cease,
CORPORATION LAW
except that of the surviving or the
consolidated corporation;
3. 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 this Code;
4. 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;
and
5. 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 [Sec. 79,
RCC].
Although in a merger, there is dissolution of the
absorbed corporations, there is no winding up
of their affairs, because the surviving
corporation automatically acquires all their
rights, privileges, powers, and liabilities
[Associated Bank v. CA, 291 SCRA 511].
Same goes for the consolidated corporation.
Salient Advantages of
Mergers/Consolidation
Unlike regular transfer/acquisition, it is able to
achieve a continuous flow of the juridical
personalities and business enterprises of the
constituent corporations. There is no “legal
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break” in their juridical personalities and
business enterprises.
Thus, merger/consolidation is not a violation of
a non-transfer clause
● Surviving/consolidated corporation is
not considered a transferee
Unlike regular transfer of assets/business
enterprise, there is no gain or loss in the pursuit
of merger or consolidation, thus it is not subject
to taxable gains under Section 40(C)(2)(a) of
the NIRC, as amended by the Train Law.
As to Constituent Corporations
Corporate existence
The constituent corporations shall become a
single corporation.
The separate existence of the constituents
shall cease, except that of the surviving or the
consolidated corporation.
The absorbed or constituent corporations are
ipso facto dissolved by operation of law [SEC
Opinion, July 16, 1981].
Assets and liabilities
There is no liquidation of the assets of the
dissolved corporations [Campos].
The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities, powers, and franchises of each
constituent corporation and the properties shall
be deemed transferred to and vested in the
surviving or consolidated corporation without
further act or deed.
The surviving or the consolidated corporation
shall be subject to all the duties and liabilities
of the dissolving corporation(s).
As to Creditors
The creditors of a corporation cannot prevent
its merger or consolidation with another even if
the surviving or new corporation is not as
acceptable a debtor as the absorbed
corporation [Campos].
Any claim, action or proceeding pending by or
against any of the constituent corporations may
be prosecuted by or against the surviving or
CORPORATION LAW
consolidated corporation; and
The rights of the creditors or lien upon the
property of any of each constituent corporation
shall not be impaired by such merger or
consolidation.
Mergers and Consolidations in Employees
Because there is no legal break by the act of
merging, consolidating, it is logical to expect
that the contractual rights of employees and
the existing collective bargaining agreement, if
any, would have to be absorbed by the
surviving/consolidated corporation
● However, SC has made contrary
rulings.
Rule on automatic assumption/absorption does
not impair the right of an employer to terminate
the employment of the absorbed employees for
a lawful or authorized cause or the right of such
an employee to resign, retire, or otherwise
sever his employment, whether before or after
the merger, subject to existing contractual
obligations [The Philippine Geothermal Inc.
Employees Union v. Unocal Philippines, Inc.,
(2016)].
J. Securities
1. State Policy
R.A. No. 8799 - The Securities Regulation
Code
The Securities Regulation Code (SRC)
regulates public offering within the Philippines.
Declaration of State Policy
The State shall:
a. Establish a socially conscious, free
market that regulates itself;
b. Encourage the widest participation of
ownership in enterprises;
c. Enhance the democratization of
wealth;
d. Promote the development of the capital
market;
e. Protect investors;
f. Ensure full and fair disclosure about
securities;
g. Minimize if not totally eliminate insider
trading and other fraudulent or
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manipulative devices and practices
which create distortions in the free
market [Sec. 2].
2. Definition of Securities
Sec. 3. Definition of Terms. – 3.1. "Securities"
are shares, participation or interests in a
corporation or in a commercial enterprise or
profit-making venture and evidenced by a
certificate, contract, instruments, whether
written or electronic in character. It includes:
a. Shares of stocks, bonds, debentures,
notes evidences of indebtedness,
asset-backed securities;
b. Investment contracts, certificates of
interest or participation in a profit
sharing agreement, certificates of
deposit for a future subscription;
c. Fractional undivided interests in oil,
gas or other mineral rights;
d. Derivatives like option and warrants;
e. Certificates of assignments, certificates
of participation, trust certificates, voting
trust certificates or similar instruments;
f. Proprietary or nonproprietary
membership certificates in
corporations; and
g. Other instruments as may in the future
be determined by the Commission.
Additional Definitions under the 2015
Implementing Rules and Regulations of the
SRC
a. Debt securities/instruments –
include any evidence of indebtedness
such as bonds, notes, debentures,
commercial papers, treasury bills,
treasury bonds, and other similar
instruments as determined by the SEC
[Rule 3.1.20].
b. Equity securities – include shares of
stock in a corporation [Rule 3.1.20].
c. Commercial paper – means an
evidence of indebtedness of any
person with a maturity of 365 days or
less [Rule 3.1.6].
d. Derivative – a financial instrument
whose value changes in response to
changes in a specified interest rate,
security price, commodity price, foreign
exchange rate, index of prices or rates,
credit rating or credit index, or similar
CORPORATION LAW
variable or underlying factor. It is
settled at a future date [Rule 3.1.9].
e. Options – contracts that give the buyer
the right, but not the obligation, to buy
or sell an underlying security at a
predetermined price on or before a
predetermined date [Rule 3.1.9.1].
f. Warrants – rights to subscribe or
purchase new or existing shares in a
company on or before a predetermined
date [Rule 3.1.9.2].
g. Investment contract – means a
contract, transaction or scheme
whereby a person invests his money in
a common enterprise and is led to
expect profits primarily from the efforts
of others. An investment contract is
presumed to exist whenever a person
seeks to use the money or property of
others on the promise of profits [Rule
26.3.5].
h. Proprietary share or certificate – an
evidence of interest, participation or
privilege in a corporation which gives
the holder of the share or certificate the
right to use the facilities covered by
such certificate and to receive
dividends or earnings from the
corporation. Upon liquidation of the
corporation, the holder shall have
proportionate ownership rights over its
assets [Rule 3.1.15].
i. Non-proprietary share or certificate
– an evidence of interest, participation
or privilege over a specific property of
a corporation that allows the holder of
the share or certificate to use such
property under certain terms and
conditions. The holder, however, shall
not be entitled to dividends from the
corporation or to its assets upon its
liquidation [Rule 3.1.13].
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3. Kinds of Securities
a. Exempt Securities [Sec. 9]
The requirement of registration shall not, as a
general rule, apply to any of the following
classes of securities:
1. Any security issued or guaranteed by the
Government of the Philippines, its political
subdivision or agency, its instrumentality, or
any person controlled or supervised thereby.
Rationale for the exception: The public does
not need protection from the government itself.
The government will always be solvent to pay
its obligations because of its ability to raise
revenues through taxation.
2. Any security issued or guaranteed by the
government of any country with which the
Philippines maintains diplomatic relations,
or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided,
That the Commission may require compliance
with the form and content for disclosures the
Commission may prescribe.
Rationale: This is rooted in comity among
nations.
3. Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by the
proper adjudicatory body.
Rationale: This is not a public offering.
Besides, protection is already afforded by that
“proper adjudicatory body” and additional SEC
protection is not necessary.
4. Any security or its derivatives, the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commission, Housing and Land
Use Rule Regulatory Board, or the Bureau of
Internal Revenue.
Rationale: The issuers are governmental
agencies covered by exception (a) above. SEC
protection would be a duplication.
5. Any security issued by a bank except its
own shares of stock [Sec. 9.1].
CORPORATION LAW
Rationale: Banks are under the supervision of
the Bangko Sentral. SEC protection is a
duplication. Shares of stock were taken out of
the exemption in the SRC. The previous laws
(the original Securities Act and the Revised
Securities Act) did not have this exception to
the exemption.
6. Any class of security with respect to which
the SEC finds that registration is not necessary
in the public interest and for the protection of
investors [Sec. 9.2].
Note: The exemption of securities by the SEC
must be made through the issuance of a rule or
regulation [Sec. 9.2].
7. Under Rule 9.1 of the 2015 SRC-IRR, the
following shall also be considered exempt
securities:
● Any evidence of indebtedness issued
by a financial institution itself that
has been duly licensed by the BSP
to engage in banking or quasi-banking
activity [Rule 9.1.1].
● Evidence of indebtedness issued to
the BSP under its open market and/or
rediscounting operations [Rule
9.1.2.1].
● Bills of exchange arising from a
bona fide sale of goods and services
that are distributed and/or traded by
banks or investment houses duly
licensed by SEC and BSP through an
organized market that is operated
under the rules approved by the SEC
[Rule 9.1.2.2].
● Any security issued or guaranteed by
multilateral financial entities
established through a treaty or any
other binding agreement to which the
Philippines is a party or subsequently
becomes a member [Rule 9.1.2.3].
● Evidence of indebtedness that meet
the following conditions (19-Lender
Rule):
● Issued to not more than 19 non-
institutional lenders;
● Payable to a specific person;
● Neither negotiable nor assignable and
held on to maturity; and
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● In an amount not exceeding P150
million or such higher amount as the
SEC may prescribe [Rule 9.1.2.4].
Note: This provision exempts from
registration only the securities issued by
banking or financial institutions mentioned in
the law. Being an issuer of an exempt security
does not exempt such issuer from the
requirement of submission of reports. These
regulations are meant to assure full, fair and
accurate information for the protection of
investors. Imposing such regulations is a
function within the jurisdiction of the SEC
[Union Bank v. SEC, G.R. No. 138949 (2001)].
Securities exempt under this section are still
subject to the anti-fraud and civil liability
provisions contained in the Code, trading
regulations where they are traded on an
exchange, and the persons who sell these
securities are subject to SEC regulation
[Decasa, Securities Regulation Code
Annotated (2004)].
b. Exempt Transactions [Sec. 10]
The requirement of registration shall not apply
to the sale of any security in any of the following
transactions:
1. At any judicial sale, or sale by an
executor, administrator, guardian or
receiver or trustee in insolvency or
bankruptcy.
Rationale: A court will presumably not
order the sale if the public will be
prejudiced thereby.
2. By or for the account of a pledge
holder, or mortgagee or any of a pledge
lien holder selling or offering for sale or
delivery in the ordinary course of
business and not for the purpose of
avoiding the provision of this Code, to
liquidate a bona fide debt, a security
pledged in good faith as security for
such debt.
Rationale: This is not a voluntary sale
contemplated by the SRC.
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3. An isolated transaction in which any
security is sold, offered for sale,
subscription, or delivery by the owner
thereof, or by his representative for the
owner’s account, such sale or offer for
sale, subscription or delivery not being
made in the course of repeated and
successive transactions of a like
character by such owner, or on his
account by such representative and
such owner or representative not being
the underwriter of such security.
Rationale: Isolated and not meant to
be an ongoing public offering.
4. The distribution by a corporation
actively engaged in the business
authorized by its articles of
incorporation, of securities to its
stockholders or other security holders
as a stock dividend or other
distribution out of surplus.
8. Broker’s transaction, executed upon
Rationale: The offerees are not the
public, but shareholders already
familiar with their company.
5. The sale of capital stock of a
corporation to its own stockholders
exclusively, where no commission
or other remuneration is paid or
given directly or indirectly in
connection with the sale of such
capital stock.
9. Subscriptions for shares of the
Rationale: Same as d. above.
Note the condition for such exemption.
6. The issuance of bonds or notes
secured by mortgage upon real
estate or tangible personal property,
when the entire mortgage together with
all the bonds or notes secured thereby
are sold to a single purchaser at a
single sale.
Rationale: This is not a public sale.
7. The issue and delivery of any
security in exchange for any other
security of the same issuer pursuant
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to a right of conversion entitling the
holder of the security surrendered in
exchange to make such conversion:
Provided, That the security so
surrendered has been registered under
this Code or was, when sold, exempt
from the provision of this Code, and
that the security issued and delivered
in exchange, if sold at the conversion
price, would at the time of such
conversion fall within the class of
securities entitled to registration under
this Code. Upon such conversion, the
par value of the security surrendered in
such exchange shall be deemed the
price at which the securities issued and
delivered in such exchange are sold.
Rationale: The SEC has already
registered the convertible security and
presumably also passed upon the
security to be issued upon conversion.
customer’s orders, on any registered
Exchange or other trading market.
Rationale: If broker’s transactions are
registered each time, the transactions
on the exchange will be unduly
hampered. Besides, the brokers are
subject to a “code of conduct”
protective of the interest of the
investors.
capitals stock of a corporation prior
to the incorporation thereof or in
pursuance of an increase in its
authorized capital stocks, when no
expense is incurred, or no commission,
compensation or remuneration is paid
or given in connection with the sale or
disposition of such securities, and only
when the purpose for soliciting, giving
or taking of such subscription is to
comply with the requirements of such
law as to the percentage of the capital
stock of a corporation which should be
subscribed before it can be registered
and duly incorporated, or its authorized
capital increased.
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Rationale: This is not a public offering.
Besides, the SEC is involved in the
subscription process, as a regulator.
Note the condition that the exemption
applies only in respect of issuance for
compliance with the percentage
needed for an increase in authorized
capital stock, and the similar condition
in f. where no compensation is paid or
given.
10. The exchange of securities by the
issuer with the existing security holders
exclusively, where no commission or
other remuneration is paid or given
directly or indirectly for soliciting such
exchange.
Rationale: This is not a public offering.
Note the condition for exemption.
11. The sale of securities by an issuer to
fewer than twenty (20) persons in the
Philippines during any twelve-month
period.
Rationale: This is not a public offering
but a private placement.
If the original purchaser shall resell
said securities resulting in more than
19 holders, the registration
requirement shall apply,
notwithstanding the exemption of their
issuances [Rule 10.1.2.2].
The sale of securities to any number
of the following qualified buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan
maintained by the Government
of the Philippines or any
political subdivision thereof or
managed by a bank or other
persons authorized by the
Bangko Sentral to engage in
trust functions;
e. Investment company; or
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f. Such other person as the
Commission may by rule
determine as qualified buyers,
on the basis of such factors as
financial sophistication, net
worth, knowledge, and
experience in financial and
business matters, or amount of
assets under management
[Sec. 10.1].
Rationale: These are sophisticated
investors who are presumed to know
the risks of investing in the securities
market.
12. Any transaction with respect to which
the SEC finds that registration is not
necessary in the public interest and
protection of investors, such as by
reason of the small amount involved or
the limited character of the public
offering [Sec. 10.2].
Note: Any person applying for an
exemption under Section 10 shall file
with the SEC:
a. A notice identifying the
exemption relied upon;
b. Payment of fee equivalent to
1/10 of 1% of the maximum
value aggregate price or issued
value of the securities.
Howey Test
The Howey test is used order to determine if a
particular transaction is an investment contract
that requires registration.
The SRC treats investment contracts as
“securities” that must be registered with the
SEC before they can be distributed and sold.
An investment contract is a contract,
transaction, or scheme where a person invests
his money in a common enterprise and is led to
expect profits primarily from the efforts of
others [SEC v. Prosperity.com, Inc, G.R. No.
164197 (2012)].
To be a security subject to regulation by the
SEC, an investment contract in our jurisdiction
must be proved to be:
1. An investment of money,
CORPORATION LAW
2. In a common enterprise,
3. With expectation of profits,
4. Primarily from efforts of others
[Power Homes Unlimited Corp. v. SEC and
Manero, G.R. No. 164182 (2008)].
The commissions, interest in real estate, and
insurance coverage given in a network
marketing scheme to a buyer that becomes a
down-line seller can hardly be regarded as
profits from investment of money under the
Howey Test. Rather, these are incentives for
down-line sellers to bring in other customers
[SEC v. Prosperity.com, Inc, G.R. No. 164197
(2012)].
A scheme wherein an investor enrolls to be
entitled to recruit other investors, and to
receive commissions from the investments of
those directly recruited by him, constitutes an
investment contract, which is a security under
RA 8799. Under the scheme, the accumulated
amount received by the investor comes
primarily from the efforts of his recruits [Power
Homes Unlimited Corp. v. SEC and Manero,
G.R. No. 164182 (2008)].
c. Non-exempt transactions
Section 8. Requirement of Registration of
Securities. –
8.1. Securities shall not be sold or offered for
sale or distribution within the Philippines,
without a registration statement duly filed with
and approved by the Commission. Prior to
such sale, information on the securities, in such
form and with such substance as the
Commission may prescribe, shall be made
available to each prospective purchaser.
All other transactions not within the scope of
exempt securities or exempt transactions, and
not otherwise declared by the Commission as
such, are non-exempt transactions and must
follow the procedure on registration and
provide prospective purchasers of information
on the securities prior to such sale.
Registration
General Rule: Securities are prohibited to be
sold or offered for sale or distribution within the
Philippines:
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1. Without registration statement duly
filed with and approved by SEC; and
2. Prior to such sale, information on the
securities, in such form and with such
substance as SEC may prescribe,
must be made available to each
prospective purchaser.
Exceptions
1. Exempt securities [Sec. 9]
2. Exempt transactions [Sec. 10]
4. Powers and Functions of the SEC
a. SEC may dispense with any
requirement or may require additional
information or documents with respect
to registration [Sec. 12.2].
b. The Commission may compel the
production of all the books and
papers of such issuer, and may
administer oaths to, and examine the
officers [Sec. 13.2].
c. If the Commission deems it necessary,
it may issue an order suspending
the offer and sale of the securities
pending any investigation. Upon the
issuance of the suspension order, no
further offer or sale of such security
shall be made until the same is lifted or
set aside by the Commission.
Otherwise, such sale shall be void
[Sec. 13.4].
5. Procedure for Registration of
Securities
a. Registration of Securities [Secs. 12
and 13]
1. Filing by the issuer of a sworn
registration statement with the SEC in
the form prescribed [Sec. 12.1]
a. Shall include any prospectus required
or permitted to be delivered under
Subsections 8.2, 8.3, and 8.4 [Sec.
12.1]
Sec. 8. Requirement of Registration of
Securities. –
CORPORATION LAW
8.2 The Commission may conditionally
approve the registration statement
under such terms as it may deem
necessary.
8.3 The Commission may specify the
terms and conditions under which any
written communication, including any
summary prospectus, shall be deemed
not to constitute an offer for sale under
this Section.
8.4. A record of the registration of
securities shall be kept in Register of
Securities in which shall be recorded
orders entered by the Commission with
respect to such securities. Such
register and all documents or
information with respect to the
securities registered therein shall be
open to public inspection at reasonable
hours on business days.
b. Shall include the effect of the securities
issue on ownership, on the mix of
ownership, especially foreign and local
ownership [Sec. 12.3].
c. Shall be signed by the issuer’s
executive officer, its principal operating
officer, its principal financial officer, its
comptroller, its principal accounting
officer, its corporate secretary, or
persons performing similar functions
accompanied by a duly verified
resolution of the board of directors of
the issuer corporation [Sec. 12.4].
d. Shall be accompanied by:
1. Written consent of the expert
named as having certified any
part of the registration
statement or any document
used in connection therewith;
and
2. Where the registration
statement includes shares to
be sold by selling shareholders
- a written certification by such
selling shareholders as to the
accuracy of any part of the
registration statement
contributed to by such selling
shareholders [Sec. 12.4].
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2. Payment to the SEC of a fee of not
more than one-tenth of one per centum
(1/10 of 1%) of the maximum aggregate
price at which such securities are
proposed to be offered [Sec. 12.5a]
The Commission shall prescribe, by rule,
diminishing fees in inverse proportion to the
value of the aggregate price of the offering.
This fee paid to the SEC is called a diminishing
fee.
3. Publication of the notice of the filing of
registration statement [Sec. 12.5b]
The notice must be published by the issuer, at
its own expense, in two (2) newspapers of
general circulation in the Philippines, once a
week for two (2) consecutive weeks, or in such
other manner as the SEC shall prescribe.
4. Declaration by the SEC whether the
registration statement is effective or
rejected
Declaration is made within 45 days from filing
of the registration statement or on such later
date to which the issuer has consented unless
applicant has been allowed to amend the
registration statement under Sec. 14 [Sec.
12.6].
5. Statement under oath by the issuer in
all prospectus that:
a. Registration requirements have been
met; and
b. All information is true and correct as
represented by the issuer or the one
making the statement.
Statement under oath must be made upon
effectivity of the registration statement [Sec.
12.7].
Grounds for Rejection and/or Revocation of
the Registration of Securities
The SEC may reject a registration statement
and reuse registration of the security
thereunder, or revoke the effectivity of a
registration statement and the registration of
the security thereunder after due notice and
hearing, if it finds that:
CORPORATION LAW
The issuer:
a. Has been judicially declared
insolvent;
b. Has violated any of the provision of
this Code, the rules promulgated
pursuant thereto, or any order of the
Commission of which the issuer has
notice in connection with the offering
for which a registration statement has
been filed;
c. Has been or is engaged or is about to
engage in fraudulent transactions;
d. Has made any false or misleading
representation of material facts in
any prospects concerning the issuer
or its securities;
e. Has failed to comply with any
requirements that the Commission
may impose as a condition for
registration of the security for which the
registration statement has been filed
[Sec. 13.1.a].
The registration statement is on its face
incomplete or inaccurate in any material
respect or includes any untrue statements of a
material fact required to be stated therein or
necessary to make the statement therein not
misleading [Sec. 13.1.b].
The issuer, any officer, director or
controlling person performing similar
functions, or any under writer has been
convicted, by a competent judicial or
administrative body, upon plea of guilty, or
otherwise, of an offense involving moral
turpitude and/or fraud or is enjoined or
restrained by the Commission or other
competent or administrative body for violations
of securities, commodities, and other related
laws [Sec. 13.1.c].
The term “competent judicial or administrative
body” shall include a foreign court of competent
jurisdiction.
If any issuer shall refuse to permit an
examination to be made by the SEC [Sec.
13.3].
Note: A registration statement may be
withdrawn by the issuer only with the consent
of the Commission [Sec. 13.6].
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Grounds for suspension of registration
[Sec. 15]
a. If, at any time, the information
contained in the registration statement
filed is or has become misleading,
incorrect, inadequate or incomplete in
any material respect;
b. If the sale or offering for sale of the
security registered thereunder may
work or tend to work a fraud;
c. If the security registered is pending
further investigation to ascertain
whether the registration of such
security should be revoked on any
ground specified in the SRC;
d. If there is refusal to furnish information
required by the SEC.
Note: Upon the issuance of such order of
suspension and notification to the issuer,
underwriter, dealer or broker known as
participating in such offering, no further offer or
sale of such security shall be made until the
order is lifted by the SEC. Otherwise, such sale
shall be void [Sec 15.2].
6. Prohibition on Fraud, Manipulation
and Insider Trading
a. Manipulation of security prices [Sec.
24]
It shall be unlawful for any person acting for
himself or through a dealer or broker,
directly or indirectly:
1. To create a false or misleading appearance
of active trading in any listed security traded in
an Exchange or any other trading market
("Exchange"):
a. Wash sales - By effecting any
transaction in such security which
involves no change in the beneficial
ownership thereof;
b. Matched orders - By entering an order
or orders for the purchase or sale of
such security with the knowledge that a
simultaneous order or orders of
substantially the same size, time and
price, for the sale or purchase of any
such security, has or will be entered by
or for the same or different parties; or
CORPORATION LAW
c. Market rigging or jiggling - By
performing similar act where there is no
change in beneficial ownership.
2. To effect, alone or with others, a series of
transactions in securities that:
a. Raises their price to induce the
purchase of a security, whether of the
same or a different class of the same
issuer;
b. Depresses their price to induce the
sale of a security, whether of the same
or a different class of the same issuer;
or
c. Creates active trading to induce such a
purchase or sale through manipulative
devices such as marking the close,
painting the tape, squeezing the float,
hype and dump, boiler room operations
and such other similar devices.
Examples of Prohibited Conduct under the
2015 SRC Rules for a.1 and a.2
Painting the tape - Engaging in a series of
transactions in securities that are reported
publicly to give the impression of activity or
price movement in a security
Marking the close - Buying and selling
securities at the close of the market in an effort
to alter the closing price of the security
Improper matched orders - Engaging in
transactions where both the buy and sell orders
are entered at the same time with the same
price and quantity by different but colluding
parties
Hype and dump - Engaging in buying activity
at increasingly higher prices and then selling
securities in the market at the higher prices or
vice versa (i.e., selling activity at lower prices
and then buying at such lower prices).
Wash sales - Engaging in transactions in
which there is no change in beneficial
ownership of a security
Squeezing the float - Taking advantage of a
shortage of securities in the market by
controlling the demand side and exploiting
market congestion during such shortages in a
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way as to create artificial prices
Boiler room operations – use of high-
pressure sales tactics to sell securities to
clients who are called randomly
Disseminating false or misleading market
information through media, including the
internet, or any other means to move the price
of a security in a direction that is favorable to a
position held or a transaction.
Other types of prohibited conduct and/or
manipulative practices which include, among
others, the creation of temporary funds for the
purpose of engaging in other manipulative
practices [Sec. 24.1, 2015 SRC-IRR].
3. To circulate or disseminate information that
the price of any security listed in an Exchange
will or is likely to rise or fall because of
manipulative market operations of any one or
more persons conducted for the purpose of
raising or depressing the price of the security
for the purpose of inducing the purchase or
sale of such security.
4. To make false or misleading statement with
respect to any material fact, which he knew or
had reasonable ground to believe was so false
or misleading, for the purpose of inducing the
purchase or sale of any security listed or traded
in an Exchange.
5. To effect, either alone or others, any series
of transactions for the purchase and/or sale of
any security traded in an Exchange for the
purpose of pegging, fixing, or stabilizing the
price of such security, unless otherwise
allowed by this Code or by rules of the
Commission [Sec. 24.1].
No person shall use or employ, in connection
with the purchase or sale of any security any
manipulative or deceptive device or
contrivance [Sec. 24.2].
Short Swing (Sec. 23.2)
Directors, officers, and shareholders who
because of unfair use of information obtained
by them shall be liable to the company for profit
earned by them for transactions made within
any period of less than six (6) months.
CORPORATION LAW
Margin Trading [Sec. 48]
This is a form of trading whereby the customer
purchases stocks by advancing only a portion
of the purchase price, with the broker
extending credit or making loan for the balance
due [Sundiang].
Purpose
To prevent the excessive use of credit for the
purchase or carrying of securities [Sec. 48.1].
Margin Requirements
The credit extended must be for an amount not
greater than whichever is the higher of—
a. Sixty-five per centum (65%) of the
current market price of the security, or
b. One hundred per centum (100%) of the
lowest market price of the security
during the preceding thirty-six (36)
calendar months, but not more than
seventy-five per centum (75%) of the
current market price.
Note: However, the Monetary Board may
increase or decrease the above percentages,
in order to achieve the objectives of the
Government with due regard for promotion of
the economy and prevention of the use of
excessive credit [Sec. 48.1].
Prohibitions [Rule 48, 2015 SRC-IRR]
a. A Broker Dealer shall not extend credit
to a customer in an amount that
exceeds fifty percent (50%) of the
current market value of the security at
the time of the transaction. In no event
shall new or additional credit be
extended to an account in which the
equity is less than Fifty Thousand
Pesos (PhP 50,000.00).
b. The margin maintained in a margin
account of a customer shall be no less
than twenty five percent (25%) of the
current market value of all securities
"long" in the account and thirty percent
(30%) of the current market value of
securities "short" in the account.
c. When there is an insufficiency of
margin, a call for additional margin
shall be issued promptly by the Broker
Dealer to the customer.
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1. A call for initial margin shall be
satisfied within 5 business days
from receipt of the call.
2. A call for maintenance margin
shall be satisfied within 24
hours after the call is received.
3. No purchase or sell order from
the customer on the margin
account shall be executed by
the Broker Dealer from the time
of insufficiency up to the
satisfaction of the call
(Mandatory Close-Out Rule).
b. Short sales [Rule 24.2-2, 2015 SRC
IRR]
No short sale shall be effected, nor any stop-
loss order be executed in connection with the
purchase or sale of any security except in
accordance with such rules and regulations as
the Commission may prescribe as necessary
or appropriate in the public interest for the
protection of investors [Sec. 24.2].
‘Short Sale’ means:
1. Any sale of a security which the seller
does not own; or
2. Any sale which is consummated by the
delivery of a security borrowed by, or
for the account of the seller with the
commitment of the seller or securities
borrower to return or deliver said
securities or their equivalent to the
lender on a determined or
determinable future date [Sec. 24.2-2,
2015 SRC-IRR].
‘Stop Loss Order’ means:
An order made by the customer to a broker to
sell a security when it reaches a certain price.
Stop loss orders are designed to limit an
investor's loss on a position in a security.
Prohibition on Short Sales under the 2015
SRC-IRR
1. No broker or dealer shall use any
facility of a securities exchange to
effect a short sale of any security
unless:
a. At a price higher than the last
sale; or
CORPORATION LAW
b. At the price of the sale if that
price is above the next
preceding different sale price
on such day (Uptick Rule).
Note: Unless otherwise provided by the
Commission, this price requirement
shall not apply to a sale due to a bona
fide market-making or arbitrage activity
executed by a broker dealer authorized
to engage in such activities.
2. No person shall, directly or indirectly,
using any facility of any securities
exchange, effect a short sale in a
security registered or listed on any
securities exchange, where the seller
does not intend or is unable to make
delivery of the securities within the
prescribed settlement period.
3. No director, officer or principal
stockholder of a corporation shall make
a short sale in securities of the
corporation in which he is a director,
officer, or principal stockholder.
4. The SEC may, motu proprio or upon
recommendation of the Exchange,
prohibit short selling indefinitely or for
such period as it may deem proper for
the protection of the investors or as an
emergency measure or whenever such
short selling is necessary or
appropriate in the public interest [Sec.
24.2-2].
c. Option trading [Sec. 25]
Prohibition on Option Trading under 2015
SRC-IRR
No member of an Exchange shall, directly or
indirectly endorse or guarantee the
performance of any put, call, straddle, option,
or privilege in relation to any security registered
on a securities exchange.
The terms "put", "call", "straddle", "option", or
"privilege" shall not include any registered
warrant, right or convertible security.
Options – contracts that give the buyer the
right, but not the obligation to buy or sell an
underlying security at a predetermined price on
or before a predetermined date [Rule 3.1.9.1].
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d. Fraudulent Transactions [Sec. 26]
It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or
sale of any securities to:
1. Employ any device, scheme, or artifice
to defraud; [Sec. 26.1]
2. Obtain money or property by means of
any untrue statement of a material fact
or any omission to state a material fact
necessary in order to make the
statements made, in the light of the
circumstances under which they were
made, not misleading [Sec. 26.2]
3. Engage in any act, transaction,
practice, or course of business which
operates or would operate as a fraud or
deceit upon any person [Sec. 26.3]
‘Material fact or information’ means:
Any fact or information that may result in a
change in the market price or value of any of
the issuer’s securities, or may potentially affect
the investment decision of an investor [Sec.
3.1.12., 2015 SRC-IRR].
Prohibited Representations, Dealings and
Solicitation [Rule 26.3, 2015 SRC-IRR]
It shall be unlawful for any:
1. Person to represent that he has been
registered as a securities intermediary
with the SEC, unless such person is
registered under the Code;
2. Broker Dealer to represent that the
registration of the Broker Dealer under
the Code, or the failure of the SEC to
deny, suspend or revoke such
registration, indicates in any way that
the SEC has passed upon or approved
the financial standing, business or
conduct of such Broker Dealer, or the
merits of any security or any
transaction/s conducted thereby;
3. Person to represent that a security is a
particular type of security when such
representation is inconsistent with a
stated definition under the Code or
rules or regulations adopted
thereunder;
4. Person to represent that a security to
be sold, transferred, pledged,
mortgaged, encumbered, used for
delivery, or any other purpose to
CORPORATION LAW
another entity or itself has been legally
authorized by the registered owner
when such representation is not true
and documented in writing at the time
and date it was used;
5. Person, whether as principal or agent,
to buy, sell or deal in securities or solicit
investments in securities and other
investment contracts, unless he is a
registered broker, dealer or licensed
salesman of a broker dealer and the
securities are registered under the
Code or exempt from registration.
e. Insider trading [Sec. 61]
An ‘Insider’ means:
1. The issuer;
2. A director or officer (or any person
performing similar functions) or a
person controlling the issuer;
3. A person whose relationship or former
relationship to the issuer gives or gave
him access to material information
about the issuer or the security that is
not generally available to the public;
4. A government employee, director, or
officer of an exchange, clearing agency
and/or self-regulatory organization who
has access to material information
about an issuer or a security that is not
generally available to the public; or
5. A person who learns such information
by a communication from any of the
foregoing insiders [Sec. 3.8].
‘Issuer’ means:
Any entity authorized by the SEC to offer to
sell, sell or promote the sale to the public of its
equity, bonds, instruments of indebtedness
and other forms of securities [Sec. 3.1.11, 2015
SRC-IRR].
‘Material non-public information’ means:
1. It has not been generally disclosed to
the public and would likely affect the
market price of the security after being
disseminated to the public and the
lapse of a reasonable time for the
market to absorb the information; or
2. It would be considered by a reasonable
person important under the
circumstances in determining his
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course of action whether to buy, sell or
hold a security [Sec. 27.2].
Principles on Insider Trading
What is sought to be addressed is the
asymmetry in information about a “public
company” (such as a company listed on the
Philippine Stock Exchange) between insiders
and outsiders.
Insiders could have material information not yet
known to the public about the company, and
they might use this information to benefit
themselves at the expense of the outsiders or
the public. Therefore, they must not trade in
the shares of the company pending the
disclosure of such information to the
public.
Unlawful Acts of an Insider
To sell or buy a security of the issuer, while in
possession of material information with respect
to the issuer or the security that is not generally
available to the public, unless:
1. The insider proves that the information
was not gained from such relationship;
or
2. If the other party selling to or buying
from the insider (or his agent) is
identified, the insider proves:
a. That he disclosed the
information to the other party,
or
b. That he had reason to believe
that the other party otherwise is
also in possession of the
information [Sec. 27.1].
Note: Presumption that purchase or sale made
by an insider, or such insider’s spouse or
relatives by affinity or consanguinity within the
second degree, legitimate or common-law, is
effected while in possession of material non-
public information arises:
1. If the purchase or sale is transacted
after such information came into
existence but prior to dissemination of
such information to the public; and
2. The lapse of a reasonable time for the
market to absorb such information.
Presumption may be rebutted by showing of
purchaser’s or seller’s lack of awareness of the
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material non-public information at the time of
purchase or sale [Sec. 27.1].
To communicate material non-public
information about the issuer or the security to
any person who, by virtue of the
communication, becomes an insider, where the
insider communicating the information knows
or has reason to believe that such person will
likely buy or sell a security of the issuer while
in possession of such information [Sec. 27.3].
Unlawful Acts Involving Insiders in
connection with Tender Offer
Where a tender offer has commenced, or is
about to commence, it shall be unlawful for:
1. Any person (other than the tender
offeror) who is in possession of
material non-public information relating
to such tender offer — to buy or sell the
securities of the issuer that are sought
or to be sought by such tender offer, if
such person: (1) knows or has reason
to believe that the information is non-
public, and (2) has been acquired
directly or indirectly from the tender
offeror, those acting on its behalf, the
issuer, or any insider of such issuer;
and
2. Any tender offeror, those acting on its
behalf, the issuer, and any insider of
such issuer — to communicate
material non-public information relating
to the tender offer to any other person
where such is likely to result in a
violation of Sec. 27.4(a)(i) [Sec 27.4].
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7. Prohibition on Fraud, Manipulation
and Insider Trading
a. Tender offer rule
Definition
Tender Offer is a publicly announced intention
by a person acting alone or in concert with
other persons to acquire:
1. Outstanding equity securities of a
public company, or
2. Outstanding equity securities of an
associate or related company of such
public company which controls the said
public company.
Stated differently, it is an offer by the acquiring
person to stockholders of a public company for
them to tender their shares therein on the terms
specified in the offer [Cemco Holdings, Inc. v.
National Life Insurance Company of the
Philippines, G.R. No. 171815 (2007)].
A public company means any corporation:
1. With a class of equity securities listed
on an Exchange, or
2. With assets in excess of Fifty million
pesos and having 200 or more holders
each holding at least 100 shares of a
class of its equity securities [Sec. 3.1,
2015 SRC-IRR].
Purpose of Tender Offer
Tender offer is in place to protect minority
shareholders against any scheme that dilutes
the share value of their investments by:
1. Giving them the chance to exit the
company under reasonable terms,
2. Giving them the opportunity to sell their
shares at the same price as those of
the majority shareholders [Cemco
Holdings, Inc. v. National Life
Insurance Company of the Philippines,
supra].
The rules aim to protect minority owners who
may be left out if the buyers extend the offer
only to strategic partners or majority owners of
a company [Decasa].
CORPORATION LAW COMMERCIAL LAW
Manner of Making Tender Offer
in a public company securities to be
No tender offer shall be made unless:
directly from one or acquired at the close
1. It is open to all security holders of the
more stockholders; of the tender offer
class of securities subject to the tender
shall be
offer; and
proportionately
2. The consideration paid to any security
distributed
holder pursuant to the tender offer shall
[Sundiang].
be the highest consideration paid to
any other security holder during such 4. Acquire any They shall make a
tender offer [Sec 19.9.8, 2015 SRC- number of shares tender offer for all
IRR]. that would result in outstanding equity
ownership of over securities to all
Mandatory Tender Offer [Rule 19.2, 2015 fifty percent (50%) of remaining
SRC-IRR] the total outstanding stockholders of the
Tender offer is mandatory whenever any equity securities of a company. The
person or group of persons acting in concert public company. acquirer shall be
intends to: required to accept all
securities tendered.
When Mandatory How Effected
Obligations of a person making a tender
1. Acquire fifteen They shall file a
offer [Rule 19, 2015 SRC-IRR]
percent (15%) of declaration to that
1. Make an announcement of his intention
equity securities in a effect with the SEC.
in a national newspaper of general
public company in
circulation, prior to the commencement
one or more
of the offer. A copy of the said notice
transactions within a
shall be submitted to the Commission
period of 12 months.
on the date of its publication [Rule
19.5].
2. Acquire thirty five They shall disclose 2. File with the Commission SEC Form
percent (35%) or such intention and 19-1, including all its exhibits [Rule
more of the make a tender offer 19.6.1.1].
outstanding voting for the percentage 3. Hand deliver a copy of the SEC Form
shares or such sought to all holders 19-1, including all its exhibits, to the
outstanding voting of such securities. target company at its principal
shares that are executive office and to each Exchange
sufficient to gain where such class of the target
control of the board company's securities is listed for
in a public company trading [Rule 19.6.1.2].
in one or more 4. File with the SEC copies of any
transactions within a additional tender offer materials as
period of 12 months; exhibit to SEC Form 19-1 and, if a
material change occurs in the
information set forth in such SEC Form,
3. Acquire thirty five They shall make a copies of an amendment to such form.
percent (35%) or tender offer for all the Copies shall be hand delivered to the
more of the outstanding voting target company and to any Exchange
outstanding voting shares. as required above [Rule 19.6.2].
shares or such 5. Report the results of the tender offer to
outstanding voting Note: If the tender the SEC by filing, not later than ten (10)
shares that are offer is business days after the termination of
sufficient to gain oversubscribed, the the tender offer, copies of the final
control of the board aggregate amount of amendments to SEC Form 19-1 [Rule
19.6.3].
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Coverage of the Mandatory Tender Offer
Rule
The coverage of the mandatory tender offer
rule covers not only direct acquisition but also
indirect acquisition or “any type of acquisition.”
The legislative intent behind the tender offer
rule makes clear that the type of activity
intended to be regulated is the acquisition of
control of the listed company through the
purchase of shares [Cemco Holdings, Inc. v.
National Life Insurance Company of the
Philippines, supra].
Exemptions from the mandatory tender
offer requirement [Rule 19.3, 2015 SRC-IRR]
Any purchase of securities from the unissued
capital stock, provided, the acquisition will not
result to a fifty percent (50%) or more
ownership of securities by the purchaser, or
such percentage that is sufficient to gain
control of the board;
1. Any purchase of securities from an
increase in authorized capital stock;
2. Purchase in connection with
foreclosure proceedings involving a
duly constituted pledge or security
arrangement where the acquisition is
made by the debtor or creditor;
3. Purchases in connection with a
privatization undertaken by the
government of the Philippines;
4. Purchases in connection with
corporate rehabilitation under court
supervision;
5. Purchases in the open market at the
prevailing market price; and
6. Merger or consolidation.
Note: Purchasers of securities in the foregoing
transactions shall, however, comply with the
disclosure and other obligations under SRC-
IRR 18.1 and 23.
When not required to make a tender offer
Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) of the outstanding voting shares
or such outstanding voting shares that are
sufficient to gain control of the board in a public
company through the Exchange shall not be
required to make a tender offer even if they
acquire the remainder through a block sale if,
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after acquisition through the Exchange, they
fail to acquire their target of thirty five percent
(35%) or such outstanding voting shares that is
sufficient to gain control of the board [Sec
19.2.3, 2015 SRC-IRR].
Issuer Tender Offer
“Issuer Tender Offer” means a publicly
announced intention by an issuer to acquire
any of its own class of equity securities, or by
an associate of such issuer to acquire such
securities [Sec 19.1.5, 2015 SRC-IRR].
A reacquisition or repurchase by an issuer of
its own securities shall only be made if such
issuer has unrestricted retained earnings in its
books to cover the amount of shares to be
purchased, and is undertaken for any of the
following purposes:
1. To implement a stock option or stock
purchase plan;
2. To meet short-term obligations which
can be settled by the reissuance of the
repurchased shares;
3. To pay dissenting or withdrawing
stockholders entitled to payment for
their securities; and
4. Such other legitimate corporate
purpose/s [Sec. 19.4, 2015 SRC-IRR].
Prohibited Acts
It shall be unlawful when a tender offer has
commenced or about to commence for:
1. Any person (other than the tender
offeror) who is in possession of
material non-public information relating
to such tender offer, to buy or sell the
securities of the issuer that are sought
or to be sought by such tender offer;
and
2. Any tender offeror, those acting on its
behalf, the issuer of the securities
sought or to be sought by such tender
offer, and any insider of such issuer to
communicate material non-public
information relating to the tender offer
to any other person where such
communication is likely to result in a
violation of Sec. 27.4(a)(i) [Sec. 27.4].
CORPORATION LAW
b. Rules on proxy solicitation
Definition
Proxy Solicitation involves the securing and
submission of proxies. It is where the
corporation obtains proxies of the stockholders
to vote on corporate matters [GSIS v. CA, G.R.
No. 183905 (2009)].
The terms solicit and solicitation shall
include:
1. Any request for proxy or authorization;
2. Any request to execute or not to
execute, or to revoke, a proxy or
authorization; or
3. The furnishing of a form of proxy or
other communication to security
holders under circumstances
reasonably calculated to result in the
procurement, withholding or revocation
of a proxy [Rule 20.2.2, 2015 SRC-
IRR].
The terms shall not apply to:
1. The performance by any person of
ministerial acts on behalf of a person
soliciting a proxy; or
2. Any solicitation made otherwise than
on behalf of the issuer where the total
number of persons solicited is not more
than 19 [Rule 20.2.2, 2015 SRC-IRR].
The SRC regulates proxy solicitation by
requiring the issuer to transmit
1. An information statement,
2. Proxy form, and
3. Management report to every security
holder of the class entitled to vote at
least 15 days prior to the conduct of
annual or other stockholders’ meetings
[Rule 20.3.1, 2015 SRC-IRR].
Preliminary copies of the information statement
and the proxy form shall be submitted to the
SEC before sending the same to security
holders [Rule 20.3.3.1, 2015 SRC-IRR].
Requirements
Proxies must be:
1. Issued and solicited in accordance with
SEC rules and regulations [Sec. 20.1]
2. In writing [Sec. 20.2]
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3. Signed by the stockholder or his duly
authorized representative [Sec. 20.2]
4. Filed before the scheduled meeting
with the corporate secretary [Sec. 20.2]
5. Valid only for the meeting for which it is
intended unless otherwise provided in
the proxy [Sec. 20.3]
Note: No proxy shall be valid and effective for
a period longer than five (5) years at one time
[Sec. 20.3].
Rules with Regard to Brokers or Dealers
No broker/dealer shall give any proxy, consent,
or any authorization, in respect of any security
carried for the account of the customer, to a
person other than the customer without written
authorization of such customer [Sec. 20.4].
A broker or dealer who holds or acquires the
proxy for at least ten percent (10%) or such
percentage as the commission may prescribe
of the outstanding share of such issuer, shall
submit a report identifying the beneficial owner
of ten days after such acquisition, for its own
account or customer to the issuer of security,
to the exchange where the security is traded,
and to the Commission [Sec. 20.5].
Note: For proxy or consent solicitation, the
SEC may require that the person making
such filing pay a fee of not more than one-
tenth of one percent (1/10 of 1%) of the
proposed payment in cash, and the value of
any security or property to be transferred in the
acquisition, merger or consolidation, or the
cash and value of any securities proposed to
be received upon sale or disposition of such
assets in case of a solicitation [Sec. 21].
c. Disclosure rule
Issuers, equity holders, and insiders are
subject to certain reportorial requirements
under the SRC.
1. Disclosure by The Issuer [Sec. 17]
To the SEC
a. Annual Report filed within one hundred
thirty-five (135) days after the end of
the issuer’s fiscal year, or such other
time as the Commission may
prescribe;
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b. Such other periodical reports for
interim fiscal periods and current
reports on significant developments of
the issuer as the Commission may
prescribe as necessary to keep current
information on the operation of the
business and financial condition of the
issuer [Sec. 17.1].
To the equity holders
An annual report shall be furnished, by every
issuer which has a class of equity securities
satisfying any of the requirements in
Subsection 17.2, to each holder of such equity
security [Sec. 17.5].
Types of issuers subject to the reportorial
requirements [Sec. 17.2]
An issuer which has sold a class of its
securities pursuant to a registration statement,
Provided however, That the requirement shall
be suspended for any fiscal year after the year
such registration became effective if such
issuer, as of the first day of any such fiscal
year, has less than one hundred (100) holders
of such class of securities or such other
number as the Commission shall prescribe and
it notifies the Commission of such;
a. An issuer with a class of securities
listed for trading on an Exchange; and
b. An issuer with assets of at least 50
million pesos or such other amount as
the Commission shall prescribe and
having 200 or more holders each
holding at least 100 shares of a class
of its equity securities.
The obligation of such issuer to file reports shall
be terminated ninety (90) days after notification
to the Commission by the issuer that the
number of its holders holding at least one
hundred (100) shares is reduced to less than
one hundred (100) [Sec. 17.2].
A “public company” is required to comply
with the reportorial requirements set forth in
Section 17.1 of the SRC. Under Rule 3(1)(m),
a “public company” is defined as “any
corporation with a class of equity securities
listed on an Exchange or with assets in excess
of Fifty Million Pesos (P50,000,000.00) and
having 200 or more holders, at least 200 of
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which are holding at least 100 shares of a class
of its equity securities.”
A “public company,” as contemplated by the
SRC, is not limited to a company whose
shares of stock are publicly listed; even
companies like the Bank, whose shares are
offered ONLY to a specific group of people, are
considered a public company, provided they
meet the requirements enumerated [Philippine
Veterans Bank v. Callangan G.R. No. 191995
(2011)].
2. Disclosure by The Issuer [Sec. 18]
Reports by Five per centum Holders of
Equity Securities [Sec. 18]
In every case in which an issuer is subject to
the reportorial requirements, any person who
acquires directly or indirectly the beneficial
ownership of more than five of per centum (5%)
of such class or in excess of such lesser per
centum as the Commission by rule may
prescribe, shall, within 10 days after such
acquisition or such reasonable time as fixed by
the Commission, submit to:
a. The issuer of the securities;
b. The Exchange where the security is
traded; and
c. The Commission
a sworn statement containing the following
information –
a. The personal background, identity,
residence, and citizenship of, and the
nature of such beneficial ownership by
such person and all other persons by
whom or on whose behalf the
purchases are effected; in the event
the beneficial owner is a juridical
person, the line of business of the
beneficial owner shall also be reported;
b. If the purpose of the purchases or
prospective purchases is to acquire
control of the business of the issuer of
the securities, any plans or proposals
which such persons may have that will
effect a major change in its business or
corporate structure;
c. The number of shares of such security
which are beneficially owned, and the
number of shares concerning which
there is a right to acquire, directly or
indirectly, by: (1) such person, and (2)
CORPORATION LAW
each associate of such person, giving
the background, identity, residence,
and citizenship of each such associate;
and
d. Information as to any contracts,
arrangements, or understanding with
any person with respect to any
securities of the issuer including but not
limited to transfer, joint ventures, loan
or option arrangements, puts or call
guarantees or division of losses or
profits, or proxies naming the persons
with whom such contracts,
arrangements, or understanding have
been entered into, and giving the
details thereof;
e. Such other information as the
Commission may require in the public
interest or for the protection of
investors.
Note: If it appears to the SEC that securities
were acquired by person in the ordinary course
of his business and were not acquired for the
purpose of and do not have the effect of
changing or influencing the control of the issuer
nor in connection with any transaction having
such purpose or effect it may permit any person
to file in lieu of the statement required by
subsection 17.1, a notice stating:
a. The name of such person;
b. The shares of any equity securities
subject to Subsection 17.1 which are
owned by him;
c. The date of their acquisition; and
d. Such other information as the
commission may specify [Sec. 18.3].
COMMERCIAL LAW
close of each calendar month
thereafter,
to be filed with the SEC and, if the security is
listed for trading on an exchange, also with the
exchange.
3. Disclosure by Insider
An insider has the duty to disclose material
information with respect to the issuer or the
security that is not generally available to the
public when selling or buying securities of the
issuer [Sec. 27.1].
What is required to be disclosed is a fact of
special significance, which may be:
a. A material fact which would be likely,
on being made generally available, to
affect the market price of a security to
a significant extent, or
b. One which a reasonable person would
consider especially important in
determining his course of action with
regard to the shares of stock [SEC v.
Interport Resources Corporation, G.R.
No. 135808 (2008)].

Transactions of Directors, Officers and

Beneficial Owners of more than ten per
centum [Sec. 23]
Every person who is:
a. The beneficial owner of more than 10%
of any class of any equity security, or
b. A director or any officer of the issuer of
such security,
shall file a statement of –
a. The amount of all the equity security of
such issuer of which he is the beneficial
owner; and
b. Such changes in his ownership as may
have occurred within 10 days after the

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IV. INTELLECTUAL 2. Intellectual Property Rights under

the Intellectual Property Code (RA
PROPERTY CODE 8293)

A. In General These include the following:

a. Copyright and Related Rights;
1. Definition b. Trademarks and Service Marks;
c. Geographic Indications;
Intangible property rights granted by law to d. Industrial Designs;
owners of intellectual creations such as e. Patents;
inventions, designs, signs, and names used in f. Utility Models; [Chapter XII]
commerce, and literary and artistic works g. Layout-Designs (Topographies) of
Integrated Circuits;
h. Protection of Undisclosed Information
[Sec. 4.1, RA 829].

3. Differences between copyright, trademarks, and patents

Copyrights Trademarks Patents

As to the Scope of Protection

Literary and artistic works which
are original intellectual
creations in the literary and
artistic domain protected from
the moment of their creation
[Sec. 172.1, RA 8293].
Any visible sign capable of
distinguishing the goods
(trademark) or services (service
mark) of an enterprise from that
of another and shall include a
stamped or marked container of
goods [Sec. 121.1, RA 8293].
In relation thereto, a trade name
means the name or designation
identifying or distinguishing an
enterprise.
Any technical solution of a
problem in any field of human
activity which is new, involves
an inventive step and is
industrially applicable [Sec. 21,
RA 8293; Kho v. Court of
Appeals, 379 SCRA 410
(2002)].

Where Registered

The National Library [Sec. 191, Intellectual Property Office Intellectual Property Office
RA 8293] (IPO) (IPO)

When Protection Starts

Upon creation Upon issuance of the trademark Upon issuance of the letters of
certificate patent by the IPO

Term of Protection

Generally, up to 50 years 10 years 20 years

AFTER the death of the author

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Copyrights Trademarks Patents

Mode of Acquisition

Literary and artistic works are
original intellectual creations in
the literary and artistic domain
protected from the moment of
their creation [Sec. 172.1, RA
8293].
Works are protected by the sole
fact of their creation,
irrespective of their mode or
form of expression, as well as of
their content, quality, and
purpose [Sec. 172.2, RA 8293].
The right to a patent belongs to
the inventor, his heirs, or
assigns.
To acquire rights in a mark, Generally, there is a
registration is required [Sec. presumption that the natural
122, RA 8293]. person whose name is
indicated on a work in the usual
However, well-known marks manner as the author shall, in
are protected even without the absence of proof to the
registration. contrary, be presumed to be the
author of the work.
Nevertheless, when the well-
known mark is not registered, The person or body corporate,
its protection is limited, as it whose name appears on an
only prevents the registration of audio-visual work in the usual
confusingly similar marks that manner, shall, in the absence of
are used for identical or similar proof to the contrary, be
goods or services [Sec. presumed to be the maker of
123.1(e), RA 8293]. said work [Sec. 219, RA 8293].

When two or more persons

have JOINTLY made an
invention, the right to a patent
shall belong to them jointly
[Sec. 28, RA 8293].

However, when two or more

persons have made the
invention SEPARATELY AND
INDEPENDENTLY OF EACH
OTHER, the right to the patent
shall belong to the person who
filed an application for such
invention, or where two or more
applications are filed for the
same invention, to the applicant
who has the earliest filing date
or, the earliest priority date
[Sec. 29, RA 8293].

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4. Intellectual Property Office
Jurisdictional Threshold
The threshold in administrative complaints for
violations of laws involving intellectual property
rights is two hundred thousand pesos
(P200,000) or more in total damages claimed.
B. Patents
A patent is an exclusive right granted for an
invention, which is a product or a process that
provides, in general, a new way of doing
something, or offers a new technical solution to
a problem. To get a patent, technical
information about the invention must be
disclosed to the public in a patent application
[World Intellectual Property Organization].
1. Patentable vs. non-patentable
inventions
a. Patentable Invention
A patentable invention is any technical
solution of a problem in any field of human
activity which is new, involves an inventive step
and is industrially applicable. It may be, or may
relate to, a product, or process, or an
improvement of any of the foregoing [Sec. 21,
RA 8293].
Standards or requirements for
registrability
1. It must be novel;
2. It must be inventive; and
3. Industrially applicable.
Novelty
An invention shall not be considered new if it
forms part of a prior art [Sec. 23, RA 8293].
Prior Art
This shall consist of:
1. Everything which has been made
available to the public anywhere in the
world, before the filing date or the
priority date of the application claiming
the invention [Sec. 24.1, RA 8293];
2. The whole contents of an application
for a patent, utility model, or industrial
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design registration, published in
accordance with this Act, filed or
effective in the Philippines, with a filing
or priority date that is earlier than the
filing or priority date of the application:
Provided, That –
a. The application which has
validly claimed the filing date of
an earlier application under
Section 31 of this Act, shall be
prior art with effect as of the
filing date of such earlier
application
b. The applicant or the inventor
identified in both applications
are not one and the same [Sec.
24.2, RA 8293].
Non-prejudicial Disclosures
This is an exception to the General Rule on
Prior Art under Sec. 24.
1. It provides that the disclosure of the
information contained in the application
during the 12 months preceding the
filing date or the priority date of the
application shall not prejudice the
applicant on the ground of lack of
novelty if such disclosure was made
by:
a. The inventor
b. A patent office and the
information was contained
1. In another application
filed by the inventor
and should not have
been disclosed by the
office, OR
2. In an application filed,
without the knowledge
or consent of the
inventor, by a third
party which obtained
the information directly
or indirectly from the
inventor
c. A third party which obtained the
information directly or indirectly
from the inventor [Sec. 25, RA
8293].
Inventive Step (Inventiveness)
An invention involves an inventive step if,
INTELLECTUAL PROPERTY CODE
having regard to prior art, it is not obvious to a
person skilled in the art at the time of the filing
date or priority date of the application claiming
the invention [Sec. 26.1, RA 8293, as amended
by RA 9502].
Cheaper Medicines Act
In case of drugs and medicines, there is no
inventive step if the invention results from:
1. The mere discovery of a new form or
new property of a known substance
which does not result in enhancement
of the known efficacy of that substance;
2. The mere discovery of any new
property or new use for a known
substance; or
3. The mere use of a known process
unless such known process results in a
new product that employs at least one
new reactant [Sec. 26.2, RA 8293 as
amended by RA 9502].
Industrial Applicability
An invention that can be produced and used in
any industry shall be industrially applicable
[Sec. 27, RA 8293].
Utility Model
A utility model is any technical solution of a
problem in any field of human activity which is
new and industrially applicable shall be
registrable. It may be, or may relate to, a
product, or process, or an improvement of any
of the foregoing.
A utility model may or may not involve an
inventive step [Cf. Sec. 109.1 in relation to Sec.
22, RA 8293].
Note: RA 8293 also removed substantive
examination of utility models.
Industrial Design
An industrial design is any composition of lines
or colors or any three-dimensional form,
whether or not associated with lines or colors:
Provided, that such composition or form –
● Gives a special appearance to;
AND
● Can serve as pattern for an
industrial product or handicraft
[Sec. 112.1, RA 8293].
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Note: RA 8293 also removed the substantive
examination of industrial design applications.
Lay-Out Designs (Topographies) of
Integrated Circuits)
A lay-out Design or topography is:
1. A three-dimensional disposition,
however expressed, of the elements, at
least one of which is an active element,
and of some or all the interconnections
of an integrated circuit; or
2. A three-dimensional disposition
prepared for an integrated circuit
intended for manufacture [Sec. 112.3,
RA 8293].
Additional Requirements
Patentable subject matter [Sec. 22]
The invention shall not be covered by the
subject matter specified under Sec. 22 of RA
8293.
Sufficient disclosure [Sec. 35]
The application shall disclose the invention in a
manner sufficiently clear and complete for it to
be carried out by a person skilled in the art.
Where the application concerns a
microbiological process or the product thereof
and involves the use of a micro-organism
which cannot be sufficiently disclosed in the
application in such a way as to enable the
invention to be carried out by a person skilled
in the art, and such material is not available to
the public, the application shall be
supplemented by a deposit of such material
with an international depository institution [Sec.
35, RA 8293].
b. Non-Patentable Inventions
The following shall be excluded from patent
protection:
1. Discoveries, scientific theories, and
mathematical methods, and in the case
of drugs and medicines, the mere
discovery of a new form or new
property of a known substance which
does not result in the enhancement of
the known efficacy of that substance,
or the mere discovery of any new
property or new use for a known
substance, or the mere use of a known
INTELLECTUAL PROPERTY CODE
process unless such known process
results in a new product that employs
at least one new reactant. Salts, esters,
ethers, polymorphs, metabolites, pure
form, particle size, isomers, mixtures of
isomers, complexes, combinations,
and other derivatives of a known
substance shall be considered to be
the same substance, unless they differ
significantly in properties with regard to
efficacy [Sec. 22.1, RA 8293 as
amended by RA 9502];
2. Schemes, rules and methods of
performing mental acts, playing games
or doing business, and programs for
computers [Sec. 22.2, RA 8293];
3. Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the
human or animal body. This provision
shall not apply to products and
composition for use in any of these
methods [Sec. 22.3, RA 8293];
4. Plant varieties or animal breeds or
essentially biological process for the
production of plants or animals. This
provision shall not apply to micro-
organisms and non-biological and
microbiological processes [Sec. 22.4,
RA 8293];
5. Aesthetic creations [Sec. 22.5, RA
8293];
6. Anything which is contrary to public
order or morality [Sec. 22.6, RA 8293].
In addition to discoveries, scientific theories
and mathematical methods, the IP Code now
includes (as non-patentable for having no
inventive step), in case of drugs and
medicines:
1. The mere discovery of a new form or
new property of a known substance
which does not result in the
enhancement of the known efficacy of
that substance
2. The mere discovery of any new
property or new use of a known
substance
3. The mere use of a known process
unless such known process results in a
new product that employs at least one
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reactant [Sec. 26.2, RA 8293 as
amended by RA 9502].
2. Ownership of a patent
a. Right to a Patent
General Rule: The right to a patent belongs to
the inventor, his heirs, or assigns. When two or
more persons have jointly made an invention,
the right to a patent shall belong to them jointly
[Sec. 28, RA 8293].
The employee has the right to the patent if the
inventive activity is not a part of his regular
duties even if the employee uses the time,
facilities, and materials of the employer [Sec.
30.2(a), RA 8293].
Exceptions: Inventions created pursuant to
employment or a commissioned work
1. The person who commissions the work
shall own the patent [Sec. 30.1, RA
8293].
2. The employer has the right to the
patent if the invention is the result of the
performance of the employee’s
regularly assigned duties [Sec. 30.2(b),
RA 8293].
a. Exception: There is an
agreement, express or implied,
to the contrary.
b. First-to-File Rule
RA 8293 changed the basis of ownership of a
patent from First-to-Invent under RA 165 to
First-to-File.
If two or more persons have made the invention
separately and independently of each other,
the right to the patent shall belong to the person
who filed an application for such invention, or
where two or more applications are filed for the
same invention, to the applicant who has the
earliest filing date or, the earliest priority date
[Sec. 29, RA 8293].
Filing Date
The filing date of a patent application shall be
the date of receipt by the Office of at least the
following elements:
INTELLECTUAL PROPERTY CODE
1. An express or implicit indication that a
Philippine patent is sought;
2. Information identifying the applicant;
and
3. Description of the invention and one (1)
or more claims in Filipino or English
[Sec. 40.1, RA 8293].
c. Invention created pursuant to a
commission/in the course of
employment
The person who commissions the work
shall own the patent, unless otherwise
provided in the contract [Sec. 30.1, RA 8293].
In case the employee made the invention in the
course of his employment contract, the patent
shall belong to:
1. The employee, if the inventive activity
is not a part of his regular duties even
if the employee uses the time, facilities,
and materials of the employer.
2. The employer, if the invention is the
result of the performance of his
regularly- assigned duties, unless there
is an agreement, express or implied, to
the contrary [Sec. 30.2, RA 8293].
d. Right of Priority
An application for patent filed by any person
who has previously applied for the same
invention in another country which by treaty,
convention, or law affords similar privileges to
Filipino citizens, shall be considered filed as of
the date of filing the foreign application:
Provided, That:
1. The local application expressly claims
priority;
2. It is filed within 12 months from the date
the earliest foreign application was
filed; and
3. A certified copy of the foreign
application together with an English
translation is filed within 6 months from
the date of filing in the Philippines [Sec.
31, RA 8293].
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3. Grounds for cancellation of a
patent
Any interested person may petition to cancel
the patent or any claim thereof, or parts of the
claim, on any of the following grounds:
a. That what is claimed as the invention is
not new or patentable;
b. That the patent does not disclose the
invention in a manner sufficiently clear
and complete for it to be carried out by
any person skilled in the art; or
c. That the patent is contrary to public
order or morality [Sec. 61.1, RA 8293].
Where the grounds for cancellation relate to
some of the claims or parts of the claim,
cancellation may be effected to such extent
only [Sec. 61.2, RA 8293].
a. Effect of Cancellation of Patent or
Claim
The rights conferred by the patent or any
specified claim or claims canceled shall
terminate.
Notice of the cancellation shall be published in
the IPO Gazette. Unless restrained by the
Director General, the decision or order to
cancel by Director of Legal Affairs shall be
immediately executory even pending appeal
[Sec. 66, RA 8293].
b. Remedies of a Person with a Right to
a Patent
Patent Application by Persons Not Having
the Right to a Patent.
If a person referred to in Section 29 (First-to-
File) other than the applicant, is declared by
final court order or decision as having the right
to the patent, such person may, within three (3)
months after the decision has become final:
1. Prosecute the application as his own
application in place of the applicant;
2. File a new patent application in respect
of the same invention;
3. Request that the application be
refused; or
INTELLECTUAL PROPERTY CODE
4. Seek cancellation of the patent, if one
has already been issued [Sec. 67, RA
8293].
4. Patent infringement
It is the making, using, offering for sale, selling,
or importing a patented product or a product
obtained directly or indirectly from a patented
process, or the use of a patented process
without the authorization of the patentee.
Provided, That, this shall not apply to instances
covered by Sections 72.1 and 72.4 (Limitations
of Patent Rights); Section 74 (Use of Invention
by Government); Section 93.6 (Compulsory
Licensing); and Section 93-A (Procedures on
Issuance of a Special Compulsory License
under the TRIPS Agreement) of this Code
[Sec. 76.1, RA 8293 as amended by RA 9502].
Anyone who actively induces the infringement
of a patent or provides the infringer with a
component of a patented product or of a
product produced because of a patented
process knowing it to be especially adopted for
infringing the patented invention and not
suitable for substantial non-infringing use shall
be liable as a contributory infringer and shall be
jointly and severally liable with the infringer
[Sec. 76.6, RA 8293].
a. Tests in Patent Infringement
1. Literal Infringement
In using literal infringement as a test, resort
must be had in the first instance to the words of
the claim.
To determine whether the particular item falls
within the literal meaning of the patent claims,
the court must juxtapose the claims of the
patent and the accused product within the
overall context of the claims and specifications,
to determine whether there is exact identity of
all material elements [Godinez v. CA, G.R. No.
L-97343 (1993)].
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The test is satisfied if:
a. The item that is being sold, made or
used conforms exactly to the patent
claim of another;
b. One makes, uses or sells an item that
has all the elements of the patent claim
of another plus other elements.
2. Doctrine of Equivalents
Under the doctrine of equivalents, an
infringement occurs when a device:
a. Appropriates a prior invention by
incorporating its innovative concept,
albeit with some modification and
change,
b. Performs substantially the same
function in substantially the same way,
and
c. Achieves substantially the same result
[Godinez v. CA, G.R. No. L-97343
(1993)].
The doctrine of equivalents thus requires
satisfaction of the function-means-and-result
test, the patentee having the burden to show
that all three components of such equivalency
test are met [Smith Klein Beckman Corp. v. CA,
G. R. No. 126627 (2003)].
b. Civil and Criminal Actions
1. Civil Action for Infringement
Any patentee, or anyone possessing any right,
title, or interest in and to the patented invention,
whose rights have been infringed, may bring a
civil action before a court of competent
jurisdiction:
a. To recover from the infringer such
damages sustained thereby, plus
attorney’s fees and other expenses of
litigation, and
b. To secure an injunction for the
protection of his rights [Sec. 76.2, RA
8293].
If the damages are inadequate or cannot be
readily ascertained with reasonable certainty,
the court may award, by way of damages, a
sum equivalent to reasonable royalty
[Sec.76.3, RA 8293].
INTELLECTUAL PROPERTY CODE
The court may, according to the circumstances
of the case, award damages in a sum above
the amount found as actual damages
sustained: Provided, That the award does not
exceed three (3) times the amount of such
actual damages [Sec.76.4, RA 8293].
2. Criminal Action Only After Finality of
Judgment in Civil Action and After
Repetition of Infringement
If infringement is repeated by the infringer or by
anyone in connivance with him after finality of
the judgment of the court against the infringer,
the offenders shall:
a. Be criminally liable therefor, and
b. Upon conviction, suffer imprisonment
for the period of not less than 6 months
but not more than 3 years and/or a fine
of not less than one hundred thousand
pesos (P100,000) but not more than
three hundred thousand pesos
(P300,000), at the discretion of the
court.
Note: Such criminal action is without prejudice
to the institution of a civil action for damages
[Sec. 84, RA 8293].
c. Prescriptive Period
No damages can be recovered for acts of
infringement committed more than four (4)
years before the institution of the action for
infringement [Sec.79, RA 8293].
The criminal action shall prescribe in 3 years
from the date of the commission of the crime
[Sec. 84, RA 8293].
d. Defenses in Actions for Infringement
In an action for infringement, the defendant, in
addition to other defenses available to him,
may show the invalidity of the patent, or any
claim thereof, on any of the grounds on which
a petition of cancellation can be brought under
Section 61 [Sec. 81, RA 8293].
Patent found invalid may be canceled
In an action for infringement, if the court shall
find the patent or any claim to be invalid, it shall
cancel the same, and the Director of Legal
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Affairs upon receipt of the final judgment of
cancellation by the court, shall record that fact
in the register of the Office and shall publish a
notice to that effect in the IPO Gazette [Sec.
82, RA 8293].
Doctrine of File Wrapper Estoppel
Patentee is precluded from claiming as part of
patented product that which he had to excise
or modify in order to avoid patent office
rejection, and he may omit any additions he
was compelled to add by patent office
regulations [Advance Transformer Co. v.
Levinson, 837 F.2d 1081(1988)].
Licensee’s Exemption from Liability
Any person who works a patented product,
substance and/or process under a license
granted under this Chapter (Compulsory
Licensing), shall be free from any liability for
infringement: Provided however, that in the
case of voluntary licensing, no collusion with
the licensor is proven.
● This is without prejudice to the right of
the rightful owner of the patent to
recover from the licensor whatever he
may have received as royalties under
the license [Sec. 102, RA 8293].
C. Trademarks
1. Marks vs. collective marks vs.
trade names
a. Definition
Marks
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark)
of an enterprise and shall include a stamped or
marked container of goods [Sec. 121.1, RA
8293].
Trademark
Any visible sign which is adopted and used to
identify the source or origin of goods; and
capable of distinguishing them from goods
emanating from a competitor.
The following are the functions of a
trademark:
INTELLECTUAL PROPERTY CODE COMMERCIAL LAW
1. To point out distinctly the origin or b. Trademark/Service Mark vs. Trade
ownership of the goods and to which it Name (Under the IP Code)
is affixed;
2. To secure him, who has been Trademark/Service Trade Name
instrumental in bringing into the market Mark
a superior article of merchandise, the
Basis of Ownership
fruit of his industry and skill;
3. To assure the public that they are
producing the genuine article; Registration Prior use in
4. To prevent fraud and imposition; and Philippine commerce
5. To protect the manufacturer against
substitution and sale of an inferior and When Protected
different article as its product [Mirpuri v.
Upon registration A trade name may be
CA, G.R. No. 114508 (1999)].
protected even if
unregistered
Service Mark
Any visible sign capable of distinguishing the Remedies
services of an enterprise from the service of
other enterprises. A trademark or A trade name owner
service mark owner only has civil and
Collective Marks can avail of administrative
Any visible sign designated as such in the administrative, civil, remedies
application for registration and capable of and criminal
distinguishing the origin or any other common remedies
characteristic, including the quality of goods or
services of different enterprises which use the Assignment
sign under the control of the registered owner
of the collective mark [Sec. 121.2, RA 8293]. A trademark or A trade name can
service mark can be only be assigned
Trade Name assigned with the business
The name or designation identifying or independent of
distinguishing an enterprise [Sec. 121.3, RA business
8293].
c. Spectrum of Distinctiveness
Any individual name or surname, firm name,
device or word used by manufacturers,
1. Generic Marks
industrialists, merchants, and others to identify
their businesses, vocations or occupations
Generic Marks are those which constitute the
[Converse Rubber Corp. v. Universal Rubber
Products, Inc., G.R. No. L-27906 (1987)]. name of an article or substance; or comprise
the genus of which the particular product is a
species of [Societe Des Produits Nestle v. CA,
G.R. No. 112012, 2001].

These must remain in the public domain and

can never be registered as a trademark.

Examples: “SUGAR” for refined sugar, “KAPE”

for instant coffee, “WATER” for bottled water.

2. Descriptive Marks

Consists exclusively of signs or of indications

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that may serve in trade to designate the kind,
quality, quantity, intended purpose, value,
geographical origin, time or production of the
goods or rendering of the services, or other
characteristics of the goods or services [Sec.
123(j), RA 8293].
These are words that merely describe the
product or service or refer to their quality or
characteristic.
General Rule: Descriptive marks are not
entitled to protection and are too weak to
function as a trademark.
Exception: Doctrine of Secondary meaning.
● A word or phrase originally
incapable of exclusive
appropriation with reference to an
article on the market, because
geographically or otherwise
descriptive, might nevertheless
have been used so long and so
exclusively by one producer with
reference to his article that , in that
trade and to that branch of the
purchasing public, the word or
phrase has come to mean that the
article was his product [Arce Sons
v. Selecta Biscuits, G.R. No. L-
14761 (1961)].
Example: “YELLOW PAGES” for telephone
directory having yellow pages.
3. Suggestive Marks
Marks that hint or suggest the nature or quality
of the good or service without directly
describing it. They are “subtly descriptive” and
are entitled to protection despite lack of
distinctiveness.
Example: “JAGUAR” for automobile.
4. Arbitrary Marks
Common words used as marks but are
unrelated to the good or service they represent.
They neither describe nor suggest the
characteristic of the goods or service, though
they are considered highly distinctive for
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purposes of registration.
Example: “APPLE” for electronic products.
5. Fanciful or “Coined” Marks
These are invented or “coined” words that do
not have any meaning and are made solely for
the purpose of the mark. They are considered
“strong” marks for purposes of registration and
protection for being inherently distinctive.
Example: “KODAK” for camera.
d. What May Not Be Registered?
A mark cannot be registered if it:
1. Consists of immoral, deceptive or
scandalous matter, or matter which
may disparage or falsely suggest a
connection with persons, living or
dead, institutions, beliefs, or national
symbols, or bring them into contempt
or disrepute;
2. Consists of the flag or coat of arms or
other insignia of the Philippines or any
of its political subdivisions, or of any
foreign nation, or any simulation
thereof;
3. Consists of a name, portrait or
signature identifying a particular living
individual except by his written
consent, or the name, signature, or
portrait of a deceased President of the
Philippines, during the life of his widow,
if any, except by written consent of the
widow;
4. Is identical with a registered mark
belonging to a different proprietor or a
mark with an earlier filing or priority
date, in respect of:
a. The same goods or services, or
b. Closely related goods or
services, or
c. If it nearly resembles such a
mark as to be likely to deceive
or cause confusion
5. Is identical with, or confusingly similar
to, or constitutes a translation of a mark
which is considered by the competent
authority of the Philippines to be well-
known internationally and in the
INTELLECTUAL PROPERTY CODE
Philippines, whether or not it is
registered here, as being already the
mark of a person other than the
applicant for registration, and used for
identical or similar goods or services:
Provided, That in determining whether
a mark is well-known, account shall be
taken of the knowledge of the relevant
sector of the public, rather than of the
public at large, including knowledge in
the Philippines which has been
obtained as a result of the promotion of
the mark;
6. Is identical with, or confusingly similar
to, or constitutes a translation of a mark
considered well-known in accordance
with the preceding paragraph, which is
registered in the Philippines with
respect to goods or services which are
not similar to those with respect to
which registration is applied for:
Provided, That use of the mark in
relation to those goods or services
would indicate a connection between
those goods or services, and the owner
of the registered mark: Provided,
further, That the interests of the owner
of the registered mark are likely to be
damaged by such use;
7. Is likely to mislead the public,
particularly as to the nature, quality,
characteristics or geographical origin of
the goods or services;
8. Consists exclusively of signs that are
generic for the goods or services that
they seek to identify;
9. Consists exclusively of signs or of
indications that have become
customary or usual to designate the
goods or services in everyday
language or in bona fide and
established trade practice;
10. Consists exclusively of signs or of
indications that may serve in trade to
designate the kind, quality, quantity,
intended purpose, value, geographical
origin, time or production of the goods
or rendering of the services, or other
characteristics of the goods or
services;
11. Consists of shapes that may be
necessitated by technical factors or by
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the nature of the goods themselves or
factors that affect their intrinsic value;
12. Consists of color alone, unless defined
by a given form; or
13. Is contrary to public order or morality
[Sec. 123.1, RA 8293].
Note: As regards signs or devices mentioned in
paragraphs (j), (k), and (l), nothing shall
prevent the registration of any such sign or
device which has become distinctive in relation
to the goods for which registration is requested
as a result of the use that have been made of it
in commerce in the Philippines.
The Office may accept as prima facie evidence
that the mark has become distinctive, as used
in connection with the applicant’s goods or
services in commerce, proof of substantially
exclusive and continuous use thereof by the
applicant in commerce in the Philippines for
five (5) years before the date on which the
claim of distinctiveness is made [Sec. 123.2,
RA 8293].
2. Acquisition of ownership
a. Concept of actual use
Actual use pertains to the actual use of the
mark in local (Philippine) commerce and trade
[Philip Morris v. Fortune Tobacco, G.R. No.
158589 (2006)].
1. Prior Use of a Mark as a Requirement
While RA 8293 no longer requires prior use
before filing the application, it still requires use
of the mark after filing, registration and
renewal.
a. Before the IP Code
Under the old trademark law or R.A. 166, actual
commercial use of a trademark in the
Philippines was required prior to its registration
[Sec. 2-A, RA 166].
b. Under the IP Code
RA 8293 no longer requires prior use before
filing the application (i.e., it shifted to an intent
INTELLECTUAL PROPERTY CODE
to use system). However, the law still requires
use of the mark after filing.
Declaration of Actual Use: The applicant or
the registrant is required to file a Declaration of
Actual Use of the mark after filing and
registration.
Note: Failure to file declaration of actual use
automatically results in the denial of the
registration or the cancellation of the
registration by operation of law [Secs. 124.2 &
145, RA 8293].
When to File Declaration of Actual Use: The
following are the periods when to file a
declaration of Actual Use
1. Within 3 years from the filing date of the
application (3rd Year DAU);
2. Within 1 year from the 5th anniversary
of the registration of the mark (5th Year
DAU);
3. Within 1 year from the date of renewal;
and
4. Within 1 year from the 5th anniversary
of each renewal [Rule 204, Trademark
Regulations of 2017].
2. Non-Use of Mark; When Excused
Non-use caused by circumstances arising
independently of the will of the trademark
owner shall be excused. However, non-use
due to lack of funds shall not excuse non-use
of a mark [Sec. 152.1, RA 8293].
The following shall not be grounds for
cancellation or removal of a mark:
1. Use which does not alter its distinctive
character though the use is different
from the form in which it is registered
[Sec. 152.2, RA 8293].
2. Use of a mark in connection with one or
more of the goods/services belonging
to the class in which the mark is
registered [Sec. 152.3, RA 8293].
3. Use of the mark by a company related
to the applicant or registrant [Sec.
152.4, RA 8293].
4. Use of the mark by a person controlled
by the registrant [Sec. 152.4, RA 8293].
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Note: The use of a mark by a company related
with or controlled by the registrant or applicant
shall inure to the latter's benefit: Provided, that
such mark is not used in such manner as to
deceive the public [Sec.152.4, RA 8293].
b. Effect of registration
General Rule: The owner of a registered mark
shall have the exclusive right to prevent all third
parties not having the owner’s consent from
using in the course of trade identical or similar
signs or containers for goods or services which
are identical or similar to those in respect of
which the trademark is registered where such
use would result in a likelihood of confusion.
In case of the use of an identical sign for
identical goods or services, a likelihood of
confusion shall be presumed [Sec. 147.1, RA
8293].
Exception: In cases of importation of drugs
and medicines allowed under Section 72.1 of
this Act and of off-patent drugs and medicines,
third parties can import the same even without
the owner’s consent, provided that:
1. Said drugs and medicines bear the
registered marks
2. The registered marks have not been
tampered, unlawfully modified, or
infringed upon [Sec. 147.1, RA 8293 as
amended by RA 9502].
Registration is a prerequisite before one can
file an action for trademark infringement [Sec.
147.1, RA 8293].
The exclusive right of the owner of a well-
known mark defined in Subsection 123.1(e)
which is registered in the Philippines, shall
extend to goods and services which are not
similar to those in respect of which the mark is
registered: Provided, That use of that mark in
relation to those goods or services would
indicate a connection between those goods or
services and the owner of the registered mark:
Provided further, That the interests of the
owner of the registered mark are likely to be
damaged by such use [Sec. 147.2, RA 8293].
INTELLECTUAL PROPERTY CODE
c. Acquisition of Ownership of Mark
General Rule: To acquire rights in a mark,
registration is required [Sec. 122, RA 8293].
Exception: Well-known marks are protected
even without registration.
Note: However, when the well-known mark is
not registered, its protection is limited, as it only
prevents the registration of confusingly similar
marks that are used for identical or similar
goods or services [Sec. 123.1(e), RA 8293].
While the IP Code expressly provides that the
rights to a mark shall be acquired through
registration, the Supreme Court held that
notwithstanding this express provision in the IP
Code, prior use is still the basis of trademark
ownership [Berris Agricultural Co., Inc. v. Norvy
Abyadang, G.R. No. 183404 (2010)].
However, in a 2020 decision, the Court held
that the language of the IP Code provisions
clearly conveys the rule that ownership of a
mark is acquired through registration; ii. the
intention of the lawmakers was to abandon the
rule that ownership of a mark is acquired
through use; and iii. the rule on ownership used
in Berris and E.Y. Industrial Sales, Inc. is
inconsistent with the IP Code regime of
acquiring ownership through registration
[Zuneca Pharmaceutical v. Natrapharm, G.R.
No. 211850 (2020)].
Upon the effectivity of the IP Code on January
1, 1998, the manner of acquiring ownership of
trademarks reverted to registration. This is
expressed in Section 122 of the IP Code, viz.:
SECTION 122. How Marks are Acquired. —
The rights in a mark shall be acquired through
registration made validly in accordance with
the provisions of this law [Zuneca
Pharmaceutical v. Natrapharm, G.R. No.
211850 (2020)].
Registration is not a mode of acquiring
ownership, rather, it merely gives rise to a
prima facie presumption of ownership of the
registrant over the mark [Sec. 138, RA 8293].
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Said presumption of ownership may be
rebutted by the true owner of the mark in an
opposition or cancellation proceeding.
Zuneca Ruling
At present, as expressed in the language of the
provisions of the IP Code, prior use no longer
determines the acquisition of ownership of a
mark in light of the adoption of the rule that
ownership of a mark is acquired through
registration made validly in accordance with
the provisions of the IP Code. Accordingly, the
trademark provisions of the IP Code use the
term "owner" in relation to registrations.
Certainly, while the IP Code and the Rule of the
IPO mandate that the applicant/registrant must
prove continued actual use of the mark, it is the
considered view of the Court that this does not
imply that actual use is still a recognized
mode of acquisition of ownership under the
IP Code. Rather, these must be understood as
provisions that require actual use of the mark
in order for the registered owner of a mark to
maintain his ownership.
The prima facie nature of the certificate of
registration is not indicative of the fact that prior
use is still a recognized mode of acquiring
ownership under the IP Code. Rather, it is
meant to recognize the instances when the
certificate of registration is not reflective of
ownership of the holder thereof, such as when:
1. The first registrant has acquired
ownership of the mark through
registration but subsequently lost the
same due to non-use or abandonment
(e.g., failure to file the Declaration of
Actual Use);
2. The registration was done in bad faith;
3. The mark itself becomes generic;
4. The mark was registered contrary to
the IP Code (e.g., when a generic mark
was successfully registered for some
reason); or
5. The registered mark is being used by,
or with the permission of, the registrant
so as to misrepresent the source of the
goods or services on or in connection
with which the mark is used.
INTELLECTUAL PROPERTY CODE
The rule on ownership based on prior use in
Berris and E.Y. Industrial Sales, Inc.
inconsistent with the IP Code regime of
ownership through registration.
To emphasize, for marks that are first used
and/or registered after the effectivity of the IP
Code, ownership is no longer dependent on the
fact of prior use in light of the adoption of the
first-to-file rule and the rule that ownership is
acquired through registration.
On Good Faith
Being the first-to-file registrant in good faith
allows the registrant to acquire all the rights in
a mark. This can be seen in Section 122 vis-a-
vis the cancellation provision in Section 155.1
of the IP Code. Reading these two provisions
together, when there are no grounds for
cancellation - especially the registration being
obtained in bad faith or contrary to the
provisions of the IP Code, which render the
registration void - the first-to-file registrant
acquires all the rights in a mark.
In the same vein, prior users in good faith are
also protected in the sense that they will not be
made liable for trademark infringement even if
they are using a mark that was subsequently
registered by another person. This is
expressed in Section 159.1 of the IP Code.
Filing Date
The filing date of an application shall be the
date on which the Office received the following
indications and elements in English or Filipino:
1. An express or implicit indication that
the registration of a mark is sought;
2. The identity of the applicant;
3. Indications sufficient to contact the
applicant or his representative, if any;
4. A reproduction of the mark whose
registration is sought; and
5. The list of the goods or services for
which the registration is sought [Sec.
127.1, RA 8293].
Priority Right
An application for registration of a mark filed in
the Philippines by a person referred to in
Section 3, and who previously duly filed an
application for registration of the same mark in
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one of those countries, shall be considered as
filed as of the day the application was first filed
in the foreign country (Provided, the Philippine
application is filed within 6 months from the
filing of the foreign application) [Sec. 131.1, RA
8293].
No registration of a mark in the Philippines by
a person described in this section shall be
granted until such mark has been registered in
the country of origin of the applicant [Sec.
131.2, RA 8293].
Significance of Priority Right
A Philippine application filed by another
applicant after the priority date but earlier than
the foreign applicant’s actual filing may be
refused registration if it is identical to the mark
with a priority date [Agpalo, The Law on
Trademark, Infringement and Unfair
Competition (2000)].
Acquisition of Ownership of Trade Name
The ownership of a trade name is acquired
through adoption and use.
Such names shall be protected, even prior to
or without registration, against any unlawful act
committed by third parties [Sec. 165.2 (a), RA
8293].
Any subsequent use of the trade name by a
third party, whether as a trade name or a mark
or collective mark,or any such use of a similar
trade name or mark, likely to mislead the
public, shall be deemed unlawful [Sec. 165.2
(b), RA 8293].
A name or designation may not be used as a
trade name:
1. If by its nature or the use to which such
name or designation may be put, it is
contrary to public order or morals; and
2. If, in particular, it is liable to deceive
trade circles or the public as to the
nature of the enterprise identified by
that name [Sec. 165.1, RA 8293].
Any change in the ownership of a trade name
shall be made with the transfer of the enterprise
or part thereof identified by that name [Sec.
165.4, RA 8293].
INTELLECTUAL PROPERTY CODE
3. Well-known marks
A well-known mark is a mark which a
competent authority of the Philippines has
designated to be well-known internationally
and in the Philippines, [Sec. 123.1(e), RA
8293].
"Competent authority" for purposes of
determining whether a mark is well-known,
means:
a. The Court;
b. The Director General;
c. The Director of the Bureau of Legal
Affairs [Rule 101 (d), Trademark
Regulations of 2017];
d. Any administrative agency or office
vested with quasi-judicial or judicial
jurisdiction to hear and adjudicate any
action to enforce the rights to a mark
[Dy v. Koninklijke Philips Electronics,
N.V. G.R. No. 186088 (2017)].
In determining whether a mark is well-known,
account shall be taken of the knowledge of the
relevant sector of the public, rather than the
public at large, including knowledge in the
Philippines which has been obtained as a
result of the promotion of the mark [Sec.
123.1(e), RA 8293].
a. Determinants
Factors to determine whether a mark is well-
known
1. The duration, extent and geographical
area of any use of the mark;
2. The market share in the Philippines
and other countries of the
goods/services to which the mark
applies;
3. The degree of the inherent or acquired
distinction of the mark;
4. The quality-image or reputation
acquired by the mark;
5. The extent to which the mark has been
registered in the world;
6. The exclusivity of the registration
attained by the mark in the world;
7. The extent of use of the mark in the
world;
8. The exclusivity of use in the world;
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9. The commercial value attributed to the
mark in the world;
10. The record of successful protection of
the rights in the mark;
11. The outcome of litigations dealing with
the issue of whether the mar is well-
known; and
12. The presence or absence of identical
or similar test marks validly registered
or used on other similar goods or
services and owned by others [See
Rule 103, Trademark Regulations of
2017].
Note: The determinants need not concur.
b. Protection Extended to Well-Known
Marks
The owner of a well-known mark has the
right to be protected, whether or not the mark
is registered in the Philippines [Sec. 123.1(e),
RA 8293].
c. Sec. 123.1 (e) vs. Sec. 123.1 (f)
If the well-known mark is registered or not
registered in the Philippines, a mark cannot
be registered if it is identical with, or confusingly
similar to, or constitutes a translation of an
internationally well-known mark if used for
identical or similar goods or services [Sec.
123.1(e)m RA 8293].
If the well-known mark is registered in the
Philippines, a mark cannot be registered if it is
identical with, or confusingly similar to, or
constitutes a translation of an internationally
well-known mark even if it is used for goods or
services which are NOT similar to those with
respect to which registration is applied [Sec.
123.1(f), RA 8293].
Other persons or entities cannot use the
registered well-known mark even for unrelated
goods, provided that:
1. The use of the mark in relation to those
goods or services would indicate a
connection between those goods or
services, and the owner of the
registered mark; and
INTELLECTUAL PROPERTY CODE
2. That the interests of the owner of the
registered mark are likely to be
damaged by such use [Sec. 123.1(f),
RA 8293].
4. Rights conferred by registration
The owner of a registered mark shall have the
exclusive right to prevent all third parties not
having the owner's consent from using in the
course of trade:
a. Identical or similar signs or containers,
b. For goods or services which are
identical or similar to those in respect
of which the trademark is registered,
c. Where such use would result in a
likelihood of confusion.
Note: In case of the use of an identical sign for
identical goods or services, a likelihood of
confusion shall be presumed [Sec. 147.1, RA
8293 as amended by RA 9502].
Exception: In cases of importation of drugs
and medicines allowed under Section 72.1 of
this Act and of off-patent drugs and medicines,
third parties can import the same even without
the owner’s consent, provided that:
a. Said drugs and medicines bear the
registered marks
b. The registered marks have not been
tampered, unlawfully modified, or
infringed upon [Sec. 147.1, RA 8293 as
amended by RA 9502].
a. When Such Rights are Conferred
The rights of the owner are conferred upon
registration of the mark, and a mark is deemed
registered on the 31st day from the publication
for purposes of opposition, provided no
opposition is filed.
1. On the 31st day from the publication for
purposes of opposition (if no opposition
is filed)
2. On the date the decision or final order
giving due course to the application
becomes final and executory (if
opposition is filed) [See Rule 703,
Trademarks Regulations of 2017].
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Certificate of Registration
A certificate of registration of a mark shall be
prima facie evidence of:
1. The validity of the registration,
2. The registrant's ownership of the mark,
and
3. The registrant's exclusive right to use
the same in connection with the goods
or services and those that are related
thereto specified in the certificate [Sec.
138, RA 8293].
Duration
A certificate of registration shall remain in force
for 10 years from registration and may be
renewed for periods of 10 years at its
expiration upon payment of the prescribed fee
and upon filing of a request [Sec. 145-146, RA
8293].
b. Limitations on Such Right
Duration
Except that, inasmuch as the registration of a
trademark could be renewed every 10 years,
provided a Declaration of Actual Use is timely
submitted, a trademark could conceivably
remain registered forever.
Territorial
While under the territoriality principle a mark
must be used in commerce in the Philippines to
be entitled to protection, internationally well-
known marks are the exceptions to this rule
[Fredco Manufacturing Corporation v.
President and Fellows of Harvard College,
G.R. No. 185917 (2011)].
Fair Use
The registration of the mark shall not confer on
the registered owner the right to preclude third
parties from using bona fide their names,
addresses, pseudonyms, a geographical
name, or exact indications concerning the kind,
quality, quantity, destination, value, place of
origin, or time of production or of supply, of their
goods or services; Provided That:
1. Such use is confined to the purposes of
mere identification or information; and
2. Such use cannot mislead the public as
to the source of the goods or services
[Sec. 148, RA 8293].
INTELLECTUAL PROPERTY CODE
Prior User
A registered mark shall have no effect against
any person who, in good faith, before the filing
date or the priority date, was using the mark for
the purposes of his business or enterprise
[Sec. 159.1, RA 8293].
Non-Use
Failure to file declaration of actual use
automatically results in the denial of the
registration or the cancellation of the
registration by operation of law [Sec. 124.2, RA
8293].
c. Assignment and Transfer of
Application and Registration
1. An application for registration of a
mark, or its registration, may be
assigned or transferred with or without
the transfer of the business using the
mark [Sec. 149.1, RA 8293].
2. Such assignment or transfer shall,
however, be null and void if it is liable
to mislead the public, particularly as
regards the nature, source,
manufacturing process,
characteristics, or suitability for their
purpose, of the goods or services to
which the mark is applied [Sec. 149.2,
RA 8293].
3. The assignment of the application for
registration of a mark, or its
registration, shall be in writing and
require the signatures of the
contracting parties. Transfers by
mergers or other forms of succession
may be made by any document
supporting such transfer [Sec. 149.3,
RA 8293].
4. Assignments and transfers shall have
no effect against third parties until they
are recorded at the Office [Sec. 149.5,
RA 8293].
Any license contract concerning the
registration of a mark, or an application
therefor, shall provide for effective control by
the licensor of the quality of the goods or
services of the licensee in connection with
which the mark is used. If the license contract
does not provide for such quality control, or if
such quality control is not effectively carried
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out, the license contract shall not be valid [Sec.
150.1, RA 8293].
5. Cancellation of registration
A petition to cancel a registration of a mark may
be filed with the Bureau of Legal Affairs by any
person who believes that he is or will be
damaged by the registration of a mark [Sec.
151.1, RA 8293]:
a. Within five (5) years from the date of
the registration of the mark [Sec. 151.1
(a), RA 8293].
b. At any time, if the registered mark:
1. becomes the generic name for
the goods or services, or
2. has been abandoned, or
3. has its registration obtained
fraudulently or contrary to the
provisions of RA 8293, or
4. is being used by, or with the
permission of, the registrant so
as to misrepresent the source
of the goods or services on or
in connection with which the
mark is used [Sec. 151.1 (b),
RA 8293].
c. At any time, by virtue of non-use
without legitimate reason for an
uninterrupted period of three (3) years
or longer [Sec. 151.1 (c), RA 8293].
6. Trademark infringement
The following shall be liable in a civil action for
infringement:
a. Any person who shall, without the
consent of the owner of the registered
mark, use in commerce any
reproduction, counterfeit, copy, or
colorable imitation of a registered mark
or the same container or a dominant
feature thereof:
1. In connection with the sale,
offering for sale, distribution,
advertising of any goods or
services, including other
preparatory steps necessary to
carry out the sale of any goods
or services on; or
2. In connection with which such
use is likely to cause confusion,
INTELLECTUAL PROPERTY CODE
or to cause mistake, or to
deceive [Sec. 155.1, RA 8293].
b. Any person who shall, without the
consent of the owner of the registered
mark:
1. Reproduce, counterfeit, copy
or colorably imitate a registered
mark or a dominant feature
thereof; and
2. Apply such reproduction,
counterfeit, copy or colorable
imitation to labels, signs, prints,
packages, wrappers,
receptacles, or
advertisements, intended to be
used in commerce:
a. In connection with the
sale, offering for sale,
distribution, or
advertising of goods or
services on; or
b. In connection with
which such use is likely
to cause confusion, or
to cause mistake, or to
deceive [Sec. 155.2,
RA 8293].
Note: The infringement takes place at the
moment any of the acts stated in Subsections
155.1 or 155.2 are committed, regardless of
whether there is actual sale of goods or
services using the infringing material.
A mere distributor, and not the owner,
cannot assert any protection from
trademark infringement as it had no right in
the first place to the registration of the disputed
trademarks [Superior Commercial Enterprises
v. Kunnan Enterprises, G.R. No. 169974
(2010)].
a. Elements of Trademark Infringement
1. The trademark being infringed is
registered in the Intellectual Property
Office; however in infringement of trade
name, the same need not be
registered;
2. The trademark or trade name is
reproduced, counterfeited, copied, or
colorably imitated by the infringer;
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3. The infringing mark or trade name is
used in connection with the sale,
offering for sale, or advertising of any
goods, business or services; or the
infringing mark or trade name is
applied to labels, signs, prints,
packages, wrappers, receptacles or
advertisements intended to be used
upon or in connection with such goods,
business or services;
4. The use or application of the infringing
mark or trade name is likely to cause
confusion or mistake or to deceive
purchasers or others as to the goods or
services themselves or as to the
source or origin of such goods or
services or the identity of such
business;
5. It is without the consent of the
trademark or trade name owner or the
assignee thereof [Prosource
International, Inc. v. Horphag Research
Management S.A., G.R. No. 180073
(2009)].
Of these, it is the element of likelihood of
confusion that is the gravamen of trademark
infringement [McDonald’s Corporation v. L.C.
Big Mak Burger, Inc., et al., G.R. No. 143993
(2004)].
Whether a trademark causes confusion and is
likely to deceive the public hinges on
“colorable imitation” which has been defined
as "such similarity in form, content, words,
sound, meaning, special arrangement or
general appearance of the trademark or trade
name in their overall presentation or in their
essential and substantive and distinctive parts
as would likely mislead or confuse persons in
the ordinary course of purchasing the genuine
article" [Mighty Corporation v. E. & J. Gallo
Winery, G.R. No. 154342 (2004)].
Two types of confusion arise from the use of
similar or colorable imitation marks, namely –
1. Confusion of goods (product
confusion) and
2. Confusion of business (source or origin
confusion).
While there is confusion of goods when the
INTELLECTUAL PROPERTY CODE
products are competing, confusion of business
exists when the products are non-competing
but related enough to produce confusion or
affiliation [McDonald’s Corporation v. L.C. Big
Mak Burger, Inc., et al., G.R. No. 143993
(2004)].
Likelihood of confusion is admittedly a relative
term, to be determined rigidly according to the
particular (and sometimes peculiar)
circumstances of each case. In determining
likelihood of confusion, the court must
consider:
1. The resemblance between the
trademarks;
2. The similarity of the goods to which the
trademarks are attached;
3. The likely effect on the purchaser; and
4. The registrant’s express or implied
consent and other fair and equitable
considerations [Mighty Corporation v.
E. & J. Gallo Winery, G.R. No. 154342
(2004)].
b. Doctrine of Natural Expansion of
Business
The protection to which the owner of a
trademark is entitled extends to cases in which
the use of by a junior appropriator of a
trademark of trade name is likely to lead to a
confusion of source.
As where prospective purchasers would be
misled into thinking that the complaining party
has extended his business into the field or is in
any way connected with the activities of the
infringer; or when it forestalls the normal
potential expansion of the business
[Dermaline v. Myra Pharmaceuticals, Inc., G.R.
No. 190065 (2010)].
It is the fact that the underlying goods and
services of both marks deal with inasal and
inasal-flavored products which ultimately fixes
the relations between such goods and
services. It is not unlikely that the average
buyer would be led into the assumption that the
curls are of petitioner and that the latter has
ventured into snack manufacturing or, if not,
that the petitioner has supplied the flavorings
for respondent's product. Either way, the
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reputation of petitioner would be taken
advantage of and placed at the mercy of
respondent [Mang Inasal Philippines v. IFP
Manufacturing Corporation, G.R. No. 221717
(2017)].
c. Requirement of Notice
The owner of the registered mark shall not be
entitled to recover profits or damages unless
the acts have been committed with
knowledge that such imitation is likely to
cause confusion, or to cause mistake, or to
deceive.
Such knowledge is presumed if:
1. The registrant gives notice that his
mark is registered by displaying with
the mark the words “Registered Mark”
or the letter R within a circle; or
2. The defendant had otherwise actual
notice of the registration [Sec. 158, RA
8293].
d. Penalties
Independent of the civil and administrative
sanctions imposed by law, a criminal penalty of
imprisonment from two (2) years to five (5)
years and a fine ranging from Fifty thousand
pesos (P50,000) to Two hundred thousand
pesos (P200,000), shall be imposed on any
person who is found guilty of committing any of
the acts mentioned in Section 155, Section 168
and Subsection 169.1 [Arts. 188 and 189,
Revised Penal Code; Sec. 170, RA 8293].
7. Unfair competition
The following shall be guilty of unfair
competition, and shall be subject to an action
therefor:
a. Any person who shall employ
deception or any other means contrary
to good faith, by which he shall pass off
the goods manufactured by him or in
which he deals, or his business, or
services for those of the one having
established such goodwill; or
b. Any person who shall commit any acts
calculated to produce said result [Sec.
168.2, RA 8293].
INTELLECTUAL PROPERTY CODE
a. Particular Acts of Unfair Competition
1. Selling one’s goods and giving them
the general appearance of goods of
another manufacturer or dealer, either:
a. As to the goods themselves or
in the wrapping of the
packages in which they are
contained, or the devices or
words thereon; or
b. In any other feature of their
appearance, which would be
likely to influence purchasers to
believe that the goods offered
are those of a manufacturer or
dealer, other than the actual
manufacturer or dealer [Sec.
168.3(a), RA 8293].
2. Clothing one’s goods with such
appearance as shall deceive the public
and defraud another of his legitimate
trade, or any subsequent vendor of
such goods or any agent of any vendor
engaged in selling such goods with a
like purpose [Sec. 168.3(a), RA 8293].
3. Using any artifice, or device, or
employing any other means calculated
to induce the false belief that such
person is offering the services of
another who has identified such
services in the mind of the public [Sec.
168.3(b), RA 8293].
4. Making any false statement in the
course of trade or committing any other
act contrary to good faith of a nature
calculated to discredit the goods,
business or services of another [Sec.
168.3(c), RA 8293].
Test to determine likelihood of confusion
Dominancy Test: Focuses on the similarity of
the prevalent features of the competing
trademarks which might cause confusion or
deception [Section 155.1, IPC]. The Holistic
Test in determining trademark resemblance
has been abandoned hence the Dominancy
Test must be used. This test relies not only on
the visual but also on the aural and connotative
comparisons and overall impressions between
the two trademarks. It would not be farfetched
to imagine that a buyer, when confronted with
such striking similarity would be led to confuse
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one over the other [Levi Strauss & Co. v.
Sevilla, G.R. No. 219744 (2021)]
b. Elements of an Action for Unfair
Competition
1. Confusing similarity in the general
appearance of the goods, and
2. Intent to deceive the public and defraud
a competitor.
The confusing similarity may or may not result
from similarity in the marks, but may result from
other external factors in the packaging or
presentation of the goods. The intent to
deceive and defraud may be inferred from the
similarity in appearance of the goods as offered
for sale to the public. Actual fraudulent intent
need not be shown [McDonald’s Corporation v.
L.G. Big Mak Burger, Inc., et al., G.R. No.
143993 (2004)].
c. Who May File an Action for Unfair
Competition?
A person who has identified in the mind of the
public the goods he manufactures or deals in,
his business or services from those of others.
● Whether or not a registered mark is
employed
● Ratio: Such person has a property right
in the goodwill of the said goods,
business or services so identified, and
said right shall be protected in the
same manner as other property rights
[Sec. 168.1, RA 8293].
d. Trademark Infringement vs. Unfair
Competition
The “true test”, therefore, of unfair competition
has thus been “whether the acts of the
defendant have the intent of deceiving or are
calculated to deceive the ordinary buyer
making his purchases under the ordinary
conditions of the particular trade to which the
controversy relates” [San Miguel Pure Foods
Company, Inc., v. Foodsphere, G.R. No.
217781 (2018)].
INTELLECTUAL PROPERTY CODE
Infringement of Unfair Competition
Trademark or
Trade Name
Unauthorized use of Passing off of one’s
a trademark or trade goods as those of
name another
Fraudulent intent is Fraudulent intent is
unnecessary essential
Prior registration of Registration is not
the trademark is a necessary
prerequisite to the
action
[In and Out Burger v. Sehwani, G.R. No.
179127 (2008); Prosource International, Inc. v.
Horphag Research Management S.A., G.R.
No. 180073 (2009)].
The law on unfair competition is broader and
more inclusive than the law on trademark
infringement.
● The latter is more limited but it
recognizes a more exclusive right
derived from the trademark adoption
and registration by the person whose
goods or business is first associated
with it.
● Hence, even if one fails to establish his
exclusive property right to a trademark,
he may still obtain relief on the ground
of his competitor’s unfairness or fraud
[Mighty Corporation v. E. & J. Gallo
Winery, G.R. No. 154342 (2004)].
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D. Copyrights
Copyright is the legal protection extended to
the owner of the rights in an “original work”,
which refers to every literary, scientific and
artistic production [IPOPHL].
Note: Sec. 173, RA 8293. Derivative Works.
Derivative works are protected as new works:
Provided however, that such new work shall
not:
● affect the force of any subsisting
copyright upon the original works
employed or any part thereof; or
● be construed to imply any right to such
use of the original works, or to secure
or extend copyright in such original
works.
Copyright refers to the right granted by a
statute to the proprietor of an intellectual
production to its exclusive use and enjoyment
to the extent specified in the statute [Olaño v.
Lim Eng Co, G.R. 195835 (2016)].
1. Basic Principles
a. Works are protected by the sole fact
of their creation.
Principle of Automatic Protection
Copyright is vested from the very moment of
creation irrespective of their mode or form of
expression, as well as of their content, quality,
and purpose [Sec. 171.1-172.2, RA 8293].
The enjoyment and exercise of copyright,
including moral rights, shall not be the subject
of any formality; such enjoyment and such
exercise shall be independent of the existence
of protection in the country of origin of the work
[Article 5(2), Berne Convention for the
Protection of Literary and Artistic Works].
b. Protection extends only to the
expression of an idea, not the idea
itself.
No protection shall extend, under this law, to
any idea, procedure, system method or
operation, concept, principle, discovery, or
INTELLECTUAL PROPERTY CODE
mere data as such, even if they are expressed,
explained, illustrated or embodied in a work
[Sec. 175, RA 8293].
c. The copyright is distinct from the
property in the material object subject
to it.
The copyright is distinct from the property in the
material object subject to it.
Consequently:
1. The transfer or assignment of the
copyright shall NOT itself constitute a
transfer of the material object
2. The transfer or assignment of the sole
copy or of one or several copies of the
work shall NOT imply transfer or
assignment of the copyright [Sec. 181,
RA 8293].
d. Copyright, like other intellectual
property rights, is a statutory right.
Copyright, in the strict sense of the term is
purely a statutory right.
1. The rights are limited to what the
statute confers.
2. It may be obtained and enjoyed only
with respect to the subjects and by the
persons, and on terms and conditions
specified in the statute.
3. It can cover only the works falling within
the statutory enumeration or
description [Pearl and Dean v.
Shoemart, G.R. No. 148222 (2003)].
2. Copyrightable works
a. Original Works
Literary and artistic works, hereinafter referred
to as "works", are original intellectual creations
in the literary and artistic domain protected
from the moment of their creation and shall
include in particular:
1. Books, pamphlets, articles and other
writings;
2. Periodicals and newspapers;
3. Lectures, sermons, addresses,
dissertations prepared for oral delivery,
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whether or not reduced in writing or
other material form;
4. Letters;
5. Dramatic or dramatico-musical
compositions; choreographic works or
entertainment in dumb shows;
6. Musical compositions, with or without
words;
7. Works of drawing, painting,
architecture, sculpture, engraving,
lithography or other works of art;
models or designs for works of art;
8. Original ornamental designs or models
for articles of manufacture, whether or
not registrable as an industrial design,
and other works of applied art;
9. Illustrations, maps, plans, sketches,
charts and three-dimensional works
relative to geography, topography,
architecture or science;
10. Drawings or plastic works of a scientific
or technical character;
11. Photographic works including works
produced by a process analogous to
photography; lantern slides;
12. Audiovisual works and
cinematographic works and works
produced by a process analogous to
cinematography or any process for
making audio-visual recordings;
13. Pictorial illustrations and
advertisements;
14. Computer programs; and
15. Other literary, scholarly, scientific and
artistic works [Sec. 172.1, RA 8293].
When a Work is Considered Original
The work is original when:
1. It is an independent creation of the
author; and
2. It must not be copied from the work of
another.
A person must be the original creator of the
work to be entitled to a copyright. He must
have created it by his own skill, labor, and
judgment without directly copying or evasively
imitating the work of another [Ching Kian
Chuan v. CA, G.R. No. 130360 (2001)].
Originality is not determined by novelty,
aesthetic merit, or ingenuity but that it is an
INTELLECTUAL PROPERTY CODE
independent creation [IPOPHL].
Works are protected irrespective of their mode
or form of expression [Sec. 172.2, RA 8293].
Derivative Works
The following derivative works shall also be
protected by copyright:
1. Dramatizations, translations,
adaptations, abridgments,
arrangements, and other alterations of
literary or artistic works; and
2. Collections of literary, scholarly, or
artistic works, and compilations of data
and other materials which are original
by reason of the selection or
coordination or arrangement of their
contents [Sec. 173.1, RA 8293].
Derivative works are protected as new works,
provided they shall not:
1. Affect the force of any subsisting
copyright upon the original works
employed or any part thereof; or
2. Be construed to imply any right to such
use of the original works, or to secure
or extend copyright in such original
works [Sec. 173.2, RA 8293].
3. Non-copyrightable works
a. Unprotected Subject Matter
1. Any idea, procedure, system method or
operation, concept, principle, discovery
or mere data as such, even if they are
expressed, explained, illustrated or
embodied in a work;
2. News of the day and other
miscellaneous facts having the
character of mere items of press
information;
3. Any official text of a legislative,
administrative or legal nature, as well
as any official translation thereof;
4. Pleadings;
5. Original decisions of courts and
tribunals (Note: This pertains to the
“original decisions” not the SCRA
published volumes since these are
protected under derivative works under
Sec. 173.1) [Sec. 175, RA 8293].
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News footages are subject to copyright.
Although news or the events themselves are
not copyrightable, expression of the news
particularly when it underwent a creative
process is entitled to copyright protection
[ABS-CBN Corp. v. Gozon, G.R. No. 195956
(2015)].
The format or mechanics of a TV show is
not copyrightable as copyright does not
extend to ideas, procedures, processes,
systems, methods of operation, concepts,
principles or discoveries regardless of the form
in which they are described, explained,
illustrated or embodied [Joaquin Jr. et al v.
Drilon, et al, G.R. No. 108946 (1999)].
No one may claim originality as to facts as
these do not owe their origin to an act of
authorship. The first person to find and report a
particular fact has not created the same; he has
merely discovered its existence [Feist
Publication v. Rural Telephone Services, 499
U.S. 340 (1991)].
A compilation is not copyrightable per se,
but it is copyrightable only if its facts have been
selected, coordinated, or arranged in such a
way that the resulting work as a whole
constitutes an original work of authorship.
Otherwise known as the Sweat of the Brow or
Industrious Collection Test [Feist Publication
v. Rural Telephone Services, 499 U.S. 340
(1991)].
b. Works of the Government of the
Philippines
A work created by an officer or employee of the
Philippine Government or any of its
subdivisions and instrumentalities, including
government-owned or controlled corporations
as a part of his regularly prescribed official
duties [Sec. 171.11, RA 8293].
General Rule: No copyright shall subsist in any
work of the Government.
Exceptions:
1. When copyright is transferred by
assignment or bequest in favor of the
government [Sec. 176.3];
INTELLECTUAL PROPERTY CODE
2. Author of speeches, lectures, sermons,
addresses and dissertations shall have
exclusive right of making a collection of
his work. However, prior approval of
the government agency or the office
wherein the work is created shall be
necessary for the exploitation of such
work for profit [Sec. 176.1].
However, prior approval of the government
agency or the office wherein the work is
created shall be necessary for the exploitation
of such work for profit [Sec. 176.1, RA 8293].
Publication or republication by the Government
in a public document of any work in which
copyright is subsisting shall not be taken:
1. To cause any abridgment or annulment
of the copyright; or
2. To authorize any use or appropriation
of such work without the consent of the
copyright owner [Sec. 176.3, RA 8293].
Works made by an officer or employee of
the Government as part of his regularly
prescribed duty do NOT enjoy copyright.
Works made by an employee of the
government which is not as a part of his
regularly prescribed official duties (i.e. not
considered a “Work of the Government”) may
enjoy copyright.
c. Works of the Public Domain
Works of the public domain are
noncopyrightable.
To this class of works belong:
1. Works, whose term of copyright has
expired;
2. Works wherein the copyright over them
are waived by the owner in favor of the
public; and
3. Works which did not enjoy copyright
protection in the first place, as in the
case of unregistered works made
under previous laws that required the
registration of copyright [See: Santos v.
McCullough Printing Company, G.R.
No. L-19439 (1964)].
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d. Useful Articles
A “useful article” is defined as an article “having
intrinsic utilitarian function that is not merely to
portray the appearance of the article or to
convey information” is excluded from copyright
eligibility.
The only instance when a useful article may be
the subject of copyright protection is when it
incorporates a design element that is physically
or conceptually separable from the underlying
product [Olaño v. Lim Eng Co, G.R. No.
195835 (2016)].
Useful Article Doctrine
Works whose sole purpose is utilitarian, and
have no separate artistic value are
noncopyrightable works.
In contrast, a work of applied art, which has
utilitarian functions, but has an identifiable
artistic work or creation incorporated thereto,
can be the subject of a copyright to the extent
that the design features:
1. Can be identified separately from, and
2. Are capable of existing independently
of the utilitarian aspects of the article
[Brandir Int’l v. Cascade Pacific, 834 F.
2nd 1142 (2nd Cir.) (1987)].
Denicola Test: Conceptual Separability
(Aesthetics vs. Functionality)
The work cannot be copyrighted if its design
elements reflect a merger of aesthetic and
functional considerations, and the artistic
aspects of the work cannot be conceptually
separable from the utilitarian aspects.
1. Conceptual separability exists where
design elements can be identified as
reflecting the designer's artistic
judgment, exercised independently of
functional influences
2. The relevant question should be
whether the design of a useful article,
however intertwined with the article’s
utilitarian aspects, causes an ordinary
reasonable observer to perceive an
aesthetic concept not related to the
article’s use [Brandir Int’l v. Cascade
Pacific, 834 F. 2nd 1142 (2nd Cir.)
(1987)].
INTELLECTUAL PROPERTY CODE
4. Rights conferred by copyright
Works are protected by the sole fact of their
creation, irrespective of their mode or form of
expression, as well as of their content, quality
and purpose [Sec. 172.2, RA 8293].
The issuance of the certificates of registration
and deposit as provided by Sec. 2, Rule 7 of
the Copyright Safeguards and Regulations, are
purely for recording the date of registration and
deposit of the work, and are not conclusive as
to copyright ownership (nor does it determine
the time when copyright vests) [Manly
Sportwear v. Dadodette Enterprises, G.R. No.
165306 (2005)].
a. Economic Rights
Copyright or economic rights shall consist of
the exclusive right to carry out, authorize or
prevent the following acts:
1. Reproduction of the work or substantial
portion of the work;
2. Dramatization, translation, adaptation,
abridgment, arrangement or other
transformation of the work;
3. The first public distribution of the
original and each copy of the work by
sale or other forms of transfer of
ownership;
4. Rental of the original or a copy of:
a. An audiovisual or
cinematographic work,
b. A work embodied in a sound
recording,
c. A computer program,
d. A compilation of data and other
materials or a musical work in
graphic form
e. Irrespective of the ownership of
the original or the copy which is
the subject of the rental;
5. Public display of the original or a copy
of the work;
6. Public performance of the work; and
7. Other communication to the public of
the work [Sec. 177, RA 8293].
Publisher’s Copyright
In addition to the right to publish granted by the
author, his heirs, or assigns, the publisher shall
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have a copyright consisting merely of the right
of reproduction of the typographical
arrangement of the published edition of the
work [Sec.174, RA 8293].
Copyright in a Work of Architecture
The copyright in any such work shall include
the right to control the erection of any building
which reproduces the whole or a substantial
part of the work either in its original form or in
any form recognizably derived from the original
However, it shall not include the right to control
the reconstruction or rehabilitation in the same
style as the original of a building to which that
copyright relates [Sec. 186, RA 8293].
Communication to the Public of
Copyrighted Works
This includes point-to-point transmission of a
work, including:
1. Video on demand, and
2. Providing access to an electronic
retrieval system
a. Such as computer databases,
servers, or similar electronic
storage devices.
Broadcasting, rebroadcasting, retransmission
by cable, and broadcast and retransmission by
satellite are all acts of “communication to the
public” within the meaning of the IPC [Rule 11,
Copyright Safeguards and Regulations].
First Public Distribution of Work
An exclusive right of first distribution of work
includes all acts involving distribution,
specifically including the first importation
of an original and each copy of the work into
the jurisdiction of the Republic of the
Philippines [Rule 12, Copyright Safeguards
and Regulations].
b. Moral Rights
The author of a work shall, independently of the
economic rights in Section 177 or the grant of
an assignment or license with respect to such
right, have the right:
1. To require that the authorship of the
works be attributed to him, in particular,
the right that his name, as far as
practicable, be indicated in a prominent
INTELLECTUAL PROPERTY CODE
way on the copies, and in connection
with the public use of his work [Sec.
193.1, RA 8293];
2. To make any alterations of his work
prior to, or to withhold it from
publication [Sec. 193.2, RA 8293];
3. To object to any distortion, mutilation or
other modification of, or other
derogatory action in relation to, his
work which would be prejudicial to his
honor or reputation [Sec. 193.3, RA
8293];
4. To restrain the use of his name with
respect to any work not of his own
creation or in a distorted version of his
work [Sec. 193.4, RA 8293].
In addition to the right to publish granted by the
author, his heirs, or assigns, the publisher shall
have a copyright consisting merely of the right
of reproduction of the typographical
arrangement of the published edition of the
work [Sec.174, RA 8293].
The author of speeches, lectures, sermons,
addresses, and dissertations mentioned in the
preceding paragraphs shall have the exclusive
right of making a collection of his works [Sec.
176.2, RA 8293].
Assignment or License of Moral Rights
Moral rights cannot be assigned or licensed
[Sec. 198, RA 8293].
Waiver of Moral Rights
While Moral Rights cannot be assigned or
licensed, it can be waived [Sec. 198, RA
8293].
General Rule: Moral rights can be waived in
writing, expressly stating such waiver [Sec.
195, RA 8293].
Exceptions: Even if made in writing, waiver is
still not valid if:
1. Use of the name of the author, title of
his work, or his reputation with respect
to any version or adaptation of his
work, which because of alterations
substantially tends to injure the literary
or artistic reputation of another author
[Sec. 195.1, RA 8293];
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2. It uses the name of the author in a work
that he did not create [Sec. 195.1, RA
8293].
The right of attribution is waived by contribution
to a collective work unless such is expressly
reserved [Sec. 196, RA 8293].
c. Right to Transfer, Assign or License
The author has the right to assign or license the
copyright and/or the material object in whole or
in part, and they allow the owner to derive
financial reward from the use of his works by
others [Sec. 180.1, RA 8293 as amended by
RA 10372].
Rights of Assignee or Licensee
The assignee or licensee is entitled to all the
rights and remedies which the assignor or
licensor had with respect to the copyright,
within the scope of the assignment or license
[Sec. 180.1, RA 8293].
The submission of a literary, photographic or
artistic work to a newspaper, magazine or
periodical for publication shall constitute only a
license to make a single publication unless a
greater right is expressly granted. If two (2) or
more persons jointly own a copyright or any
part thereof, neither of the owners shall be
entitled to grant licenses without the prior
written consent of the other owner or owners
[Sec. 180.3, RA 8293].
Any exclusivity in the economic rights in a work
may be exclusively licensed. Within the scope
of the exclusive license, the licensee is entitled
to all the rights and remedies which the licensor
had with respect to the copyright [Sec. 180.4,
RA 8293].
Filing of Assignment or License
An assignment or exclusive license may be
filed in duplicate with the National Library upon
payment of the prescribed fee for registration in
books and records kept for the purpose [Sec.
182, RA 8293].
INTELLECTUAL PROPERTY CODE
d. Rights to Proceed on Subsequent
Transfers (Droit de Suite or Follow Up
Rights)
In every sale or lease of an original work of
painting or sculpture or of the original
manuscript of a writer or composer,
subsequent to the first disposition thereof
by the author, the author or his heirs shall have:
● An inalienable right to participate in the
gross proceeds of the sale or lease to
the extent of five percent (5%) [Sec.
200, RA 8293].
Duration of Right
This right shall exist during the lifetime of the
author and for 50 years after his death [Sec.
200, RA 8293].
Works not covered
Prints, etchings, engravings, works of applied
art, or works of similar kind wherein the author
primarily derives gain from the proceeds of
reproductions [Sec. 201, RA 8293].
e. Related Rights (Neighboring Rights)
Rights of Performers
1. As regards their performances, the
right of authorizing:
a. The broadcasting and other
communication to the public of
their performance; and
b. The fixation of their unfixed
performance [Sec. 203.1, RA
8293];
c. Such right shall be maintained
and exercised 50 years after
his death, by his heirs, and in
default of heirs, the
government, where protection
is claimed [Sec. 204.2, RA
8293];
2. The right of authorizing the direct or
indirect reproduction of their
performances fixed in sound
recordings, or audiovisual works or
fixations in any manner or form [Sec.
203.2, RA 8293, as amended by RA
10372];
3. The right of authorizing the first public
distribution of the original and copies of
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their performance fixed in the sound
recording or audiovisual works or
fixations through sale or rental or other
forms of transfer of ownership [Sec.
203.3, RA 8293, as amended by RA
10372];
a. Subject to the provisions of
Section 206
4. The right of authorizing the commercial
rental to the public of the original and
copies of their performances fixed in
sound recordings or audiovisual works
or fixations, even after distribution of
them by, or pursuant to the
authorization by the performer [Sec.
203.4, RA 8293, as amended by RA
10372];
5. The right of authorizing the making
available to the public of their
performances fixed in sound
recordings or audiovisual works or
fixations, by wire or wireless means, in
such a way that members of the public
may access them from a place and
time individually chosen by them [Sec.
203.5, RA 8293, as amended by RA
10372];
6. The right to claim to be identified as the
performer of his performances, and to
object to any distortion, mutilation or
other modification of his performances
that would be prejudicial to his
reputation, as regards his live aural
performances or performances fixed in
sound recordings or audiovisual works
or fixations;
a. Exception: Where the
omission is dictated by the
manner of the use of the
performance [Sec. 204.1, RA
8293, as amended by RA
10372].
7. The right to an additional remuneration
equivalent to at least five percent (5%)
of the original compensation he or she
received for the first communication or
broadcast, in every communication to
the public or broadcast of a
performance subsequent to the first
communication or broadcast thereof by
the broadcasting organization [Sec.
206, RA 8293].
INTELLECTUAL PROPERTY CODE COMMERCIAL LAW
a. Unless otherwise provided in from excluding broadcasting organization
the contract especially in those places not reached by
signal.
Rights of Producers of Sound
Recordings Also, the rule prevents cable television
1. The right to authorize the direct or companies from depriving viewers in far-flung
indirect reproduction of their sound areas the enjoyment of programs available to
recordings, in any manner or form; the city viewers [ABS-CBN Broadcasting v.
placing of these reproductions in the Philippine Multi-Media System, G.R. Nos.
market and the right of rental or lending 175769-70 (2009)].
[Sec. 208.1, RA 8293];
2. The right to authorize the first public 5. Ownership of a copyright
distribution of the original and copies of
Work Ownership
their sound recordings through sale or
rental or other forms of transferring Single Creator Belongs to the author of
ownership [Sec. 208.2, RA 8293]; of an Original the work [Sec. 178.1, RA
3. The right to authorize the commercial Work 8293].
rental to the public of the original and
copies of their sound recordings, even Works of Joint Belongs of the co-
after distribution by them by or Authorship authors; in the absence
pursuant to authorization by the of agreement, their rights
producer [Sec. 208.3, RA 8293]. shall be governed by the
rules on co-ownership.
Single Equitable Remuneration However, if the work
The right to be paid a single equitable consists of parts that can
remuneration by the user to be shared with the be used separately and
performers equally, in the absence of any identified, the author of
agreement, when a sound recording published each part owns the
for commercial purposes, or a reproduction of copyright of the part he
such sound recording, is: has created [Sec. 178.2,
1. Used directly for broadcasting or RA 8293].
2. Used for other communication to the
public; or Work created Belongs to the employee
3. Publicly performed with the intention of during the if the creation is not a part
making and enhancing profit [Sec. 209, course of of his regular duties,
RA 8293]. employment even if he used the time,
facilities and materials of
Rights of Broadcasting Organizations the employer. However,
1. The rebroadcasting of their broadcasts copyright belongs to the
[Sec. 211.1, RA 8293]; employer if the work is in
2. The recording in any manner, including the performance of the
the making of films or the use of video employee’s regular
tape, of their broadcasts for the duties unless there is an
purpose of communication to the public agreement to the
of television broadcasts of the same; contrary [Sec. 178.3, RA
[Sec. 211.2, RA 8293]; 8293].
3. The use of such records for fresh
transmissions or for fresh recording Work The person who
[Sec. 211.3, RA 8293]. commissioned commissioned the work
by a person and pays for it holds
Must-Carry Rule other than the ownership of the work
This rule prevents cable television companies employer per se, but copyright

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INTELLECTUAL PROPERTY CODE
remains with the creator
unless there was a
stipulation to the contrary
[Sec. 178.4, RA 8293].
Audio visual Belongs to the producer,
works author of the scenario,
composer of the music,
film director, and author
of the adapted work.
However, subject to
stipulations, the
producers shall exercise
the copyright as may be
required for the exhibition
of the work, except for
the right to collect license
fees for the performance
of musical compositions
in the work [Sec. 178.5,
RA 8293].
Letters Belongs to the writer, but
the court may authorize
their publication or
dissemination of the
public good or interest of
justice requires, pursuant
to Art. 723, New Civil
Code [Sec. 178.6, RA
8293].
Anonymous Publishers are deemed
and to represent the authors,
pseudonymous unless the contrary
works appears, the
pseudonyms or adopted
names leave no doubt as
to the author’s identity or
if the author discloses his
identity [Sec. 179, RA
8293].
Collective A contributor is deemed
works to have waived his right
unless he expressly
reserves it [Sec. 196, RA
8293].
A person to be entitled to copyright must be
the original creator of the work. He must
have created it by his own skill, labor and
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judgment without directly copying or evasively
imitating the work of another [Wilson Ong
Ching Kian Chuan v. CA, G.R. 130360 (2001)].
Ownership of copyrighted material is
shown by proof of originality and
copyrightability. While it is true that where the
complainant presents a copyright certificate in
support of the claim of infringement, the validity
and ownership of the copyright is presumed.
This presumption however is rebuttable and
cannot be sustained where other evidence in
the record casts doubt on the question of
ownership.
Valid copyright ownership denotes
originality of the copyrighted material.
Originality means that the material was not
copied, evidences at least minimum creativity
and was independently created by the author
[Olaño v. Lim Eng Co, G.R. 195835 (2016)].
a. Presumption of Ownership
General Rule: The natural person whose
name is indicated on a work in the usual
manner as the author shall, in the absence of
proof to the contrary, be presumed to be the
author of the work.
The person or body corporate, whose name
appears on an audio-visual work in the usual
manner, shall, in the absence of proof to the
contrary, be presumed to be the maker of said
work [Sec. 219, RA 8293].
Use of Pseudonym
This provision shall be applicable even if the
name is a pseudonym, where the pseudonym
leaves no doubt as to the identity of the author
[Sec. 219, RA 8293].
b. Transfer or Assignment of Copyright
The copyright may be assigned or licensed in
whole or in part [Sec. 180.1, RA 8293].
1. The copyright is not deemed assigned
or licensed inter vivos in whole or in
part unless there is a written indication
of such intention [Sec. 180.2, RA 8293
as amended by RA 10372];
INTELLECTUAL PROPERTY CODE
2. If two or more persons jointly own a
copyright or any part thereof, neither of
the owners shall be entitled to grant
licenses without the prior written
consent of the other owner or owners
[Sec. 180.3, RA 8293].
Submitted Work
General Rule: The submission of a literary,
photographic, or artistic work to a newspaper,
magazine or periodical for publication shall
constitute only a license to make a single
publication.
Exception: Unless a greater right is expressly
granted [Sec. 180.3, RA 8293].
c. Collective Management
Organizations (CMO)
CMOs are entities composed of artists, writers,
composers and other creators, or
copyright/related rights holders that manage
the bundle of copyrights that their members
own by providing the legal platform to efficiently
enforce their intellectual property rights.
The owners of copyright and related rights or
their heirs may designate a society of artists,
writers, composers, and other right-holders to
collectively manage their economic or moral
rights on their behalf.
● For the said societies to enforce the
rights of their members, they shall first
secure the necessary accreditation
from the Intellectual Property Office
[Sec. 183, RA 8293 as amended by RA
10372].
The primary purpose of a CMO is to collectively
manage copyright and/or related rights,
including any or all of the following activities:
1. Negotiation with and grant of licenses
to users of protected literary, scholarly,
scientific and artistic works, derivative
works, performances, sound
recordings, audiovisual works and
broadcasts;
2. Collection of royalties and other forms
of remuneration for the use of
protected literary, scholarly, scientific
and artistic works, derivative works,
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performances, sound recordings,
audiovisual works and broadcasts;
3. Collection of proceeds in subsequent
transfers of the originals of paintings,
sculptures and manuscripts;
4. Collection of additional remuneration
for subsequent communication or
broadcast of a performance;
5. Collection of single equitable
remuneration for the broadcast, other
communication to the public or public
performance of a sound recording; and
6. Distribution of the abovementioned
collections to the rights holders
[IPOPHL Office Order 13-173 s.2013].
6. Limitations on copyright
a. Fair Use
Doctrine of Fair Use
The fair use of copyrighted work for criticism,
news reporting, teaching (including multiple
copies for classroom use), research and similar
purposes is not an infringement of copyright
[Sec. 185.1, RA 8293].
A privilege, in persons other than the owner of
the copyright, to use the copyrighted material
in a reasonable manner without his consent,
notwithstanding the monopoly granted to the
owner by the copyright. It is meant to balance
the monopolies enjoyed by the copyright owner
with the interests of the public and of society
Decompilation
Refers to the reproduction of the code and
translation of the forms of the computer
program to achieve the inter-operability of an
independently created computer program with
other programs. This may also constitute fair
use [Sec. 185.1, RA 8293].
Factors to consider in determining Fair
Use
1. The purpose and character of the use,
including whether such use is of a
commercial nature or is for non-profit
educational purposes;
2. The nature of the copyrighted work;
INTELLECTUAL PROPERTY CODE COMMERCIAL LAW
3. The amount and substantiality of the c. Term of Protection
portion used in relation to the
copyrighted work as a whole; and Duration of Copyright
4. The effect of the use upon the potential
Works Term
market for or value of the copyrighted
work [Sec. 185.1, RA 8293; Harper &
Original Literary and Lifetime of author
Row v. Nation Enterprise, 471 US 539
Artistic Works and for 50 years after
(1985)].
including Posthumous his death [Sec.
Works 213.1, RA 8293]
The fact that a work is unpublished shall not
by itself bar a finding of fair use if such Derivative Works Lifetime of author
finding is made upon consideration of all the including Posthumous and for 50 years after
above factors [Sec. 185.2, RA 8293]. Works his death [Sec.
213.1, RA 8293]
Commercial use of the copyrighted work can
be weighed against fair use [ABS–CBN Corp. Joint Authorship Lifetime of the last
v. Gozon, G.R. No. 195956 (2015)]. surviving author and
for 50 years after his
Parody, like other comment and criticism, death [Sec. 213.2,
may claim fair use. The more transformative RA 8293]
the new work, the less will be the significance
of other factors, like commercialism. The heart Anonymous or 50 years from date of
of any parodist's claim to quote from existing Pseudonymous first lawful
material is the use of some elements of a prior Works publication [Sec.
author's composition to create a new one that, 213.3, RA 8293]
at least in part, comments on that author's work
[Campbell v. Acuff-Rose Music Inc., 510 U.S. Applied Art 25 years from date of
569 (1994)]. making [Sec. 213.4,
RA 8293]
b. Limitations on Protection of
Neighboring Rights Published 50 years from
Photographic Works publication [Sec.
Sections 203, 208 and 209 shall not apply 213.5, RA 8293]
where the acts referred to in those Sections are
Unpublished 50 years from the
related to:
Photographic Works making [Sec. 213.5,
1. The use by a natural person
RA 8293]
exclusively for his own personal
purposes; Published Audiovisual 50 years from
2. Using short excerpts for reporting Works publication [Sec.
current events; 213.6, RA 8293]
3. Use solely for the purpose of teaching
or for scientific research; and Unpublished 50 years from the
4. Fair use of the broadcast subject to Audiovisual Works making [Sec. 213.6,
certain conditions [Sec. 212, RA 8293]. RA 8293]

The term of protection subsequent to the

death of the author shall run from the date
of his death or of publication, but such terms
shall always be deemed to begin on the first
day of January of the year following the event
which gave rise to them [Sec. 214, RA 8293].
Term of Protection of Moral Rights

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2. Has the right and ability to
Moral Right Term
control the activities of the
Right of Attribution or Lifetime of author other person;
Right of Paternity and in perpetuity c. With knowledge of infringing activity,
(Sec. 193.1) after his death [Sec. induces, causes or materially
198.1, RA 8293 as contributes to the infringing conduct of
amended by RA another [Sec. 216, RA 8293 as
10372]. amended by RA 10372].

Other Moral Rights Coterminous with the It also includes the act of any person who at the
[Sec. 193.2- 193.4] economic rights time when copyright subsists in a work has in
[Sec. 198, RA 8293 his possession an article which he known, or
as amended by RA ought to know, to be an infringing copy of the
10372]. work for the purpose of:
a. Selling, letting for hire, or by way of
trade offering or exposing for sale, or
Term of Protection of Neighboring Rights hire, the article
Works Term b. Distributing the article for purpose of
trade, or for any other purpose to an
For performances 50 years from the extent that will prejudice the rights of
not incorporated in end of the year in the copyright owner in the work; or
recordings which the c. Trade exhibit of the article in public
performance took [Sec. 217.3, RA 8293].
place [Sec. 215.1(a),
RA 8293]. a. What Constitutes Infringement

For sound or image 50 years from the
and sound end of the year in
recordings and for which the recording
performances took place [Sec.
incorporated therein 215.1(b), RA 8293].
Infringement consists in the doing by any
person, without the consent of the owner of the
copyright, of anything the sole right to do which
is conferred by statute on the owner of the
copyright.

Broadcasts 20 years from the
date the broadcast
took place [Sec.
215.2, RA 8293]
7. Copyright infringement
The IP Code was amended to expand
infringement not only to cover direct
infringement but also third-party infringement.
A person infringes a right protected under this
Act when one:
a. Directly commits an infringement;
b. Benefits from the infringing activity of
another person who commits an
infringement if the person benefiting:
1. Has been given notice of the
infringing activity; and
It can cover a whole range of acts from
copying, assembling, packaging to marketing,
including the mere offering for sale of
counterfeit goods [Habana et al v. Robles et al.,
G.R. No. 131522 (1999)].
Copyright infringement is thus committed by
any person who shall use original literary or
artistic works, or derivative works, without the
copyright owner’s consent in such a manner as
to violate the foregoing copy and economic
rights.
For a claim of copyright to prevail, the
evidence on record must demonstrate:
a. ownership of a validly copyrighted
material by the complainant; and
b. infringement of the copyright by the
respondent.

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[W]hat was copyrighted were their
sketches/drawings only, and not the actual
hatch doors themselves. To constitute
infringement, the usurper must have copied or
appropriated the original work of an author or
copyright proprietor, absent copying, there
can be no infringement of copyright. Absent
originality and copyrightability as elements of a
valid copyright ownership, no infringement can
subsist [Olaño v. Lim Eng Co, G.R. 195835
(2016)].
b. Substantial Reproduction
It is not necessarily required that the entire
copyrighted work, or even a large portion of
it, be copied. If so much is taken that the value
of the original work is substantially diminished,
there is an infringement of copyright and to an
injurious extent, the work is appropriated.
In cases of infringement, copying alone is
not what is prohibited. The copying must
produce an “injurious effect” [Habana et al v.
Robles et al., G.R. No. 131522 (1999)].
c. Knowledge not an Element
Infringement
Knowledge of infringement is material only
when a person is charged of aiding and
abetting a copyright infringement. The
liability for copyright infringement is in the
nature of strict liability. It does not require mens
rea or culpa [ABS–CBN Corp v. Gozon, G.R.
No. 195956 (2015)].
d. What Does NOT Constitute
Infringement
The following shall NOT constitute
infringement of copyright:
1. Recitation or performance of a work
once it has been made accessible to
the public if
a. privately done AND free of
charge OR
b. strictly for a charitable or
religious institution [Sec.
184.1(a), RA 8293];
2. Making of quotations from a published
work:
COMMERCIAL LAW
a. compatible with fair use,
b. extent is justified by the
purpose,
c. source and name of the author,
appearing on work, must be
mentioned [Sec. 184.1(b), RA
8293];
3. Reproduction or communication to the
public by mass media of articles on
current political, social, economic,
scientific, or religious topic, lectures,
addresses and other works, delivered
in public:
a. for information purposes,
b. not expressly reserved, and
c. source is already indicated
[Sec. 184.1(c), RA 8293];
4. Reproduction and communication to
the public of literary, scientific or artistic
works as part of reports of current
events by means of photography,
cinematography or broadcasting to the
extent necessary for the purpose [Sec.
184.1(d), RA 8293];
5. Inclusion of a work in a publication,
broadcast or other communication to
of the public, sound recording or film if
made by way of illustration for teaching
purposes compatible with fair use and
the source and the name of the author
appearing on work, must be mentioned
[Sec. 184.1(e), RA 8293];
6. Recording made in schools,
universities, or educational institutions
of a work included in a broadcast for
the use of schools, universities or
educational institutions. Such
recording must be deleted within a
reasonable period; such recording may
not be made from audio-visual works
which are part of the general cinema,
repertoire of feature films except of
brief excerpts of the work [Sec.
184.1(f), RA 8293];
7. Making of ephemeral recordings;
a. by a broadcasting organization,
b. by means of its work or
facilities,
c. for use in its own broadcast
[Sec. 184.1(g), RA 8293];
8. Use made of a work by or under the
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for public interest compatible with fair
use [Sec. 184.1(h), RA 8293];
9. Public performance or the
communication to the public of a work
in a place where no admission fee is
charged by a club on institution for
charitable or educational purpose only
and the aim is not profitmaking [Sec.
184.1(i), RA 8293];
10. Public display of the original or a copy
of the work not made by means of a
film, slide, television, image or
otherwise on screen or by means of
any other device or process either the
work has been published, sold, given
away, or transferred to another person
by the author or his successor in title
[Sec. 184.1(j), RA 8293];
11. Use made of a work for the purpose of
any judicial proceedings or for the
giving of professional advice by a legal
practitioner [Sec. 184.1(k), RA 8293].
12. The reproduction or distribution of
published articles or materials in a
specialized format exclusively for the
use of the blind, visually- and reading-
impaired persons: Provided, That such
copies and distribution shall be made
on a nonprofit basis and shall indicate
the copyright owner and the date of the
original publication [Sec. 184.1(l), RA
8293 as amended by RA 10372].
e. Reproduction of Published Work
General Rule: The private reproduction of a
published work in a single copy, where the
reproduction is made by a natural person
exclusively for research and private study, shall
be permitted, without the authorization of the
owner of copyright in the work [Sec. 187.1, RA
8293].
Exceptions: Such permission shall not extend
to:
1. A work of architecture in the form of
building or other construction;
2. An entire book, or a substantial part
thereof, or of a musical work in graphic
form by reprographic means;
3. A compilation of data and other
materials;
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4. A computer program except as
provided in Section 189; and
5. Any work in cases where reproduction
would unreasonably conflict with a
normal exploitation of the work or
would otherwise unreasonably
prejudice the legitimate interests of the
author [187.2, RA 8293].
f. Reprographic Reproduction by
Libraries
Any library or archive whose activities are not
for profit may, without the authorization of the
author of copyright owner, make a single copy
of the work by reprographic reproduction:
1. Where the work by reason of its fragile
character or rarity cannot be lent to
user in its original form;
2. Where the works are isolated articles
contained in composite works or brief
portions of other published works and
the reproduction is necessary to supply
them, when this is considered
expedient, to persons requesting their
loan for purposes of research or study
instead of lending the volumes or
booklets which contain them; and
3. Where the making of such a copy is in
order to preserve and, if necessary in
the event that it is lost, destroyed or
rendered unusable, replace a copy, or
to replace, in the permanent collection
of another similar library or archive, a
copy which has been lost, destroyed or
rendered unusable and copies are not
available with the publisher [Sec.
188.1, RA 8293].
It shall not be permissible to produce a volume
of a work published in several volumes or to
produce missing tomes or pages of magazines
or similar works, unless the volume, tome or
part is out of stock:
● Provided, That every library which, by
law, is entitled to receive copies of a
printed work, shall be entitled, when
special reasons so require, to
reproduce a copy of a published work
which is considered necessary for the
collection of the library but which is out
of stock [Sec. 188.2, RA 8293].
INTELLECTUAL PROPERTY CODE
g. Reproduction of Computer Program
The reproduction in one back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the
author of, or other owner of copyright in, a
computer program, by the lawful owner of that
computer program: Provided, That the copy or
adaptation is necessary for:
1. The use of the computer program in
conjunction with a computer for the
purpose, and to the extent, for which
the computer program has been
obtained; and
2. Archival purposes, and, for the
replacement of the lawfully owned copy
of the computer program in the event
that the lawfully obtained copy of the
computer program is lost, destroyed or
rendered unusable [Sec. 189.1, RA
8293].
Importation for Personal Purposes
Sec. 190.2 of RA 8293 that limited the
importation of books was repealed by RA
10372.
RA 10372 expressly limited the prohibition to
import or export only to counterfeit goods.
8. Remedies
Remedies for Infringement
a. An injunction restraining such
infringement [Sec. 216.1(a), RA 8293];
b. Actual damages, including legal costs
and other expenses, as he may have
incurred due to the infringement, as
well as the profits the infringer may
have made due to such infringement;
c. In proving profits: The plaintiff shall be
required to prove sales only, and the
defendant shall be required to prove
every element of cost which he claims
[Sec. 216.1(b), RA 8293];
d. Such damages which to the court shall
appear to be just and shall not be
regarded as penalty, in lieu of actual
damages and profits [Sec. 216.1(b),
RA 8293];
e. Impounding during the pendency of the
action, upon such terms and conditions
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as the court may prescribe, sales
invoices and other documents
evidencing sales, all articles and their
packaging alleged to infringe a
copyright and implements for making
them [Sec. 216.1(c), RA 8293];
f. Deliver under oath for destruction
without any compensation all infringing
copies or devices, as well as all plates,
molds, or other means for making such
infringing copies as the court may order
[Sec. 216.1(d), RA 8293];
g. Such other terms and conditions,
including the payment of moral and
exemplary damages, which the court
may deem proper, wise and equitable
and the destruction of infringing copies
of the work even in the event of
acquittal in a criminal case [Sec.
216.1(e), RA 8293];
h. Criminal liability
The copyright owner may elect, at any
time before final judgment is rendered,
to recover instead of actual damages
and profits, an award of statutory
damages for all infringements involved
in an action in a sum equivalent to the
filing fee of the infringement action but
not less than Php50,000.00. In
awarding statutory damages, the court
may consider the following factors:
• The nature and purpose of the
infringing act;
• The flagrancy of the
infringement;
• Whether the defendant acted in
bad faith;
• The need for deterrence;
• Any loss that the plaintiff has
suffered or is likely to suffer by
reason of the infringement; and
• Any benefit shown to have
accrued to the defendant by
reason of the infringement.
In case the infringer was not aware and had no
reason to believe that his acts constitute an
infringement of copyright, the court in its
discretion may reduce the award of statutory
damages to a sum of not more than Ten
thousand pesos (Php10,000.00) [Sec. 216.1,
RA 8293].
INTELLECTUAL PROPERTY CODE
The amount of damages to be awarded shall
be doubled against any person who:
1. Circumvents effective technological
measures; or
2. Having reasonable grounds to know
that it will induce, enable, facilitate or
conceal the infringement:
a. Remove or alter any electronic
rights management information
from a copy of a work, sound
recording, or fixation of a
performance; or
b. Distribute, import for
distribution, broadcast, or
communicate to the public
works or copies of works
without authority, knowing that
electronic rights management
information has been removed
or altered without authority
[Sec. 216.1(b), RA 8293].
However, no damages may be recovered
under this Act after the lapse of four (4) years
from the time the cause of action arose [Sec.
226, RA 8293].
9. Criminal Penalties
Criminal Penalties for Infringement
Any person infringing any right secured by
provisions of Part IV of this Act or aiding or
abetting such infringement shall be guilty of a
crime punishable by:
a. Imprisonment of one (1) year to three
(3) years plus a fine ranging from Fifty
thousand pesos (P50,000) to One
hundred fifty thousand pesos
(P150,000) for the first offense.
b. Imprisonment of three (3) years and
one (1) day to six (6) years plus a fine
ranging from One hundred fifty
thousand pesos (P150,000) to Five
hundred thousand pesos (P500,000)
for the second offense.
c. Imprisonment of six (6) years and one
(1) day to nine (9) years plus a fine
ranging from Five hundred thousand
pesos (P500,000) to One million five
hundred thousand pesos (P1,500,000)
for the third and subsequent offenses.
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d. In all cases, subsidiary imprisonment in
cases of insolvency [Sec. 217.1, RA
8293 as amended by RA 10372].
Determination of Penalty
In determining the number of years of
imprisonment and the amount of fine, the court
shall consider:
a. The value of the infringing materials
that the defendant has produced or
manufactured; and
b. The damage that the copyright owner
has suffered by reason of the
infringement [Sec. 217.2, RA 8293 as
amended by RA 10372].
The respective maximum penalty stated in
Section 217.1 for the first, second, third and
subsequent offense, shall be imposed when
the infringement is committed by: The
circumvention of effective technological
measures;
a. The removal or alteration of any
electronic rights management
information from a copy of a work,
sound recording, or fixation of a
performance, by a person, knowingly
and without authority; or
b. The distribution, importation for
distribution, broadcast, or
communication to the public of works
or copies of works, by a person without
authority, knowing that electronic rights
management information has been
removed or altered without authority
[Sec. 217.2, RA 8293 as amended by
RA 10372].
Certificate of Registration and Deposit
The issuance of the certificates of registration
and deposit as provided by Sec. 2, Rule 7 of
the Copyright Safeguards and Regulations, are
purely for recording the date of registration and
deposit of the work and are not conclusive as
to copyright ownership (nor does it determine
the time when copyright vests) [Manly
Sportswear v. Dadodette Enterprises, G.R. No.
165306 (2005)].
Purpose of Registration and Deposit
Completing the records of the National Library
and the Supreme Court Library; provided, that
INTELLECTUAL PROPERTY CODE COMMERCIAL LAW
only works in the field of law shall be deposited
with the Supreme Court Library [Sec. 191, RA
8293 as amended by RA 10372].
● Note: The National Library has
deputized the IPOPHL to receive
deposited works on its behalf.

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a. Securities dealers, brokers,
V. ANTI-MONEY salesmen, investment houses
LAUNDERING ACT and other similar entities
managing securities or
The section numbers hereinafter generally rendering services as
pertain to RA 9160 or the Anti-Money investment agent, advisor, or
Laundering Act, as amended by RA 9194 and consultant,
RA 10365, unless otherwise indicated. b. Mutual funds, close – end
investment companies,
Money Laundering is a crime where the common trust funds, pre –
proceeds of an unlawful activity are transacted, need companies and other
thereby making them appear to have originated similar entities
from legitimate sources. c. Foreign exchange
corporations, money changers,
It is governed by RA 9160, as amended by RA money payment, remittance
9194 (2003), RA 10167 (2012), RA 10365 and transfer companies and
(2013) and RA 10927 (2017). other similar entities, and
d. Other entities administering or
A. Policy of the Law otherwise dealing in currency,
commodities or financial
It is the policy of the State to: derivatives based thereon,
valuable objects, cash
1. Protect and preserve the integrity and substitutes and other similar
confidentiality of bank accounts monetary instruments or
2. Ensure that the Philippines shall not be property supervised or
used as a money laundering site for the regulated by the Securities and
proceeds of any criminal activity. Exchange Commission (SEC).
4. Jewelry dealers in precious metals,
Consistent with its foreign policy, the State who, as a business, trade in precious
shall extend cooperation in transnational metals, for transactions in excess of
investigations and prosecutions of persons Php1,000,000.
involved in money laundering activities 5. Jewelry dealers in precious stones,
whenever committed [Sec. 2]. who, as a business, trade in precious
stones, for transactions in excess of
B. Covered Institutions and Php1,000,000.
6. Company service providers which, as a
their Obligations business, provide any of the following
services to third parties:
Covered Institutions a. Acting as a formation agent of
1. Banks, non-banks, quasi–banks, trust juridical persons;
entities, foreign exchange dealers, b. Acting as, or arranging for
pawnshops, money changers, another person to act as:
remittance and transfer companies and i. director or corporate
other similar entities and all other secretary of a company
persons and their subsidiaries and ii. partner of a
affiliates supervised or regulated by the partnership, or
BSP; iii. A similar position in
2. Insurance companies, pre-need relation to other
companies and all other persons juridical persons;
supervised or regulated by the c. Providing a registered office,
Insurance Commission; business address or
3. Those who are: accommodation,

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correspondence or
administrative address for a
company, a partnership or any
other legal person or
arrangement; and
d. Acting as, or arranging for
another person to act as, a
nominee shareholder for
another person
7. Persons who provide any of the
following services:
a. Managing of client money,
securities or other assets
b. Management of bank, savings
or securities accounts
c. Organization of contributions
for the creation, operation or
management of companies;
and
d. Creation, operation or
management of juridical
persons or arrangements and
buying or selling business
entities [Sec. 1].
e. Casinos, including internet and
ship-based casinos, with
respect to their casino cash
transactions related to their
gaming operations [Sec. 1].
The term ‘covered persons’ excludes lawyers
and accountants acting as independent legal
professionals, 1. in relation to information
concerning their clients; or 2. where disclosure
of information would compromise client
confidences or the attorney-client relationship.
Provided, 1. that these lawyers and
accountants are authorized to practice in the
Philippines and 2. shall continue to be subject
to the provisions of their respective codes of
conduct and/or professional responsibility or
any of its amendments [Sec. 1].
Obligations of Covered Institutions
1. Customer Identification
2. Record Keeping
3. Reporting of Covered and Suspicious
Transactions
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Customer Identification
Covered institutions shall:
1. Establish and record a true identity of
its clients, based on official documents
2. Maintain a system of verifying the true
identity of their clients
3. In case of corporate clients, require a
system to verify:
a. Legal existence and
organizational structure; an
b. Authority and identification of
persons purporting to act on
their behalf
Anonymous accounts, accounts under fictitious
names, and all other similar accounts shall be
absolutely prohibited. Peso and foreign
currency non- checking numbered accounts
shall be allowed. The BSP may conduct annual
testing solely limited to the determination of the
existence and true identity of the owners of
such accounts [Sec. 9].
Record Keeping
All records of all transactions of covered
institutions shall be maintained and safely
stored for five (5) years from the dates of
transactions.
With respect to closed accounts, the records
on customer identification, account files and
business correspondence, shall be preserved
and safely stored for at least five (5) years from
the dates when they were closed.
Reporting of Covered and Suspicious
Transactions
General Rule: Covered institutions shall report
to the AMLC all covered transactions within
five (5) working days from occurrence.
Exception: If the Anti Money Laundering
Council (AMLC) prescribed a longer period not
exceeding fifteen (15) working days [Sec.
9(c)].
When reporting covered transactions
to the AMLC:
1. Covered institutions and their officers,
and employees are prohibited from
communicating, directly or indirectly, in
SPECIAL COMMERCIAL LAWS
any manner, to any person, entity, or
the media:
a. The fact that a covered
transaction report has or is
about to be reported;
b. The contents thereof;
c. Any other information in
relation thereto; and
2. Neither may such reporting be
published or aired in any manner or
form by the mass media, electronic
mail, or other similar devices [Sec. 9,
RA 10365].
In case of violation, criminal liability ensues as
against the concerned officer and employee of
the covered person and media.
Anti-money laundering regulations
Republic Act No. 9160, otherwise known as the
Anti-Money Laundering Act, as amended
(AMLA) and its 2018 implementing rules and
regulations (IRR) impose certain obligations
upon covered persons to ensure that the
Philippines will not be used as a money
laundering site for the proceeds of any unlawful
activity. Below are the key obligations of
covered persons under the AMLA and its IRR.
1. Customer due diligence (CDD)
obligations
Under the AMLA IRR, covered persons must
conduct CDD for the following purposes:
a. to identify the customer, and its agents
and beneficial owners;
b. to determine the risk posed by each
customer;
c. to establish, maintain, close or
terminate the account or business
relationship; and
d. to assess the level of monitoring to be
applied.
CDD measures must be undertaken when:
a. establishing business or professional
relationship;
b. carrying out occasional transactions
above PHP100,000 or any other
threshold as may be determined by the
relevant supervising authority, with
notice to the Anti-Money Laundering
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Council (AMLC), including situations
where the transaction is carried out in
a single operation or in several
operations that appear to be linked;
c. carrying out occasional wire transfers
under certain circumstances;
d. there is a suspicion of money
laundering/terrorism financing
(ML/TF), regardless of any exemptions
or thresholds; or
e. the covered person has doubts about
the veracity or adequacy of previously
obtained identification information
and/or data.
Further, the AMLA IRR requires covered
persons to apply CDD requirements to existing
customers on the basis of materiality and risk,
and conduct due diligence on existing
relationships at appropriate times, taking into
account whether and when CDD measures
have previously been undertaken and the
adequacy of information and document
obtained.
In conducting CDD, the covered persons must
adopt appropriate CDD measures following a
risk-based approach, which include the
following procedures:
a. Customer identification process - covered
persons shall identify and record the true
identity of their customers, whether permanent
or occasional, and whether natural or juridical
person, or legal arrangement.
Note that in case the customer engages in a
transaction with a covered person for the first
time, the covered person must require the
customer to present the original and submit a
clear copy of, at least, one identification
document (ID). In case the ID presented does
not bear any photo of the customer, or the
photo-bearing ID or a copy thereof does not
clearly show the face of the customer, a
covered person may utilize information and
communication technology or any other
technology to take the photo of the customer.
b. Customer verification process - covered
persons shall implement and maintain a
system of verifying the true identity of their
SPECIAL COMMERCIAL LAWS
clients, including validating the truthfulness of
the information and confirming the authenticity
of the identification documents presented,
submitted and provided by the customer, using
reliable and independent sources, documents,
data, or information.
The covered persons must independently
verify the collected data during customer
identification process, through any of the
following:
1. face-to-face contact;
2. use of information and
communication technology;
3. by confirming the authenticity of the
identification documents to the
issuing office;
4. reliance on third parties and
service providers; or
5. such other methods of validation
based on reliable and independent
sources, documents, data, or
information.
c. Identification and verification of agents -
covered persons shall verify that any person
purporting to act on behalf of a customer is so
authorized and identify and verify the identity of
that person.
The covered person must verify the validity of
the authority of the agent. In case of doubt as
to whether the person purporting to act on
behalf of the customer is being used as a
dummy in circumvention of existing laws, the
covered person must apply enhanced due
diligence and file a suspicious transaction
report, if warranted.
d. Beneficial ownership verification -
covered persons shall identify the beneficial
owner and take reasonable measures to verify
the identity of the beneficial owner, using the
relevant information or data obtained from
reliable sources, such that the covered person
is satisfied that it knows who the beneficial
owner is.
The covered person must obtain a copy of the
written document evidencing the relationship
and apply the same standards for assessing
the risk profile and determining the standard of
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CDD to be applied to both.
e. Determination of the purpose of
relationship - covered persons shall
understand and, as appropriate, obtain
information on, the purpose and intended
nature of the account, transaction, or the
business or professional relationship with their
customers.
f. Ongoing monitoring process - covered
persons shall, on the basis of materiality and
risk, conduct ongoing monitoring by
establishing a system that will enable them to
understand the normal and reasonable
account or business activity of customers, and
scrutinize transactions undertaken throughout
the course of the business or professional
relationship to ensure that the customers’
accounts, including transactions being
conducted, are consistent with the covered
person’s knowledge of its customer, their
business and risk profile, including where
necessary, the source of funds.
Covered persons must develop a clear set of
criteria for customer risk profiling and
assessment, which must include at least three
of the following:
1. The nature of the service or product to
be availed of by the customers;
2. The purpose of the account or
transaction;
3. The source of fund and source of
wealth;
4. The nature of business and/or
employment;
5. Country of origin and residence of
operations, or the fact that a customer
came from a high- risk jurisdiction or
geographical area;
6. Watchlist of individuals and entities
engaged in illegal activities or terrorist
related activities as circularized by the
BSP, AMLC, and other international
entities or organizations, such as the
Office of Foreign Assets Control of the
U.S. Department of the Treasury and
United Nations Sanctions List;
7. The existence of suspicious
transaction indicators; and
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8. Such other factors as the covered
persons may deem reasonable or
necessary to consider in assessing the
risk of a customer, including the
amount of funds to be transacted by a
customer or the size of transactions
undertaken, regularity or duration of
the transaction, and/or are included in
the negative list.
Where the risks are higher, covered persons
must conduct enhanced due diligence. On the
other hand, where lower risks of ML/TF have
been identified, through an adequate analysis
of risk by the covered person, reduced due
diligence procedures may be applied.
2. Transaction reporting
The AMLA IRR provides that covered persons
must report to the AMLC all covered
transactions within five working days, unless
the AMLC prescribes a different period not
exceeding 15 working days. Further,
suspicious transactions shall be filed with the
AMLC within the period prescribed under the
registration and reporting guidelines of the
AMLC.
3. Record keeping
Under the AMLA IRR, covered persons are
required to maintain and safely store for five
years from the dates of transactions all records
of customer identification and transactions
documents. Further, covered persons must
keep the electronic copies of all covered and
suspicious transaction reports, for at least five
years from the dates of submission to the
AMLC. In addition, covered persons shall keep
all records obtained through CDD, account files
and business correspondence, and the results
of any analysis undertaken, for, at least, five
years following the closure of account,
termination of the business or professional
relationship or after the date of the occasional
transaction.
If a case has been filed in court involving the
account, records must be retained and safely
kept beyond the five-year period, until it is
officially confirmed by the AMLC Secretariat
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that the case has been resolved, decided, or
terminated with finality.
4. Adoption of a money laundering and
terrorist financing prevention program
(MTPP)
Under the AMLA IRR, covered persons must
formulate and implement a comprehensive
and risk-based MTPP that is compliant with
the AMLA and Republic Act 10168 (otherwise
known as Terrorism Financing Prevention
and Suppression Act or TFPSA), their
respective IRR, and other AMLC issuances,
and the AML/CTF guidelines of their
supervising authorities. The MTPP must be
commensurate to the size and risk profile of
the covered person. The covered person must
consider the results of the national risk
assessment and its own risk assessment in
the development and/or updating of its MTPP.
The MTPP shall be in writing and shall
include, at the minimum, internal policies,
controls, and procedures on the following:
a. risk management;
b. compliance management setup,
including the designation of a
compliance officer at the management
level or creation of compliance unit;
c. screening procedures to ensure high
standards when hiring employees;
d. continuing education and training
program;
e. independent audit function;
f. details of implementation of CDD,
record-keeping and reporting
requirements;
g. compliance with freeze, bank inquiry
and asset preservation orders, and all
directives of the AMLC;
h. adequate safeguards on the
confidentiality and use of information
exchange, including safeguards to
prevent tipping-off; and
i. cooperation with the AMLC and
supervising authority.
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5. Designation of an AML compliance
officer
Covered persons must designate an AML
compliance officer or create a compliance unit,
responsible for the covered person’s day-to-
day compliance with the AMLA and TFPSA,
their respective IRR, and other AMLC
issuances. The internal auditor, general
manager, or proprietor, as the case maybe,
shall be the compliance officer in case the
resources of the covered person hamper the
establishments of the compliance unit. The
compliance officer or the head of the
compliance unit must be of senior
management level.
C. Covered and Suspicious
Transactions
General Rule: A covered transaction is a
transaction in cash or other equivalent
monetary instrument involving a total amount in
excess of Php 500,000 within one banking day
[Sec. 3(b)].
Exception: for Casinos or “covered persons
under Section 3(a)(8),” a single casino
transaction involving an amount in excess of
Php 5,000,000 or its equivalent in any other
currency.
Suspicious Transactions are transactions
with covered institutions, regardless of the
amount involved, where any of the following
circumstances exist:
1. There is no underlying legal or trade
obligation, purpose, or economic
justification
2. The client is not properly identified
3. The amount involved is
commensurate with the business or
financial capacity of the client
4. Taking into account all known
circumstances, it may be perceived
that the client’s transaction is
structured to avoid being the subject of
reporting requirements under this Act
5. Any circumstance relating to the
transaction which is observed to
deviate from the profile of the client
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and/or the client’s past transactions
with the covered institution;
6. The transaction is in any way related to
an unlawful activity or offense under
this Act that is about to be, is being or
has been committed [Sec. 3(b-1)].
D. Safe Harbor Provision
The Safe Harbor Provision states that no
administrative, criminal, or civil
proceedings shall lie against any person for
having made a covered transaction report in
the regular performance of his duties and in
good faith, whether or not such reporting
results in any criminal prosecution under this
Act or any other Philippine law [Sec. 9].
Lawyers and accountants acting as
independent legal professionals are not subject
to the reporting requirement if the relevant
information was obtained in circumstances
subject to professional secrecy or legal
professional privilege [Sec. 9(c)].
E. When is Money Laundering
Committed (Including Predicate
Crimes)
Money laundering is a crime whereby the
proceeds of an unlawful activity are transacted,
thereby making them appear to have originated
from legitimate sources.
Money Laundering is committed by any
person who, knowing that any monetary
instrument or property represents, involves, or
relates to the proceeds of any unlawful activity:
1. Transacts said monetary instrument or
property;
not
2. Converts, transfers, disposes of,
moves, acquires, possesses or uses
said monetary instrument or property;
3. Conceals or disguises the true nature,
source, location, disposition,
movement or ownership of or rights
with respect to said monetary
instrument or property;
4. Attempts or conspires to commit
money laundering offenses referred to
in paragraphs (a), (b) or (c);

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5. Aids, abets, assists in or counsels the
commission of the money laundering
offenses referred to in paragraphs (a),
(b) or (c) above; and
6. Performs or fails to perform any act as
a result of which he facilitates the
offense of money laundering referred
to in paragraphs (a), (b) or (c) above.
Money laundering is also committed by any
covered person who, knowing that a covered
or suspicious transaction is required under this
Act to be reported to the Anti-Money
Laundering Council (AMLC), fails to do so
[Sec. 4, RA 10365].
RA 10365 further added the following:
Unlawful activity refers to any act or omission
or series or combination thereof involving or
having direct relation to the following:
1. Kidnapping for ransom under Article
267 of Act No. 3815, otherwise known
as the Revised Penal Code, as
amended;
2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15,
and 16 of RA 9165, otherwise known
as the Comprehensive Dangerous
Drugs Act of 2002;
3. Section 3 paragraphs B, C, E, G, H and
I of RA. 3019, as amended; otherwise
known as the Anti-Graft and Corrupt
Practices Act;
4. Plunder under RA 7080, as amended;
5. Robbery and extortion under Articles
294, 295, 296, 299, 300, 301 and 302
of the Revised Penal Code, as
amended
6. Jueteng and Masiao punished as
illegal gambling under Presidential
Decree No. 1602;
7. Piracy on the high seas under the
Revised Penal Code, as amended and
Presidential Decree No. 532; Qualified
theft under Article 310 of the Revised
Penal Code, as amended;
8. Swindling under Article 315 of the
Revised Penal Code, as amended;
9. Smuggling under RA Nos. 455 and
1937;
10. Violations under RA 8792, otherwise
known as the Electronic Commerce Act
of 2000;
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11. Hijacking and other violations under
RA 6235; destructive arson and
murder, as defined under the Revised
Penal Code, as amended, including
those perpetrated by terrorists against
non-combatant persons and similar
targets;
12. Fraudulent practices and other
violations under RA 8799, otherwise
known as the Securities Regulation
Code of 2000;
13. Felonies or offenses of a similar nature
that are punishable under the penal
laws of other countries [Sec. 3 (i)].
1. Terrorism and conspiracy to commit
terrorism as defined and penalized
under Sections 3 and 4 of RA No. 9372
2. Financing of terrorism under Section 4
and offenses punishable under
Sections 5, 6, 7 and 8 of RA 10168,
otherwise known as the Terrorism
Financing Prevention and Suppression
Act of 2012;
3. Bribery under Articles 210, 211 and
211-A of the Revised Penal Code, as
amended, and Corruption of Public
Officers under Article 212 of the
Revised Penal Code, as amended;
4. Frauds and Illegal Exactions and
Transactions under Articles 213, 214,
215 and 216 of the Revised Penal
Code, as amended;
5. Malversation of Public Funds and
Property under Articles 217 and 222 of
the Revised Penal Code, as amended;
6. Forgeries and Counterfeiting under
Articles 163, 166, 167, 168, 169 and
176 of the Revised Penal Code, as
amended;
7. Violations of Sections 4 to 6 of RA
9208, otherwise known as the Anti-
Trafficking in Persons Act of 2003;
8. Violations of Sections 78 to 79 of
Chapter IV, of Presidential Decree No.
705, otherwise known as the Revised
Forestry Code of the Philippines, as
amended;
9. Violations of Sections 86 to 106 of
Chapter VI, of RA 8550, otherwise
SPECIAL COMMERCIAL LAWS
known as the Philippine Fisheries
Code of 1998;
10. Violations of Sections 101 to 107, and
110 of RA 7942, otherwise known as
the Philippine Mining Act of 1995;
11. Violations of Section 27(c), (e), (f), (g)
and (i), of RA 9147, otherwise known
as the Wildlife Resources
Conservation and Protection Act;
12. Violation of Section 7(b) of RA 9072,
otherwise known as the National
Caves and Cave Resources
Management Protection Act;
13. Violation of RA 6539, otherwise known
as the Anti-Carnapping Act of 2002, as
amended;
14. Violations of Sections 1, 3 and 5 of PD
1866, as amended, otherwise known
as the decree Codifying the Laws on
Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or
Explosives;
15. Violation of PD 1612, otherwise known
as the Anti-Fencing Law;
16. Violation of Section 6 of RA 8042,
otherwise known as the Migrant
Workers and Overseas Filipinos Act of
1995, as amended by RA 10022;
17. Violation of RA 8293, otherwise known
as the Intellectual Property Code of the
Philippines;
18. Violation of Section 4 of RA 9995,
otherwise known as the Anti-Photo and
Video Voyeurism Act of 2009;
19. Violation of Section 4 of RA 9775,
otherwise known as the Anti-Child
Pornography Act of 2009;
20. Violations of Sections 5, 7, 8, 9, 10(c),
(d) and (e), 11, 12 and 14 of RA 7610,
otherwise known as the Special
Protection of Children Against Abuse,
Exploitation and Discrimination.
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F. Authority to Inquire into
Banks
General Rule: The AMLC may inquire into or
examine any particular deposit or investment,
including related accounts, with any banking
institution or non-bank financial institution upon
order of any competent court in cases of
violation of this Act when it has been
established that there is probable cause that
the deposits or investments involved are
related:
1. To an unlawful activity as defined in
Sec. 3(i); or
2. To any money laundering offense
under Sec. 4
Related Accounts refers to accounts, funds
and sources of which originated from and/or
are materially linked to the monetary
instrument(s) or property(ies) subject of the
freeze order(s).
Exception: No court order shall be required in
the following cases –
1. Kidnapping for ransom under Article
267 of the RPC
2. Sections 4,5,7,8,9,10,12,13,14,15
and16 of RA No. 9615
3. Hijacking and other violations under
RA No. 6235; destructive arson and
murder as defined under the RPC
4. Felonies or offenses of a nature similar
to those mentioned in Section 3(i) (1),
(2), and (12) which are punishable
under the penal laws of other countries;
5. Terrorism and conspiracy to commit
terrorism as defined and penalized
under RA No. 9372.
The authority of AMLC to inquire into or
examine the main account and the related
accounts shall comply with the Due Process
requirements (Art. III, Sec. 2 and 3) of the 1987
Constitution. Likewise, the constitutional
injunction against ex post facto laws and bills
of attainder shall be respected [Sec. 21], as
amended by RA 10365].
A bank inquiry order may be availed of without
need of a pre-existing case under the AMLA. If
the contrary position is adopted, the AMLC
SPECIAL COMMERCIAL LAWS
would be virtually deprived of its character as a
discovery tool, and thus would become less
circumspect in filing complaints against
suspect account holders. However, unlike a
freeze order, it cannot be issued ex parte.
Without doubt, a requirement that the
application for a bank inquiry order be done
with notice to the account holder will alert the
latter that there is a plan to inspect his bank
account on the belief that the funds therein are
involved in an unlawful activity or money
laundering offense [Republic v. Eugenio, G.R.
No. 174629 (2008)].
G. Freezing and Forfeiture
Application for Freeze Orders
a. Who may apply
Upon verified ex parte petition by the AMLC
and after determination that probable cause
exists that any monetary instrument or property
is in any way related to an unlawful activity, the
Court of Appeals may issue a freeze order,
which shall be effective immediately, directing
the concerned covered persons and
government agency to desist from allowing any
transaction, withdrawal, transfer, removal,
conversion, concealment, or other disposition
of the subject monetary instrument or property
[Rule 10(a), Revised IRR].
b. Effectivity
The freeze order shall be effective
immediately and shall not exceed six (6)
months depending upon the circumstances of
the case.
On motion of the AMLC filed before the
expiration of the original period of the freeze
order, the court may, for good cause shown,
extend its effectivity. Upon the timely filing of
such motion and pending resolution by the
Court of Appeals, the freeze order shall remain
effective [Rule 10(a)(3), Revised IRR].
c. Duties of covered institutions
1. Implement Freeze Order. - Upon receipt of
the notice of the freeze order, the covered
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person and government agency concerned
shall immediately freeze the monetary
instrument or property subject thereof and shall
immediately desist from and not allow any
transaction, withdrawal, transfer, removal,
conversion, other movement or concealment
thereof.
2. Freeze Related Accounts. - Upon receipt of
the freeze order and upon verification by the
covered person that there are accounts related
to the monetary instrument or property subject
of the freeze order, the covered person shall
immediately freeze these related accounts
wherever these may be found. If the related
accounts cannot be determined within 24 hours
from receipt of the freeze order due to the
volume and/or complexity of the transactions,
or any other justifiable factors, the covered
person shall effect the freezing of the related
accounts within a reasonable period and shall
submit a supplemental return thereof to the
Court of Appeals and the AMLC within 24 hours
from the freezing of said related accounts.
3. Furnish Copy of Freeze Order to Owner
or Holder. - The covered person and
government agency concerned shall likewise
immediately furnish a copy of the notice of the
freeze order upon the owner or holder of the
monetary instrument or property or related
accounts subject thereof.
4. Submit Detailed Return. - Within 24 hours
from receipt of the freeze order, the covered
person and government agency concerned
shall submit, by personal delivery, to the Court
of Appeals and to the AMLC, a written detailed
return on the freeze order.
5. The covered person shall also submit to the
AMLC, through the internet, an electronic
detailed return in a format to be prescribed by
the latter [Rule 10(e), Revised IRR].
Forfeiture Provisions
Civil Forfeiture
Upon determination by the AMLC that
probable cause exists that any monetary
instrument or property is in any way related to
SPECIAL COMMERCIAL LAWS
an unlawful activity or a money laundering
offense, the AMLC shall file with the
appropriate court (through the OSG) a
verified ex parte petition for forfeiture [Sec.
12(a), as amended by RA 10365].
Procedural rule applicable: The Rules of
Court on Civil Forfeiture.
What is covered by the forfeiture
The forfeiture shall include those other
monetary instrument or property having an
equivalent value to that of the monetary
instrument or property found to be related in
any way to an unlawful activity or a money
laundering offense, when:
1. With due diligence, the former cannot
be located, or
2. It has been substantially altered,
destroyed, diminished in value or
otherwise rendered worthless by any
act or omission, or
3. It has been concealed, removed,
converted, or otherwise transferred, or
4. It is located outside the Philippines or
has been placed or brought outside the
jurisdiction of the court, or
5. It has been commingled with other
monetary instrument or property
belonging to either the offender himself
or a third person or entity, thereby
rendering the same difficult to identify
or be segregated for purposes of
forfeiture [Sec. 12(a), as amended by
RA 10365].
Claim on Forfeited Assets
Where the court has issued an order of
forfeiture of the monetary instrument or
property in a criminal prosecution for any
money laundering offense defined under
Section 4 of this Act, the offender or any other
person claiming an interest therein may apply,
by verified petition, for a declaration that the
same legitimately belongs to him and for
segregation or exclusion of the monetary
instrument or property corresponding thereto.
Where filed: With the court which rendered the
judgment of forfeiture.
When filed: Within 15 days from the date of
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the finality of the order of forfeiture, in default of
which the said order shall become final and
executory [Sec. 12(b)].
Note: This provision shall apply in both civil and
criminal forfeiture.
Payment in Lieu of Forfeiture
The court may, instead of enforcing the order
of forfeiture of the monetary instrument or
property or part thereof or interest therein,
accordingly order the convicted offender to
pay an amount equal to the value of said
monetary instrument or property, where:
1. The court has issued an order of
forfeiture of the monetary instrument or
property subject of a money laundering
offense (defined under Section 4), and
2. Said order cannot be enforced
because:
a. Any particular monetary
instrument or property cannot,
with due diligence, be located,
or
b. It has been substantially
altered, destroyed, diminished
in value or otherwise rendered
worthless by any act or
omission, directly or indirectly,
attributable to the offender, or
c. It has been concealed,
removed, converted, or
otherwise transferred to
prevent the same from being
found or to avoid forfeiture
thereof, or
d. It is located outside the
Philippines or has been placed
or brought outside the
jurisdiction of the court, or
e. It has been commingled with
other monetary instruments or
property belonging to either the
offender himself or a third
person or entity, thereby
rendering the same difficult to
identify or be segregated for
purposes of forfeiture [Sec.
12(c)].
Note: This provision shall apply in both civil and
criminal forfeiture.
SPECIAL COMMERCIAL LAWS
H. Anti-Money Laundering
Council; Functions
The Anti-Money Laundering Council shall be
composed of the Governor of the Bangko
Sentral ng Pilipinas (BSP) as chairman, and
the Commissioner of the Insurance
Commission and the Chairman of the
Securities and Exchange Commission (SEC)
as members [Sec. 7].
Functions
The AMLC shall act unanimously in the
discharge of its functions as defined
hereunder:
1. To require and receive covered or
suspicious transaction reports from
covered institutions;
2. To issue orders addressed to the
appropriate Supervising Authority or
the covered institution to determine the
true identity of the owner of any
monetary instrument or property
subject of a covered transaction or
suspicious transaction report or
request for assistance from a foreign
State, or believed by the Council, on
the basis of substantial evidence, to be,
in whole or in part, wherever located,
representing, involving, or related to,
directly or indirectly, in any manner or
by any means, the proceeds of an
unlawful activity;
3. To institute civil forfeiture proceedings
and all other remedial proceedings
through the Office of the Solicitor
General;
4. To cause the filing of complaints with
the Department of Justice or the
Ombudsman for the prosecution of
money laundering offenses;
5. To investigate suspicious transactions
and covered transactions deemed
suspicious after an investigation by
AMLC, money laundering activities,
and other violations of this Act;
6. To apply before the Court of Appeals,
ex parte, for the freezing of any
monetary instrument or property
alleged to be laundered, proceeds from
or instrumentalities used/ intended for
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use in any unlawful activity (as defined
in Section 3(i) hereof);
7. To implement such measures as may
be necessary and justified under this
Act to counteract money laundering;
8. To receive and take action in respect
of, any request from foreign states for
assistance in their own anti-money
laundering operations provided in this
Act;
9. To develop educational programs on
the pernicious effects of money
laundering, the methods and
techniques used in money laundering,
the viable means of preventing money
laundering and the effective ways of
prosecuting and punishing offenders;
10. To enlist the assistance of any branch,
department, bureau, office, agency or
instrumentality of the government,
including government-owned and -
controlled corporations, in undertaking
any and all anti-money laundering
operations, which may include the use
of its personnel, facilities and
resources for the more resolute
prevention, detection and investigation
of money laundering offenses and
prosecution of offenders; and
11. To impose administrative sanctions for
the violation of laws, rules, regulations
and orders and resolutions issued
pursuant thereto [Sec. 7];
12. To require the Land Registration
Authority and all its Registries of Deeds
to submit to the AMLC, reports on all
real estate transactions involving an
amount in excess of Php 500,000
within 15 days from the date of
registration of the transaction, in a form
to be prescribed by the AMLC. The
AMLC may also require the Land
Registration Authority and all its
Registries of Deeds to submit copies of
relevant documents of all real estate
transactions [Sec. 7].
SPECIAL COMMERCIAL LAWS
VI. ELECTRONIC
COMMERCE ACT
The section numbers hereinafter generally
pertain to RA 8792 or the Electronic Commerce
Act of 2000, unless otherwise indicated.
A. Policy of the Law
The Electronic Commerce Act shall apply to
any kind of data message and electronic
document used in the context of commercial
and non-commercial activities to include
domestic and international dealings,
transactions, arrangements, agreements
contracts and exchanges and storage of
information [Sec. 4].
The State recognizes:
1. The vital role of information and
communications technology (ICT) in
nation- building
2. The need to create an information-
friendly environment which supports
and ensures the availability, diversity
and affordability of ICT products and
services
3. The primary responsibility of the private
sector in contributing investments and
services in telecommunications and
information technology;
4. The need to develop, with appropriate
training programs and institutional
policy changes, human resources for
the information technology age, a labor
force skilled in the use of ICT and a
population capable of operating and
utilizing electronic appliances and
computers;
5. Its obligation to facilitate the transfer
and promotion of technology; to ensure
network security, connectivity and
neutrality of technology for the national
benefit; and
6. The need to marshal, organize and
deploy national information
infrastructures, comprising in both
telecommunications network and
strategic information services,
including their interconnection to the
global information networks, with the
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necessary and appropriate legal,
financial, diplomatic and technical
framework, systems and facilities [Sec.
2].
The objective of the law is to facilitate domestic
and international dealings, transactions,
arrangements agreements, contracts and
exchanges and storage of information through
the utilization of electronic, optical and similar
medium, mode, instrumentality and technology
to recognize the authenticity and reliability of
electronic documents related to such activities
and to promote the universal use of electronic
transaction in the government and general
public [Sec. 3].
B. Definition of Terms
Electronic Data Messages
It refers to information generated, sent,
received or stored by electronic, optical or
similar means [Sec. 5].
Electronic Document
It refers to information or the representation of
information, data, figures, symbols or other
modes of written expression, described or
however represented, by which a right is
established or an obligation extinguished, or by
which a fact may be prove and affirmed, which
is receive, recorded, transmitted, stored,
processed, retrieved or produced electronically
[Sec. 5].
Electronic Signature
It refers to any distinctive mark, characteristic
and/or sound in electronic form, representing
the identity of a person and attached to or
logically associated with the electronic data
message or electronic document or any
methodology or procedures employed or
adopted by a person and executed or adopted
by such person with the intention of
authenticating or approving an electronic data
message or electronic document [Sec. 5].
SPECIAL COMMERCIAL LAWS
C. Legal Recognition of
Electronic Data Messages,
Documents and Signatures
Legal Recognition of Electronic Data
Messages
Information shall not be denied legal effect,
validity or enforceability solely on the grounds
that it is in the data message purporting to give
rise to such legal effect, or that it is merely
referred to in that electronic data message
[Sec. 6].
Legal Recognition of Electronic
Documents
Electronic documents shall have the legal
effect, validity or enforceability as any other
document or legal writing [Sec. 7].
Where the law (1) requires a document to be in
writing; (2) requires a form of an obligation; (3)
provides consequences for the document not
being presented or retained in its original from,
that requirement is met if the electronic
document maintains its integrity and reliability
and can be authenticated so as to be usable for
subsequent reference, in that:
The electronic document has remained
complete and unaltered
Apart from: Any endorsement and any
authorized change, or any change which arises
in the normal course of communication,
storage and display.
The electronic document is reliable in the light
of the purpose for which it was generated and
in the light of all relevant circumstances [Sec.
7].
Where the law requires that a document be
presented or retained in its original form, that
requirement is met by an electronic document
if:
1. There exists a reliable assurance as to
the integrity of the document from the
time when it was first generated in its
final form; and
2. That document is capable of being
displayed to the person to whom it is to
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be presented: Provided, that no
provision of this Act shall apply to vary
any and all requirements of existing
laws on formalities required in the
execution of documents for their
validity.
For evidentiary purposes, an electronic
document shall be the functional equivalent of
a written document under existing laws.
This Act does not modify any statutory rule
relating to the admissibility of electronic data
messages or electronic documents, except the
rules relating to authentication and best
evidence.
Legal Recognition of Electronic
Signatures
An electronic signature on the electronic
document shall be equivalent to the signature
of a person on a written document if that
signature is proved by showing that a
prescribed procedure, not alterable by the
parties interested in the electronic document,
existed under which [Sec. 8]:
1. A method is used to identify the party
sought to be bound and to indicate said
party's access to the electronic
document necessary for his consent or
approval through the electronic
signature;
2. Said method is reliable and appropriate
for the purpose for which the electronic
document was generated or
communicated, in the light of all
circumstances, including any relevant
agreement;
3. It is necessary for the party sought to
be bound, in or order to proceed further
with the transaction, to have executed
or provided the electronic signature;
and
4. The other party is authorized and
enabled to verify the electronic
signature and to make the decision to
proceed with the transaction
authenticated by the same.
The Court recognized the broadness of what
may be considered an electronic signature.
Thus, a machine signature of a Precinct Count
SPECIAL COMMERCIAL LAWS
Optical Scan (PCOS) machine may be
considered the functional equivalent of a digital
signature as it represents the identity of the
individual, such digital signature naturally being
created specifically for the person himself or
herself inputting the details [Bagumbayan-VNP
Movement, Inc. v. COMELEC (2019)].
Original Documents
Where the law (1) requires a document to be in
writing; (2) requires a form of an obligation; (3)
provides consequences for the document not
being presented or retained in its original from,
that requirement is met by an electronic data
message or electronic document if [Sec. 10]:
1. The integrity of the information from the
time when it was first generated in its
final form, as an electronic data
message or electronic document is
shown by evidence aliunde or
otherwise; and
a. Criteria for assessing integrity -
whether the information has
remained complete and
unaltered, apart from the
addition of any endorsement
and any change which arises in
the normal course of
communication, storage and
display
b. Standard of reliability - photocopies of the original fax transmittals, are
assessed in the light of
purposed for which the
information was generated and
in the light of all the relevant
circumstances.
2. Where it is required that information be
resented, that the information is
capable of being displayed to the
person to whom it is to be presented.
Authentication of Electronic Data
Messages and Electronic Documents
Now governed by: A.M. No. 01-7-10-SC –
RULES ON ELECTRONIC EVIDENCE
Before any private electronic document offered
as authentic is received in evidence, its
authenticity must be proved by any of the
following means:
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1. By evidence that it had been digitally
signed by the person purported to have
signed the same;
2. By evidence that other appropriate
security procedures or devices as may
be authorized by the Supreme Court or
by law for authentication of electronic
documents were applied to the
document; or
3. By other evidence showing its integrity
and reliability to the satisfaction of the
judge [Sec. 2, Rules on Electronic
Evidence].
Note: The terms electronic data message
and electronic document, as defined under
the Electronic Commerce Act of 2000, do
not include a facsimile transmission.
Accordingly, a facsimile transmission cannot
be considered as electronic evidence. It is not
the functional equivalent of an original under
the Best Evidence Rule and is not admissible
as electronic evidence. Since a facsimile
transmission is not an electronic data message
or an electronic document and cannot be
considered as electronic evidence by the
Court, with greater reason is a photocopy of
such a fax transmission not electronic
evidence. In the present case, therefore, Pro
Forma Invoice Nos. ST2-POSTS0401-1 and
ST2-POSTS0401-2, which are mere
not electronic evidence [MCC Industrial Sales
Corporation v. Ssangyong Corporation, G.R.
No. 170633 (2007)].
D. Presumption Relating to
Electronic Signatures
Presumption Relating to Electronic
Signatures
In any proceeding involving an electronic
signature, it shall be presumed that [Sec. 9]:
1. The electronic signature is the
signature of the person to whom it
correlates; and
2. The electronic signature was affixed by
that person with the intention of signing
or approving the electronic document.
Exception: When the person relying on the
SPECIAL COMMERCIAL LAWS
electronically signed electronic document
knows or has notice of defects in or unreliability
of the signature or reliance on the electronic
signature is not reasonable under the
circumstances.
E. Admissibility and Evidential
Weight of Electronic Data
Message or Electronic
Document
Admissibility
In any legal proceeding, nothing in the
application of the rules on evidence shall deny
the admissibility of an electronic data message
or electronic document in evidence:
1. On the sole ground that it is in
electronic form; or
2. On the ground that it is not in the
standard written form, and the
electronic data message or electronic
document meeting, and complying with
the requirements (under Sections 6 or
7) shall be the best evidence of the
agreement and transaction contained
therein [Sec. 12].
Note: This Act does not modify any statutory
rule relating to admissibility of electronic data
massages or electronic documents, except the
rules relating to authentication and best
evidence [Sec. 7].
Evidential Weight
The following shall be given due regard In
assessing the evidential weight of an electronic
data message or electronic document:
1. The reliability of the manner in which it
was generated, stored or
communicated,
2. The reliability of the manner in which its
originator was identified, and
3. Other relevant factors [Sec. 12].
F. Obligation of Confidentiality
Except for the purposes authorized under this
Act, any person who obtained access to any
electronic key, electronic data message, or
electronic document, book, register,
correspondence, information, or other material
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pursuant to any powers conferred under this
Act, shall not convey to or share the same with
any other person [Sec. 32].
G. Punishable Acts and
Penalties
Hacking or cracking
Unauthorized access into or interference in a
computer system/server or information and
communication system; or any access in order
to corrupt, alter, steal, or destroy using a
computer or other similar information and
communication devices, without the knowledge
and consent of the owner of the computer or
information and communication system,
including the introduction of computer viruses
and the like, resulting in the corruption,
destruction, alteration, theft or loss of electronic
data messages or electronic documents [Sec.
33(a)].
Piracy
Unauthorized copying, reproduction,
dissemination, distribution, importation, use,
removal, alteration, substitution, modification,
storage, uploading, downloading,
communication, making available to the public,
or broadcasting of protected material,
electronic signature or copyrighted works
including legally protected sound recordings or
phonograms or information material on
protected works, through the use of
telecommunication networks, such as, but not
limited to, the internet, in a manner that
infringes intellectual property rights [Sec.
33(b)].
Violations of the RA No. 7394 or the
Consumer Act
In relation to transactions covered by or using
electronic data messages or electronic
documents [Sec. 33(c)].
Other violations of the provisions of
the Electronic Commerce Act [Sec.
33(d)]
SPECIAL COMMERCIAL LAWS
VII. FINANCIAL
REHABILITATION,
INSOLVENCY,
LIQUIDATION &
SUSPENSION OF
PAYMENTS
The section numbers hereinafter generally
pertain to RA 10142 or the Financial
Rehabilitation and Insolvency Act of 2010,
unless otherwise indicated.
A. Basic Concepts
1. Insolvency
Insolvency refers to the financial condition of
a debtor that is:
a. Generally unable to pay liabilities as
they fall due on the ordinary course of
business (hence illiquid); or
b. Has liabilities that are greater than its
or his assets (balance sheet insolvent)
[Sec. 4(p)].
Liabilities refer to money claims against the
debtor [Sec. 4(s)].
Debtors under the FRIA include:
a. Sole proprietorship registered with DTI;
b. Partnership registered with SEC;
c. Corporation duly registered and
existing under Philippine laws; or
d. Individual debtor, who is a natural
person that is a resident citizen, that
has become insolvent [Sec. 4(k)].
Note: Under the FRIA, the rules on debtors also
include and apply to groups of debtors:
a. Corporations financially related to one
another as parent corporations,
subsidiaries or affiliates;
b. Partnerships owned more than 50% by
the same person; and
c. Single proprietorships owned by the
same person.
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Debtors under the FRIA Exclude:
a. Banks
b. Insurance companies
c. Pre-need companies
d. National and local government
agencies or units [Sec. 5].
2. Rehabilitation
Rehabilitation refers to the restoration of the
debtor to a condition of successful operation
and solvency, if it is shown that:
a. Its continuance of operation is
economically feasible; and
b. Its creditors can recover more, by way
of the present value of payments
projected in the plan, if the debtor
continues as a going concern than if it
is immediately liquidated [Sec. 4(gg)].
3. Liquidation
Liquidation – a judicial insolvency proceeding
by which the debtor’s assets are reduced and
converted to cash in order to discharge the
claims against the debtor [Secs. 119 and 131;
Somera].
4. Suspension of Payment
Suspension of Payments – A remedy where
an individual debtor who, possessing
sufficient property to cover all his debts but
foreseeing the impossibility of meeting
them when they respectively fall due, may
file a verified petition that he be declared in the
state of suspension of payments by the court of
the province or city in which he has resided for
six (6) months prior to the filing of his petition.
He shall attach to his petition, as a minimum:
(a) a schedule of debts and liabilities; (b) an
inventory of assess; and (c) a proposed
agreement with his creditors [Sec. 94].
Definition
Suspension of payments is a judicial
insolvency proceeding by which an individual
debtor submits, for approval by his debtors, a
proposed agreement, containing
propositions delaying or extending the time
of payment of his debts.
SPECIAL COMMERCIAL LAWS
Who Can Avail – An illiquid debtor
An individual debtor (natural person) who
possesses sufficient property to cover all his
debts but foresees the impossibility of meeting
them when they respectively fall due.
Purpose
Debt moratorium: To delay or extend the time
of payment of one’s debts.
Allows distressed debtor to defer payment
of his debts by presenting a plan, subject to the
following:
a. It must relate to a schedule of
payments.
b. No haircut (reduction of debts), only a
grace period to pay the debts.
How Initiated
Illiquid debtor files a duly verified petition that
he be declared in the state of suspension of
payments by the court of the province/city in
which he has resided for 6 months prior to the
filing of the petition.
Minimum Requirements for Petition
a. Schedule of debts and liabilities
b. Inventory of assets
c. Proposed agreement with his creditors
Suspension of Payments Order
When Issued: Within 5 working days if the
court finds the petition sufficient in form and
substance
● Remains effective from the time of
the filing of the petition until the
termination of the proceedings.
Most Important Elements
Automatic Stay: No creditor except those
exempt shall institute proceedings to collect its
claim from the time of filing until the termination
of the proceedings.
Exempt from stay order:
a. Claims for personal labor,
b. Expense of last illness and funeral,
c. Secured creditors
Injunction against debtor: The individual
debtor is subjected to an injunction against:
a. Disposing of his property except those
used in the ordinary operations of
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commerce or industry in which he is
engaged.
b. Making any payment outside of the
necessary or legitimate expenses of
his business.
Approval of Proposed Agreement
Once a majority vote is reached in the creditors
meeting, the court shall issue an Order that the
agreement be carried out and all parties bound
thereby with its terms.
Order shall be binding upon all creditors.
whose claims are included in the schedule of
debts and liabilities submitted by the individual
debtor, and who were properly summoned.
B. Modes of Rehabilitation
Rehabilitation refers to the restoration of the
debtor to a condition of successful operation
and solvency, if it is shown that:
1. Its continuance of operation is
economically feasible; and
2. Its creditors can recover more, by way
of the present value of payments
projected in the plan, if the debtor
continues as a going concern than if it
is immediately liquidated [Sec. 4(gg)].
Rehabilitation proceedings are
1. In Rem: Jurisdiction over all persons
affected is considered as acquired
upon publication of the notice of
proceedings.
2. Summary and Non-Adversarial [Sec. 3]
3 Types of Rehabilitation Proceedings
Court- A judicial proceeding;
Supervised may be voluntary or
involuntary.
Pre-Negotiated An insolvency
proceeding involving
negotiation of terms
between the debtor and
the creditor(s). It
commences as an
extrajudicial proceeding
but terminates as a
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judicial proceeding.
Out-of-Court An insolvency
proceeding involving a
consensual contract
between the debtor and
the creditor(s). Unlike
pre-negotiation
rehabilitation, no
petitions are filed with
the court
[Somera]
1. Court-supervised rehabilitation
a. Voluntary vs. involuntary
1. Voluntary
Voluntary Rehabilitation — Refers to
proceedings initiated by the debtor, which may
be [Sec. 12]:
1. Sole Proprietorship: When approved
by the owner;
2. Partnership: When approved by a
majority of the partners;
3. Stock Corporation: When approved
by a majority vote of the BOD or
trustees, and authorized by the
stockholders representing 2/3 of the
outstanding capital stock in a meeting
called for the purpose;
4. Non-Stock Corporation: When
approved by 2/3 of the members in a
meeting called for the purpose.
When may a group of debtors file a petition
for rehabilitation?
1. When one of more of its members
foresee the impossibility of meeting
debts when they respectively fall due;
and
2. When the financial distress would likely
adversely affect the financial condition
and/or operations of the other
members of the group, and/or the
participation of the other members of
the group is essential under the terms
and conditions of the Rehabilitation
Plan.
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The debtor must file a verified petition for
rehabilitation with the court, to establish:
1. The insolvency of the debtor; and
2. The viability of the rehabilitation.
2. Involuntary
Involuntary Rehabilitation — Refers to
proceedings initiated by the creditor(s) [Secs.
13 and 14].
Value Requirement for Creditors
The claim(s), or aggregate thereof, must
amount to at least Php 1 million or at least 25%
of the subscribed capital stock or partners’
contributions, whichever is higher.
Circumstances for Involuntary
Rehabilitation
There is no genuine issue of fact or law on the
claims of the creditors; and –
1. That the due and demandable
payments have not been made for at
least 60 days; or
2. The debtor has failed generally to meet
its liabilities as they fall due (illiquidity);
or
3. At least one creditor, other than the
petitioner(s), has initiated foreclosure
proceedings against the debtor that will
prevent the debtor from paying its
debts as they become due or will
render it insolvent.
Restructuring of both secured and
unsecured claims is possible
Condition: subject to the non-diminution of
rights of secured creditors.
Claims of Creditors and Shareholders are
Placed into Separate Classes for Purposes
of Voting and Treatment Under the Plan or
Scheme
Classes of Creditors Include:
1. Secured Creditors
2. Unsecured Creditors
3. Trade Creditors and Suppliers; and
4. Employees of the debtor
The establishment of the classes of voting
creditors are indicated in the rehabilitation plan
SPECIAL COMMERCIAL LAWS
● Classification of creditors is important
because the treatment or voting
requirements for particular process
under the FRIA depend on groups of
certain creditors.
b. Commencement Order (including
stay order)
If the petition for rehabilitation is deficient in
form and substance, the court may give a
reasonable period to amend or supplement the
petition. If such deficiency is not complied with,
the court may dismiss the petition.
If the petition for rehabilitation is sufficient in
form and substance, it shall issue a
Commencement Order within five (5) working
days from the filing of the petition.
The rehabilitation proceedings shall
commence upon the issuance of the
Commencement Order.
1. Contents of the Commencement Order
a. Identifies the debtor, its principal
business and principal place of
business;
b. Summarize the grounds for initiating
proceedings;
c. States the legal effects of the Order;
d. Declares the debtor is under
rehabilitation;
e. Directs the publication of the
Commencement Order;
f. Directs service by personal delivery of
a copy of the petition to the creditor or
to the debtor (not the petitioner);
g. Appoints a rehabilitation receiver;
h. Summarizes the requirements and
deadlines for creditors to establish
their claims against the debtor;
i. Directs the BIR to file and serve its
comment or opposition;
j. Prohibits the debtor’s suppliers from
withholding the supply of goods and
services in the ordinary course of
business for as long as the debtor
makes payments for services/goods
supplied after issuance of the Order;
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k. Authorizes the payment of
administrative expenses;
l. Sets the case for initial hearing;
m. Makes available copies of the petition
and Rehabilitation Plan for examination
and copying by any interested party;
n. Indicates the location(s) at which
documents may be reviewed and
copied;
o. States that any creditor or debtor, not
the petitioner, may submit the name or
nominate any other qualified person to
the position of rehabilitation receiver;
p. Includes a Stay or Suspension Order
[Sec. 16].
2. Effects of the Commencement Order
In addition to the effects of a Stay or
Suspension Order:
a. Vests the rehabilitation receiver with
all the powers and functions provided
for this Act, subject to the approval by
the court of the performance bond filed
by the rehabilitation receiver;
b. Prohibits or otherwise serves as the
legal basis rendering null and void the
results of any attempt to collect or
enforce a claim against the debtor
after the commencement date, unless
otherwise allowed under the FRIA;
c. Serves as the legal basis for rendering
null and void any setoff after the
commencement date of any debt owed
to the debtor by any of the debtor's
creditors;
d. Serves as the legal basis for rendering
null and void the perfection of any lien
against the debtor's property, after the
commencement date; and
e. Consolidates the resolution of all legal
proceedings by and against the
debtor to the court; however, the court
may allow the continuation of cases on
other courts where the debtor had
initiated the suit [Sec. 17].
3. Effectivity and Duration of the
Commencement Order
Unless lifted by the court, the Commencement
Order shall be effective for the duration of the
SPECIAL COMMERCIAL LAWS
rehabilitation proceedings for as long as there
is a substantial likelihood that the debtor will be
successfully rehabilitated [Sec. 21].
4. Minimum Requirements for
Substantial Likelihood
a. The proposed Rehabilitation Plan
complies with the minimum contents
prescribed by the FRIA;
b. There is sufficient monitoring by the
rehabilitation receiver of the debtor's
business for the protection of creditors;
c. The debtor has met with its creditors to
the extent reasonably possible in
attempts to reach consensus on the
proposed Rehabilitation Plan;
d. The rehabilitation receiver submits a
report, based on preliminary
evaluation, stating that the underlying
assumptions and the goals stated in
the petitioner's Rehabilitation Plan are
realistic, feasible and reasonable or if
not, there is, in any case, a substantial
likelihood for the debtor to be
successfully rehabilitated because,
among others:
a. There are sufficient assets
with which to rehabilitate the
debtor;
b. There is sufficient cash flow
to maintain the operations of
the debtor;
c. The debtor's, partners,
stockholders, directors and
officers have been acting in
good faith and which due
diligence;
d. The petition is not a sham
filing intended only to delay
the enforcement of the rights of
the creditors or of any group of
creditors; and
e. The debtor would likely be able
to pursue a viable
Rehabilitation Plan;
e. The petition, the Rehabilitation Plan
and the attachments thereto do not
contain any materially false or
misleading statement;
f. If the petitioner is the debtor, that the
debtor has met with its creditor/s
representing at least three-fourths (3/4)
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of its total obligations to the extent
reasonably possible and made a good
faith effort to reach a consensus on
the proposed Rehabilitation Plan; or if
the petitioner/s is/are a creditor or
group of creditors, that/ the petitioner/s
has/have met with the debtor and
made a good faith effort to reach a
consensus on the proposed
Rehabilitation Plan; and
g. The debtor has not committed acts of
misrepresentation or in fraud of its
creditor/s or a group of creditors.
c. Stay or Suspension Order
Effects
Stay And Suspension Order – An order
included in the Commencement Order that has
the following effects:
a. Suspending all actions or proceedings,
in court or otherwise, for the
enforcement of claims against the
debtor;
b. Suspending all actions to enforce any
judgment, attachment or provisional
remedies against the debtor;
c. Prohibiting the debtor from selling,
encumbering, transferring, or disposing
in any manner any of its properties
except in the ordinary course of
business; and
d. Prohibiting the debtor from making any
payment of its liabilities outstanding as
of the commencement date except as
may be provided herein [Sec. 16].
Exceptions to the Stay or Suspension
Order
a. Cases already pending appeal in the
Supreme Court as of commencement
date Provided, That any final and
executory judgment arising from such
appeal shall be referred to the court for
appropriate action;
b. Subject to the discretion of the court,
cases pending or filed at a specialized
court or quasi-judicial agency which,
upon determination by the court is
capable of resolving the claim more
quickly, fairly and efficiently than the
SPECIAL COMMERCIAL LAWS
court: Provided, that any final and
executory judgment of such court or
agency shall be referred to the court
and shall be treated as a non- disputed
claim;
c. Enforcement of claims against sureties
and other persons solidarily liable with
the debtor, and third party or
accommodation mortgagors as well as
issuers of letters of credit, unless the
property subject of the third party or
accommodation mortgage is
necessary for the rehabilitation of the
debtor as determined by the court upon
recommendation by the rehabilitation
receiver;
d. Any form of action of customers or
clients of a securities market
participant to recover or otherwise
claim moneys and securities entrusted
to the latter in the ordinary course of the
latter's business as well as any action
of such securities market participant or
the appropriate regulatory agency or
self-regulatory organization to pay or
settle such claims or liabilities;
e. Actions of a licensed broker or dealer
to sell pledged securities of a debtor
pursuant to a securities pledge or
margin agreement for the settlement of
securities transactions in accordance
with the provisions of the Securities
Regulation Code and its implementing
rules and regulations;
f. Clearing and settlement of financial
transactions through the facilities of a
clearing agency or similar entities duly
authorized, registered and/or
recognized by the appropriate
regulatory agency like the BSP and the
SEC as well as any form of actions of
such agencies or entities to reimburse
themselves for any transactions settled
for the debtor; and
g. Criminal action against individual
debtor or owner, partner, director, or
officer of a debtor [Sec. 18].
Application of Stay or Suspension Order
in Foreign Countries
The FRIA and the Financial Rehabilitation
Rules of Procedure are silent as to whether
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such a stay or moratorium will apply outside the
Philippines.
However, the FR Rules provide that a
commencement order for rehabilitation
proceedings shall direct the petitioner to serve
copies of the order to foreign creditors at their
foreign addresses so that they will receive the
order at least 15 days before the initial hearing.
Liability of directors for wrongful or
insolvent trading restrictions
Directors and officers of a debtor will be liable
for double the value of the property sold,
embezzled or disposed of or double the
amount of the transaction involved, whichever
is higher to be recovered for the benefit of the
debtor and the creditors, if they, having notice
of the commencement of the proceedings, or
having reason to believe that proceedings are
about to be commenced, or in contemplation of
the proceedings, willfully commit the following
acts:
a. Dispose or cause to be disposed of any
property of the debtor other than in the
ordinary course of business, or
authorize or approve any transaction in
fraud of creditors or in a manner
grossly disadvantageous to the debtor
and/or creditor
b. Conceal or authorize or approve the
concealment, from the creditors, or
embezzle or misappropriate, any
property of the debtor [Sec. 10].
Criminal liability may also result if it is shown
that this prohibition was knowingly violated
[Sec. 145].
Prior transactions
Any transaction involving the debtor's funds or
assets occurring prior to the commencement of
the proceedings/issuance of the liquidation
order, which was executed with intent to
defraud a creditor or that constitutes undue
preference of creditors, may be the subject of
rescission [Sec. 58].
SPECIAL COMMERCIAL LAWS
d. Rehabilitation receiver
Rehabilitation Receiver – Any qualified
person, natural or juridical, may serve as a
receiver [Sec. 28].
If the receiver is a juridical entity, he must
designate a natural person as a representative.
Such representative must possess all the
qualifications and none of the disqualification
1. Qualifications
a. Citizen or resident for at least six (6)
months immediately prior to
nomination;
b. Of good moral character and with
acknowledged integrity, impartiality
and independence;
c. Has the requisite knowledge of
insolvency and other relevant
commercial laws, rules and
procedures, as well as the relevant
training and/or experience that may be
necessary to enable him to properly
discharge the duties and obligations of
a receiver; and
d. Has no conflict of interest [Sec. 29].
2. Conflicts of Interest
Test: An individual is deemed to have a conflict
of interest if he is so situated as to be materially
influenced in the exercise of his judgment for or
against any party to the proceedings [Sec. 40].
An individual may have a conflict of interest if:
a. He is a creditor, owner, partner or
stockholder of the debtor;
b. He is engaged in a line of business
which competes with that of the debtor;
c. He is, or was, within five (5) years from
the filing of the petition, a director,
officer, owner, partner or employee of
the debtor or any of the creditors, or the
auditor or accountant of the debtor;
d. He is, or was, within two (2) years from
the filing of the petition, an underwriter
of the outstanding securities of the
debtor;
e. He is related by consanguinity or
affinity within the fourth civil degree to
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any individual creditor, owners of a sole
proprietorship-debtor, partners of a
partnership- debtor or to any
stockholder, director, officer, employee
or underwriter of a corporation-debtor;
or
f. He has any other direct or indirect
material interest in the debtor or any of
the creditors [Sec. 40].
3. Principal Duties
a. Preserving and maximizing the value of
the assets of the debtor during the
rehabilitation proceedings;
b. Determining the viability of the
rehabilitation of the debtor;
c. Preparing and recommending a
Rehabilitation Plan; and
d. Implementing the approved
Rehabilitation Plan [Sec. 31].
4. Management
Unless otherwise provided, the management of
the debtor remains with the existing
management, subject to laws and agreements,
if any, on election or appointment of directors,
managers, or managing partner [Sec. 47].
The debtor retains control of its business and
properties, subject only to monitoring by the
receiver. This is referred to as the principle of
debtor–in–possession or debtor–in–place
[Umale v. ASB Realty, G.R. No. 181126
(2011)].
Exceptions: The following are subject to the
approval of the receiver or the court:
a. Disbursements affecting title or interest
in the property;
b. Payments affecting title or interest in
property;
c. Sale, disposal, assignment, transfer or
encumbrance of property; or
d. Any other act affecting title or interest
in property [Sec. 47].
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5. Immunity from Suit
The receiver, the management committee, and
all persons they engage are not subject to any
action, claim or demand for any act or omission
in good faith in the exercise of their powers and
functions [Sec. 41].
6. Report of the Receiver
Within 40 days from the initial hearing, the
receiver shall submit a report to the court on
whether:
a. The debtor is insolvent, and if so, the
causes thereof; and
b. There is any unlawful or irregular act(s)
committed by the management of the
debtor in contemplation of the
insolvency or which may have
contributed to the insolvency;
c. The assumptions, goals and
procedures of the Rehabilitation Plan
are realistic, feasible and reasonable;
d. There is a substantial likelihood of
successful rehabilitation;
e. The petition should be dismissed; and
f. The debtor should be dissolved and/or
liquidated.
7. Removal
The receiver may be removed at any time by
the court, either by (1) motu propio or (2)
motion by any creditor(s) holding more than
50% of the total obligations of the creditor, on
the following grounds:
a. Incompetence, gross negligence,
failure to perform or failure to exercise
the proper degree of care in the
performance of his duties and powers;
b. Lack of particular or specialized
competency required by the specific
case;
c. Illegal acts or conduct in the
performance of his duties and powers;
d. Lack or qualification or presence of any
disqualification;
e. Conflict of interest that arises after his
appointment; and
f. Manifest lack of independence that is
detrimental to the general body of the
stakeholders [Sec. 32].
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The Implementing Rules add the following
grounds for removal:
1. Failure, without just cause, to perform
any of the powers and functions under
the Rules; or
2. Any of the grounds for removing a
trustee under the general principles for
trusts [FR Rules, Rule 2, Sec. 27].
e. Management committee
Management Committee – Upon motion of
any interested party, the court may appoint
either (1) the rehabilitation receiver or (2) a
management committee to assume the
management of the debt [Sec. 36].
1. Grounds
There must be clear and convincing evidence
of any of the following circumstances:
a. Actual or imminent danger of
dissipation, loss, waste or destruction
of the debtor’s assets or other
properties;
b. Paralyzation of the business
operations of the debtor; or
c. Gross mismanagement of the debtor,
or fraud or other wrongful conduct, or
gross or willful violation of the FRIA
[Sec. 36].
b. Composition
Three qualified members appointed as follows:
1. The first member shall be appointed by
the debtor;
2. The second member shall be
appointed by the creditor(s) holding
more than 50% of the total obligations
of the debtor; and
3. The third member shall be appointed
by the first and second members within
10 days from the appointment.
In case of failure to nominate, the court shall
appoint the member(s) concerned. In case the
decision to appoint a management committee
is due to the third ground (mismanagement,
etc.), the court shall appoint the first member.
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f. Determination of claims
The rules on the determination of claims are as
follows:
1. Within 20 days from assuming office,
the liquidator shall prepare a
preliminary registry of claims.
2. Secured creditors who have waived
their security or have fixed the value of
the property subject of the security
shall be considered unsecured.
3. The registry shall be available for
public inspection and publication notice
shall be provided to stakeholders [Sec.
123].
4. The debtor and the creditor have the
right to set off their debts against each
other; only the balance, if any, shall be
allowed in the proceedings [Sec. 124].
5. Within 30 days from expiration of the
period for filing of applications for
recognition of claims, interested parties
may challenge claims to the court.
6. Upon the expiration of the 30-day
period, the liquidator shall submit the
registry of claims containing the claims
not subject to challenge. Such claims
shall become final upon filing of the
register.
7. Claims that have become final may be
set aside only on grounds of fraud,
accident, mistake or inexcusable
neglect [Sec. 125].
8. The liquidator shall submit disputed
claims to court for final approval [Sec.
126].
g. Rehabilitation Plan
Rehabilitation Plan - a plan by which the
financial well- being and viability of an insolvent
debtor can restore using various means
including, but not limited to:
1. Debt Forgiveness: Condoning and/or
waiving the claims;
2. Debt Rescheduling: Extending the
time to pay the claim;
3. Reorganization or Quasi-
Reorganization: Changing the equity,
corporate or operating structure of the
debtor;
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4. Dacion en Pago: Assigning property
and assets as payment for certain
claims;
5. Debt to Equity Conversion: The
issuance of equity and/or ownership
interests as payment for certain claims;
6. Sale of the Business (or parts of it) as
a going concern;
7. Setting up of new business entities;
or
8. Other similar arrangements as may
be approved by the court or the
creditors [Sec. 4(ii); Somera].
1. Contents
1. Underlying assumptions, financial
goals and procedures proposed to
accomplish such goals;
2. Comparison of amounts expected to be
received by the creditors under the
Rehabilitation Plan with those that they
will receive if liquidation ensues within
the next 120 days;
3. Information sufficient to give the
various classes of creditors a
reasonable basis for determining
whether supporting the Plan is in their
financial interest when compared to the
immediate liquidation of the debtor;
4. Classes of voting creditors;
5. Subclasses of voting creditors if prior
approval has been granted by the
court;
6. How the insolvent debtor will be
rehabilitated;
7. Treatment of each class or subclass of
voting creditors
8. Provision for equal treatment of all
claims within the same class or
subclass, unless a particular creditor
voluntarily agrees to less favorable
treatment;
9. Ensure that the payments made under
the plan follow the priority established
under the provisions of the Civil Code
on concurrence and preference of
credits and other applicable laws;
10. Maintenance of the security interest of
secured creditors and preserve the
liquidation value of the security unless
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such has been waived or modified
voluntarily;
11. Disclosure of all payments to creditors
for pre-commencement debts made
during the proceedings and the
justifications thereof;
12. Description of the disputed claims and
the provisioning of funds to account for
appropriate payments should the claim
be ruled valid or its amount adjusted;
13. Identification of the debtor’s role in the
implementation of the Plan;
14. Statement of any rehabilitation
covenants of the debtor, the breach of
which shall be considered a material
breach of the Plan;
15. Identification of those responsible for
the future management of the debtor
and the supervision and
implementation of the Plan, their
affiliation with the debtor and their
remuneration;
16. Treatment of claims arising after the
confirmation of the Rehabilitation Plan;
17. Requirement to the debtor and its
counter-parties to adhere to the terms
of all contracts that the debtor has
chosen to confirm;
18. Arrangement for the payment of all
outstanding administrative expenses
as a condition to the Plan’s approval
unless such condition has been waived
in writing by the creditors concerned;
19. Arrangement for the payment of all
outstanding taxes and assessments, or
an adjusted amount pursuant to a
compromise settlement with the BIR or
other applicable tax authorities;
20. Certified copy of a certificate of tax
clearance or evidence of a compromise
settlement with the BIR;
21. Valid and binding resolution of a
meeting of the debtor’s stockholders to
increase the shares by the required
amount in cases where the Plan
contemplates an additional issuance of
shares by the debtor;
22. Compensation and status, if any, of the
rehabilitation receiver after the
approval of the Plan; and
23. Provisions for conciliation and/or
mediation as a prerequisite to court
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assistance or intervention in the event
of any disagreement in the
interpretation or implementation of the
Rehabilitation Plan.
2. Important Requirements
1. Economic Feasibility
2. Present Value Recovery [Sec. 4(gg)].
Economic Feasibility - A rehabilitation is
feasible if:
1. The debtor has assets that can
generate more cash if used in its daily
operations than if sold;
2. Liquidity issues can be addressed by a
practicable business plan that will
generate enough cash to sustain daily
operations;
3. Debtor has a definite source of
financing to properly implement the
Rehabilitation Plan [Wonder Book
Corp. v. Philippine Bank of
Communications, G.R. 187316
(2012)].
The Rehabilitation Plan must contain such
relevant information to enable a reasonable
investor to make an informed decision on the
feasibility of the Plan [FR Rules, Rule 2, Sec.
61(BB)].
Note: Findings as to whether the assumptions,
goals and procedures of the Rehabilitation
Plan are realistic, feasible and reasonable are
also part of the Report of the Rehabilitation
Receiver [Sec. 24].
Present Value Recovery - The restoration of
the insolvent debtor to a condition of successful
operation and solvency must result in better
present value recovery for the creditors
If either one condition is not present, then the
recourse shall be liquidation, not rehabilitation
[Somera].
SPECIAL COMMERCIAL LAWS
3. Compliance with the FRI and FR Rules
This includes, among others:
Material Financial Commitments
The Rehabilitation Plan, shall “include material
financial undertakings or commitments to
support [it]” [FR Rules, Rule 2, Sec.61 (Y)].
A material financial commitment becomes
significant in gauging the resolve,
determination, earnestness and good faith of
the distressed corporation in financing the
proposed rehabilitation plan.
This commitment may include the voluntary
undertakings of the stockholders or the
would-be investors of the debtor-corporation
indicating their readiness, willingness and
ability to contribute funds or property to
guarantee the continued successful
operation of the debtor corporation during
the period of rehabilitation [Philippine Bank
of Communications v. Basic Polyprinters and
Packaging Corporation, G.R. No. 187581
(2014)].
Where the only proposed source of revenue
the Rehabilitation Plan suggests is the capital
which would come from potential investors,
with whom negotiations are merely pending,
such Plan is bereft of any material financial
commitment which would inspire confidence
that the rehabilitation would turn out to be
successful [BPI Family Savings Bank, Inc. v.
St. Michael Medical Center, Inc., G.R. 205469
(2015)].
[T]he conversion of all deposits for future
subscriptions to common stock and the
treatment of all payables to officers and
stockholders as trade payables was hardly
constituting material financial commitments.
Such “conversion” of cash advances to trade
payables was, in fact, a mere re-classification
of the liability entry and had no effect on the
shareholders’ deficit [Wonder Book
Corporation v. Philippine Bank of
Communications, G.R. No. 187316 (2012)].
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Liquidation Analysis
As one of the required contents of a
Rehabilitation Plan, a liquidation analysis sets
out for each creditor or each class of creditor,
as applicable, the amounts they expect to
receive under the Rehabilitation Plan and
those that they will receive if liquidation
ensues within one hundred twenty (120) days
after the filing of the petition [FR Rules, Rule 2,
Sec. 61 (B)].
The total liquidation assets and the estimated
liquidation return to the creditors, as well as the
fair market value vis-a-vis the forced liquidation
value of the fixed assets was not shown. As
such, the Court could not ascertain if the
petitioning debtor's creditors can recover by
way of the present value of payments projected
in the plan, more if the debtor continues as a
going concern than if it is immediately
liquidated [Philippine Asset Growth Two, Inc. v.
Fastech Synergy Phils. Inc., G.R. 206528
(2016)].
Effect: The failure of the Rehabilitation Plan to
state any material financial commitment to
support rehabilitation, as well as to include a
liquidation analysis, renders the CA's
considerations for approving the same as
actually unsubstantiated, and hence,
insufficient to decree the feasibility of
respondents' rehabilitation. It is well to
emphasize that the remedy of rehabilitation
should be denied to corporations that do not
qualify under the Rules. Neither should it be
allowed to corporations whose sole purpose is
to delay the enforcement of any of the rights of
the creditors [Ibid].
h. Creditor approval and confirmation
Approval of the Rehabilitation Plan
The receiver shall notify the stakeholders that
the Plan is ready for examination. Within 20
days from notification, the receiver shall
convene the creditors to vote on the Plan.
The Plan must be approved by all classes of
creditors whose rights are adversely modified
or affected. Otherwise, it is deemed rejected.
The Plan is approved by a class of creditors if
SPECIAL COMMERCIAL LAWS
members of the said class holding more than
50% of the total claims of the class vote in favor
of the Plan [Sec. 64].
If the Plan is approved, the receiver shall
submit the same to the court for confirmation.
Objections to the Rehabilitation Plan
The creditor may file an objection to the Plan
within 20 days from receipt of notice that it has
been submitted for confirmation.
Objections are limited to the following:
1. The creditors’ support was induced by
fraud;
2. The documents or data relied upon in
the Plan are materially false or
misleading;
3. The Plan is in fact not supported by the
voting creditors [Sec. 66].
If upon hearing, the court finds merit in the
objections, it should order the curing of the
defect.
If the court determines the debtor acted in bad
faith, or that it is not possible to cure the defect,
the court shall convert the proceedings into one
for liquidation.
Confirmation of the Rehabilitation Plan
Confirmation has the following effects:
1. The Plan and its provisions shall be
binding upon the debtor and all
persons who may be affected by it;
2. The debtor shall comply with the
provisions of the Plan and shall take all
actions necessary to carry out the Plan;
3. Payments shall be made to the
creditors in accordance with the
provisions of the Plan;
4. Contracts and other arrangements
between the debtor and its creditors
shall be interpreted as continuing to
apply to the extent that they do not
conflict with the provisions of the
Rehabilitation Plan;
5. Any compromises on amounts or
rescheduling of timing of payments by
the debtor shall be binding on creditors
regardless of whether the Plan is
successfully implemented; and
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6. Claims arising after approval of the
Plan that are otherwise not treated by
the Plan are not subject to any
Suspension Order [Sec. 69].
The court has a maximum period of one year
from the date of filing to confirm a
Rehabilitation Plan. If no Rehabilitation Plan is
confirmed, the proceedings may be converted
into one for liquidation [Sec. 72].
i. Failure of rehabilitation
There is failure of rehabilitation in the following
cases:
1. Dismissal of the petition by the court;
2. The debtor fails to submit a
Rehabilitation Plan;
3. Under the Rehabilitation Plan
submitted by the debtor, there is no
substantial likelihood that the debtor
can be rehabilitated within a
reasonable period;
4. The Rehabilitation Plan or its
amendment is approved by the court
but in the implementation thereof, the
debtor fails to perform its obligations
thereunder, or there is a failure to
realize the objectives, targets or goals
set forth therein, including the timelines
and conditions for the settlement of the
obligations due to the creditors and
other claimants;
5. The commission of fraud in securing
the approval of the Rehabilitation Plan
or its amendment; and
6. Other analogous circumstances as
may be defined by the rules of
procedure [Sec. 74].
If there is a showing that the rehabilitation of
the insolvent debtor is no longer economically
feasible or does not provide better present
value recovery for the creditors, rehabilitation
may be converted into liquidation [Somera].
SPECIAL COMMERCIAL LAWS
2. Pre-negotiated rehabilitation
Pre-Negotiated Rehabilitation — An
insolvency proceeding involving a pre-
negotiated Rehabilitation Plan between the
debtor and the creditor(s). It commences as an
extrajudicial proceeding but terminates as a
judicial proceeding [Somera].
a. How Initiated; Requirements for
Petition
How Initiated
An insolvent debtor, either by itself or jointly
with any of its creditors, may file a verified
petition for approval of the Pre-Negotiated
Rehabilitation Plan that complies with the
following:
● Approval of creditors holding at least
2/3 of the total liabilities of the debtor,
including –
1. Secured creditors holding more
than 50% of the total secured
claims; and
2. Unsecured creditors holding
more than 50% of the total
unsecured claims [Sec. 76].
Within five working days, and after
determination that the petition is sufficient in
form and substance, the court shall issue an
Order [Sec. 77].
Requirements for Petition
The petition shall include, as a minimum:
1. schedule of the debtor’s debts and
liabilities;
2. an inventory of the debtor’s assets;
3. the pre-negotiated Rehabilitation Plan,
including the names of at least 3
nominees for rehabilitation receiver;
and
4. a summary of disputed claims against
the debtor and a report on the
provisioning of funds to account for
appropriate payments should any such
claims be ruled valid or their amounts
adjusted [Sec. 76].
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b. Objections to the Petition or
Rehabilitation Plan
Any creditor or other interested party may
submit a verified objection to the petition or the
Rehabilitation Plan. The objections shall be
limited to the following:
1. The allegations in the petition or the
Rehabilitation Plan, or the attachments
thereto, are materially false or
misleading;
2. The majority of any class of creditors
do not in fact support the Rehabilitation
Plan;
3. The Rehabilitation Plan fails to
accurately account for a claim against
the debtor and the claim is not
categorically declared as a contested
claim; or
4. The support of the creditors, or any of
them, was induced by fraud [Sec. 79].
c. Period and Effect of Approval of the
Plan
Period of Approval of the Plan
Within 10 days from the date of the second
publication of the Order, the court shall
approve the Rehabilitation Plan unless an
objection is submitted.
The court has a maximum period of 120 days
from the date of the filing of the petition to
approve the Rehabilitation Plan. If the court
fails to act within the same period, the Plan
shall be deemed approved.
Effect of the Approval of the Plan
Approval of a Plan has the same legal effect
as confirmation of a Plan in Court-
Supervised Rehabilitation. It also results in a
cram down, as it binds not only the debtor but
also all persons affected by it.
SPECIAL COMMERCIAL LAWS
3. Out-of-Court or Informal
Restructuring Agreement or
Rehabilitation Plan
Out-of-Court Rehabilitation — An
extrajudicial insolvency proceeding of an Out-
of-Court or Informal Restructuring Agreement
(OCRA), or a restructuring of the claims
negotiated between the debtor and the
creditor(s). No petitions are filed with the court,
though the debtor and/or the creditor may seek
court assistance in implementation.
In an OCRA, the debtor remains in possession
of the continuation of incumbent management
control.
Pending negotiation and finalization of the
OCRA, there may be a standstill period that
allows the debtor not to pay liabilities as they
fall due and prevents creditors from enforcing
their claims [Somera].
a. Minimum requirements
1. The debtor must agree to the out-of-
court or informal restructuring/ workout
agreement or Rehabilitation Plan;
2. It must be approved by creditors
representing at least 67% of the
secured obligations;
3. It must be approved by creditors
representing at least 75% of the
unsecured obligations;
4. It must be approved by creditors
holding at least 85% of the total
liabilities, secured or unsecured, of the
debtor [Sec. 84].
b. Standstill period/agreement
This refers to the period agreed upon by the
debtor and its creditors to enable them to
negotiate and enter into an out-of-court or
informal restructuring/workout agreement or
rehabilitation plan. It may include provisions
identical with or similar to the legal effects of a
commencement order [Financial Rehabilitation
Rules, Rule 1, Sec. 5(q)].
The standstill period/agreement is effective
and enforceable not only against contracting
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parties but also against other creditors,
provided that:
1. Such agreement is approved by
creditors representing more than 50%
of the total liabilities of the debtor;
2. Notice of the standstill agreement is
published in a newspaper of general
circulation in the Philippines once a
week for 2 consecutive weeks;
3. The standstill period does not exceed
120 days from the date of effectivity.
The notice must invite creditors to participate in
the negotiation for the OCRA and inform them
that the agreement would bind all creditors if
the minimum vote requirements were met [Sec.
85].
c. Effects of the OCRA
1. Results in a cram down, binding not
only the debtor but also all persons
affected;
2. Any proceedings arising or relating to
the OCRA shall not stay its
implementation unless the relevant
party secures a TRO or injunctive relief
from the Court of Appeals.
d. Cram down effect
Cram Down Effect – Notwithstanding the
rejection of the creditors of the Rehabilitation
Plan, the court may nonetheless confirm the
Rehabilitation Plan in what is known as a cram
down.
The effect of the cram down is to bind the
debtor and all persons who may be affected,
whether or not they participated in the
proceedings or opposed the plan.
A cram down is permitted only if all of the
following circumstances are present:
1. The Rehabilitation Plan complies with
the requirements specified in the FRIA;
2. The receiver recommends confirmation
of the Rehabilitation Plan;
3. The shareholders, owners or partners
of the debtor lost at least their
controlling interest as a result of the
Rehabilitation Plan; and
SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
4. The Rehabilitation Plan would likely Proceedings that may be Availed of vis-à-
provide the objecting class or creditors vis Type of Debtor
with compensation which has a net
Debtor Proceeding Requisites
present value greater than that which
they would have received if the debtor Individual Suspension Possesses
were under liquidation [Sec. 64]. of sufficient
Payments property to
e. Annulment of the OCRA/Standstill cover debts but
Agreement foresees the
impossibility of
The debtor or creditor may file a petition to meeting them
annul based only on the following grounds: as they fall due
(illiquid)
1. Non-compliance with the requirements
for a standstill agreement or an OCRA Voluntary Properties are
under the FRIA or the implementing not sufficient to
rules; or cover liabilities;
2. Vitiation of consent due to fraud, and
intimidation or violence if committed Owing debts
against such number of creditors exceeding Php
required to approve the OCRA or the 500,000
standstill agreement [FR Rules, Rule 4,
Sec. 11]. Involuntary 1. Creditor(s)
have claim(s)
C. Liquidation aggregating at
least Php
500,000; and
Liquidation – a judicial insolvency proceeding
by which the debtor’s assets are reduced and
2. An act of
converted to cash in order to discharge the
claims against the debtor [Secs. 119 and 131; insolvency
alleged in the
Somera].
petition
The concept of liquidation is thus diametrically
Juridical Voluntary Insolvent: Either
opposed to that of rehabilitation, and both
unable to pay
cannot be undertaken at the same time
liabilities as they
[Philippine Veterans Bank Employees Union-
fall due or
NUBE v. Vega, G.R. No. 105364 (2001)].
assets are
insufficient to
Kinds of Debtors [Sec. 4] pay for liabilities

Involuntary 1. At least three

Individual A natural person who is a creditors; and
resident and citizen of the
Philippines 2. With
aggregate
Juridical A partnership registered with
claims at least
the SEC, or a corporation duly
either Php
registered and existing under
1,000,000 or at
Philippine laws
least 25% of
subscribed
capital stock or

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partner’s
contributions,
whichever is
higher
1. Voluntary liquidation vs.
involuntary liquidation vs.
conversion
Types of Liquidation Proceedings
Voluntary liquidation proceedings
instituted by the debtor
Involuntary liquidation proceedings
Instituted by a creditor or a
group of creditors;
Conversion When the court-supervised
or pre-negotiated
rehabilitation proceeding is
converted by the court into
liquidation proceedings
2. Procedure
a. Conversion of rehabilitation to
liquidation proceedings
Under the FRIA, court-supervised or pre-
negotiated rehabilitation proceedings may be
converted in the following instances:
1. Within 10 days from receipt of the
receiver’s report, a court finding that
the debtor is insolvent and there is no
substantial likelihood of substantial
rehabilitation [Sec. 25(c)];
2. If no Rehabilitation Plan is confirmed
within 1 year from filing the petition to
confirm the Plan [Sec. 72];
3. If termination is due to failure or
rehabilitation or dismissal of the
petition for reasons other than
technical grounds [Sec. 75]; or
4. Upon motion filed by the insolvent
debtor for conversion into liquidation
proceedings [Sec. 90].
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b. Liquidation order; effects
Liquidation Order
Liquidation Order – Such order results in the
dissolution of a juridical debtor, however, the
individual debtor is only discharged upon
termination of the proceedings [Somera].
Contents of Liquidation Order
The Liquidation Order shall:
1. Declare the debtor insolvent;
2. Order the liquidation of the debtor and,
in the case of a juridical debtor, declare
it as dissolved;
3. Order the sheriff to take possession
and control of all the property of the
debtor, except those that may be
exempt from execution;
4. Order the publication of the petition or
motion in a newspaper of general
circulation once a week for two (2)
consecutive weeks;
5. Direct payments of any claims and
conveyance of any property due the
debtor to the liquidator;
6. Prohibit payments by the debtor and
the transfer of any property by the
debtor;
7. Direct all creditors to file their claims
with the liquidator within the period set
by the rules of procedure;
8. Authorize the payment of
administrative expenses as they
become due;
9. State that the debtor and creditors who
are not petitioner/s may submit the
names of other nominees to the
position of liquidator; and
10. Set the case for hearing for the election
and appointment of the liquidator,
which date shall not be less than thirty
(30) days nor more than forty-five (45)
days from the date of the last
publication [Sec. 112].
Administrative expenses – consist of
reasonable and necessary expenses:
1. Incurred or arising from the filing of a
petition under the provisions of this act
2. Arising from, or in connection with, the
conduct of the proceedings under this
act, including those incurred for the
SPECIAL COMMERCIAL LAWS
rehabilitation or liquidation of the
debtor
3. Incurred in the ordinary course of
business after the commencement
date
4. For the payment of new obligations
obtained after the commencement date
to finance the rehabilitation of the
debtor
5. Incurred for the fees of the
rehabilitation receiver or liquidator and
of the professionals engaged by them
6. That is otherwise authorized or
mandated under this act, or such other
expenses as may be allowed by the
Supreme Court in its rules
Rules on Preference of Credits
Under Article 110 of Republic Act No. 44 (as
amended) or the Labor Code of the Philippines,
workers enjoy first preference as regard to their
wages and other monetary claims in the event
of bankruptcy or liquidation of an employer's
business. Notwithstanding the provisions
under the Civil Code on the preference of
credits or any other provision of law to the
contrary, unpaid wages and monetary claims
will be paid in full before claims of the
government and other creditors may be paid.
Under Article 2247 of the Civil Code, duties,
taxes and fees due to the state or any
subdivision thereof pertaining to a specific
movable property enjoy absolute preference
over all other claims. Thereafter, if there are
two or more credits with respect to the same
specific movable property, they will be satisfied
pro rata.
Article 2241 of the Civil Code enumerates the
special preferred credits with respect to a
specific movable property, as follows:
1. Claims arising from misappropriation,
breach of trust or malfeasance by
public officials committed in the
performance of their duties, on the
movables, money or securities
obtained by them
2. Claims for the unpaid price of
movables sold, on said movables, so
long as they are in the possession of
the debtor, up to the value of the same;
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and if the movable has been resold by
the debtor and the price is still unpaid,
the lien may be enforced on the price;
this right is not lost by the
immobilization of the thing by
destination, provided it has not lost its
form, substance and identity; neither is
the right lost by the sale of the thing
together with other property for a lump
sum, when the price thereof can be
determined proportionally.
3. Credits guaranteed with a pledge so
long as the things pledged are in the
hands of the creditor, or those
guaranteed by a chattel mortgage,
upon the things pledged or mortgaged,
up to the value thereof
4. Credits for the making, repair,
safekeeping, or preservation of
personal property, on the movable thus
made, repaired, kept or possessed
5. Claims for laborers' wages on the
goods manufactured or the work done
6. For expenses of salvage, upon the
goods salvaged
7. Credits between the landlord and the
tenant, arising from the contract of
tenancy on shares, on the share of
each in the fruits or harvest
8. Credits for transportation, upon the
goods carried, for the price of the
contract and incidental expenses, until
their delivery and for 30 days thereafter
9. Credits for lodging and supplies,
usually furnished to travelers by hotel
keepers, on the movables belonging to
the guest as long as such movables are
in the hotel, but not for money loaned
to the guests
10. Credits for seeds and expenses for
cultivation and harvest advanced to the
debtor, upon the fruits harvested
11. Credits for rent for one year, upon the
personal property of the lessee existing
on the immovable leased and on the
fruits of the same, but not on money or
instruments of credit
12. Claims in favor of the depositor if the
depositary has wrongfully sold the
thing deposited, upon the price of the
sale
On the other hand, Article 2242 of the Civil
SPECIAL COMMERCIAL LAWS
Code enumerates the special preferred credits
with respect to an immovable property and real
rights, as follows:
1. Taxes due upon the land or building
2. For the unpaid price of real property
sold, upon the immovable sold
3. Claims of laborers, masons,
mechanics, and other workmen as well
as of architects, engineers and
contractors, engaged in the
construction, reconstruction or repair of
buildings, canals or other works, upon
said buildings, canals or other works
4. Claims of furnishers of materials used
in the construction, reconstruction or
repair of buildings, canals or other
works, upon said buildings, canals or
other works
5. Mortgage credits recorded in the
Registry of Property upon the real
estate mortgaged
6. Expenses for the preservation or
improvement of real property when the
law authorizes reimbursement, upon
the immovable preserved or improved
7. Credits annotated in the Registry of
Property, in virtue of a judicial order, by
attachments or executions, upon the
property affected, and only as to later
credits
8. Claims of co-heirs for warranty in the
partition of an immovable among them,
upon the real property thus divided
9. Claims of donors of real property for
pecuniary charges or other conditions
imposed upon the done, upon the
immovable donated
10. Credits of insurers, upon the property
insured, for the insurance premiums for
two years
Credits that do not enjoy any preference with
respect to specific property are satisfied in the
order established under Article 2244 of the Civil
Code, thus:
1. Proper funeral expenses for the debtor,
or children under their parental
authority who have no property of their
own, when approved by the court
2. Credits for services rendered the
insolvent by employees, laborers or
household helpers for one year
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preceding the commencement of the
proceedings in insolvency
3. Expenses during the last illness of the
debtor or of their spouse and children
under their parental authority, if they
have no property of their own
4. Compensation due to the laborers or
their dependents under laws providing
for indemnity for damages in cases of
labor accident, or illness resulting from
the nature of the employment
5. Credits and advancements made to the
debtor for supporting themselves and
their family during the last year
preceding the insolvency
6. Support during the insolvency
proceedings and for three months
thereafter
7. Fines and civil indemnification arising
from a criminal offense
8. Legal expenses, and expenses
incurred in the administration of the
insolvent's estate for the common
interest of the creditors, when properly
authorized and approved by the court
9. Taxes and assessments due to the
national government, other than those
mentioned in Articles 2241, No. 1, and
2242, No. 1
10. Taxes and assessments due to any
province, other than those referred to in
Articles 2241, No. 1, and 2242, No. 1
11. Taxes and assessments due to any city
or municipality, other than those
indicated in Articles 2241, No. 1, and
2242, No. 1
12. Damages for death or personal injuries
caused by a quasi-delict
13. Gifts due to public and private
institutions of charity or beneficence
14. Credits that, without special privilege,
appear in (a) a public instrument or (b)
in a final judgment, if they have been
the subject of litigation
Credits of any other kind of class
(nonpreferred, common credit) not included in
Articles 2241, 2242 and 2244 will not enjoy any
preference.
In satisfying several preferred credits
registered with the Register of Deeds, the rule
SPECIAL COMMERCIAL LAWS
is priority of credits in the order of the time of
registration. On the other hand, preferred
credits in Article 2244 (14) enjoy preference in
the order of priority of the dates of the
instruments and the judgments.
Effects of Liquidation Order
1. The juridical debtor shall be deemed
dissolved and its corporate or juridical
existence terminated;
2. Legal title to and control of all the
assets of the debtor, except those that
may be exempt from execution, shall
be deemed vested in the liquidator or,
pending his election or appointment,
with the court;
3. All contracts of the debtor shall be
deemed terminated and/or breached,
unless the liquidator, within ninety (90)
days from the date of his assumption of
office, declares otherwise and the
contracting party agrees;
4. No separate action for the collection of
an unsecured claim shall be allowed.
Such actions already pending will be
transferred to the Liquidator for him to
accept and settle or contest. If the
liquidator contests or disputes the
claim, the court shall allow, hear and
resolve such contest except when the
case is already on appeal. In such a
case, the suit may proceed to
judgment, and any final and executory
judgment therein for a claim against the
debtor shall be filed and allowed in
court; and
5. No foreclosure proceeding shall be
allowed for a period of one hundred
eighty (180) days.
3. Rights of Secured and Unsecured
Creditors
Creditor refers to natural or juridical persons
which have claims against the debtor that
arose on or before the commencement date
[Sec. 4].
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a. General Unsecured Creditors
General Unsecured Creditor refers to a
creditor whose claim or a portion thereof is
neither secured, preferred nor subordinated
under the FRIA.
General Rule: No separate action for the
collection of an unsecured claim shall be
allowed. Actions already pending will be
transferred to the liquidator.
Exception: When the action is already on
appeal, the suit may proceed to judgment, and
any final and executory judgment shall be filed
and allowed [Sec. 113].
b. Secured Creditors
Secured Creditor refers to a claim secured by
a lien, which is a statutory or contractual claim
or juridical charge on real or personal property
that legally entitles a creditor to resort to said
property for payment of the debt or claim
secured.
General Rule: Upon issuance of the
Liquidation Order, no foreclosure proceeding
shall be allowed for 180 days [Sec. 113].
Exception: However, the Liquidation Order
shall not affect the right of a secured creditor to
enforce his lien.
During the proceedings, a secured creditor
may:
1. Waive his right under the security or
lien, prove his claim in the liquidation
proceedings and share in the
distribution of the assets of the debtor;
or
2. Maintain his rights under the security or
lien.
If the secured creditor maintains his rights
under the security or lien:
1. The value of the property may be fixed
in a manner agreed upon by the
creditor and the liquidator.
If the value of the property is less than
the claim, the liquidator may convey
SPECIAL COMMERCIAL LAWS
the property to the secured creditor and
the latter will be admitted in the
liquidation proceedings as a creditor for
the balance.
If its value exceeds the claim secured,
the liquidator may convey the property
to the creditor and waive the debtor's
right of redemption upon receiving the
excess from the creditor.
2. The liquidator may sell the property
and satisfy the secured creditor's entire
claim from the proceeds of the sale; or
3. The secured creditor may enforce the
lien or foreclose on the property
pursuant to applicable laws [Sec. 114].
Is restructuring of both secured and
unsecured claims possible?
Yes. A liquidation order issued by a court will
not affect the right of a secured creditor to
enforce its lien, subject to the secured
creditor's waiver of rights under such lien to
prove its claim in the liquidation proceedings
and share in the distribution of the debtor's
assets.
4. Liquidator
Liquidator – Any qualified person, natural or
juridical, may serve as a receiver.
If the receiver is a juridical entity, he must
designate a natural person as a representative.
Such representative must possess all the
qualifications and none of the disqualifications.
a. Qualifications
The liquidator shall have the same
qualifications as that of rehabilitator, thus:
1. Citizen or resident for at least six (6)
months immediately prior to
nomination;
2. Of good moral character and with
acknowledged integrity, impartiality
and independence;
3. Has the requisite knowledge of
insolvency and other relevant
commercial laws, rules and
procedures, as well as the relevant
training and/or experience that may be
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necessary to enable him to properly
discharge the duties and obligations of
a receiver; and
4. Has no conflict of interest, which may
be waived by a party who may be
prejudiced [Sec. 29].
b. Powers, Duties and Responsibilities
Principal duty of the liquidator: to preserve
and maximize the value and recover the assets
of the debtor, with the end of liquidating them
and discharging all the claims against the
debtor.
The powers, duties and responsibilities of the
liquidator include:
1. To sue and recover all the assets,
debts and claims, belonging or due to
the debtor;
2. to take possession of all the property of
the debtor except property exempt by
law from execution;
3. To sell, with the approval of the court,
any property of the debtor which has
come into his possession or control;
4. To redeem all mortgages and pledges,
and so satisfy any judgment which may
be an encumbrance on any property
sold by him;
5. To settle all accounts between the
debtor and his creditors, subject to the
approval of the court;
6. To recover any property or its value,
fraudulently conveyed by the debtor;
7. To recommend to the court the creation
of a creditors' committee which will
assist him in the discharge of the
functions and which shall have powers
as the court deems just, reasonable
and necessary; and
8. Upon approval of the court, to engage
such professional as may be
necessary and reasonable to assist
him in the discharge of his duties.
SPECIAL COMMERCIAL LAWS
5. Determination of claims
a. Qualifications
1. Within 20 days from assuming office,
the liquidator shall prepare a
preliminary registry of claims.
2. Secured creditors who have waived
their security or have fixed the value of
the property subject of the security
shall be considered unsecured.
3. The registry shall be available for
public inspection and publication notice
shall be provided to stakeholders [Sec.
123].
4. The debtor and the creditor have the
right to set off their debts against each
other; only the balance, if any, shall be
allowed in the proceedings [Sec. 124].
5. Within 30 days from expiration of the
period for filing of applications for
recognition of claims, interested parties
may challenge claims to the court.
6. Upon the expiration of the 30-day
period, the liquidator shall submit the
registry of claims containing the claims
not subject to challenge. Such claims
shall become final upon filing of the
register.
7. Claims that have become final may be
set aside only on grounds of fraud,
accident, mistake, or inexcusable
neglect [Sec. 125].
8. The liquidator sh.all submit disputed
claims to court for final approval [Sec.
126].
b. Treatment of Contracts
General Rule: All contracts are deemed
terminated and/or breached.
Exception: When the liquidator, within 90 days
from assumption of office, declares otherwise
and the contracting party agrees [Sec. 113].
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6. Liquidation Plan
Liquidation Plan – Within three months from
assuming office, the liquidator shall submit a
Liquidation Plan enumerating the assets,
claims and a schedule of liquidation and
payment [Sec. 129].
Properties exempted by law shall be set apart
from liquidation for the use and benefit of the
insolvent [Sec. 130].
The Plan and its implementation shall observe
the concurrence and preference of credits
under the Civil Code [Sec. 133].
Sales of Assets in Liquidation
The liquidator may sell the unencumbered
assets of the debtor and convert the same into
money.
General Rule: The sale shall be made at public
auction.
Exception: A private sale may be allowed with
the approval of the court if:
a. The goods are of perishable nature;
b. The goods are likely to quickly
deteriorate in value;
c. The goods are disproportionately
expensive to keep or maintain; or
d. The private sale is for the best interest
of the debtor and credit.
SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
Rehabilitation and Liquidation Summary
Out-of-Court
Rehabilitation (Pre-
Court-supervised negotiated
Liquidation
Rehabilitation Rehabilitation and Out-
of-Court Restructuring
Agreements)
Initial Considerations
Private and consensual
among the relevant
parties and have the
effect of a rehabilitation
In rem plan, provided that they
Jurisdiction over all affected or interested persons meet the requirements of
will be deemed acquired upon publication of the the law.
notice of the commencement of the proceedings in Parties may seek court
Nature of any newspaper of general circulation in the assistance for the
insolvency Philippines, in the manner prescribed under implementation or
process applicable rules of procedure. execution of OCRAs. In
such cases where resort
The proceedings will be conducted in a summary to court is allowed, the
and non-adversarial manner in accordance with proceedings will be
applicable rules of procedure. conducted in a summary
and non-adversarial
manner in accordance
with applicable rules of
procedure.
Companies filing for voluntary rehabilitation or Not applicable since
liquidation must be insolvent, as defined in the these are out-of-court
FRIA. processes.

When insolvent?
1. When the company’s financial condition
generally disallows it to pay its debts or
liabilities as they fall due in the ordinary
Solvency course of business or in the pursuit of the
requirement debtor's business operations on ordinary
business terms.
2. When the debtor’s assets are greater than
its liabilities, including all monetary claims
against the debtor, even stockholder's
advances recorded in the debtor's audited
financial statements as advances for
future subscriptions.
Yes, subject to the non- Yes. A liquidation Yes, as long as this is
diminution of the rights of order issued by a stipulated and agreed
Is restructuring secured creditors. court will not affect upon by the relevant
of both secured the right of a secured parties.
and unsecured creditor to enforce its
claims possible? lien, subject to the
secured creditor's
waiver of rights under

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SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
Rehabilitation and Liquidation Summary
Out-of-Court
Rehabilitation (Pre-
Court-supervised negotiated
Liquidation
Rehabilitation Rehabilitation and Out-
of-Court Restructuring
Agreements)
such lien in order to
prove its claim in the
liquidation
proceedings and
share in the
distribution of the
debtor's assets.
Yes. Classes of creditors include: (a) secured creditors, (b) unsecured
creditors, (c) trade creditors and suppliers and (d) employees of the debtor.
The establishment of the classes of voting creditors are indicated in the
rehabilitation plan.

Importance of creditor classification: treatment or voting requirements for

Are the claims of particular processes under the FRIA depend on groups of certain creditors,
creditors and such as:
shareholders ● The issuance of commencement/stay/suspension orders shall not be
put into separate deemed a diminution or impairment of the security or lien of a secured
classes for creditor or the value of their lien or security.
purposes of ● For pre-negotiated rehabilitation, the pre-negotiated rehabilitation plan
voting and will have to be approved by creditors holding at least two-thirds of the
treatment under debtor's total liabilities, including secured creditors holding more than
the plan or 50% of the debtor's total secured claims and unsecured creditors
scheme? holding more than 50% of the debtor's total unsecured claims.
● A liquidation order shall not affect the right of a secured creditor to
enforce their lien in accordance with the applicable contract or law.
There are no special distinctions among shareholders beyond those already
recognized under existing law, such as the preference accorded to preferred
shareholders in the distribution of corporate assets in case of liquidation.
Yes, shareholder approval Yes, shareholder Not applicable since
is required to commence approval is required these are out-of-court
voluntary rehabilitation to commence processes.
proceedings. However, voluntary liquidation However, depending on
shareholders are not proceedings. the nature of the
Is shareholder entitled to vote on the However, rehabilitation or
approval needed rehabilitation plan. shareholders are not restructuring agreement
to commence a To commence voluntary entitled to vote on the and whether the same
case? Are liquidation proceedings, liquidation plan. entails a sale of all or
shareholders there should be: Similar to court- substantially all of the
entitled to vote 1. A majority vote of supervised assets of the insolvent
on a plan? the board of rehabilitation debtor, Philippine law
directors or proceedings, the requires the approval of
trustees; and filing of the petition 1. Stockholders
2. An affirmative should be approved representing at
vote of the by: least two-thirds
shareholders of the

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SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
Rehabilitation and Liquidation Summary
Out-of-Court
Rehabilitation (Pre-
Court-supervised negotiated
Liquidation
Rehabilitation Rehabilitation and Out-
of-Court Restructuring
Agreements)
representing at 1. Two-thirds of outstanding
least two-thirds of the capital stock of
the outstanding outstanding the corporation
capital stock or at capital stock or,
two-thirds of the of a 2. In case of a
members in a corporation; nonstock
nonstock or corporation, the
corporation. 2. Two-thirds of approval of at
the members least two-thirds
or partners in of its members.
a nonstock
Such approval must be
corporation,
signified by means of
association
voting in a stockholders'
or
or members' meeting
partnership.
duly called for the
purpose.
Can minority
dissenting
creditors be Yes.
bound?
Commencing the process
Pre-negotiated
rehabilitation plan
An insolvent debtor, by
itself or jointly with any of
its creditors, may file a
verified petition with the
Court-supervised rehabilitation proceedings court for the approval of a
and/or Liquidation proceedings may be either: pre-negotiated
a. Voluntary, as commenced by the filing of rehabilitation plan.
a verified petition by the debtor, or OCRA
b. Involuntary, as commenced by the filing The process is
Who can of a verified petition by a creditor or commenced by the
commence? group of creditors with an aggregate claim approval of the
of at least PHP 1 million or at least 25% of a. Debtor;
the subscribed capital stock or partners' b. Creditors
contributions of the debtor, whichever is representing at
higher. least 67% of the
secured
obligations of the
debtor;
c. Creditors
representing at
least 75% of the
unsecured

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SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
Rehabilitation and Liquidation Summary
Out-of-Court
Rehabilitation (Pre-
Court-supervised negotiated
Liquidation
Rehabilitation Rehabilitation and Out-
of-Court Restructuring
Agreements)
obligations of the
debtor; and
d. Creditors
holding at least
85% of the total
liabilities,
secured and
unsecured, of the
debtor.
Yes, if voluntarily commenced by the debtor. Generally yes,
depending on the nature
Is shareholder's
of the rehabilitation or
consent
restructuring agreement
required to
and whether the same
commence
entails the sale of all or
proceedings?
substantially all of the
insolvent debtor's assets.
Yes, the assets and liabilities of a debtor may be commingled or aggregated
with a related enterprise owned or controlled directly or indirectly by the same
interests and upon compliance with the following:
a. Commingling of the assets and liabilities of the debtor and related
enterprise was done prior to the commencement of the proceedings;
Can group b. The debtor and the related enterprise have common creditors, and it
estates be will be more convenient to treat them together rather than separately;
consolidated? c. The related enterprise voluntarily accedes to join the debtor and
commingle its assets and liabilities with the debtor's, and
d. Consolidation of assets and liabilities of the debtor and the related
enterprise is beneficial to all concerned and promotes the objectives
of rehabilitation.
Yes. In general, the court supervises the entire Yes.
process. Pre-negotiated
rehabilitation plan
The court supervises the
process and ultimately
approves the pre-
Is there any negotiated rehabilitation
court plan.
involvement?
OCRA
The parties may apply for
court assistance for the
execution or
implementation of the
agreement.

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SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
Rehabilitation and Liquidation Summary
Out-of-Court
Rehabilitation (Pre-
Court-supervised negotiated
Liquidation
Rehabilitation Rehabilitation and Out-
of-Court Restructuring
Agreements)
General Rule: Existing The liquidator, for the Subject to the parties'
management. limited purpose of agreement.
fulfilling their duties
Exception: The court may and obligations.
issue an order displacing
the existing management
and appoint and direct the
rehabilitation receiver or
management committee
to assume the powers of
management upon a
Who manages
showing of (a) actual or
the debtor?
imminent danger of
dissipation, loss, wastage,
or destruction of the
debtor's assets or
properties; (b) paralysis of
the business operations of
the debtor; or (c) gross
mismanagement, fraud or
wrongful conduct on the
part of the debtor's
existing management.
Relevant information, Relevant information, Pre-negotiated
such as the assets, such as the assets, rehabilitation plan
liabilities and financial liabilities and Relevant information,
reports, among others, are financial reports, such as the assets, debts
required to be attached to among others, are and the pre-negotiated
the petition to be filed with required to be rehabilitation plan,
the court. Such attached to the among others, are
information must also be petition to be filed required to be attached to
furnished or disclosed to with the court. Such the petition to be filed with
Level of creditors and interested information must also the court. Such
disclosure of parties. be furnished or information must also be
process to disclosed to creditors furnished or disclosed to
voting creditors The rehabilitation receiver and interested creditors and interested
will have the duty and parties. parties.
responsibility to submit a
status report on the The liquidator will OCRA
rehabilitation proceedings make and keep a The OCRA and,
every quarter/as may be record of all monies consequently, the
required by the court/upon received and all availability of information
motion of any creditor/as disbursements made or documents are subject
provided in the by them or under to the negotiation of the
rehabilitation plan. their authority as parties.

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SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
Rehabilitation and Liquidation Summary
Out-of-Court
Rehabilitation (Pre-
Court-supervised negotiated
Liquidation
Rehabilitation Rehabilitation and Out-
of-Court Restructuring
Agreements)
liquidator. They will The notice of the OCRA
submit a quarterly is required to be
report to the court, published once a week
which will be made for at least three
available to all consecutive weeks in a
interested parties. newspaper of general
The liquidator will circulation in the
also submit such Philippines. The salient
reports as may be provisions of the OCRA,
required by the court including the number of
from time to time, as secured/unsecured/total
well as a final report creditors that approved
at the end of the the OCRA, must be
liquidation included in the
proceedings. information published.
FRIA does not cover banks, insurance companies, and pre-need companies.
For purposes of financial rehabilitation and insolvency, (a) banking institutions
and quasi-banks under the direct supervision of the Bangko Sentral ng
Entities Pilipinas (BSP), the Philippines' central bank, are governed by Republic Act
excluded from No. 7653 or the New Central Bank Act, the Manual of Regulations for Banks
customary (MORB), while nonbanks with quasi-banking functions and trust entities are
insolvency or governed by the Manual of Regulations for Non-Bank Financial Institutions
reorganization (MORNBFI);1 (b) insurance companies are governed by Republic Act No.
proceedings, 10607 (Amended Insurance Code); and (c) pre-need companies are covered
and applicable by Republic Act No. 9829 (Pre-Need Code).
statutes
The Supreme Court also enacted the Rules on the Liquidation of Banks on 18
February 2020, which applies to banks closed and placed under liquidation by
the BSP Monetary Board pursuant to relevant law.
A creditor may commence the procedure any time N/A. These proceedings
When so long as the requirements/grounds are present. are commenced by the
commenced? debtor/jointly with the
debtor.
Effect of process
Yes, the debtor remains in No, upon the Yes, the debtor remains
Does the debtor possession of the issuance of a in possession of the
remain in continuation of incumbent liquidation order, the continuation of
possession with management control. juridical debtor is incumbent management
continuation of However, the court may considered dissolved control.
incumbent appoint and direct the and its juridical
management rehabilitation receiver to existence is
control? assume the powers of the terminated. The
management of the debtor liquidator is charged

1 The MORB and the MORNBFI are the compilation of regulations issued and promulgated by the BSP.

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SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
Rehabilitation and Liquidation Summary
Out-of-Court
Rehabilitation (Pre-
Court-supervised negotiated
Liquidation
Rehabilitation Rehabilitation and Out-
of-Court Restructuring
Agreements)
or appoint a management with winding up the
committee that will business of the
undertake the debtor.
management of the debtor
if there is clear and
convincing evidence of
any of the following
circumstances:
● Actual or
imminent danger
of dissipation,
loss, wastage or
destruction of the
debtor's assets or
other properties
● Paralysis of the
business
operations of the
debtor
● Gross
mismanagement,
or fraud, or other
wrongful conduct
on the part of the
debtor
If the court finds a petition The court will issue a With respect to a pre-
sufficient, it will issue a liquidation order that: negotiation rehabilitation
commencement order that ● Prohibits plan, if the court finds the
includes a stay or payments by petition sufficient, it will
suspension order. The the debtor issue a stay or
latter will: and the suspension order with the
● Suspend all transfer of same effects as in court-
What is the
actions or any property supervised rehabilitation.
stay/moratorium
proceedings, in by the debtor With respect to OCRAs,
regime (if any)?
court or otherwise, the parties may agree
Is the stay or ● Directs all
for the upon a "standstill period"
moratorium creditors to
enforcement of pending negotiation. The
worldwide? file their
claims against the effects of the standstill
claims with
debtor period, including whether
the liquidator
the application is
● Suspend all within the
worldwide, will depend
actions to enforce period set
upon the agreement of
any judgment,
● Disallows a the parties. The period
attachment or
separate will be effective against

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SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
Rehabilitation and Liquidation Summary
Out-of-Court
Rehabilitation (Pre-
Court-supervised negotiated
Liquidation
Rehabilitation Rehabilitation and Out-
of-Court Restructuring
Agreements)
other provisional action for the the contracting parties
remedies against collection of and other creditors,
the debtor an provided:
unsecured ● such agreement
● Prohibit the debtor
claim, and all is approved by
from selling,
such actions creditors
encumbering,
already representing
transferring, or
pending will more than 50%
disposing of in
be of the total
any manner any
transferred to liabilities of the
of its properties
the liquidator debtor
except in the
for them to
ordinary course of ● notice thereof is
accept and
business published in a
settle or
newspaper of
● Prohibit the debtor contest
general
from making any
● Disallows circulation in the
payment of its
foreclosure Philippines once
liabilities
proceedings a week for two
outstanding as of
for a period consecutive
the
of 180 days weeks
commencement
date, except as The FRIA and the ● the standstill
may be provided Financial Liquidation period does not
therein and Suspension of exceed 120 days
Payments Rules ("FL
The FRIA and the The FRIA and the FR
Rules") are likewise
Financial Rehabilitation Rules are silent as to
silent as to whether
Rules of Procedure ("FR whether such a standstill
such stay or
Rules") are silent as to period will apply outside
moratorium will apply
whether such a stay or the Philippines.
outside the
moratorium will apply
Philippines. Notably,
outside the Philippines.
unlike the FR Rules,
the FL Rules do not
However, the FR Rules
direct the petitioner to
provide that a
furnish foreign
commencement order for
creditors with a copy
rehabilitation proceedings
of the petition.
shall direct the petitioner
to serve copies of the
order to foreign creditors
at their foreign addresses
so that they will receive the
order at least 15 days
before the initial hearing.
Are third-party Yes. Generally, third parties such as officers, directors and shareholders are
releases not liable for a corporate debtor's debts.

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SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
Rehabilitation and Liquidation Summary
Out-of-Court
Rehabilitation (Pre-
Court-supervised negotiated
Liquidation
Rehabilitation Rehabilitation and Out-
of-Court Restructuring
Agreements)
available?
Has the Yes. The UNCITRAL Model Law on Cross-Border Insolvency is adopted in
UNCITRAL Republic Act No. 10142 or the Financial Rehabilitation and Insolvency Act
Model Law been (FRIA).
adopted?
Yes. No, because the Yes.
entity is dissolved
Can a debtor
upon issuance of a
continue to
liquidation order. The
carry on
only affairs that may
business during
be conducted are
insolvency
those related to the
proceedings?
winding up of the
business.

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SPECIAL COMMERCIAL LAWS
7. Suspension of Payments;
Suspension of Payment Order
Suspension of Payments - a judicial
insolvency proceeding by which an individual
submits, for approval by his creditors, a
proposed agreement containing propositions
delaying or extending the time of payment of
his debts. It is always voluntary and may be
properly availed of or instituted by an individual
debtor [Somera].
To be declared in a state of suspension of
payments, the individual debtor must be
insolvent under the illiquidity or equity concept,
i.e. he must possess sufficient property to
cover all his debts but foresees the
impossibility of meeting them when they fall
due.
There is no minimum value of debt required
before the insolvent individual debtor may
institute proceedings for suspension of
payments [Somera].
a. Effects
If the Court finds the petition for suspension of
payments sufficient, it shall issue a Suspension
of Payments Order:
1. calling a meeting of all the creditors
named in the schedule of debts and
liabilities not less than 15 days nor
more than for 40 days from the date of
such Order and designating the date,
time and place of the meeting;
2. directing such creditors to prepare and
present written evidence of their claims
before the scheduled creditors’
meeting;
3. directing the publication of the said
order in a newspaper of general
circulation published in the province or
city in which the petition is filed once a
week for 2 consecutive weeks (first
publication shall be made within 7 days
from the issuance of the Order);
4. directing the clerk of court to send a
copy of the Order to all creditors named
in the schedule of debts and liabilities;
5. forbidding the individual debtor from
selling, transferring, encumbering or
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COMMERCIAL LAW
disposing of his property, except those
used in the ordinary operations of
commerce or of industry in which the
individual debtor is engaged, so long
as the proceedings relative to the
suspension of payments are pending;
6. prohibiting the individual debtor from
making any payment outside of the
necessary or legitimate expenses of
his business or industry, so long as the
proceedings relative to the suspension
of payments are pending; and
7. appointing a commissioner to preside
over the creditors’ meeting [Sec. 95].
b. Actions Suspended
Court may issue an order suspending any
pending execution against the individual
debtor.
Properties held as security by secured
creditors shall not be the subject of such
suspension order.
The suspension order shall lapse after 3
months without the proposed agreement being
accepted by the creditors or as soon as such
agreement is denied.
No creditor shall sue or institute proceedings to
collect his claim from the debtor from the time
of the filing of the petition for suspension of
payments and for as long as proceedings
remain pending except:
1. Creditors with claims for personal
labor, maintenance, expense of last
illness and funeral of the wife or
2. Children of the debtor incurred in the 60
days immediately prior to the filing of
the petition; and
3. Secured creditors [Sec. 96].
c. Most Important Elements of the
Suspension of Payments Order
1. Automatic Stay
2. Injunction against the Debtor
Automatic Stay - No creditor, except those
specifically excepted by law, shall sue or
institute proceedings to collect its claim from
SPECIAL COMMERCIAL LAWS COMMERCIAL LAW
the debtor

Injunction - From the time of issuance of the

Suspension of Payments Order and while the
proceedings are pending, the individual
debtor is subject to an injunction against:
1. Selling, transferring, encumbering, or
disposing of his property, except those
used in the ordinary operations of
commerce or of industry in which he is
engaged; and
2. Making any payment outside of the
necessary or legitimate expenses of
his business or industry.

d. Creditor’s Meeting

A suspension of payments will only be effective

when the creditors issue a majority vote
approving the agreement.

Determination of majority votes

As to number of creditors: ⅔ of the creditors
voting approve the proposed agreement; and

As to the value of the claims: claims

represented by the majority vote amount to at
least ⅗ of the total liabilities of the debtor

e. Dismissal of Petition

If the proposed agreement is not approved

within 90 days from the date of the last
publication of the Suspension of Payments
Order, it shall be deemed rejected and the
Court shall dismiss the petition [FLSP Rules,
Rule 3(A), Sec. 7].

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