2020 UP BOC Commercial Law Reviewer

Training and Convention Bar Operations Commissioner Faculty Advisers
Division Joshua Ejeil A. Pascual Prof. Rafael A. Morales

Atty. Glenda T. Litong Prof. Marie Cecile R. Quintos
Academics Committee Heads Prof. Josephine R. Santiago
Atty. Renee A. Fopalan
Ana Regina A. Buban
Atty. Jelorie F. Gallego Overall Heads
John Alfred H. Mendoza
Kent A. Alonzo
Ms. Hannah Georgia F. Plopinio
Mikaela V. Bernardino
Deputy Heads
Mary Clarence Angela T. Protacio Subject Heads
Irene Carmella P. Trinidad Jena Veronica F. Fernandez
Janna Jee-Anne G. Abella
Layout Committee Head Vianca Mikaella S. Miguel
Niegel F. Simon
UP LAW BAR OPERATIONS COMMISSION

2020 UP LAW BAR OPERATIONS COMMISSION
EXECUTIVE BOARD
COMMISSIONER SECRETARY REPRESENTATIVES
Joshua Ejeil A. Pascual Karen Faith L. Abrea FOR ACADEMICS
Ana Regina A. Buban
DEPUTY COMMISSIONER
FOR SUPPORT TREASURER John Alfred H. Mendoza
Cristina D. de los Reyes Ven Gabriel G. Tan
BGC REPRESENTATIVES
DEPUTY COMMISSIONER AUDITOR Robert Daniel B. Arcadio
FOR OPERATIONS Julia Gabrielle D.R. Lagman Felix Gerard D. Leyson Jr.
Nicholas William G. Di
COMMITTEE HEADS
ACADEMICS ACADEMIC SUPPORT HUMAN RESOURCES LOGISTICS
Ana Regina A. Buban Christine Joy S. Escalante Andrea Mae M. Muhlach Aloysius Francis M. Bresnan
John Alfred H. Mendoza Pristine Bernadette F. Soriano Prudente Ricardo Paulo C. Soller Allison Michael Jude T. Maraon
Gabriel D. Vera Cruz
OEPLfTY HEADS SECRETARIAT & WELFARE FOOD OPERATIONS
Mary Clarence Angela T. Protacio Shania Vie T. Bautista Jules Bernard V. Guevarra LINKAGES
Irene Carmella P. Trinidad Kenneth P. Geolina Alexandra Yvonne A. Orias Jan Fredrick P. Cruz
Erickson C. Mariñas
LAYOUT HOTEL OPERATIONS DEPUTY’HEAD
Niegel F Simon EVENTS Kennedy E. Espina Jose Victor A. Dimaculangan
Enrico Miguel D.R. Dizon Andrea Jasmine O. Yu
PUBLIC RELATIONS Stephanie E. Dos Santos ALUMNI RELATIONS HEAD
Jose Alfonso O. Altamira DAY OPERATIONS Mikaela D.C. Solmerano
Gianna Chris Gaile E. Bitancor MERCHANDISE Jamela Vidad B. Devanadera
Bernadine Louise C. Tan John T. Lansangan John Edrick R. Serrano
John Victor C. Sosito
Beatriz M. Zamora
COMMERCIAL LAW TEAM LAYOUT TEAM

FACULTY ADVISERS INTELLECTUAL HEAD
Prof. Rafael A. Morales PROPERTY LAW Niegel F. Simon
Prof. Marie Cecile R. Ouintos HEAD
Prof. Josephine R. Santiago Vianca Mikaella S. Miguel
MEMBERS
CONTRIBUTOR
OVERALL HEADS Bianca Ortiz Nicolas Japheth D. Mabini
Kent A. Alonzo
Regina Victoria B. Medina
Mikaela V. Bernardino sEcURITY REGULATIONS
CODE, TRUST RECEIPTS, Patricia Marie P. Sales
CORPORATION LAW AND LETTERS OF CREDIT Ven Gabriel G. Tan \jy COLLEGE OF
HEAD HEAD
Jena Veronica F. Fernandez Kent A. Alonzo Mae Celriz O. Yano
CONTRIBUTORS CONTRIBUTOR
Kent A. Alonzo Simplicio Pio I. Mathay III
Anna Nikita R. Bayot INSURANCE LAW &
Freya Elessandra G. Patron BANKING LAW
Micah Amethyst M Taguibao HEAD
Samantha Isabelle Vitriol0 Mikaela V. Bernardino
TRANSPORTATION LAW SPECIAL LAWS
HEAD HEAD
Janna Jee-Anne G. Abella Mikaela V. Bernardino
CONTRIBUTORS CONTRIBUTORS
Kent A. Alonzo
Romina Luz B. Medina
Simplicio Pio I. Mathay III
Anne Renee T. Suarez
2020 UP LAW BAR OPERATIONS COMMISSION
PHILIPPINE COPYRIGHT
By
THE UNIVERSITY OF THE PHILIPPINES COLLEGE OF LAW
THE UP LAW BAR OPERATIONS COMMISSION 2020-2021
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BY THE AUTHORS
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U.P. LAW BOC COMMERCIAL LAW
TABLE OF CONTENTS
INSURANCE ............................................................. 1 TRANSPORTATION ............................................... 56
A. CONCEPT OF INSURANCE.......................................... 2 A. COMMON CARRIERS ................................ 57

B. ELEMENTS OF AN INSURANCE CONTRACT ............... 3 1. Diligence Required of Common Carriers 58
C. CHARACTERISTICS AND NATURE OF AN INSURANCE 2. Liabilities of Common Carriers ................ 59
CONTRACT ....................................................................... 5 3. Classification of transport network vehicle
D. CLASSES ........................................................................... 6 services and transport network companies 60
1. Marine Insurance....................................... 6 B. VIGILANCE OVER GOODS ...........................................60
2. Fire .......................................................... 11 1. Exempting Causes .................................. 61
3. Casualty .................................................. 13 2. Contributory Negligence .......................... 63
4. Suretyship ............................................... 14 3. Duration of Liability .................................. 63
5. Life .......................................................... 15 4. Stipulation for Limitation of Liability ......... 64
6. Microinsurance ........................................ 17 5. Liability for Baggage of Passengers ........ 66
7. Compulsory Motor Vehicle Liability C. SAFETY OF PASSENGERS ..........................................67
Insurance ................................................... 18 1. Void Stipulations...................................... 67
8. Compulsory Insurance Coverage for 2. Duration of Liability .................................. 68
Agency-Hired Workers............................... 19 3. Liability for Acts of Others........................ 69
E. VARIABLE CONTRACTS .............................................. 19 4. Liability for Delay in Commencement of
F. INSURABLE INTEREST ................................................. 20 Voyage ...................................................... 71
1. In Life/Health ........................................... 21 5. Liability for Defects in Equipment and
2. In Property ............................................... 23 Facilities..................................................... 72
3. Double Insurance and Over Insurance .... 25 6. Extent of Liability for Damages ................ 72
4. Multiple or Several Interests on Same D. BILL OF LADING .............................................................74
Property ..................................................... 26 1. Three-Fold Character .............................. 74
G. PERFECTION OF THE CONTRACT OF INSURANCE 28 2. Delivery of Goods .................................... 74
1. Offer and Acceptance/Consensuality ...... 28 3. Period for Filing Claims ........................... 76
2. Premium Payment ................................... 29 4. Period for Filing Actions........................... 77
3. Non-Default Options in Life Insurance ..... 30 5. Effects of Stipulations .............................. 77
4. Reinstatement of a Lapsed Policy of Life E. MARITIME COMMERCE ................................................77
Insurance ................................................... 31 1. Charter Parties ........................................ 77
5. Refund of Premiums................................ 31 2. Liability of Ship Owners and Shipping Agents
H. RESCISSION OF INSURANCE CONTRACTS ............. 32 ................................................................ 79
1. Concealment ........................................... 32 3. Accidents and Damages in Maritime
2. Misrepresentation/Omissions .................. 35 Commerce ................................................. 82
3. Breach of Warranties............................... 36 4. Carriage of Goods by Sea Act (COGSA) 85 F.
I. CLAIMS SETTLEMENT AND SUBROGATION ............ 38 PUBLIC SERVICE ACT ..................................................86
1. Notice and Proof of Loss ......................... 39 1. Definition of Public Utility ......................... 86
2. Guidelines on Claims Settlement ............ 40 2. Necessity for certificate of public
J. BUSINESS OF INSURANCE; REQUIREMENTS ......... 43 convenience .............................................. 86
K. INSURANCE COMMISSIONER AND ITS POWERS .... 47 G. THE W ARSAW CONVENTION .....................................89
1. Jurisdiction and Adjudicatory Powers ...... 47
BUSINESS ORGANIZATIONS................................ 93
2. Revocation of Certificate of Authority ...... 47
3. Liquidation of Insurance Company .......... 48 A. PARTNERSHIPS .............................................................94
1. General Provisions .................................. 94
PRE-NEED .............................................................. 49
2. Rights and obligations of partnership and
A. DEFINITION ..................................................................... 50 partners ................................................... 100
1. Pre-Need Plans ....................................... 50 3. Dissolution and Winding Up .................. 111
2. Pre-Need Company................................. 50 4. Limited Partnership ............................... 118
B. REGISTRATION OF PRE-NEED PLANS .................... 51 B. CORPORATIONS ........................................... 126
C. LICENSING OF SALES COUNSELORS AND GENERAL 1. Definition of Corporation ........................ 126
AGENTS .......................................................................... 52 2. Classes of Corporations ........................ 127
D. DEFAULT AND TERMINATION..................................... 53 3. Nationality of Corporations .................... 133
E. CLAIMS SETTLEMENT ................................................. 54 4. Corporate Juridical Personality.............. 136
5. Capital Structure.................................... 140
6. Incorporation and Organization ............. 147
7. Corporate Powers ................................. 162 B. LAW ON SECRECY OF BANK DEPOSITS ............... 307
8. Stockholders and Members ................... 179 1. Purpose ................................................. 307
9. Board of Directors and Trustees ............ 205 2. Prohibited Acts ...................................... 307
10. Capital Affairs .................................... 219 3. Deposits and Investments Covered ....... 307
11. Dissolution And Liquidation ............... 231 4. Exceptions............................................. 308
12. Other Corporations............................ 242 5. Garnishment of Deposits, Including Foreign
13. Merger and Consolidation ................. 264 Deposits................................................... 309
14. Investigations, offenses, and penalties ... 6. Penalties for Violation ............................ 310
.......................................................... 268 C. GENERAL BANKING LAW OF 2000 (GBL) ........ 310
1. Definition and classification of banks ..... 310
SECURITIES ......................................................... 276
2. Distinction of banks from Quasi-banks and
A. STATE POLICY ............................................. 277 trust entities ............................................. 311
B. DEFINITION OF SECURITIES ..................................... 277 3. Bank Powers and Liabilities................... 311
C. KINDS OF SECURITIES .............................................. 278 4. Diligence required of banks in view of
1. Exempt Securities [Sec. 9] .................... 278 fiduciary nature of banking ....................... 313
2. Exempt Transactions [Sec. 10].............. 279 5. Nature of Bank Funds and Bank Deposits ..
3. Non-exempt transactions ...................... 281 .............................................................. 314
D. POWERS AND FUNCTIONS OF THE SECURITIES AND 6. Grant of Loans and Security Requirements
EXCHANGE COMMISSION .............................................. 282 .............................................................. 314
E. PROCEDURE FOR REGISTRATION OF SECURITIES ... 7. Penalties for violations .......................... 317
.................................................................. 282 D. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT.
F. PROHIBITIONS ON FRAUD, MANIPULATION, AND .................................................................. 319
INSIDER TRADING ............................................................. 284 1. Basic Policy ........................................... 319
1. Manipulation of security prices [Sec. 24] .... 2. Powers and functions of the PDIC;
.............................................................. 284 prohibitions .............................................. 319
2. Short sales [Rule 24.2-2, 2015 SRC IRR]... 3. Concept of insured deposits .................. 321
.............................................................. 286 4. Liability to depositors ............................. 321
3. Option trading [Sec. 25] ......................... 287 5. Concept of bank resolution .................... 325
4. Fraudulent transactions [Sec. 26] .......... 287 6. Role of the PDIC in relation to banks in
5. Insider trading [Sec. 61]......................... 288 distress .......................................................... 326
G. PROTECTION OF SHAREHOLDER INTERESTS....... 289
INTELLECTUAL PROPERTY LAW ...................... 331
1. Tender offer rule .................................... 289
2. Rules on proxy solicitation ..................... 291 A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL. 332
3. Disclosure rule....................................... 292 1. Intellectual Property Rights.................... 332
2. Differences between copyright, trademarks,
BANKING .............................................................. 295
and patents .............................................. 332
A. THE NEW CENTRALBANK ACT ............... 296 3. Technology Transfer Arrangements ...... 332
1. State Policies......................................... 296 B. PATENTS ...................................................................... 333
2. Creation of the Bangko Sentral ng Pilipinas 1. Patentable Invention.............................. 333
.............................................................. 296 2. Non-Patentable Inventions .................... 334
3. Responsibility and Primary Objective of BSP 3. Ownership of a Patent ........................... 335
.............................................................. 296 4. Grounds for Cancellation of a Patent..... 336
4. Corporate Powers ................................. 297 5. Remedy of the True and Actual inventor.....
5. Operations of the BSP ........................... 297 .............................................................. 336
6. Monetary Board (MB); Powers and 6. Rights Conferred by a Patent ................ 337
Functions ................................................. 300 7. Limitations of Patent Rights ................... 337
7. How The BSP Handles Banks In Distress .. 8. Patent Infringement ............................... 339
.............................................................. 300 9. Licensing ............................................... 340
8. Administrative sanctions on supervised 10. Assignment and Transmission of Rights
entities ..................................................... 304 344
9. Rules on bank deposits and investments by C. TRADEMARKS ............................................................. 344
directors, officers, stockholders and their 1. Definition of Marks, Collective Marks, and
related interests ....................................... 304 Trade Names ................................................. 344
10. Supervision and regulation of bank 2. Acquisition of Ownership of Mark .......... 346
operations ................................................ 305 3. Acquisition of Ownership of Trade Name....
11. Rate of exchange .............................. 306 .............................................................. 347
4. Non-Registrable Marks .......................... 347
5. Prior use of mark as a Requirement ...... 348 2. Financial Rehabilitation and Insolvency Act
6. Tests to Determine Confusing Similarity of 2010..................................................... 423
between Marks ........................................ 350 F. DATA PRIVACY ACT OF 2012 ........................ 437
7. Well-Known Marks ................................ 351 1. Definitions and Scope ........................... 437
8. Rights Conferred by Registration........... 352 2. Extraterritorial Application...................... 438
9. Use by third parties of names, etc. similar to 3. Processing of personal information ....... 438
registered mark ........................................ 354 4. Rights of the data subject; exceptions/non-
10. Infringement and remedies................ 354 applicability .............................................. 440
11. Unfair Competition ............................ 356 5. Duties and responsibilities of personal
12. Registration of marks under the Madrid information controller ............................... 442
Protocol ................................................... 357 G. PHILIPPINE COMPETITION ACT .............................. 443
D. COPYRIGHT ................................................................. 360 1. Definitions and Scope of Application ..... 443
1. Basic Principles ..................................... 360 2. Powers and functions of the Philippine
2. Copyrightable Works ............................. 360 Competition Commission ......................... 444
3. Non-Copyrightable Works ..................... 361 3. Prohibited acts....................................... 445
4. Rights of Copyright Owner .................... 363 4. Covered Transactions ........................... 448
5. Rules on Ownership of Copyright .......... 367 5. Determining the Relevant Market .......... 449
6. Limitations on Copyright ........................ 369 6. Determining the control or dominance of.......
7. Copyright Infringement .......................... 370 market...................................................... 449
7. Determining Existence of Anti-Competitive
SPECIAL LAWS .................................................... 376
Conduct ................................................... 450
A. SECURED TRANSACTIONS .................... 377 8. Forbearance by the Philippine Competition
1. Personal Property Security Act.............. 377 Commission ............................................. 450
2. Real Estate Mortgage Law..................... 391
3. Guaranty ............................................... 392
4. Surety .................................................... 397
5. Letters of credit...................................... 399
B. TRUTH IN LENDING ACT ........................................... 402
1. Purpose ................................................. 402
2. Obligation of Creditors to Persons to whom
Credit is Extended ................................... 402
3. Covered and Excluded Transactions ..... 402
4. Consequences of Non-Compliance ....... 403
C. ANTI-MONEY LAUNDERING ACT ............ 403
1. Policy of the Law ................................... 403
2. Covered Institutions and Their Obligations .
.............................................................. 404
3. Covered and Suspicious Transactions . 405
4. Money Laundering; how committed; unlawful
and predicate crimes ............................... 406
5. Anti-Money Laundering Council; functions .
.............................................................. 407
6. Safe Harbor Provision ........................... 408
7. Application for Freeze Orders................ 408
8. Authority to Inquire into Bank Deposits. 409
D. FOREIGN INVESTMENTS ACT ................ 411
1. Policy of the law .................................... 412
2. Definition of terms ................................. 412
3. Registration of investments of non-Philippine
nationals .................................................. 414
4. Foreign investments in export enterprises ..
.............................................................. 414
5. Foreign investments in domestic market
enterprises ............................................... 415
6. Foreign Investment Negative List .......... 415
E. INSOLVENCY LAWS ................................ 418
1. Concurrence and preference of credits. 418
U.P. LAW BOC INSURANCE COMMERCIAL LAW
INSURANCE
COMMERCIAL LAW
Page 1 of 450
parties do not know about it e.g., prior loss of a

A. CONCEPT OF ship at sea (applicable only to marine
INSURANCE insurance) [de Leon, The Insurance Code of
the Philippines Annotated (2014)].
Insurance is essentially a contract by which
one party (the insurer), for a consideration that The unknown event may be past or future.
is usually paid in money, either in a lump sum Even if the proximate cause of the loss is a
or at different times during the continuance of fortuitous event, the insurer may still be liable if
the risk, promises to make a certain payment, it is the event or peril insured against [de Leon].
usually of money, upon the destruction or injury
of “something” in which the other party (the Form
insured) has an interest [Carale, The Philippine There is no particular form required for a
Insurance Law (2014)]. contract of insurance.
On August 15, 2013, RA 10607 was signed into The Insurance Code has no provision requiring
law. It is a restatement of the Insurance Code a particular form for the validity of an insurance
(PD 612), with amendments. contract. In our jurisdiction, the Supreme Court
has not made a categorical ruling against the
The section numbers hereinafter generally validity of an oral contract of insurance
pertain to RA 10607, unless otherwise [Carale].
indicated.
An insurance policy is different from the
1. Contract of Insurance contract of insurance. The policy is the formal
A contract of insurance is an agreement written instrument evidencing the contract of
whereby one undertakes for a consideration to insurance entered into between the insured
indemnify another against loss, damage or and the insurer. [Sec. 232]
liability arising from an unknown or contingent
event. [Sec. 2(a)] 2. Doing or Transacting Insurance
Business
Definition The term “doing an insurance
Thus, a contract of insurance is: business or transacting an insurance
1. A contract of indemnity; business” includes:
2. Wherein one undertakes for a 1. Making or proposing to make, as insurer,
consideration; any insurance contract;
3. To indemnify another against loss, 2. Making or proposing to make, as surety,
damage, or liability; any contract of suretyship as a vocation
4. Arising from an unknown or contingent and not as merely incidental to any other
event. legitimate business or activity of the surety;
3. Doing any kind of business, including a
Contingent Event Unknown Event reinsurance business, specifically
Event that is not Event which is certain to recognized as constituting the doing of
certain to take happen, but the time of an insurance business within the
place. its happening is not meaning of the Insurance Code;
known. 4. Doing or proposing to do any business in
substance equivalent to any of the
foregoing in a manner designed to evade
General Rule: A past event cannot be a
designated event in an insurance contract. the provisions of the Insurance Code. [Sec.
2(b)]
Exception: It may be a designated event only
in cases where it has happened already but the
Page 2 of 450
General rule: An insurance business consists 4. Parties to an Insurance Contract

in undertaking, for a consideration, to
indemnify another against loss, damage or Two Parties to a Contract of Insurance:
liability arising from an unknown or contingent a. Insurer or the party who assumes or
event. accepts the risk of loss and undertakes for
consideration to indemnify the insured or to
Exception: Those not formally designated as pay a certain lump sum on the happening
insurance businesses but are deemed “doing of the event or peril insured against. May
or transacting an insurance business” as listed be any person, partnership, association, or
in Sec. 2(b). corporation [Sec. 6]; and
b. Insured or the person in whose favor the
The “principal object and purpose test” contract is operative and whose loss is the
 Determines: occasion for the payment of the insurance
- Whether the assumption of risk and proceeds by the insurer. [Carale]
indemnification of loss are the principal
object and purpose of the organization; May be any person except a public enemy
or [Sec. 7]
- Whether they are merely incidental to
its business. There is no definition of what a “public enemy”
 From such determination, it concludes that: is, but a definition that is generally accepted
- If these are the principal objectives, the and in keeping with the nature of an insurance
business is that of insurance. contract is one where a person possesses the
- But if they are merely incidental and nationality of the state which another is at war.
service is the principal purpose, then [Carale]
the business is not insurance.
3. Governing Law
B. ELEMENTS OF AN
General Rule: The Insurance Code primarily INSURANCE
governs insurance contracts.
CONTRACT
Exception: When there is a special law which
specifically governs (e.g., insurance contract C2 R2 I M
under R.A. 1161 or the Social Security Act), in a) Cause – event or peril insured against;
which case, the Insurance Code governs b) Consideration – premium payments paid
subsidiarily. by the insured
c) Risk of loss or damage being assured by
Matters not expressly provided for in the the Insurer
Insurance Code and special laws are regulated d) Risk-Distributing Scheme – distribution
by the Civil Code. and transfer by the insurer of risk of loss,
damage or liability among persons having
Other special laws: similar risks;
a. National Health Insurance Act of 2013 (RA e) Insurable interest - the insured possesses
10606, amending RA 7875) an interest of some kind which the event
b. The Revised Government Service insured against may cause loss or damage
Insurance Act of 1997 (RA 8291) f) A Meeting of Minds of the parties upon all
c. The Social Security Act (RA 8282) the foregoing essentials.
d. The Property Insurance Law (RA 656, as
amended by PD 245)
e. The Philippine Deposit Insurance Act of
1963 (RA 3591)
Page 3 of 450
1. Cause 5. Insurable Interest

Cause refers to an event or peril insured Insurable interest is the interest which the law
against. requires the owner of an insurance policy to
have in the person or thing insured [Carale].
2. Consideration
An insurance premium is the agreed price for In terms of the event insured against, it is the
assuming and carrying the risk. It is the relation between the insurer and the risk
consideration paid to the insurer for insured, such that the occurrence of the risk will
undertaking to indemnify the insured against a cause substantial loss or harm of some kind to
designated peril. It is based on probability of the insured [Carale].
loss and extent of liability [43 Am. Jur. 2d 326].
Under the Code, the following are void:
Premium Assessment . Stipulation in a policy for the payment of
A sum levied and A sum specifically loss whether the person insured has or
paid to meet levied by mutual has not any interest in the property
anticipated loss, insurance insured;
assessments are companies or i. Stipulation that the policy shall be
collected to meet associations, upon a received as proof of such interest;
actual loss [Vance, fixed and definite ii. Policy executed by way of gaming or
Handbook on the plan, to pay losses wagering. [Sec. 25]
Law of Insurance and expenses. [Sec.
(1951)]. 403] Note: Insurable interest is not required in
industrial life insurance [Sec. 235-237].
3. Risk of Loss or Damage
Peril is the contingent or unknown event which 6. Meeting of the Minds
may cause a loss. Its existence creates a risk The two parties to a contract of insurance
and its occurrence results in loss. whose minds need to meet regarding the
essential elements are:
The event or peril insured against must be such a. Insurer or the party who assumes or
that its happening will: accepts the risk of loss and undertakes
a. Damnify or cause loss to a person; or foonsideration to indemnify the insured or
b. Create liability against him [Sec. 3] to pay a certain lump sum on the
happening of the event or peril insured
against; and
4. Risk-Distributing Scheme b. Insured or the person in whose favor the
Insurance contracts serve to distribute the risk contract is operative and whose loss is the
of economic loss, damage or liability among as occasion for the payment of the insurance
many as possible of those who are subject to proceeds by the insurer [de Leon].
the same kind of risk.
The insured is not always the person whom the
Scheme: proceeds are paid. Such person is the
i. The payment of premiums by all will beneficiary [Vance].
inure to a general fund, out of which
payment will be made for anyone who
has suffered an economic loss.
ii. Hence, each member contributes to a
small degree toward compensation for
losses suffered by any member of the
group.
Page 4 of 450
c. Voluntary
C. CHARACTERISTICS
AND NATURE OF AN General rule: Contracts of Insurance are not
compulsory and the parties are free to
INSURANCE incorporate such terms and conditions they
CONTRACT may deem convenient provided they are not
contrary to law, morals, good customs, public
1. In General order, or public policy [de Leon].
An insurance contract is: Exceptions: Insurance contracts particularly

CAVE-CCPU liability insurance, may be required by law in
a. Consensual; certain instances:
b. Aleatory; 1. For motor vehicles [Compulsory Motor
c. Voluntary; Vehicle Liability Insurance, Secs 386-402,
d. Executory and unilateral, but Insurance Code];
synallagmatic; 2. For employees [Compulsory Coverage in
e. Conditional; State Insurance Fund, Articles 168-184,
f. Contract of adhesion; Labor Code];
g. Personal contract; 3. As a condition to granting a license to
h. Uberrimae fides contract (i.e. a conduct business or calling affecting the
contract of the highest degree of good public safety or welfare [de Leon];
faith). 4. Social Insurance for members of the
Government Service Insurance System
a. Consensual (GSIS) and for the employees of the private
Sector covered by the Social Security
General Rule: An insurance contract is System (SSS).
perfected by the meeting of the minds of the
parties. There must be concurrence of offer d. Executory and Unilateral but
and acceptance. The insurance policy merely Synallagmatic
evidences the terms and conditions thereof.
Once the insured pays the premium, the
Exception: It is stipulated that the policy is contract already takes effect. After the payment
essential to the existence of the contract. of premiums, the insurance imposes a
[Campos, Insurance (1983)]. unilateral obligation on the insurer who
promises to indemnify in case of loss.
b. Aleatory
It is also synallagmatic and reciprocal such
It is aleatory because it depends upon some that even if the contingent event or designated
contingent event. The obligation of the insurer peril does not occur, the insurer has still
to pay depends on the happening of an event provided protection against the risk for the
which is uncertain, or though certain, is to occur period covered by the insurance contract.
at an indeterminate time [Art. 2010, NCC].
e. Conditional
Being an aleatory contract does not
necessarily mean that it is a “contract of It is conditional because the insurer incurs
chance” because in a contract of insurance, the liability only upon the happening of the event
parties seek to distribute possible loss by insured against. However, many other
reason of mischance, unlike a wagering conditions are usually required (e.g. payments
contract [Carale]. of premium or performance of other act) as
precedent to the right of the insured to claim
benefit under the insurance.
Page 5 of 450
f. Contract of Adhesion (Fine Print 2. For Specific Kinds of Insurance

Rule) Contracts
Insurance contracts are already presented to a. For Non-Life Insurance

the insured in its printed form on a “take it or
leave it” basis. The insured merely has to agree Contract of Indemnity
to its terms. Such contracts of adhesion are The insured who has insurable interest over
valid. the property is only entitled to recover the
amount of actual loss sustained. The burden
General Rule: When the terms of the contract is upon him to establish the amount of such
are clear and leave no doubt upon the intention loss. Property insurance is personal in the
of the contracting parties, the literal meaning of sense that it is the damage to the personal
its stipulations shall control [Art. 1370, NCC]. interest not the property that is being
reimbursed.
Exception: Where the terms of the insurance
contract are ambiguous and susceptible to General rule: Only non-life insurance or
various interpretations, the issue is to be property insurance contracts are contracts of
resolved against the insurer, being the party indemnity. Life insurance contracts are not
that prepared the contract [Art 1377, NCC]. contracts of indemnity because the value of a
Thus, ambiguity shall be interpreted liberally in life is immeasurable.
favor of the insured and strictly against the
insurer who prepared the same. Exception: Where the basis of the insurable
interest of the policy owner on the life of the
g. Personal Contract insured is a commercial relationship (e.g.,
creditor-debtor, mortgagor/guarantor-
The contract of insurance is basically between mortgagee), then such contract of life
the insurer and the insured. insurance is an indemnity contract.
The insured cannot assign, before the b. For Life Insurance

happening of the loss, his rights under a
property policy to others without the consent of Nature of property
the insurer [Sec. 20, 58, and 83]. Life insurance policies, unlike property
insurance, are generally assignable or
h. Uberrimae fides Contract transferrable [Sec. 81] as they are in the
nature of property.
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;
D. CLASSES
3. Disclose any material fact which the
applicant knows and those which he ought
to know. 1. Marine Insurance
Violation of this duty gives the aggrieved party a. Definition

the right to rescind the contract. Where the
aggrieved party is the insured, the bad faith of Marine insurance is a type of transportation
the insurer will preclude it from denying liability insurance which is concerned with the perils of
on the policy based on breach of warranty. property in, or incidental to transit, as opposed
[Campos] to property perils at a generally fixed location.
Page 6 of 450
Marine insurance includes: c. Loan on Bottomry and

1. Loss or damage to: Respondentia Distinguished
a. Vessels, cargo, freightage, profits, and Loan on Bottomry Loan on
all kinds of property and interests Respondentia
therein, in connection with any and all Loan that is obtained Loan that is obtained
risks or perils of navigation; for the value of the as security for the
b. Person or property appertaining to a vessel on a voyage. value of the cargo to
marine, inland marine, transit or be transported.
transportation insurance;
c. Precious stones, jewels, jewelry, In a bottomry loan, the insurable interest of a
precious metals, whether in course of ship owner on its bottomed boat is the
transportation or otherwise; difference between the amount of the loan and
d. Instrumentalities of transportation and the value of the boat. Thus, if the amount of the
communication, excluding buildings, loan does not cover the total value of the boat,
aids to navigation and transportation, the owner can still insure the boat.
and appurtenant facilities for the
control of waterways. Both loans depend on upon the safe
2. Marine protection and indemnity insurance conclusion of the voyage. [Carale]
against liability incidental to ownership,
operation, maintenance or construction of d. Risks
vessels and facilities therefore. [Sec. 101;
Carale] TWO KINDS OF RISKS
i. Perils of the Sea
b. Divisions ii. Perils of the Ship
Marine insurance has two major divisions: i. PERILS OF THE SEA

1. Ocean marine insurance insures against
risk connected with navigation to which a Ocean marine insurance protects ships at sea
ship, cargo, freightage, profits or other and the cargo or freight on such ships from
insurable interest in movable property, may standard “perils of the sea” or “perils of
be exposed during a certain voyage or a navigation”.
fixed period of time. Its scope includes:
a. Ships or hulls; Includes:
b. Goods or cargoes; i. Losses caused by sea damage, or by
c. Earnings such as freight, passage the violence of the elements;
money, commissions, or profits; and ii. Losses from extraordinary occurrences
d. Liability (protection and indemnity or those which cannot be guarded
insurance). against by the ordinary exertion of
2. Inland marine insurance covers the land human skill or prudence;
or over-the-land transportation perils of iii. Barratry or the willful and intentional act
property shipped by railroads, motor on the part of the master or the crew, in
trucks, airplanes, and other means of pursuance of some unlawful or
transportation. It also covers risks of lake, fraudulent purpose, without the
river or other inland waterway consent of the owner, and to the
transportation and other waterborne perils prejudice of his interest (e.g., burning
outside those covered by ocean marine the ship, unlawfully selling the cargo).
insurance.
Excludes
Ordinary wear and tear of the voyage and from
injuries suffered by the vessel in consequence
Page 7 of 450
of her not being unseaworthy. [Roque v. IAC, e. Loss

G.R. No. L-66935 (1985)]
 Loss may be total or partial.
ii. PERILS OF THE SHIP  Total loss may be actual or constructive.
Perils of the ship are those which cause a loss
which in the ordinary course of events, results: TOTAL LOSS
1. From the ordinary, natural and inevitable 1. Actual loss exists when the subject matter
action of the sea; of the insurance is wholly destroyed or lost
2. From ordinary wear and tear of the ship; or when it is so damaged that it no longer
and exists in its original character. [Vance]
3. From the negligent failure of the ship’s
owner to provide the vessel with the proper It is caused by:
equipment to convey the cargo under a. A total destruction of the thing insured;
ordinary conditions. [de Leon] b. The irretrievable loss of the thing by
sinking, or by being broken up;
Perils of the Sea Perils of the Ship c. Any damage to the thing which renders
it valueless to the owner for the
Covers those Covers losses purpose for which he held it;
casualties due to resulting from d. Any other event which effectively
unusual violence or ordinary wear and deprives the owner of the possession,
extraordinary causes tear, or other damage at the port of destination of the thing
connected with incident to the insured. [Sec. 132]
navigation. voyage.
An actual loss may be presumed from the
Covers losses which Covers losses which continued absence of a ship without being
cannot be guarded result from the heard of. The length of time which is sufficient
against by prudence negligent failure of the to raise this presumption depends on the
and the ordinary ship’s owner to circumstances of the case. [Sec. 134]
exertion of human provide the vessel
skill. with proper 2. Constructive total loss or “technical total
equipment, and can loss” is one in which the loss, although not
thus be guarded actually total, is of such character that the
against by ordinary insured is entitled, if he thinks fit, to treat it
exertion of human as total by abandonment. [45 CJS 1150]
skill.
A constructive total loss is one which gives to a
RULE ON ALL RISKS COVERED person insured a right to abandon. [Sec. 133]
General Rule: In the absence of stipulation,
the risks insured against are only perils of the As to when a constructive total loss exists,
sea, and does not embrace all losses three rules exist:
happening at sea. [Go Tiaco y Hermanos v. 1. English rule: there is constructive total loss
Union Ins. Society of Canton, G.R. No. 13983 when the subject matter of the insurance,
(1919)] while still existent in specie, is so damaged
as not to be worth, when repaired, the cost
Exception: However, in an all risk policy, all of the repairs;
risks are covered unless expressly excepted. 2. American rule: there is constructive total
The burden rests on the insurer to prove that loss when it is so damaged that the costs
the loss is caused by a risk that is excluded. of repairs would exceed one-half of the
[Filipino Merchants Ins. Co. v. CA, G.R. No. value of the thing as acquired (also known
85141(1989)] as the “fifty percent rule”);
Page 8 of 450
3. Philippine rule: the insured may not information is of a doubtful character, the
abandon the thing insured unless the loss insured is entitled to a reasonable time to
or damage is more than ¾ of its value. [de make inquiry [Sec. 143];
Leon] 3. Abandonment is made by giving notice
thereof to the insurer, which may be done
A person insured by a contract of marine orally, or in writing: Provided, That if the
insurance may abandon the thing insured and notice be done orally, a written notice of
recover for a total loss thereof when the cause such abandonment shall be submitted
of the loss is a peril insured against – within seven days from such oral notice
1. If more than ¾ thereof in value is actually [Sec. 145];
lost, or would have to be expended to 4. Abandonment must be absolute and
recover it from the peril; total.
2. If it is injured to such an extent as to reduce
its value by more than ¾; No notice of abandonment is required for
3. If the thing insured is a ship, and the recovery of loss in cases of actual total loss.
contemplated voyage cannot be lawfully
performed without incurring either an Where the information upon which an
expense to the insured of more than ¾ the abandonment has been made proves
value of the thing abandoned or a risk incorrect, or the thing insured was so far
which a prudent man would not take under restored when the abandonment was made
the circumstances; or that there was in fact no total loss, the
4. If the thing insured is cargo or freightage, abandonment becomes ineffectual.
and the voyage cannot be performed, nor
another ship procured by the master, within Characteristics
a reasonable time and with reasonable A valid abandonment has the following
diligence, to forward the cargo without characteristics:
incurring either an expense to the insured 1. There must be an actual relinquishment
of more than ¾ the value of the thing by the person insured of his interest in the
abandoned or a risk which a prudent man thing insured;
would not take under the circumstances 2. There must be a constructive total loss;
[Sec. 141]. 3. It must be factual [Sec. 144];
4. The notice of abandonment must be
Note: Freightage cannot in any case be explicit and must specify the particular
abandoned unless the ship is also abandoned. cause of the abandonment. [Sec. 146]
f. Abandonment Effects
1. An abandonment is equivalent to a transfer
Definition by the insured of his interest to the insurer,
Abandonment, is the act of the insured by with all the chances of recovery and
which, after a constructive total loss, he indemnity [Sec. 148];
declares the relinquishment to the insurer of his 2. If a marine insurer pays for a loss as if it
interest in the thing insured. [Sec. 140] were an actual total loss, he is entitled to
whatever may remain of the thing insured,
Conditions or its proceeds or salvage, as if there had
Aside from the requirement under Sec. 141 been a formal abandonment [Sec. 149];
already mentioned above: 3. Upon an abandonment, acts done in good
1. An abandonment must be neither partial faith by those who were agents of the
nor conditional [Sec. 142]; insured in respect to the thing insured,
2. An abandonment must be made within a subsequent to the loss, are at the risk of the
reasonable time after receipt of reliable insurer, and for his benefit [Sec. 150].
information of the loss, but where the
Page 9 of 450
g. Average 3. It must be successful (i.e., resulted in the

saving of the vessel and/or cargo);
An Average is the extraordinary or accidental 4. Expenses or damages should have been
expense incurred during the voyage for the incurred or inflicted after taking proper legal
preservation of the vessel, cargo or both and steps and authority. [Magsaysay v. Agan,
all the damages to the vessel and cargo from G.R. No. L-6393 (1955)]
the time it is loaded and the voyage
commenced until it ends and the cargo is Vance, however, includes as part of the
unloaded. [Art. 806, Code of Commerce] requisites:
1. Sacrifice was made by the master or upon
There are two kinds of averages: his authority; and
1. Gross or general averages; and 2. That it was not caused by any fault of the
2. Simple or particular averages. party asking for the contribution. [Carale]
Gross/General Simple/Particular An example of particular average loss would be

Average Average the wages of the crew when the vessel is
Includes damages Includes damages detained by reason of force majeure. In such a
and expenses which and expenses case, the loss is only partial and must be borne
are deliberately caused to the vessel by the owner of the vessel alone. [Carale]
caused by the or her cargo, which
master of the vessel have not inured to Rule on averages in marine insurance
or upon his authority, the common benefit Where it has been agreed that an insurance
in order to save the and profit of all the upon a particular thing, or class of things, shall
vessel, her cargo, or persons interested in be free from particular average:
both at the same the vessel and her i. A marine insurer is NOT liable for any
time from a real and cargo [Art. 809, particular average loss not depriving
known risk [Art. 811, Code of Commerce]. the insured of the possession of the
Code of Commerce]. whole of such thing, or class of things
The loss is borne The loss is suffered at the port of destination (even though
by all the owners of by and borne alone it becomes entirely worthless);
the interests by the owner of the ii. HOWEVER, such insurer is liable for
involved, who are cargo or of the his proportion of all general average
pro tanto obliged to vessel, as the case loss assessed upon the thing insured.
give proportionate must be [de Leon]. [Sec. 138]
contributions to Such loss is NOT
make up for such suffered by all h. Warranties
loss, since the persons contributing
sacrifice was made ratably [Carale]. Marine Insurance is unique in that it has certain
for the common implied warranties:
benefit of all who 1. Implied Warranty of Seaworthiness
have an interest in 2. Implied Warranty of Against Improper
the venture [Art 812, Deviation
Code of Commerce; 3. Implied Warranty of proper Documentation
Carale].
Implied Warranty of Seaworthiness
To claim general average contributions, the In every marine insurance upon a ship or
requisites are: freight, or freightage, or upon anything which is
1. There must be a common danger to the the subject of marine insurance, a warranty is
vessel or cargo; implied that the ship is seaworthy. [Sec. 115]
2. The sacrifice must be for the common
safety or for the benefit of all;
Page 10 of 450
A vessel is seaworthy if: Implied Warranty Against Improper

1. It is fit to perform the service and to deviation
encounter the ordinary perils of the voyage A deviation is a departure from the course of
contemplated by the parties to the policy the voyage insured, or an unreasonable delay
[Sec. 116]; in pursuing the voyage or the commencement
2. It is properly laden; of an entirely different voyage. [Sec.125]
3. It is provided with a competent master;
4. It is provided with a sufficient number of Deviation is proper (Insurer remains liable):
competent officers and seamen; 1. When caused by circumstances over which
5. It is provided with the requisite neither the master nor the owner of the ship
appurtenances and equipment; has any control;
6. It is provided with other necessary or 2. When necessary to comply with a
proper stores and implements for voyage. warranty, or to avoid a peril, whether or not
[Sec.118] the peril is insured against;
3. When made in good faith, and upon
A vessel should be seaworthy at the time reasonable grounds of belief in its
commencement of the risk or start of the necessity to avoid a peril; or
voyage, except: 4. When made in good faith, for the purpose
1. When the insurance is made for a specified of saving human life or relieving another
length of time, the implied warranty is not vessel in distress. [Sec. 126]
complied with unless the ship be
seaworthy at the commencement of Every deviation not specified in the last section
every voyage it undertakes during that is improper [Sec. 127]. Effect of any loss
time (Time Policy); subsequent to an improper deviation: Insurer
2. When the insurance is upon the cargo is not liable. [Sec. 128]
which, by the terms of the policy,
description of the voyage, or established Implied Warranty of Proper documentation
custom of the trade, is to be transhipped at Where the nationality or neutrality of a ship or
an intermediate port, the implied warranty cargo is expressly warranted, it is implied that
is not complied with unless each vessel the ship will carry the requisite documents to
upon which the cargo is shipped, or show such nationality or neutrality and that it
transhipped, be seaworthy at the will not carry any documents which cast
commencement of each particular reasonable suspicion thereon. [Sec. 122]
voyage (Cargo Policy). [Sec. 117]
2. Fire
Where different portions of the voyage
contemplated by a policy differ in respect to the a. Definition
things requisite to make the ship seaworthy
therefor, a warranty of seaworthiness is Fire Insurance is a contract of indemnity by
complied with if, at the commencement of each which the insurer, for a stipulated premium,
portion, the ship is seaworthy with reference to agrees to indemnify the insured against loss
that portion. [Sec. 119] by:
i. Fire, lightning, windstorm, tornado or
The insurer is not liable despite breach of earthquake; and
warranty when the ship becomes unseaworthy ii. Other allied risks, when such risks are
during the voyage to which an insurance covered by extension to fire insurance
relates, but there is an unreasonable delay in policies or under separate policies.
repairing the defect. [Sec. 120] [Sec. 169]
Fire is oxidation which is so rapid as to produce

either a flame or a glow. Spontaneous
Page 11 of 450
combustion is usually rapid oxidation. Fire is as it burns in the place where it ought to be.
always caused by combustion, but combustion [Carale]
does not always cause fire. [Western Woolen
Mills Co. v. Northern Assurance Co., 139 Fed c. Alterations in Use or Condition
637 (1905)]
An alteration in the use or condition of a thing
Fire cannot be considered a natural disaster or insured from that to which it is limited by the
calamity since it almost always arises from policy:
some acts of man or by human means. It 1. Entitles an insurer to rescind a contract
cannot be an act of God unless caused by of fire insurance if such alteration:
lightning or a natural disaster or casualty not a. Increases the risks, and
attributable to human agency. [Phil. Home b. Was made: (i) Without the consent
Assurance Corp. v. CA, G.R. No. 106999 of the insurer, and (ii) By means
(1996)] within the control of the insured;
2. Does not affect a contract of fire
Fire or other so-called “allied risks” insurance if the alteration does not
enumerated in Sec. 169 must be the proximate increase the risk. [Sec. 170-171]
cause of the damage or loss.
Note: A contract of fire insurance is not affected
The presence of heat, steam, or even smoke is by any act of the insured subsequent to the
evidence of fire, but taken by itself will not execution of the policy, which does not violate
prove the existence of fire. its provisions, even though it increases the risk
and is the cause of the loss. [Sec. 172]
b. Risks
Transferring machinery to another location,
Rule: The risk assumed by the insurer is the despite a provision in the policy stating that the
loss and damage caused by hostile fire and not machine cannot be transferred without the
friendly fire. consent of the insurer, is considered an
alteration in the condition and location of the
thing insured. [Malayan Insurance Co, Ltd v.
Hostile Fire Friendly Fire
PAP Co., Ltd., G.R. No. 200784 (2013)]
Fire that escapes Fire that burns in a
from the place where place where it is d. Measure of Indemnity
it was intended to intended to burn and
burn and ought to be, ought to be like fire 1. In an open policy, only the expense
or one which remains burning in a stove or necessary to replace the thing lost or
completely within its a lamp. [de Leon] injured in the condition it was at the time of
proper place but the injury will be paid;
because of the Friendly fire may 2. In a valued policy, the parties are bound
unsuitable materials become hostile fire by the valuation, in the absence of fraud or
used to light it, by escaping from the mistake [Sec. 173];
becomes inherently place where it ought 3. The parties may provide for an option-to-
dangerous and to be to some place in rebuild clause concerning the repairing,
uncontrollable. [de which it ought not to rebuilding, or replacing of buildings or
Leon] be [Carale]. structures wholly or partially damages.
[Sec. 174]
The principle underling this distinction is that
Valued policy
the policy shall not be construed to protect the
If there is a valuation, the effect shall be similar
insured from injury consequent upon his
to a marine insurance policy wherein the
negligent use or management of fire, so long
Page 12 of 450
valuation is conclusive between the parties in Excluding:

adjusting the loss. [Sec. 158] Certain types of loss which by law or custom
are considered as falling exclusively within the
Open policy scope of other types of insurance, such as fire
In the absence of express valuation in a fire or marine. [Sec. 176]
insurance policy, the insured is only entitled to
recover the amount of actual loss sustained b. Intentional and Accidental Injury
and the burden of proof is upon him to establish Distinguished
the amount of such loss by preponderance of
evidence. Intentional Injury Accidental Injury
Injury involves the Injury happens by
In an open policy, the actual loss, as exercise of the chance or
determined, will represent the total indemnity reasoning faculties, fortuitously, without
due the insured except only that the total consciousness and intention or design,
indemnity shall not exceed the total value of the volition which is
policy. [Development. Ins. Corp. v. IAC, G.R. unexpected,
No. 71360 (1986)] unusual and
unforeseen
Open to rebuild clause Where a provision of The terms do not,
Whenever the insured desires to have a the policy excludes without
valuation named in his policy, insuring any intentional injury, it is qualification,
building or structure against fire, he may the intention of the exclude events
require such building or structure to be person inflicting the resulting in
examined by an independent appraiser and the injury that is damage due to
value of the insured’s interest therein may then controlling fault, recklessness
be fixed as between the insurer and the or negligence of
insured. The cost of such examination shall be If the injuries suffered third parties.
paid for by the insured. A clause shall be by the insured clearly
inserted in such policy stating substantially that resulted from the
the value of the insured’s interest in such intentional act of the
building or structure has been thus fixed. [Sec. third person, the
174] insurer is relieved
from liability as
3. Casualty stipulated.
a. Definition c. Divisions
Casualty Insurance is insurance covering loss Casualty insurance has two general divisions:
or liability arising from accident or mishap. 1. Liability Insurance - against specified
perils which may give rise to liability on
Including, but not limited to: the part of the insured;
i. Employer’s liability insurance, 2. Indemnity insurance – against
ii. Motor vehicle liability insurance, specified perils which may affect the
iii. Plate glass insurance, persons.
iv. Burglary and theft insurance,
v. Personal accident and health Except with respect to compulsory motor
insurance, as written by non-life vehicle liability insurance, the Insurance Code
insurance companies, and contains no other provisions applicable to
vi. Other substantially similar kinds of casualty insurance or to robbery insurance in
insurance. particular. These contracts are, therefore,
governed by the general provisions applicable
Page 13 of 450
to all types of insurance. Outside of these, the principal or obligor, of an obligation or

rights and obligations of the parties must be undertaking in favor of a third party called the
determined by the terms of their contract, obligee. [Sec. 177]
taking into consideration its purpose and
always in accordance with the general It includes official recognizances, stipulations,
principles of insurance law [Fortune Insurance bonds or undertakings issued by any company
& Surety Co. v. CA, G.R. No. 115278 (1995)]. by virtue of and under the provisions of Act. No
536, as amended by 2206. [Sec. 177]
Liability Insurance
The insurer assumes the obligation to pay the Nature of Contract
third party in whose favor the liability of the It shall be deemed as insurance contract if the
insured arises. The liability of the insurer surety’s main business is that of
attaches as soon as the liability of the insured suretyship, and not where the contract is
to the third party is established. It covers merely incidental to any other legitimate
liability incurred from quasi-delict or criminal business or activity of the surety.
negligence but cannot cover deliberate criminal
acts [DE LEON]. It is an accessory contract unlike a contract
of insurance which is the principal contract
Indemnity Insurance itself.
Under this kind of insurance, no action will lie
against the insurer unless brought by the The contract of a surety is evidenced by a
insured for loss actually sustained and paid by document called surety bond which is
him. Liability of the insurer attaches only after essentially a promise to guarantee the
the insured has paid his liability to the third obligation of the obligor. In turn, the obligor
party [DE LEON]. executes an indemnity agreement in favor of
the insurer [de Leon].
d. No Action Clause
When the obligee accepts the bond, the bond
A no action clause is a requirement in a policy becomes valid and enforceable, whether or not
of liability insurance which provides that a suit the premium has been paid by the obligor,
must first be instituted, and a final judgment be unlike in an insurance contract where payment
first obtained against the insured before the of premium is necessary for the contract to be
person injured can recover on the policy. valid. If the obligee has not yet accepted, then
payment of premium is still necessary for the
However, a no-action clause cannot prevail contract of suretyship to be valid.
over the Rules of Court provisions which are
aimed at avoiding multiplicity of suits. Parties Liability of Surety
(i.e. the insured and the insurer) may be joined The liability of the surety or sureties under a
as defendants in a case commenced by the bond is joint and several, or solidary [Sec.
third party claiming under a liability insurance, 178]. This means that upon the default of the
as the right to relief in respect to the same principal obligor, the surety becomes primarily
transactions is alleged to exist. [Sec. 5, Rule 2 liable. Unlike a guarantor, a surety is not
and Sec. 6, Rule 3, 1997 Rules of Civil entitled to the benefit of exhaustion of the
Procedure; Guingon v. Del Monte, G.R. No. L- principal obligor’s assets and assumes a
22042 (1967)] regular party to the undertaking.
4. Suretyship Said liability is limited or fixed to the amount of

the bond.
A Contract of Suretyship is an agreement
whereby a party, called the surety, guarantees
the performance by another party, called the
Page 14 of 450
5. Life may be made payable on the death of the

person, or after his surviving a specified period
a. Definition (as an annuity or endowment), or otherwise
contingently on the continuation or cessation of
Life Insurance is insurance on human lives life.
and insurance appertaining thereto or
connected therewith. Group life
The ff. shall be considered a life insurance It is a blanket policy covering a number of
contract for purposes of the Insurance Code: individuals who are usually a cohesive group
1. Every contract or undertaking for the (e.g., employees of a company) and subjected
payment of annuities; to a common risk. No medical examination is
usually required of each person insured (in
 Including contracts for the payment of
contrast to individual life insurance).
lump sums under a retirement program
where a life insurance company
manages or acts as a trustee for such Group insurance is a single insurance contract
retirement program that provides coverage for many individuals.
2. Every contract or pledge for the payment of The employer-policy holder is the agent of the
endowments or annuities. [Sec. 181-182] insurer in collecting the premium. [Pineda v.
CA, G.R. No. 105562 (1993)]
An insurance upon life may be made payable:
1. On the death of the person, or Typically, the policy owner is an employer and
2. On his surviving a specified period, or the policy covers the employees or members of
3. On the continuance or cessation of life. the group, with one master contract kept by the
[Sec. 182] employer. Where the employee is required to
pay a portion of the premium, the arrangement
PARTIES [Carale] is called a contributory plan, wherein his share
is deducted from his wages. [Carale]
Owner of With the power to name the
the policy beneficiary, assign it, cash it
in or use as collateral, with Industrial life
the obligation to pay the Industrial life insurance refers to an
premiums insurance policy under which the premiums are
payable either monthly or oftener, if:
Cestui que One on whose life insurance 1. The face amount of insurance provided in
vie is obtained any policy is not more than 500 times that
Beneficiary One to whom the proceeds of the current statutory minimum daily
may be paid wage in the City of Manila; and
2. The words “industrial policy” are printed
There are also cases wherein there may be upon the policy as part of the descriptive
one person only for all three parties. matter. [Sec. 235]
b. Types It provides insurance coverage to industrial

workers or people who are unable to afford
There are 4 types of Life Insurance insurance for bigger amounts.
1. Individual Life
2. Group Life It shall not lapse after non-payment of
3. Industrial Life premiums in 3 months after the expiration of
4. Microinsurance the grace period, if such non-payment is due to
the failure of the company to send its
Individual life representatives to the insured to collect
Insurance on human lives and insurance premium. [Sec. 235]
appertaining thereto or connected therewith. It
Page 15 of 450
c. Other Classifications of Life provides, need not reimburse any

Insurance Policies part of the premiums paid.
h. Endowment policy – where the
1. Ordinary or whole life policy, where the insured is paid the face value of the
insurer agrees to pay the face value of the policy if he outlives the designated
policy upon the death of the insured; period. If he dies within said period,
the insurer pays the proceeds to
Distinct variations of Whole Life Policy: the beneficiary. This is a
a. Ordinary Life Insurance – combination of term policy and
Premiums are paid throughout the pure endowment policy.
lifetime of the person insured or
until the person reaches a 2. Term Life Insurance, which provides for
predetermined specified age at the payment of a specified amount if death
which point the coverage continues occurs within the time period designated in
without the payment of additional the policy, usually for periods of one to five
premiums. years.
b. Limited Payment Life Insurance
– Premiums are paid only during a 3. Modified Life Insurance, which is a policy
specified number of years or until a that combines term and whole life
specified event occurs. insurance into a single insurance policy.
c. Single Premium Life Insurance – Premiums paid by the insured are
the coverage is acquired by the substantially less during the first few years
payment of a single premium. then later on increases during the
d. Joint Life Insurance – coverage is remaining term of the policy. [Carale]
payable upon the first death among
two or more insured (normally d. Risks
purchased by business partners or
spouses) and paid to the survivor. Five important risks:
e. Universal Life Insurance – 1. Death or Survival
emphasizes the separation of the 2. Suicide
portion of the premium that is used 3. Death at the hands of the law
to cover the insurance protection 4. Killing by the beneficiary
from the portion of the premium 5. Accidental Death
allocated to an investment.
f. Variable Life Insurance – some Death or survival
amount of death benefit provided Life insurance may be made payable on the
by a variable life insurance policy is death of the person, or on his surviving a
guaranteed by the insurer, but the specified period, or otherwise contingently on
total death benefit and the cash the continuation or cessation of life. [Campos]
value of the insurance before death
depend on the investment Death of the insured must be proven by the
performance of that portion of the beneficiary before the insurer can be made to
premium which is allocated to a pay.
separate fund.
g. Pure endowment policy –where Suicide
the insurer pays the insured if the Insurer is liable in any of the following cases:
insured survives a specified period. 1. If committed after 2 years from the date of
If the insured dies within the period, the policy’s issue or its last reinstatement
the insurer is released from liability unless the policy provides for a shorter
and unless the contract otherwise period.
Page 16 of 450
Note: Any stipulation extending the 2-year design and are unexpected, unusual, and
period is void. unforeseen.
2. If committed in a state of insanity, Where the death or injury is not the natural or
regardless of the date of the commission, probable result of the insured’s voluntary act,
unless suicide is an excepted peril. [Sec. or if something unforeseen occurs in the doing
183] of the act which produces the injury, the
resulting death is within the protection of the
Since suicide is contrary to the laws of nature policies insuring against death or injury from
and the ordinary rules of conduct, it is never accident. [Carale]
presumed. The burden of proving lies with the
insurer, who seeks to avoid liability under a life An event is not an accident if it is due to a
policy, excepting it from coverage. [Campos] voluntary and intentional act on the part of
anyone, including third parties. In the absence
Death at the hands of the law of proof that the incident was intentional, the
Death at the hands of the law (e.g., legal insurer shall pay the beneficiary the value of
execution) is one of the risks assumed by the the supplemental policy covering death by
insurer under a life insurance policy in the accident. [Calanoc v. CA, G.R. No. L-8151
absence of a valid policy exception. [Campos] (1955)]
Killing by the beneficiary The fact that there were nine wounds in total is
General rule: The interest of a beneficiary in a proof that the victim was killed intentionally, as
life insurance policy shall be forfeited when the this cannot be considered accidental. Thus,
beneficiary is the principal, accomplice or the incident is not covered by the supplemental
accessory in willfully bringing about the death insurance on death by accident. [Biagtan v.
of the insured. In such event, the other Insular [G.R. No. L-25579 (1972)]
beneficiaries so named shall receive their
share and divide among them the forfeited 6. Microinsurance
share of the “guilty” beneficiary. In the absence
of other beneficiaries, proceeds shall be paid Microinsurance is a financial product or
according to the policy contract, and if silent, it service that meets the risk protection needs of
shall be paid to the estate of the insured. [Sec. the poor, where:
12] 1. The amount of contributions, premiums,
fees or charges, computed on a daily basis,
Exceptions does not exceed 7.5% of the current daily
1. Accidental killing minimum wage rate for nonagricultural
2. Self-defense workers in Metro Manila; and
3. Insanity of the beneficiary at the time he 2. The maximum sum of guaranteed benefits
killed the insured is not more than 1,000 times of the said
4. Negligence current daily minimum wage rate. [Sec.
187]
Note: Conviction of the beneficiary is
necessary before his interest in the insurance No insurance company or mutual benefit
policy is forfeited in favor of the others indicated association shall engage in the business of
in Sec. 12. Microinsurance UNLESS it possesses all the
requirements as may be prescribed by the
Accidental death Commissioner. [Sec. 188]
The terms accident and accidental means
have been taken to mean that they happen by
chance or fortuitously, without intention and
Page 17 of 450
7. Compulsory Motor Vehicle The claimants/victims may be a passenger or

a third party. The insured may be the party at
Liability Insurance fault as against claims of third parties (i.e. third-
party liability) or the victim of the contingent
Compulsory motor vehicle liability event.
insurance is a policy of insurance or guaranty
in cash or surety bond to indemnify the death, The following clauses are relevant to
bodily injury, and/or damage to property of a compulsory motor vehicle liability insurance:
third-party or passenger arising from the use of 1. Authorized Driver Clause is a stipulation
a motor vehicle. in a motor vehicle insurance policy which
provides that the driver, other than the
It shall be unlawful for any land transportation insured owner, must be duly licensed to
operator or owner of a motor vehicle to operate drive the motor vehicle, otherwise the
the same in the public highways unless there is insurer is excused from liability;
in force, a policy of insurance or guaranty in 2. Theft Clause is a stipulation including theft
cash or surety bond: as one of the risks insured against. If there
1. Issued in accordance with the is such a provision and the vehicle was
provisions of this chapter; unlawfully taken, the insurer is liable under
2. To indemnity the death, bodily injury the theft clause and the authorized driver
and/or damage to property of a third- clause does not apply. The insured can
party or passenger, as the case may recover even if the thief has no driver’s
be, arising from the use thereof. [Sec. license.
387] 3. No Fault Clause is a provision required in
every compulsory motor vehicle liability
It is a requisite for registration or renewal of insurance regarding claims for death or
registration of a motor vehicle by every land injury to a passenger or third party on a
transportation operator or owner. [Sec. 390] It liability insurance policy covering the
is the only type of compulsory insurance vehicle.
provided for under the Insurance Code.
Any claim for death or injury to any passenger
It applies to all vehicles whether public or or third party shall be paid without the necessity
private vehicles. of proving fault or negligence of any kind,
provided the total indemnity in respect of any
To the extent that motor vehicle insurance is person shall not exceed P15,000.
compulsory, it must be a liability policy, and
the provision making it merely an indemnity The claim shall be made against only one
insurance contract cannot have any effect. motor vehicle. It shall lie against the insurer of
[Campos] the vehicle in which the occupant is riding, and
no other. The claimant is not free to choose
The insurer’s liability is direct and primary so from which insurer he will claim the no fault
the insurer need not wait for final judgment in indemnity. [Perla Compania de Seguros v.
the criminal case to be liable. The purpose is to Ancheta, G.R. No. L-49699 (1988)]
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)]
Page 18 of 450
8. Compulsory Insurance relatives within the fourth civil degree of

consanguinity or affinity who work or have
Coverage for Agency-Hired interest in any of the licensed
Workers recruitment/manning agencies or in any of the
government agencies involved in the overseas
a. Definition employment program shall be disqualified from
providing the migrant worker’s insurance
Compulsory Insurance Coverage for coverage.
Agency-Hired Workers is an insurance
mechanism made available by the law to It shall be the duty of the said directors,
provide insurance protection for OFWs. partners, officers, employees or agents to
disclose any such interest to the IC and POEA.
Each migrant worker to be deployed by a [Sec. 2, Insurance Guidelines on Rule XVI of
recruitment/manning agency shall be covered the Omnibus Rules and Regulations
by a compulsory insurance contract which shall Implementing RA 8042]
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
E. VARIABLE CONTRACTS
workers by ensuring coverage under the
compulsory insurance requirement in Section Variable contract refers to any policy or
37-A of the Migrant Workers and Overseas contract, on either a group or on an individual
Filipinos Act of 1995, as amended. [Sec. 1(b), basis, issued by an insurance company
Insurance Guidelines on Rule XVI of the providing:
Omnibus Rules and Regulations Implementing 1. Benefits or other contractual payments or
RA 8042] values thereunder to vary, so as to reflect
investment results of:
b. Qualifications a. Any segregated portfolio of
investments; or
To be qualified to provide for the Migrant b. A designated separate account in
Workers’ Compulsory Insurance Coverage, the which amounts received, in
insurance company must: connection with such contracts shall
1. Be a reputable private life, non-life and have been placed and accounted for
composite insurance company; separately and apart from other
2. Be duly licensed by IC; investments and accounts; AND/OR
3. Be in existence and operational for at least 2. Benefits or values incidental thereto
five (5) years; payable in fixed or variable amounts, or
4. Have a net worth of at least Php both.
500,000,000 based on the audited financial
statements for the immediately preceding It shall not be deemed to be a security or
year; securities as defined in The Securities Act, as
5. Have a current year certificate of authority; amended, or in the Investment Company Act,
and as amended, nor subject to regulations under
6. Have an IC-approved standard policy. said Acts. [Sec.238(b)]
[Sec. 1, Insurance Guidelines on Rule XVI
of the Omnibus Rules and Regulations No insurance company authorized to transact
Implementing RA 8042] business in the Philippines shall issue, deliver,
sell or use any variable contract in the
c. Disqualifications Philippines, unless and until such company
Insurance companies who have directors, shall have satisfied the Commissioner that:
partners, officers, employees, or agents with
Page 19 of 450
a. Its financial and general condition; and combination of fixed amount and variable
b. Its methods of operations, including the amount of benefits, and for option lump-sum
issue and sale of variable contracts, payment of benefits. [Sec. 239]
are not and will not be hazardous to the
public or to its policy and contract owners.
[Sec. 238(a)] F. INSURABLE INTEREST
No foreign insurance company shall be
authorized to issue, deliver or sell any variable Insurable interest
contract in the Philippines, unless it is likewise That interest which a person is deemed to have
authorized to do so by the laws of its domicile. in the subject matter insured, where he has a
[Sec. 238(a)] relation or connection with or concern in it, such
that the person will:
In determining the qualifications of a company  Derive pecuniary benefit or advantage from
requesting authority to issue, deliver, sell or the preservation of the subject matter
use variable contracts, the Commissioner shall insured; and
always consider the following:
 Suffer pecuniary loss or damage from its
destruction, termination, or injury by the
1. The history, financial and general condition
happening of the event insured against.
of the company: Provided, That such
[Lalican v. Insular Life Ins., G.R. No.
company, if a foreign company, must have
183526 (2009)].
deposited with the Commissioner for the
benefit and security of its variable contract An insurable interest is one of the most basic
owners in the Philippines, securities and essential requirements in an insurance
satisfactory to the Commissioner contract.
consisting of bonds of the Government of
 The existence of an insurable interest gives
the Philippines or its instrumentalities with
a person the legal right to insure the subject
an actual market value of Two million
matter of the policy of insurance [Lalican v.
pesos (P2,000,000.00);
Insular Life Ins., G.R. No. 183526 (2009)].
2. The character, responsibility and fitness of
 It may NOT be waived by stipulation.
the officers and directors of the company;
 Absence of insurable interest renders the
and
insurance contract void. [Sec. 25]
3. The law and regulation under which the
company is authorized in the state of
General Rule: Insurable interest must be
domicile to issue such contracts. [Sec.
capable of pecuniary estimation because the
238(c)] purpose of insurance is to indemnify. It would
be difficult to measure if the benefit derived or
If after notice and hearing, the Commissioner
the loss incurred is not capable of pecuniary
shall find that the company is qualified to issue,
estimation.
deliver, sell or use variable contracts in
Exception: The insurable interest need not
accordance with this Code and the regulations
always be pecuniary in nature (e.g., in insuring
and rules issued thereunder, the
the life of a person, the purpose is not to
corresponding order of authorization shall be
indemnify but to act as an investment or
issued. Any decision or order denying authority
savings instrument). [Lucena v. Crawford,
to issue, deliver, sell or use variable contracts
2Bos & PNR 269 (1806)]
shall clearly and distinctly state the reasons
and grounds on which it is based. [Sec.238(d)]
Rationale: As a deterrence to the insured
Any insurance company issuing variable
contracts pursuant to this Code may, in its
discretion, issue contracts providing a
Page 20 of 450
A policy issued to a person without insurable General rule: A change of interest in the thing
interest is a mere wager policy or contract and insured does not transfer the policy, but
is void for illegality. [de Leon] suspends the insurance to an equivalent extent
until the interest in the thing and the interest in
Evidence that life insurance is regarded as the insurance policy are vested in the same
a wager policy: person. Thus, the contract is not rendered void
a) The original proposal to take out but is merely suspended. [Sec. 20]
insurance was that of the beneficiary;
b) The premiums are paid by the Exceptions
beneficiary; 1. Life, health, and accident insurance.
c) The beneficiary has no interest, 2. A change of interest in the thing insured
economic or emotional, in the after the occurrence of an injury which
continued life of the insured. [de Leon] results in a loss does not affect the policy.
[Sec. 21]
As a measure of limit of recovery 3. A change in the interest in one or more of
The insurable interest is the measure of the several things, separately insured by one
upper limit of his provable loss under the policy, such as a conveyance of one or
contract. Insurance should not provide the more things, does not affect the policy with
insured means of making a net profit from respect to the others not so conveyed.
the happening of the event insured against. [Sec. 22]
[de Leon] 4. A change of interest by will or succession
on the death of the insured. His interest
When insurable interest should exist passes to his heir or legal representative
Insurable Interest Required who may continue the insurance policy on
Inceptio Interveni Occurren the property by continuing paying
n ng Period ce of Loss premiums. [Sec. 23]
Life/Heal ✓ 5. A transfer of interest by one of several
th partners, joint owners, or owners in
Property ✓ ✓ common, who are jointly insured, to the
others. This will avoid the policy only as to
the selling partners or co-owners, but not
For Life Insurance: Insurable interest over as to others. [Sec. 24]
life/health must exist at the time of the inception 6. Automatic transfers of interest in cases in
of the contract, but may be lost after. [Sec. 19] which the policy is so framed that it will
inure to the benefit of whosoever may
For Property Insurance: Insurable interest become the owner of the interest insured
must exist at the time of the inception of the during the circumstance of the risk. [Sec.
contract and at the occurrence of the loss. 57]
 But it need not exist during the intervening
period or from the time between when the It is an exception to the general rule that upon
policy takes effect and the loss occurs. maturity, the proceeds of a policy shall be given
 The alienation of insured property will not exclusively to the proper interest if the person
defeat a recovery if the insured has in whose name or for whose benefit it is made.
subsequently reacquired the property and
possesses an insurable interest at the time In case of an express prohibition against
of loss. [Sec. 19] alienation in the policy [Art. 1306, NCC],
alienation will not merely suspend the contract
CHANGE OF INTEREST but avoid it entirely.
Change of interest means the absolute transfer
of the property insured.
Page 21 of 450
1. In Life/Health Each person has unlimited interest in his own

life, whether the insurance is for the benefit of
Every person has an insurable interest in the himself or another. [40 CJS 909]
life and health:
(a) Of himself, of his spouse and of his The beneficiary designated need not have any
children; interest in the life of the insured when the latter
(b) Of any person on whom he depends wholly takes out policy on his own life. [de Leon]
or in part for education or support, or in
whom he has a pecuniary interest; INTEREST IN LIFE OF ANOTHER
(c) Of any person under a legal obligation to The insurable interest in the life of another:
him for the payment of money, or (i) Must be a pecuniary interest;
respecting property or services, of which (ii) Exists whenever the relation between
death or illness might delay or prevent the the assured and the insured is such
performance; and that the assured has a reasonable
(d) Of any person upon whose life any estate expectation of deriving benefit from the
or interest vested in him depends. [Sec. 10] continuation of the life insured or of
suffering detriment through its
A person is not allowed to take out insurance termination. [de Leon]
upon the life of a stranger. [Carale]
General Rule: When the owner of the policy
There is no insurable interest in the life of an insures the life of another, and designates a
illegitimate spouse. A creditor may take out third party as beneficiary, both the owner
insurance on the life of his debtor, but his and beneficiary must have an insurable
insurable interest is only up to the amount of interest in the life of the cestui que vie.
the debt, and only when the debt is unsecured.
[Carale] Exception: An assignee of the insurance
contract is not required to have insurable
General Rule: The measure of indemnity under interest in the life of the insured, since insurable
a policy of insurance upon life or health is the interest over life should exist only during the
sum fixed in the policy. inception of the contract.
Exception: Unless the interest of a person Note: An assignment of the insurance contract
insured is susceptible of exact pecuniary is different from a change in the designated
measurement. [Sec. 186] beneficiary.
But if a person obtains a policy on the life of

In Life Insurance
another and names himself as the beneficiary,
he must have insurable interest therein [de
TYPES OF LIFE INSURANCE
Leon].
Life insurance policies may be divided into two
BENEFICIARY OF LIFE INSURANCE
general classes:
A beneficiary is the person named or
Insurance upon one’s life
designated in a contract of life, health, or
Insurance upon the life of another
accident insurance as the person who is to
receive the proceeds or benefits which become
INTEREST IN ONE’S OWN LIFE
payable, if the insured risk occurs.
The cestui que vie is the insured himself. The
insured can designate anyone to be the
General rule: A person may designate a
beneficiary of the policy.
beneficiary, irrespective of the beneficiary’s
lack of insurable interest, provided he acts in
good faith and without intent to make the
Page 22 of 450
transaction merely a cover for a forbidden In Health Insurance

wagering contract, [de Leon]
General rule: Interest in the life or health of a
Exceptions: Any person who is forbidden from person must exist at the inception of the
receiving any donation under Art. 739, Civil insurance contract but need not exist thereafter
Code cannot be named beneficiary of a life or when the loss occurs. [Sec. 19]
insurance policy by the person who cannot
make any donation to him [Art. 2012, NCC]. Exceptions
1. In the case of a creditor’s insurance taken
Art. 739, NCC. The following donations are on the life of the debtor, insurable interest
void: disappears once the debt has been paid;
(1) Those made between persons who were 2. In the case of a company’s insurance taken
guilty of adultery or concubinage at the on the life of an employee, insurable
time of the donation; interest disappears once the employee
(2) Those made between persons found leaves the company.
guilty of the same criminal offense, in
consideration thereof; 2. In Property
(3) Those made to a public officer or his wife,
descendants and ascendants, by reason The following are considered as insurable
of his office. (…) interest, provided that they are of such nature
that a contemplated peril might directly damnify
CHANGING THE BENEFICIARY the insured:
General Rule: The insured shall have the right 1. Every interest in real or personal property;
to change the beneficiary he designated in the or
policy. [Sec. 11]  e.g., ownership
2. Any relation thereto; or
Exception: If the insured expressly waived his  e.g., interest of a trustee or a
right to change the beneficiary, this makes the commission agent
latter an irrevocable beneficiary. But despite 3. Any liability in respect thereof. [Sec. 13]
the waiver, he can still change the beneficiary,  e.g., interest of a carrier or
provided he obtained the beneficiary’s consent. depository of goods
[Sec. 11]
A person has an insurable interest in property
Under the Slayer Statute, when the beneficiary when he sustains such relation with respect to
is the principal, accomplice or accessory in it that he has a reasonable expectation of:
willfully bringing about the death of the insured,  Benefit to be derived from its continued
the interest of beneficiary in life insurance existence; or
policy is forfeited. [Sec. 12]  Loss or liability from its destruction.
[Carale; Gaisano Cagayan Ins. V. Ins. Co.
TRANSFER OF POLICY of North America, G.R. No. 147839 (2006)]
The life insurance policy can be transferred
whether the transferee has insurable interest or An insurable interest in property may
not. Notice of the transfer to the insurer is not consist in:
required for the validity of the same. [Sec. 184 a. An existing interest; [Sec. 14]
and 185]  Existing interest in property may be a
legal title or equitable title. [DE LEON]
There is no right of subrogation in life  Examples of those having existing
insurance, because it is not a contract of interest are:
indemnity. (1) Owners as regards their
properties,
Page 23 of 450
(2) Trustees in the case of the seller may sell the remains without prejudice to
of property not yet delivered, his right to recover; [Sec. 21]
(3) Mortgagors over the property 2. A change of interest in one or more several
mortgaged, and lessor, lessee distinct things, separately insured by one
and sub-lessee over the property policy. This does not avoid the insurance
leased. [de Leon] as to the others; [Sec. 22]
b. An inchoate interest founded on an 3. A change in interest by will or succession
existing interest; [Sec. 14] or upon the death of the insured; [Sec. 23]
 Inchoate interest in property exists but 4. A transfer of interest by one of several
is incomplete or unripe until the partners, joint owners, or owners in
happening of an event. [de Leon] common who are jointly insured. The
 Examples of inchoate interests are: acquiring co-owner has the same interest;
(1) The interest of stockholders with his interest merely increases upon
respect to dividends in case of acquiring other co-owners interest. [Sec.
profits and shares in the assets, 24]
and
(2) The interest of a partner in the Note: This makes a distinction between a
properties belonging to the transfer in favor of a partner and in favor of a
partnership. [de Leon] stranger. The latter will avoid the policy while
c. An expectancy, coupled with an the former will not. [Carale]
existing interest in that out of which the
expectancy arises. [Sec. 14] Mere transfer of the property does not transfer
 For example, a farmer who planted the policy but suspends it until the same person
crops has insurable interest over his becomes the owner of both the policy and the
harvest which can be expected. [de thing insured. [Sec. 20]
Leon]
Measure of Indemnity
A mere contingent or expectant interest in
anything, not founded on an actual right to the Being a contract of indemnity, the measure of
thing, nor upon any valid contract for it, is not insurable interest in property is the extent to
insurable. [Sec. 16] which the insured might be damnified by the
 A son has no insurable interest over loss of injury thereof. [Sec. 17]
the property of his father because
such is just a mere expectancy and The insured cannot recover a greater value
has no legal basis before he inherits than that of his actual loss because it would be
such property. [Carale] a wagering policy contrary to public policy and
void.
Time of Existence
A carrier or depository of any kind has an
General rule: Interest in property insured must insurable interest in a thing held by him as
exist both at inception and at time of loss, but such, to the extent of his liability but not to
not in the intervening period [Sec. 19]. exceed the value thereof. [Sec. 15]
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
Page 24 of 450
Interest in Property and Life 3. The same subject matter;

Distinguished 4. The same interest insured; and
5. The same risk or peril insured against.
Property Life [Malayan Insurance v. Philippine First
Extent Insurance, G.R. No. 184300 (2012)]
Limited to actual Unlimited (save in life
value of the interest insurance effected Double insurance is NOT prohibited under the
thereon by a creditor on the law, unless the policy contains a stipulation to
life of the debtor – the contrary.
amount of debt only)  Usually, insurance policies contain an
Existence other insurance clause, which requires
Must exist when the Must exist at the time disclosure of other existing insurance
insurance takes the insurance takes policy.
effect and when the effect, BUT need not  In such case, non-disclosure will avoid the
loss occurs, BUT exist thereafter policy. It is intended to prevent over
need not exist in the insurance and thus avert the perpetration
meantime of fraud.
Expectation of benefit to be derived
If there is double insurance and loss occurs:
Must have legal Need not have legal
basis basis  Each of the insurers will be liable only up to
the face value of their respective policies;
Interest of beneficiary
and
Must have insurable Need not have
 The insured has the option of choosing the
interest over the insurable interest
order by which he will claim from the
thing insured over the life of the
insurers. [Carale]
insured if the insured
himself secured the
policy. But if the Over Insurance
insurance was
obtained by the Over insurance occurs when the value of the
beneficiary, the latter insurance exceeds the value of the insurable
must have insurable interest.
interest over the life
of the insured Over insurance It is not per se void, however:
[SUNDIANG and  Recovery is allowed only to the extent of
AQUINO] the loss or damage incurred by the insured.
[CARALE]
 An insurer may cancel an insurance policy,
3. Double Insurance and Over other than life, based on a “discovery of
Insurance other insurance coverage that makes the
total insurance in excess of the value of the
Double Insurance property insured”, subject to the
requirement of prior notice. [Sec. 64(f)]
Double insurance exists where the same  The insured is entitled to a ratable return of
person is insured by several insurers the premium, proportioned to the amount
separately in respect to the same subject and by which the aggregate sum insured in all
interest. [Sec. 95] the policies exceeds the insurable value of
the thing at risk (in case of an over
Requisites: insurance by several insurers other than
1. The same person is insured; life). [Sec. 83]
2. Two or more insurers insuring separately;
Page 25 of 450
If there is over-insurance and loss occurs, then ratably to the loss or damage considering that
the insurers will pay pro-rata or in the order as the several insurances cover the same subject
stated in contract or excess clause. matter and interest against the same peril. If
the loss is greater than the sum total of all the
Double Insurance Over Insurance policies issued, each insurer is liable for the
Amount of insurance Amount of insurance amount of his policy.
may or may not exceeds the value of
exceed the value of the insured’s 4. Multiple or Several Interests
the insured’s insurable interest
insurable interest
on Same Property
There are always There may be one or
General Rule: The insurance proceeds shall
several insurers more insurers
be applied exclusively to the proper interest of
the person in whose name or for whose benefit
Rules for Payment it is made.
Where the insured in a policy other than life is Exception: Unless otherwise specified in the
over insured by double insurance: policy. [Sec. 53]
(a) The insured, unless the policy otherwise
provides, may claim payment from the Examples wherein multiple persons may each
insurers in such order as he may select, up have insurable interest over the same property:
to the amount for which the insurers are (1) Corporations – the corporation and its
severally liable under their respective stockholders have insurable interest over
contracts; the corporate assets.
(b) Each insurer is bound, as between himself (2) Partnerships – the partnership and the
and the other insurers, to contribute ratably partners composing it have insurable
to the loss in proportion to the amount for interest over its assets.
which he is liable under his contract. [Sec. (3) Assignments – the assignor and assignee
96] have insurable interest over the property
assigned.
Rules for claiming payment under Valued (4) Trusts – the trustor and trustee have
Policies vs. Unvalued Policies [Sec. 96] insurable interest over the property in trust.
Valued Policy Unvalued policy (5) Lease Agreements - the lessor, lessee and
Any sum received by Any sum received by sub-lessees have insurable interest over
him under any other him under any policy the property in lease.
policy shall be shall be deducted (6) Mortgages – the mortgagor and
deducted from the against the full mortgagee/s have insurable interest over
value of the policy insurable value for the property mortgaged.
without regard to the any sum received by
actual value of the him under any policy
Multiple Interests over Mortgaged
subject matter
insured
Property
The Insurance Code recognizes that:
Where the insured receives any sum in
 Both the mortgagor and mortgagee have
excess of the valuation (for valued policies),
each separate and distinct insurable
or of the insurable value (for unvalued
interest in the mortgaged property.
policies), the insured must hold such sum in
trust for the insurers, according to their right  They may take out separate policies with
of contribution among themselves. the same or different insurance companies.
 Insurance taken by one on his own name
only, does not inure to the benefit of the
Sec. 96 enunciates the principle of contribution
other. [Sec. 53]
which requires each insurer to contribute
Page 26 of 450
Thus, a mortgagor has an insurable interest insurer, to the extent of the insurance money
equal to the value of the mortgaged property paid. [Palileo v. Cosio, G.R. No. L- 7667
and a mortgagee, only to the extent of the debt (1955)]
Secured by the mortgage. [Geagonia v. CA,
G.R. No. 114427(1995)] When mortgagor takes out insurance policy
When a mortgagor takes out an insurance for
Mortgagor Mortgagee his own benefit, only he can recover from the
As owner, the Only to the extent of insurer but the mortgagee has a lien on the
interest is to the the debt secured proceeds by virtue of the mortgage. A
extent of the value of mortgagor can make the proceeds payable to
the property, or assigned to the mortgagee [de Leon].
regardless of
whether it equals to Ways where mortgagee may be the
the mortgage debt or beneficial payee [Geagonia v. CA, G.R. No.
not 114427 (1995)]:
His interest lies in What is insured is (1) As assignee with the consent of the
that the loss or not the property, but insurer;
destruction of the his interest as (2) A pledge without such consent;
property will not mortgagee, which (3) The original policy may contain a mortgage
extinguish his subsists until the clause;
mortgage debt mortgage debt is (4) A rider making the policy payable to the
extinguished mortgagee “as his interest may appear”
[CARALE] may be attached;
(5) A “standard mortgage clause,” containing a
When mortgagee takes out insurance collateral independent contract between
policy the mortgagee and the insurer may be
 When a mortgagee insures his own interest attached;
in the mortgaged property without (6) The policy, though by its terms payable
reference to the right of the mortgagor, absolutely to the mortgagor, may have
mortgagee is entitled to the proceeds of the been procured by a mortgagor under a
policy in case of loss to the extent of his contract duty to insure for the mortgagee's
credit. [de Leon] benefit.
 If the proceeds are more than the total
amount of credit, then mortgagee has no Open Loss Payable Mortgage
right to the excess. Clause
 If the proceeds are equal to the credit, then
insurer is subrogated to the mortgagee’s An open loss payable clause states that the
rights and mortgagee can no longer proceeds of the insurance contract is payable
recover the mortgagor’s indebtedness. to the mortgagee as beneficiary.
 If the proceeds are less than the credit,
then the mortgagee may recover from the The contract, however, is procured by the
mortgagor the deficiency. Upon payment, mortgagor for his interest in the property. He is
the insurer is subrogated to the rights of the the party to the contract, not the mortgagee.
mortgagee against the mortgagor to the
extent of the amount paid. The acts of the mortgagor prior to the loss,
which would otherwise avoid the insurance,
When a mortgagee insured his own interest affects the mortgagee, even if the property is in
and a loss occurs, he is entitled to recover on the hands of said mortgagee.
the insurance. The mortgagee, however, is not
allowed to retain his claim against the
mortgagor, but it passes by subrogation to the
Page 27 of 450
Union Mortgage or Standard in the application that contract shall not

Mortgage Clause become binding until the policy is delivered and
the first premium is paid. [de Leon]
A standard or union mortgage clause makes a
separate and distinct contract of insurance on Cognition Theory
the interest of the mortgagee, thus any act of An acceptance made by letter shall not bind the
the mortgagor will not affect the mortgagee. person making the offer, except from the time
[Carale] it came to his knowledge.
This clause is similar to an open loss payable In Enriquez v. Sun Life Assurance Co. [G.R.
clause, except that it is stipulated that the acts No. L-15895 (1920)] the Court held that:
of the mortgagor cannot invalidate the a) The submission of an application,
insurance, provided that if the mortgagor fails even with premium payment is a mere
to pay the premiums due, the mortgagee shall, offer on the part of the applicant, and
on demand, pay said premiums. [de Leon] does not bind the insurer;
b) An insurance contract is also not
perfected where the applicant dies
G. PERFECTION OF THE before the approval of his application
CONTRACT OF or it does not appear that the
acceptance of the application ever
INSURANCE came to the knowledge of the
applicant.
1. Offer and
Acceptance/Consensuality Delay in Acceptance
Delay in acting on the application does not

An insurance contract is consensual, it is
constitute acceptance even though the insured
therefore perfected by mere consent.
has forwarded his first premium with his
application. [Perez v. CA, G.R. No. 112329
Consent is manifested by the meeting of the
(2000)]
offer and the acceptance upon the object or the
cause which are to constitute the contract.
When there is delay in acceptance due to the
negligence of the insurance company which
There is an offer when the insured submits an
takes unreasonably long time before the
application to the insurer.
application is processed and the applicant dies,
the contract is not perfected.
There is acceptance when the insurer
approves the application.
The insurer can be liable for damages in
accordance with the “tort theory.”
So long as an application for insurance has not
been either accepted or rejected, it is merely a
The insurance business is imbued with public
proposal or an offer to make a contract. [Perez
interest, thus it is the duty of the insurer to act
v. CA, G.R. No. 112329 (2000)]
with reasonable promptness in acting on
applications submitted to it. [Wallace v.
The insurance contract becomes effective
Hartford Fire Insurance Co, 31 Idaho 48r,
upon payment of first premium, provided there
(1918)]
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
Page 28 of 450
Delivery of Policy Jurisprudence decided before RA 10607

provides two further exceptions:
Delivery is the act of placing the insurance a) Agreement to grant payment of premium in
policy (i.e. the physical document) into the installment basis and partial payment has
possession of the insured. been made; [Makati Tuscany v. CA, G.R.
No. 95546, (1992)]
The delivery can be proof of the acceptance of b) When parties are barred by Estoppel.
the insurer of the offer of the insured. [UCPB v. Masagana Telemart, G.R. No.
137172 (2001)]
It is not, however, a pre-requisite of a valid
contract of insurance. Authority of Agent to Receive
Premium
Actual manual delivery is not necessary for the
validity of the contract; constructive delivery Where an insurer authorizes an insurance
may be sufficient. agent or broker to deliver a policy to the
insured, it is deemed to have authorized said
Delivery to the agent cannot be considered agent to receive the premium in its behalf.
delivery to the insured, as the agent of the
insurance company is not the agent of the The insurer is bound by its agent’s
insured. [Bradley v. New York Life Ins., 275 F. acknowledgement of receipt of payment of
657 (1921)] premium. [American Home Assurance Co. v.
Chua, G.R. No. 130421 (1999)]
2. Premium Payment
Payment by Post-Dated Check
An insurance premium is the agreed price for
assuming and carrying the risk, that is, the The payment of premium by a postdated check
consideration paid an insurer for undertaking to at a stated maturity subsequent to the loss is
indemnify the insured against the specified insufficient to put the insurance into effect.
peril.
But payment by a check bearing a date prior to
General rule: No insurance policy issued or the loss, assuming availability of funds, would
renewal is valid and binding until actual be sufficient, even if it remains unencashed at
payment of the premium. Any agreement to the the time of the loss. The subsequent effects of
contrary is void. [Sec. 77] encashment would retroact to the date of the
instrument and its acceptance by the creditor.
Exceptions [Vitug, Commercial Laws and Jurisprudence
1. Whenever the grace period provision (2006)]
applies in the case of a life or an industrial
life policy. [Sec. 77] Non-Payment of Premium
2. Whenever under the broker and agency
agreements with duly licensed Effects of non-payment of first premium:
intermediaries, a 90-day credit extension is (1) Prevents the contract from becoming
given. binding, unless waived. [Philippine Phoenix
Note: No credit extension to a duly licensed Surety and Insurance v. Woodworks, G.R.
intermediary should exceed 90 days from No. L-25317 (1979)]
the date of issuance of the policy. [Sec. 77] (2) Does not affect the validity of the contracts
3. When there is an acknowledgment in the unless, by express stipulation, it is provided
contract that the premium has been paid. that the policy shall, in that event, be
[Sec. 79] suspended or shall lapse.
Page 29 of 450
Applicable Grace Periods Cash Surrender Value (CSV)

In case of individual life insurance, the policy
holder is entitled a grace period of either 30 The CSV is the amount that the insured is
days or one month within which payment of any entitled to receive if he surrenders the policy
premium after the first may be made. [Sec. 233] and releases his claims upon it.
 The right to CSV accrues only after three
In cases of industrial life insurance, the grace full annual premium payments.
period is four weeks, and where premiums are  The insured is given the right to claim the
paid monthly, either 30 days or one month. amount less than the reserve, reduced by
[Sec. 236] surrender charge, [Sec. 233(f)(1)]
Excuses for Non-Payment The CSV is an amount which the insurance

(1) Fortuitous events which render payment company holds in trust for the insured to be
by the insured wholly impossible will not delivered to him upon demand. When the
prevent forfeiture of the policy when the company’s credit for advances is paid out of the
premium remains unpaid. In other words, it cash value or cash surrender value, that value
is not an excuse. and the company’s liability is diminished.
(2) Non-payment of premiums occasioned by [Manufacturer’s Life Ins. v. Meer, G.R. No. L-
war causes an insurance to be not merely 2910(1951)]
suspended, but completely abrogated.
[Constantino v. Asia Life Ins. Co. G.R. No. Rationale: The premium is uniform throughout
L-1669 (1950)]. a lifetime, but the risk is varied (i.e. higher risk
when older, lower when young). Thus, the cost
3. Non-Default Options in Life of protection is more expensive during the early
years of the policy.
Insurance
In the case of individual life or endowment Alternatives to CSV
insurance, the policy shall contain a provision
specifying the options to which the policyholder (1) Extended insurance/term insurance -
is entitled to in the event of default in a premium where the insured, after having paid three
payment after three (3) full annual premiums full annual premiums, is given the right to
have the policy continued in force from
shall have been paid. [Sec. 233(f)]
date of default for a time either stated or
Such option shall consist of: equal to the amount of the CSV, taken as a
(1) A cash surrender value payable upon single premium.
surrender of the policy which shall not be
less than the reserve on the policy. The face value of the policy remains the
- The basis of which shall be indicated, same but only within the term.
for the then current policy year; and
- Any dividend additions thereto, shall be If death occurs during this period, the
reduced by a surrender charge, which beneficiary can recover the face value of
shall not be more than one-fifth (1/5) of the policy, but if the insured survives, the
the entire reserve or two and one-half beneficiary gets nothing.
percent (2½%) of the amount insured
and any dividend additions thereto Reinstatement is allowed if made within the
(2) One or more paid-up benefits on a plan or term purchased; no reinstatement after the
plans specified in the policy of such value lapse of the term purchased.
as may be purchased by the cash
surrender value. [Sec. 233(f)] (2) Paid-up insurance - where, after the
insurance is “paid-up,” the insured who has
Page 30 of 450
paid three full annual premiums is given the  Upon production of evidence of insurability
right, upon default, to have the policy satisfactory to the company; and
continued from the date of default for the  Upon payment of all overdue premiums
whole period of insurance without further and any indebtedness to the company
payment of premiums. upon said policy, with interest rate not
exceeding that which would have been
It is also called reduced paid-up because in applicable to said premiums and
effect the policy, terms and conditions are indebtedness in the policy years prior to
the same but the face value is reduced to reinstatement. [Sec. 233(j)]
the “paid-up” value.
Reinstatement of a lapsed life insurance policy
The terms and conditions of the original is NOT a non-default option.
policy remain the same, however, the  It does not create a new contract, but
amount will be less than the original face merely revives the original policy so insurer
value. cannot require a higher premium than the
amount stipulated in the contract.
(3) Automatic premium loan (APL) - where,  It does not apply to group/industrial life
upon default, the insurer lends/advances to insurance.
the insured without any need of application
on his part, the amount necessary to pay Requisites: [Sec. 233(j)]
overdue premium, but not to exceed the a. It must be exercised within three years from
CSV of the policy. date of default;
b. The insured must present evidence of
It only applies if requested in writing by the insurability satisfactory to the insurer;
insured either in the application or at any c. He must pay all back premiums and all
time before expiration of the grace period. indebtedness to the insurer (with interest);
d. The CSV must not have been duly paid to
In effect, the insurance policy continues in the insured nor the extension period
force for a period covered by the payment. expired;
e. The application must be filed during the
After the period, if insured still does not insured’s lifetime, [Andres v. Crown Life
resume paying his premiums, the policy Ins., G.R. No. L-10874 (1958)]
lapses, unless CSV still remains. If there is
still CSV, APL continues until CSV is 5. Refund of Premiums
exhausted.
Return of premiums can be made in the
4. Reinstatement of a Lapsed following cases:
Policy of Life Insurance a. If the thing insured was never exposed to
the risks insured against, the whole
In the case of individual life or endowment premium should be refunded. [Sec. 80(a)]
insurance, the policy shall contain a provision b. When the contract is voidable due to the
that the policyholder shall be entitled to have fraud or misrepresentation of insurer or his
the policy reinstated: agent, the whole premium should be
 At any time within three (3) years from the refunded. [Sec. 82]
date of default of premium payment c. When by any default of the insured other
o Unless the cash surrender value than actual fraud, the insurer never
has been duly paid incurred any liability under the policy and
o Unless the extension period has the whole premium should be refunded.
expired, [Sec. 82]
Page 31 of 450
d. When the contract is voidable because of i. Which are material to the contract;
the existence of facts of which the insured ii. As to which he makes no warrant; and
was ignorant without his fault, the whole iii. Which the other has not the means of
premium should be refunded. [Sec. 82] ascertaining. [Sec. 28]
e. Where the insurance is for a definite period
and the insured surrenders his policy, the An intentional or fraudulent omission, on the
portion of the premium that corresponds to part of one insured, to communicate
the unexpired time at a pro rata rate, unless information of matters proving or tending to
a short period rate has been agreed upon prove the falsity of a warranty, entitles the
and appears on the face of the policy insurer to rescind. [Sec. 29]
should be return. [Sec. 80(b)]
f. When there is over-insurance by several Note: If the applicant is aware of the existence
insurers, the return premiums should be of some circumstance which he knows would
proportioned to the amount by which the influence the insurer in acting upon his
aggregate sum insured in all the policies application, good faith requires him to disclose
exceeds the insurable value of the thing at that circumstance, though unasked. [Vance]
risk. [Sec. 83]
g. When rescission is granted due to the Matters which Need Not be Disclosed
insurer’s breach of contract. 1. Matters already known to the insurer [Sec.
30(a)];
2. Matters which each party are bound to
H. RESCISSION OF know [Sec. 30(b) and Sec. 32];
INSURANCE CONTRACTS 3. Matters of which the insurer waives
communication [Sec. 30(c) and Sec. 33];
4. Matters which prove or tend to prove the
1. Concealment existence of a risk excluded by a warranty
and which are not otherwise material [Sec.
A concealment, whether intentional or 30(d)];
unintentional, entitles the injured party to 5. Matters which relate to a risk excepted in
rescind a contract of insurance. [Sec. 27] the policy, and which are not otherwise
material [Sec. 30(e)];
Rationale: The contract of insurance is one of 6. Information of the nature or amount of the
perfect good faith (uberrimae fides) not for the interest of one insured unless if inquired
insured alone, but equally for the insurer [Qua upon by the insurer, except if required by
Chee Gan v. Law Union & Rock Insurance, Sec. 51 [Sec. 34];
G.R. No. L-4611(1955)]. 7. Matters of opinion. [Sec. 35]
Definition Each party to a contract of insurance is bound

Concealment is the failure to disclose facts to know all the general causes which are open
which the applicant at the time of application, to his inquiry, equally with that of the other, and
knows or ought to know and are material to the which may affect the political or material perils
insurance applied for. [Carale] contemplated; and all general usages of trade.
[Sec. 32]
A neglect to communicate that which a party
knows and ought to communicate, is called a Requisites of Concealment:
concealment. [Sec. 26] a. A party knows a fact which he neglects to
communicate or disclose to the other;
Duty to Communicate by the Insured b. Such party concealing is duty bound to
Each party to a contract of insurance must disclose such fact to the other;
communicate to the other, in good faith, all c. Such party concealing makes no warranty
facts within his knowledge: of the fact concealed;
Page 32 of 450
d. The other party has not the means of (3) Accepting the application for
ascertaining the fact concealed; insurance. [Sec. 31]
e. The fact concealed is material.
The test is the effect which the knowledge of
Failure of the insured to disclose conditions the fact in question would have on the contract.
affecting the risk, of which he is aware, makes It is sufficient if the knowledge of it would
the contract voidable at the insurer’s option, the influence the party in making the contract. [de
ratio being that a contract of insurance is of Leon]
good faith.
In several cases, the cause of death may have
But, Sec. 27, uses the phrase “injured party”, no relation to the fact or facts concealed.
thus the insured may also rescind the contract. [CARALE]
Concealment may be committed by either the Effects

insurer or the insured. [Qua Chee Gan v. Law
Union & Rock Ins. Co. G.R. No. L-4611(1955)] General rule: Concealment vitiates the
contract and entitles the insurer to rescind,
Proof of Fraud in Concealment even if the death or loss is due to a cause not
related to the concealed matter. [Sec. 27]
General rule: Fraud need not be proven in
order to prove concealment. Good faith is not a Exceptions
defense. [Saturnino v. Phil. American Life 1. Concealment after the contract has
Insurance, G.R. No. L-16163 (1963)] become effective, because concealment
must take place at the time the contract is
Exception: When the concealment is made by entered into in order that the policy may be
the insured in relation to the falsity of a avoided; [Vance]
warranty, the non-disclosure must be 2. Waiver or estoppel;
intentional and fraudulent in order that the 3. In marine insurance, where concealment of
contract may be rescinded. [Sec. 29] the following matters does not vitiate the
entire contract, but merely exonerates the
Rationale: The insured is under no obligation to insurer from a loss resulting from the risk
reveal things of which he makes a warrant concealed:
because it would constitute a superfluity of a. The national character of the insured;
disclosure. [Carale] b. The liability of the thing insured to
capture and detention;
Test of Materiality c. The liability to seizure from breach of
foreign laws of trade;
The test of materiality is whether the insurer d. The want of necessary documents; and
would have agreed to issue the policy had it e. The use of false and simulated papers.
known of the facts concealed or, perhaps, [Sec. 112]
impose additional terms or require higher 4. Incontestability clause: stipulates that the
premium. [Carale] policy shall be incontestable after two
years from its date of issue or of its last
Materiality relates to the probable and reinstatement. The incontestability clause
reasonable influence of the facts upon the is a mandatory provision in life and
party to whom the communication should have endowment policies, [Sec. 233 (b) and
been made, in: Sec. 48]
(1) Assessing the risk involved;
(2) Making or omitting to make further
inquiries; and
Page 33 of 450
INCONTESTABILITY CLAUSE Grounds still available:

In the case of individual life or endowment 1. Non-payment of premium to make the
insurance, the policy shall contain a provision policy effective or remain in force
that the policy shall be incontestable. 2. Lack of insurable interest
 After it shall have been in force during the 3. Coverage such that the loss/damage did
lifetime of the insured for a period of two (2) not arise from the risks covered
years from its date of issue as shown in the 4. Violation of military or naval service
policy, or date of approval of last provisions of the policy (also an issue of
reinstatement. [Sec. 233(b)] coverage)
 Exceptions: 5. Failure to commence action within
o Non-payment of premium reglementary period
o Violation of the conditions of the 6. Failure to comply with conditions (proof of
policy relating to military or naval loss, etc.) subsequent to the loss; or
service in time of war [Sec. 233(b)] 7. The particular viciousness of the fraud
employed by the insured to procure the
The insurer CANNOT prove that the policy is contract, such as:
void ab initio or is rescindable by reason of the Where the policy was taken pursuant to
fraudulent concealment or misrepresentation a scheme to murder the insured, or
of the insured or his agent: the insured substitutes himself with
 After a policy of life insurance made another during the medical
payable on the death of the insured shall examination.
have been in force during the lifetime of the
insured for a period of two (2) years from Concealment in Marine and
the date of its issue or of its last Ordinary Private Insurance
reinstatement [Sec. 48] Distinguished
 The insurer’s right to rescind a contract is
not exercised previous to the Marine Ordinary
commencement of an action on the Insurance Insurance
contract. [Sec. 48]
Required Exact and Substantial
Disclosure whole truth truth
Effect of the incontestability clause Effect of Concealment Any kind of
The insurer cannot prove that the policy is: Concealment of the concealment
 Void ab initio; or
matters will make the
 Rescissible by reason of –
specified in insurer not
o Fraudulent concealment by the
Sec. 112 will liable.
insured or his agent;
not entirely
o Misrepresentation by the insured or
his agent. [Sec. 48] avoid the
contract but
The incontestability clause is made for the will merely
benefit of the insured, and not the insurer, exonerate
considering that its effect and purpose is to cut the insurer
off, after a considerable period, any assertion from losses
that the policy is invalid. resulting
from the risk
concealed.
Defenses, other than concealment,
misrepresentation and breach of warranty are
still available to the insurer, subsequent to the
2-year period. [Carale]
Page 34 of 450
Concealment in Non-Medical Just like concealment, misrepresentation is

Insurance committed before or at the time of the
commencement of the insurance contract.
The cause of death is not important because it Subsequent to this time, an insured may no
is well settled that the insured need not die of longer be guilty of misrepresentation as the
the disease he had failed to disclose to the insurer had already been persuaded to assume
insurer. It is sufficient that his nondisclosure the risk. [Carale]
misled the insurer in forming his estimates of
the risks of the proposed policy or in making There is no false representation if the matter is
inquiries. [Sunlife v. Sps. Bacani G.R. No. true at the time the contract takes effect
105135 (1995)] although false at the time it was
made/represented.
Where matters of opinion or judgment are
called for, answers made in good faith and Requisites of misrepresentation:
without intent to deceive will not avoid the a. The insured stated a fact which is untrue;
policy even though they are untrue. Reason: b. Such fact was stated with knowledge that it
The insurer cannot simply rely on those is untrue and with intent to deceive or which
statements. He must make further inquiry. he states positively as true without knowing
[Philamcare Health Systems v. CA, G.R. No. it to be true and which has a tendency to
125678 (2002)] mislead;
c. Such fact in either case is material to the
risk.
2. Misrepresentation/Omissions
Like in concealment, fraud or intent is not
Representations are factual statements made essential to entitle the insurer to rescind on the
by the insured at the time of, or prior to, the ground of misrepresentation. [Sec. 45]
issuance of the policy, which give information
to the insurer and induce him to enter into the
insurance contract. It may be about a past, an
Kinds of Representations
existing fact, or a future happening. [Carale]
a. Affirmative – Refers to any allegation as
to the existence or non-existence of a fact
A representation:
when the contract begins [de Leon]
 May be oral or written. [Sec. 36]
b. Promissory - Any promise to be fulfilled
 May be made at the time of or before, the
after the contract has come into existence;
issuance of the policy. [Sec. 37]
or any statement concerning what is to
 May be altered or withdrawn before the
happen during the existence of the
insurance is effected, but not afterwards.
insurance. [Sec. 39]
[Sec. 41]
 Must be presumed to refer to the date on A promissory representation is substantially a
which the contract goes into effect. [Sec. condition or warranty. [de Leon]
42]
Test of Materiality
Misrepresentation is a false representation
which the insured states with knowledge that is The materiality of a representation is
untrue, intended to deceive the insurer into determined by the same rules as the materiality
accepting risk. It can be distinguished from of a concealment. [Sec. 46]
concealment in a sense that it is an active form
of deception, while concealment is the passive Materiality is a judicial question and not left to
form thereof. [Carale] the insurance company’s sole discretion.
Page 35 of 450
Effects estopped. [Edillon v. Manila Bankers Life, G.R.

No. L-34200 (1982)]
General Rule: The injured party is entitled to
rescind from the time when the representation Despite not answering the questions and
becomes false. [Sec. 45] keeping blank certain questions in the
application regarding ailments he has suffered,
Exceptions when the insured signed the pension plan
1) Incontestability clause; application, he adopted the written
2) Misrepresentation after contract takes representations and declarations embodied in
effect; as his own. Therefore, it is clear from these
3) Waiver, made by acceptance of insurer of representations that he concealed his chronic
premium payments despite knowledge of heart ailment and diabetes. [Florendo v. Philam
the ground for rescission [Sec. 45]; Plans, G.R. No. 186983 (2012)]
4) A representation of the expectation, belief,
opinion, or judgment of the insured, Concealment Misrepresentation
although false, and even if material to the Who may commit
risk [Philamcare Health Systems, Inc. v. May be committed Committed only by
CA, G.R. No. 125678 (2002)]; by either insured or insured
5) Representation by insured based on insurer
information obtained from third persons Act involved
(not his agent), provided the insured: Passive form Active form
a) Has no personal knowledge of the Insured withholds Insured makes
facts; information of erroneous
b) Believes them to be true; and material facts from statements of facts
c) Explains to the insurer that he does so the insurer; he with the intent of
on the information of others; maintains silence inducing the insurer
6) A misrepresentation as to age does not when he ought to to enter into the
constitute a ground for rescission. If the speak insurance contract
age of the insured was considered in Materiality
determining the premium and the benefits Determined by the same rules
under the policy and the age is misstated, Effects
the amount payable for the policy shall be Same effects on the part of the insured;
as if the policy was purchased at the insurer has right to rescind
correct age. [Sec. 233(d); Carake] Injured party is entitled to rescind a contract
of insurance on ground of concealment or
A representation cannot qualify an express false representation, whether intentional or
provision or an express warranty of insurance not.
[Sec. 40] because a representation is not part
of the contract but only a collateral inducement
to it. However, it may qualify as an implied 3. Breach of Warranties
warranty.
A warranty is a statement or promise by the
It is sufficient that the representation is insured set forth in the policy itself or
substantially or materially true, and in case of incorporated in it by proper reference, the
promissory representation, it is sufficient that it untruth or nonfulfillment of which in any respect
is substantially complied with. [Carale] and without reference to whether the insurer
was in fact prejudiced by such untruth or non-
The insurer is not entitled to rescission for fulfillment, renders the policy voidable by the
misrepresentation of age if the birth date on the insurer. [Vance]
policy leads to the conclusion that the insured
is beyond the age covered. Insurer is deemed
Page 36 of 450
Statements or promises agreed upon by both Kinds of Warranties

parties to the insurance contract which are
contained in the contract or properly Express Warranty
incorporated constitute warranties. [Carale]
The Code does not prescribe a particular form
A warranty may: for a warranty to be considered as such. [Sec.
 Relate to the past, the present, the future, 69]
or to all of these. [Sec. 68]
 Be made in any form of words. [Sec. 69] However, the Code prescribes a requirement
 Also be made by the insurer. [Carale] for express warranties. It must be an
agreement contained in the policy or clearly
Warranties, Riders, and incorporated therein as part thereof, relating to
Endorsements the person or thing insured or to the risk as a
fact. [Sec. 71]
A rider is a printed or typed stipulation
contained in a slip of paper attached to the Thus, it is not enough, for a stipulation to
policy and forming an integral part thereof. become a warranty, that the parties intended it
Thus, it does not need to be signed by the as such. It must form part of the contract of
insured. insurance.
The signature of the insured is required only if Implied Warranty

the warranties, or endorsements are in another
instrument. Deemed included in the contract although not
expressly mentioned (e.g., implied warranty of
For any rider, clause, warranty or endorsement seaworthiness of the vessel in marine
to be binding on the insured: [Sec. 50] insurance and implied warranty not to alter the
 Such rider, clause, warranty or circumstances of the thing insured). This is
endorsement, must be pasted or attached only available for marine insurance.
to the policy;
 The descriptive title or name of the rider, Affirmative Warranty
clause, warranty or endorsement must also
be mentioned and written on the blank Asserts the existence of a fact or condition at
spaces provided in the policy; the time it is made.
 Such rider, clause, warranty or
endorsement issued after the original Promissory Warranty or Executory
policy must be countersigned by the Warranty
insured or owner.
o Unless the same is applied for by The insured stipulates that certain facts or
the insured or owner conditions pertaining to the risk shall exist or
o Such countersignature shall be that certain things with reference thereto shall
taken as his agreement to the be done or omitted. It is in the nature of a
contents of such rider, clause, condition subsequent. [Sec. 72 and 73]
warranty or endorsement
Effect of Breach
Notwithstanding the foregoing, the policy may
be in electronic form subject to the pertinent MATERIAL WARRANTY
provisions of Republic Act No. 8792, otherwise The violation of a material warranty, or other
known as the ‘Electronic Commerce Act’ and to material provision of the policy, on the part of
such rules and regulations as may be either the insured or insurer, entitles the other
prescribed by the Commissioner. to rescind. [Sec. 74]
Page 37 of 450
Breach of a material warranty may either be: Warranty Representation

1. Without fraud, in which case, the insurer Nature
will be exonerated from the time it occurs. Part of the contract Mere collateral
If made during the inception, it will prevent inducement
the policy from taking effect. [Sec. 76] Form
2. With fraud, in which case, the policy is Written on the policy, May be written in the
avoided ab initio and the insured is not actually or by policy or may be oral
entitled to the return of the premiums paid. reference
[de Leon] Materiality
Presumed material Must be proved to be
Exceptions material
1. Loss occurs before the time of Compliance
performance of the warranty; [Sec. 73]
Must be strictly Requires only
2. Performance becomes unlawful; [Sec. 73]
complied with substantial truth and
3. Performance becomes impossible; [Sec.
compliance
73];
Applicability of incontestability clause
4. Waiver or estoppel.
Does not apply Applies
IMMATERIAL WARRANTY
A policy may declare that a violation of I. CLAIMS SETTLEMENT
specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision AND SUBROGATION
does not avoid the policy. [Sec. 75]
Loss in insurance law embraces injury or
General rule: Breach of an immaterial damage.
provision does not avoid the policy. [Sec. 75]
Requisites
Exception: Breach of an immaterial provision Recovery upon a loss requires that:
avoids the policy when the parties stipulate that a. The insured must have insurable
violation of a particular provision, though interest in the subject matter;
immaterial, shall avoid the policy. In effect, the b. The interest is covered by the policy;
parties converted the immaterial provision into c. There be a loss; and
a material one. [Sundiang and Aquino] d. The loss must be one for which the
insurer is liable;
A condition in the policy which requires the e. Notice and proof of loss must be given
insured to disclose to the insurer of any if policy is fire insurance or when the
insurance that, if violated by the insured, would same is stipulated in the policy.
ipso facto avoid the contract. [Pioneer v. Yap,
G.R. No. L-36232 (1974)] Causes of loss
Insurer is barred by waiver (or estoppel) to 1. Remote Cause

claim violation of the so-called hydrants An event preceding another in a causal chain,
warranty when, despite knowing fully that only but separated from it by other events.
2 fire hydrants existed (out of the 11 hydrants 2. Proximate Cause
required), it still issued the insurance policies That cause, which, in natural and continuous
and received the premiums. [Qua Chee Gan v. sequence, unbroken by any efficient
Law Union, G.R. No. L-4611 (1955)] intervening cause, produces the injury, and
without which the result would not have
occurred. [Vda. De Bataclan v. Medina, G.R.
No. L-10126 (1957)]
3. Immediate Cause
Page 38 of 450
The cause, not the proximate cause, which investigation and take such action as may be
immediately precedes the loss. necessary to protect its interest.
Liability for Loss Failure to Give Notice

In fire insurance: An insurer is exonerated, if
Loss for which the Loss for which the notice of loss be not given to him by an insured,
insurer is liable insurer is not liable or some person entitled to the benefit of the
Loss the proximate Loss by insured’s insurance, without unnecessary delay. [Sec.
cause of which is the willful act 90]
peril insured against
[Sec. 86] In other types of insurance:
Loss the immediate Loss due to General Rule: Failure to give notice will not
cause of which is the connivance of the exonerate the insurer.
peril insured against, insured [Sec. 89] Exception: Unless there is a stipulation in the
except where the policy requiring the insured to do so.
proximate cause is
an excepted peril However, it has been held that formal notice of
Loss through Loss where the loss is not necessary if insurer has actual
negligence of excepted peril is the notice of loss [Fidelity Phoenix Insurance v.
insured except proximate cause Friedman, 174 SW 215 (1987)] but there is a
where there was ruling to the contrary [Col. Sav. Bank v.
gross negligence American Surety, 87 P 118].
amounting to willful
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

1. Notice and Proof of Loss Notice of loss must be given within reasonable
time. [Bachrach v. Britain American Assurance,
Notice of Loss G.R. No. L-5715 (1910)]
This refers to the formal notice given the For compulsory motor vehicle insurance, the
insurer by the insured or claimant under a notice must be given within six months from the
policy of the occurrence of the loss insured date of the accident. [Sec. 397]
against.
For other non-life insurance, the Commissioner
Purpose may specify the period for the submission of
Its purpose is to apprise the insurance the notice of loss. [Sec. 90]
company so that it may make proper
Page 39 of 450
Proof of Loss 2) For notice of loss, a formal notice of loss is

not necessary if insurer has actual notice
It is the formal evidence given to the insurance of loss.
company by the insured or claimant, under a
policy, of: 2. Guidelines on Claims
 The occurrence of the loss,
Settlement
 The particulars thereof, and
 The data necessary to enable the company
Claims settlement is the indemnification of the
to determine its liability and the amount. [de
loss suffered by the insured. The claimant may
Leon]
be the insured or reinsured, the insurer who is
entitled to subrogation, or a third party who has
Purpose
a claim against the insured.
Its purpose is to give the insurer information by
which he may determine the extent of his
Where a policy gives the insurer the control of
liability but also to afford him a means of
the decision to settle claim or litigate it, the
detecting any fraud that may have been
insurer nevertheless is required to observe a
practiced upon him, and to operate as a check
certain measure of consideration for the
upon extravagant claims.
interest of the insured.
Like a notice of loss, in the absence of any
Life Insurance Non-Life
stipulation in the policy, proof may be given
Insurance
orally or in writing.
Maturity
Either: 1. Upon happening
The insured is not bound to give such proof as
1. Upon death of of event insured
would be necessary in a court of justice; but it
the person against; and
is sufficient for him to give the best evidence
insured; 2. Event must occur
which he has in his power at the time. [Sec. 91]
2. Upon his within the period
surviving a specified in
RULES FOR RECOVERY
specific period; policy, otherwise
General Rule: Timely compliance with the
or insurer has no
notice and proof of loss is a condition
3. Otherwise liability
precedent to the right to recover if the policy is
contingently on
fire insurance, or when the same is stipulated
in the policy [Sec. 90]. the continuance
or cessation of
life. [Sec. 182]
Exceptions
1) For both notice and proof of loss, defects Delivery of Proceeds
or delay in the presentation of notice may
be waived:
a) Defects in a notice or proof of loss
may be waived when such defects,
which the insured might remedy, are
not specified without unnecessary
delay to him as ground of objection by
the insurer. [Sec. 92]
b) Delay in presentation to an insurer of
notice or proof of loss is waived if
caused by any act of his, or if he omits
to take objection promptly and
specifically upon that ground. [Sec. 93]
Page 40 of 450
General rule: The 1. Within 30 days Unfair Claims Settlement;

proceeds should be after: Sanctions
delivered a. Proof of loss is
immediately upon received by No insurance company doing business in the
maturity of policy. insurer; and Philippines shall:
b. Ascertainment of (1) Refuse, without just cause, to pay or settle
Exceptions: loss or damage is claims arising under coverages provided
1. If payable in made either by by its policies; nor
installments or agreement (2) Engage in unfair claim settlement
as an annuity, between the practices. [Sec. 247]
when such insured and
installments or insurer or by Unfair Claim Settlement Practices
annuities arbitration Any of the following acts by an insurance
become due; 2. If ascertainment company, if committed without just cause and
2. If maturity is is not made performed with such frequency as to indicate a
upon death, within 60 days general business practice, shall constitute
within 60 days after such receipt unfair claim settlement practices:
after by insurer of (1) Knowingly misrepresenting to claimants
presentation of proof of loss, pertinent facts or policy provisions relating
claim and filing then loss or to coverage at issue;
of proof of death damage shall be
of insured. [Sec. paid within 90 (2) Failing to acknowledge with reasonable
248] days after such promptness pertinent communications with
receipt. [Sec. respect to claims arising under its policies;
249]
Effect of refusal or failure to pay claim (3) Failing to adopt and implement reasonable
within time prescribed standards for the prompt investigation of
1. This entitles the beneficiary to collect claims arising under its policies;
interest on the proceeds of policy for the
duration of the delay at rate of twice the (4) Not attempting in good faith to effectuate
ceiling prescribed by the monetary board prompt, fair and equitable settlement of
(unless refusal to pay is based on claims submitted in which liability has
ground that claim is fraudulent) become reasonably clear; or
2. In case damages are awarded, this
includes attorney’s fees and other (5) Compelling policyholders to institute suits
expenses incurred due to delay (plus the to recover amounts due under its policies
interest) [Sec. 248 and 249] by offering without justifiable reason
substantially less than the amounts
In case of litigation, it is the duty of the ultimately recovered in suits brought by
Commissioner or the Court to determine them. [Sec. 247]
whether the claim has been unreasonably
denied or withheld. Failure to pay any such Admissible Evidence
claim within the time prescribed shall be The following shall be admissible in evidence
considered prima facie evidence of in an administrative or judicial proceeding for
unreasonable delay in payment. [Sec. 250] 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
Page 41 of 450
(b) The Commissioner’s complaint experience insurer, NOT from the time when the loss
with other insurance companies writing actually occurs.
similar lines of insurance. [Sec. 247]
The cause of action in an insurance contract
Penalty Per Violation does not accrue until the insured's claim is
If it is found, after notice and an opportunity to finally rejected by the insurer. This is because
be heard, that an insurance company has before such final rejection, there is no real
violated this section, each instance of necessity for bringing suit. [Eagle Star
noncompliance: Insurance vs Chia Yu, G.R. No. L-5915 (1955)]
(1) May be treated as a separate violation; and
(2) Shall be considered sufficient cause for the Subrogation
suspension or revocation of the company’s
certificate of authority. Subrogation is a process of legal substitution.
The insurer, after paying the amount covered
Sec. 247 lists the grounds which are sufficient by the insurance policy, steps into the shoes of
cause for the suspension or revocation of the the insured and avails himself of the latter's
insurer’s certificate of authority [Sec. 247(c)]. rights that exist against the wrongdoer at the
time of loss.
Prescription of Action
The insurer becomes entitled to recover from
Should the insurer reject the claim of the the wrongdoer the amount of the loss it may
insured, the remedy of the latter would be to file have paid to the insured.
an action against the insurer with the proper
tribunal [Carale]. Note: Subrogation applies only to property
insurance and non-life insurance.
An “action” or “suit” is an act by which one sues
another in a court of justice for the enforcement Right of Subrogation
or protection of a right, or the prevention or The insurance company shall be subrogated to
redress of a wrong. [Lopez v. Filipinas the rights of the insured against the wrongdoer
Compania de Seguros, G.R. No. L-19613 or the person who has violated the contact if:
(1966)] (1) The plaintiff’s property has been insured,
and
Prescriptive Period (2) The plaintiff has received indemnity from
General Rule: It being based on a written the insurance company for the injury or loss
contract, the action prescribes in ten years. arising out of the wrong or breach of
[Art. 1144, NCC] contract complained of. [Art. 2207, NCC]
Exception: The parties may validly agree on a Rights Transferred

shorter period, provided it is not less than one A subrogee-insurer cannot succeed to a right
year from the time the cause of action accrues. not possessed by the subrogor. A subrogee
[Sec. 63] can recover only if the insured likewise could
have recovered. [Sulpicio Lines, Inc. v. First
Note: In compulsory motor vehicle insurance, Lepanto-Taisho Ins. Corp., G.R. No. 140349
the action prescribes in one year from the (2005)]
denial of the claim. [Sec. 397]
Right to Recover Deficiency Not
Reckoning Point Subrogated
The period of commencing an action under a If the amount paid by the insurance company
policy of insurance under Sec. 63 is to be does not fully cover the injury or loss, the
computed from the time when the insured aggrieved party shall be entitled to recover the
has a right to bring an action against the
Page 42 of 450
deficiency from the person causing the loss or

injury. [Art. 2207, NCC]
J. BUSINESS OF
INSURANCE;
The insured can no longer recover from the
offended party what was paid to him by the
REQUIREMENTS
insurer, but he can recover any deficiency if the
Business of Insurance
damages suffered are more than what was
The term “doing an insurance
paid. The deficiency is not covered by the right
business or transacting an insurance
of subrogation.
business” includes:
(1) Making or proposing to make, as insurer,
The insurer must present the policy as
any insurance contract;
evidence to determine the extent of its
(2) Making or proposing to make, as surety,
coverage. [Wallem Phil. Shipping v. Prudential
any contract of suretyship as a vocation;
Guarantee, G.R. No. 152158 (2003)]
- Must not be merely incidental to any
other legitimate business or activity of
Where There is No Right of Subrogation
the surety
1. Where the insured by his own act releases
(3) Doing any kind of business, specifically
the wrongdoer or third party liable for the
recognized as constituting the doing of an
loss or damage;
insurance business within the meaning of
2. Where the insurer pays the insured the
the Insurance Code;
value of the loss without notifying the
- Including a reinsurance business,
carrier who has in good faith settled the
(4) Doing or proposing to do any business in
insured’s claim for loss;
substance equivalent to any of the
3. Where the insurer pays the insured for a
foregoing in a manner designed to evade
loss or risk not covered by the policy; [Pan
the provisions of the Insurance Code. [Sec.
Malayan Ins. Co. v. CA, G.R. No. 81026
2(b)]
(1990)]
4. In life insurance;
The following shall NOT be deemed conclusive
5. For recovery of loss in excess of insurance
to show that the making thereof does not
coverage. [de Leon]
constitute the doing or transacting of an
insurance business:
The right of subrogation is not dependent upon,
a. The fact that no profit is derived from
nor does it grow out of, any privity of contract
the making of insurance contracts,
or upon written assignment of claim. It accrues
agreements or transactions; or
simply upon payment of the insurance claim by
b. The fact that no separate or direct
the insurer. [Pan Malayan Ins. Co v. CA, G.R.
consideration is received therefor.
No. 81026 (1990)]
[Sec. 2(b)]
Should the insured, after receiving payment
For the purpose of determining what "doing an
from the insurer, release the wrongdoer who
insurance business" means, we have to
caused the loss, the insurer loses his rights
scrutinize the operations of the business as a
against the latter. But in such a case, the
insurer will be entitled to recover from the whole and not its mere components. [Philippine
insured whatever it has paid to the latter, Health Care Providers, Inc. v. CIR,
unless the release was made with the consent G.R.167330 (2009)]
of the insurer. [Manila Mahogany v. CA G.R.
No. L- 52756 (1987)] Requirements to Engage in the Business of
Insurance
1. Certificate of Authority
2. Sufficient paid-up capital, Surplus Fund &
Solvency
Page 43 of 450
3. Filing with the Commissioner interests a contributed surplus fund of

4. Reserves not less than P100,000,000.00;
5. For foreign companies: Sufficient capital (2) The company to submit to him a business
and securities deposited with the plan showing the company’s estimated
Commissioner receipts and disbursements, as well as the
6. For foreign companies: Resident Agent basis therefor, for the next succeeding
7. For foreign companies: Surplus Fund, three (3) years. [Sec. 194]
Legal Reserves
An insurance company doing business in the
1. Certificate of Authority Philippines shall at all times maintain the
No insurance company shall transact any minimum paid-up capital and net worth
insurance business in the Philippines until after requirements as prescribed by the
it shall have obtained a certificate of authority Commissioner. Such solvency requirements
for that purpose from the Commissioner upon shall be:
application therefor and payment by the (1) Based on internationally accepted
company concerned of the fees hereinafter solvency frameworks; and
prescribed. [Sec. 193] (2) Adopted only after due consultation
with the insurance industry
2. Sufficient paid-up capital, Surplus Fund associations. [Sec. 200]
& Solvency [Sec. 194, 197, 200]
No new domestic life or non-life insurance 3. Filing with the Commissioner [Sec. 195]
company shall, in a stock corporation, engage Every company must, before engaging in the
in business in the Philippines unless business of insurance in the Philippines, file
possessed of a paid-up capital equal to at with the Commissioner the following:
least One billion pesos a) A certified copy of the last annual
(P1,000,000,000.00): Provided, That a statement or a verified financial
domestic insurance company already doing statement exhibiting the condition and
business in the Philippines shall have: affairs of such company; and
(1) By June 30, 2013 – P250,000,000.00
net worth If A copy of the articles of
(2) By December 31, 2016 – An additional incorporated incorporation and bylaws,
P300,000,000.00 in net worth; under the and any amendments to
(3) By December 31, 2019 – An additional laws of the either, certified by the SEC
P350,000,000.00 in net worth; and Philippines
(4) By December 31, 2022 – An additional 1. A certificate from the
P400,000,000.00 in net worth. [Sec. SEC showing that it is
194] duly registered in the
Note: The President of the Philippines may mercantile registry of
order a periodic review every two (2) years the that Commission in
capital structure set out above to determine the If accordance with the
capital adequacy of the local insurance incorporated Corporation Code
industry from and after the integration and under any 2. If organized or formed
liberalization of the financial services, including laws other under any law requiring
insurance, in the ASEAN Region. than those such to be filed: A copy
of the of the articles of
The Commissioner may also, as a pre- Philippines incorporation and
licensing requirement of a new insurance bylaws, and any
company, require: amendments to either
(1) The stockholders to pay in cash to the 3. If not so organized: A
company in proportion to their subscription copy of the law, charter
or deed of settlement
Page 44 of 450
under which the deed of A. Possessed of unimpaired capital or

organization is made assets and reserve of not less than
4. A certificate under the One billion pesos (P1,000,000,000.00)
hand and seal of the B. It has deposited with the Commissioner
proper officer of such for the benefit and security of the
state or country that policyholders and creditors of such
such corporation or company in the Philippines, securities
company is : satisfactory to the Commissioner:
i. Organized under the Provided That –
laws of such state or (1) At least fifty percent (50%) of such
country, securities shall consist of bonds or
ii. With the amount of other instruments of debt of the
capital stock or assets Government of the Philippines, its
and legal reserve political subdivisions and
required by this Code; instrumentalities, or of GOCCs and
A certificate setting forth: entities, including the Bangko Sentral
i. The nature and ng Pilipinas;
character of the (2) The total investment of a foreign
business, insurance company in any registered
ii. The location of the enterprise shall not exceed twenty
principal office, percent (20%) of the net worth of said
iii. The name of the foreign insurance company nor twenty
individual or names of percent (20%) of the capital of the
If not the persons registered enterprise, unless
incorporated composing the previously authorized in writing by the
and of partnership or Commissioner. [Sec. 197]
foreign association,
domicile iv. The amount of actual Securities, for the purposes of this
capital employed or to requirement, consist of:
be employed therein, - Good securities of the Philippines,
and - New issues of stock of registered
v. The names of all enterprises
officers and persons
by whom the 6. For foreign companies: Resident Agent
business is or may be The Commissioner must require as a condition
managed. precedent to the transaction of insurance
business in the Philippines by any foreign
4. Reserves insurance company, that such company file in
Every insurance company, other than life, shall his office:
maintain a reserve for unearned premiums on A. A written power of attorney:
its policies in force, which shall be charged as (1) Designating some person who
a liability in any determination of its financial shall be a resident of the
condition. [Sec. 219] Philippines as its general agent on
whom any notice provided by law
5. For foreign companies: Sufficient or by any insurance policy, proof of
capital and securities deposited with loss, summons and other legal
the Commissioner [Sec. 197, 198] processes may be served in all
No insurance company organized or existing actions or other legal proceedings
under the government or laws other than those against such company, and
of the Philippines shall engage in business in (2) Consenting that service upon such
the Philippines unless: general agent shall be admitted
Page 45 of 450
and held as valid as if served upon (1) Set aside an amount corresponding to the
the foreign company at its home legal reserves of the policies written in the
office. Philippines; and
B. Agreement or stipulation, executed (2) Invest and keep the same therein in
by the proper authorities of said accordance with the provisions of this
company, which states that: section. [Sec. 199]
(1) Service of any notice provided by
law, or insurance policy, proof of The legal reserve therein required to be set
loss, summons, or other legal aside shall be invested only in the classes of
process may be made upon the Philippine securities described in Section
Insurance Commissioner 206: Provided, however, That –
(2) Such service upon the Insurance (1) No investment in stocks or bonds of any
Commissioner shall have the same single entity shall, in the aggregate exceed
force and effect as if made upon 20% of the net worth of the investing
the company if at any time said company or 20% of the capital of the
company shall: issuing company, whichever is the lesser,
a. Leave the Philippines, or unless otherwise approved in writing by the
b. Cease to transact business Commissioner.
therein, or (2) The securities purchased and kept in the
c. Be without any agent in the Philippines under this section, shall not be
Philippines on whom any sent out of the territorial jurisdiction of the
notice, proof of loss, Philippines without the written consent of
summons, or legal process the Commissioner. [Sec. 199]
may be served, then in any
action or proceeding Rule as to Partnerships, Persons, or
arising out of any business Association of Persons
or transaction which General Rule: No person, partnership, or
occurred in the Philippines association of persons shall transact any
(3) Whenever such service of notice, insurance business in the Philippines except as
proof of loss, summons, or other agent of a person or corporation authorized to
legal process shall be made upon do the business of insurance in the
the Commissioner, he must, within Philippines.
ten (10) days thereafter, transmit
by mail, postage paid, a copy of Exceptions: Such person, partnership, or
such notice, proof of loss, association of persons may transact insurance
summons, or other legal process to business in the Philippines, provided that:
the company at its home or (1) It is possessed of the capital and assets
principal office. [Sec. 196] required of an insurance corporation doing
the same kind of business in the
7. For foreign companies: Surplus Fund, Philippines and invested in the same
Legal Reserves [Sec. 196, 199] manner;
The Commissioner may, as a pre-licensing (2) The Commissioner granted it a certificate
requirement of a new branch office of a foreign to the effect that it has complied with all the
insurance company, require the company to provisions of this Code. [Sec. 192]
have an additional surplus fund in an amount
to be determined by the Insurance
Commission. [Sec. 197]
Every foreign company doing business in the

Philippines shall:
Page 46 of 450
documents or contracts or other records which

K. INSURANCE are relevant or material to the inquiry [Sec.
COMMISSIONER AND 439].
ITS POWERS Note: However, the Insurance Commission has
no jurisdiction to decide the legality of a
1. Jurisdiction and Adjudicatory contract of agency entered into between an
insurance company and its agent. The same is
Powers not covered by the term “doing or transacting
insurance business” under Sec. 2, neither is it
The Insurance Commissioner exercises covered by Sec. 439, which grants the
administrative supervision over insurance Commissioner adjudicatory powers. [Sundiang
companies, mutual benefit associations and and Aquino]
trusts for charitable uses. He has the duty to
see that all laws relating to insurance
companies and other insurance matters are 2. Revocation of Certificate of
faithfully executed. [Carale] Authority
In addition to administrative powers, the The Certificate of Authority issued to the
Commissioner has the power to adjudicate domestic or foreign company by the
disputes relating to an insurance company’s Commission may be revoked or suspended by
liability to an insured under a policy. [Sec. 437] the Insurance Commissioner for any of the
following grounds:
A complaint or claim filed with such official is . The company is in an unsound condition
considered an “action” or “suit” the filing of a. That it has failed to comply with the
which would have the effect of tolling the provisions of law or regulations obligatory
suspending the running of the prescriptive upon it
period. b. That its condition or method of business is
such as to render its proceedings
Concurrent jurisdiction (with regular civil hazardous to the public or its policyholders
courts) over cases where any single claim does c. That its paid-up capital stock, in the case of
not exceed P5,000,000 involving liability a domestic stock corporation, or its
arising from: available cash assets, in the case of a
a. Insurance contract; domestic mutual company, or its security
b. Contract of suretyship; deposits, in the case of a foreign company,
c. Reinsurance contract; is impaired or deficient
d. Membership certificate issued by members d. That the margin of solvency required of
of mutual benefit association [Sec. 439] such company is deficient. [Sec. 254]
Primary and exclusive jurisdiction over claims The Commissioner is authorized to suspend or
for benefits involving pre-need plans where the revoke all certificates of authority granted to
amount of benefits does not exceed P100,000. such insurance company, its officers and
[Sec. 55, RA 9829] agents, and no new business shall thereafter
be done by such company or for such company
For the purpose of proceeding under its by its agents in the Philippines while such
adjudicatory powers under the Insurance suspension, revocation, or disability continues
Code, the Commissioner or any officer thereof or until its authority to do business is restored
designated by him, is empowered to administer by the Commissioner. [Sec. 254]
oaths and affirmation, subpoena witnesses,
compel their attendance, take evidence and Before restoring such authority, the
require the production of any books, papers, Commissioner shall require the company
Page 47 of 450
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]
Page 48 of 450
PRE-NEED
COMMERCIAL LAW
Page 49 of 450
U.P. LAW BOC PRE-NEED COMMERCIAL LAW
1. Pre-Need Plans
A. DEFINITION
Pre-need plans are contracts which provide
The section numbers hereinafter generally pertain to for the rendering of services or payment of
RA 9829 (Pre-Need Code), unless otherwise indicated. money to plan holders or their beneficiaries
when the actual need for such payment or
Pre-need plans are contracts, agreements, rendition of services accrues. [Carale]
deeds or plans for the benefit of the
planholders which provide for the performance They are governed by the Pre-Need Code (RA
of future services, payment of monetary 9829). They are not considered as
considerations or delivery of other benefits at insurance contracts because:
>the time of actual need or agreed maturity a. Pre-need plans can have insurance
date, as specified therein, in exchange for cash coverage, implying that they are separate
or installment amounts with or without interest contracts; and
or insurance coverage and includes life, b. Pre-need plans do not involve unknown or
pension, education, interment and other plans, contingent events but events certain to
instruments, contracts or deeds. [Sec. 4(B)] happen at a certain time.
Contracts However, all Pre-need plans are under the

Agreements primary and exclusive power supervision and
Form
Deeds regulation of the Insurance Commission. [Sec.
Plans 5, RA 9829. In addition, the Insurance
Beneficiary Planholder/s Commissioner shall have the primary and
To provide for the: exclusive power to adjudicate any and all
- Performance of future claims involving pre-need plans. If the amount
services of benefits does not exceed P100,000, which
Purpose - Payment of monetary decision shall be final and executory. [Sec. 55]
considerations; or
- Delivery of other 2. Pre-Need Company
benefits
At the time of actual need A Pre-need Company refers to:
When
OR a. Any corporation
benefits may
On agreed maturity date  Registered with the Commission and
be availed
specified therein
authorized/licensed to sell or offer to sell
Cash or installment pre-need plans
amounts with or without b. Schools, memorial chapels, banks,
Consideration
interest, OR nonbank financial institutions and other
Insurance Coverage entities
Life  Authorized/licensed to sell or offer to sell
Pension pre-need plans insofar as their pre-need
Education activities or business are concerned. [Sec.
Types
Interment 4(c)]
Other plans, instruments,
contracts, or deeds
Page 50 of 450
U.P. LAW BOC TRANSPORTATION LAW COMMERCIAL LAW
(c) Opinion of independent counsel on the

B. REGISTRATION OF legality of the issue;
PRE-NEED PLANS (d) Audited financial statements;
(e) Viability study with certification, under oath,
Powers of the Commission of pre-need actuary accredited by the
Commission;
i. Promulgate rules governing the registration
(f) Copy of the proposed pre-need plan; and
of pre-need plans and the required
documents. Said rules shall further set (g) Sample of sales materials.
forth the:
a. Conditions under which such Such registration statements and sales
registration may be denied materials required under this section shall
revoked, suspended or withdrawn; contain the appropriate risk factors as may be
determined by the Commission. [Sec. 15]
b. Remedies of pre-need companies
in such instances;
ii. Approve all forms, including amendments, 4. Accreditation of Actuary
relating to the pre-need plans. [Sec. 14 & An actuary prepares and certifies, under oath,
17] the viability study required for registration.
[Sec. 15]
Required Documents for Registration
a. The viability study Requirements to be a Pre-Need Actuary:
b. Certification, under oath, of a pre-need i. Must be accredited by the Commission.
actuary accredited by the Commission [Sec. 15]
ii. Must NOT be engaged by the pre-need
c. A copy of the pre-need plan
company as actuary, and at the same time:
d. Any information brochure
e. Information and documents necessary to  Be a stockholder; or
ensure the protection of planholders and  Serve as:
the general public [Sec. 14] a. Director of the board
b. Chief executive officer or
c. Chief financial officer of the
1. Necessity of Registration company, or
a. To be granted a license to do business as d. Any such position that the
a pre-need company Commission may determine to
b. To file a registration statement with the have an inherent conflict of
Commission for the sale of pre-need interest to the position of an
plans actuary. [Sec. 16]
- This is required for every pre-need
plan which the company intends to The Commission shall have the power to:
offer for sale to the public [Sec. 14] 1. Set standards for the accreditation of
actuaries directly responsible for the
2. When Registered preparation and certification of the viability
Within a period of forty-five (45) days after the study of the pre-need plan submitted by the
grant of a license to do business as a pre-need pre-need company for registration or
company. [Sec. 14] amendment with the Commission;
2. Define the obligations and liabilities of
3. Registration Requirements actuaries accredited by it.
The Commission shall require the following
documents, among others: 5. Pre-Need Advertising Rules
(a) Duly accomplished Registration Pre-need plans shall be advertised and sold in
Statements; an appropriate non-misleading manner in
(b) Board resolution authorizing the accordance with the rules to be prescribed by
registration of applicant’s pre-need plans; the Code.
Page 51 of 450
It shall be unlawful for any pre-need company d. Such other information that the
to adverti>se itself or its pre-need plans unless Commission shall require by rule. [Sec. 19]
the Commission has approved such
advertising material. The making of any untrue statement of a
material fact in an information brochure is a
The Commission shall have a period of ten (10) ground for administrative sanctions and
working days to approve or deny the criminal penalties. [Sec. 56(a)(i), IRR of RA
advertising material and failure to act within the 9829]
said period shall cause the advertising material
to be approved. For purposes hereof, the
Commission shall have the power to define the
C. LICENSING OF SALES
scope of its advertising rules to appropriately COUNSELORS AND
cover advertising or other communications to
the public.
GENERAL AGENTS
Any person who sells or offers to sell any pre- 1. Qualifications for Issuance
need plan or contract by any means or No sales counselor shall be allowed to solicit,
instruments of communication in violation of sell or offer to sell pre-need plans under this
this section shall be liable to the person Code without being licensed as such by the
purchasing such pre-need contract who may Commission.
sue to recover the consideration paid for such
pre-need contract with interest thereon. In Such license shall automatically expire every
addition hereto, the Commission shall have the 30th day of June or such date of every year as
power to pursue the erring pre-need company may be fixed by the Commission and may be
in an administrative or criminal proceeding. accordingly renewed.
A fine of P100, 000,000.00 shall be imposed on Qualifications for the issuance of a license:
any pre-need company found to have violated a. The applicant must be of good moral
this section: Provided, That a second violation character and must not have been
of this section shall, in addition to the fine convicted of any crime involving moral
imposed, result in the suspension of the license turpitude;
of the pre-need company. [Sec. 18] b. The applicant has undergone a training
program approved by the Commission and
6. Disclosures to Prospective Planholders such fact has been certified under oath by
No registered pre-need plan shall be sold to a duly authorized representative of a pre-
prospective planholders unless an information need company; and
brochure, which has been filed with the c. The applicant has passed a written
Commission, has been provided to the examination administered by the
purchaser. Commission: Provided, that the
administration of the examination may be
The information brochure shall contain: delegated to an independent organization
a. An explanation of the principal features of under the supervision of the Commission.
the pre-need plan; [Sec. 20]
b. A statement that the planholder may avail
of a default or reinstatement period within 2. Denial, Suspension, or Revocation of
which to reinstate his lapsed plan; License
c. The conditions of the same and the rates of An application for the issuance or renewal of a
return for scheduled benefit plans and license to act as sales counselor may be
illustrative yields for contingent benefit denied, or such license, if already issued, shall
be suspended or revoked based on the
plans;
following grounds:
Page 52 of 450
(a) Materially misrepresented statements in grace period or a longer period, as provided in

the application requirements; the contract within which to reinstate his plan.
(b) Obtained or attempted to obtain a license
by fraud or misrepresentation; No cancellation of plans shall be made by the
(c) Materially misrepresented the terms and issuer during such period when reinstatement
conditions of pre-need plans; may be effected.
(d) Sold, solicited or attempted to solicit or sell
a pre-need plan by means of false or Notice Requirement
misleading representation and other The pre-need company shall give written notice
fraudulent means; to the planholder that his plan will be cancelled
(e) Terminated for cause from another pre- if not reinstated within two (2) years.
need company;
(f) Similar grounds found in Section 11 of RA Two notices shall be given:
9829;  Within thirty (30) days from the expiration
(g) Wilfully allowing the use of one’s license by of the grace period; and
a non-licensed or barred individual;  Within thirty (30) days from the expiration
(h) Analogous circumstances. [Sec. 21] of the reinstatement period, which is two (2)
years from the lapse of the grace period.
3. Licensing of General Agents
If the issuer should contract the services of a Failure to give either of the required notices
general agent to undertake the sales of its shall preclude the pre-need company from
plans, such general agent shall be required to treating the plans as cancelled. [Sec. 23]
be licensed as such with the Commission, in
accordance with the requirements imposed by 2. Termination of Pre-Need Plans
the Commission. [Sec. 22] A planholder may terminate his pre-need plan
at any time by giving written notice to the
issuer. [Sec. 24]
D. DEFAULT AND
TERMINATION Termination Value
The termination value of the pre-need plan
shall be predetermined by the actuary of the
1. Default; Reinstatement Period
pre-need company upon application for
registration of the pre-need plans with the
Grace Period
Commission and shall be disclosed in the
The pre-need company must provide in all
contract.
contracts issued to planholders a grace period
of at least sixty (60) days within which to pay
A pre-need plan shall contain a schedule of
accrued installments, counted from the due
termination values to which the planholder is
date of the first unpaid installment.
entitled to upon termination.
Nonpayment of a plan within the grace period
Such schedule of termination value shall be
shall render the plan a lapsed plan.
required for all in-force pre-need plans and
shall be fair, equitable and in compliance with
Any payment by the planholder after the grace
the Commission issuances. [Sec. 24]
period shall be reimbursed forthwith, unless the
planholder duly reinstates the plan.
Reinstatement
The planholder shall be allowed a period of not
less than two (2) years from the lapse of the
Page 53 of 450
Contingent Benefit Plans

E. CLAIMS SETTLEMENT In the case of contingent benefit plans, the
benefits shall be paid by the pre-need company
thirty (30) days upon submission of all
necessary documents. [Sec. 26]
1. Unfair Claims Settlement Practices
No pre-need company shall refuse, without just
Refusal or Failure to Pay
cause, to pay or settle claims arising under
coverages provided by its plans nor shall any General Rule: Refusal or failure to pay the
such company engage in unfair claim claim within fifteen (15) days from maturity or
due date will entitle the beneficiary to collect
settlement practices.
interest on the proceeds of the plan for the
duration of the delay at the rate twice the legal
The following acts constitute unfair claims
interest.
settlement practices:
1. Knowingly misrepresenting to claimants
Provided, That the planholder has duly
pertinent facts or plan provisions relating to
complied with the documentary requirements
coverages at issue;
of the pre-need company.
2. Failing to acknowledge with reasonable
promptness pertinent communications with
Exception: Unless such failure or refusal to
respect to claims arising under its plan;
3. Failing to adopt and implement reasonable pay is based on the ground that the claim is
standards for the prompt investigation of fraudulent.
claims arising under its plan;
3. Recovery of Investment
4. Failing to provide prompt, fair and equitable
settlement of claims submitted in which The planholder may institute the necessary
legal action in court to recover his/her
liability has become reasonably clear; or
investment in the pre-need company thirty (30)
5. Compelling planholders to institute suits or
days upon submission of all necessary
recover amounts due under its plan by
documents.
offering, without justifiable reason,
substantially less than the amounts
However, in case the insolvency or bankruptcy
ultimately recovered in suits brought by
is a mere cover-up for fraud or illegality, the
them.
planholder may institute the legal action
Any violation of this section shall be considered directly against the officers and/or controlling
owners of the said pre-need company. [Sec.
sufficient cause for the suspension or
revocation of the company's certificate of 27]
authority. [Sec. 25]
4. Consequences of Delay or Default
In case of any litigation for the enforcement of
2. Payment of Plan Proceeds
any pre-need plan, it shall be the duty of the
Commission to determine whether the
Scheduled Benefit Plans
payment of the claim of the planholder has
General Rule: In the case of scheduled benefit
been unreasonably denied or withheld.
plans, the proceeds of the plan shall be paid
immediately upon maturity of the contract.
The failure to pay any such claim within the
time prescribed in Section 26 hereof shall be
Exception: Unless such proceeds are made
considered prima facie evidence of
payable in installments or as an annuity, in
unreasonable delay in payment. [Sec. 27]
which case the installments or annuities shall
be paid as they become due.
If found to have unreasonably denied or
withheld the claim, the pre-need company shall
be liable to pay damages, consisting of actual
Page 54 of 450
damages, attorney’s fees and legal interest, to

be computed from the date the claim is made
until it is fully satisfied.
5. Distribution of Profits
A pre-need company may declare
divided: Provided, That the following shall
remain unimpaired, as certified under oath by
the president and the treasurer with respect to
items (a) and (b); and in the case of item (c), by
the trust officer:
(a) One hundred percent (100%) of the capital
stock;
(b) An amount sufficient to pay all net losses
reported, or in the course of settlement,
and all liabilities for expenses and taxes;
and
(c) Trust fund.
Any dividend declared under the preceding

paragraph shall be reported to the Commission
within thirty (30) days after such declaration.
[Sec. 29]
Page 55 of 450
TRANSPORTATION
COMMERCIAL LAW
Page 56 of 450
Common carriers are:

A. COMMON CARRIERS a. Persons,
associations,
corporations, firms or
b. Engaged in the business of carrying or

Contract of Transportation transporting,
A contract of transportation is one whereby a c. Passengers or goods or both,
certain person or association of persons d. By land, water, or air,
obligate themselves to transport persons, e. For compensation,
things, or news from one to another for a fixed f. Offering their services to the public. [Art.
price. [Crisostomo v CA, G.R. No. 138334 1732, NCC]
(2003)]
Art. 1732 makes no distinction:
Parties to the contract: a. Between one whose principal business
a. Shipper - one who gives rise to the activity is the carrying of persons or goods
contract of transportation by agreeing to or both, and one who does such carrying
deliver the things or news to be only as an ancillary activity [Fabre v. CA,
transported, or to present his own person G.R. No. 111127 (1996)];
or those of other or others in the case of b. Between a person or enterprise offering
transportation of passengers transportation service on a regular or
b. Carrier (may sometimes be referred to scheduled basis and one offering such
as conductor) - one who binds himself to service on an occasional, episodic, or
transport persons, things, or news, as the unscheduled basis [Loadstar Shipping Co.,
case may be, or one employed in or Inc. v. CA, G.R. No. 131621 (1999)];
engaged in the business of carrying goods c. Between a carrier offering its services to
for others for hire the general public and one who offers
c. Consignee - the party to whom the carrier services or solicits business only from a
is to deliver the things being transported, or narrow segment of the general population
to whom the carrier may lawfully make [De Guzman v. CA, G.R. No. L-47822
delivery in accordance with its contract of (1988)];
carriage; the shipper and the consignee d. Between a carrier that maintains terminals
may be the same person or issues tickets with fixed and publicly
known routes and one that does not. [Asia
Carriers are persons or corporations who Lighterage and Shipping v. CA, G.R. No.
undertake to transport or convey goods, 147246 (2003)]
property, or persons, from one place to
another, gratuitously or for hire, and are Test for a Common Carrier
classified as: Whether the undertaking is a part of the activity
a. Private or special carriers, who transport or engaged in by the carrier, which it has held out
undertake to transport in a particular to the general public as its business or
instance for hire or reward [AGBAYANI, occupation.
Commercial Laws of the Philippines - Determined by the character of the
(1987)]; and business actually carried on by the carrier
b. Common or public carriers [Art. 1732, - If the undertaking is a single transaction,
NCC] not a part of the general business or
occupation engaged in, as advertised and
held out to the general public, the individual
or the entity rendering such service is a
private, not a common, carrier. [Perena v.
Nicolas, G.R. No. 157917 (2012)]
Page 57 of 450
One engaged in the business of transporting special agreement to

petroleum products from refineries via do so
pipeline is a common carrier. It is engaged in
the business of transporting or carrying goods, Diligence Required
i.e., petroleum products, for hire as a public
employment. It undertakes to carry for all Extraordinary
Ordinary diligence
persons indifferently, that is, to all persons who diligence
choose to employ its services, and transports
Governing Law
the goods by land and for compensation. The
fact that it has a limited clientele does not Civil Code; Code of
exclude it from the definition of a common Commerce and
carrier. [First Phil. Industrial v. CA, G.R. No. special laws, if not
125948 (1998)] regulated by the Civil
Code (Art. 1766); law
A customs broker may be regarded as a of the country to which Law on obligations
common carrier. As long as a person holds the goods are to be and contracts
itself to the public for the purpose of transported, if
transporting goods as a business, it is already regarding liability for
considered a common carrier regardless if it loss, destruction, or
owns the vehicle used or has to hire one. deterioration of goods
[Schmitz Transport v. CA, G.R. No. 150255 (Art. 1753)
(2005)] Regulation
A travel agency is not a common carrier. It is A public service,

not an entity engaged in the business of therefore subject to Not subject to
transporting either passengers or goods and is provisions governing regulation as a
therefore neither a private nor a common common carriers and common carrier
carrier. Its covenant with its customers is public utilities
simply to make travel arrangements on their It is not necessary that the carrier be issued a
behalf. [Crisostomo v. CA, G.R. No. 138334 certificate of public convenience. [Loadstar
(2003)] Shipping Co., Inc. v. CA, G.R. No. 131621
(1999)]
DIFFERENCE BETWEEN COMMON
CARRIER AND PRIVATE CARRIER 1. Diligence Required of
Common Carrier Private Carrier
Common Carriers
Availability
a. Standard of Diligence
Holds himself out in Agrees in some Common carriers, from the nature of their
common, that is, to all special case with business and for reasons of public policy, are
persons who choose some private bound to observe extraordinary diligence,
to employ him, as individual to carry for according to all the circumstances of each
ready to carry for hire hire case:
Binding Effect 1. In the vigilance over the goods, [Arts. 1734,
1735, and 1745, Nos. 5, 6, and 7, NCC]
Bound to carry all who Not bound to carry for and
offer and tender any reason, such 2. For the safety of the passengers
reasonable goods as it is transported by them [Art. 1733, NCC].
compensation for accustomed to carry,
carrying them unless it enters into a Extraordinary diligence
Requires carrying passengers safely:
Page 58 of 450
 As far as human care and foresight can 2. Liabilities of Common

provide,
 Using the utmost diligence of very cautious
Carriers
persons,
The obligation of the common carrier consists
 With a due regard for all the circumstances
in the transportation of passengers or goods or
[Art. 1755, NCC].
both [Art. 1732, NCC].
Note: A common carrier is not an insurer of the
safety of its passengers and is not bound Principles governing the liability of
absolutely and at all events to carry them safely common carriers:
and without injury [Yobido v. CA, G.R. No. a. The liability of a carrier is contractual and
113003 (1997)]. arises upon breach of its obligation. There
is breach if it fails to exert extraordinary
b. Presumption of Negligence diligence according to all circumstances of
each case;
The following gives rise to a presumption of b. A carrier is obliged to carry its passenger
negligence against the carrier: with the utmost diligence of a very
cautious person, having due regard for all
For carriage of goods the circumstances;
i. Proof of delivery of goods in good order c. A carrier is presumed to be at fault or to
to a carrier, and have acted negligently in case of death
of, or injury to, passengers, it being its duty
ii. Proof their arrival at the place of
to prove that it exercised extraordinary
destination in bad order
diligence; and
d. The carrier is not an insurer against all
Note: While delay in the delivery of goods is a
risks of travel [Isaac v. A.L. Ammen, G.R.
breach of contract of carriage, it does not raise
No. L-9671 (1957)].
the presumption of negligence because the
goods are not lost, deteriorated, or destroyed.
Registered owner rule
[Art. 1735, NCC].
The person who is the registered owner of a
vehicle is liable for any damage caused by the
For carriage of passengers
negligent operation of the vehicle although the
i. Death of passenger/s, or
same was already sold [Filcar Transport v.
ii. Injury to passenger/s
Espinas, G.R. No. 174156 (2012)].
Note: Mere failure to reach one’s destination,
without injury or death, does not raise the
Kabit system
presumption of negligence because it does not
It is an arrangement whereby a person who has
involve safety of the passengers.
been granted a certificate of convenience
allows another person who owns motor
Effects of Presumption
vehicles to operate under such franchise for a
 Makes out a prima facie case against the
fee [Lita Enterprises, Inc. v. IAC, G.R. No. L-
carrier
64693 (1984)].
 Makes it incumbent upon the carrier to
prove that the loss/death/injury was due to
It is invariably recognized as being contrary to
some other circumstance inconsistent with
public policy and therefore void and inexistent
its liability, or that it observed extraordinary
under Art. 1409. Thus, for the safety of
diligence [Art. 1756, NCC; Ynchausti
passengers and the public, the registered
Steamship v. Dexter and Unson, G.R. No.
owner of the vehicle is not allowed to prove that
L-15652 (1920)]. another person has become the owner so that
he may be thereby relieved of responsibility
[Lim v. CA, G.R. No. 125817 (2002)].
Page 59 of 450
One of the primary factors considered in the 1. application and approval/ denial of
granting of a certificate of public convenience franchise,
for the business of public transportation is the 2. setting of fares, routes, operating
financial capacity of the holder of the license, conditions, and
so that liabilities arising from accidents may be 3. imposition of fines, suspension and
duly compensated. The kabit system renders cancellation of franchise.
illusory such purpose and, worse, may still be
availed of by the grantee to escape civil liability The LTFRB shall grant the TNCs and their
caused by a negligent use of a vehicle owned accredited TNVS a Certificate of Public
by another and operated under his license Convenience (CPC) upon full compliance of
[Dizon v. Octavio (1955)]. jurisdictional requirements, as may be
determined by LTFRB. The LTFRB shall also
However, one who has availed of the kabit set the fare for the TNVS after public hearing
system is not precluded from filing for damages or in consultation with the TNCs and TNVS.
against another who caused the injury, as the [DOTr D.O. No. 2018-012]
policy against the kabit system will not be Previously, the TNC may or may not have been
defeated by giving such person standing to sue granted a Certificate of Public Convenience
[Lim v. CA, G.R. No. 125817 (2002)]. (CPC).
 If it is a holder of a valid and current CPC,
3. Classification of transport it is known as a common carrier.
 Otherwise, it is classified as a land
network vehicle services and transportation service contractor.
transport network companies
The Partners (owners of the vehicles used in
Transport Network Company or TNC is transporting passengers) forming part of the
defined as an organization whether a network of a TNC, may or may not be a
corporation, partnership, or sole proprietor, that common carrier, depending on whether the
provides pre-arranged transportation services Partner(s) itself/themselves are holders of a
for compensation using an internet-based CPC.
technology application or a digital platform  A mere Accreditation given by Land
technology to connect passengers with drivers Transportation Franchising and Regulatory
using their personal vehicles [DOTC D.O. No. Board (LTFRB) is not an equivalent to a
2015-011]. CPC and will not make said holder a
common carrier.
Transport Network Vehicle Service or TNVS  If the Partner is a holder of a CPC, said
refers to a TNC-accredited private vehicle Partner is a common carrier. However, if
owner, which is a common carrier, using the the Partner is not a holder of a CPC, said
internet-based technology application or digital Partner is merely a land transportation
platform technology transporting passengers service contractor [BIR RMC 70-2015]
from one point to another, for compensation.
The TNVS cannot operate as a common carrier
outside of or independent from the use of the B. VIGILANCE OVER
internet-based technology of the TNC or TNCs GOODS
to which they are accredited. [DOTr D.O. No.
2018-012]
The liability of the common carrier with respect
to vigilance over goods, in general, are as
TNVs and TNCs are expressly considered
follows:
common carriers and are classified as public a. Common carriers are responsible for the
utilities. They are subject to full regulation and loss, destruction, or deterioration of the
supervision by the LTFRB, including but not goods [Art. 1734, NCC]. In fact, they are
limited to:
Page 60 of 450
liable even in those cases where the cause 2. The common carrier must exercise due
of the loss or damage is unknown diligence to prevent or minimize the loss
[AGBAYANI]. before, during and after the occurrence of
b. If the goods are lost, destroyed, or the flood, storm, or natural disaster [Art.
deteriorated, common carriers are 1739, NCC]; and
presumed to have been at fault or to have 3. The common carrier must not have
acted negligently [Art. 1735, NCC]. negligently incurred delay [Art. 1740,
NCC].
Note: Two-pronged analysis in determining
liability: Fire may not be considered a natural disaster
a. Whether or not the cause of the loss, or calamity because it arises almost invariably
destruction, or deterioration is included from some act of man or by human means. It
under Art. 1734; does not fall within the category of an act of
b. If not, whether or not the common carrier God unless caused by lightning or by other
exercised extraordinary diligence. natural disaster or calamity [Eastern Shipping
Lines v. IAC, G.R. No. L-69044 (1987)].
Presumption of Negligence
General rule: Common carriers are Act of public enemy
responsible for the loss, destruction, or
deterioration of the goods. Requisites
a. The act of the public enemy was committed
Exception: Common carriers are not liable either in an international or civil war [Art.
when such loss, destruction, or deterioration is 1734 (2), NCC];
due to any of the following causes only: b. The act of the public enemy must have
1. Flood, storm, earthquake, lightning, or been the proximate and only cause; and
other natural disaster or calamity; c. The common carrier must exercise due
2. Act of the public enemy in war, whether diligence to prevent or minimize the loss
international or civil; before, during and after the act of the public
3. Act of omission of the shipper or owner of enemy causing the loss, destruction or
the goods; deterioration of the goods [Art. 1739, NCC].
4. The character of the goods or defects in the
packing or in the containers; Thieves, rioters, robbers, and insurrectionists,
though at war with social order, are not in a
5. Order or act of competent public authority
legal sense classed as public enemies, but are
[Art. 1734, NCC].
merely private depredators for whose acts a
carrier is answerable. Pirates on the high seas,
In all other cases of loss, destruction, or
however, stand as an exception to this rule.
deterioration, the common carrier is presumed
They are considered the enemies of all civilized
to have been at fault or to have acted
nations, and indeed of the human race, and
negligently, unless they prove that they
consequently their depredations on a common
observed extraordinary diligence [Art. 1735,
carrier will excuse him from liability [Aquino].
NCC].
Act or omission of shipper or owner
1. Exempting Causes
The act or omission of the shipper must have
Natural disaster or calamity been the proximate and only cause of the loss,
destruction, or deterioration of the goods.
Requisites
1. The natural disaster must have been the If the shipper or owner merely contributed to
proximate and only cause of the loss; the loss, destruction or deterioration of the
goods, the proximate cause being the
Page 61 of 450
negligence of the common carrier, the latter A fortuitous event has the following
shall be liable for the damages, which shall, characteristics:
however, be equitably reduced [Art. 1741, a. The cause of the unforeseen and
NCC]. unexpected occurrence, or the failure of
the debtor to comply with his obligations,
Character of the goods must be independent of human will;
b. It must be impossible to foresee the event
Requisites which constitutes the caso fortuito, or if it
a. The loss, destruction, or deterioration of can be foreseen, it must be impossible to
the goods is due to the character of the avoid;
goods or defects in the packing or in the c. The occurrence must be such as to render
containers [Art. 1734 (4), NCC]; and it impossible for the debtor to fulfill his
b. The common carrier must exercise due obligation in a normal manner; and
diligence to forestall or lessen the loss [Art. d. The obligor must be free from any
1742, NCC]. participation in the aggravation of the injury
resulting to the creditor.
If the fact of improper packing is known to the
carrier or its servants or apparent upon A common carrier may not be absolved from
ordinary observation, but it accepts the goods liability in case of force majeure or fortuitous
notwithstanding such condition, it is not event alone. The common carrier must still
relieved of liability for loss or injury resulting prove:
therefrom [Southern Lines v. CA, G.R. No. L- (i) That it was not negligent in causing the
16629 (1962)]. death or injury resulting from an
accident; [Yobido v. CA, G.R. No.
Order of competent authority 113003 (1997)]
(ii) That the loss or destruction of the
Requisites merchandise was due to accident and
a. There must be an order or act of competent force majeure and not fraud, fault, or
public authority through which the goods negligence on the part of the captain or
are seized or destroyed [Art. 1734 (5), owner of the ship [Tan Chiong Sian v.
NCC]; and Inchausti, G.R. No. L-6092 (1912)].
b. The said public authority must have had
the power to issue the order [Art. 1743, a. Requirement of Absence of
NCC]. Negligence
To be exempted from liability, the intervention If the common carrier is found to have acted
of the competent public authority must be of a negligently, it is precluded from invoking the
character that would render impossible the exempting causes under Art. 1734, and will be
fulfillment by the carrier of the obligation liable for damages suffered by the goods it
[Ganzon v. CA, G.R. No. L-48757 (1988)]. carried if such damages arise from its
negligence [Agbayani].
Force majeure
The exempting circumstance should be the
Force majeure – in general, has also been proximate and only cause of the loss,
invoked as an exempting cause based on Art. destruction, or deterioration of the goods for
1174, which states that no person shall be the common carrier to be exempted from
responsible for a fortuitous event which could liability on any of the ff. grounds:
not be foreseen, or which, though foreseen, 1. Natural Disaster/Calamity
was inevitable. 2. Act of Public Enemy
3. Character of the Goods [Art. 1739, 1742,
NCC]
Page 62 of 450
Maritima v. Insurance Co., G.R. No. L-

When the common carrier’s negligence is the 18965 (1964)], until the same are
proximate cause of the loss, destruction, or delivered actually and constructively by the
deterioration of the goods, the act or omission carrier to the consignee or to the person
of the shipper will only mitigate the carrier’s who has a right to receive them;
liability [Art. 1741, NCC]. b. When goods are temporarily unloaded or
stored in transit, unless the shipper or
b. Absence of Delay owner has made use of the right of
stoppage in transitu [Art 1737, NCC];
In order to be free from responsibility on the c. During storage in a warehouse of the
ground of natural disaster/calamity, the carrier at the place of destination, until
common carrier should not have negligently consignee has been advised of the arrival
incurred in delay [Art. 1740, NCC]. of the goods and has had reasonable
opportunity to remove or dispose them [Art
c. Due Diligence to prevent or lessen 1738, NCC].
the loss
In dealing with the contract of common carriage
of passengers, for purpose of accuracy, there
The common carrier should have exercised
are two (2) aspects of the same, namely:
due diligence to prevent, forestall or lessen the
(a) Contract ‘to carry (at some future time),’
loss, destruction, or deterioration of the goods,
in order to be exempted from liability on any of which contract is consensual and is
the ff. grounds: necessarily perfected by mere consent;
a. Natural Disaster/Calamity and
b. Act of Public Enemy (b) Contract ‘of carriage’ or ‘of common
c. Character of the Goods [Art. 1739, carriage,’ which should be considered as a
real contract for not until the carrier is
1742, NCC]
actually used can the carrier be said to
Meeting a typhoon head-on falls short of due
have already assumed the obligation of a
diligence required from a common carrier [Asia
carrier [Paras, Civil Code Annotated, 11th
Lighterage and Shipping Inc. v CA, G.R. No.
Ed].
147246 (2000)].
Note: The distinction is important in
2. Contributory Negligence determining when the common carrier is
required to exercise extraordinary
The liability of the common carrier shall be responsibility. The birth of the contract is not
equitably reduced when the loss, destruction, necessarily the birth of the duty to exercise
or deterioration of the goods when: extraordinary responsibility.
a. The negligence of the common carrier was
the proximate cause thereof; and Delivery of Goods to Common
b. The shipper or owner merely contributed to
Carriers
such loss, destruction, or deterioration [Art.
1741, NCC].
Delivery means unconditionally placing the
goods in the possession of the carrier and the
3. Duration of Liability carrier receiving them for transportation [Art.
1736].
Instances when carrier has responsibility to
exercise extraordinary diligence: Unconditionally placing the goods in the
a. From the time the goods are possession of the carrier means the shipper
unconditionally placed in the possession cannot get them back from the common carrier
of, and received by the carrier [Art 1736, at will.
NCC] or its authorized agent [Compania
Page 63 of 450
Thus, the liability of the carrier as common It is settled in maritime law jurisprudence that
carrier and its duty of extraordinary diligence cargoes while being unloaded generally remain
begins with the actual delivery of the goods, under the custody of the carrier [Asian
NOT: Terminals, Inc. v. Philam Insurance Co., G.R.
 When the common carrier received the No. 181163 (2013)].
goods not for transportation but only for
safekeeping; or Temporary Unloading or Storage
 When a receipt or bill of lading is executed,
since the issuance of a bill of lading is not General rule: Extraordinary diligence over the
necessary to complete delivery and goods remains even when the goods are
acceptance [Compania Maritima v temporarily unloaded or stored in transit.
Insurance Co., G.R. No. L-18965 (1964)].
Exception: The duty to observe such diligence
Actual or Constructive Delivery ceases when shipper or owner makes use of
the right of stoppage in transitu [Art 1737,
The extraordinary responsibility of the common NCC].
carrier ends when, subject to Art. 1738, the
goods are delivered actually or constructively Stoppage in transitu is the act by which the
by the carrier to: unpaid vendor of goods stops their progress
a. The consignee; or and resumes possession of them
b. The person who has a right to receive constructively, while they are in the course of
them, such as agents, brokers, and the transit from him to the purchaser and not yet
like. actually delivered to the latter [Agbayani].
Art. 1738 provides that the extraordinary Basis: Under Art. 1530, when the buyer of the
liability of the common carrier continues to be goods becomes insolvent, the unpaid seller
operative even during the time the goods are who has parted with the possession of the
stored in a warehouse of the carrier at the place goods, at any time while they are in transit, may
of destination, until the consignee has: resume the possession of the goods as he
1. Been advised of the arrival of the goods; would have had if he had never parted with the
and possession.
2. Had reasonable opportunity thereafter to When the right of stoppage in transitu is
remove them or otherwise dispose of them. exercised, the common carrier holds the goods
in the capacity of an ordinary bailee or
Delivery of the cargo to the customs authorities warehouseman upon the theory that the
is not delivery to the consignee or “to the exercise of the right of stoppage in transitu
person who has a right to receive them” as terminates the contract of carriage. Hence,
contemplated in Art. 1736 because in such only ordinary diligence is required
case the goods are still in the hands of the [Agbayani].
government and the owner cannot exercise
dominion over them. However, the parties may 4. Stipulation for Limitation of
agree to limit the liability of the carrier
considering that the goods still have to go Liability
through the inspection of the customs
authorities before they are actually turned over There are two possible stipulations limiting the
to the consignee. It is unfair that the carrier be liability of the common carrier:
made responsible for what may happen during a. Stipulation limiting the common carrier’s
the interregnum [Lu Do v. Binamira, G.R. No. liability as to the diligence required;
L-9840 (1957)]. b. Stipulation limiting the common carrier’s
liability as to the amount of liability.
Page 64 of 450
An agreement limiting the common carrier’s 8. That the common carrier is exempt from
liability for delay on account of strikes or riots is any and all liability for loss or damage
also valid [Art. 1748, NCC]. occasioned by its own negligence;
9. Stipulation providing for an unqualified
As to Diligence Required limitation of such liability to an agreed
A stipulation between the common carrier and stipulation [Heacock v. Macondray, G.R.
the shipper or owner limiting the liability of the No. L-16598 (1921)].
former for the loss, destruction, or deterioration
of the goods to a degree less than b. Limitation of Liability to Fixed
extraordinary diligence shall be valid, provided Amount
it be:
1. In writing, signed by the shipper or A contract fixing the sum that may be
owner; recovered by the owner or shipper for the loss,
2. Supported by a valuable consideration destruction or deterioration of the goods is
other than the service rendered by the valid if:
common carrier; and 1. It is reasonable and just under the
3. Reasonable, just and not contrary to circumstances; and
public policy [Art. 1744, NCC]. 2. It has been fairly and freely agreed upon
[Art. 1750, NCC].
a. Void Stipulations
While a passenger may not have signed the
Any of the following or similar stipulations shall plane ticket, he is nevertheless bound by the
be considered unreasonable, unjust and provision thereof, regardless of the latter’s lack
contrary to public policy: of knowledge or assent to the regulation. It is
what is known as a contract of adhesion
1. That the goods are transported at the risk wherein one party imposes a ready-made form
of the owner or shipper; of contract on the other. The one who adheres
2. That the common carrier will not be liable to the contract is in reality free to reject it
for any loss, destruction, or deterioration of entirely. A contract limiting liability upon an
the goods; agreed valuation does not offend against the
3. That the common carrier need not observe policy of the law forbidding one from
any diligence in the custody of the goods; contracting against his own negligence [Ong
4. That the common carrier shall exercise a Yiu v. CA, G.R. No. l-40597 (1979)].
degree of diligence less than that of a good
father of a family, or of a man of ordinary [However], the fact that the conditions are
prudence in the vigilance over the printed at the back of the ticket stub in letters
movables transported; so small that they are hard to read would not
5. That the common carrier shall not be warrant the presumption that the [shipper] was
responsible for the acts or omission of his aware of those conditions such that he had
or its employees; “fairly and freely agreed” to those conditions
6. That the common carrier’s liability for acts [Shewaram v. PAL, G.R. No. L-20099 (1966)].
committed by thieves, or of robbers who do
not act with grave or irresistible threat, Factors Affecting Agreement
violence or force, is dispensed with or The effect of these stipulations is subject to the
diminished; following provisions:
7. That the common carrier is not responsible 1. An agreement limiting the common
for the loss, destruction, or deterioration of carrier’s liability may be annulled by the
goods on account of the defective condition shipper or owner if the common carrier
of the car, vehicle, ship, airplane or other refused to carry the goods unless the
equipment used in the contract of carriage former agreed to such stipulation [Art.
[Art. 1745, NCC]; 1746, NCC];
Page 65 of 450
2. If the common carrier, without just cause, must have a direct relationship with the
delays the transportation of the goods or passenger who is traveling.
changes the stipulated or usual route, the
contract limiting the common carrier’s For instance, a balikbayan box or suitcase is
liability cannot be availed of in case of the passenger’s baggage. However, 10,000 cans
loss, destruction, or deterioration of the of corned beef is not considered as passenger
goods [Art. 1747, NCC]; baggage. They are considered as goods, and
3. The fact that the common carrier has no are not part of the contract of carriage [of
competitor along the line or route, or a part passenger]. A separate contract of carriage [or
thereof, to which the contract refers shall bill of lading] must be entered into in order to
be taken into consideration on the question transport them [Agbayani].
of whether or not a stipulation limiting the
common carrier’s liability is reasonable, There are two kinds of passenger’s baggage,
just and in consonance with public policy which are governed differently:
[Art. 1751, NCC]; a. Passenger baggage in the custody of the
4. Even when there is an agreement limiting passenger (or carry-on luggage); and
the liability of the common carrier in the b. Passenger baggage NOT in the custody
vigilance over the goods, the common of the passenger (or checked-in luggage).
carrier is disputably presumed to have
been negligent in case of their loss, The liability is greater for baggage that is in the
destruction or deterioration [Art. 1752, custody of the carrier, or checked-in baggage,
NCC]. as compared to those in the possession of the
passenger.
c. Limitation of Liability in
Absence of Declaration of a. Checked-In baggage
Greater Value
The provisions of Arts. 1733-1753 shall apply
A stipulation that the common carrier’s liability to passenger’s baggage which is not in his
is limited to the value of the goods appearing in personal custody or in that of his employee [Art.
the bill of lading, unless the shipper or owner 1754, NCC].
declares a greater value, is binding [Art. 1749,
NCC]. In other words, the rules governing the
responsibility of a common carrier in the
Where the liability has been limited due to a transportation of goods apply. Thus,
stipulation written at the back of a ticket, to the extraordinary diligence is required.
effect that the liability is limited to a certain
amount unless the passenger declares a b. Baggage in Possession of
higher valuation, a passenger who did not
Passengers
declare a higher valuation, or did not pay
additional charges, cannot increase the liability
As to baggage other than checked-in baggage,
of the carrier [Ong Yiu v. CA, G.R. No. l-40597
they are governed by Arts. 1998, and 2000-
(1979)].
2003, concerning the responsibility of hotel-
keepers [Art. 1754, NCC].
5. Liability for Baggage of
Passengers Art. 1998, as applied by analogy, the baggage
of passengers in their personal custody or in
Baggage are things that a passenger will bring that of their employees, while being
with him consistent with a temporary absence transported, are regarded as necessary
from where he lives. Passenger’s baggage deposits. The common carriers are responsible
as depositaries, provided that:
Page 66 of 450
1. Notice was given to them, or to their

employees, of the effects brought by the C. SAFETY OF
passengers; and PASSENGERS
2. The passengers take the precautions
which the common carrier advised relative The liability of the common carrier with respect
to the care and vigilance of their baggage.
to the safety of passengers, in general, are as
follows:
In case of loss or injury to the baggage of
(1) A common carrier is bound to carry the
passengers in their personal custody, or in that
passengers safely as far as human care
of their employees, while being transported,
and foresight can provide, using the utmost
the carrier is liable if the loss or injury is caused
diligence of very cautious persons, with a
by:
due regard for all the circumstances [Art.
1. His servants;
1755, NCC];
2. His employees;
(2) In case of death of or injuries to
3. Strangers [Art. 2000, NCC]; or
passengers, common carriers are
4. A thief or robber done without the use of
presumed to have been at fault or to have
arms or irresistible force [Art. 2001, NCC].
acted negligently, unless they prove that
they observed extraordinary diligence [Art.
The carrier is not liable if loss or injury is
1756, NCC].
caused by:
1. Force majeure [Art 2000, NCC];
Note: It is not enough that the accident was
2. Theft or robbery with the use of arms or
caused by force majeure, the common carrier
irresistible force [Art 2001, NCC];
must still prove that it was not negligent in
3. The acts of the passenger, his family, causing the injuries resulting from such
servants, or visitors; accident [Bachelor Express v. CA, G.R. No.
4. The character of the baggage [Art 2002, 85691 (1990)]. Bachelor Express illustrates
NCC]. that force majeure is not itself a defense; the
exercise of the diligence required by law is the
The following provisions also figure in defense.
determining the liability of the common carrier:
1. The fact that passengers are constrained 1. Void Stipulations
to rely on the vigilance of the common
carrier shall be considered in determining General rule: The responsibility of a common
the degree of care required of him [Art carrier for the safety of passengers cannot be
2000, NCC]; dispensed with or lessened by stipulation by
2. The common carrier cannot free himself the posting of notices, by statements on tickets,
from responsibility by posting notices to the or otherwise [Art. 1757, NCC].
effect that he is not liable for the articles
brought by the passenger; Exception: When a passenger is carried
3. Any stipulation whereby the responsibility gratuitously, a stipulation limiting the common
of the common carrier as set forth in Arts. carrier’s liability for negligence is valid [Art
1998-2001 is suppressed or diminished 1758, NCC].
shall be void [Art. 2003, NCC].
Exception to the exception: Even when a
passenger is carried gratuitously, a stipulation
limiting the common carrier’s liability for willful
acts or gross negligence is invalid [Art 1758,
NCC].
Page 67 of 450
The reduction of fare does not justify any (1) Caused by the (a) He may not be
limitation of the common carrier’s liability [Art. disability of the required to pay
1758, NCC]. vessel and any increased
(2) A passenger price of passage;
2. Duration of Liability should agree to but
await the repairs (b) His living
As in the contract of carriage of goods, the expenses during
perfection of the contract of carriage of the stay shall be
passengers does not necessarily coincide with for his own
the commencement of the duty of extraordinary account.
diligence. It may occur at the same time or
later. 2. In case of delay in the departure of the
vessel, the passengers have:
Based on jurisprudence, the duty that the a) The right to remain on board;
carrier of passengers owes to its patrons b) If the delay is not due to a fortuitous
extends to persons boarding the cars as well event or force majeure, the right to be
as those alighting therefrom [Del Prado v.
furnished with food for the account of
Manila Electric Company, G.R. No. L-29462
the vessel;
(1929)].
c) If the delay should exceed ten days:
i) Passengers requesting the same
This is also reflected in Art. 17, Warsaw shall be entitled to the return of the
Convention, which applies to international air fare; and
carriage. It provides that the liability of a
ii) If it is due exclusively to the fault
common carrier for injury to the passenger
of the captain or ship agent, they
lasts from embarkation to disembarkation,
may also demand indemnity for
including the period when the passenger is on
losses and damages.
board the aircraft.
A vessel exclusively devoted to the
In maritime commerce, Art. 698, Code of transportation of passengers must take them
Commerce relates to the period of the voyage: directly to the port or ports of destination, no
1. In case a voyage already begun should be matter what the number of passengers may be,
interrupted: making all the stops indicated in its itinerary.
a. The passengers shall be obliged to
pay the fare in proportion to the
distance covered; and
a. Waiting for Carrier or Boarding of
b. Have the following reliefs: Carrier
The duty that the carrier of passengers owes to

Cause of Relief its patrons extends to persons boarding the
interruption cars as well as to those alighting therefrom.
An accidental cause Without right to
or force majeure recover for losses It is the duty of common carriers of passengers
and damages to stop their conveyances at a reasonable
length of time in order to afford passengers an
By the captain With a right to opportunity to board and enter:
exclusively indemnity 1. 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)].
Page 68 of 450
2. However, a person boarding a moving car justify the presence of the victim on or near
must be taken to assume the risk of injury the petitioner’s vessel:
from boarding the car under the conditions 1. A person who, after alighting from a train,
open to his view. Nonetheless, he cannot walks along the station platform is
fairly be held to assume the risk that the considered still a passenger;
motorman, having the situation in view, will 2. A passenger, who has alighted at his
increase the peril by accelerating the destination and is proceeding by the usual
speed of the car before he is planted safely way to leave the company’s premises, but
on the platform [Del Prado v. Manila before actually doing so is halted by the
Electric Company, G.R. No. L-29462 report that his brother, a fellow passenger,
(1929)]. has been shot, and he in good faith, returns
to relieve his brother, is deemed
The extraordinary responsibility of common reasonably and necessarily delayed and
carriers commences: thus continues to be a passenger entitled
(i) With respect to carriage of passengers as such to the protection of the railroad and
by trains: The moment the person who company and its agents [La Mallorca v. CA,
purchases the ticket from the carrier G.R. No. L-20761 (1966)];
presents himself at the proper place 3. In the case of a shipper, the passengers of
and in a proper manner to be vessels are allotted a longer period of time
transported with a bona fide intent to to disembark from the ship than other
ride the coach [Aquino citing Vda. de common carriers such as a passenger bus,
Nueca, et al. vs. Manila Railroad since such vessels are capable of
Company]. accommodating a bigger volume of both
(ii) With respect to carriage of passengers passenger and baggage as compared to
by sea: As soon as the person with the capacity of a regular commuter bus.
bona fide intention of taking passage Consequently, a ship passenger will need
places himself in the care of the carrier at least an hour as is the usual practice, to
or its employees and is accepted as disembark from the vessel and claim his
passenger [Aquino]. baggage [Aboitiz Shipping v. CA, G.R. No.
84458 (1989)];
b. Arrival at Destination 4. The carrier necessarily would still have to
exercise extraordinary diligence in
The relation of carrier and passenger does not safeguarding the comfort, convenience
cease at the moment the passenger alights and safety of its stranded passengers until
from the carrier’s vehicle at a place selected by they have reached their final
the carrier at the point of destination, but destination [PAL v. CA, G.R. No. L-82619
continues until the passenger has had a (1993)].
reasonable time or a reasonable opportunity to
leave the carrier’s premises. Note: Despite the Court’s pronouncement in
PAL v. CA, note that common carriers are
What is a reasonable time or a reasonable bound to observe extraordinary diligence in the
delay within this rule is to be determined from ‘safety’ of its passengers. The law does not
all the circumstances such as the kind of mention the words ‘comfort’ and ‘convenience.’
common carrier, the nature of its business, the
customs of the place, and so forth, and 3. Liability for Acts of Others
therefore precludes a consideration of the time
element per se without taking into account Employees
such other factors.
General rule: Common carriers are liable for
The primary factor to be considered is the the death of or injuries to passengers through
existence of a reasonable cause as will
Page 69 of 450
the negligence or willful acts of the former’s as there are human factors involved in the
employees, although such employees may situation [Yobido v. CA, G.R. No. 113003
>have acted beyond the scope of their (1997)].
authority or in violation of the orders of the
common carriers. Other Passengers and Strangers
This liability does not cease: General Rule: A common carrier is not liable
(i) Even upon proof that they exercised for injuries inflicted by strangers or co-
all the diligence of a good father of a passengers.
family in the selection and
supervision of their employees [Art. Exception: A common carrier is responsible
1759, NCC]; for injuries suffered by a passenger on account
(ii) By stipulation, by the posting of of the willful acts or negligence of other
notices, nor by statements on the passengers or of strangers, if the common
tickets eliminating or limiting said carrier's employees, through the exercise of
liability [Art. 1760, NCC]. the diligence of a good father of a family,
could have prevented or stopped the act or
Ratio: The servant is clothed with delegated omission [Art. 1763, NCC].
authority and charged with the duty to execute
the carrier’s undertaking to carry the passenger Note: The law speaks of injuries suffered by the
safely [Agbayani]. Also, the defense of passenger but not death. However, there
diligence in the selection and supervision of appears to be no reason why the common
employees does not obtain because the liability carrier should not be held liable under such
is not based on quasi-delict, but on culpa circumstances. The word “injuries” should be
contractual. However, there must be a interpreted to include death [Agbayani].
reasonable connection between the act and
the contract of carriage. Under Art. 1763, a tort committed by a stranger
which causes injury to a passenger does not
Note: The employee must be on duty at the accord the latter a cause of action against the
time of the act. carrier. The negligence for which a common
It is enough that the assault happens within carrier is held responsible is the negligent
the course of the employee’s duty. It is no omission by the carrier’s employees to prevent
defense for the carrier that the act was done in the tort from being committed when the same
excess of authority or in disobedience of the could have been foreseen and prevented by
carrier’s orders. [Maranan v. Perez, G.R. No. them through the exercise of the diligence of
L-22272 (1967)]. a good father of a family [Pilapil v. CA, G.R.
No. 52159 (1989)].
Exception: A common carrier is not
responsible for acts falling under force Contributory Negligence
majeure. When a party is unable to fulfill his The passenger must observe the diligence of a
obligation because of force majeure, he cannot good father of a family to avoid injury to himself
be held liable for damages for non- [Art. 1761, NCC].
performance [Japan Airlines vs. CA, G.R. No.
118664 (1998)]. The contributory negligence of the passenger
does not bar recovery of damages for his death
Note: In order to be exempted from liability due or injuries, if the proximate cause thereof is the
to a fortuitous event, a common carrier must negligence of the common carrier, but the
still prove a complete exclusion of human amount of damages shall be equitably reduced
agency from the cause of injury or death. [Art. 1762, NCC].
Hence, it was held that the explosion of the new
tire may not be considered a fortuitous event
Page 70 of 450
However, when the negligence of the

passenger was the proximate cause of the c. Right to amenities
injury, the passenger is barred from recovery, The operator shall provide, free of charge, the
and the common carrier is exempted from passengers with the following:
liability. i. Snacks or refreshment, or meals
during mealtime;
It is negligence per se to voluntarily or ii. Free access to first aid/ relief medicine,
inadvertently protrude one’s arm, hand, elbow, if necessary;
or any other part of his body through the iii. Free access to communication facilities
window of a moving car beyond the outer edge or services, if necessary;
of the window or outer surface of the car, so as iv. Free, decent, and clean
to come in contact with objects or obstacles accommodation located near or
near the track [Isaac v. A.L. Ammen, G.R. No. accessible from the port;
L-9671 (1957)]. v. Free transportation to and from the port
and the place of accommodation,
4. Liability for Delay in should the delay require a waiting time
of more than eight (8) but not
Commencement of Voyage exceeding twenty-four (24) hours
[Maritime Industry Authority Circular
A “delayed voyage” refers to a voyage No. 2018-27].
involving:
i. Late departure of the ship from its port d. Right to compensation
of origin; or As an alternative to providing accommodation
ii. Late arrival thereof to its port of or whenever the same is not practicable, the
destination for a period of time not operator may offer the passengers
exceeding twenty-four (24) hours from corresponding compensation:
the CPC-authorized time of departure i. In an amount equivalent to the
or arrival of the ship [Maritime Industry prevailing market price of a decent and
Authority Circular No. 2018-27]. clean accommodation in the immediate
or adjacent locality of the ship’s point of
In case of delayed voyages, passengers shall departure;
have the following rights: ii. Subject to the limitation of a maximum
of three (3) nights per passenger
a. Right to information [Maritime Industry Authority Circular
Within thirty (30) minutes of knowledge that the No. 2018-27].
voyage shall be delayed but not later than one
(1) hour before the CPC-authorized departure e. Right to remain on board
schedule, the operator shall inform the In case the departure of the vessel is delayed
passengers of: the passengers have a right to remain on board
i. The delay; and to be furnished with food for the account of
ii. The cause of delay; the vessel, unless the delay is due to an
iii. The new departure or expected arrival accidental cause or to force majeure [Art. 698,
time [Maritime Industry Authority COC].
Circular No. 2018-27].
f. Right to return
b. Right to refund or revalidation If the delay should exceed ten days, the
Should the delay be for more than three (3) passengers who request it shall be entitled to
hours, the passenger shall be offered the the return of the passage [Art. 698, COC].
option to request a refund of the ticket price, or
for the revalidation of the ticket [Maritime
Industry Authority Circular No. 2018-27].
Page 71 of 450
g. Right to damages a. Actual or Compensatory Damages

If the delay were due exclusively to the captain Actual or compensatory damages refer to
or agent, the passengers may furthermore adequate compensation for such pecuniary
demand indemnity for losses and damages loss suffered as duly proved [Art. 2199, NCC].
[Art. 698, COC].
Under Art. 2201, the liability for damages
5. Liability for Defects in include:
a. In case the common carrier acted in good
Equipment and Facilities faith:
a. The natural and probable
While a carrier is not an insurer of the safety of consequence of the breach of the
the passengers, it should nevertheless be held obligation; and
to answer for the flaws of its equipment and b. Those which the parties have
mechanical defects, if such flaws were at all foreseen or could have reasonably
discoverable. foreseen at the time the obligation
was constituted;
The manufacturer of the defective appliance is b. In case of fraud, bad faith, malice or wanton
considered in law, as the agent of the carrier, attitude, all damages which may be
and the good repute of the manufacturer will reasonably attributed to the non-
NOT relieve the carrier from liability. performance of the obligation.
Rationale: The passenger has no privity with
the manufacturer of the defective equipment. In case of death, actual damages also include:
Hence, he has no remedy against him, while a. Loss of earning capacity, unless the
the carrier usually has [Necesito vs. Paras, deceased had no earning capacity at the
G.R. No. L-10605 (1958)]. time of death; and
b. Support for a period not exceeding five
6. Extent of Liability for years [Art. 2206, NCC].
Damages
In the absence of a showing that common
Damages recoverable from common carriers, carrier’s attention was called to the special
both in cases of carriage of passengers and circumstances requiring prompt delivery of a
goods, shall be awarded in accordance with passenger’s luggage, the common carrier
Title XVIII concerning Damages. cannot be held liable for the cancellation of
passenger’s contracts [for exhibition of films]
Art. 2206, on liability, in case of death, for loss as it could not have foreseen such an
of earning capacity, support, and moral eventuality when it accepted the luggage for
damages for mental anguish, shall also apply transit [Pan-Am World Airways v. IAC, G.R. No.
to the death of a passenger caused by the 70462 (1988)].
breach of contract by a common carrier [Art.
1764, NCC]. b. Moral Damages
Moral damages, though incapable of pecuniary
Thus, the damages recoverable are: computation, if they are the proximate result of
a. Actual or compensatory damages; the common carrier’s wrongful act or omission,
b. Moral damages; may be recovered [Art. 2217, NCC].
c. Exemplary damages;
d. Nominal, temperate, and liquidated In cases of breach of contract of carriage,
damages; moral damages may be recovered where:
e. Attorney’s fees. 1. The common carrier acted fraudulently;
2. The common carrier acted in bad faith [Art.
2220, NCC];
Page 72 of 450
3. Death of a passenger resulted even in the breach of contract of carriage and in every case
absence of bad faith or fraud [Art. 2206, where any property right has been invaded
NCC]. [Art. 2222, NCC].
Bad faith contemplates a state of mind A violation of the passenger’s right to be

affirmatively operating with furtive design or treated with courtesy in accordance with the
with some motive of self-interest or will or for degree of diligence required by law to be
ulterior purpose [Air France v. Carrascoso, exercised by every common carrier entitles the
G.R. No. L-21438 (1966)]. passenger to nominal damages [Saludo v. CA,
G.R. No. 95536 (1922)].
Inattention and lack of care on the part of the
carrier, resulting in the failure of the passenger Temperate or moderate damages, which are
to be accommodated in the class contracted more than nominal but less than compensatory
for, amounts to bad faith or fraud which entitles damages, may be recovered when some
the passenger to the award of moral damages pecuniary loss has been suffered but its
in accordance with Art. 2220 [Ortigas v. amount cannot, from the nature of the case, be
Lufthansa, G.R. No. L-28773 (1975)]. proved with certainty [Art. 2224, NCC].
Willful and deliberate overbooking on the part In the case of Philtranco v Paras [G.R. No.
of the airline carrier constitutes bad faith. Under 161909(2012)], the Supreme Court upheld the
Section 3, Economic Regulations No. 7 of the award of temperate damages by the CA. Paras
Civil Aeronautics Board, overbooking, which failed to show receipts of at least two surgeries
does not exceed ten percent, is not considered as well as rehabilitative therapy. Nonetheless,
as deliberate and therefore does not amount to the CA was convinced that Paras should not
bad faith [United Airlines v. CA, G.R. No. suffer from the lack of definite proof of his
124110 (2001)]. actual expenses for the surgeries and
rehabilitative therapy. Thus, the CA awarded to
c. Exemplary Damages him temperate damages of P50,000.00 in the
In a contract of carriage, exemplary damages absence of definite proof of his actual
may be awarded if the common carrier acted in expenses towards that end.
a wanton, fraudulent, reckless, oppressive, or
malevolent manner [Art. 2232, NCC]. Liquidated damages are those damages
agreed upon by the parties to a contract, to be
Exemplary damages serves as an instrument paid in case of breach thereof [Art. 2226, NCC].
to serve the ends of law and public policy by
reshaping socially deleterious behaviors, e. Attorney’s Fees
specifically, in the case, to compel the common Under Art. 2208, as applicable to a contract of
carrier to control their employees, to tame their carriage, attorney’s fees and expenses of
reckless instincts, and to force them to take litigation may be recovered in the following
adequate care of human beings and their cases:
property [Mecenas v. CA, G.R. No. 88052 1. When exemplary damages are awarded;
(1989)]. 2. When the common carrier’s act or omission
has compelled the plaintiff to litigate with
d. Nominal, Temperate, and Liquidated third persons or to incur expenses to
Damages protect his interest;
Nominal damages are adjudicated in order 3. Where the common carrier acted in gross
that a right of the plaintiff, which has been and evident bad faith in refusing to satisfy
violated by the defendant, may be vindicated or the plaintiff’s valid, just and demandable
recognized, not for the purpose of indemnifying claim;
the plaintiff for any loss suffered by him [Art.
2221, NCC]. It may be awarded in case of
Page 73 of 450
4. In any other case where the court deems it It is covered by the Parol Evidence Rule in
just and equitable that attorney’s fees and which the terms of the contract are rendered
expenses of litigation should be recovered. conclusive upon the parties.
Evidence aliunde is not admissible to vary or

D. BILL OF LADING contradict a complete and enforceable
agreement embodied therein [Magellan Mfg.
Marketing Corp. v. CA, G.R. No. 95529
Definition (1991)].
A Bill of Lading is a written acknowledgement,
signed by the master of a vessel or other The value of the goods stated in the bill of
authorized agent of the carrier, that he has lading is conclusive between the parties, and
received the described goods from the shipper: the shipper is not allowed to prove a higher
a. To be transported on the expressed terms value [Art. 372, COC].
to the described place of destination; and
b. To be delivered there to the designated It is only when the carrier’s fault is so gross as
consignee or parties [70 Am. Jur. 2d 924]. to amount to actual fraud that the actual
amount of the losses and damages suffered
Effectivity may be proved by the shipper against the
The bill of lading becomes effective usually carrier.
upon its delivery to and acceptance by the
shipper [Aquino]. Exception: The contents of the bill of lading
are not controlling when there is falsity and
In the absence of fraud, concealment, or material error in its drafting [Art. 353, COC].
improper conduct, it is presumed that the
stipulations of the bill are known to the shipper, A bill of lading is not, however, indispensable
and he is generally bound by his acceptance for the creation of a contract of carriage
whether he reads the bill or not [Magellan Mfg. [Compania Maritima v Insurance Co., G.R. No.
Marketing Corp. v. CA, G.R. No. 95529 L-18965 (1964)].
(1991)].
In the absence of a bill of lading, disputes shall
be determined by the legal proofs which the
1. Three-Fold Character parties may present in support of their
respective claims, according to the Code of
A Bill of Lading operates as a: Commerce [Art. 354, COC].
1. Receipt as to the quantity and description
of the goods shipped;
2. Contract to transport and deliver the goods 2. Delivery of Goods
to the consignee or other person therein
designated, on the terms specified in such The goods should be delivered to the
instrument; and consignee or any other person to whom the bill
3. Document of title, which makes it a symbol of lading was validly transferred or negotiated.
of the goods.
The carrier is duty bound to deliver the goods
General Rule: The bill of lading constitutes the in the same condition in which, according to the
legal evidence of the contract of transportation, bill of lading, they were at the time of their
and all disputes between the parties regarding receipt, without damage or impairment [Art.
the execution and performance of the contract 363, COC].
shall be decided by the contents of the bill of
lading issued by the carrier.
Page 74 of 450
Period of Delivery This receipt produces the same effects as the

return of the bill of lading [Art. 353, par. 3,
Period for the delivery of goods COC].
Period of Delivery must be made
delivery is within period fixed [Art. 370, If surrender of the original bill of lading is not
stipulated COC]. possible, acknowledgment of the delivery by
in the Bill of signing the delivery receipt suffices for a
Lading common carrier to be discharged of its
Period of Delivery must be made contractual obligation [National Trucking and
delivery is through the first shipment of Forwarding Corp v Lorenzo Shipping Corp,
NOT the same or similar G.R. No. 153563 (2005)].
stipulated merchandise to the point of
delivery. If not made on such Refusal of Consignee to Take
first shipment, delay arises. Delivery
[Art. 358, COC].
The consignee may refuse to take delivery in
the following cases:
Liability in case of delay in delivering the goods 1. If only part of the goods transported should
Indemnity Liability is limited to the be delivered, when he proves that he
for delay is stipulation [Art. 358, COC]. cannot make use thereof without the others
fixed in the [Art. 363, COC];
Bill of 2. When the goods are rendered useless for
Lading purposes of sale or consumption in the use
Indemnity Liable for all damages which for which they are properly destined, in
for delay may have been caused by which case the consignee may demand
NOT fixed the delay [Art. 370, COC]. payment of the goods at current market
prices [Art. 365, COC];
3. In case part of the goods is in good
Delivery Without Surrender of Bill condition and separation is possible, the
of Lading consignee may refuse to receive only the
damaged goods [Art. 365, COC];
After the contract has been complied with: 4. Where the delay is through the fault of the
a. The bill of lading which the carrier has carrier [Art. 371, COC].
issued shall be returned to him; and
b. The respective obligations and actions In case of dispute as to the condition of the
shall be considered cancelled by virtue goods, the same shall be examined by experts
of the exchange of this title with the appointed by the parties, and in case of
thing transported. disagreement, appointed by the judicial
Unless in the same act, the claim which the authority.
parties may wish to reserve be reduced to
writing. If the persons interested should not agree with
Exception being made of the provisions of Art. the report, said judicial authority shall order the
366, on period for filing claims [Art. 353, par. 2, deposits of the merchandise in a safe
COC]. warehouse, and the parties interested shall
make use of their rights in the proper manner
If the consignee CANNOT return the bill of [Art. 367, COC].
lading subscribed by the carrier, upon receiving
the merchandise, in case of loss or for any Horses, vehicles, vessels and equipment used
other reason whatsoever: The consignee shall by the carrier serve as liens for the payment of
give said carrier a receipt for the goods the value of the goods, which the carrier must
delivered.
Page 75 of 450
pay in case of loss or misplacement [Art. 372, requirement was held nevertheless to have
COC]. been complied with [Aboitiz v Insurance
Company of North America, GR No. 168402
3. Period for Filing Claims (2008)].
A claim, on account of damage found upon Code of Commerce COGSA

opening the packages, must be made against
the carrier: Primarily governs Applicable law for
a. Within 24 hours, if the indications of the domestic transport, all contracts for
damage cannot be ascertained from the but nothing stops carriage of goods
exterior of the packages (i.e., latent parties from by sea to Philippine
damage); or stipulating that ports in foreign
b. At the time of receipt, if the indications COGSA applies in trade
damage can be so ascertained (i.e., patent their contract
damage) [Art. 366, COC]. File claim for apparent loss: upon receipt
File claim within 24 File claim within 3
No claim whatsoever shall be admitted against
hours from delivery if days from delivery if
the carrier with regard to the condition in which
damage or loss is not damage or loss is
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 been mandatory; condition not mandatory
paid. precedent for filing of
action for damages
The periods mentioned commence upon
delivery of cargo to the consignee at the place
of destination. Prescriptive period to Prescriptive period
file an action: to file an action:
Thus, Art. 366 is limited to cases of claims for 10 years from breach 1 year from
damage to goods actually turned over by the if bill of lading/written discharge of goods,
carrier and received by the consignee. It does receipt/contract is or date when they
not apply to misdelivery of goods. issued. 6 years from should have been
breach if only through delivered. The 1-
Failure to file a claim bars recovery [Aquino]. oral contract year period may be
extended by
Ratio: The rule protects the carrier by affording stipulation.
it an opportunity to make an investigation of a
claim while the matter is still fresh and easily
investigated so as to safeguard itself from false The parties to a contract of carriage may fix, by
and fraudulent claims [UCPB General Ins. Co., agreement, a shorter time for the bringing of
Inc. v. Aboitiz Shipping, G.R. No. 168433 suit on a claim for the loss of or damage to the
(2009)]. shipment than that provided by the statute of
limitations.
However, provisions specifying a time to give i. In the absence of any statutory limitation;
notice of damage to common carriers are and
ordinarily to be given a reasonable and ii. Subject to the requirement on the
practical, rather than a strict construction. reasonableness of the stipulated period.
Thus, in light of the peculiar circumstances in Ratio: Such stipulation merely affects the
this case, the Court made a pro hac vice ruling, shipper’s remedy and does not affect the
in that even if the notice was given more than liability of the carrier [PHILAMGEN v. Sweet
24 hrs after the receipt of the goods, the notice Lines, Inc., G.R. No. 87434 (1992)].
Page 76 of 450
occasioned by
4. Period for Filing Actions its own
negligence
Overland Transportation and Limited Unqualified INVALID
liability limitation of
Coastwise Shipping such liability to
an agreed
The general rules under the Civil Code on valuation
extinctive prescription apply. Thus, action for
Qualified Limits the VALID and
damages must be filed in court:
liability liability of the enforceable
1. Within 6 years, if a bill of lading was not
carrier to an
issued [Art. 1145, NCC];
agreed
2. Within 10 years, if a bill of lading was
valuation unless
issued [Art. 1146, NCC].
the shipper
declares a
International Carriage of Goods by higher value
Sea and pays a
higher rate of
Suit must be brought within one year: freight
1. After delivery of the goods; or [H.E. Heacock Company v. Macondray &
2. From the date when the goods should have Company, Inc., G.R. No. L-16598, Oct. 3,
been delivered. 1921].
Otherwise, the carrier and the ship shall be

discharged from all liability in respect of loss or
damage. E. MARITIME COMMERCE
The absence of notice shall not affect or
prejudice the right of the shipper to bring suit Vessel
within one year after the delivery of the goods Vessels are those engaged in navigation,
or the date when the goods should have been whether coastwise or on the high seas
delivered [Section 3(6), COGSA]. destined for the services of the industry or
maritime commerce.
The COGSA, as adopted and embodied in CA
No. 65, applies because it is a special law, and, The word ‘vessel’ used in the Code of
as such, prevails over the general provisions of Commerce was not intended to include all
the Civil Code on prescription of actions ships, craft, or floating structures of every kind
[Maritime Agencies & Services, Inc. v. CA, without limitation [Lopez v. Duruelo, G.R. No.
G.R. No. 77638 (1990) ]. L-29166 (1928)].
Vessels are considered personal or movable

5. Effects of Stipulations property [Art. 585, COC]; but they partake to a
certain extent, of the nature and conditions of
Three kinds of limiting stipulations often made real property, on account of their value and
in bill of lading: importance in the world of commerce.
Effect Valid/Invalid
No Exempts the INVALID
liability carrier from any
1. Charter Parties
and all liability
for loss or Charter party – a contract by virtue of which the
damage owner or agent of a vessel binds himself to
Page 77 of 450
transport merchandise or persons for a fixed b. Existing vessel which should be placed at
price. the disposition of the shipper;
c. Freight; and
Liabilities arising from breach of a charter party d. Compliance with the formal requisites
is identical to overland transport. under Article 652 of the Code of Commerce
which include the requirement that the
Towage is not a charter party. It is a contract charter party must be in (a) writing, (b)
for the hire of services by which a vessel is drawn in duplicate, and (c) signed by the
engaged to tow another vessel from one port to parties [Aquino].
another for consideration.
In modern maritime law and usage, there are
Bill of lading distinguished from a charter party three distinguishable types of charter parties:
Bill of Lading Charter Party a. Bareboat or demise charter;
A private receipt A complete contract, b. Time charter; and
which the captain whereby the whole or c. Voyage or trip charter [Litonjua Shipping,
gives to accredit part of the ship is let Inc. v. National Seamen Board, G.R. No. L-
that such goods by the owner to a 51910 (1989)].
belong to such merchant or other
persons. person for a specified Note: Both time and voyage charters are said
time or use for the to be contracts of affreightment, where a
conveyance of goods, common or public carrier is not converted into
in consideration of the a private carrier.
payment of freight
[Caltex v. Sulpicio Contract of affreightment – one in which the
Lines, G.R. No. owner of the vessel leases part or all of its
131166 (1999)]. space to haul goods for others.
A real contract A consensual contract
which exists only which can be It is a contract for special service, wherein the
after delivery of the dissolved by means of general owner retains the possession,
goods to be indemnity for losses command and navigation of the ship
transported is and damages.
made. The charterer or freighter merely has use of the
space in the vessel in return for his payment of
Persons who make a charter: the charter hire.
a. Owner or owners of the vessel, either in
whole or in part, who have legal control and The rights, responsibilities of ownership rest on
possession of the vessel; the owner, and the charterer is usually free
b. Charterer may subcharter entire vessel to from liability to third persons in respect of the
3rd person only if not prohibited in original ship [Puromines Inc. v. CA, G.R. No. 91228
charter [Art 679, COC]; (1993)].
c. Ship agent if authorized by the owner/s or Bareboat or Demise Charter
given such power in the certificate of
appointment [Art 598, COC]; or In a bareboat or demise charter, the ship owner
d. Captain in the absence of the ship agent or leases to the charterer the whole vessel.
consignee and only if he acts in
accordance with the instructions of the The owner relinquishes, completely and
agent or owner and protects the latter’s exclusively, the possession, command and
interest [Art 609, COC]. navigation of the vessel
Requisites for a valid charter party:

a. Consent of the contracting parties;
Page 78 of 450
Anything short of such a complete transfer is a Common carrier is Common carrier is

contract of affreightment or not a charter party converted to private not converted to
at all. carrier private carrier
The master and crew of the vessel thereby Time Charter

become the charterer’s “servants” [AQUINO
(2011)]. Time charter – a contract for the use of a
vessel for a specified period of time or for the
Thus, the charterer, by virtue of a demise duration of one or more specified voyages.
charter, is considered the owner pro hac vice.
The owner of a time-chartered vessel retains
He mans and equips the vessel and assumes possession and control through the master and
all responsibility for navigation, management crew, who remain his employees.
and operation.
The time charterer acquires the right to:
He thus acts as the owner of the vessel in all  Utilize the carrying capacity and facilities of
important aspects during the duration of the the vessel; and
charter [Puromines Inc. v. CA, G.R. No. 91228  Designate her destinations during the term
(1993)]. of the charter [Litonjua Shipping Co., Inc. v.
National Seamen Board, G.R. No. L-
Bareboat distinguished from contract of 51910(1989)].
affreightment
In a bareboat or demise charter, the common Voyage or Trip Charter
carrier is converted to private carrier.
In a voyage charter, the vessel is leased for a
Although a charter party may transform a single or particular voyage.
common carrier into a private one, the same, The vessel is chartered for a carriage of goods
however, is not true in a contract of from one or more ports of loading to one or
affreightment on account of the distinctions more ports of unloading.
between a contract of affreightment and a
demise or bareboat charter [Puromines Inc. v. The master and crew remain the employ of the
CA, G.R. No. 91228 (1993)]. owner of the vessel [Litonjua Shipping Co., Inc.
v. National Seamen Board, G.R. No. L-51910
Demise or Contract of (1989)].
Bareboat Affreightment
Charterer becomes Owner remains The owner who retains possession of the ship
liable to others for liable as carrier and remains liable as carrier and must answer for
any breach caused must answer for any loss or non-delivery of the goods received for
by its negligence breach of duty transportation [Cebu Salvage Corp. vs.
Charterer regarded Charterer is not Philippine Home Assurance Corp., G.R. No.
as owner pro hac regarded as owner 150403 (2007)].
vice for the voyage
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;
c. Other officers and crew;
Page 79 of 450
d. Supercargoes.  Buys cargo to be brought back on the

return voyage of the ship, and comes home
Ship Owner - has possession, control and with it.
management of the vessel.
 >He has the consequent right to direct her The ship owner or ship agent is liable:
navigation and receive freight earned and a. For the acts of the captain, unless the latter
paid, while his possession continues; exceeds his authority [Art. 586, COC];
 He is the person who is PRIMARILY liable b. For contracts entered into by the captain to
for damages sustained in the operation of repair, equip and provision the vessel,
the vessel, based on the provisions of the provided that the amount claimed was
Code of Commerce. invested for the benefit of the vessel [Art.
586, COC];
Ship Agent - the person entrusted with the c. For the indemnities in favor of third persons
provisioning of a vessel, or who represents her which may arise from the conduct of the
in the port in which she happens to be [Art. 586, captain in the care of the goods
COC]. transported, as well as for the safety of
 The ship agent is SOLIDARILY liable with passengers transported [Art. 587, COC];
the owner; d. For damages to third persons for tort or
 The joint and several liability applies both quasi-delict committed by the captain,
for breach of contract and extra-contractual except collision with another vessel [Art.
obligation such as tort; 1759, NCC];
 The ship agent, even though he is not the e. For damages in case of collision due to the
owner, is liable in every way to the creditor fault, negligence, or want of skill of the
for losses and damages, without prejudice captain, sailing mate, or any other member
to the right of the owner, the vessel and its of the complement [Art. 826, COC].
equipment and freight [Aquino].
Captains - those who govern vessels that Liability for Acts of Captain
navigate the high seas or ships of large
dimensions and importance, although they Three (3) distinct roles of a captain:
may be engaged in coastwise trade. 1. General agent of the ship owner;
2. Commander and technical director of the
Masters - those who command smaller ships vessel;
engaged exclusively in coastwise trade. In 3. Representative of the country under whose
maritime commerce, masters and captains are flag he navigates [Inter-Orient Marine
the same. Enterprises v. NLRC, G.R. No. 115286
(1994)].
Crew - a person on board who is involved in
highly technical tasks and in the manning of the The captain shall be liable to the agent, and the
vessel (e.g. master, mate). latter to third persons [Art. 618, COC]:
1. For all the damages suffered by the vessel
Complement - a person, not a crew, who is not and his cargo by reason of want of skill or
directly involved in the manning of the vessel negligence on his part;
(e.g. cook). 2. For all the thefts committed by the crew,
reserving his right of action against the
Supercargo - a person on board the vessel, guilty parties;
who: 3. For the losses, fines, and confiscations
 Functions as an agent of the owner of the imposed on account of violation of the laws
goods shipped as cargo on a vessel; and regulations of customs, police, health,
 Has charge of the cargo on board; and navigation;
 Sells the cargo to the best advantage in the 4. For the losses and damages caused by
foreign markets; mutinies on board the vessel, or by reason
Page 80 of 450
of faults committed by the crew in the  Induce capitalists into effectively wagering
service and defense of the same, if he does their resources against the consideration of
not prove that he made full use of his the large profits attainable in the trade
authority to prevent or avoid them; [Aboitiz Shipping Corp. v. General Accident
5. For those arising by reason of an undue Fire and Life Assurance Corp., G.R. No.
use of powers and non-fulfillment of the 100446 (1993)].
obligations which are his;
6. For those arising by reason of his going out Thus, under the doctrine of abandonment:
of his course or taking a course which he 1. The agent shall be civilly liable for the
should not have taken without sufficient indemnities in favor of third persons which
cause, in the opinion of the officers of the arise from the conduct of the captain in the
vessel at a meeting with the shippers or care of the goods which the vessel carried,
supercargoes who may be on board; but he may exempt himself therefrom by
7. For those arising by reason of his abandoning the vessel with all her
voluntarily entering a port other than that of equipment and the freight he may have
his destination; earned during the voyage [Art. 587, COC];
8. For those arising by reason of non- 2. The owners of a vessel shall be civilly
observance of the provisions contained in liable in the proportion of their contribution
the regulations on situation of lights and to the common fund, for the results of the
maneuvers for the purpose of preventing acts of the captain, referred to in Art. 587.
collisions. Each part owner may exempt himself from
this liability by the abandonment before a
Exceptions to Limited Liability notary of the part of the vessel belonging to
him [Art. 590, COC];
The Doctrine of Limited Liability 3. In case of collision, the liability of the ship
(Hypothecary Rule) owner shall be understood as limited to the
The real and hypothecary nature of maritime value of the vessel with all her
law simply means that the liability of the carrier appurtenances and all the freight earned
in connection with losses related to maritime during the voyage [Art. 837, COC];
contracts is confined to the vessel, which is 4. If the vessel and her freight should be
hypothecated for such obligations or which totally lost, by reason of capture or wreck,
stands as the guaranty for their settlement. all rights of the crew to demand any wages
whatsoever shall be extinguished, as well
The liability of the vessel owner and agent as the agent for the recovery of the
arising from the operation of such vessel is advances made [Art. 643, COC].
confined to the vessel itself, its equipment, If the ship owner or agent may in any way be
freight, and insurance, if any held civilly liable at all for injury to or death of
passengers arising from the negligence of the
Originated by reason of the conditions and captain in cases of collisions or shipwrecks, his
risks attending maritime trade in its earliest liability is merely co-extensive with his interest
years, when such trade was replete with in the vessel such that a total loss thereof
innumerable and unknown hazards since results in its extinction [Yangco v. Laserna,
vessels had to go through largely uncharted G.R. No. L-47447 (1941)].
waters to ply their trade.
Exceptions to the Limited Liability Rule
Ratio: Such limitation of liability was designed (1) Claims under the Workmen’s
to – Compensation Act [Abueg v. San Diego,
 Offset adverse conditions; G.R. No. L-773 (1946)];
 Encourage people and entities to venture (2) Expenses for repairing, provisioning and
into maritime commerce despite the risks equipping the vessel [Government v
and the prohibitive cost of shipbuilding; and
Page 81 of 450
Insular Maritime, G.R. No. L-21495

(1924)]; The owner of the goods which gave rise to the
(3) There is an actual finding of negligence on expense or suffered the damage shall bear this
the part of the vessel owner or agent average [Art. 810, COC].
[Aboitiz Shipping v. General Accident Fire
and Life Assurance Corp., G.R. No. GENERAL AVERAGE
100446 (1993)]; General or gross averages shall include all the
(4) Vessel is insured, to the extent of the damages and expenses which are deliberately
insurance proceeds [Vasquez v. CA, G.R. caused in order to save the vessel, her cargo,
No. L-42926 (1985)]; or both at the same time, from a real and
(5) There was no total loss and the vessel is known risk [Art. 811, COC].
not abandoned [Yangco v. Laserna, G.R.
No. L-47447 (1941)]; The gross or general average shall be borne by
(6) Collision between two negligent vessels. those who benefited from the sacrifice. These
include the ship owner and the owners of the
3. Accidents and Damages in cargoes that were saved. Contribution may
also be imposed on the insurers of the vessel
Maritime Commerce or cargoes that were saved, as well as lenders
on bottomry or respondentia.
General Average
Requisites
Averages pertain to expenses and damages: 1. There must be a common danger;
a. Expense – to constitute an average, an 2. That for the common safety, part of the
expense must be: vessel or of the cargo or both is sacrificed
a. Extraordinary or accidental; deliberately;
b. Incurred during the voyage; and 3. That from the expenses or damages
c. Incurred in order to preserve the caused follows the successful saving of the
vessel, the cargo, or both. vessel and cargo; and
b. Damages or Deterioration – to constitute 4. That the expenses or damages should
an average, it must: have been incurred or inflicted after taking
a. Have been suffered by the vessel proper legal steps and authority
from the time the vessel put to sea [Magsaysay, Inc. v. Agan, G.R. No. L-6393
from the port of departure until it (1955)].
casts anchor in the port of
destination; and Common danger means both the ship and the
b. Have been suffered by the cargo, after it has been loaded, are subject to
merchandise from the time they are the same danger.
loaded in the port of shipment until  Whether during the voyage, or in the port
they are unloaded in the port of of loading or unloading;
consignment [Art. 806, COC].  Whether the danger arises from the
accidents of the sea, dispositions of the
There are two kinds of averages: authority, or faults of men;
1. Particular or simple average; and  Provided that the circumstances producing
2. Gross or general average. the peril may rationally be said to be certain
and imminent;
PARTICULAR AVERAGE  Excludes measures undertaken against a
Particular or simple averages shall include all distant peril [Magsaysay, Inc. v. Agan, G.R.
damages and expenses caused to the vessel No. L-6393 (1955)].
or cargo that did not inure to the common
benefit and profit of all persons interested in
the vessel and her cargo [Art. 809, COC].
Page 82 of 450
Note: When a vessel is stranded Government, or in order to repair the

unintentionally, the damages incurred cannot damage caused for the common good;
constitute general averages. 11. The loss suffered in the value of the goods
sold at arrivals under stress in order to
Cases of general average repair the vessel because of gross
1. The goods or cash invested in the average;
redemption of the vessel or cargo captured 12. The expenses of the liquidation of the
by enemies, privateers, or pirates, and the average [Art. 811, COC];
provisions, wages, and expenses of the 13. If in lightening a vessel on account of a
vessel detained during the time the storm, in order to facilitate her entry into a
arrangement or redemption is taking place; port or roadstead, part of her cargo should
2. The goods jettisoned to lighten the vessel, be transferred to lighters or barges and be
whether they belong to the vessel, to the lost, the owner of said part shall be entitled
cargo, or to the crew, and the damage to indemnity, as if the loss has originated
suffered through said act by the goods from a gross average [Art. 817, COC];
kept; 14. If, as a necessary measure to extinguish a
3. The cables and masts which are cut or fire in a port; roadstead; creek, or bay, it
rendered useless, the anchors and the should be decided to sink any vessel, this
chains which are abandoned in order to loss shall be considered gross average, to
save the cargo, the vessel, or both; which the vessels saved shall contribute.
4. The expenses of removing or transferring a
portion of the cargo in order to lighten the Jettison – The act of throwing overboard part
vessel and place her in condition to enter a of a vessel’s cargo or hull in hopes of saving a
port or roadstead, and the damage ship from sinking.
resulting therefrom to the goods removed
or transferred; The captain shall direct the jettison, and shall
5. The damage suffered by the goods of the order the goods cast overboard in the following
cargo through the opening made in the order:
vessel in order to drain her and prevent her 1. Goods on deck - beginning with those
sinking; which embarrass the maneuver or damage
6. The expenses caused through floating a the vessel, preferring if possible, the
vessel intentionally stranded for the heaviest ones with the least utility and
purpose of saving her; value;
7. The damage caused to the vessel which is 2. Goods below the upper deck - always
necessary to break open, scuttle, or smash beginning with those of the greatest weight
in order to save the cargo; and smallest value to the amount and
8. The expenses of curing and maintaining number absolutely indispensable [Art. 815,
the members of the crew who may have COC].
been wounded or crippled in defending or
saving the vessel; To include the goods jettisoned in the general
9. The wages of any member of the crew or gross average, the existence of the cargo or
detained as hostage by enemies, goods must be proved:
privateers, or pirates, and the necessary 1. For cargo – by means of bill of lading;
expenses which he may incur in his 2. For good belonging to the vessel – by
imprisonment, until he is returned to the means of the inventory prepared prior to
vessel or to his domicile, should he prefer departure [Art. 816, COC].
it;
10. The wages and victuals of the crew of a Jason clause
vessel chartered by the month during the Jason clause is a provision in the contract of
time it should be embargoed or detained by carriage that requires the cargo owners to
force majeure or by order of the contribute in the general average, though the
Page 83 of 450
event which gave rise to the sacrifice or

expenditure may have been due to the fault of Ratio: The steamer’s greater facility of
one of the parties to the adventure [Rule D, maneuvering over a sail vessel means it has
York Antwerp Rules]. the greater ability to avoid collisions [A. Urrutia
& Co. v. Baco River Plantation Co, G.R. No. L-
Note: This shall not prejudice any remedies or 7675. [1913)].
defenses which may be open against or to that
party in respect of such fault. Collision between Two Power-Driven
Vessels
Procedure for recovery General Rule: When two power-driven vessels
1. Assembly and deliberation with the sailing are meeting head on, or nearly head on, so as
mate and other officers; to involve risk of collision, each shall alter her
2. Resolution of the captain adopted; course to starboard (right side).
3. Hearing of the persons interested. In case
an interested person should not be heard, Ratio: So that each may pass on the port (left)
he shall not contribute to the gross average side of the other [Smith Bell and Co. v. CA,
[Art. 813, COC]; G.R. No. L-56294 (1991)].
4. Resolution to be entered in the log book,
stating the motives and reasons therefore Liability in Collision Cases
as well as the votes and reason for Liability in collision cases is negligence-based.
disagreement [Art. 814, COC]; Courts are called upon to determine the
5. Minutes to be signed by all the persons negligence of the persons involved in order to
present or in urgent cases, the captain; impose liability.
6. Captain shall deliver one copy of the
minutes to the maritime judicial authority of The person who caused the injury is both civilly
the first port he may make within 24 hours and criminally liable [Aquino].
[Art. 814, COC];
7. Captain shall ratify the minutes under oath Nevertheless, the rules that apply to quasi-
[Art. 814, COC]. delict cannot be applied to collision cases.
Collisions and Allisions The doctrine of last clear chance and the rules
on contributory negligence cannot be applied in
Collision is an impact or sudden contact collision cases.
between two moving vessels [Aquino].
This is in accordance with Art. 827 of the Code
Allision is the striking of a moving vessel of Commerce.
against one that is stationary.
Thus, if both vessels were negligently
Collision between a Steam and a Sail Vessel operated, each must suffer its own damage
General Rule: When meeting a sailing vessel, even if the other has the last clear chance of
whether close hauled or with the wind free, the avoiding the injury [C.B. Williams v. Yangco,
sail vessel has a right to keep her course, and G.R. No. L-8325 (1914)].
it is the duty of the steamer to adopt
precautions as will avoid the sail vessel. Similarly, proof that the plaintiff was negligent
will bar recovery from the defendant in collision
In a collision between a steam vessel and a sail cases even if the plaintiff’s negligence can be
vessel, the presumption is against the steam classified as merely contributory [Gorgonio De
vessel. Sarasola v. Yu Biao Sontua, G.R. No. L-22630
(1925)].
The steam vessel must show that she took the
proper measures to avoid a collision.
Page 84 of 450
Classes of Collision Application

a. Fortuitous - none was at fault;
b. Culpable - one or more vessels were at COGSA (Commonwealth Act No. 65) is a
fault; special law that governs all contracts of
c. Inscrutable Fault - it cannot be determined carriage of goods by sea between or to and
which of the vessels was at fault. from the Philippine ports.
Fortuitous Its application is according to the following

When collision is due to a fortuitous event or scheme:
force majeure, each vessel and its cargo shall Common Carrier Private carrier
bear its own damages [Art. 830, COC].
When, by reason of force majeure, a vessel Coming to the Philippines from foreign trade*
properly anchored and moored collides with New Civil Code COGSA
another, the injury occasioned shall be looked (Common Carriers) Code of Commerce
upon as particular average to the vessel run COGSA New Civil Code
into [Art. 832, COC]. Code of Commerce (Provisions NOT on
common carriers, i.e.
Culpable torts, contracts)
When only one vessel is at fault, the owner of From Philippines to foreign country
the vessel at fault shall indemnify the losses Apply laws of such foreign country [1753,
and damages suffered, after an expert NCC]
appraisal. *Nothing stops parties from stipulating that
COGSA shall primarily apply; even domestic
When both vessels are at fault, each shall carriers can stipulate such. With respect to
suffer its own damages, and both shall be vessels destined for foreign ports, the COGSA
solidarily responsible for the losses and does not apply unless parties make it
damages occasioned to their cargoes [Art. 826, applicable.
COC].
Under Art. 1766, in all matters not regulated by
Note: The ship owners cannot successfully the Civil Code, the rights and obligations of
maintain an action against the other for the loss common carriers shall be governed by the
or injury to his vessel. Code of Commerce and special laws. Thus,
although a special law, COGSA only applies
When a third vessel is at fault, the owner of the when the Civil Code has no provision dealing
third vessel shall indemnify the losses and with the matter.
damages caused, the captain thereof being
civilly liable to said owner [Art. 831, COC]. Notice of Loss or Damage
Inscrutable Fault Notice of claim and the general nature of the
In case of inscrutable fault, that is, if it cannot loss or damage must be given in writing to the
be decided which of the two vessels was the carrier or his agent at the port of discharge
cause of the collision, each shall bear his own before or at the time of the removal of the
damage and both shall be jointly responsible goods [Section 3(6), COGSA].
for the losses and damages suffered by their
cargoes [Art. 828, COC]. If damage is not patent or cannot be
ascertained from the package, the shipper
4. Carriage of Goods by Sea Act should file the claim with the carrier within three
(COGSA) days from delivery.
Under Section 3(6), COGSA, a failure to file a

notice of claim within three (3) days will not bar
Page 85 of 450
recovery if it is nonetheless filed within one but only if the amount so declared is the real
year. value of goods [Aquino].
This one-year prescriptive period also applies The Civil Code does not limit the liability of the
to the shipper, the consignee, the insurer of the common carrier to a fixed amount per package.
goods or any legal holder of the bill of lading. Thus, the COGSA, supplements the Civil Code
Inasmuch as the neither the Civil Code nor the by establishing a statutory provision limiting the
Code of Commerce states a specific carrier’s liability in the absence of a shipper’s
prescriptive period on the matter, the COGSA declaration of a higher value in the bill of lading
may be applied [Belgian Overseas Chartering [Belgian Overseas Chartering and Shipping v.
and Shipping v. Philippine First Ins. Co, G.R. Philippine First Ins. Co, G.R. No. 143133
No. 143133 (2002)]. (2002)].
Note: In the Warsaw Convention, as well as the

Code of Commerce, the notice requirement is F. PUBLIC SERVICE ACT
a condition precedent for the right of action
against the shipowner to accrue.
Period of Prescription
1. Definition of Public Utility
A public utility is a business or service engaged
The carrier and the ship shall be discharged
in regularly supplying the public with some
from all liability in respect of loss or damage
commodity or service of public consequence
unless suit is brought within one year after
such as electricity, gas, water, transportation,
delivery of the goods or the date when the
telephone, or telegraph service [National
goods should have been delivered.
Power Corporation v. Court of Appeals, G.R.
No. 112702 (1997)].
The absence of a notice shall not affect or
prejudice the right of the shipper to bring suit
Elements of a public utility:
within one year after the delivery of the goods
1. There must be public interest or
or the date when the goods should have been
consequence;
delivered [Section 3 (6), COGSA].
2. Private property devoted to public use;
3. Offers to the public indiscriminately ;
COGSA, as a special law, prevails over the
4. For hire/ compensation.
general provisions of the Civil Code on
prescription of actions [Maritime Agencies &
Services, Inc. v. CA, G.R. No. 77638 (1990)]. 2. Necessity for certificate of
public convenience
Limitation of Liability
No public service as herein defined shall
Under Section 4(5), COGSA, the limit is set at operate in the Philippines without having first
a maximum of $500 per package or customary secured from the Commission a certificate,
freight unit. which shall be known as Certificate of Public
Convenience (CPC) or as Certificate of Public
This is deemed incorporated in the bill of lading Convenience and Necessity (CPCN) [Section
even if not mentioned therein [Eastern 15, Public Service Act].
Shipping Lines v. IAC, G.R. No. L-69044
(1987)]. Requisites
The declaration made by the shipper stating an The ff. are the requisites before a Certificate of
amount bigger than $500 per package will Public Convenience (CPC) may be granted:
make the carrier liable for such bigger amount,
Page 86 of 450
1. The applicant must be a citizen of the financial capacity of the holder of the license,
Philippines, or a corporation or co- so that liabilities arising from accidents may be
partnership, association or joint stock duly compensated [Dizon v Octavio, 51 O.G.
company constituted and organized under 4059 (1955)].
the laws of the Philippines, 60 per centum
at least of the stock or paid-up capital of Prior operator rule
which belong entirely to citizens of the
Philippines; Meaning
2. The applicant must prove that the
operation of the public service proposed The first licensee should have more or less of
and the authorization to do business will a vested and preferential right over a person
promote the public interest in a proper who seeks to acquire another and a later
and suitable manner; license over the same route, so long as the first
3. The applicant must be financially capable licensee:
of undertaking the proposed service and  Keeps and performs the terms and
meeting the responsibilities incident to its conditions of its license; and
operations [Vda. De Lat v. Public Service  Complies with the reasonable rules
Commission, G.R. No. L-34978 (1988)]. and regulations of the Commission and
meets the reasonable demands of the
Citizenship public.
No franchise, certificate, or any other form of Rationale: Without such preferential right, the
authorization for the operation of a public utility first licensee would not have protection on his
shall be granted except to: investment, and would be subject to ruinous
(1) Citizens of the Philippines; or competition and thus defeat the very purpose
(2) Corporations or associations organized and intent for which the Public Service
under the laws of the Philippines at least Commission was created [Batangas
sixty per centum of whose capital is owned Transportation Co., G.R. No. L-28865 (1928)].
by such citizens [Section 11, Article XII,
1987 Constitution]. Exceptions
Promotion of public interests 1. Where public interest and convenience

would be better served by the new
Property becomes clothed with a public interest operator;
when used in a manner to make it of public 2. Where the old operator failed to make an
consequence and affect the community at offer to meet the increase in traffic;
large. 3. Where the CPC granted to the new
operator is a maiden franchise;
When one devotes his property to a use in 4. When the application of the rule would be
which the public has an interest, he, in effect, conducive to monopoly [Mandbusco Inc. v.
grants to the public an interest in that use, and Francisco, G.R. No. L-23688 (1970)].
must submit to be controlled by the public for
the common good, to the extent of the interest iii. Ruinous competition
he has thus created [North Negros Sugar Co.
vs. Hidalgo, G.R. No. L-42334 (1936)]. There is ruinous competition if:
a. The operator would be deprived of their
Financial capability profits on the capital invested in its
business;
One of the primary factors considered in the b. The business would not have sufficient
granting of a certificate of public convenience gains to pay a fair rate of interest on its
for the business of public transportation is the capital investments.
Page 87 of 450
b. rate base; and

In order that the opposition based on ruinous c. the return itself or the computed revenue to
competition may prosper, it must be shown that be earned by the public utility based on the
the opponent would be deprived of their rate of return and rate base.
profits on the capital invested in its business.
 The mere possibility of reduction in the The rate of return is a judgment percentage
earnings of a business is not sufficient to which, if multiplied with the rate base, provides
prove ruinous competition. a fair return on the public utility for the use of its
 It must be shown that the business would property for service to the public.
not have sufficient gains to pay a fair rate  The rate of return of a public utility is not
of interest on its capital investments [Vda. prescribed by statute but by administrative
De Lat v. Public Service Commission, G.R. and judicial pronouncements.
No. L-34978 (1988)].  This Court has consistently adopted a 12%
rate of return for public utilities [Republic
3. Fixing of rate of the Philippines v. Manila Electric
Company, G.R. No. 141314 (2002)].
Rationale for control by the government
The investor agrees, by embarking capital in a Exclusion of income tax as
utility, that its charges to the public shall be expense
reasonable. His company is the substitute for
the State in the performance of the public Income derived from any public utility or from
service, thus becoming a public servant. The the exercise of any essential government
compensation which the Constitution function accruing to the Philippine government
guarantees an opportunity to earn is the or to any political subdivision is excluded from
reasonable cost of conducting the business gross income [Sec. 32(B)(7)(b), NIRC].
[Republic of the Philippines v. Manila Electric
Company, G.R. No. 141314 (2002)]. 4. Unlawful arrangements
Standard for fixing of rates
In the fixing of rates, the only standard which Boundary system
the legislature is required to prescribe for the
guidance of the administrative authority is that
Under the boundary system, the driver:
the rate be reasonable and just. (1) Rents the vehicle, typically a jeepney, from
the owner or operator by paying a fee
What is a just and reasonable rate is a question called the “boundary” fee;
of fact calling for the exercise of discretion,
(2) Pays for fuel and maintenance of the
good sense, and a fair, enlightened and
vehicle.
independent judgment. The requirement of
reasonableness comprehends such rates
Whatever the driver earns from passenger
which must not be so low as to be confiscatory,
fares in excess of the boundary fee is his
or too high as to be oppressive [Republic of the
income [Paguio Transport Corp. v. National
Philippines v. Manila Electric Company, G.R.
Labor Relations Commission, G.R. No. 11950
No. 141314 (2002)].
(1998)].
Rate of return Kabit system

In determining the just and reasonable rates to
Definition
be charged by a public utility, three major The kabit system is an arrangement “whereby
factors are considered by the regulating a person, who has been granted a CPC allows
agency: another person, who owns motor vehicles. to
a. rate of return;
operate under such franchise for a fee” [Teja
Page 88 of 450
Marketing v. Intermediate Appellate Court, Before the sale, encumbrance, or lease of

G.R. No. L-65510 (1987)]. public utility property or assets, the Public
Service Act requires the approval of the PSC.
Rationale against the kabit system  There should be a public hearing, with
1. it is an abuse of the certificate of public notice to all interested parties before the
convenience, a special privilege conferred approval is granted;
by the government;  The PSC must first determine if there are
2. it is one of the root causes of the good and reasonable grounds justifying the
prevalence of graft and corruption in the transfer or lease of the property covered by
government transportation offices; the franchise, or if the sale or lease is
3. it is contrary to public policy, and is detrimental to public interest.
therefore void and inexistent [Teja
Marketing v. Intermediate Appellate Court, Rationale: A franchise is personal in nature.
G.R. No. L-65510 (1987)]. Any transfer or lease thereof should be notified
to the PSC so that the latter may take proper
Effect of the kabit system safeguards to protect the interest of the public.
 Although not outrightly penalized as a
criminal offense, the kabit system is If the property covered by the franchise is
invariably recognized as being contrary to transferred or leased to another without
public policy and, therefore, void and in obtaining the requisite approval:
existent [Art. 1409, NCC]. (1) The transfer is not binding against the
o It is a fundamental principle that the Public Service Commission; and
court will not aid either party to enforce (2) The grantee continues to be responsible
an illegal contract, but will leave both under the franchise in relation to the
where it finds them [Art. 1412, NCC]; Commission and to the public [Montoya v.
o Courts will not grant affirmative relief Ignacio, G.R. No. L-5868 (1953)].
to parties in cases where they set up a
Kabit system. They are in pari delicto
and the Court will simply leave them G. THE WARSAW
where it found them [Lita Enterprises, CONVENTION
Inc. v. IAC, G.R. No. 64693 (1984)].
 The operator of record is considered the
operator of the vehicle in contemplation of 1. Applicability
law as regards the public and third
persons, even if the vehicle involved in the The Warsaw Convention applies to:
accident had been sold to another [Santos All international carriage of persons,
v Sibug, G.R. No. L-26815 (1981)]. baggage, or cargo performed by aircraft for
o Where such sale had not been reward;
approved by the then Public Service Gratuitous carriage by aircraft performed
Commission (PSC). by an air transport undertaking [Art. 1(1),
Warsaw Convention].
See also Registered Owner Rule under A. 2.
Liabilities of Common Carriers International air carriage or international air
transport means transportation by air between
points of contact of two high contracting
5. Approval of sale, parties, or those countries that have acceded
encumbrance or lease of to the Warsaw Convention, wherein the place
property of departure and the place of destination are
situated:
a. Within the territories of two high contracting
parties, regardless of whether or not there
Page 89 of 450
be a break in the transportation or a place during the transportation by air [Art. 18,
transshipment; or WC].
b. Within the territory of a single >high
contracting party, if there is an agreed The Warsaw Convention does not provide for
stopping place within a territory subject to an exclusive enumeration of instances when
the sovereignty, mandate or authority of the carrier is liable.
another power, even though the power is  It does not provide an absolute limit of
not a party to the Convention [Art. 1(2), liability and it does not preclude the
WC]. application of the Civil Code and other
pertinent local laws in the determination of
A carriage to be performed by several the extent of liability of the common carrier
successive air carriers is deemed, for the [Philippine Airlines v. CA, G.R. No. (1996)].
purposes of the Convention, to be one  Hence, a complaint for quasi-delict can still
undivided carriage, if it has been regarded by be filed even if the filing is beyond the
the parties as a single operation, whether it had prescriptive period provided for under the
been agreed upon under the form of a single Convention so long as it is within the
contract or of a series of contracts [Art. 1(3), prescriptive period of four years under the
WC]. Civil Code [Villanueva].
The carrier is liable for damages for: Notice of claim with the international carrier is
a. Death or injury of a passenger if the a mandatory or condition precedent under the
accident causing it took place: Warsaw Convention.
1. On board the aircraft; a. Baggage: within 3 days from receipt. In
2. In the course of the operations of case of delay, within 14 days from the time
embarking or disembarking; or the baggage was placed at the disposal of
3. When there was delay [Art. 17 and 19, the passenger;
WC]. b. Goods: within 7 days from delivery.
b. Destruction, loss, or damage to any
baggage or goods that are checked in, if In case of an action for damage to passenger
damage occurred: baggage, the case must be filed in court within
1. During the transportation by air; or two years.
2. When there was delay [Art. 18 and 19,
WC]. 2. Limitation of Liability
c. Delay in the transport by air of
passengers, baggage or goods [Art. 19, Any provision tending to relieve the carrier of
WC]. liability or to fix a lower limit than that which is
laid down shall be null and void, but the nullity
The carriage by air contemplated comprises of any such provision does not involve the
the period in which the baggage or goods are nullity of the whole contract [Art. 23, WC].
in charge of the carrier, whether in an airport or
on board an aircraft, or, in the case of a landing Availing of Provisions Excluding/Limiting
outside an airport, in any place whatsoever. Liability
The carrier shall not be entitled to avail himself
It does not cover any transportation by land, by of the provisions which exclude or limit his
sea, or by river performed outside an airport. liability, if:
(1) The damage is caused by his willful
If transportation takes place in the performance misconduct or by such default on his part,
of a contract by air, for the purpose of loading, as is considered to be equivalent to willful
delivery, or transshipment, any damage is misconduct; or
presumed, subject to proof to the contrary, to
have been the result of an event which took
Page 90 of 450
(2) The damage is caused as aforesaid by any General rule: “In the carriage of cargo, the
agent of the carrier acting within the scope liability of the carrier is limited to a sum of 17
of his employment [Art. 25, WC]. Special Drawing Rights per kilogramme”
[Art. 22(1), WC as amended by Additional
Sec. 22(2), WC does not operate as an Protocol No. 3 (1975)].
exclusive enumeration of the instances of an
airline’s liability, or as an absolute limit of the Exception: The limit does not apply when the
extent of that liability. The Convention’s consignor has made, at the time when the
provisions do not regulate or exclude the package was handed over to the carrier, a
following areas: special declaration of the value at delivery and
(1) Liability for other breaches of the contract has paid a supplementary sum if the case so
by the carrier; requires.
(2) Misconduct of its officers and employees;
and In that case, the carrier will be liable to pay a
(3) For some particular or exceptional type of sum not exceeding the declared sum, unless
damage (i.e. moral, nominal, temperate or he proves that that sum is greater than the
exemplary damages) [Alitalia v. IAC, G.R. actual value to the consignor at delivery [Art.
No. 71929 (1990)]. 22(2), WC].
Right to Damages Liability for Hand-Carried Baggage

The right to damages under the WC is
extinguished after two years from the date of As regards hand-carried baggage, the liability
arrival at the destination or from the date on of the carrier is limited to “332 Special
which the aircraft ought to have arrived, or from Drawing Rights per passenger” [Art. 22(3)
the date on which the carriage stopped. The WC, as amended by Additional Protocol No. 2
method of calculating the period of limitation (1975)].
shall be determined by the law of the Court
seized of the case [Art. 29, WC]. The Guatemala Protocol of 1971 increased the
limit for passengers to $100,000 and for
Liability to Passengers baggage to $1,000. However, the Supreme
Court noted in Santos III v. Northwest Orient
General rule: In the carriage of passengers, Airlines [G.R. No. 101538(1992)], that the
the liability of the carrier for each passenger is Guatemala Protocol is still ineffective
limited to “100,000 Special Drawing Rights [Sundiang and Aquino].
for the aggregate of the claims” in respect of
damage suffered as a result of death or The Warsaw Convention should be deemed a
personal injury to each passenger [Art. 22(1), limit of liability only in those cases where:
WC as amended by Additional Protocol No. 3 (1) The cause of death or injury to person, or
(1975)]. destruction, loss or damage to property or
delay in its transport is not attributable to or
Exception: By special contract, the carrier and attended by:
the passenger may agree to a higher limit [Art. a. Any willful misconduct, bad faith,
22(1), WC]. recklessness; or
b. Otherwise improper conduct on the
Note: Special drawing rights are part of any official or employee for
supplementary foreign exchange reserve which the carrier is responsible;
assets defined and maintained by the and
International Monetary Fund. (2) There is otherwise no special or
extraordinary form of resulting injury
Liability for Checked Baggage [Alitalia v. IAC, G.R. No. 71929 (1990)].
Page 91 of 450
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 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].
Page 92 of 450
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW
BUSINESS
ORGANIZATIONS
COMMERCIAL LAW
Page 93 of 450
persons. The form of the common fund may not

A. PARTNERSHIPS even be cash or property; it can be in the form
of credit or industry. [Lim Tong Lim v. Philippine
Fishing Gear, G.R. No. 136448 (1999)]
1. General Provisions 2. With the intention of dividing the profits
among themselves
Definition
Intention to Divide Profits
By the contract of partnership: If the common fund’s work is “indispensable,
1. Two or more persons bind themselves to beneficial and economically useful to the
contribute to a common fund: business” of the partners and the profit motive
a. money; is the primordial reason to establish the
b. property; or partnership, even if there are no actual profits,
c. industry then there is partnership. [AFISCO v. CA, G.R.
2. With the intention of dividing the profits No. 112675 (1999)]
among themselves.
Note: There must be a valid contract.
Two or more persons may also form a Additionally, a partnership contract must
partnership for the exercise of a profession. comply with the necessary elements of a
[Art. 1767, NCC] contract under the Civil Code (cause, object,
and consideration).
Elements
Parties
According to Article 1767, the elements are as
follows: General Rule: Any person capacitated to
1. Two or more persons bind themselves contract may enter into a contract of
to contribute money, property, or partnership.
industry to a common fund
 Money – must be in legal tender. The following persons CANNOT enter into a
Checks, drafts, promissory notes, and contract of partnership:
other mercantile documents are not a. Those suffering from civil interdiction;
money. There is no contribution of b. Minors;
money until they have been cashed. c. Insane or demented persons;
[Art. 1249, NCC] d. Deaf-mutes who do not know how to write;
 Property – may be real, personal, e. Incompetents who are under guardianship.
corporeal, or incorporeal property.
 Industry – means the active Exceptions: The capacity of the following
cooperation, the work of the party persons to enter into a contract of partnership,
associated, which may be either though capacitated to contract generally, are
personal manual efforts or intellectual, limited:
and for which he receives a share in the a. Those who are prohibited from giving each
profits (not salary) of the business. other any donation or advantage cannot
enter into a universal partnership [Article
Common Fund 1782];
The NCC requires the parties “bind themselves
to contribute” to a common fund. The Void donations:
partnership may therefore exist even before the 1. Those made between persons who
common fund is created. The common fund were guilty of adultery or concubinage
may not even come from the partners at the time of the donation [Article 739,
themselves but may be borrowed from third NCC]
Page 94 of 450
2. Those made between persons found the partners may acquire subsequently
guilty of the same criminal offense, in by inheritance, legacy or donation
consideration thereof [Article 739, cannot be included in such stipulation,
NCC] except the fruits thereof. [Art. 1779,
3. Those made to a public officer or his NCC]
wife, descendants and ascendants, by 2. All the profits –
reason of his office [Article 739, NCC] a. It comprises all that the partners may
4. Every donation or grant of gratuitous acquire by their industry or work during
advantage, direct or indirect, between the existence of the partnership.
the spouses during the marriage shall b. Only the usufruct over the property of
be void, except moderate gifts, which the partners passes to the partnership.
the spouses may give to each other on [Art. 1780, NCC]
the occasion of any family rejoicing.
The prohibition shall also apply to When the articles of universal partnership do
persons living together as husband and not specify its nature (all present property or all
wife without a valid marriage. [Article the profits), the partnership will be considered
87, Family Code] as one only of all the profits. [Art. 1781, NCC]
b. A corporation cannot enter into a
partnership in the absence of express Rule on After-Acquired Properties
authorization by statute or charter. Aside from the contributed properties, only the
[Mendiola v. CA, G.R. No. 159333 (2006)] profits of the contributed common property (no
other profits) are included. Thus, should a
Under Sec. 35 of the Revised Corporation partner subsequently acquire a property as
Code (RCC), every corporation incorporated remuneration for his work, such property and
under the RCC has the power and capacity to its fruits are not to be enjoyed by the universal
enter into a partnership, joint venture, partnership of all present property. [Paras]
merger, consolidation, or any other commercial
agreement with natural and juridical persons. Properties subsequently acquired by
inheritance, legacy, or donation, cannot be
There is no prohibition against a partnership included in the stipulation but the fruits thereof
being a partner in another partnership. [de can be included in the stipulation.
Leon]
IN A PARTICULAR PARTNERSHIP
Object A particular partnership has for its object
determinate things, their use or fruits, or a
IN A UNIVERSAL PARTNERSHIP specific undertaking, or the exercise of a
A universal partnership may refer to: profession or vocation. [Art. 1783, NCC]
1. All present property –
a. The partners contribute all the property EFFECT WHEN THE OBJECT IS
which belongs to them to a common UNLAWFUL
fund, with the intention of dividing the If the partnership has an unlawful object or
same among themselves, as well as purpose:
the profits they may acquire therewith. 1. The contract is void ab initio [Art. 1409(1),
[Art. 1778, NCC] NCC];
b. The property contributed includes all 2. Once dissolved by judicial decree:
those belonging to the partners at the a. The profits shall be confiscated by
time of the constitution of the favor of the State;
partnership. b. The instruments or tools and proceeds
c. A stipulation for the common of the crime shall also be forfeited in
enjoyment of any other profits may also favor of the State [Art. 1770, NCC];
be made. However, the property which
Page 95 of 450
3. The contributions of partners shall not be Essential Attributes [Villanueva]

confiscated unless they are instruments or
tools of the crime. [de Leon] 1. Informal/Consensual and Weak Juridical
Personality [Arts. 1771, 1785, 1830, NCC]
Form a. Generally, a partnership may be
constituted in any form;
No required form is necessary, but the contract b. The juridical personality of a
is subject to the provisions of Arts. 1771, 1772 partnership is deemed weak since a
and 1773, NCC and to the Statute of Frauds. partnership may be dissolved without
• Where immovable property or real rights need of going through a formal
are contributed to the partnership, a dissolution process.
public instrument shall be necessary.
[Art. 1771, NCC] 2. Mutual Agency [Arts. 1803, 1818, NCC]
- An inventory of said property, signed a. All partners shall be considered agents
by the parties, must be attached to and whatever any one of them may do
the public instrument; alone shall bind the partnership;
- Otherwise, the contract of b. Every partner is an agent of the
partnership is void. [Art. 1773, NCC] partnership for the purpose of its
business, and the act of every partner
• Every contract of partnership having a
binds the partnership.
capital of P3,000 or more, in money or
property, shall appear in a public
3. Delectus Personae (Selection of Persons)
instrument
One selects his partners on the basis of
- The instrument must be recorded in
their personal qualifications and qualities. It
the Office of the Securities and
is for this reason that there is mutual
Exchange Commission.
representation among the partners so that
- Failure to comply with these
the act of one is considered the act and
requirements shall not affect the
responsibility of the others as well.
liability of the partnership and the
[Bautista]
members thereof to third persons.
[Art. 1772, NCC]
4. Partners Burdened with Unlimited Liability
[Arts. 1816, 1817, NCC]
Characteristics
Rules to determine existence
Generally
When the intent of the parties is clear, such
1. Principal – does not depend on other
intent shall govern. When it does not clearly
contracts;
appear, the following rules apply:
2. Preparatory – entered as a means to an
1. Persons who are not partners to each other
end;
are not partners as to third persons, subject
3. Commutative – undertaking of each one is
to the provisions on partnership by
considered equal with others;
estoppel.
4. Consensual – perfected by mere consent;
2. Co-ownership or co-possession does not
5. Bilateral – entered by two or more persons;
of itself establish a partnership, even when
6. Onerous – contributions have to be made,
there is sharing of profits in the use of the
and
property.
7. Nominate – has a special designation in
law. [de Leon]
Exception: The co-ownership of inherited
properties is automatically converted into
an unregistered partnership the moment
said common properties and/or the income
Page 96 of 450
derived therefrom are used as a common a. The partnership is for a fixed term or
fund with intent to produce profits for the particular undertaking;
heirs in proportion to their respective b. It is continued after the termination of
shares in the inheritance as determined in the fixed term or particular undertaking
a project partition. [Ona v. CIR, G.R. L- without any express agreement. [Art.
19342 (1972)] 1785, NCC]
3. Sharing of gross returns does not of itself Partnership by Estoppel

establish a partnership, even when the
parties have joint or common interest in any Estoppel – a bar which precludes a person
property from which the returns are from denying or asserting anything contrary to
derived. that which has been established as the truth by
4. The receipt by a person of a share in the his own deed or representation, either express
profits of a business is prima facie evidence or implied. [de Leon]
that he is a partner.
A partner by estoppel is a person who, by
No such inference is drawn if the profits are words spoken or written or by conduct: (1)
received in payment: represents himself as a partner or (2) consents
a. As a debt by installments or otherwise; to another representing him to anyone as a
b. As wages of an employee or rent to a partner –
landlord; a. In an existing partnership; or
c. As an annuity to a widow or representative b. With one or more persons not actual
of a deceased partner; partners [par. 1, Art. 1825, NCC].
d. As interest on a loan, though the amount of
payment vary with the profits of the LIABILITY OF A PARTNER BY ESTOPPEL
business;
e. As the consideration for the sale of a Personal Representation
goodwill of a business or other property by
installments or otherwise. [Art. 1769, NCC] a. A partner by estoppel is liable to any such
persons:
Partnership Term 1. To whom such representation has
been made; and
A partnership begins from the moment of the 2. Who has, on the faith of such
execution of the contract, unless it is otherwise representation, given credit to the
stipulated. [Art. 1784] actual or apparent partnership. [par. 1,
Art. 1825]
As to period, a partnership may either be:
1. For a fixed term or particular undertaking; Public Representation
or
2. At will, the formation and dissolution of If he has made such representation or
which depend on the mutual desire and consented to its being made in a public
consent of the parties. Any one of the manner, whether the representation has or has
partners may, at his sole pleasure, dictate not been (personally) made or communicated
the dissolution of the partnership, even in to such persons so giving credit by or with his
bad faith, subject to liability for damages. knowledge:
[Ortega v. CA, G,R, No. 109248 (1995)] 1. When partnership liability results, he is
liable as though he were an actual
A partnership term may be extended by: member of the partnership.
1. Express renewal; or 2. When no partnership liability results, he
2. Implied renewal, when these requisites is liable pro rata with the other persons,
concur:
Page 97 of 450
if any, so consenting to the contract or 2. There is no existing partnership and all

representation. those represented as partners
3. When there are no such other persons, consented to the representation.
he is separately liable. [par. 1, Art. (c) He is liable separately when:
1825, NCC] 1. There is an existing partnership but
none of the partners consented; or
Effect on Existing Partnership or Other 2. There is no existing partnership and not
Persons not Actual Partners [par. 2, Art. all of those represented as partners
1825, NCC] consented to the representation.
Representation Effect
Note: Art 1825 does not create a partnership as
When a person has He is an agent of the between the alleged partners. The law only
been represented to persons consenting to considers them as partners and the association
be a partner (1) in an such representation: as a partnership insofar as it is favorable to
existing partnership, • To bind them to third persons. However, partnership liability is
or (2) with one or the same extent created only in favor of persons who on the
more persons not and in the same faith of such representation given credit to the
actual partners manner as partnership. [de Leon]
though he were a
partner in fact
Partnership as distinguished from
• With respect to
persons who rely
joint venture
upon the
representation. Partnership Joint venture
When all the A partnership act or
Operates with firm Operates without
members of the obligation results.
existing partnership name and legal firm name and legal
consent to the personality personality
representation
Generally relates to a
In all other cases The representation is continuing business of Usually limited to a
the joint obligation of
various transactions of single transaction
the person acting and
a certain kind
the persons
consenting to the
representation
A joint venture is an agreement between two
Nature of Liability parties to enter into a commercial undertaking.
Summarizing Article 1825, a partner by It may fall under a partnership with a limited
estoppel is liable in the following manner: purpose.
(a) He is liable as though he were a partner
when – Under Philippine law, a joint venture is a form
1. There is an existing partnership; of partnership and should thus be governed by
2. All the partners consented to the the laws of partnership. [Aurbach v. Sanitary
representation; and Wares Manufacturing Corp, G.R. No. 75875]
3. A partnership liability results.
(b) He is liable jointly and pro rata (as though Professional Partnership
he were a partner in fact) with those who
consented to the representation when: Definition
1. There is an existing partnership but not General professional partnerships — those
all the partners consented; or formed by persons for the sole purpose of
exercising their common profession, no part of
Page 98 of 450
the income of which is derived from engaging Exception: He cannot do so when he acts in
in any trade or business. [Sec. 22(B), NIRC] bad faith. [Art. 1800, NCC]
Distinction from an Ordinary Partnership Revocation of Power by Managing Partner

The distinction between a Partnership and a General Rule: Power is irrevocable without
General Professional Partnership (GPP) is just or lawful cause.
material in taxation.
• A GPP is NOT TAXABLE as an entity. The powers of the managing partner may be
revoked:
• The income tax is imposed not on the
If appointed in the articles of partnership, when
professional partnership, which is tax
—
exempt, but on the partners themselves in
a. There is just or lawful cause for
their individual capacity computed on their
revocation; and
distributive shares of partnership profits.”
b. The partners representing the
[Tan v. Del Rosario, G.R. No. 109289
controlling interest revoke such power.
(1994)]
If appointed after the constitution of the
Requirement to File Income Tax Returns
partnership, at any time and for any cause. [Art.
GPPs are still required to file income tax
1800, NCC]
returns for the purposes of furnishing
Rationale: Such appointment is a mere
information as to the share in the gains or
delegation of power, not founded on a change
profits which each partner shall include in his
of will on the part of the partners, the
individual return. [RR 2-1998]
appointment not being a condition of the
contract.
Management
It is merely a simple contract of agency, which
In General may be revoked at any time.
The property rights of a partner are: Removal, however, should also be done by the
(1) His rights in specific partnership property; partners having the controlling interest. [de
(2) His interest in the partnership; and Leon]
(3) His right to participate in the management
[Art. 1810, NCC] Managing by Two or More Partners
When there are two or more managing partners
Management of the partnership is primarily appointed —
governed by the agreement of the partners in 1. Each one may separately execute all acts
the articles of partnership. of administration.
2. If any of them opposes the acts of the
It may be stipulated that the partnership will be others, the decision of the majority prevails.
managed by: 3. In case of a tie, the partners owning the
1. All the partners; or controlling interest will decide. [Art. 1801,
2. A number of partners appointed as NCC]
managers which may be appointed –
 In the articles of partnership; or Requisites for Applicability of Art. 1801:
 After constitution of the partnership. a. Two or more partners have been appointed
as managers;
Scope of Powers of a Managing Partner b. There is no specification of their respective
General rule: The partner designated as duties or no stipulation on how each one
manager in the articles may execute all acts of will act; and
administration, despite opposition by the other c. There is no stipulation that one of them
partners. shall not act without the consent of all the
others. The right to oppose is not given to
Page 99 of 450
non-managers because in appointing their alteration without interposing any objection. [de
other partners as managers, they have Leon]
stripped themselves of all participation in
the administration. [Paras] Mutual Agency
In addition to the Art. 1801, NCC there is
The other managers, however, should effectively a mutual agency in the following
make the opposition before the acts cases:
produce legal effects insofar as third 1. Partners can dispose of partnership
persons are concerned. property even when in partnership name.
[Art. 1819, NCC]
IRRECONCILABLE DEADLOCK 2. An admission or representation made by
Those who vote against the contract shall any partner concerning partnership affairs
prevail, the same having been entered into is evidence against the partnership. [Art.
without authority. [de Leon] 1820, NCC]
3. Notice to any partner of any matter relating
Stipulation of Unanimity to partnership affairs is notice to the
General Rule: In case there is a stipulation that partnership. [Art. 1821, NCC]
none of the managing partners shall act without 4. Wrongful act or omission of any partner
the consent of others — acting for partnership affairs makes the
a. The concurrence of all is necessary for the partnership liable. [Art. 1822, NCC]
validity of the acts, and 5. Partnership is bound to make good losses
b. The absence or disability of one cannot be for wrongful acts or misapplications of
alleged. partners. [Art. 1823, NCC]
Exception: Unless there is imminent danger of 2. Rights and obligations of

grave or irreparable injury to the partnership.
[Art. 1802, NCC] partnership and partners
Management When Manner Not Agreed Rights and obligations of the

Upon partnership
When there is no agreement as to the manner
of management, the following rules apply: a. Right to Contribution, Right to
1. All the partners are considered agents Warranty
(mutual agency). Whatever any one does
alone binds the partnership, unless there is As a general rule, every partner is a debtor of
a timely opposition to the act, under Art. the partnership for whatever he may have
1801, NCC. promised to contribute. [Art. 1786, NCC]
2. Any important alteration in the immovable
property of the partnership, even if useful to Contribution of Money or Property
the partnership, requires unanimity. If the With respect to contribution of money or
alteration is necessary for the preservation property, a partner is obliged to:
of the property, however, consent of the 1. To contribute, at the beginning of the
others is not required. [Art. 1803, NCC; de partnership or at the stipulated time, the
Leon] money, property or industry which he
undertook to contribute;
If the refusal is manifestly prejudicial to the
partnership, court intervention may be sought. Effect of failure to contribute: Makes the
[Art. 1803, NCC] partner ipso jure a debtor of the partnership
even in the absence of demand. The
The consent need not be express. It may be remedy is not rescission but an action for
presumed from the fact of knowledge of the specific performance with damages and
Page 100 of 450

interest. [Sancho v. Lizarraga, G.R. L- ADDITIONAL CAPITAL CONTRIBUTION

33580 (1931)]
Requisites:
Note: When contribution is in goods, the 1. There is an imminent loss of the business
amount thereof must be determined by of the partnership;
proper appraisal of the value thereof at the 2. The majority of the capitalist partners are of
time of contribution. [Art. 1787, NCC] the opinion that an additional contribution
to the common fund would save the
2. In case a specific and determinate thing is business;
to be contributed: 3. The capitalist partner refuses deliberately
a. To warrant against eviction in the same (not because of financial inability) to
manner as a vendor; and contribute an additional share to the
capital; and
b. To deliver to the partnership the fruits 4. There is no agreement that even in case of
of the property promised to be imminent loss of the business, the partners
contributed, from the time they should are not obliged to contribute.
have been delivered, without need of
demand [Art. 1786, NCC]; Any partner who refuses to contribute an
additional share to the capital, except an
3. In case a sum of money is to be industrial partner, to save the venture shall be
contributed, or in case he took any amount obliged to sell his interest to the other partners,
from the partnership coffers, to indemnify unless there is an agreement to the contrary.
the partnership for: [Art. 1791, NCC]
a. Interest; and
b. Damages from the time he should have Contribution of Industry
complied with his obligation, or from the An industrial partner is obliged to contribute his
time he converted the amount to his industry at the stipulated time.
own use, respectively. [Art. 1788, NCC]
Right to Have Sums Applied Pro
4. To preserve the property with diligence of a Rata
good father of a family pending delivery to
the partnership. [Art. 1163, NCC] General rule: A partner —
1. Authorized to manage;
5. To indemnify for any interest and damages 2. Who collects a demandable sum owed to
caused by the retention of the property or him
by delay in its obligation to contribute a sum a. In his own name;
of money. [Art. 1788 and 1170, NCC] b. From a person who also owes the
partnership a demandable sum,
Amount of Contribution
General rule: Partners are to contribute equal is obliged to apply the sum collected to both
shares to the capital of the partnership. credits pro rata, even if he issued a receipt for
his own credit only. [Art. 1792, NCC]
Exception:
When there is an agreement to the contrary, Exceptions:
the contribution shall follow such agreement 1. In case the receipt was issued for the
[Art. 1790, NCC]. account of the partnership credit only,
Industrial partners, unless he has contributed however, the sum shall be applied to the
capital pursuant to an agreement to that effect. partnership credit alone.
2. When the debtor declares, pursuant to Art.
1252, NCC at the time of making the
payment, to which debt the sum must be
Page 101 of 450

applied, and if the personal credit of the Right to Accounting of Profits

partner is more onerous to him, it shall be Received without the Consent of the
so applied. [Art. 1792, NCC] Other Partners
Requisites for Applicability of Art. 1792: Every partner must:

There exist at least two debts, one where the (1) Account to the partnership for any benefit;
collecting partner is creditor, and the other, and
where the partnership is the creditor; (2) Hold as trustee for it any profits derived by
Both debts are demandable; and him without the consent of the other
The partner who collects is authorized to partners from any transaction connected
manage and actually manages the partnership. with the formation, conduct, or liquidation of
the partnership or from any use by him of its
Right to be Compensated property. [Art. 1807, NCC]
Every partner is responsible to the partnership Obligation to Reimburse Partners

for damages suffered by it through his fault.
• He cannot compensate the damages with The partnership shall be responsible to every
the profits and benefits which he may have partner for:
earned for the partnership by his industry. 1. The amounts he may have disbursed on
behalf of the partnership; and
• However, the courts may equitably lessen
2. The corresponding interest, from the time
this responsibility if through the partner's
the expenses are made;
extraordinary efforts in other activities of
3. The obligations the partner may have
the partnership, unusual profits have been
contracted in good faith in the interest of
realized. [Art. 1794, NCC]
the partnership business; and
4. Risks in consequence of the partnership’s
Set-Off of Liability
management. [Art. 1796, NCC]
General rule: The liability for damages cannot
be set-off or compensated by profits or benefits
which the partner may have earned for the Obligations of the partners among
partnership by his industry. themselves
Rationale: The partner has the obligation to Right to Associate Another in Share
secure the benefits for the partnership. As
such, the requirement for compensation that Every partner may associate another person
the partner be both a creditor and a debtor of with him in his share, but the associate shall not
the partnership at the same time, is not be admitted into the partnership without the
complied with [Art. 1278, NCC; de Leon]. consent of all the other partners, even if the
partner having an associate should be a
Exception: The court may equitably lessen the manager. [Art. 1804, NCC]
liability if, through his extraordinary efforts in
other activities of the partnership, unusual This arrangement refers to a contract of
profits were realized [Art. 1794, NCC]. Note, subpartnership, which is a partnership within a
however, that there is still no compensation in partnership, distinct and separate from the
this case. main partnership. It is considered a
modification of the original contract. [de Leon]
Page 102 of 450

Right to Inspect Partnership Books Property Rights of Partners
The partnership books shall be kept: In General

1. At a place agreed upon by the partners; The property rights of a partner are:
2. When there is no such agreement, at the (a) His rights in specific partnership property;
principal place of business of the (b) His interest in the partnership; and
partnership. (c) His right to participate in the management.
[Art. 1810, NCC]
Every partner shall, at any reasonable hour,
have access to and may inspect and copy any Property And Capital Distinguished
of them. [Art. 1805, NCC] Partnership
Partnership property
capital
Any reasonable hour means reasonable hours
on business days throughout the year. [Pardo Value varies with
With constant value
v. Lumber Co., G.R. No. L-22442 (1925)] market conditions
Right to Formal Account Includes only Includes the

actually contributed contributions and
General rule: The right to a formal account of and promised property acquired by
partnership affairs accrues only when the capital the partnership
partnership is dissolved.
Ownership of Certain Properties
Exceptions: In the special and unusual cases The ownership of property used by the
mentioned in Article 1809, formal accounting partnership depends on the intention of the
may be demanded by any partner even before parties, which may be drawn from an express
dissolution: agreement or their conduct.
a. If he is wrongfully excluded from the
partnership business or possession of its A partner may allow the property to be used by
property by his co-partners; the partnership without transfer of ownership,
b. If the right exists under the terms of any contributing only the use or enjoyment thereof.
agreement;
c. If, without his consent, a partner has He may also hold title to partnership property,
derived profits from any transaction without acquiring ownership thereof. [Art. 1819,
connected with the formation, conduct, or NCC]
liquidation of the partnership or from any
use of partnership property; Property acquired by a partner with partnership
d. Whenever other circumstances render it funds is presumed to be partnership property.
just and reasonable. [Art. 1809, NCC]
The same presumption also arises when the
As long as the partnership exists, any of the property is indicated in the partnership books
partners may demand an accounting of the as partnership asset.
partnership business. Prescription of the said
right starts to run only upon the dissolution of Other factors may be considered to determine
the partnership when the final accounting is ownership of the property.
done. [Emnace v. CA, G.R. 126334 (2001)]
Rights in Specific Property
a. The partners have equal rights to possess
partnership property for partnership
purposes.
b. For other purposes, the consent of his
partners is necessary.
Page 103 of 450

c. If the partner is excluded, he may ask for: partner without the consent of all other
1. Formal accounting [Art.1809, NCC]; or partners.
2. Dissolution by judicial decree
[Art.1831, NCC]. RISK OF LOSS OF THINGS CONTRIBUTED
d. A partner’s right in such property is not Who Bears the
Thing Contributed
assignable, except when all the partners Risk
assign their rights in the same property. Specific and
e. The right is not subject to attachment or determinate things Borne by the partner
execution, except on claim against the which are not because he remains
partnership. fungible; only the the owner of the
usufruct is things
In case of such attachment, the partners, or contributed
any of them, or the representatives of a Specific and
deceased partner, cannot claim any right determinate things
under the homestead or exemption laws. the ownership of Borne by the
f. The right is not subject to legal support which is partnership as owner
under Article 291. [Art. 1811, NCC] transferred to the
g. Contemplates tangible property. partnership
Partnership,
Interest In Partnership because use is
A partner’s interest in the partnership is his impossible without
share of the profits and surplus. [Art. 1812, Fungible things
the things being
NCC] consumed or
impaired
Assignment of Interest [Art. 1813, NCC] Partnership, for
Assignment by a partner of his whole interest there cannot be any
in the partnership, of itself: Things contributed doubt that the
a. Does not dissolve the partnership; or to be sold partnership was
b. Does not entitle the assignee to: intended to be the
1. Interfere in the management or owner
administration of the partnership Partnership,
business or affairs; because the
2. Require information or account of intention of the
partnership; or parties was to
3. Inspect the partnership books. Things brought contribute to the
and appraised in partnership the price
It merely entitles the assignee to: the inventory of the things
a. Receive the profits to which the assigning contributed with an
partner was entitled; appraisal in the
b. In case of fraud in management, avail inventory. There is
himself of the usual remedies provided by thus an implied sale.
law, such as dissolution [Art. 1831, NCC];
c. In case of dissolution: Note: The list presupposes delivery. Without
1. Receive his assignor’s interest; and delivery, the loss is borne by the partner.
2. Require an accounting from the date
only of the last account agreed to by all Right to be Reimbursed by the
the partners. [Art. 1813, NCC]. Partnership
Rationale: It would effectively allow a third party The partnership shall be responsible to every
to participate in the affairs of the partnership partner for:
and would basically have a stranger become a
Page 104 of 450

(a) The amounts he may have disbursed on Every partner must:

behalf of the partnership; and (a) Account to the partnership for any benefit;
(b) The corresponding interest, from the time and
the expenses are made; (b) Hold as trustee for it any profits derived by
(c) The obligations the partner may have him without the consent of the other
contracted in good faith in the interest of partners:
the partnership business; and 1. From any transaction connected with
(d) Risks in consequence of the partnership’s the formation, conduct, or liquidation of
management. [Art. 1796, NCC] the partnership; or
2. From any use by him of its property.
The provision is meant to grant to every partner [Art. 1807, NCC].
the right to demand from the partnership
reimbursement of advances made on behalf of General Rule: The partner cannot use or apply
the partnership business. [Villanueva] exclusively to his own benefit partnership
assets or results of the knowledge or
Article 1796 is not applicable when there is no information gained by him as a partner to the
other money than that contributed as capital is detriment of the partnership. [de Leon]
involved. [de Leon; Martinez v. Ong Pong Co,
G.R. No. 5236 (1910)] Exception: If the taking by the partner is with
the consent of all other partners. [Lim Tanhu v.
Right to Ask for Dissolution [Arts. Ramolete, G.R. L-40098 (1975)]
1830(2) and 1831, NCC] The duty to account continues until the
partnership relation is terminated. [de Leon]
See Dissolution and Winding Up, infra.
This obligation exists even when he issued a
Obligation to Render True and Full receipt for his share only [Art. 1793, NCC].
Information Rationale: In this case, the debt becomes a
bad debt. It would be unfair for the partner who
Partners shall render on demand true and full already collected not to share in the loss of the
information of all things affecting the other partners.
partnership to:
a. Any partner; Credit collected after dissolution: The
b. The legal representative of any collecting partner need not bring the same to
deceased partner; or the partnership capital. Art. 1793 presupposes
c. The legal representative of any partner that there exists partnership capital. Upon
under legal disability [Art. 1806, NCC]. dissolution of the partnership and the return to
each principal of what he contributed, the
Even without demand, honesty demands the community of interest between them
giving of vital information, the refraining from all disappears altogether. [de Leon]
kinds of concealment. [Paras]
Obligation not to Engage in Another
By “information”, it is meant that which can be Business
used for partnership purposes, it is in the sense
of a property which the partnership has a FOR INDUSTRIAL PARTNERS
valuable right. [de Leon]
General rule: An industrial partner cannot
Obligation to Account and Act as engage in business for himself. Should he do
Trustee so, the capitalist partners, as well as industrial
partners may either:
Exclude him from the firm; or
Page 105 of 450

Avail themselves of the benefit which he may the partnership, whether in his own name or for
have obtained with a right to damages. [de the account of another at the expense of the
Leon] partnership. [de Leon]
Exception: He may engage in business for Obligation to Share in the

himself when the partnership expressly permits Profits/Losses
him to do so. [Art. 1789, NCC]
Remedy of the other partners Rules for Distribution of Profits and Losses
The other partners have the remedy of either The distribution of profits and losses shall be in
excluding the erring partner from the firm or of accordance with the following rules:
availing themselves of the benefits which he 1. They shall be distributed in conformity with
may have obtained. the agreement.
2. If only the share in profits has been
An action for specific performance to compel stipulated, the share in the losses shall be
the partner to perform the promised work is not in the same proportion.
available as a remedy because this will amount 3. In the absence of any stipulation:
to involuntary servitude. (a) The share in the profits of the capitalist
partners shall be in proportion to their
Reasons: contributions.
1. To prevent the industrial partner from (b) The losses shall be borne by the
exploiting his services for his own personal capitalist partners, also in proportion to
benefit without the permission of the firm. the contributions.
2. To prevent conflict of interest and to ensure (c) The share of the industrial partners in
compliance by said partner with his the profits is that share as may be just
prestation. and equitable. If he also contributed
capital, he will receive a share of the
FOR CAPITALIST PARTNERS profits in proportion to his contribution;
and
General Rule: For a capitalist partner, the (d) The industrial partner, who did not
prohibition on engaging in another business contribute capital, is not liable for
extends only to any operation which is of the losses. [Art. 1797, NCC]
same or similar kind of business in which the
partnership is engaged Exclusion Of Partner From Share
General rule: A stipulation excluding one or
Exception: Unless there is a stipulation to the more partners from any share in the profits or
contrary. losses is void. [Art. 1799, NCC]
If the capitalist partner violates this prohibition, Exception: A stipulation exempting an

he shall: industrial partner from losses is valid, since, if
(1) Bring to the common funds any profits the partnership fails to realize profits, he can no
accruing to him from his transactions; and longer withdraw his work or labor. [de Leon]
(2) Personally bear all the losses. [Art. 1808,
NCC] But this does not exempt the industrial partner
from liability insofar as third persons are
The test is the possibility of unfair concerned. He may however, recover what he
competition. has given to third persons from the other
partners, for he is exempted by law from
A partner occupies a fiduciary position with losses.
respect to his co-partners imposing duties of
utmost good faith and he may not carry on any
other business in rivalry with the business of
Page 106 of 450

Obligations of Nature of Individual Liability Subsidiary

partnership/partners to third General rule: The partners are liable
persons subsidiarily. It only arises upon exhaustion of
partnership assets. [Cia. Maritima v. Muñoz,
G.R. No. L-24796 (1907)]
Operate Under a Firm Name
Exceptions:
General rule: The partners may adopt any firm
1. A third person who transacted with the
name desired, which may or may not include
partnership can hold the partners solidarily
the name of one or more of the partners. [Art.
(rather than subsidiarily) liable for the
1815, NCC]
whole obligation if the case falls under
Articles 1822 or 1823. [Muñasque v. CA,
Note: Those who, not being members of the
G.R. L-39780 (1985)] The provisions refer
partnership, include their names in the firm
to wrongful acts or omission and
name, shall be subject to the liability of a
misapplication of money or property by a
partner. [Art. 1815, NCC]
partner in the ordinary course of business.
2. A person admitted as a partner into an
The partnership name shall contain the word
existing partnership is liable for all the
“Company” or “Co.”, except for professional
partnerships. [SEC Memo Circ No. 14-00] obligations of the partnership arising before
his admission, except that his liability shall
be satisfied only out of partnership
Exceptions:
property, unless there is a stipulation to the
1. They cannot use a name which is “identical
contrary. [Art. 1826, NCC] In other words,
or deceptively or confusingly similar one
he is not personally liable.
already protected by the Commission or a
sole proprietorship registered with the
Pro Rata
Department of Trade and Industry. [SEC
Memo Circ No. 14-00] The partners are liable pro rata. This liability is
not increased even when a partner:
2. The use of names of a deceased partner in
Has left the country and the payment of his
law firms is “permissible provided that the
share of the liability cannot be enforced; [Co-
firm indicates in all its communications that
Pitco v. Yulo, G.R. No. L-3146 (1907)] or
said partner is deceased”. [Rule 3.02, Code
of Professional Responsibility] His liability is condoned by the creditor. [Island
Sales v. United Pioneers, G.R. No. L-22493
(1975)]
Liability for Partnership Debts
Basis for Pro-rating
Liability of Partners for Partnership
Pro rata must be understood to mean equally
Contracts
or jointly and not its literal meaning.
The partnership is primarily liable for contracts
entered into:
After all partnership assets have been
1. In its name and for its account;
exhausted, pro-rating is based on the number
2. Under its signature; and
of partners and not on the amount of their
3. By a person authorized to act for it.
contributions to the common fund, subject to
adjustment among the partners. [de Leon]
Upon exhaustion of its assets, all partners are
liable pro rata with all their property. Any
Liability of an Industrial Partner
partner may enter into a separate obligation to
An industrial partner, who is not liable for
perform a partnership contract [Art. 1816,
losses, is not exempt from this liability (for
NCC].
partnership debts). However, he can recover
the amount he has paid from the capitalist
partners, unless there is a stipulation to the
Page 107 of 450

contrary. [Cia. Maritima v. Muñoz, G.R. No. L- Exception: The partnership is bound if the
24796 (1907)] other partners authorized him to do the act.
[par. 2, Art. 1818, NCC]
Stipulation against Individual Liability
Any stipulation against pro rata liability is: 3. Acts of Strict Dominion
Void against third persons; but
Valid among the partners. [Art.1817, NCC] General Rule: One or some of the partners
have no authority to do the following acts of
A stipulation which excludes one or more strict dominion:
partners from any share in the profits or loses a. Assign the partnership property in trust
is void. [Art. 1799, NCC] for creditors or on the assignee’s
promise to pay the debts of the
Reconciling Art. 1816 and Art. 1797 partnership;
The exemption of the industrial partner to pay b. Dispose of the goodwill of the business;
losses relates exclusively to the settlement of c. Do any other act which makes it
the partnership affairs among the partners impossible to carry on the ordinary
themselves, and has nothing to do with the business of the partnership;
liabilities of the parties to third persons. d. Confess a judgment;
e. Enter into a compromise concerning a
Art. 1816 refers to “liabilities” while Art. 1797 partnership claim or liability;
speaks of “losses”. There is therefore no f. Submit a partnership claim or liability to
conflict between the two articles. [Nachura] arbitration;
g. Renounce a claim of the partnership.
Liability of Partners for Partnership
Contracts Exceptions:
They may do so if:
1. Acts apparently for the carrying on of 1. Authorized by all the partners; or
usual business 2. The other partners have abandoned the
business. [par. 3, Art. 1818, NCC]
General rule: The partnership is liable for
any act of a partner which is apparently for 4. Acts In Contravention of a Restriction
the carrying on of the usual business of the
partnership binds the latter, including the Any act of a partner in contravention of a
execution of any instrument in the restriction on authority does not bind the
partnership name. partnership to persons having knowledge
of the restriction. [par. 4, Art. 1818, NCC].
Exception: The partnership is not bound
when the following concur: The partnership is not liable to third
(a) The partner has in fact no authority to persons having actual or presumptive
act; and knowledge of the restrictions, whether or
(b) The person with whom he deals has not the acts are for apparently carrying on
knowledge of such fact [par. 1, Art. in the usual business of the partnership. [de
1818, NCC]. Leon]
2. Acts not apparently for carrying on of Conveyance of Partnership Real Property

the usual business (a) Title In Partnership Name
Any partner may convey the real property
General rule: Acts of a partner which is not in the name of the partnership. The
apparently for carrying on of the usual partnership can recover it, except when:
business does not bind the partnership. 1) The act of the partner binds the
partnership, when he has authority to
Page 108 of 450

carry out the usual business of the Instances Where Knowledge of a Partner is
partnership, under par. 1, Art. 1818, Considered Knowledge of the Partnership
NCC; or a. Knowledge of the partner acting in the
2) If not so authorized, the property has particular matter –
been conveyed by the grantee, or a a. Acquired while a partner; or
person claiming under him, to a holder b. Then present to his mind;
for value and without knowledge that b. Knowledge of any other partner who
the partner exceeded his authority. reasonably could and should have
[par. 1, Art. 1819, NCC] communicated it to the acting partner. [Art.
A partner authorized to carry out the usual 1821, NCC]
business may convey, in his own name, the
equitable interest of the partnership. [par. Liability for Wrongful Acts of a
2, Art. 1819, NCC] Partner
(b) Title in the Name Of Other Persons The partnership is solidarily liable with the
Where the title is in the name of one or partner who causes loss or injury to any
more but not all the partners, and the person not a partner, or incurs any penalty
record does not disclose the right of the through any wrongful act or omission:
partnership: a. In the ordinary course of the business of
1) The partners having title may convey the partnership; or
title. b. Not in such ordinary course of business,
2) The partnership may recover it when but with the authority of his co-partners.
the partners conveying title have no [Art. 1822, NCC]
authority to carry on the usual business
of the partnership, unless the Liability for Misapplication of Money
purchaser or his assignee is: or Property
i. A holder for value; and
ii. Without knowledge that the act The partnership is liable for losses suffered by
exceeded authority. [par. 4, Art. a third person whose money or property was:
1819, NCC]. a. Received by a partner –
 Acting within the scope of his apparent
Where the title is in the name of one or more or authority; and
all the partners, or in a third person in trust for  Misapplied it;
the partnership, a partner authorized to carry b. Received by the partnership –
on the usual business may convey equitable  In the course of its business; and
title in the partnership name or in his own  Misapplied by any partner while it is in
name. [par. 4, Art. 1819, NCC] the custody of the partnership. [Art.
Where the title is in the names of all the 1823, NCC]
partners, a conveyance executed by all of them
passes all the rights to the property. [par. 5, Art. LIABILITY OF THE OTHER PARTNERS
1819, NCC] UNDER ARTS. 1822 AND 1823, NCC
Liability for Admission by a Partner All partners are solidarily liable with the
partnership for its liabilities under Arts. 1822
An admission or representation by any partner and 1823. [Art. 1824, NCC]
may be used as evidence against the
partnership when: This is without prejudice to the guilty partner
a. It concerns partnership affairs; and being liable to the other partners. However, as
b. Such affairs are within the scope of his far as third persons are concerned, the
authority. [Art. 1820, NCC] partnership is answerable. [de Leon]
Page 109 of 450

Applicability of the Rule of Respondeat property, unless otherwise stipulated that he

Superior fully assumes such obligations.
The rule of respondeat superior (also called the
rule of vicarious liability) applies to the law of Rationale
partnership in the same manner as other rules a. The new partner partakes of the benefits of
governing the agency relationship. [de Leon] the partnership property and an already
established business.
It is not only the partners who are liable in b. He has every means of obtaining full
solidum; it is also the partnership. [Art 1824, knowledge of the debts of the partnership
NCC] and remedies that amply protect his
interest. [de Leon]
The injured party may proceed against the
partnership or any partner. [Paras] Notice To Or Knowledge Of The Partnership
The following operate as notice to or
The reason for the law’s imposition of wider knowledge of the partnership:
liability on the partnership with respect to torts a. Notice to any partner of any matter relating
and breach of trust is based on public policy. to partnership affairs;
[de Leon] b. Knowledge of the partner acting in the
particular matter acquired while a partner;
Criminal Liability for Criminal Acts c. Knowledge of the partner acting in the
A non-acting partner in a partnership engaged particular matter then present to his mind;
in a lawful business is not criminally liable for or
the criminal acts of another partner but he is d. Knowledge of any other partner who
criminally liable if the partnership is involved in reasonably could and should have
an unlawful enterprise with his knowledge or communicated it to the acting partner.
consent.
These do not apply in case of fraud on the
Partnership Liability partnership committed by or with the consent
Does Not Extend to criminal liability where of the partner. [Art. 1821, NCC]
the wrongdoing is regarded as individual in
character, i.e. embezzlement. Preference of Partnership Creditors in
Extends to criminal liability where the crime Partnership Property
is statutory, especially where it involves fine or With respect to partnership assets the
imprisonment. [de Leon] partnership creditors are entitled to priority of
payment. However, the private creditors of
Liability in Case of Partnership by each partner may ask the attachment and
Estoppel public sale of the share of the latter in the
partnership assets as provided in Art. 1814,
See Partnership by Estoppel, supra. NCC. [Art. 1827, NCC]
Liability of an Incoming Partner Property Preference:

a. Partnership Property – Partnership
A person admitted as a partner is liable for creditors are preferred;
obligations incurred subsequent to his b. Partner’s Individual Property – Partner’s
admission as the other partners are liable. This individual creditors are preferred. [de Leon]
is because he is already part of the partnership.
Remedy in Case of Insufficiency of Assets:
As per Article 1826, the partner is liable for a. Partnership Creditor – After exhaustion of
obligations incurred before his admission, but partnership assets, the creditor may come
will be satisfied only out of the partnership after the private property of the partners.
Page 110 of 450

b. Partner’s Individual Creditor – Ask for Note: The dissolution of a partnership must not
attachment and public sale of the share of be understood in the absolute and strict sense
the partner in the partnership assets. [de so that at the termination of the object for which
Leon]. it was created, the partnership is extinguished.
[Testate Estate of Mota v. Serra, G.R. No. L-
Liability with Regard to Personal 22825 (1925)]
Creditors of Partners
Partnership Still Exists
Interest by Personal Creditors The partnership, although dissolved, continues
General rule: Partnership creditors are to exist until its termination, at which time the
preferred over the personal creditors of the winding up of its affairs should have been
partners as regards partnership property. completed and the net partnership assets are
partitioned and distributed to the partners.
Exception: On due application by any [Emnace v. CA, G.R. No. 126334 (2001)]
judgment creditor of a partner, a competent
court may: Winding up – the actual process of settling the
a. Charge the interest of the partner for the partnership business or affairs after
satisfaction of the judgment debt; dissolution. It involves collection and
b. Appoint a receiver of the share of the distribution of partnership assets, payment of
profits and of any other money due or to fall debts, and determination of the value of the
due to the partner; and interest of the partners in the partnership.
c. Make all other orders, directions, accounts
and inquiries, which the debtor partner Termination – the point in time when all
might have made, or which the partnership affairs are completely wound up
circumstances may require. [par. 1, Art. and finally settled. It signifies the end of the
1814, NCC] partnership life. [de Leon]
The interest charged may be redeemed before Causes of Dissolution

foreclosure or, in case of sale directed by the
court, may be purchased without causing Without Violation of the Agreement
dissolution: Between the Partners
a. With separate property, by one or more of
the partners; or 1. By the termination of the definite term or
b. With partnership property, by one or more particular undertaking specified in the
of the partners, with consent of all, except agreement;
the debtor partner. [par. 2, Art. 1814, NCC] 2. By the express will of any partner, who
must act in good faith, when no definite
3. Dissolution and Winding Up term or particular is specified;
3. By the express will of all the partners who
Concepts have not assigned their interests or
suffered them to be charged for their
Dissolution – the change in the relation of the separate debts, either before or after the
partners caused by any partner ceasing to be termination of any specified term or
associated in the carrying on of the business. It particular undertaking;
is different from the winding-up of the business. 4. By the expulsion of any partner from the
[Art. 1828, NCC] It does not terminate the business bona fide in accordance with such
partnership, which continues until the winding a power conferred by the agreement
up of partnership affairs is completed. [Art. between the partners. [Art. 1830(1), NCC]
1829, NCC]
If, after the expiration of the definite term or
particular undertaking, the partners continue
Page 111 of 450

the partnership without making a new 4. By the insolvency of any partner or of the
agreement, the firm becomes a partnership at partnership;
will. [Art. 1785, NCC]
5. Note: The insolvency of the partner or of
Any one of the partners may, at his sole the partnership must be adjudged by the
pleasure, dictate the dissolution of the court. [de Leon]
partnership at will. He must, however, act in
good faith, not that the attendance of bad faith 6. By the civil interdiction of any partner;
can prevent the dissolution of the partnership,
but that it can result in a liability for damages. Civil interdiction deprives the offender
[Ortega v. CA, G.R. No. 109248 (1995)] during the time of his sentence of the right
to manage his property and dispose such
In Contravention of the Agreement property by any act or any conveyance
Between the Partners inter vivos. [Art. 34, RPC]
Where circumstances do not permit dissolution Ratio: One who is without capacity to
under any other provision of Art. 1830, NCC it manage his own property should not be
may also be dissolved by the express will of allowed to manage partnership property.
any partner at any time. [de Leon]
Thus, even if there is a specified term, one By Decree of Court

partner can cause its dissolution by expressly
withdrawing even before the expiration of the A partner may apply for dissolution in court
period, with or without justifiable cause. If the when:
cause is not justified or no cause was given, the
withdrawing partner is liable for damages but in 1. A partner has been declared insane in any
no case can he be compelled to remain in the judicial proceeding or is shown to be of
firm [Rojas v. Maglana, G.R. No. 30616 unsound mind;
(1990)].
Note: The partner may have been
By operation of Law previously declared insane in a judicial
proceeding; otherwise, his insanity must be
1. By any event which makes it unlawful for duly proved. It must materially affect the
the business of the partnership to be capacity of the partner to perform his
carried on or for the members to carry it on contractual duties as such. [de Leon]
in partnership;
2. A partner becomes in any other way
Note: If the business or object had been incapable of performing his part of the
unlawful from the very beginning, the firm partnership contract;
never had juridical personality. [Paras]
Note: The incapacity must be lasting, from
2. When a specific thing which a partner had which the prospect of recovery is remote.
promised to contribute, perishes before [de Leon]
delivery, or by the loss of the thing, only the
use or enjoyment of which has been 3. A partner has been guilty of such conduct
contributed; the loss of a specific thing, as tends to affect prejudicially the carrying
however, does not dissolve the corporation on of the business;
after its ownership has already been
transferred to the partnership; 4. A partner willfully or persistently commits a
breach of the partnership agreement, or
3. By the death of any partner; otherwise so conducts himself in matters
Page 112 of 450

relating to the partnership business that it Effects of Dissolution

is not reasonably practicable to carry on the
business in partnership with him; On Authority of the Partners
Ratio: They defeat and materially affect In general, upon dissolution, the authority of the
and obstruct the purpose of the partners to represent the partnership is
partnership. [de Leon] confined only to acts necessary to:
1. Wind up partnership affairs; or
5. The business of the partnership can only 2. Complete transactions begun but not then
be carried on at a loss; finished. [par. 1, Art. 1832, NCC]
Note: A court is authorized to decree With respect to partners

dissolution notwithstanding the partnership The authority of partners to act for the
has been making profits where it appears partnership is terminated, with respect to
at the time of the application that the partners:
business can only be carried on at a loss. 1. When the dissolution is not by the act,
[de Leon] insolvency or death of a partner; or
2. When the dissolution is by such act,
6. Other circumstances render a dissolution insolvency or death, when the partner
equitable. acting for the partnership has knowledge or
notice of the cause. [Art. 1832 and 1833,
Reason for necessity of court decree: In the NCC]
instances mentioned in Art. 1831, the facts
may be so far open to dispute as to make In other cases, each partner is still liable for his
necessary judicial determination as to share in the liability created by the partner
dissolution, rather than allow them to be the acting for the partnership. [Art. 1833, NCC]
occasion for automatic dissolution by
operation of law. [de Leon] With respect to third persons
With respect to persons not partners:
A person who acquires the interest of a partner 1. After dissolution, a partner can bind the
may likewise apply: partnership by any act appropriate for –
1. After the termination of the specified term a. Winding up partnership affairs; or
or particular undertaking; b. Completing transactions unfinished
2. At any time if the partnership was a at dissolution.
partnership at will when the interest was 2. He can also bind it by any transaction
assigned or when the charging order was which would bind the partnership as if
issued. dissolution had not taken place, provided
the other party to the transaction –
Other Causes a. Had extended credit to the
partnership prior to dissolution and
1. When a new partner is admitted into an had no knowledge or notice
existing partnership; thereof; or
2. When any partner retires; b. Had not so extended credit but had
3. When the other partners assign their rights known of the partnership prior to
to the sole remaining partner; dissolution, and having no
4. When all the partners assign their rights in knowledge or notice of dissolution,
the partnership property to third persons. the fact had not been advertised in
[Art. 1840, NCC] a newspaper of general circulation
in the place (or in each place if
more than one) at which the
Page 113 of 450

partnership business was regularly his want of authority, the fact of his
carried on. [par. 1, Art. 1834, NCC] want of authority has not been
advertised. [Art. 1834, NCC]
Note the character of the notice required:
1. As to persons who extended credit to the Art. 1834, NCC does not affect the liability
partnership prior to dissolution, notice must under Art. 1825, NCC of any person who, after
be actual. dissolution, represents himself or consents to
2. As to persons who merely knew of the another representing him as a partner in a
existence of the partnership, publication in partnership engaged in carrying on business.
a newspaper of general circulation in the [Art. 1834, NCC]
place of business of the partnership is
sufficient. On Liability for Contracts after
Dissolution by Specific Causes
On Liability for Transactions after
Dissolution General rule: A contract:
1. Entered into by a partner acting for the
The liability of a partner, in general, is the same partnership;
as in ordinary contracts (pro rata and 2. After dissolution by –
subsidiary). a. act,
b. death, or
In the following cases, however, the liability c. insolvency of a partner,
shall be satisfied out of the partnership assets Binds the other partners.
alone (i.e., there is no subsidiary liability):
1. When the partner had been, prior to the Exceptions:
dissolution, unknown as a partner to the 1. The dissolution being by act of any partner,
person with whom the contract is made; the partner acting for the partnership had
2. When the partner had been, prior to the knowledge of the dissolution; or
dissolution, so far unknown or inactive in 2. The dissolution being by death or
partnership affairs that the business insolvency of a partner, the partner acting
reputation of the partnership could not be for the partnership had knowledge or notice
said to have been in any degree due to his of the death or insolvency. [Art. 1833, NCC]
connection with it. [Art. 1834, NCC]
On Existing Liability of Partners
Any act of a partner after dissolution in no case
binds the partnership in the following cases: General rule: Dissolution does not of itself
1. Where the partnership is dissolved discharge the existing liability of any partner.
because it is unlawful to carry on the
business, unless the act is appropriate for Exception: A partner may be relieved when
winding up partnership affairs; there is an agreement to that effect between:
2. Where the partner has become insolvent; 1. Himself;
or 2. The partnership creditor; and
3. Where the partner has no authority to wind 3. The person or partnership continuing the
up partnership affairs, except by a business.
transaction with one who –
a. Had extended credit to the
partnership prior to dissolution and
had no knowledge or notice of his
want of authority; or
b. Had not extended credit to the
partnership prior to dissolution and,
having no knowledge or notice of
Page 114 of 450

Such agreement may be inferred from the Rights of Partners in Case of

course of dealing between: Dissolution
1. The creditor having knowledge of the
dissolution; and a. Dissolution Without Violation of the
2. The person or partnership continuing the Agreement
business.
Each partner may have:
In case of dissolution by death, the individual 1. The partnership property applied to
property of a deceased partner is liable for discharge the partnership liabilities; and
obligations of the partnership incurred while he 2. The surplus applied in cash to the net
was a partner, after payment of his separate amount owing to the respective partners.
debts. [Art.1835, NCC]
This is a right as against his co-partners and all
Winding Up Partners partners claiming through them in respect of
their interests in the partnership. It cannot be
Who May Wind Up availed if there is an agreement to the contrary.
[Art. 1837 (1), NCC]
The following partners have the right to wind up
the partnership affairs: Note: When dissolution is caused by expulsion,
1. Those designated in an agreement; the expelled partner may be discharged from
2. Those who have not wrongfully dissolved all partnership liability in the same manner as
the partnership; or above but he shall receive in cash only the net
3. The legal representative of the last amount due him from the partnership. [de
surviving partner, who was not insolvent. Leon]
Any partner or his legal representative or Dissolution in Contravention of the

assignee may obtain winding up by the court, Agreement
upon cause shown [Art. 1836, NCC].
PARTNER WHO DID NOT CAUSE THE
Manner of Winding Up DISSOLUTION
The partners who did not cause the dissolution
1. Extrajudicial, by the partners themselves; wrongfully has the following rights:
or 1. To demand the right under par. 1, Art.
2. Judicial, under the control and direction of 1837, NCC;
the proper court. 2. To be indemnified for damages for breach
of the agreement against the partner who
The action for liquidation of the partnership is caused the dissolution wrongfully [Art.
personal. The fact that sale of assets, including 1837(1), NCC];
real property, is involved does not change its 3. To continue the business:
character, such sale being merely a necessary a. In the same name;
incident of the liquidation of the partnership, b. By themselves or jointly with others;
which should precede and/or is part of its c. During the agreed term for the
process of dissolution. [Claridades v. partnership.
Mercader, G.R. No. L-20341 (1966)]
For the purpose of continuing the business, the
said partners may possess the partnership
property provided:
1. They secure the payment by bond
approved by the court; or
2. They pay any partner, who has caused the
dissolution wrongfully, the value of his
Page 115 of 450

interest in the partnership, less any creditors of the partnership for any
damages recoverable, and indemnity payments made by him in respect of the
against all present or future partnership partnership liabilities; and
liabilities. [Art. 1837(2), NCC] c. To be indemnified by the person guilty of
the fraud or making the representation
PARTNER WHO CAUSED THE against all debts and liabilities of the
DISSOLUTION partnership [Art. 1838, NCC].
The partner who caused the dissolution
wrongfully has the following rights: Nature of Fraud or Deceit
1. If the business is not continued, all the The fraud or deceit must be material or
rights par. 1, Art. 1837, NCC, subject to substantial. Mere exaggerations of one partner
liability for damages; of the prospects of enterprises or of value of the
2. If the business is continued, the right, as property which he has put into the firm as
against his co-partners and all claiming capital is not ground for dissolution. [Pineda]
through them, to:
a. Ascertainment, without considering Settling of Accounts between
the value of the goodwill of the Partners
business, and payment to him in
cash the value of his partnership Subject to any agreement to the contrary, the
interest, less any damage, or have following rules shall be observed in settling
the payment secured by a bond accounts between partners after dissolution.
approved by the court; and
b. Be released from all existing Composition of Partnership Assets
liabilities of the partnership. [Art.
1837(3), NCC] 1. The partnership property; and
2. The contributions of the partners
The goodwill of a business may be defined to necessary for the payment of all the
be the advantage which it has from its liabilities. [Art. 1839(1), NCC]
establishment or from the patronage of its
customers, over and above the mere value of In accordance with the subsidiary liability of the
its property and capital. The goodwill (which partners, the partnership property shall be
includes the firm name) is part of the applied first to satisfy any liability of the
partnership assets and may be subject of sale. partnership. [Art. 1839(3), NCC]
[de Leon]
Amount of Contribution for
Rights of Partners in Case of Liabilities
Rescission
The rules for distribution of losses shall
A partner, who is induced by fraud or determine the contributions of the partners.
misrepresentation to become such partner, [Art. 1839(4), NCC] As such:
may rescind the contract. Without prejudice to 1. The contribution shall be in conformity with
any other right, he is entitled: the agreement.
a. To a lien on, or right of retention of, the 2. If only the share in profits has been
surplus of the partnership property after stipulated, the contribution shall be in the
satisfying the partnership liabilities to third same proportion.
persons for any sum of money paid by him 3. In the absence of any stipulation, the
for the purchase of an interest in the contribution shall be in proportion to the
partnership and for any capital or advances capital contribution. [Art. 1797, NCC]
contributed by him;
b. To stand, after all liabilities to third persons
have been satisfied, in the place of the
Page 116 of 450

Enforcement of Contribution c. Those owing to partners by way of

contribution. [Art. 1839(9), NCC].
The following persons have the right to enforce
the contributions: Rights of Creditors of Dissolved
1. An assignee for the benefit of creditors; Partnership
2. Any person appointed by the court; or
3. To the extent of the amount which he has As Creditors of the New Partnership
paid in excess of his share of the
partnership liability, any partner or his legal In the following cases, creditors of the
representative. [Art. 1839(5) and (6), NCC] dissolved partnership are also creditors of the
person or partnership continuing the business:
The individual property of a deceased partner 1. When the business is continued without
shall be liable for the contributions. [Art. liquidation, and the cause of dissolution is
1839(7), NCC] –
a. Admission of a new partner into the
Order of Application of Assets existing partnership;
b. Retirement or death of any partner, and
The partnership liabilities shall rank, in order of his rights to partnership property are
payment, as follows: assigned to [1] two or more of the
1. Those owing to creditors other than partners, or [2] one or more of the
partners; partners and one or more third
2. Those owing to partners other than for persons;
capital and profits; c. Retirement of all but one partner, and
3. Those owing to partners in respect of their rights to partnership property are
capital; assigned to the remaining partner, who
4. Those owing to partners in respect of continues the business, either alone or
profits. [Art. 1839(2), NCC] with others;
d. Wrongful dissolution by any partner,
Doctrine of Marshaling of Assets and the remaining partners continue
the business, either alone or with
When partnership property and the individual others; or
properties of the partners are in possession of e. Expulsion of a partner, and the
a court for distribution: remaining partners continue the
1. Partnership creditors have priority on business, either alone or with others.
partnership property;
2. Separate creditors have priority on 2. When the cause of dissolution is the
individual property, saving the rights of lien retirement or death of any partner, and
of secured creditors; business is continued with the consent of
3. Anything left from either shall be applied to the retired partner or the representative of
satisfy the other. [Art. 1839(8), NCC] the deceased partner, without assignment
of their rights to partnership property.
Distribution of Property of Insolvent 3. When the cause of dissolution is the
Partner assignment by all the partners or their
representatives of their rights in
Where: partnership property to one or more third
1. A partner has become insolvent; or persons who promise to pay the debts and
2. His estate is insolvent, who continue the business of the
The claims against his separate property shall partnership. [par. 1, Art. 1840, NCC]
rank in the following order:
a. Those owing to separate creditors;
b. Those owing to partnership creditors;
Page 117 of 450

Liability of A New Partner in the property of the dissolved

partnership. [Art. 1841, NCC]
The liability to the creditors of the dissolved
partnership of a new partner in the partnership Right to an account
continuing the business shall be satisfied out
of the partnership property alone. However, he In the absence of any agreement to the
may, through agreement, assume individual contrary, the right to an account of his interest
liability. [par. 2, Art. 1840, NCC] shall accrue to any partner, or his legal
representative at the date of dissolution, as
Priority of Creditors of Dissolved against:
Partnership a. The winding up partners;
b. The surviving partners; or
Creditors of the dissolved partnership have c. The person or partnership continuing the
prior right to any claim of the retired partner or business [Art. 1842, NCC].
the representative of the deceased partner
against the person or partnership continuing 4. Limited Partnership
the business. [par. 3, Art. 1840, NCC]
This is without prejudice to the right of creditors Definition

to set aside any assignment on the ground of (1) A partnership;
fraud. [par. 4, Art. 1840, NCC] (2) Formed by two or more persons;
(3) Having as members:
Ratio: Business will be hampered if outside i. One or more general partners; and
creditors are not given superior right. It will be ii.One or more limited partners.
risky for them to deal with partnerships.
Moreover, if partners enjoy priority right, in the The limited partners as such shall not be bound
natural order of things, they will prefer their own by the obligations of the partnership [Art. 1843,
interests to that of the outside creditors. Such NCC], except to the extent of their capital
state will make it easy to defraud non-partner contributions.
creditors. [Pineda]
Characteristics
Rights of a Retired Partner or a
Representative of Deceased Partner 1. A limited partnership is formed by
compliance with the statutory
Unless otherwise agreed upon, when any requirements. [Art. 1844, NCC]
partner retires or dies, and the business is 2. The business is controlled or managed by
continued without any settlement of accounts one or more general partners, who are
as between him or his estate and the person or personally liable to creditors. [Arts. 1848
partnership continuing the business, he or his and 1850, NCC]
legal representative, as against such person or 3. One or more limited partners contribute to
partnership, subject to the prior rights of the capital and share in the profits but do
creditors of the dissolved partnership: not manage the business and are not
a. May have the value of his interest at the personally liable for partnership obligations
date of dissolution ascertained; and beyond their capital contributions. [Arts.
b. Shall receive as an ordinary creditor – 1845, 1848 and 1856, NCC]
1. An amount equal to the value of his 4. Obligations or debts are paid out of the
interest in the dissolved partnership partnership assets and the individual
with interest; or property of the general partners. [Art. 1843,
2. At his option or at the option of his legal NCC]
representative, in lieu of interest, the 5. The limited partners may have their
profits attributable to the use of his right contributions back subject to conditions
Page 118 of 450

prescribed by law. [Arts. 1844 and 1957, Prohibited (subject Not prohibited
NCC] to qualifications)
Effect of retirement, death, insanity or
A limited partnership has the following insolvency
advantages: Dissolves Does not dissolve
1. For general partners, to secure capital partnership partnership; rights
from others while retaining control and transferred to executor
supervision for the business; or administrator for
2. For limited partners, to have a share in selling his estate
the profits without risk of personal liability. Assignability of interest
Not assignable Assignable
General and Limited Partners
Distinguished General and Limited Partnership
Distinguished
General partner Limited partner
Extent of liability General Limited
Personally, but Liable only to the partnership partnership
subsidiarily liable extent of his capital Creation
for obligations of contributions (subject
Partners must: [1]
the partnership to exceptions)
sign and swear to a
Right to participate in management May be constituted in certificate in
Unless otherwise No right to participate any form, subject to compliance with Art.
agreed upon, all in management exceptions 1844, NCC; and [2]
general partners file the certificate for
have an equal record in the SEC
right to manage
Composition
the partnership
One or more general,
Nature of contribution
Only general partners and one or more
Cash, property or Cash or property only,
limited partners
industry not industry Firm name
Proper party in proceedings by or Must include the word
against partnership “Limited” [SEC Memo.
Proper party Not proper party, Circ. No. 14-00]
unless (1) he is also a Must contain the word
general partner; or (2) “Company” [SEC
Must not include
where the object of the Memo Circ No. 14-
name of limited
00], except for
proceedings is to partners, unless: [1] it
professional
enforce his right is also the surname of
partnerships.
against or liability to a general partner, or
the partnership. [2] prior to the time
May or may not
when the limited
include the name of
The limited partner is partner became such,
one or more of the
a necessary but not an the business has
partners.
indispensable party. been carried on under
a name in which his
Firm name
surname appeared
Name may appear Name must not
Rules governing dissolution
in the firm name appear in the firm
Arts. 1828-1842, NCC Arts. 1860-1863, NCC
name (subject to
exceptions)
Prohibition to engage in other business
Page 119 of 450

Formation Exceptions:
1. It is also the surname of a general partner;
General Requirements or
2. Prior to the time when the limited partner
Two or more persons desiring to form a limited became such, the business had been
partnership shall: carried on under a name in which his
1. Sign and swear to a certificate stating the surname appeared.
items in Art. 1844, NCC; and
2. File for record the certificate in the SEC. A limited partner whose surname appears in a
[Art. 1844, NCC] partnership name contrary to this prohibition
is liable as a general partner to partnership
A limited partnership is formed if there is creditors who extend credit without actual
substantial compliance in good faith with the knowledge that he is not a general partner. [Art.
requirements. [Art. 1844, NCC] When there is 1846, NCC]
failure to substantially comply with the
requirements: False Statement in the Certificate
1. In relation to third persons, the partnership
is general, unless they recognized that the If the certificate contains a false statement, one
firm is a limited partnership; and who suffers loss by reliance thereon may hold
2. As between the partners, the partnership liable any party to the certificate who knew the
remains limited, since they are bound by statement to be false:
their agreement. [de Leon] 1. At the time he signed the certificate; or
2. Subsequently, but within a sufficient time
Purpose of Filing before the statement was relied upon to
enable him to cancel or amend the
1. To give actual or constructive notice to certificate, or to file a petition for its
potential creditors or persons dealing with cancellation or amendment [Art. 1847,
the partnership; and NCC].
2. To acquaint them with its essential
features, including the limited liability of Requisites:
limited partners. [de Leon] 1. The partner knew the statement to be false:
a. At the time he signed the
Firm Name certificate; or
b. Subsequently, but having sufficient
General rule: The surname of a limited partner time to cancel or amend it, or file a
shall not appear in the partnership name. petition for its cancellation or
amendment, and he failed to do so;
2. The person seeking to enforce liability has
relied upon the false statement in
transacting business with the partnership;
and
3. The person suffered loss as a result of
reliance upon such false statement.
Page 120 of 450

General and Limited Partner at the f. Admit a person as a limited partner, unless
Same Time the right to do so is given in the certificate;
1. Continue the business with partnership
A person may be: property on the:
1. A general; and 2. Death;
2. A limited partner, 3. Retirement;
in the same partnership at the same time. 4. Insanity;
5. Civil interdiction; or
This fact must be stated in the certificate. 6. Insolvency of a general partner,
Such person shall have: unless the right so to do is given in the

1. All the rights and powers of a general certificate [Art. 1850, NCC]
partner; and
2. Be subject to all the restrictions of a general Obligations of a Limited Partner
partner.
Obligations Related to Contribution
Except that, in respect to his contribution
as a limited partner, he shall have the rights The contributions of a limited partner may be
against the other members which he would cash or other property, but not services. [Art.
have had if he were not also a general partner. 1845, NCC]
[Art. 1853, NCC]
A limited partner is liable for partnership
Management obligations when he contributes services
instead of only money or property to the
General Rule: Only general partners have the partnership. [de Leon]
right to manage the partnership.
A limited partner is liable to the partnership:
A general partner shall have the rights and 1. For the difference between his actual
powers and be subject to all restrictions and contribution and that stated in the
liabilities of a partner in a partnership without certificate as having been made; and
limited partners. Thus, he has general authority 2. For any unpaid contribution which he
over the business. agreed in the certificate to make in the
future, at the time and on the conditions
Thus, if a limited partner takes part in the stated in the certificate. [par. 1, Art. 1858,
control of the business, he becomes liable as a NCC]
general partner. [Art. 1848, NCC]
He holds as trustee for the partnership:
However, written consent or ratification by 1. Specific property stated in the certificate as
all limited partners is necessary to contributed by him, but which was not
authorize the general partners to: contributed or which has been wrongfully
a. Do any act in contravention of the returned; and
certificate; 2. Money or other property wrongfully paid or
b. Do any act which would make it impossible conveyed to him on account of his
to carry on the ordinary business of the contribution. [par. 2, Art. 1858, NCC]
partnership;
c. Confess a judgment against the
partnership;
d. Possess partnership property, or assign
their rights in specific property, for other
than a partnership purpose;
e. Admit a person as a general partner;
Page 121 of 450

These liabilities can be waived or compromised 1. His surname appears in the partnership
only by the consent of all members. Such name, with certain exceptions. [par. 2, Art.
waiver or compromise, however, shall not 1846, NCC]
affect the right to enforce said liabilities of a 2. He takes part in the control of the business.
creditor: [Art. 1848, CC]
1. Who extended credit; or 3. The certificate contains a false statement of
2. Whose claim arose, after the filing or before which he knows and which was relied
a cancellation or amendment of the upon, resulting in loss. [Art. 1847, CC]
certificate, to enforce such liabilities. [par.
3, Art. 1858, NCC] In cases (1) and (2), the limited partner is
entitled to reimbursement by the general
Even after a limited partner has rightfully partner/s.
received the return in whole or in part of his
capital contribution, he is still liable to the Ratio: The general partner/s may not have
partnership for any sum, not in excess of such been aware of such false statement.
return with interest, necessary to discharge its
liabilities to all creditors: Liability to Separate Creditors
1. Who extended credit; or
2. Whose claims arose before such return. On due application to a court of competent
[par. 4, Art. 1858, CC] jurisdiction by any separate creditor of a limited
partner, the court may:
A person: 1. Charge his interest with payment of the
1. Who has contributed capital to a unsatisfied amount of such claim;
partnership; 2. Appoint a receiver; and
2. Who erroneously believed that he has 3. Make all other orders, directions and
become a limited partner; and inquiries which the circumstances of the
3. Whose name appears in the certificate as case may require.
a general partner, or who is not designated
as a limited partner, The interest so charged may be redeemed with
is not personally liable as a general partner by the separate property of any general partner,
reason of his exercise of the rights of a limited but may not be redeemed with partnership
partner, provided: property. [Art. 1862, NCC]
a. On ascertaining the mistake, he
promptly renounces his interest in the Note: In a general partnership, the interest may
profits of the business or other be redeemed with partnership property with the
compensation by way of income [Art. consent of all the partners whose interests are
1852, NCC]; not charged. [Art. 1814, NCC]
b. He does not participate in the
management of the business [Art. Rights of a Limited Partner
1848, NCC]; and
c. His surname does not appear in the In General
partnership name. [Art. 1846, NCC]
A limited partner shall have the same rights as
Liability to Partnership Creditors a general partner to:
1. Require that the partnership books be kept
General rule: A limited partner is not liable as at the principal place of business of the
a general partner. His liability is limited to the partnership;
extent of his contributions. [Art. 1843, NCC] 2. To inspect and copy any of them at a
reasonable hour;
Exceptions: The limited partner is liable as a 3. To demand true and full information of all
general partner when: things affecting the partnership;
Page 122 of 450

4. To demand a formal account of partnership Rationale: Otherwise, he will receive a share to

affairs whenever circumstances render it the prejudice of third-party creditors.
just and reasonable;
5. To ask for dissolution and winding up by Right to Return of Contribution
decree of court;
6. To receive a share of the profits or other A limited partner may have his contributions
compensation by way of income; and withdrawn or reduced when:
7. To receive the return of his contribution 1. All the liabilities of the partnership, except
provided the partnership assets are in liabilities to general partners and to limited
excess of all its liabilities. [Art. 1851, NCC] partners on account of their contributions,
have been paid or there remains property
Right to Transact Business with the of the partnership sufficient to pay them;
Partnership 2. The consent of all members is had, unless
the return may be demanded as a matter of
A limited partner may: right; and
1. Loan money to the partnership; 3. The certificate is cancelled or so amended
2. Transact other business with the as to set forth the withdrawal or reduction.
partnership; and [par. 1, Art. 1857, NCC]
3. Receive a pro rata share of the partnership
assets with general creditors if he is not Note: Once withdrawal has been approved by
also a general partner. [par. 1, Art. 1854, the SEC and registered, the partnership may
NCC] no longer recover the limited partner’s
contributions.
Limitations: A limited partner, with respect to
his transactions with the partnership, cannot: The return of his contributions may be
1. Receive or hold as collateral security any demanded, as a matter of right [i.e., even when
partnership property; or not all the other partners consent]:
2. Receive any payment, conveyance, or 1. On the dissolution of the partnership;
release from liability if it will prejudice the 2. Upon the arrival of the date specified in the
right of third persons. [par.1, Art. 1854, certificate for the return; or
NCC] 3. After the expiration of a 6-month notice in
writing given by him to the other partners, if
Violation of the prohibition is considered a fraud no time is fixed in the certificate for:
on the creditors of the partnership. [par. 2, Art. a. The return of the contribution; or
1854, NCC] b. The dissolution of the partnership
[par. 2, Art. 1857, CC].
Right to Share in Profits
General rule: A limited partner, irrespective of
A limited partner may receive from the the nature of his contribution has only the right
partnership the share of the profits or the to demand and receive cash in return for his
compensation by way of income stipulated for contribution.
in the certificate.
Exceptions: He may receive his contribution in
This right is subject to the condition that a form other than cash when:
partnership assets will still be in excess of 1. There is a statement in the certificate to the
partnership liabilities after such payment. [Art. contrary; or
1856, NCC] The partnership liabilities being 2. All the members of the partnership
referred to exclude the liabilities to the limited consent. [par. 3, Art. 1857, NCC]
and general partners.
Page 123 of 450

Preference of Limited Partners An assignee becomes a substituted limited

partner when the certificate is appropriately
General rule: The limited partners stand on amended. [par. 5, Art. 1859, NCC]
equal footing.
Right to Ask for Dissolution
Exception: By an agreement of all the partners
(general and limited) stated in the certificate, A limited partner may have the partnership
priority or preference may be given to some dissolved and its affairs wound up when:
limited partners over others with respect to: 1. He rightfully but unsuccessfully demands
1. The return of contributions; the return of his contribution; or
2. Their compensation by way of income; or 2. He has a right to contribution but his
3. Any other matter. [Art. 1855, NCC]. contribution is not paid because the
partnership property is insufficient to pay its
Note: Such an agreement shall be stated in liabilities. [par. 4, Art. 1857, NCC]
the certificate.
Dissolution
Right to Assign Interest
A limited partnership is dissolved in much the
The interest of a limited partner is assignable. same way and causes as an ordinary
The assignee may become: partnership. [de Leon]
1. A substituted limited partner; or
2. A mere assignee. General rule: The retirement, death,
insolvency, insanity or civil interdiction of a
A substituted limited partner is a person general partner dissolves the partnership.
admitted to all the rights of a limited partner
who has died or has assigned his interest in a Exception: It is not so dissolved when the
partnership. He has all the rights and powers, business is continued by the remaining general
and is subject to all the restrictions and partners:
liabilities of his assignor, except those liabilities a. Under a right to do so stated in the
which: certificate; or
1. The assignee was ignorant of; and b. With the consent of all members. [Art.
2. Cannot be ascertained from the certificate. 1860, NCC]
[pars. 2 and 6, Art. 1859, NCC]
Upon the death of a limited partner, his
An assignee is only entitled to receive the executor or administrator shall have:
share of the profits or other compensation by a. All the rights of a limited partner for the
way of income, or the return of contribution, to purpose of settling his estate; and
which the assignor would otherwise be entitled. b. The power to constitute an assignee as a
He has no right: substituted limited partner, if the deceased
1. To require any information or account of was so empowered in the certificate.
the partnership transactions;
2. To inspect the partnership books. [par. 3, The estate of a deceased limited partner shall
Art. 1859, NCC] be liable for all his liabilities as a limited partner.
[Art. 1861, NCC]
An assignee has the right to become a
substituted limited partner if:
1. All the partners consent thereto; or
2. The assignor, being empowered to do so
by the certificate, gives him that right, [par.
4, Art. 1859, NCC].
Page 124 of 450

Settlement of Accounts Amendment of Certificate
Order of Payment A certificate shall be amended when:

1. There is a change in the name of the
In settling accounts after dissolution, the partnership or in the amount or character of
liabilities of the partnership shall be entitled to the contribution of any limited partner;
payment in the following order: 2. A person is substituted as a limited partner;
1. Those to creditors, including limited 3. An additional limited partner is admitted;
partners except those on account of their 4. A person is admitted as a general partner;
contributions, in the order of priority as 5. A general partner retires, dies, becomes
provided by law; insolvent or insane, or is sentenced to civil
2. Those to limited partners in respect to their interdiction and the business is continued;
share of the profits and other compensation 6. There is a change in the character of the
by way of income in their contributions; business of the partnership;
3. Those to limited partners in respect to the 7. There is a false or erroneous statement in
capital of their contributions; the certificate;
4. Those to general partners other than for 8. There is a change in the time as stated in
capital and profits; the certificate for the dissolution of the
5. Those to general partners in respect to partnership or for the return of a
profits; contribution;
6. Those to general partners in respect to 9. A time is fixed for the dissolution of the
capital. [par. 1, Art. 1863, NCC] partnership, or the return of a contribution,
no time having been specified in the
Note: In settling accounts of a general certificate; or
partnership, those owing to partners in respect 10. The members desire to make a change in
to capital enjoy preference over those in any other statement in the certificate in
respect to profits. order that it shall accurately represent the
agreement among them. [Art. 1864, NCC].
Share in the Partnership Assets
Requirements for Amendment or
The share of limited partners in respect to their Cancellation
claims for capital, profits, or for compensation
by way of income, is in proportion of their To amend or cancel a certificate:
contribution, unless: The amendment or cancellation must be in
1. There is a statement in the certificate as to writing;
their share in the profits; or 1. It must be signed and sworn to by all the
2. There is a subsequent agreement fixing members including the new members, and
their share. [Art. 1863, NCC] the assigning limited partner in case of
substitution or addition of a limited or
Amendment or Cancellation of general partner; and
The writing to amend (with the certificate, as
Certificate
amended) or to cancel must be filed for
recorded in the SEC.
a. Cancellation of Certificate
When a person required to sign the writing, a
The certificate shall be cancelled when:
The partnership is dissolved; or person desiring the cancellation or amendment
may petition the court to order cancellation or
1. All limited partners cease to be such limited
partners. amendment. The court shall order the SEC to
record the cancellation or amendment if it finds
that the petitioner has a right to have the writing
executed.
Page 125 of 450

From the moment the amended Being only a juridical entity, the physical acts of
certificate/writing or a certified copy of a court the corporation, like the signing of documents,
order granting the petition for amendment has can be performed only by natural persons duly
been filed, such amended certificate shall authorized for such purpose by corporate by-
thereafter be the certificate of partnership. [Art. laws or by a special act of the Board of
1865, NCC] Directors (BOD). [Swedish Match Philippines,
Inc. v. Treasurer of the City of Manila, G.R. No.
Limited Partnerships Formed Prior 181277 (2013)]
to the NCC
A corporation, upon coming into existence, is
Limited partnerships formed under the law prior invested by law with a personality separate and
to the NCC may distinct from those persons composing it as
a. Continue to be governed by the provisions well as from any other legal entity to which it
of the old law may be related. [Yutivo Sons Hardware v. CTA,
b. Become a limited partnership under the G.R. No. L-13203 (1961)]
NCC by compliance with Art. 1844,
provided that the certificate states: b. Created by Operation of Law
1. The amount of the original contribution Mere consent of the parties to form a
of each limited partner and the time it corporation is not sufficient. The State must
was made; and give its consent either through a special law (in
2. That the partnership assets exceeds its case of government corporations) or a general
liabilities to third persons by an amount law (i.e., Revised Corporation Code in case of
greater than the sum of all limited private corporations).
partners’ contributions. [Art. 1867,
NCC] A corporation comes into existence upon the
issuance of the certificate of incorporation.
Then, and only then, will it acquire juridical
personality to sue and be sued, enter into
B. CORPORATIONS contracts, hold or convey property or perform
any legal act in its own name.
1. Definition of Corporation c. Has the Right of Succession

Since one of the attributes of a corporation is
A Corporation is an artificial being created by that it is an artificial being with a distinct
operation of law, having the right of succession personality, the corporation’s existence is
and the powers, attributes, and properties unaffected by a change in the composition of
expressly authorized by law or incident to its stockholders. Its existence is limited only by the
existence. [Sec. 2, unless otherwise indicated, Articles of Incorporation (AOI), may be subject
all sections cited herein are from RA 11232, or to Quo Warranto proceedings (Rule 66 of the
the Revised Corporation Code] Rules of Court), and may be shortened by
dissolution (Title XIV).
ATTRIBUTES OF A CORPORATION
d. Has the Powers, Attributes and
a. An Artificial Being Properties Expressly Authorized by Law or
A corporation is a juridical entity that exists Incident to its Existence
apart from its stockholders. It has its own set of A corporation has no power except those
rights and obligations as provided for by law. expressly conferred on it by the Revised
Technically, it has no physical existence Corporation Code and by its articles of
although it occupies a principal place of incorporation, those which may be incidental to
business. such conferred powers, those that are implied
from its existence, and those reasonably
Page 126 of 450

necessary to accomplish its purposes. In turn, Its governing body is usually the Board of
a corporation exercises said powers through its Trustees (BoT). However, non-stock
BOD and/or its duly authorized officers and corporations may, through their articles of
agents. [Monfort Hermanos Agricultural Dev. incorporation or their by-laws, designate their
Corp. v. Monfort III, G.R. No. 152542 (2004)] governing boards by any name other than as
board of trustees. [Sec. 174]
Being a creature of the law, its powers are
limited by: Stock Non-Stock
 The law (see Sec. 35 for general
powers and Secs. 36 to 43 for specific No part of income is
powers); Have capital stock distributable as
 By the express terms of its AOI as well divided into shares dividends to its
those essential or necessary to carry [Sec. 3,] members or trustees
out its purpose or purposes under such [Sec. 86]
Articles (see Sec. 35, last par.); and
 By those necessary or incidental to its Are authorized to Any profit may obtain
powers so conferred (see Sec. 44) distribute to the as an incident to its
holders of such operations shall,
shares, dividends or when necessary or
2. Classes of Corporations allotments of surplus proper, be used for
profits on the basis of the furtherance of its
a. Stock Corporation the shares held [Sec. purpose or purposes
Stock corporations – corporations which 3] [Sec. 86,]
have capital stock divided into shares AND are
authorized to distribute to the holders of such Composed of Composed of
shares dividends or allotments of the surplus stockholders members
profits on the basis of shares held. [Sec. 3] It is
organized for profit. It is not for profit [Sec.
It is for profit
87]
The governing body of a stock corporation is
usually the BOD (except in certain instances, Other distinctions
e.g. one person corporations, close Stock Non-Stock
corporations).
Cumulative voting in Cumulative voting in
Note: A corporation is deemed to have the election of directors election of trustees is
power to declare dividends. So long as the is provided by law only available if
corporation has capital stock and there is no [Sec. 23] provided in AOI or
prohibition in its Articles of Incorporation or in BL [Sec. 23]
its by-laws for it to declare dividends, such
corporation is a stock corporation. [Sec. 42] Maximum of 15 May be more than 15
directors except in [Sec. 91]
b. Non-Stock Corporation merger or
All other corporations are non-stock consolidation of
corporations. [Sec. 3] banks [Sec. 13]
Term of director is 1 Maximum term of a

Non-stock corporations – One where no part trustee is 3 years
year [Sec. 22]
of the income is distributable as dividends to its [Sec. 91]
members, trustees, or officers, subject to the
provisions of the Code on dissolution. [Sec. 86]
It is not organized for profit.
Page 127 of 450

Stockholders’ May be anywhere unreasonable under t

meetings must be in within Philippine he circumstances
the principal office as territory as provided (SEC Opinion, [June
set forth in the AOI by BL. [Sec. 92] 8, 1995])
or, if not practicable,
in the city or
municipality where Residual assets are Generally, members
the principal office is to be distributed to are not allowed to
located [Sec. 50] the stockholders participate in
upon dissolution, distribution of assets.
One class of shares Right to vote of after payment of Assets are to be
must always have members of any creditors. Dissolution distributed to such
complete voting class may be denied is effected through persons, societies,
rights [Sec. 6,] in the AOI or BL the methods organizations or
[Sec. 88] provided in the Code. corporations as may
[Sec. 133] be specified in a plan
There is free transfer Transfer of of distribution. [Sec.
of shares. membership cannot 93]
Membership is not be made without
personal to the consent of the
stockholder. corporation. [Sec. 89] c. One Person Corporations
Note: Subject to Membership is One Person Corporations - A corporation
provisions on close personal. with a single stockholder. Only a natural
corporations. person, trust, or an estate may form a One
Person Corporation.
May always vote by Vote by proxy can be
proxy [Sec. 57] denied in the AOI or Banks and quasi-banks, pre-need, trust,
BL [Sec. 88] insurance, public and publicly-listed
companies, and non-chartered government-
Upon transfer of Membership may be owned and controlled corporations may not
share, seller is no terminated according incorporate as One Person Corporations.
longer part of to causes provided in
corporation. Transfer the BL. [Sec. 90] A natural person who is licensed to exercise a
may only be subject profession may not organize as a One Person
to restrictions noted Corporation for the purpose of exercising such
down in AOI, BL, and profession except as otherwise provided under
stock certificate, and special laws. [Sec. 116,]
must not be more
onerous than the d. Other Corporations
right of first refusal.
[Sec. 97] 1. Public Corporation
Public corporation – one formed or organized
Note: Transfer for the government of a portion of the state. Its
restrictions imposed i purpose is for the general good and welfare.
n a Shareholders Agr [Sec. 3, Act 1456]
eement may be bindi
ng upon the stockhol Beyond cavil, a GOCC has a personality of its
ders who are parties own, distinct and separate from that of the
thereto, since they ar government, and the intervention in a
e chargeable with not transaction of the Office of the President
ice, unless palpably through the Executive Secretary does not
Page 128 of 450

change the independent existence of a at least 2/3 of its voting stock or voting rights is
government entity as it deals with another owned or controlled by another corporation
government entity. [Polytechnic University of which is not a close corporation. [Sec. 95]
the Phils. v. CA, G.R. No. 143513 (2001)]
Any corporation may be incorporated as a
Not all corporations which are not GOCCs close incorporation, except:
are ipso facto to be considered private 1. Mining or oil companies;
corporations as there exists another distinct 2. Stock exchanges;
class of corporations or chartered institutions 3. Banks;
which are otherwise known as “public 4. Insurance companies;
corporations.” These corporations are 5. Public utilities;
treated by law as agencies or instrumentalities 6. Educational institutions; and
of the government which are not subject to 7. Corporations declared to be vested with
the tests of ownership or control and public interest. [Sec. 95]
economic viability but to different criteria
relating to their public purposes/interests or
Ordinary Stock
constitutional policies and objectives and Close Corporation
Corporation
their administrative relationship to the
government or any of its Departments or AOI must provide:
Offices. [Boy Scouts of the Philippines v. COA, a. Not to be held by
G.R. No. 177131 (2011)] more than a certain
number of
2. Private Corporation Stockholders, not
Private corporation – One formed for some to exceed 20
private purpose, benefit, aim or end [Sec. 3, Act b. Transfer
1456]; it may be either stock or non-stock, restrictions allowed
Has an AOI with a
government-owned or controlled or quasi- c. Shall not be listed,
general template
public. and shall not
[Sec. 14]
publicly offer
The test to determine whether GOCC or
private corporation: if a corporation is created Further, a corporation
by its own charter for the exercise of a public which is not a close
function, then GOCC; if by incorporation under corp. cannot own more
the general corporation law, then private than 75% of the
corporation. [Baluyot v. Holganza, G.R. No. outstanding capital
136374 (2000)] stock
3. Close Corporation No limit to number

Close corporation – One whose articles of of corporators Not more than 20,
incorporation provide that: allowed by according to AOI
1. All issued stock, exclusive of treasury authorized shares
shares, shall be held by persons not May list in
exceeding 20; Philippine Stock May not list on PSE
2. All issued stock shall be subject to one or Exchange (PSE)
more specified restrictions on transfer; and
3. The corporation shall not list in any stock Mining, Oil, Stock
exchange or make any public offering of In general, all
Exchange, Banks
any of its stock of any class. businesses may be
Insurance, Public
carried out by
Utility, Educational,
Notwithstanding the foregoing, a corporation corporation
Public Interest cannot
shall not be deemed a close corporation when
Page 129 of 450

be organized as close 4. Educational Corporation

corporation Educational corporation – One organized for
educational purposes. [Sec. 105]
Stockholders may
Powers exercised manage affairs directly, If organized as a non-stock corporation
by board, elected subject to the same Trustees of educational institutions organized
by stockholders rights and liabilities of as non-stock corporations shall not be less
directors than five (5) nor more than fifteen (15).
Provided, however, that the number of trustees
No limit to pre-emptive shall be in multiples of five (5). They shall
Pre-emptive right rights. Thus, includes classify themselves in such a way that the term
subject to Sec. 38 sale of treasury shares of 1/5 of them expires every year. [Sec. 106]
limitations and for acquisition of
properties If organized as a stock corporation
Appraisal right can be For institutions organized as stock
for any cause, and no corporations, the number and term of directors
need for unrestricted shall be governed by the provisions on stock
Appraisal right must corporations. [Sec. 106]
retained earnings
be for reasons
(URE), so long as the
listed in the Code 5. Religious Corporation
corporation would not
thereby become Classes of Religious Organization
insolvent (i) Corporation Sole – incorporated by one
person; and
Dissolution must Any stockholder may (ii) Religious Societies – incorporated by
comply with all the petition for dissolution more than one person. [Sec. 107]
requirements for stated grounds
Corporation sole – is one formed for the
SEC may not SEC may intervene in purpose of administering and managing, as
regulate if purpose management of corp. in trustee, the affairs, property and temporalities
not illegal case of deadlocks of any religious denomination, sect, or church,
by the chief archbishop, bishop, priest, rabbi, or
No classification of
May classify directors other presiding elder of such religious
directors
denomination, sect or church. [Sec. 108]
Shareholders, as
directors, directly elect A corporation sole has no nationality but for the
BOD elects officers purpose of applying nationalization laws,
officers, if provided by
AOI nationality is determined not by the nationality
of its presiding elder but by the nationality of its
No need for URE to members constituting the sect in the
acquire shares if Philippines. Thus, the Roman Catholic Church
Must have URE to
ordered by SEC in can acquire lands in the Philippines even if it is
buy own shares
intra-corporate headed by the Pope. [Roman Catholic
deadlock Apostolic, etc v. Register of Deeds of Davao
City, G.R. No. L-8451 (1957)]
An arbitration
agreement may be
Religious Society (Corporation Aggregate)
provided in the
Arbitration allowed Corporation aggregate – A religious
AOI/BL of unlisted
corporation incorporated by more than one
corporations [Sec.
person.
181]
Page 130 of 450

6. Eleemosynary Corporation complaint with the regulations of the RCC,

Eleemosynary corporation– One organized other laws, rules and regulations, the
for a charitable purpose. Commission shall issue the certificate of
incorporation. [Sec. 18]
7. Domestic Corporation
Domestic corporation – One formed, 13. De facto Corporation
organized, or existing under the laws of the De facto corporation – A corporation where
Philippines. there exists a flaw in its incorporation.
8. Foreign Corporation Rule on De Facto Corporations

Foreign corporation – One formed, organized The due incorporation of any corporation
or existing under any laws other than those of claiming in good faith to be a corporation under
the Philippines and whose law allows Filipino this Code, and its right to exercise corporate
citizens and corporations to do business in its powers, shall not be inquired into collaterally in
own country and state. [Sec. 140] any private suit to which such corporation may
be a party. Such inquiry may be made by the
9. Corporation Created By Special Laws Solicitor General in a quo warranto proceeding.
Or Charter [Sec. 19]
Corporation created by special laws or
charter - Corporations which are governed General Rule: The defect in the juridical
primarily by the provisions of the special law or personality of a corporation cannot be inquired
charter creating them. Corporation Code has into by private individuals, much less used as a
suppletory application. [Sec. 4] defense to avoid claims.
10. Subsidiary Corporation Exception: In quo warranto proceedings

Subsidiary corporation – One in which brought on behalf of the State where the main
control, in the form of ownership of majority of action is to question the validity or existence of
its shares, is in another corporation (the parent such juridical personality. [Villanueva]
corporation).
Requisites
11. Parent Corporation 1. There is an apparently valid statute under
Parent corporation – Its control lies in its which the corporation may be formed;
power, directly or indirectly, to elect the 2. There has been colorable compliance
subsidiary’s directors thus controlling its with the legal requirements in good faith;
management policies. and
3. There has been user of corporate
Holding company – a parent company which powers, i.e. the transaction of business as
has no other business aside from the holding if it were a corporation. [Campos]
of the shares of its subsidiaries, which it
controls. An association of persons cannot claim to be a
corporation if it has not been issued a
Investment company – a company which certificate of incorporation since that fact belies
holds shares in other corporations not for the the claim of good faith compliance with the
purpose of controlling them but merely to invest requirements of the law. [Hall v. Piccio, G.R.
therein. No. L-2598 (1950)]
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
Page 131 of 450

14. Corporation By Estoppel Comparison with Sec. 15, Rule 3 of the ROC
Corporation by estoppel – Where a group of
Corporation by Estoppel Sec.15, Rule 3
persons misrepresent themselves as a
corporation, they are subsequently estopped Clothes a non-entity with
The unincorporated
from claiming lack of corporate life in order to personality to sue a third
entity may only be
avoid liability. Also, a third party who had dealt person who seeks to
sued but has no
with an unincorporated association as a evade liability in favor of
personality to sue
corporation is precluded from denying its the former
corporate existence on a suit brought by the Does not concede
alleged corporation on the contract. Merely creates a fiction to the association
whereby an association of of persons the
persons is treated as a cover of a
EFFECTS OF CORPORATION BY
corporation only for corporate entity
ESTOPPEL purposes of even for such
exacting/enforcing liability purposes of
As to liability litigation
All persons who assume to act as a corporation Procedural remedy
For purposes of both
knowing it to be without authority to do so shall for drawing out the
protecting, as well as
be liable as general partners for all debts, persons who will
imposing liability against,
liabilities and damages incurred or arising as a truly answer for the
third parties liability
result thereof. [Sec. 20]
As to the defense of lack of corporate De facto Corporation vs. Corporation By

personality Estoppel
When such ostensible corporation is sued, it De facto Estoppel
shall not be allowed to use its lack of corporate
personality as a defense. [Sec. 20] Where all the requisites If any of the requisites
of a de facto are absent, then the
As to third party corporation are estoppel doctrine may
Anyone who assumes an obligation to an present, then the be applied only if any
ostensible corporation as such cannot resist defectively formed of the parties is
corporation will have estopped from
performance thereof on the ground that there
the status of a de jure defending:
was in fact no corporation. [Sec. 20]
corporation in all cases a. The defendant
brought by or against it, association is
The doctrine of estoppel applies to a third party except only as to the estopped from
only when he tries to escape liability on a State in a direct defending on the
contract from which he has benefited on the proceeding ground of its lack
ground of defective incorporation. It does not of capacity to be
apply to a third party who is not trying to escape sued, or
liability from the contract, but rather is the one b. The defendant
claiming from the contract. [International third party had
Express Travel v. CA, G.R. No. 119002 (2000)] dealt with the
plaintiff as a
corporation and is
deemed to have
admitted its
existence.
Page 132 of 450

3. Nationality of Corporations corporation specially in cases where foreign

ownership restrictions apply. [SEC OGC
The nationality of a corporation serves as a Opinion No. 16-19]
legal basis for subjecting an enterprise or its
activities to the laws, the economic and fiscal Control Test is applied in the following:
powers, and the various social and financial  Exploitation of natural resources - Only
policies of the State to which it is supposed to Filipino citizens or corporations whose
belong. [SEC OGC Opinion No. 22-07] capital stock is at least 60% owned by
Filipinos can qualify to exploit natural
Place of Incorporation Test resources. [Sec. 2, Art. XII, Const.]
Under the incorporation theory, a corporation is  Public Utilities - No franchise, certificate
a national of the country under whose laws it is or any other form of authorization for the
organized or incorporated. operation of a public utility shall be granted,
except to citizens of the Philippines or to
Domestic corporations – organized and corporations or associations organized
governed under and by Philippine laws. under the laws of the Philippines at least
60% of whose capital is owned by such
Foreign corporations – one formed, citizens. [Sec. 11, Art. XII, Const.]
organized or existing under laws other than  Mass Media (100%) - “The ownership and
those of the Philippines’ and whose laws allow management of mass media shall be
Filipino citizens and corporations to do limited to citizens of the Philippines, or to
business in its own country or State. It shall corporations, cooperatives or associations,
have the right to transact business in the wholly-owned and managed by such
Philippines after obtaining a license for that citizens.” [Sec. 11, Art. XVI, Const.]
purpose. [Sec. 140]  Advertising industry (70%) – “Only
Filipino citizens or corporations or
While the incorporation test serves as the associations at least seventy per centum of
primary test under Philippine jurisdiction, other the capital of which is owned by such
tests such as the Control Test and the citizens shall be allowed to engage in the
Grandfather Rule must also be applied in advertising industry.” [Sec. 11, Art. XVI,
determining compliance with the provisions of Const.]
the Constitution and of other laws on nationality  Any industry or activity where foreign
requirements. [SEC OGC Opinion No. 11-42] ownership is prohibited or restricted under
the Foreign Investment Negative List.
Control Test
The "control test" is still the prevailing mode of
determining whether or not a corporation is a
The nationality of the private corporation is
Filipino corporation, within the ambit of Sec. 2,
determined by the citizenship of the controlling
stockholders. Art. XII of the 1987 Constitution, entitled to
undertake the exploration, development and
utilization of the natural resources of the
Under the “liberal” Control Test, there is no
Philippines. When in the mind of the Court,
need to further trace the ownership of the 60%
there is doubt, based on the attendant facts
(or more) Filipino stockholdings of the Investing
and circumstances of the case, in the 60-40
Corporation since a corporation which is at
Filipino equity ownership in the corporation,
least 60% Filipino-owned is considered as
then it may apply the "grandfather rule." [Narra
Filipino. [Narra Nickel Mining & Development
Nickel Mining & Development Corp. v.
Corp. v. Redmont Consolidated Mines Corp.,
Redmont Consolidated Mines Corp., G.R. No.
G.R. No. 195580, April 21, 2014]
195580, April 21, 2014]
Absent any doubt, the Control Test shall be
used in determining the nationality of a
Page 133 of 450

THE GAMBOA RULINGS 2017 Gamboa Ruling (Roy III v Herbosa)

However, in 2017, the Supreme Court
2011 Gamboa Ruling explained its ruling in the 2012 Gamboa
The term "capital" in Sec. 11, Article XII of the decision. It stated that the resolution of the
1987 Constitution refers only to shares of stock 2012 Gamboa resolution, specifically its
entitled to vote in the election of directors, and dispositive portion, did not modify the 2011
thus in the present case only to common Gamboa decision.
shares, and not to the total outstanding capital
stock [common and non-voting preferred The Supreme Court clarified that the Gamboa
shares]. Decision already held, in no uncertain terms,
that what the Constitution requires is full and
For stocks to be deemed owned and held by legal beneficial ownership of 60% of the
Philippine citizens or Philippine nationals, mere outstanding capital stock, coupled with 60% of
legal title is not enough to meet the required the voting rights must rest in the hands of
Filipino equity. Full beneficial ownership of the Filipino nationals. Thus, for purposes of
stocks, coupled with appropriate voting rights is determining compliance with the
essential. Thus, stocks, the voting rights of constitutional or statutory ownership, the
which have been assigned or transferred to required percentage of Filipino ownership
aliens, cannot be considered held by Philippine shall be applied to both the (a) total number
citizens or Philippine nationals. [Gamboa v. of outstanding shares of stock entitled to
Teves, G.R. No. 176579 (2011)] vote in the election of directors; and (b) the
total number of outstanding shares of
2012 Gamboa Ruling stock, whether or not entitled to vote. [Jose
In 2012, the Supreme Court reversed its ruling, M. Roy III v. Chairperson Teresita Herbosa,
stating now that: G.R. No. 207246 (2017)]
The term “capital” is not limited to voting shares SEC Memorandum Circular No. 8 dated 20
since the constitutional requirement of at least May 2013
60% Filipino ownership applies not only to All corporations engaged in identified areas of
voting control of the corporation, but also to the activities or enterprises specifically reserved,
beneficial ownership of the corporation. It is wholly or partly, to Philippine Nationals by the
therefore imperative that such requirement Constitution, the FIA and other existing laws,
apply uniformly and across the board to all shall, at all times, observe the constitutional or
classes of shares, regardless of nomenclature statutory ownership requirement. For
and category, comprising the capital of a purposes of determining compliance
corporation. therewith, the required percentage of Filipino
ownership shall be applied to both:
Preferred shares, denied the right to vote in the 1. the total number of outstanding shares of
election of directors, are still entitled to vote on stock entitled to vote in the election of
the eight specific corporate matters under Sec. directors; AND
6. of the Corporation Code. [Note: Still Sec. 6 2. the total number of outstanding shares of
under the RCC] stock, whether or not entitled to vote in the
Thus, the 60-40 ownership requirement in favor election of directors. [Sec. 1-2, SEC MC
of Filipino citizens must apply separately to No. 8]
each class of shares, whether common, Note: This was the SEC Memorandum that was
preferred non-voting, preferred voting or any put in question in the Roy III v. Herbosa case,
other class of shares. [Gamboa v. Teves, G.R. and subsequently upheld by the Court as
No. 176579 (2012)] constitutional.
Page 134 of 450

Grandfather Rule Corp v. Redmont Consolidated Mines

Corp., G.R. No. 195580 (2014)].
The Grandfather Rule is a method of
determining the nationality of a corporation, The Grandfather Rule applies only when the
which is owned in part by another corporation, 60-40 Filipino foreign equity ownership is in
by breaking down the equity structure of the doubt (i.e. in cases where the joint venture
shareholder corporation. [de Leon] corporation with Filipino and foreign
stockholders with less than 60% Filipino
The Grandfather Rule is applied if doubt exists stockholdings [or 59%] invests in another joint
as to the locus of the “beneficial ownership” venture corporation, which is either 60-40%
and “control” of a corporation, even if the 60-40 Filipino-alien or the 59% less Filipino). [Narra
Filipino to foreign equity ratio is apparently met Nickel Mining and Dev. Corp v. Redmont
by the subject or investee corporation. [Narra Consolidated Mines Corp., G.R. No. 195580
Nickel Mining & Development Corp. v. (2014)]
Redmont Consolidated Mines Corp., G.R. No.
195580, April 21, 2014] Successive Application of the Tests
The Control Test can be applied jointly with the
It involves the computation of Filipino Grandfather Rule to determine the observance
ownership of a corporation in which another of foreign ownership restriction in nationalized
corporation, of partly-Filipino and partly-foreign economic activities. They are not incompatible
equity, owns capital stock. The percentage of ownership-determinant methods that can only
shares held by the second corporation in the be applied alternative to each other.
first is multiplied by the latter’s own Filipino
equity, and the product of these percentages is The Grandfather Rule, standing alone, should
determined to be the ultimate Filipino NOT be used to determine the Filipino
ownership of the subsidiary corporation. ownership and control in a corporation, as it
could result in an otherwise foreign corporation
The Grandfather Rule must be applied to rendered qualified to perform nationalized or
accurately determine the actual participation, partly nationalized activities.
both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity Hence, it is only when there is doubt, based
or business. [SEC Opinion re: Silahis Int’l Hotel on the Control Test, that the Grandfather
(1987)] Rule is applied.
i. If the subject corporation’s Filipino
“Doubt” equity falls below the threshold 60%,
"Doubt" refers to various indicia that the the corporation is immediately
"beneficial ownership" and "control" of the considered foreign-owned, in which
corporation do not in fact reside in Filipino case, the need to resort to the
shareholders, but in foreign stakeholders. The Grandfather Rule disappears.
following are indicators of doubt: ii. If a corporation that complies with the
a. That the foreign investors provide 60-40 Filipino to foreign equity
practically all the funds for the joint requirement, it can be considered a
investment undertaken by these Filipino Filipino corporation, and if there is no
businessmen and their foreign partner; doubt as to who has the “beneficial
b. That the foreign investors undertake to ownership” and “control” of the
provide practically all the technological corporation, there is no need for the
support for the joint venture; application of the Grandfather Rule.
c. That the foreign investors, while being iii. However, if there is doubt as to who
minority stockholders, manage the has the “beneficial ownership” and
company and prepare all economic viability “control” of the corporation (e.g. the
studies. [Narra Nickel Mining and Dev. Filipino-Owned corporation subscribed
Page 135 of 450

to 60% of the capital and the foreign 1. This legal fiction is used for ends
corporation subscribed to 40%, but the subversive to the policy and purpose
subscription of the former is only behind its creation or which could not have
nominally paid-up and such been intended by law to which it owes its
corporation entered into a financial being (i.e. to defeat public convenience,
assistance agreement with the foreign- justify wrong, protect fraud, defend crime,
owned corporation), the application of confuse legitimate legal or judicial issues,
the grandfather rule is necessary. used as a vehicle for the evasion of an
[Narra Nickel Mining and Dev. Corp v. existing obligation, perpetrate deception or
Redmont Consolidated Mines Corp., otherwise circumvent the law).
G.R. No. 195580 (2015)] 2. The corporate entity is a mere alter ego,
adjunct, or business conduit for the sole
4. Corporate Juridical benefit of the stockholders or of another
corporate entity. [Land Bank of the
Personality Philippines v. CA, G.R. No. 127181 (2001)]
The corporation is merely a farce, as it so
Corporate existence and juridical personality organized and controlled, and its affairs are
commences from the date the SEC issues a so conducted, as to make it merely an
certificate of incorporation under its official instrumentality, agency, conduit or adjunct
seal. [Sec. 18] of another corporation. [Lanuza et al v. BF
Corporation, et al, G.R. No. 174938 (2014)]
Persons desiring to incorporate must submit to
the SEC: Property
1. The intended corporate name for Corporate property is owned by the corporation
verification, and as a juridical person, and the stockholders
2. The articles of incorporation and bylaws. have no claim on corporate property as
[Sec. 18] owners. The latter only have a mere
Note: One person corporations are not expectancy or inchoate right to the same upon
required to submit and file bylaws. [Sec. 119] dissolution of the corporation and after all
corporate creditors have been paid. Such right
Doctrine of Separate Juridical is limited only to their equity interest (doctrine
Personality of limited liability).
Concept Although a stockholder’s interest in the

A corporation has a personality separate and corporation may be attached by his personal
distinct from that of its stockholders and creditor, corporate property cannot be used to
members and is not affected by the personal satisfy his claim. [Wise and Co. v. Man Sun
rights, obligations, and transactions of the Lung, G.R. No. 46997 (1940)]
latter.
A stockholder cannot bring an action for
General Rule: Due the corporation’s replevin to recover property of the corporation.
seaparate juridical personality, a stockholder The corporation, as an artifical person, must
may not be made to answer for acts or liabilities purchase, hold, grant, sell, and convey the
of said corporation, and vice-versa. [Land Bank corporate property, and do business, sue and
of the Philippines v. CA, G.R. No. 127181 be sued, plead and be impleaded, for corporate
(2001)] purposes, in its corporate name. [Button v.
Hoffman, 61 Wis. 20 (1884)]
Exceptions: The corporation’s seaparate
juridical personality cannot be invoked to Corporations are entitled to due process and
escape liability when: equal protection, but subject to the police
power of the state. insofar as their properties
Page 136 of 450

are concerned. [Smith, Bell & Co. v. Natividad, Nevertheless, a corporation can recover moral
40 Phil. 144 (1920)] They are also entitled to damages under Art 2219(7), if it was the victim
protection against unreasonable searches and of defamation. [Filipinas Broadcasting Network
seizures. [Bache & Co. v. Ruiz, 37 SCRA 823 v. Ago Medical and Educational Center, G.R.
(1971)] They are not, however, entitled to the No. 141994 (2005)]
privilege against self-incrimination. [Bataan
Shipyard & Engineering v. PCGG, 150 SCRA Note: Filipinas Broadcasting pointed out that
181 (1987)] the doctrine in Mambulao Lumber v. PNB
(1968), to the effect that a corporation may
Liability for Tort and Crime recover moral damages for besmirched
reputation, is obiter dictum.
Being an entity with a separate juridical
personality, a corporation can be held liable for Doctrine of Piercing the Corporate
torts committed by its officers under express Veil
direction from the stockholders or directors,
acting as a body. [PNB v. CA G.R. No. L-27155 A corporation will be looked upon as a legal
(1978)] entity as a general rule, and until sufficient
reason to the contrary appears but when the
The corporation itself cannot be arrested and notion of legal entity is used to defeat
imprisoned; thus, it cannot be penalized for a public convenience, justify wrong, protect
crime punishable by imprisonment. However, a fraud or defend crime, the law will regard
corporation may be charged and prosecuted the corporation as an association of
for a crime if the imposable penalty is a fine. persons.
[Ching v. Secretary of Justice,¸G.R. No.
164317 (2006)] Piercing the veil of corporate entity is an
Note: Sec. 170 of the RCC provides that for equitable remedy developed to address
violations of the Code, if it is committed by a situations where the separate corporate
corporation, the same may, after notice and personality of a corporation is abused or used
hearing, be dissolved in appropriate for wrongful purposes. [PNB v. Ritratto Group,
proceedings before the Commission. G.R. No. 142616 (2001)]
Since a corporation as a person is a mere legal Effect of Piercing the Corporate Veil
fiction, it cannot be proceeded against The corporation will be considered as a mere
criminally because it cannot commit a crime in association of persons. Thus, the liability will
which personal violence or malicious intent is directly attach to the stockholders or to the
required. Criminal action is limited to the other corporation. [China Banking v. Dyne-
corporate agents guilty of an act amounting Sem, G.R. No. 149237 (2006)]
to a crime and never against the
corporation itself. [Time Inc. v. Reyes, G.R. For the juridical personality of a corporation to
No. L-28882 (1971)] be disregarded, the wrongdoing must be
clearly and convincingly established, and
Recovery of Damages cannot be presumed. [Del Rosario v. NLRC,
G.R. No. 85416 (1990)]
A corporation, being an artificial person, has no
feelings, emotions nor senses; therefore, it Procedural Considerations
cannot experience physical suffering and One cannot pierce the veil in order to acquire
mental anguish, which are bases for moral jurisdiction over a party. [Pacific Rehouse
damages under Art. 2217 of Civil Code. [Manila Corp. v. CA, G.R. No. 199687 (2014)]
Electric Co. v. Nordec Philippines, 861 SCRA
515 (2018)].
Page 137 of 450

General Rule Banking v. Dyne-Sem, G.R. No. 149237

1. Both the individual sought to be held liable (2006)]
and the corporation must be impleaded at
the first instance; Note: Aside from this general guideline, no
2. The court must first acquire jurisdiction hard and fast rule can be laid down to cover all
over the corporation or corporations cases where the corporate entity theory cannot
involved before its or their separate be availed of, and each case will have to be
personalities are disregarded; and considered on its merits. [CAMPOS]
3. The doctrine of piercing the veil of
corporate entity can only be raised during a The Court has pierced the veil of corporate
full-blown trial over a cause of action duly fiction when it was used:
commenced involving parties duly brought 1. To defraud the government of taxes due it;
under the authority of the court by way of 2. To evade payment of civil liability;
service of summons or what passes as 3. By a corporation which is merely a conduit
such service. [Kukan v. Reyes, G.R. No. or alter ego of another corporation;
182729 (2010)]. 4. To evade compliance with contractual
obligations;
Exception: When an aggrieved laborer is 5. To evade financial obligation to its
unable to attach the properties of the employees;
corporation, the Labor Arbiter may thereafter 6. To ward off a judgment credit;
“amend” its decision by ordering that the 7. To avoid inclusion of corporate assets as
individuals responsible be impleaded and their part of the estate of the decedent; and
properties levied. [Guillermo v. Uson, G.R. No. 8. To cover up an otherwise blatant violation
198967 (2016)] of the prohibition against forum shopping.
A sheriff may not pierce the corporate veil, Only in these and similar instances may the veil
because such power only belongs to the court. be pierced and disregarded. [PNB v. Andrada
[Cruz v. Dalisay, A.M. No. R-181-P (1987)] Electric and Engineering Co., G.R. No. 142936
(2002)]
Grounds for Application of the
Doctrine Test in Determining Applicability
The veil of separate corporate personality may The doctrine has been applied in the following
be lifted/pierced: contexts:
1. When such personality is used to defeat
public convenience, to justify wrong, to 1. When the liability belongs to the
protect fraud or defend crime, or as a shield corporations but the plaintiff seeks to
to confuse the legitimate issues; hold the individual liable. Mere
2. When the corporation is merely an adjunct, controlling interest is not enough. There
a business conduit or an alter ego of must be a clear showing that the corporate
another corporation; or fiction is used to defeat public convenience,
3. Where the corporation is so organized and justify wrong, protect fraud or defend crime.
controlled and its affairs are so conducted [Koppel Phil v. Yatco, G.R. No. L-47673
as to make it merely an instrumentality, (1946)]
agency, conduit or adjunct of another
corporation; or Note the following badges of fraud: (1)
4. When the corporation is used as a cloak or used as a shield to further an end
cover for fraud or illegality, or to work subversive of justice; or (2) for purposes
injustice, or that could not have been intended by the
5. Where necessary to achieve equity or for law that created it; or (3) to defeat public
the protection of the creditors. [China convenience; (4) justify wrong; (5) protect
Page 138 of 450

fraud; or (6) defend crime; or (7) to e. the subsidiary has grossly inadequate
perpetuate fraud or confuse legitimate capital;
issues; or (8) to circumvent the law or f. the parent corporation pays the
perpetuate deception. salaries and other expenses or losses
of the subsidiary;
2. Where the liability is personal to the g. the subsidiary has substantially no
individual and he seeks to evade it by business except with the parent
hiding behind a corporate vehicle. corporation or no assets except those
conveyed to or by the parent
The veil of corporate fiction must be corporation;
pierced where the main purpose in forming h. in the papers of the parent corporation
the corporation was to evade the or in the statements of its officers, the
incorporator’s subsidiary civil liability subsidiary is described as a
resulting from the conviction of one of his department or division of the parent
employees. [Palacio v. Fely corporation or its business or financial
Transportation, G.R. No. L-15121 (1962)] responsibility is referred to as the
parent corporation’s own;
3. The instrumentality or alter ego rule. i. the parent corporation uses the
The elements of this modality are: property of the subsidiary as its own;
a. Control, not mere majority or j. the directors or executives of the
complete stock control, but subsidiary do not act independently in
complete domination, not only of the interest of the subsidiary but take
finances but of policy and business their orders from the parent corporation
practice in respect to the in the latter’s interest; and
transaction attacked so that the k. the formal ledger requirements of the
corporate entity as to this subsidiary are not observed. [PNB v.
transaction had at the time no Ritratto Group, G.R. No. 142616
separate mind, will or existence of (2001)]
its own;
b. Such control must have been used 4. Successor corporation rule - where a
by the defendant to commit fraud corporation feigns dissolution or cessation
or wrong, to perpetuate the but really continues in existence organized
violation of a statutory or other under another name.
positive legal duty, or dishonest
and unjust act in contravention of The application of the rule figures
plaintiffs’ legal rights; and prominently in labor cases where the prior
c. The aforesaid control and breach of entity seeks to evade its obligations to its
duty must proximately cause the laborers. Some telltale signs exhibited in
injury or unjust loss complained of. Claparols v. CIR [G.R. No. L-30822 (1975)]
include: (1) consecutive date of cessation
Circumstances rendering a subsidiary and commencement of subsequent entity;
an instrumentality (2) ownership and control by former
a. the parent corporation owns all or most controlling stockholder; and (3) turnover of
of the subsidiary’s capital stock; assets. On the other hand, in Livesey v.
b. the parent and subsidiary corporations Binswanger [G.R. No. 177493 (2014)], the
have common directors or officers; court pointed to the following: (1) same
c. the parent corporation finances the officers; (2) same office; and (3)
subsidiary; continuation of the business.
d. the parent corporation subscribes to all
the capital stock of the subsidiary or Note: SME v. De Guzman, G.R. No.
otherwise causes its incorporation; 184517 (2013) allows for the defense of
Page 139 of 450

good faith in case of assets sales between number of incorporators. Previously,

a predecessor and successor corporation: the incorporators must be no less than
five except for special corporations.
In asset sales or when the assets of the [Herbosa, 2019]
selling corporation are transferred to  A corporation with a single stockholder
another entity, the rule is that – is considered a One Person
a. The seller in good faith is authorized to Corporation
dismiss the affected employees, but is
liable for the payment of separation pay Qualifications
under the law 1. Any person, natural or juridical, may
b. The buyer in good faith is not obliged to organize a corporation [Sec. 10]
absorb the employees affected by the  Juridical entities (partnership, association
sale, nor is it liable for the payment of or corporation, singly or jointly with others)
their claims. The most that it may do, are now permitted to be incorporators, and
for reasons of public policy and social not merely initial subscribers under the Old
justice, is to give preference to the Code.
qualified separated personnel of the  The following are NOT allowed to organize
selling firm. as a corporation, except as provided under
special laws:
In stock sales, which takes place at a. Natural persons who are licensed
the shareholder level, the rule is that – to practice a profession
a. A shift in the composition of its b. Partnerships or associations
shareholders will not affect its organized for the purpose of
existence and continuity because practicing a profession
the corporation possesses a 2. Natural persons must be of legal age
personality separate and distinct 3. Each incorporator must subscribe to at least
from that of its shareholders one share of the capital stock
b. The corporation continues to be the
employer of its people and Note: The RCC removed the Philippine
continues to be liable for the residency requirement for the majority of the
payment of their just claims. incorporators.
c. The corporation or its new majority
shareholders are not entitled to Subscription Requirements
lawfully dismiss corporate
employees absent a just or No minimum capital requirement
authorized cause Under the Old Corporation Code (CC), at least
25% of the authorized capital stock as stated in
Note: This overturns the ruling in the AOI must be subscribed at the time of
Manlimos v. NLRC (1995) allowing incorporation, and at least 25% of the total
for the defense of good faith in subscription must be paid upon subscription
stock sales. [Sec 13, CC].
5. Capital Structure Section 13 has been removed in the Revised

Corporation Code, thus removing such
Number and Qualification of minimum capital requirements [Sec 12].
Incorporators However, the increase in capital remains
subject to the 25% subscription and 25%
Number: Not more than fifteen [Sec. 10] payment of subscription rule [Sec. 37].
 The Revised Corporation Code
removed the prescribed minimum
Page 140 of 450

Subscription Agreements becomes a stockholder upon

Any contract for the acquisition of unissued acceptance of the corporation of his
stock in an existing corporation or a corporation offer to subscribe whether the
still to be formed shall be deemed a consideration is fully paid or not
subscription contract. This is 2. By acquisition of already issued shares
notwithstanding the fact that the parties may  from an existing stockholder
refer to it as a purchase or some other contract.  purchase of TREASURY SHARES
[Sec. 59] from the corporation
Nature of Subscription Contracts Types of Subscription Contracts

A subscription contract is indivisible. 1. Pre-incorporation subscription - It is a
Consequently, where stocks were subscribed subscription for shares of stock of a
and part of the subscription contract price was corporation still to be formed.
not paid, the whole subscription shall be 2. Post-incorporation subscription - Entered
considered delinquent, and not only the into after incorporation. [Sundiang Sr. &
shares which correspond to the amount not Aquino, 2009]
paid.
Rules on Pre-Incorporation Subscription
Nevertheless, holders of subscribed shares not General Rule: A pre-incorporation
fully paid, which are not delinquent, shall have subscription is IRREVOCABLE:
all the rights of a stockholder. [Sec. 71]
 SEC has opined that the entire For a period of at least 6 months
subscription, although not yet fully paid, from the date of subscription;
may be transferred to a single transferee,
who as a result of the transfer must assume Exceptions
the unpaid balance. [SEC Opinion, 9 Oct. (1) All of the other subscribers consent to the
1995] revocation, or
 It is necessary, however, to secure the (2) The incorporation fails to materialize within
consent of the corporation because such 6 months or within a longer period as may
transfer contemplates a novation which be stipulated in the contract of subscription
under Art. 1293 (NCC) cannot be made
without consent of the creditor. After the submission of the Articles
of Incorporation to the SEC. [Sec.
Characteristics 60]
There can be a subscription only with reference
to unissued shares of the Authorized Capital Interest on Unpaid Subscription
Stock (ACS), in the following cases: General Rule: A stockholder is NOT liable to
1. The original issuance of the ACS at the time pay interest on his unpaid subscription. He is
of incorporation. not considered a corporate debtor for the
2. The opening, during the life of the unpaid amount of his subscription. [Herbosa,
corporation, of the portion of the original ACS 2019]
previously unissued; or
3. The increase in ACS achieved through a Exception: If expressly stipulated in the
formal amendment of the Articles and subscription contract. [Sec 65]
registration thereof with the SEC [Villanueva]
Corporate Term
Status as Shareholder
One may become a stockholder in a Perpetual existence
corporation in either of two ways: General Rule: The Revised Corporation Code
1. By SUBSCRIPTION to shares before or provides that a corporation shall have
after incorporation perpetual existence. The AOIs of existing
Page 141 of 450

corporations shall be deemed amended to Revival of Corporate Existence

reflect their perpetual term. Corporations with an expired term upon the
effectivity of the RCC, may apply with the SEC
Exception: The AOIs of corporations created for revival of its corporate existence.
under the effectivity of this Code provide for a
specific period. [Sec 11] Upon approval by the SEC, it will then issue a
certificate of revival giving it perpetual
A corporation already existing upon effectivity existence, with all its rights and privileges, and
of the RCC may opt out of the rule on subject to all its duties, debts and liabilities prior
perpetual existence by: to revival, unless it requests for a limited term.
i. Obtaining the vote of its stockholders [Sec. 11]
representing majority of the
Outstanding Capital Stock, without This benefit does not extend to corporations
prejudice to the appraisal right of whose dissolution was decreed by the SEC or
dissenting stockholders the courts.
ii. Notifying the Commission that it elects
to retain its specific corporate term, as Should the controlling stockholders or
provided in its AOI. [Herbosa, 2019] members wish to file the application, they must
represent the prescribed number of
It is presumed that shareholders, when they stockholders or members the application for
incorporated, assented to the perpetual voluntary dissolution (i.e. at least 2/3 of
character of their contract. Their corporate OCS/membership). Dissenting stockholders
relations will only end upon agreement may not exercise their appraisal right.
between or among the prescribed number of [Herbosa, 2019]
shareholders or involuntarily upon the court’s
or the SEC’s determination. Summary of changes [Herbosa, 2019]
For newly GR: Automatic perpetual term
Extending or shortening the corporate term established XPN: AOI provides a specific
General Rule: If a corporation wishes to corporations corporate term
extend its corporate term, it may amend its AOI GR: AOI shall be deemed
at least 3 years prior to the expiration of its amended to reflect a perpetual
term. Previously, such change should be made term
at least 5 years prior to the expiration. [Sec. 11] For existing XPN: The corporation opts out
corporations and elects to retain their
Exception: When there exists justifiable existing term; Requires
majority vote of
reasons for an earlier extension, to be
shareholders/members
determined by the SEC.
GR: May apply with the SEC
For for the revival of the
Requisites: A private corporation may extend
corporations corporation. Upon approval,
or shorten its term as stated in the articles of with expired they will have a perpetual term
incorporation when – terms XPN: Their application
1. Approved by a majority vote of the board of indicates a fixed term
directors or trustees, and GR: May file an application for
2. Ratified at a meeting by the stockholders or extension of such term 3 years
members representing at least two-thirds For
prior to the expiration of the
(2/3) of the outstanding capital stock or of corporations
term
its members with a
XPN: There are justifiable
limited term
reasons for an earlier
Note: In case of extension of corporate term, a extension
dissenting stockholder may exercise the right
of appraisal [Sec. 36]
Page 142 of 450

Classification of shares i. Preferred Shares vs. Common

Shares
Nature of Shares of Stock
Shares of stock are units into which the capital PREFERRED SHARES
stock is divided. A share of stock represents Stocks which are given, by the issuing
interest of the holder thereof to participate in corporation:
the management of the corporation, to share 1. Preference in dividends
proportionally in the profits of the business and, 2. Preference in the distribution of assets of
upon liquidation, to obtain an aliquot part of the corporation in case of liquidation, or
corporate assets after all corporate debts have 3. Preference in both dividends and
been paid. [Campos] distribution, or
4. Such other preferences as may be stated
Classes of Shares of Stock in the Articles of Incorporation which do not
The shares in stock corporations may be violate the Corporation Code.
divided into classes or series of shares, or both.
The rights, privileges, or restrictions, and the Note: Preferred shares may be issued only
stated par value of the class or series of shares with a stated par value. [Sec. 6]
must be indicated in the Articles of
Incorporation. [Sec. 6] Unless the right to vote is clearly withheld, a
preferred stockholder would have such right as
General Rule: No share may be deprived of it is an incident to stock ownership. The Board
voting rights [Sec. 6] of Directors may fix the terms and conditions
only when so authorized by the Articles of
Exceptions Incorporation and such terms and conditions
 Preferred non-voting shares shall be effective upon filing a certificate thereof
 Redeemable shares, with the SEC. [Sec. 6]
 Provided by the Code (e.g. Treasury
shares) Kinds of Preferred Shares
1. Preferred Shares as to Assets vs.
There shall always be a class/series of shares Preferred Shares as to Dividends
which have COMPLETE VOTING RIGHTS. 2. Cumulative vs. Non-Cumulative
[Sec. 6] 3. Participating vs. Non-participating
DOCTRINE OF EQUALITY OF SHARES Preferred Shares as to Assets vs. Preferred

Each share shall be EQUAL in ALL respects to Shares as to Dividends
every other share, except as otherwise a. Preferred shares as to assets –gives the
provided in the Articles of Incorporation and holder preference in the distribution of the
stated in the certificate of stock. [Sec. 6] assets of the corporation in case of
liquidation.
Classification of shares: b. Preferred shares as to dividends - entitled
(i) Preferred Shares vs. Common Shares to receive dividends on said share to the
(ii) Scope of Voting Rights Subject to extent agreed upon before any dividends at
Classification all are paid to the holders of common stock.
(iii) Founders’ Shares
(iv) Redeemable Shares
(v) Treasury Shares
(vi) Par value shares vs. No-par value shares
Page 143 of 450

Cumulative vs. Non-cumulative and entitles the shareholder to a pro rata

In the absence of any express stipulation, division of profits.” [CIR v. CA, 301 SCRA 152
preferred stocks are deemed cumulative. (1999)]
a. Cumulative - regardless of lack of profits in The owners thereof are entitled to

any given year, and lack of declaration of management (via exclusive right to vote) of the
dividends, the arrears for such year have to corporation and to equal pro-rata division of
be paid to the preferred stocks in a profits.
subsequent year (once profits are made)
before any dividends can be paid to the COMPARISON
common stocks. Common Preferred
b. Non-Cumulative – entitlement to receipt of Definition Stock which Stock which
dividends essentially depends on entitles the entitles the
declaration of such; types: owner to an holder to
(i) Discretionary – right to dividends in a equal pro rata some
particular year depends on the division of preference,
discretion of the board, even if the profits either in the
corporation has profits. dividends, or
(ii) Mandatory – a positive duty is in the
imposed to declare preferred distribution of
dividends every year that profits are assets, or
earned. both
(iii) Earned cumulative or dividend credit Value Depends if it Stated par
– board has discretion not to declare is a par or no- value [Sec. 6]
dividends, even if there were profits par value
in a certain year; however, once the share
board decides that dividends will be Voting Usually May be
declared, the preferred stockholders Rights vested with deprived of
have a right to arrears in dividends the exclusive voting rights
for the years when there were profits right to vote [Sec. 6]
but no dividend was declared. Preference No Has the first
upon advantage, crack at
Participating and Non-participating Liquidatio priority or dividends/prof
n preference its/
Unless otherwise provided, preferred stocks over any other distribution of
are non-participating. stockholder in assets
the same
a. Participating - those which, after getting class
their fixed dividend preference, share with
common stocks the rest of the dividends. ii. Scope of Voting Rights Subject to
b. Non-participating - those which, after Classification
getting their fixed dividend preference,
have no more right to share in the Only preferred and redeemable shares may be
remaining dividends with the common deprived of the right to vote [Sec. 6], except as
stocks. otherwise provided in the Revised Corporation
Code.
Common shares
A common stock represents the residual General Rule: Non-Voting Shares are not
ownership interest in the corporation. It is a entitled to vote. The law only authorizes the
basic class of stock ordinarily and usually denial of voting rights in the case of
issued without extraordinary rights or privileges redeemable shares and preferred shares,
Page 144 of 450

provided that there shall always be a class or The RCC made the redemption subject to the
series of shares which have complete voting rules and regulations that may be issued by
rights. [Sec. 6] SEC, in addition to what may be stipulated in
the AOI and Certificate of Stock. [Sec. 8]
Exception: These redeemable and preferred
shares, when such voting rights are denied, Limitations
shall nevertheless be entitled to vote on the 1. Redeemable shares may be issued only
following fundamental matters: when expressly provided for in the AOI
1. Amendment of the Articles of Incorporation [Sec. 8].
2. Adoption and amendment of by-laws 2. The terms and conditions affecting said
3. Sale, lease, exchange, other disposition of shares must be stated both in the AOI and
all or substantially all of the corporate in the certificate of stock [Sec. 8].
property 3. Redeemable shares may be deprived of
4. Incurring, creating or increasing bonded voting rights in the AOI. [Sec. 6]
indebtedness 4. The corporation is required to maintain a
5. Increase or decrease of capital stock sinking fund to answer for redemption price
6. Merger and consolidation if the corporation is required to redeem.
7. Investment of corporate funds in another [SEC-OGC Opinion No. 07-03]
corporation or business 5. The redeemable shares are deemed
8. Dissolution of the corporation retired upon redemption, unless otherwise
provided in the AOI (i.e., if the AOI allows
iii. Founders’ Shares for reissuance of such shares). [SEC Rules
Governing Redeemable and Treasury
Founders’ Shares are shares classified as Shares, 26 April 1982]
such in the AOI, which are given certain rights 6. Unrestricted retained earnings are NOT
and privileges not enjoyed by the owners of necessary before shares can be
other stocks. These may be given special redeemed, but there must be sufficient
preference in voting rights and dividend assets to pay the creditors and to answer
payments. for operations. [Republic Planters Banks v.
Agana, G.R. No. 51765 (1997)]
Where exclusive right to vote and be voted for 7. Redemption cannot be made if such
in the election of directors is granted, such right redemption will result in insolvency or
must be for a limited period not to exceed 5 inability of the corporation to meet its
years, subject to approval by SEC The 5-year obligations. [SEC Opinion, 24 Aug 1987]
period shall commence from date of approval
by SEC. Kinds of redeemable shares
Founder’s shares given the exclusive right to 1. Compulsory - the corporation is required to
vote and be voted for are not allowed to redeem the shares.
exercise that right in violation of the Anti- 2. Optional - the corporation is not mandated
Dummy Law and the Foreign Investment Act. to redeem the shares.
[Sec. 7]
v. Treasury Shares
iv. Redeemable Shares
Treasury Shares are shares which have been
Redeemable Shares are shares which may be issued and fully paid for, but subsequently re-
purchased by the corporation from the holders acquired by the issuing corporation by
of such shares upon the expiration of a fixed purchase, redemption, donation or through
period, regardless of the existence of some other lawful means. Such shares may
unrestricted retained earnings in the books of again be disposed of for a reasonable price
the corporation. fixed by the BOD. [Sec. 9]
Page 145 of 450

Shares may be reacquired without impairing Treasury Shares are not Retired Shares
the corporate trust fund. Reacquisition of Treasury shares do not revert to the unissued
shares is allowed, provided the corporation will shares of the corporation, but are regarded as
use assets up to the extent of its unrestricted property acquired by the corporation, which
retained earnings. [SEC Rules Governing may be reissued or resold at a price to be fixed
Redeemable and Treasury Shares, Sec 3, par by the Board of Directors. [SEC Rules
(1)(a)] Governing Redeemable and Treasury Shares,
CCP No. 1-1982]
It should be recalled that corporate earnings
are not part of the corporate trust fund. Note: Under the SEC Rules, the redemption of
[Herbosa, 2019] They are excluded from the redeemable shares does not necessarily make
definition of outstanding capital stock. them as treasury shares. Instead, it leads to
their automatic retirement or cancellation,
Pre-emptive right of stockholders in close unless the contrary is specifically stipulated.
corporations shall extend to reissuance of The articles thus provide advance notice to
treasury shares, unless otherwise provided in ordinary shareholders that the board may, at its
the AOI. [Sec. 101] own discretion, reissue redeemable shares
with the same features.
Delinquent stocks, which are stocks that have
not been fully paid, may become treasury Treasury shares distributed by way of
stocks upon bid of the corporation in absence dividends
of other bidders. [Sec.67] Treasury shares may also be distributed as
property dividends. In order for treasury shares
Limitations on treasury shares to be distributed as property dividends, the
1. They may be re-issued or sold again as amount of the retained earnings previously
long as it is for a reasonable price fixed by used to support their acquisition must not have
the BOD. been impaired by losses. Further, such
2. Cannot participate in dividends. retained earnings must not be used to justify
3. It has no voting right as long as such the distribution of treasury shares as property
shares remain in the Treasury. [Sec. 56] dividends. They may only be distributed out of
4. It cannot be represented during the other earnings of the corporation. [SEC-
stockholder’s meetings. OGC Opinion No. 12-06, dated April 20, 2012]
5. The amount of URE equivalent to the cost
of treasury shares being held shall be Note: Treasury shares are treated as assets of
restricted from being declared and issued the corporation. [Herbosa, 2019] Since a
as dividends. treasury share is a fully paid share re-acquired
by the corporation, it is not outstanding and
Note: When treasury shares are sold below its may be re-issued and resold. It cannot receive
par or issued value, there can be no watering dividends before the resale, because the
of stock because such watering of stock corporation cannot grant dividends to itself.
contemplates an original issuance of shares. [CIR vs Manning]
For both stock corporations and close vi. Par Value Shares vs. No-Par Value
corporations, the pre-emptive right of Shares
stockholders extends to the re-issuance or sale
treasury shares, unless the articles of Par value shares
incorporation provide otherwise. [Sec. 38 and These are shares with a stated or fixed value
101; SEC Opinion, 14 January 1993] set out in the Articles of Incorporation, which
remains the same regardless of the profitability
of the corporation. This gives rise to financial
stability, and is the reason why banks, trust
Page 146 of 450

corporations, insurance companies and 6. Incorporation and

building and loan associations must always be
organized with par value shares. Organization
Par value is minimum issue price of such share Promoter

in the Articles of Incorporation which must be
stated in the certificate. [Sec 61] Promoters – persons who, acting alone or with
others, take initiative in founding and
No par value shares organizing the business or enterprise of the
These are shares without a stated value in the issuer and receives consideration therefor.
AOI. They are without nominal value. They [Sec. 3.10, RA 8799, The Securities Regulation
may be issued for the amount stipulated in the Code]
AOI, or fixed by the Board. [Sec 61]
Promoter’s Contracts
Limitations on no par value shares [Sec. 6] Promoter’s contracts are those types of
1. Cannot have an issue price of less than contracts entered into in behalf of a corporation
P5.00 per share which is in the process of organization and
2. Once issued, they shall be deemed fully incorporation, and such fact is acknowledged
paid and non-assessable, and the holders as an essential ingredient in the process of
of such shares shall not be liable to the perfection. [Villanueva]
corporation or to its creditors in respect
thereto Liability of Promoter
3. Entire consideration received by the
corporation shall be treated as capital and General rule: the promoter binds himself
shall not be available for distribution as personally and assumes the responsibility of
dividends looking to the proposed corporation for
4. The AOI must state the fact that the reimbursement.
corporation issues no-par shares and the  The promoter binds himself to ensure that
number of shares the corporation, once formed, will ratify the
5. Cannot be issued as preferred stock contract entered into in its name.
6. Cannot be issued by banks, insurance  Otherwise, he becomes personally liable
companies, public utilities and building and for such contract in the event that
loan associations corporation does not ratify.
7. Cannot be issued by all corporations
authorized to obtain or access funds from Exceptions:
the “public” 1. Express or implied agreement to the
Note: A new addition in the Revised contrary
Corporation Code is the prohibition on the 2. Novation, not merely adoption or
issuance of no-par shares being imposed on all ratification, of the contract
corporations authorized to obtain or access
funds from the “public.” This prohibition is not Liability of Corporation for
anymore limited to banks, insurance Promoter’s Acts
companies, public utilities and building and
loan associations. General rule: A corporation is NOT bound by
the contract. A corporation, until organized, has
no life and no legal existence. It could not have
had an agent [the promoter] who could legally
bind it. [Cagayan Fishing Development Co.,
Inc. v. Sandiko, G.R. No. L-43350 (1937)]
Page 147 of 450

Exceptions: A corporation may be bound by the acquisition of unissued stock in a

the contract if it makes the contract its own by: corporation still to be formed.
 Adoption or ratification of the ENTIRE
contract after incorporation. Subscription for shares of stock of a
a. Novation or the intent to novate the original corporation still to be formed shall be
contract is required to adopt or ratify the irrevocable for a period of at least six (6)
pre-incorporation contract. [Campos] months from the date of subscription, UNLESS:
b. The Court’s ruling in Cagayan Fishing v. (1) All of the other subscribers consent to the
Teodoro Sandiko, that “a corporation revocation; or
should have a full and complete (2) The corporation fails to incorporate within
organization and existence as an entity the same period or within a longer period
before it can enter into any kind of a stipulated in the contract of subscription.
contract or transact any business”, is not
absolute. One of the exceptions No pre-incorporation subscription may be
recognized by American courts is that “a revoked after the articles of incorporation is
contract made by the promoters of a submitted to the Commission. [Sec. 60]
corporation on its behalf may be
adopted, accepted or ratified by the The rule on irrevocability of a pre-incorporation
corporation when organized”. [Rizal subscription agreement embodied in the RCC
Light v. PSC and Morong Electric (1968)] is a combination of the features of two theories:
 Acceptance of benefits under the contract  Contract Theory: Subscription agreement
with knowledge of the terms thereof. among several persons to take shares in
 Performance of its obligation under the a proposed corporation becomes a
contract. binding contract and is irrevocable from
the time of subscription unless cancelled
The contract must of course be one which is by all parties before acceptance of
within the powers of the corporation to enter. corporation.
[Builders’ Duntile Co. v. Dunn Mfg. Co. (1929)]  Offer Theory: Subscription agreement is
The corporation adopts the entire contract, not only a continuing offer to a proposed
only parts which are beneficial. [Campos] corporation, offer does not ripen into a
contract until accepted by the corporation
Subscription Contract when organized. [Villanueva]
A subscription contract is any contract for the Consideration for Stocks

acquisition of unissued stock in an existing
corporation, or corporation still to be formed. Stocks shall not be issued for a consideration
less than the par or issued price thereof.
Notwithstanding the fact that the parties refer Consideration for the issuance of stock may be:
to the contract as a purchase or some other (a) Actual cash paid to the corporation;
contract, it shall be deemed a subscription as (b) Property, tangible or intangible, which must
long as it involves the acquisition of unissued be:
stock in an existing corporation or a corporation i. Actually received by the
still to be formed. [Sec. 59] corporation; and
ii. Necessary or convenient for its use
Pre-incorporation Subscription and lawful purposes
Agreements iii. At a fair valuation equal to the par
or issued value of the stock issued;
A pre-incorporation subscription (c) Labor performed for or services actually
agreement is a type of promoter’s contract for rendered to the corporation;
(d) Previously incurred indebtedness of the
corporation;
Page 148 of 450

(e) Amounts transferred from unrestricted (b) between the stockholders and the State;
retained earnings to stated capital; (c) between the corporation and its
(f) Outstanding shares exchanged for stocks stockholders. [Villanueva]
in the event of reclassification or (d) among the stockholders [Campos]
conversion;
(g) Shares of stock in another corporation; The AOI must be filed with the SEC for the
and/or issuance of the Certificate of Incorporation. The
(h) Other generally accepted form of AOI and its amendments can be filed
consideration. [Sec. 61] electronically. [Sec. 13]
Invalid Consideration Contents

The following cannot be exchanged for the
issuance of shares of stock: [Sec. 61] The Articles of Incorporation must contain:
(1) Promissory notes (a) Corporate Name;
(2) Future service (b) Purpose Clause;
(c) Principal Office;
In case a subscription contract contemplates (d) Corporate Term if the corporation has not
unlawful consideration exchanged for shares of elected perpetual existence;
stock: (e) Incorporators;
 The subscription contract would be valid (f) Trustees/Directors;
and binding on both the corporation and (g) For stock corporations:
subscriber 1. The authorized capital stock,
 But the provision on such unlawful 2. Number of shares into which it is
consideration is deemed void, such that the divided,
subscription agreement would be 3. The par value of each share,
construed to be for cash, and the unpaid 4. Names, nationalities, and residence
amount treated as part of subscription addresses of the original subscribers,
receivables 5. Amount subscribed and paid by each
on the subscription, and
It would not be in consonance with the trust 6. A statement that some or all of the
fund doctrine to consider the subscription shares are without par value, if
contract void. [Villanueva] applicable
(h) For nonstock corporations:
Valuation of Consideration 1. Amount of its capital,
Where the consideration is other than actual 2. The names, nationalities, and
cash, or consists of intangible property, the 3. Residence addresses of the
valuation thereof shall initially be determined contributors, and
by the stockholders or the board of directors, 4. Amount contributed by each
subject to the approval of the Commission. (i) Other matters (including arbitration
[Sec. 61] agreement pursuant to Sec. 181). [Sec. 13]
Articles of Incorporation (AOI) (a) Corporate Name
The AOI is a basic contract document, defining See f. Corporate Name; Limitations on Use
the charter of the corporation, and serves as of Corporate Name
the basis by which to judge whether it exists for
legal purposes. (b) Purpose Clause
The charter of the corporation is a contract A corporation only has such powers as are
between 3 parties: expressly granted by law and the AOI. The
(a) between the State and the corporation;
Page 149 of 450

purpose clause confers and limits the powers chattel mortgage of shares should be
that a corporation may exercise. registered. [Chua Guan vs. Samahang
 Must indicate the specific PRIMARY and Magsasaka, G.R. No. L-42091 (1935)]
SECONDARY purposes if there are more
than one purpose; a non-stock corporation 1. Must be within the Philippines [Sec. 13 (c)];
may not include a purpose which would 2. Articles of Incorporation must specify both
contradict or change its nature as such. province or city or town where it is located;
[Sec. 13 (b)] 3. All corporations and partnerships applying
 Must not be patently unconstitutional, for registration with the SEC should state in
illegal, immoral, and contrary to their Articles of Incorporation or Articles of
government rules and regulations. [Sec. 16 Partnership the following:
(b)] a. Specific address of their principal
 Must not be for the purpose of practicing a office, which shall include, if
profession. [Sec. 10] feasible, the street number, street
name, barangay, city or
Prohibited Purposes and Activities municipality, and if applicable, the
A corporation may not be formed for the name of the building, number of the
purpose of practicing a profession like law, building, and name or number of
medicine or accountancy. [Sec. 10] the room or unit; and
b. Specific residence address of each
Under the present state of our law and incorporator, stockholder, director,
jurisprudence, a corporation cannot be trustee or partner. [SEC
organized for or engage in the practice of law Memorandum Circular No. 6, s.
in this country. 2016, Sec. 1]
 This cannot be subverted by employing 4. For foreign corporations, the principal
some so-called paralegals supposedly office address in the country of
rendering the alleged support services. incorporation, the specific address of the
 The remedy for the apparent breach of this resident agent, the present directors and
prohibition is the concern and province of officers, and the specific location
the Solicitor General who can institute the where it will hold office in the Philippines,
corresponding quo warranto action. [Ulep shall be indicated. [SEC Memorandum
v. The Legal Clinic, B.M. No. 553 (1993)] Circular No. 6, s. 2016, Sec. 2]
The RCC prohibits to foreign corporations from The residence of a corporation is the place
giving donations in aid of any political party or where its principal office is located, as stated in
candidate or for purposes of partisan political its Articles of Incorporation.
activity”. [Sec. 35(i)]  Thus, the proper venue is not the actual
principal office but that stated in its Articles
Reasons for requiring purpose clause: (a) of Incorporation.
investor will know what line of business he will  A corporation has no residence in the same
be risking his money on; (b) Ultra vires sense in which the term is applied to a
doctrine; (c) third persons dealing with natural person. [Hyatt Elevators v. Goldstar
corporation can determine if the corporation Elevators, G.R. No. 161026 (2005)].
can enter into a transaction. [Campos]
(d) Corporate Term
(c) Principal Office
See c. Corporate Term under 5. Capital
The principal office establishes the residence Structure
of a corporation, which is important in
determining the venue in an action by or (e) Number, Names, Citizenship and
against the corporation or the province where a Residences of the Incorporators
Page 150 of 450

See a. Number and Qualification of If STOCK corporation:

Incorporators under 5. Capital Structure Authorized capital stock (ACS) in lawful money
of the Philippines
(f) Number, Names, Citizenship and a. The number of shares into which the ACS
Residences of the is divided
Directors/Trustees b. If with par value shares, the par value of
each share [Sec. 13[h], Sec. 14[7]]
The minimum number of directors/trustees has c. Names, citizenship, residences of original
been repealed. [Sec. 13] subscribers
d. Amount subscribed and paid on each
Note: Ordinary corporations can have a subscription
minimum of two (2) directors, since only OPCs e. Fact that some or all shares are without par
can have one (1) director. value
Stock corporations: directors, not more than If NON-STOCK:

15 a. Amount of capital
b. Names, nationalities and residences of
Non-stock corporations: trustees contributors
a. Non-stock corporations whose articles or c. Amount contributed by each
by-laws may provide for more than 15
trustees. [Sec. 91] (h) Other Matters Included in the AOI
b. Banks may have up to 21 directors for
cases of mergers and consolidation. [Sec.  Classes of shares, as well as preferences
17, General Banking Act] or restrictions on any such class [Sec. 6].
c. For educational non-stock corporations:  Denial or restriction of pre-emptive right
i. Trustees may not be less than 5 [Sec. 38]
nor exceed 15;  Prohibition against transfer of stock which
ii. Number of trustees shall be in would reduce stock ownership to less than
multiples of 5. [Sec. 106] the required minimum in the case of a
nationalized business or activity [Sec.
Nationalized or Partially-Nationalized 14(11)]
Industries:  Arbitration agreement [Sec. 13; 181]
Aliens may be directors but only in such
number as may be proportional to their No transfer clause
allowable ownership of shares. If the foreign shareholdings of a landholding
corporation exceed 40%, it is not the foreign
(g) Capital/Capital Stock stockholders’ ownership of the shares which is
adversely affected but the capacity of the
“Outstanding capital stock” is the total shares corporation to own land – that is, the
of stock issued under binding subscription corporation becomes disqualified to own
contracts to subscribers or stockholders, land. No law disqualifies a person from
whether fully or partially paid, except treasury purchasing shares in a landholding corporation
shares. [Sec. 173] even if the latter will exceed the allowed foreign
equity, what the law disqualifies is the
corporation from owning land [J.G. Summit
Holdings, Inc. v. CA, G.R. No. 124293 (2005)
Page 151 of 450

Contents of AOI Comments
Under the RCC, incorporators undertake to change the name of the corporation
immediately upon receipt of notice from SEC that another corporation, partnership
or person has acquired a prior right to its use, that the name has been declared
Corporate name
not distinguishable from a name already registered or reserved for the use of
another corporation, or that it is contrary to law, public morals, good customs or
public policy. [Sec. 14(11)] See also SEC Memorandum Circular No. 13, s. 2019
A corporation can only have one (1) primary purpose. However, it can have
several secondary purposes.
A corporation has only such powers as are expressly granted to it by law & by its
articles of incorporation, those which may be incidental to such conferred powers,
Purpose clause
those reasonably necessary to accomplish its purposes & those which may be
incident to its existence.
Corporation may not be formed for the purpose of practicing a profession like law,
medicine or accountancy.
● Must be within the Philippines

● Must contain specific address of their principal office, which shall include, if
feasible, the street number, street name, barangay, city or municipality, and
if applicable, the name of the building, number of the building, and name or
Principal office
number of the room or unit
● Important in determining venue in an action by or against the corp., or on
determining the province where a chattel mortgage of shares should be
registered
● A corporation shall now have perpetual existence unless its AOI provides
Term of existence
otherwise. [Sec. 11]
● Names, nationalities & residences of the incorporators;

● Names, nationalities & residences of the directors or trustees who will act as
such until the first regular directors or trustees are elected;
Incorporators and
● Treasurer who has been chosen by the pre-incorporation
Directors/Trustees
subscribers/members to receive on behalf of the corporation, all
subscriptions /contributions paid by them See SEC Memorandum Circular
No. 26, s. 2019
● Amount of its authorized capital stock in lawful money of the Philippines

● Number of shares into which it is divided
● In case the shares are par value shares, the par value of each,
● Names, nationalities and residences of the original subscribers, and the
Capital stock amount subscribed and paid by each on his subscription, and if some or all
of the shares are without par value, such fact must be stated
● For a non-stock corporation, the amount of its capital, the names, nationalities
and residences of the contributors and the amount contributed by each
● The provision on minimum subscribed and paid up capital has been repealed.
Page 152 of 450

● Classes of shares into which the shares of stock have been

divided; preferences of & restrictions on any such class; and any denial or
restriction of the pre-emptive right of stockholders should also be expressly
stated in said articles.
● If the corporation is engaged in a wholly or partially nationalized business or
Other matters
activity, the AOI must contain a prohibition against a transfer of stock which
would reduce the Filipino ownership of its stock to less than the required
minimum.
● Transfer restrictions
● Arbitration agreement
ii. Non-amendable Items (e) Both the original and the amended articles
together must contain all the provisions
The following items are amendable under Sec. required by law to be set out in the articles
15: (f) If the corporation is governed by a special
1. Change of name of the Corporation; adding law, the amended articles must be
business name accompanied by a favorable
2. Adding to or changing the purpose/s recommendation of the appropriate
3. Change of principal office government agency to the effect that such
4. Change in the number of directors or amendment is in accordance with law.
trustees [Lopez]
5. Increase or decrease in authorized capital (g) Will take effect only:
stock [subject to Sec. 37]; re-classifying a. Upon their approval by the SEC by the
shares in the authorized capital stock; issuance of a certificate of filing of
6. Adding or revising transfer restrictions amended articles; OR
b. From the date of filing with the SEC if not
Requirements for Making Amendments to acted upon within 6 months from the date
AOI of filing for a cause not attributable to the
a. By a majority vote of the BOD or trustees; corporation
and
b. The vote or written assent of Procedure
a. 2/3 of the outstanding capital stock, a. The original and amended articles together
without prejudice to the appraisal shall contain all provisions required by law
right of dissenting stockholders in to be set out in the articles of incorporation
accordance with the provisions of b. The articles, as amended shall be indicated
this Code, by underscoring the change or changes
b. 2/3 of the members if it be a non- made
stock corporation. [Sec. 15] c. A copy shall be submitted to the SEC
unless the AOI provides for higher voting a. Duly certified under oath by the
requirements corporate secretary and a majority
of the directors or trustees
Limitations b. Stating the fact that the
(a) Requirements imposed by the Code or by amendment or amendments have
special laws been duly approved by the required
(b) Must be for a legitimate purpose vote of the directors or trustees and
(c) Must be approved by the directors/trustees stockholders or members
and the stockholders/members through the
vote requirement
(d) Appraisal Right (in specified cases)
Page 153 of 450

Non-Amendable Items microfinance operations pursuant

The following items state accomplished facts to Republic Act No. 8425 or the
(fait accompli), therefore, cannot be Social Reform and Poverty
amended: Alleviation Act.
1. The names, nationalities and residences
of the incorporators. Criteria for Allowable Corporate Names
 To allow an amendment would mean Under present law, no corporate name shall be
going against the definition of allowed by the Commission if it is:
“incorporators” in Sec. 5 a. Not distinguishable from that already
2. Treasurer-in-trust reserved or registered for the use of
3. First set of directors or trustees another corporation, or
4. Original stock subscriptions and paid-in b. Already protected by law, or
capital c. Used contrary to existing law, rules and
5. Place and date of execution regulations. [Sec. 17]
6. Witnesses [De Leon]
A name is not distinguishable even if it
Corporate Name; Limitations on contains one or more of the following:
Use of Corporate Name i. The word “corporation”, “company”,
“incorporated”, “limited”, “limited liability”,
The name of a corporation is essential not or an abbreviation of one of such words;
only for its existence as a juridical person, but and
also in the manner of dealing with it, and it ii. Punctuations, articles, conjunctions,
cannot be changed except in the manner contractions, prepositions, abbreviations,
provided for by law. [Villanueva] different tenses, spacing, or number of the
same word or phrase. [Sec. 17]
SEC Memorandum Circular No. 13 s. 2019
a) The corporate name shall contain the Note: Instead of being distinguishable, the old
word "Corporation" or "Incorporated," or criteria under the Sec. 18 of the OLD
the abbreviations "Corp." or "Inc." Corporation Code to determine whether or not
respectively; a corporate name should be allowed is whether
b) In the case of a One Person Corporation, it is “identical or deceptively or confusingly
the corporate name shall contain the word similar” to that of any existing corporation or
"OPC" either below or at the end of its which is “patently deceptive or patently
corporate name; confusing”.
c) The partnership name shall bear the word
"Company" or "Co." and if it is a limited If the SEC determines that a corporation’s
partnership, the word "Limited" or "Ltd.". name is not allowed, it may:
d) A professional partnership name may (1) Summarily order the corporation to
bear the word "Company," "Associates," or immediately cease and desist from using a
"Partners," or other similar descriptions; non-distinguishable name and require it to
e) The corporate name of a foundation shall register a new one,
use the word "Foundation"; (2) Cause the removal of all visible signages,
f) The corporate name of all non-stock, non- marks, advertisements, labels, prints and
profit corporations, including non- other effects bearing such corporate name.
governmental organizations and [Sec. 17]
foundations, engaging in micro finance
activities shall use the word "Microfinance" Business or trade name which is different from
or "Microfinancing" the corporate or partnership name shall be
- Provided that said corporations indicated in the articles of incorporation or
shall state in the purpose clause of partnership. A company may have more than
their AOI that they shall conduct
Page 154 of 450

one business or trade name. [SEC issues the certificate of incorporation under its
Memorandum Circular No. 13 s. 2019] official seal. [Sec. 18]
 Thereupon, the incorporators, stockholders
Change of Corporate Name or members, and their successors
A change of corporate name requires the constitute a body politic and corporate
amendment of the Articles of Incorporation under the name stated in the AOI, for the
which must be approved by: period of time mentioned therein. [Sec. 18]
(1) Majority vote of the board; and  AOIs do not become binding as the charter
(2) The vote or written assent of stockholders of the corporation unless they have been
holding 2/3 of the outstanding capital stock. filed and registered with, and certified by
[Sec. 16] the SEC.
Unless the Articles of Incorporation provides for DOCUMENTS TO BE FILED WITH SEC:
a higher voting requirement. a. Articles of Incorporation, and By-Laws (if
crafted prior to incorporation)
Amendment of a corporation’s Articles of b. Certification concerning the amount of
Incorporation to change its corporate name capital stock subscribed and/or paid
does not extinguish the personality of the
original corporation. It is the same corporation Note: Sec. 15 of the OLD Corporation Code
with a different name, and its character is not requiring that at least 25% of amount
changed. Consequently, the “new” corporation subscribed be paid, and a minimum paid-
is still liable for the debts and obligations of the up capital upon incorporation, was
“old” corporation. [Republic Planters Bank v. removed under the RCC.
CA, G.R. No. 93073 (1992)]
Note: SEC Resolution No. 0331 dated July
Use of Corporate Names of Dissolved 20, 2012 no longer requires a bank
Corporations certificate of deposit covering the paid-up
The name of a corporation or partnership that capital if payment for shares is made in
has been dissolved or whose registration has cash; where the capital stock is paid by a
been revoked shall not be used by another combination of cash and property, only the
corporation or partnership: portion paid by way of property will require
a. Within five years from the approval of the the submission of supporting documents.
dissolution; or
b. Within five (5) years from the date of c. Undertaking to change the corporate name
revocation, unless its use has been in case there is another person or entity
allowed at the time of the dissolution or with same or similar name that was
revocation by the stockholders, members previously registered (unless already
or partners who represent a majority of the incorporated in the Articles of
outstanding capital stock or membership of Incorporation)
the dissolved corporation or partnership, as
the case may be. [SEC Memo Circ. No. 13, d. Favorable recommendation from the
s. 2019] appropriate government agency that the
AOI or amendments thereto of banks,
Registration, Incorporation, and banking and quasi-banking institutions,
Commencement of Corporate preneed, insurance and trust companies,
Existence NSSLAS, pawnshops, and other financial
intermediaries, is in accordance with law.
A private corporation organized under the RCC [Sundiang and Aquino; Sec. 16]
commences its corporate existence and
juridical personality from the date the SEC
Page 155 of 450

ISSUANCE OF CERTIFICATE OF
INCORPORATION BY SEC
Effect: Commencement of corporate existence
and juridical personality. [Sec. 18]
Ground for revocation of certificate of

incorporation: If, after due notice and hearing,
the Commission finds that any provision of this
Code, rules or regulations, or any of the
Commission’s orders has been violated
- Depending on the extent of participation,
nature, effects, frequency and seriousness
of the violation. [Sec. 158]
GROUNDS FOR DISAPPROVING THE

ARTICLES OF INCORPORATION:
a. Does not substantially comply with form

prescribed
b. Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
c. The certification concerning the amount of
capital stock subscribed and/or paid is false
d. Required percentage of ownership of
Filipino citizens has not been complied with
when required by existing laws or the
Constitution. [Sec. 16]
SEC shall give the incorporators reasonable

time to correct or modify objectionable portions
of the articles or amendment. [Sec. 16]
Page 156 of 450

Steps in Incorporation
Steps Comments
Promoter:
● Brings together persons who become interested in the
enterprise
● Aids in procuring subscriptions and sets in motion the
Promotional Stage machinery which leads to the formation of the corporation itself
● Formulates the necessary initial business and financial plan
and, if necessary, buys the rights and property which the
business may need, with the understanding that the
corporation, when formed, shall take over the same
[See e. Articles of Incorporation under 6. Incorporation and

Organization]
Drafting Articles of ● Arbitration agreements may now be provided in the AOI
Incorporation (see Sec. 13) (see Sec. 181).
● The AOI and applications for amendments may be filed in
an electronic document
● AOI must be filed w/ the SEC & the corresponding fees paid
● Failure to file the AOI will prevent due incorporation of the
proposed corporation and will not give rise to its juridical
personality. It will not even be a de facto corporation.
● Under present SEC rules, the AOI once filed, will be published
Filing of Articles; Payment of
in the SEC Weekly Bulletin at the expense of the corporation
Fees
[SEC Circular # 4, 1982].
For corporations governed by special laws (banks, insurance
companies, public utilities and educational institutions) the AOI
must be accompanied by a favorable recommendation from the
appropriate government agency.
Process:
a. SEC shall examine them in order to determine whether they
are in conformity with law
b. If it is not, the SEC must give the incorporators a reasonable
time within which to correct or modify the objectionable
portions.
Grounds for rejection or disapproval of AOI: [Sec. 16]

Examination of Articles; a. AOI/amendment not substantially in accordance with the form
Approval or Rejection by SEC prescribed
b. Purpose/s are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations
c. The certification concerning the amount of capital stock
subscribed and/or paid is false
d. Required percentage of ownership has not been complied with
Favorable recommendation from the appropriate government
agency did not accompany the AOI or amendments thereto of
banks, banking and quasi-banking institutions, preneed, insurance
Page 157 of 450

and trust companies, NSSLAS, pawnshops, and other financial

intermediaries, is in accordance with law.
Certificate of Incorporation will be issued if:

a. SEC is satisfied that all legal requirements have been complied
with; AND
b. There are no reasons for rejecting or disapproving the AOI.
Issuance of Certificate of
It is only upon such issuance that the corporation acquires juridical
Incorporation
personality. [Sec. 18]
Should it be subsequently found that the incorporators were guilty

of fraud in procuring the certificate of incorporation, the same may
be revoked by the SEC, after proper notice and hearing.
Election of Directors or Trustees  By a resolution of the majority of the

board of directors; Provided, That the
When Elections are Held resolution shall only be applicable for
The time for holding the annual election of a particular meeting.
directors of trustees and the mode or manner  Notwithstanding the absence of a
of giving notice thereof are provided in the by- provision in the bylaws of the
laws. [Sec. 49] corporation [SEC Memorandum
Circular No. 6, s. 20]
Nomination
General Rule: Each stockholder or member The right to vote through such modes may be
shall have the right to nominate any director or exercised in corporations vested with public
trustee who possesses all of the qualifications interest, notwithstanding the absence of a
and none of the disqualifications set forth in this provision in the bylaws of such corporations.
Code. [Sec. 23]
Exception: When the exclusive right to A stockholder or member who participates

nominate directors or trustees is reserved for through remote communication or in absentia,
holders of founders’ shares under Section 7 of shall be deemed present for purposes of
the RCC. [Sec. 23] quorum.
Required Participation The election must be by ballot if requested by

At all elections of directors or trustees, there any voting stockholder or member.
must be present, either in person or through a
representative authorized to act by written Voting in Stock Corporations
proxy: Stockholders entitled to vote shall have the
(1) Stock Corporations: The owners of right to vote the number of shares of stock
majority of the outstanding capital stock standing in their own names in the stock books
(2) Non-Stock Corporations: A majority of the of the corporation at the time fixed in the
members entitled to vote. [Sec. 23] bylaws, or where the bylaws are silent, at the
time of the election.
Voting via Remote Communication/In
Absentia
The stockholders or members may also vote
through remote communication or in absentia:
Page 158 of 450

The said stockholder may: iv. Residence addresses [Sec. 25]

(a) vote such number of shares for as many
persons as there are directors to be When No Election is Held
elected; The meeting may be adjourned if:
(b) cumulate said shares and give one (1) (1) If no election is held; or
candidate as many votes as the number of (2) The owners of majority of the outstanding
directors to be elected multiplied by the capital stock or majority of the members
number of the shares owned; or entitled to vote are not present in person,
(c) distribute them on the same principle by proxy, or through remote
among as many candidates as may be communication or not voting in absentia at
seen fit: Provided, That – the meeting.
i. The total number of votes cast shall not
exceed the number of shares owned by Report to SEC
the stockholders as shown in the books After such adjournment, the non-holding of
of the corporation multiplied by the elections and the reasons therefor shall be
whole number of directors to be elected reported to the Commission within thirty (30)
ii. No delinquent stock shall be voted. days from the date of the scheduled election.
[Sec. 23] [Sec. 25]
Nominees for directors receiving the highest The report shall specify a new date for the
number of votes shall be declared elected. election, which shall not be later than sixty (60)
They shall perform their duties as prescribed by days from the scheduled date.
law, rules of good corporate governance, and
bylaws of the corporation. [Sec. 23] SEC Order to Hold Election
If no new date has been designated, or if the
Voting in Non-Stock Corporations rescheduled election is likewise not held:
General Rule: Members of nonstock (1) The Commission may summarily order that
corporations may cast as many votes as there an election be held.
are trustees to be elected but may not cast a. Upon the application of a
more than one (1) vote for one (1) candidate. stockholder, member, director or
trustee; and
Exception: Unless otherwise provided in the b. After verification of the unjustified
articles of incorporation or in the bylaws. [Sec. non-holding of the election
23] (2) The Commission shall have the power to
issue such orders as may be appropriate,
Nominees for trustees receiving the highest including orders directing the issuance of a
number of votes shall be declared elected. notice stating the:
They shall perform their duties as prescribed by a. Time and place of the election,
law, rules of good corporate governance, and b. Designated presiding officer, and
bylaws of the corporation. [Sec. 23] c. The record date or dates for the
determination of stockholders or
Report to SEC members entitled to vote. [Sec. 25]
Within thirty (30) days after the election of the (3) The shares of stock or membership
directors, trustees and officers of the represented at such meeting and entitled to
corporation, the secretary, or any other officer vote shall constitute a quorum for purposes
of the corporation, shall submit to the of conducting an election under this
Commission, the elected trustees’ and section.
officers’:  Notwithstanding any provision of the
i. Names articles of incorporation or bylaws to
ii. Nationalities the contrary.
iii. Shareholdings, and
Page 159 of 450

Election of Officers Adoption of By-Laws

Immediately after the election of directors, the
directors must formally organize by electing the By-laws are regulations, ordinances, rules or
corporate officers. They are tasked to carry out laws adopted by an association or corporation
the policies laid down by the Board, the AOI for its internal governance, including rules for
and the by- laws. [Sec. 24] routine matters such as calling meetings. [SMC
v. Mandaue, G.R. No. 152356 (2005)]
Who are the Corporate Officers
. President – must be a director; May be done either:
a. Treasurer – may or may not be a director; 1. Prior to incorporation - approved and
must be a resident signed by all the incorporators and
b. Secretary – need not be a director unless submitted to SEC together with Articles of
required by the by-laws; must be a citizen Incorporation; or
and resident of the Philippines; and 2. After incorporation - The requirement of
c. Other officers as may be provided in the by- adoption of by-laws one (1) month after
laws. receipt of the notice of issuance of
d. Compliance officer – only for corporations certificate of incorporation has been
vested with public interest. [Sec. 24] deleted in the RCC. [Sec. 45]
Note: Any 2 or more positions may be held Nature: It is a product of agreement of the
concurrently by the same person, EXCEPT that stockholders or members. [Campos]
no one shall act as president and secretary or
as president and treasurer at the same time, Function: It establishes the rules for internal
unless otherwise allowed in the Code. [Sec 24] government of the corporation [Campos]. It
also regulates the affairs and relationship
The number of officers is not limited to those between and among stockholders, BOD and
three enumerated in Sec. 24. A corporation corporation. [Lopez]
may have such other officers as may be
provided for by its by-laws. [Garcia v. Eastern Note: OPCs are not required to have by-laws.
Telecommunications Philippines, Inc., G.R.
No. 173115 (2009)]. EFFECT OF FAILURE TO FILE THE BY-
LAWS
Qualifications of Corporate Officers
President Secretary Treasurer Does not imply the "demise" of the
corporation. By-laws may be required by law
Director YES NO NO for an orderly governance and management of
corporations but they are not essential to
Filipino NO YES NO
Citizen* corporate birth. Nonetheless, failure to file them
within the period required by law by no means
Residency NO YES YES tolls the automatic dissolution of a corporation.
[Loyola Grand Villas Homeowners Association
Prohibited Secretary President President v. CA G.R. No. 117188 (1997)]
concurrent or
positions
Treasurer Note: Sec. 21 on the effect of failure to formally
* subject to rule if corporation is engaged in a organize within 5 years from incorporation, the
nationalized or partially-nationalized industry corporation’s corporate powers cease and the
corporation is deemed dissolved. Organization
Additional qualifications of officers may be includes: the filing and approval of by-laws with
provided for in the by-laws. [Sec. 46(f)] the SEC and the election of directors and
officers. [Campos]
Page 160 of 450

d. The modes by which a stockholder,

REQUISITES OF VALID BY-LAWS member, director, or trustee may attend
meetings and cast their votes;
Approval requirement: Must be approved by e. The form for proxies of stockholders and
the affirmative vote of the stockholders members and the manner of voting them;
representing at least a MAJORITY of the f. The directors’ or trustees’ qualifications,
outstanding capital stock, or majority of duties and responsibilities, the guidelines
members. [Sec. 45] for setting the compensation of directors or
trustees and officers, and the maximum
If filed pre-incorporation: Must be approved number of other board representations that
and signed by all incorporators. an independent director or trustee may
have which shall, in no case, be more than
Record-Keeping: Must be kept in the principal the number prescribed by the Commission;
office of the corporation, subject to inspection g. The time for holding the annual election of
by any director, trustee, stockholder or member directors or trustees and the mode or
of the corporation in person or by a manner of giving notice thereof;
representative at reasonable hours on h. The manner of election or appointment and
business days. [Sec. 45] the term of office of all officers other than
directors or trustees;
Filing with SEC: A copy of the by-laws duly i. The penalties for violation of the bylaws;
certified by a majority of the directors or j. In the case of stock corporations, the
trustees and countersigned by the secretary of manner of issuing stock certificates; and
the corporation, shall be filed with the k. Such other matters as may be necessary
Commission and attached to the original for the proper or convenient transaction of
articles of incorporation. [Sec. 45] its corporate affairs for the promotion of
good governance and anti-graft and
No provision of the by-laws can be adopted if it corruption measures.
is contrary to law. Since the provision in l. An arbitration agreement may be provided
question is contrary to law, the fact that for in the bylaws pursuant to Section 181 of
fifteen years it has not been questioned or RCC. [Sec. 46]
challenged but, on the contrary, appears to
have been implemented by the members of the Note: In close corporations - restrictions on
association cannot forestall a later challenge to the right to transfer shares must appear in both
its validity. [Grace Christian High School v. CA, the articles of incorporation and in the by-laws
G.R. No. 108905 (1997)] as well as in the certificate of stock; otherwise,
restriction shall not be binding on any
Contents of By-laws purchases of good faith. [Sec. 97]
Matters Usually Found in By-Laws Matters That Cannot Be Provided for in the
a. The time, place and manner of calling and By-laws (must be in the AOI)
conducting regular or special meetings of ● Classification of shares of stock and
the directors or trustees; preferences granted to preferred shares
b. The time and manner of calling and ● Provisions on founder’s shares
conducting regular or special meetings and ● Providing for redeemable shares
mode of notifying the stockholders or ● Provisions on the purposes of the
members thereof; corporation
c. The required quorum in meetings of ● Providing for the corporate term of
stockholders or members and the manner existence
of voting therein; ● Capitalization of stock corporations
● Corporate Name
● Denial of pre-emptive rights [Villanueva]
Page 161 of 450

ii. Binding Effects Effectivity of Amended By-Laws

The amended or new bylaws shall only be
When Binding: ONLY from date of issuance of effective upon the issuance by the Commission
SEC of a certification that the by-laws are not of a certification that the same is in accordance
inconsistent with the Code [Sec. 45] Pending with this Code and other relevant laws. [Sec.
such approval, they cannot bind stockholders 47]
or corporation.
Effects of Non-Use of Corporate
Effect on third parties: Mere internal rules Charter
among stockholders cannot affect or prejudice
3rd persons who deal with the corporation Failure to Organize
unless they have knowledge of the same If a corporation does not formally organize and
[China Banking Corp v CA G.R. No. 117604 commence its business within five (5) years
(1997)]. from the date of its incorporation, its certificate
of incorporation shall be deemed revoked as
iii. Amendments of the day following the end of the five (5) year
period. [Sec. 21]
Effected by: majority vote of the members of
the board and majority vote of owners of the Continuous Inoperation
Outstanding Capital Stock or members, in a If a corporation has commenced its business
meeting duly called for the purpose. [Sec. 47] but subsequently becomes inoperative for a
Unless a higher requirement is provided in the period of at least five (5) consecutive years, the
by-laws Commission may, after due notice and hearing,
place the corporation under delinquent
Delegation to BOD of power to amend status. [Sec. 21]
By vote of stockholders representing 2/3 of the ● A delinquent corporation shall have a
Outstanding Capital Stock or 2/3 of the period of two (2) years to resume
members. [Sec. 47] operations and comply with all
requirements that the Commission shall
Delegation to BOD may be revoked prescribe.
Any power delegated to the BOD or trustees to ● Upon compliance by the corporation, the
amend or repeal any by-laws or adopt new by- Commission shall issue an order lifting the
laws shall be considered as revoked whenever delinquent status.
stockholders owning or representing a majority ● Failure to comply with the requirements
of the outstanding capital stock or a majority of and resume operations within the period
the members in non-stock corporations, shall given by the Commission shall cause the
so vote at a regular or special meeting. [Sec. revocation of the corporation’s certificate
47] of incorporation. [Sec. 21]
Filing with SEC 7. Corporate Powers

Whenever the bylaws are amended or new
bylaws are adopted, the corporation shall file
General Powers; Theory of General
with the Commission:
(1) Such amended or new bylaws; and, Capacity [Sec. 35]
(2) If applicable, the stockholders’ or
members’ resolution authorizing the General Powers
delegation of the power to amend Every corporation has the power and capacity:
and/or adopt new bylaws, duly certified (a) To sue and be sued in its corporate
under oath by the corporate secretary name;
and a majority of the directors or (b) To have perpetual existence;
trustees. [Sec. 47]
Page 162 of 450

- Unless the certificate of giving donations in aid of any

incorporation provides otherwise political party or candidate or for
(c) To adopt and use a corporate seal; purposes of partisan political
(d) To amend its articles of activity.
incorporation in accordance with the (j) To establish pension, retirement,
provisions of this Code; and other plans for the benefit of its
(e) To adopt bylaws, and to amend or directors, trustees, officers, and
repeal the same in accordance with employees; and
this Code; (k) To exercise such other powers as
- Must not contrary to law, morals or may be essential or necessary to
public policy carry out its purpose or purposes as
(f) In case of stock corporations: To issue stated in the articles of incorporation.
or sell stocks to subscribers and to [Sec. 35]
sell treasury stocks in accordance with
the provisions of this Code; and A corporation has:
In case of non-stock corporations: To i. Express Powers – such powers as
admit members to the corporation; are expressly granted by law and its
(g) To purchase, receive, take or grant, articles of incorporation;
hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with ii. Implied Powers – those reasonably
such real and personal property, necessary to accomplish its purposes,
including securities and bonds of other as stated in its articles of incorporation;
corporations; and
- As the transaction of the lawful Note: Such implied powers are deemed to
business of the corporation may exist because of the following provisions –
reasonably and necessarily require  “Except such as are necessary or
- Subject to the limitations incidental to the exercise of the powers
prescribed by law and the so conferred” [Sec. 44]
Constitution  “Such powers as are essential or
(h) To enter, with natural and juridical necessary to carry out its purpose or
persons, into a: purposes as stated in the Articles of
i. Partnership, (Note: New in the Incorporation” – catch-all phrase.
RCC) [Sec. 35(k)]
ii. Joint venture, (Note: New in the
RCC) iii. Incidental Powers – those which may
iii. Merger, be incident to its existence as a juridical
iv. Consolidation, or entity [Pilipinas Loan v. SEC, 356
v. Any other commercial SCRA 193 (2001)]
agreement
(i) To make reasonable donations, The Theory of General Capacity states that a
including those for the public welfare or corporation is said to hold such powers as are
for hospital, charitable, cultural, not prohibited or withheld from it
scientific, civic, or similar purposes: by general law.
- Provided, That no foreign
corporation shall give donations in
aid of any political party or
candidate or for purposes of
partisan political activity;
- Note: Under OLD Corporation
Code, both domestic and foreign
corporations were prohibited from
Page 163 of 450

Specific Powers; Theory of Requirements

Specific Capacity [Secs. 36-43, 15] (1) Approval by majority vote of the board of
directors or trustees, and
The Theory of Specific Capacity states that (2) Ratification at a meeting by the
the corporation cannot exercise powers except stockholders or members representing at
those expressly/impliedly given. least two-thirds (2/3) of the outstanding
Under the Theory of Specific Capacity, the capital stock or of its members.
specific powers of a corporation are as (3) Notice Requirement – Written notice of
follows: the proposed action and the time and place
(a) Power to extend or shorten corporate of the meeting shall be:
term [Sec. 36] i. Sent to stockholders or members at
(b) Power to increase or decrease capital their respective place of residence as
stock, or incur, create, increase bonded shown in the books of the corporation,
indebtedness [Sec. 37] and
(c) Power to deny pre-emptive rights [Sec. ii. Either:
38] a. Deposited to the addressee in the post
(d) Power to sell or dispose corporate office with postage prepaid, served
assets [Sec. 39] personally, OR
(e) Power to acquire own shares [Sec. 40] b. Sent electronically in accordance with the
(f) Power to invest corporate funds in rules and regulations of the Commission on
another corporation or business, or for any the use of electronic data messages, when
other purpose [Sec. 41] allowed in the by-laws or done with the
(g) Power to declare dividends [Sec. 42] consent of the stockholder. [Sec. 36]
(h) Power to enter into management
contract [Sec. 43] Exercise of Appraisal Right
(i) Power to amend AOI [Sec. 15] In case of extension of corporate term, a
dissenting stockholder may exercise the right
Power to Extend or Shorten the of appraisal under the conditions provided in
this Code. [Sec. 36]
Corporate Term [Sec. 36]
An extension of corporate term actually
A private corporation may extend or shorten its
novates the corporate contract with each
term as stated in the articles of incorporation.
shareholder by extending the corporate
[Sec. 36]
relationship beyond the original term.
Perpetual existence under the RCC applies to
Shortening the corporate term DOES NOT
existing corporations. AOIs shall be deemed
trigger the right of appraisal because there
amended to reflect its perpetual term, unless
would be no violation of the original
the corporation elects to retain its limited term
contractual intent, since shortening would
[Herbosa, 2019].
mean the early realization of the value of the
shares of a dissenting stockholder with the
When Exercised dissolution of the corporation. [Villanueva]
Period to extend the corporate term has been
reduced by the RCC to three years before
expiration.
When the term expires, it is not ipso facto
dissolved but may apply for a revival of its
corporate existence. [Divina, 2020]
Page 164 of 450

Power to Increase or Decrease meeting and the purpose for said meeting
Capital Stock or Incur, Create, must be:
Increase Bonded Indebtedness i. Sent to the stockholders at their places
of residence as shown in the books of
[Sec. 37] the corporation and
ii. Served on the stockholders personally,
A corporation may increase or decrease its
OR through electronic means
capital stock or incur, create or increase any
recognized in the corporation’s bylaws
bonded indebtedness. [Sec. 37]
and/or the Commission’s rules as a
valid mode for service of notices.
Power to Increase or Decrease Capital (4) Certification Requirement – A certificate
Stock
must be signed by a majority of the
An increase or decrease of the capital stock
directors of the corporation and
amends the underlying contractual
countersigned by the chairperson and
relationships between and among members of
secretary of the stockholders’ meeting,
the corporation.
setting forth:
(a) That the requirements of this
Aside from the requisites in Sec. 37, when the
section have been complied with;
capital stock is increased or decreased, the
(b) The amount of the increase or
provisions of Sec. 15 on the amendment of the
decrease of the capital stock;
articles of incorporation must also be complied
(c) In case of an increase of the capital
with. [Villanueva]
stock:
i. The amount of capital stock or
Power to Incur, Create, or Increase Bonded number of shares of no-par
Indebtedness
stock thereof actually
“Bonded indebtedness” are long term debts of subscribed,
the corporation, secured by mortgage on real
ii. The names, nationalities and
or personal property of the corporation, which
addresses of the persons
are:
subscribing,
 Structured in denominated units of iii. The amount of capital stock or
indebtedness number of no-par stock
 Intended to eventually circulate within subscribed by each, and
the investing public as securities, iv. The amount paid by each on the
representing units of investment subscription in cash or property,
Thus, the power to incur, create, or increase or the amount of capital stock or
bonded indebtedness is a form of distributing number of shares of no-par
liability securities to the public, and constitutes stock allotted to each
an aspect of the inherent power of every stockholder, if such increase is
corporation to borrow or to incur loan for the purpose of making
obligations. [Villanueva] effective stock dividend therefor
authorized;
Requirements [Sec. 37] (d) Any bonded indebtedness to be
(1) Approval by a majority vote of the board incurred, created or increased;
of directors or trustees (e) The amount of stock represented at
(2) Approval by two-thirds (2/3) of the the meeting; and
outstanding capital stock or at least (f) The vote authorizing the increase
two-thirds (2/3) of the members at a or decrease of the capital stock, or
stockholders’ meeting duly called for the
the incurring, creating or increasing
purpose
of any bonded indebtedness.
(3) Notice Requirement – Written notice of
(5) Sworn Statement of the Treasurer – A
the time and place of the stockholders’
sworn statement of the corporation’s
Page 165 of 450

treasurer must accompany the filing of the Copies of the certificate of the
certificate, and it must show that: increase/decrease in capital shall:
(a) At least twenty-five percent (25%) of the (1) Be kept on file in the office of the
increase in capital stock has been corporation and
subscribed; and (2) Filed with the Commission and
(b) At least twenty-five percent (25%) of the (3) Attached to the original articles of
amount subscribed has been paid in incorporation. [Sec. 37]
actual cash to the corporation or that
property, the valuation of which is equal to Exercise of Appraisal Right
twenty-five percent (25%) of the In Cases of Increase or Decrease of Capital
subscription, has been transferred to the Sock
corporation The right of appraisal can be exercised in
Note: A treasurer’s affidavit is required in cases of increase of capital stock because it
an increase of capital stock, not in a has the potential effect of diluting the
decrease in capital stock. proportionate interest of a stockholder in the
(6) Prior SEC Approval – The application with corporation.
the Commission shall be made within six
(6) months from the date of approval of the Even with the existence of the pre-emptive
board of directors and stockholders, which right, there is no guaranty that the stockholder
period may be extended for justifiable can preserve his proportional interest, since he
reasons. might not have the financial resources to
(7) Prior PCC Approval – Where appropriate, exercise his pre-emptive right on the increase.
prior approval of the Philippine Competition
Commission is required for any increase or The right of appraisal CANNOT be exercised in
decrease in the capital stock or the cases of decrease in capital stock since the
incurring, creating or increasing of any decrease would result in returning part of the
bonded indebtedness investments of the stockholders, including
(8) SEC Registration – Applicable only to dissenting stockholders. [Villanueva]
bonds issued by a corporation.
In Cases of Incurring, Creating or Increasing
After approval and the issuance by the Bonded Indebtedness
Commission of its certificate of filing: The appraisal right CANNOT be exercised by
(1) The capital stock shall be deemed dissenting stockholders when the corporation
increased or decreased; and validly incurs, creates, or increases bonded
(2) The incurring, creating or increasing of any indebtedness.
bonded indebtedness authorized, as the
certificate of filing may declare To allow them to do so would drain the financial
Provided, That: resources of the corporation, which is contrary
(a) The Commission shall not accept for to the purpose for which the power is
filing any certificate of increase of exercised, which is to raise funds for corporate
capital stock unless accompanied by a affairs. [Villanueva]
sworn statement of the treasurer (with
the abovementioned contents) Power to Deny Pre-Emptive Rights
(b) No decrease in capital stock shall be [Sec. 38]
approved by the Commission if its effect
shall prejudice the rights of corporate Preemptive right
creditors. [Sec. 37] The preferential right of shareholders to
subscribe to all issues or disposition of shares
of any class in proportion to their present
shareholdings. [Sec 38] The purpose of pre-
emptive right is to enable the shareholder to
Page 166 of 450

retain his proportionate control in the b. Sent electronically in accordance

corporation and to retain his equity in the with the rules and regulations of the
surplus. Commission on the use of
electronic data messages, when
General Rule: All shareholders of a stock allowed in the by-laws or done with
corporation have the preemptive right to the consent of the stockholder.
subscribe to all issues or disposition of shares
of any class, in proportion to their respective Denial of preemptive right
shareholdings. The AOI may deny pre-emptive right. It may
also be denied when circumstances call for its
Exception: If such right is denied by the AOI or denial, specifically when:
an amendment thereto. [Sec. 38]  Shares to be issued are to comply with
laws requiring stock offerings or minimum
“All issues” of shares extends to BOTH stock ownership by the public; [Sec. 38]
issuances of:  Shares to be issued are in good faith with
 New shares resulting in an increase in the approval of the stockholders
capital stock, and representing 2/3 of the OCS in exchange
 Previously unsubscribed shares which for property needed for corporate
formed part of the existing capital purposes; [Sec. 38]
stock. [Herbosa, 2019; SEC Opinion  Shares to be issued are issued in payment
No. 5-03] of previously contracted debts; [Sec. 38]
For close corporations, the pre-emptive rights  In case the right is denied in the AOI;
extend to all stock to be issued, including  Waiver of the right by the stockholder.
reissuance of treasury shares, whether for
money, property or personal services, or in Note: The validity of issuance of additional
payment of corporate debts, unless the AOI shares may be questioned if done in breach of
provides otherwise. [Sec. 101] trust by the controlling stockholders
notwithstanding the non-existence of the pre-
Pre-emptive right can only be exercised to the emptive right, (i.e. when controlling
same class of shares issued or disposed with stockholders’ primary purpose is to perpetuate
that owned by the stockholder (Share-a-like or shift control of the corporation or to “freeze
basis). out” the minority interest).
Requirements Amendment of the Articles of Incorporation

(1) Approval by majority vote of the board of to deny pre-emptive right
directors, and Such amendment to the AOI to deny pre-
(2) Ratification at a meeting by the emptive right may trigger the exercise of a
stockholders or members representing at dissenting stockholder of his appraisal right.
least two-thirds (2/3) of the outstanding This is because such amendment prevents the
capital stock. dissenting stockholder from maintaining his
(3) Notice Requirement – Written notice of equity interest in the corporation. The test is
the proposed action and the time and place whether the company controllers initiated the
of the meeting shall be: questioned amendment. [Herbosa, 2019]
i. Sent to stockholders at their respective
place of residence as shown in the Power to Sell or Dispose Corporate
books of the corporation, and
Assets [Sec. 39]
ii. Either:
a. Deposited to the addressee in the
A corporation may sell, lease, exchange,
post office with postage prepaid,
mortgage, pledge, or otherwise dispose of its
served personally, OR
property and assets:
Page 167 of 450

 For such consideration as its board of (2) Notice Requirement – Written notice of
directors or trustees may deem expedient, the proposed action and of the time and
which may be: place for the meeting shall be:
- Money i. Addressed to stockholders or
- Stocks members at their places of
- Bonds, or residence as shown in the books of
- Other instruments for the payment of the corporation; and
money or ii. Deposited to the addressee in the
- Other property or consideration post office with postage prepaid,
 Subject to the provisions of Republic Act served personally, OR sent
No. 10667, otherwise known as “Philippine electronically, when allowed by the
Competition Act”, and other related laws. by-laws or done with the consent of
the stockholder. [Sec. 39]
Requisite: A majority vote of its board of
directors or trustees [Sec. 39] Abandonment of Sale/Lease/Mortgage
After obtaining the authorization or approval by
Sale of all or substantially all of corporate the stockholders or members, the board of
assets directors or trustees may abandon such sale,
A corporation may sell all or substantially all of lease, exchange, mortgage, pledge, or other
the its properties and assets, including its disposition of property and assets.
goodwill. [Sec. 39]
However, this is subject to the rights of third
To determine whether a sale or other parties under any contract relating thereto,
disposition shall be deemed to cover all or without further action or approval by the
substantially all the corporate property and stockholders or members. [Sec. 39]
assets:
i. Make a computation based on the Where only the approval of a quorum of the
corporation’s net asset value, as shown BOD/T is required
in its latest financial statements. Corporation is not restricted in its power to sell
ii. Assess whether the corporation would or dispose of its assets without the
be rendered incapable of continuing authorization of shareholders or members:
the business or accomplishing the a. If the same is necessary in the usual
purpose for which it was incorporated. and regular course of business of
[Sec. 39] the corporation or
b. If the proceeds of the sale will be
The exercise of this power does not render the appropriated for the conduct of its
corporation empty, since it is still left with remaining business
assets received in exchange. It always c. If the transaction does not cover all or
receives something of equal value to what has substantially all of the assets. [Sec. 39]
been disposed. [Villanueva]
Exercise of Appraisal Right
Requirements Any stockholder who disagrees from the sale,
(1) Vote of the stockholders representing at lease, exchange, mortgage, pledge and any
least two- thirds (2/3) of the outstanding other disposition may exercise his appraisal
capital stock, or at least two-thirds (2/3) right. [Sec. 39]
of the members, in a stockholders’ or
members’ meeting duly called for the The transfer should not prejudice the
purpose; OR creditors of the assignor
Vote of at least a majority of the trustees The only way the transfer can proceed without
in office in nonstock corporations, where prejudice to the creditors is to hold the
there are no members with voting rights assignee liable for the obligations of the
Page 168 of 450

assignor. The acquisition by the assignee of b. Transfers to capital stock or other

all or substantially all of the assets of the accounts, and
assignor necessarily includes the assumption (2) NOT appropriated by its Board of Directors
of the assignor’s liabilities, unless the creditors for corporate expansion projects or
who did not consent to the transfer choose to programs:
rescind the transfer on the ground of fraud. (3) NOT covered by a restriction for dividend
[Caltex (Phils.) Inc. v. PNOC Shipping and declaration under a loan agreement; and
Transport Corp, G.R. No. 150711 (2006)] (4) NOT required to be retained under special
circumstances obtaining in the corporation
De facto Merger – Continuity-of-business such as when there is a need for a special
enterprise requirement reserve for probable contingencies. [SEC
There is a de facto merger when a corporation Memorandum Circular No. 11-08,
(transferring corporation) exchanges all or (December 5, 2008)]
substantially all of its assets for the shares of
another (transferee corporation). The General Rule: The corporation may only
transferring corporation may later on be acquire its own stocks in the presence of URE.
dissolved, where the shares of the transferee [Sec. 40]
corporation will be distributed by way of Rationale: Existence of URE is required before
liquidating dividends to the shareholders of the a corporation acquires its own shares because:
transferring corporation. i. The repurchase of shares is a method
of distribution or withdrawal of assets,
The continuity-of-business enterprise and is subject to abuse, as creditors
requirement is what differentiates a de facto have a right to assume that so long as
merger from a voluntary dissolution of a there are debts and liabilities, the
corporation. [Herbosa, 2019] Board will not use corporate assets to
purchase its own stock; and
Power to Acquire Its Own Shares ii. Treasury shares may be availed of to
[Sec. 40] perpetrate control of the enterprise
without the expensive requisite of a
The power of a corporation to acquire its majority voting stock. [Villanueva]
own shares
A stock corporation shall have the power to Exceptions:
purchase or acquire its own shares for a a. Redeemable shares may be acquired even
legitimate corporate purpose or purposes. without surplus profit for as long as it will
not result to the insolvency of the
This corporate power does not need Corporation;
shareholder’s approval. Discretion solely rests b. In cases that the corporation conveys its
on the board, subject to the existence of stocks in payment of a Debt;
unrestricted retained earnings (“URE”) and c. In a Close corporation, a stockholder may
for a legitimate corporate purpose/s. [Sec. demand the payment of the fair value of
40] shares regardless of existence of retained
earnings for as long as it will not result to
Unrestricted Retained Earnings the insolvency of the corporation.
This is defined as the amount which is:
(1) The Legitimate Corporate Purposes [Sec. 40]
accumulated profits and gains realized out Legitimate corporate purposes include, but is
of the normal and continuous not limited to the following:
operations of the company AFTER 1. To eliminate fractional shares arising out of
deducting therefrom: stock dividends
a. Distributions to stockholders and 2. To collect or compromise an indebtedness
to the corporation, arising out of unpaid
Page 169 of 450

subscription, in a delinquency sale, and to regulations of the Commission

purchase delinquent shares sold during on the use of electronic data
said sale; and messages, when allowed in the
3. To pay dissenting or withdrawing by-laws or done with the
stockholders. consent of the stockholder
Power to Invest Corporate Funds Exercise of Appraisal Right

in Another Corporation or Any stockholder who disagrees from the
Business [Sec. 41] investment of corporate funds in another
corporation or business may exercise his
appraisal right.
General Rule: The corporation is not allowed
to engage in a business different from those
enumerated in its AOI. Power to Declare Dividends [Sec.
Exception: The purpose will be amended to 42]
include the desired business activity among its
secondary purpose. Requirements
(1) Must be distributed out of URE
Rules in case a corporation wants to invest (2) Payable in cash, in property, or in stock to
in an undertaking all shareholders on the basis of outstanding
● Investment of a corporation in a business stock held by them
which is in line with its primary purpose (3) Resolution by the Board
requires only the approval of the board.
● Investment of assets for any of its Additional requirement for stock dividend
secondary purposes requires the prior Approved by 2/3 of shareholders representing
approval of its shareholders/members the outstanding capital stock at a
● If the investment is outside the purpose/s regular/special meeting called for that purpose
for which the corporation was organized, - Note: The approval requirement for the
Articles of Incorporation must be amended declaration of stock dividends
first, otherwise it will be an Ultra Vires act. underscores that the payment of
dividends to a stockholder is not a
Requirements matter of right but a matter of
(1) Approval by majority vote of the board of consensus. [Republic Planters Bank v.
directors or trustees, and Agana, 269 SCRA 1 (1997)]
(2) Ratification at a meeting by the A corporation must have also a sufficient
stockholders or members representing at number of authorized unissued shares for
least two-thirds (2/3) of the outstanding distribution to stockholders (if ACS is
capital stock or of its members. insufficient, corporation must apply for increase
(3) Notice Requirement – Written notice of in capital stock).
the proposed action and the time and place
of the meeting shall be: Source of dividends
i. Sent to stockholders or members at Dividends may only be declared out of actual
their respective place of residence and bona fide unrestricted retained earnings.
as shown in the books of the
corporation, and Prohibition imposed by law on UREs of a
ii. Either: stock corporation
a. Deposited to the addressee in Stock corporations are prohibited from
the post office with postage retaining surplus profits in excess of 100% of
prepaid, served personally, OR their paid-in capital stock, except:
b. Sent electronically in a. When justified by definite corporate
accordance with the rules and expansion projects or programs approved
by the BOD;
Page 170 of 450

b. When the corporation is prohibited under plus cost and

any loan agreement with any financial expenses
institution or creditor from declaring
dividends without its consent, and such
consent has not yet been secured;
c. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation.
No, since this
Can this be
Note: In case a corporation unjustifiably retains requires
issued by
surplus profits in excess of one hundred No [Sec. 34] stockholders’
Executive
approval [Sec.
(100%) percent of the paid-in accumulated Committee?
34]
capital, it will be liable for Improperly
Accumulated Earnings Tax (IAET) equal to
10% of the improperly accumulated taxable Rule on shares of stock issued to pay for
income. [Sec. 29 (A), NIRC] Moreover, it will services
also be liable to pay a penalty imposed by the A corporation may legally issue shares of stock
SEC. [SEC Memo. Circ. No. 6, s. 2005] in consideration of services rendered to it by a
person not a stockholder, or in payment of its
Forms of dividends indebtedness. But a share of stock thus issued
1. Cash - Any cash dividend due on should be part of:
delinquent stock shall first be applied to the i. The original capital stock of the
unpaid balance on the subscription plus corporation upon its organization; or
cost and expenses. [Sec. 42] ii. The stocks issued when the increase
2. Stock - Stock dividends shall be withheld of the capitalization of a corporation is
from the delinquent stockholder until his properly authorized.
unpaid subscription is fully paid; Stock
dividends cannot be issued to a person In other words, it is the shares of stock that
who is not a stockholder in payment of are ORIGINALLY ISSUED by the
services rendered. corporation and FORMING PART OF THE
3. Property - Stockholders are entitled to CAPITAL that can be exchanged for cash or
dividends pro-rata based on the total services rendered, or property; that is, if the
number of shares and not on the amount corporation has original shares of stock unsold
paid on shares. or unsubscribed, either coming from the
original capitalization or from the increased
Cash Dividends vs. Stock Dividends capitalization. STOCK DIVIDENDS are issued
only to stockholders because only stockholders
Cash Stock
are entitled to dividends. [Nielson and Co. v.
Dividends Dividends
Lepanto Consolidated Mining, G.R. No. L-
21601., (1968)].
Voting Board of
Board of
requirements Directors + 2/3
Directors Rule on the receipt of dividends in case of
for issuance of stockholders
mortgaged or pledged shares
General Rule: The mortgagor or the pledgor
Shall be has the right to receive the dividends.
Shall be
withheld from
applied to the
Effect on the delinquent
unpaid Exception: When the mortgagor or pledgor
delinquent stockholder
stock
balance on defaults and the mortgagee or pledgee
until his unpaid
the acquires the pledged stocks and the transfer is
subscription is
subscription recorded in the books of the corporation, the
paid
Page 171 of 450

mortgagee or pledgee is entitled to receive the 1/3 of the total outstanding capital stock
dividends. entitled to vote of the managing
corporation (Interlocking stockholders);
Power to Enter into Management or
Contracts [Sec. 43] ii. A majority of the members of the BOD
of the managing corporation also
Management Contract constitute a majority of the BOD of the
Any contract whereby a corporation managed corporation (Interlocking
undertakes to manage or operate all or directors).
substantially all of the business of another
corporation, whether such contracts are For the managed corporation: There is a need
called service contracts, operating agreements for such ratification as such contract is a
or otherwise. deviation from the principle that corporate
affairs shall be managed by the BOD.
This refers only to a management contract with For the managing corporation: There is a need
another corporation and does not apply to for such ratification as such contract is a
management contracts entered into by a deviation from the principle that the BOD would
corporation with natural persons. Corollary to devote their time and resources for the affairs
this, management contract with a natural of the corporation. [Villanueva]
person need not comply with the requisites of
Sec. 43. Limitations
Period of every management contract a. Ultra Vires Acts

General Rule: No management contract shall
be entered into for a period longer than 5 years Ultra Vires Acts
for any one term. Those acts which a corporation is not
empowered to do or perform because they are
Exception: Service contracts or operating outside or beyond the express and implied
agreements which relate to exploration, powers conferred by its Articles of
development, exploitation or utilization of Incorporation or by the Revised Corporation
natural resources may be entered into for such Code, or not necessary or incidental to the
periods as may be provided in the pertinent exercise of the powers so conferred. [Sec. 44]
laws and regulations.
Types of Ultra Vires Acts
Requirements a. Acts done beyond the powers of the
(1) Approval by majority vote of the BOD of corporation as provided in the law or its
both the managing and the managed articles of incorporation;
corporation b. Ultra Vires acts of officers and not of the
(2) Approval by shareholders owning at least corporation
the majority of the outstanding capital c. Acts or contracts, which are per se illegal
stock or at least a majority of the members as being contrary to law. [Villanueva]
of both the managing and the managed
corporation Kinds of Ultra Vires acts by reason
a. By reason of Lack of Authority (ultra vires
However, the contract must be approved by 2/3 acts)
of stockholders owning outstanding capital b. By reason of Illegality (illegal acts)
stock/members of the managed corporation
when:
i. Stockholders representing the same
interest of both the managing and
managed corporations own more than
Page 172 of 450

Basis Ultra Vires Illegal Acts 3. The act reasonably tributary to the
Acts promotion of those ends, in a substantial,
and not in a remote and fanciful sense.
Lawfulness Lack of Illegality;
authority; Unlawful; The test to be applied is whether the act in
Not necessarily against law, question is in direct and immediate furtherance
unlawful, but morals, public of the corporation’s business, fairly incident to
outside the policy, and the express powers and reasonably necessary
powers of the public order to their exercise. If so, the corporation has the
corporation power to do it; otherwise, not. [Montelibano v.
Ratification Can be ratified Cannot be Bacolod-Murcia Milling Co., Inc., G.R. No. L-
ratified 15092 (1962)]
Binding Can bind the Cannot bind the (b) Consequences of Ultra Vires Acts
power parties if wholly parties
or partly Ultra vires acts, which are per se illegal are
executed generally void.
Enforceabil Voidable, and Void and cannot
ity may be be validated While ultra vires acts which are not illegal but
enforced by are within the scope of the articles of
performance, incorporation, are merely voidable and may
ratification or become binding and enforceable when ratified
estoppel by stockholders. [Montelibano v. Bacolod-
Murcia Milling Co., Inc., G.R. No. L-15092
Examples 1. Acts done Acts or (1962)]
beyond the contracts, which
powers of the are per se illegal Consequences of Ultra Vires Acts with
corporation as as being respect to contracts:
provided in the contrary to law.
law or its
a. Executed contract – courts will not set
articles of
incorporation;
aside or interfere with such contracts;
2. Ultra Vires b. Executory contracts – no enforcement
acts of officers even at the suit of either party (void and
and not of the unenforceable);
corporation c. Partly executed and partly executory –
principle of “no unjust enrichment at
expense of another” shall apply;
(a) Applicability of the Ultra Vires Doctrine d. Executory contracts apparently
authorized but Ultra Vires – the principle
The application of the Ultra Vires Doctrine is a of estoppel shall apply.
question, in each case, of the logical relation of
the act to the corporate purpose expressed in Remedies in case of Ultra Vires Acts
the charter. a. State
i. Dissolution of the corporation thru a
It may fairly be considered within the charter quo warranto proceeding
powers if: ii. Injunction
1. The act is one which is lawful in itself, and iii. Suspension or revocation of the
not otherwise prohibited; certificate of registration by the SEC
2. The act is done for the purpose of serving b. Stockholders
corporate ends; AND  Injunction
 Derivative suit
Page 173 of 450

 Ratification (except when a 3rd party is presumption should exist to distinguish one
prejudiced or the act is illegal) share from another.
c. Creditors - Nullification of contract in fraud  Sec. 6 of the RCC now requires that the
of creditors distinguishing features be stated also in the
Certificate of Stock.
Doctrine of Individuality of
Subscription Trust Fund Doctrine
The Doctrine of Individuality of Subscription The Trust Fund Doctrine states that the capital
states that a subscription is one entire and stock, properties and other assets of a
indivisible whole contract. It cannot be divided corporation are regarded as equity in trust for
into portions. the payment of corporate creditors.
 All funds received by the corporation in
Consequently, where stocks were subscribed payment of the shares of stock shall be
and part of the subscription contract price was held in trust for the corporate creditors and
not paid, the whole subscription shall be other stockholders of the corporation.
considered delinquent, and not only the  No fund shall be used to buy back the
shares which correspond to the amount not issued shares of stock except only in
paid. instances specifically allowed by the
Corporation Code. [Boman Environmental
Nevertheless, holders of subscribed shares not Development Corporation v. CA, G.R. No.
fully paid, which are not delinquent, shall have 77860 (1988)]
all the rights of a stockholder. [Sec. 71]
 SEC has opined that the entire Effects of the trust fund doctrine
subscription, although not yet fully paid, 1. Dividends must never impair the
may be transferred to a single transferee, subscribed capital stock and must only be
who as a result of the transfer must assume declared out of unrestricted retained
the unpaid balance. [SEC Opinion, 9 Oct. earnings (URE). [Philippine Trust Co. v.
1995] Rivera, G.R. No. L-19761 (1923)]
 It is necessary, however, to secure the 2. Subscription commitments cannot be
consent of the corporation because such condoned or remitted.
transfer contemplates a novation which 3. General Rule: The corporation cannot buy
under Art. 1293 (NCC) cannot be made its own shares using the subscribed capital
without consent of the creditor. as the consideration therefore. [NTC v. CA.
G.R. No. 127937 (1999)]
Doctrine of Equality of Shares
Exceptions:
The doctrine of equality of shares states that all 1. Redeemable shares may be acquired even
stocks issued by the corporation are presumed without surplus profit for as long as it will
equal with the same privileges and liabilities, not result to the insolvency of the
provided that the Articles of Incorporation is Corporation;
silent on such differences. [Sec. 6] 2. In cases that the corporation conveys its
stocks in payment of a Debt; or
There is a presumption of equality of the rights 3. In a Close corporation, a stockholder may
and features of shares when nothing is demand the payment of the fair value of
expressly provided to the contrary. shares regardless of existence of retained
 Although a corporation has the power to earnings for as long as it will not result to
classify its shares of stock, provide for the insolvency of the corporation
preferences and other conditions, no 4. Rescission of a subscription agreement is
not allowed since it will effectively result in
the unauthorized distribution of the capital
Page 174 of 450

assets and property of the corporation. and assets generally regarded in equity as a
[Ong Yong v. Tiu, G.R. No. 144476 (2003)] trust fund for the payment of corporate debts.
NOTE: Rescission of a subscription agreement All assets and property belonging to the
is not one of the instances when distribution of corporation held in trust for the benefit of
capital assets and property of the corporation creditors that were distributed or in the
is allowed (Ibid). possession of the stockholders, regardless of
full payment of their subscriptions, may be
Exceptions to the Trust Fund Doctrine --- reached by the creditor in satisfaction of its
When Distribution of Corporate Capital is claim.
Allowed
The Trust Fund Doctrine, first enunciated by To make out a prima facie case in a suit
this Court in the 1923 case of Philippine Trust against stockholders of an insolvent
Co. v. Rivera is the underlying principle in the corporation to compel them to contribute to the
procedure for the distribution of capital assets, payment of its debts by making good unpaid
embodied in Corporation Code, which allows balances upon their subscriptions, it is only
the distribution of corporate capital only in three necessary to establish that the stockholders
instances: have not in good faith paid the par value of the
1. Amendment of the AOI to reduce the stocks of the corporation. [Donnina Halley v.
authorized capital stock, Printwell, Inc., G.R. No. 157549 (2011)]
2. Purchase of redeemable shares by the
corporation, regardless of the existence of How Corporate Powers Are
unrestricted retained earnings, and Exercised
3. Dissolution and eventual liquidation of the
corporation. By the Shareholders
The creditors of a corporation have the right to Corporate Acts Requiring All (Voting and
assume that so long as there are debts and Non-Voting) Shareholders’ Approval
liabilities, the BOD will not use corporate assets General Rule: Vote necessary to approve a
to purchase its own shares of stock or to particular corporate act as provided in this
declare dividends to its stockholders when the Code shall be deemed to refer only to stocks
corporation is insolvent. [Steinberg v. Velasco, with voting rights [Sec. 6]
G.R. No. L-30460 (1929)]
Exceptions [Sec. 6]:
Scope of the Trust Fund Doctrine Voting and non-voting shares shall be entitled
The trust fund doctrine is NOT limited to to vote in the following cases:
reaching the stockholder’s unpaid a. Amendment of Articles of Incorporation
subscriptions. [Sec. 15]
 A corporation has no legal capacity to b. Adoption, Amendment and Repeal of By-
release an original subscriber to its capital Laws [Sec. 47]
stock from the obligation of paying for his c. Sale, Lease, Mortgage or Other Disposition
shares, in whole or in part, without a of Substantially all corporate assets [Sec.
valuable consideration, or fraudulently, to 39]
the prejudice of creditors. d. Incurring, Creating or Increasing Bonded
 The creditor is allowed to maintain an Indebtedness [Sec. 37]
action upon any unpaid subscriptions and e. Increase or Decrease of Capital Stock
thereby steps into the shoes of the [Sec. 37]
corporation for the satisfaction of its debt. f. Merger and Consolidation [Sec. 76-79]
g. Investment of funds in another corporation
The scope of the doctrine when the corporation or business or for any purpose other than
is insolvent also encompasses other property
Page 175 of 450

the primary purpose for which it was authority, but an innocent person cannot be
organized [Sec. 41] prejudiced if he had the right to presume under
h. Dissolution of the Corporation [Secs. 133- the circumstances the authority of the acting
138] officers.
Corporate Acts Requiring Voting Doctrine of Apparent Authority

Shareholders’ Approval Corporate officers have apparent authority to
1. Declaration of Stock Dividends [Sec. 42] bind the corporation on matters that are
2. Management Contracts [Sec. 43] generally within the domain of corporate
3. Fixing the Consideration of No-Par shares business, and the scope of their usual duties.
[Sec. 61] [Herbosa, 2019]
4. Fixing the Compensation of Directors [Sec.
29] If a corporation knowingly permits one of its
officers, or any other agent, to act within the
By the Board of Directors scope of an apparent authority, it holds him out
to the public as possessing the power to do
Unless otherwise provided in this Code, the those acts; the corporation will, as against
board of directors or trustees shall exercise anyone who has in good faith dealt with it
the corporate powers, conduct all business, through such agent, be estopped from denying
and control all properties of the corporation. the agent’s authority. [Associated Bank v.
[Sec. 22] Pronstroller, G.R. No. 148444 (2008)]
Majority vote of the Board is needed in the

exercise of the ff. powers:
(1) Filling of vacancies in the board, except
when it is due to removal by the
stockholders/members or by expiration of
term
(2) Extension or shortening of the corporate
term
(3) Increase or decrease of capital stock or the
creation of bonded indebtedness
(4) Sale or other disposition of all or
substantially all assets
(5) Acquisition of its own shares
(6) Investment of corporate funds in any
corporation or business or for any purpose
other than its primary purpose
(7) Declaration of cash, property, and stock
dividends
(8) Entering into management contracts
(9) Amendment of AOI
(10) Amendment of the by-laws
(11) Approval of the plan of merger or
consolidation
(12) Dissolution of the corporation
By the Officers
Authority of Corporate Officers

A person dealing with a corporate officer is put
on inquiry as to the scope of the latter’s
Page 176 of 450

SUMMARY OF SPECIFIC POWERS

Specific Power Approval Required Appraisal Right
Power to extend or Majority vote of the BOD/T and Can be exercised only in case of
shorten corporate term extension of the corporate term
[Sec. 36] Ratification by the stockholders or [Sec. 36]
members representing at 2/3 of the
outstanding capital stock or of its members [Note: Section 80(a) however
provides that appraisal right may
be exercised in both extension and
shortening of corporate term, which
is an error carried over from the old
Corporation Code. It does not
make sense to grant appraisal right
in case of shortening the
term/dissolution, since the same
would already result in liquidation
of the corporation.]
Power to increase or Majority vote of the BOD Can be exercised only if the
decrease capital stock, or increase of capital stock results in or
incur, create, increase Approval by 2/3 of the outstanding capital has the effect of changing or
bonded indebtedness stock restricting the rights of any
[Sec. 37] stockholder or class of shares, or of
authorizing preferences in any
respect superior to those of
outstanding shares of any class
[Sec. 80(a)];
Power to incur, create, Majority vote of the BOD/T

increase bonded x
indebtedness [Sec. 37] Approval by 2/3 of the outstanding capital
stock or of the members
Power to deny pre- Can be denied by the AOI or an Can be exercised in case it is
emptive rights [Sec. 38] amendment thereto denied through an amendment of
AOI [Sec. 80(a)]
Power to Sell of All or A majority vote of its board of directors or Can be exercised [Sec. 39/ 80(b)]
Substantially All of the trustees
Properties of the
Corporation [Sec. 39] Ratification by the stockholders or
members representing at 2/3 of the
outstanding capital stock or of its members
(Note: Vote of at least a majority of the
trustees in office in nonstock corporations,
where there are no members with voting
rights)
[Note: power to sell assets in the ordinary

course of business only requires board
approval]
Page 177 of 450

Specific Power Approval Required Appraisal Right
Power to acquire own Majority vote of the BOD x

shares [Sec. 40]
Power to invest corporate Majority vote of the board of directors or Can be exercised [Sec. 41/80(d)]
funds in another trustees and
corporation or business,
or for any other purpose Ratification by the stockholders
[Sec. 41] representing at least 2/3 of the outstanding
capital stock, or of the members
Power to declare For cash and property dividends: Resolution

dividends [Sec. 42] by the Board only x
Additional requirement for stock dividends:

Approval of stockholders representing not
less than 2/3 of the outstanding capital
stock
Power to enter into Approval of:

management contract - BOD of both managing and managed x
[Sec. 43] corporation; and
- Majority of outstanding shares or Note: A management contract is a
members of both managed and deviation from the centralized
managing corporation management doctrine, and this
departure would require the
But 2/3 vote of outstanding stock/members approval of the stockholders under
of managed corporation is necessary in the the principle that it would vary the
ff: contractual corporate arrangements
- A stockholder/s representing the same [Villanueva]
interest of both the managing and
managed corporations own more than
1/3 of the total outstanding capital
stock; or
- Where majority of directors in both
corporations are the same
OTHERS
Approval Required Appraisal Right
Merger or consolidation Majority vote of the board of directors or

[Sec. 76] trustees and Can be exercised [Sec. 76/80(c)]
Ratification by the stockholders representing

at least 2/3 of the outstanding capital stock, or
of the members
Voluntary Dissolution (by Majority vote of the board of directors or

Petition or by shortening trustees and x
corporate term) [Sections
134-136] Ratification by the stockholders representing [See Note on Sec. 36]
at least 2/3 of the outstanding capital stock,
or of the members
Page 178 of 450

8. Stockholders and Members Participation in Management
Proxy
Fundamental Rights of a
Stockholder Stockholders and members may vote in person
or by proxy in all meetings. [Sec. 57]
1. Direct or indirect participation in
management [Sec. 6] The word “proxy” may be understood in two
2. Voting rights [Sec. 6] ways:
3. Right to remove directors [Sec. 27] (1) First, it may refer to the person duly
4. Proprietary rights authorized by a stockholder to vote in his
(a) Right to dividends [Sec. 42 and 70] behalf in a stockholder’s meeting.
(b) Appraisal rights [Sec. 80] (2) Secondly, it may refer to the document
(c) Right to issuance of stock certificate for which evidences this authority. [CAMPOS]
fully paid shares [Sec. 63]
(d) Proportionate participation in the Right to Issue a Proxy
distribution of assets in liquidation [Sec. The right to issue a proxy is vested with public
139] interest when it comes to stock corporations.
(e) Right to transfer of stocks in corporate
books [Sec. 62] • Although it may be regulated under the by-
(f) Pre-emptive right [Sec. 38] laws, it cannot be denied, since it is an
aspect of ownership interest of
5. Right to inspect books and records [Sec.
stockholders.
73]
6. Right to be furnished with the most recent • However, the right of members to vote by
financial statements/reports [Sec. 73] proxy may be denied under the articles of
7. Right to recover stocks unlawfully sold for incorporation or bylaws of a non-stock
delinquent payment of subscription [Sec. corporation. [Sec. 88; CAMPOS]
68]
8. Right to file individual suit, representative Requisites for a Valid and Enforceable
suit and derivative suits Proxy:
1. It must be in writing;
Nature of the Rights of Members 2. Signed by the stockholder or member of
The eleemosynary nature (i.e. charitable) of record; and
every non-stock corporation defines the 3. Filed with the corporation before the
characteristic of membership therein as being scheduled meeting with the Corporate
essentially personal in character and therefore Secretary. [Sec. 57]
essentially non-transferable in nature.
[Villanueva] Period of Effectivity
Unless otherwise provided in the proxy, it shall
Sec. 88 of the Revised Corporation Code be valid only for the meeting for which it is
specifically provides that in a non-stock intended. No proxy shall be valid and effective
corporation, the right of members of any class for a period longer than five (5) years at any
or classes to vote “may be limited, broadened one time. [Sec. 57]
or denied to the extent specified in the articles
of incorporation or the by-laws.” Procedural Matters Relating to Proxies:
1. “Proxy solicitation” involves the securing
and submission of proxies, while “proxy
validation” concerns the validation of such
secured and submitted proxies;
Page 179 of 450

2. The SEC’s power to pass upon the validity Under a voting trust agreement, a stockholder
of proxies in relation to election of a stock corporation parts with the naked or
controversies has effectively been legal title, including the power to vote, of the
withdrawn, tied as it is to its abrogated shares and only retains the beneficial
quasi-judicial powers, and has been ownership of the stock.
transferred to the RTC Special Commercial
Courts pursuant to the terms of Sec. 5.2 of Voting trustee — A share owner vested with
the Securities Regulation Code; colorable and naked title of the shares covered
for the primary purpose of voting upon stocks
Note: The SEC has the power to mpose or that he does not own.
recommend new modes by which a
stockholder, member, director, or trustee A voting trust agreement shall be ineffective
may attend meetings or cast their votes, as and unenforceable unless:
technology may allow, taking into account 1. It is in writing and notarized;
the company’s scale, number of 2. It specifies the terms and conditions
shareholders or members, structure, and thereof; and
other factors consistent with the basic right 3. A certified copy of such agreement is filed
of corporate suffrage. [Sec. 179] with the corporation and with the SEC.
[Sec. 58]
3. Nevertheless, although an intra-corporate
controversy may animate a disgruntled Period of Effectivity
shareholder to complain to the SEC a General Rule: Voting trust agreements shall
corporation’s violations of SEC rules and not exceed five (5) years at any one time.
regulations, that motive alone should not
be sufficient to deprive the SEC of its Exception: Voting trust agreements may be for
investigatory and regulatory powers, a period exceeding five (5) years if it is
especially so since such powers are specifically required as a condition in a loan
exercisable on a motu proprio basis. agreement.
• This envisions a situation where a
The fact that the jurisdiction of the RTC corporation obtains a loan from a bank,
Special Commercial Courts is confined to but as a condition of the loan, the majority
the voting on election of officers, and not all stockholders would be required to
matters which may be voted upon by execute voting trust agreements to
stockholders, elucidates that the power of ensure that the lending institution would
the SEC to regulate proxies remains extant have a controlling interest in the corporate
and could very well be exercised when votes to be taken that may affect the
stockholders vote on matters other than the ability of the borrowing corporation to pay.
election of directors. [GSIS v. C.A., G.R. The voting trust agreement therefore
No. 183905 (2009)] constitutes further security to the lending
institution. (VILLANUEVA, supra at 432)
Voting Trust
• Such voting trust agreement conditioned
upon a loan agreement, however, shall
Voting Trust — An arrangement created by automatically expire upon full payment of
one or more stockholders: the loan. [Sec. 58]
(a) For the purpose of conferring upon a
trustee or trustees the right to vote and Unless the agreement is expressly renewed, all
other rights pertaining to the shares; rights granted in the agreement shall
(b) For a period not exceeding 5 years at any automatically expire at the end of the agreed
time [Sec. 58]. period. [Sec. 58]
Page 180 of 450

Right to Inspect holds legal title over

The voting trust agreement filed with the the shares
corporation shall be subject to examination by
any stockholder in the same manner as any
Revocable at will in Irrevocable, as long
other corporate record. [Sec. 58]
any manner, as no misconduct or
EXCEPT if coupled fraud
Both the trustor and trustee may exercise the
with an interest
right of inspection of all corporate books and
records in accordance with the provisions of Max of 5 years at a Max of 5 years at a
the RCC. [Sec. 58] time time (unless the
voting trust is
Limitation of a Voting Trust Agreement specifically required
No voting trust agreement shall be entered into as a condition in a
for the purposes of circumventing the laws loan agreement)
against:
 Anti-competitive agreements; SEC can pass on validity
 Abuse of dominant position;
 Anti-competitive mergers and acquisitions; Cases When Stockholders’ Action is
 Violations of nationality and capital Required
requirements; or
 Fraud. [Sec. 58] Right to Vote in Stock Corporations
General Rule: Each share of stock is entitled
Proxy vs. Trustee to vote. [Sec. 6]
Proxy Trustee 1. The stockholder of record has the right to
participate and to vote [Villanueva]
Principal-agent Trustee-beneficiary 2. Executors, administrators, receivers, and
other legal representatives duly appointed
Proxy cannot exceed The only limit to by the court may attend or vote in behalf of
delegated authority authority is that the stockholders without need of any written
act must be for the proxy. [Sec. 54]
benefit of the trustor
(fiduciary obligation) Exception: Unless otherwise provided in
Must be in writing Must be in writing the articles of incorporation or declared
and notarized delinquent under Sec. 66. [Sec. 6]
Copy must be filed Copy must be filed Note: “Outstanding capital stock” means
with the corporation with SEC and the stocks entitled to VOTE.
corporation
Nevertheless, ALL stockholders,
No transfer Transfer of legal title regardless of classification as voting or
to trustee non-voting, are entitled to vote in the
Proxy exercises Trustee exercises following matters:
voting rights only for absolute voting rights a. Amendment of the articles of
a specific meeting continuously, subject incorporation;
(unless otherwise only to fiduciary duty b. Adoption and amendment of by-laws;
provided) c. Sale, lease, exchange, mortgage,
pledge, or other disposition of all or
Proxy cannot be Trustee can be substantially all of the corporate
director director because he property;
d. Incurring, creating, or increasing
bonded indebtedness;
Page 181 of 450

e. Increase or decrease of capital stock; Pledged or Pledgor or mortgagor

f. Merger or consolidation; mortgaged shares shall have the right to
g. Investment of corporate funds in attend and vote,
another corporation or business; and unless the pledgee or
h. Dissolution of the corporation. [Sec. 6] mortgagee is
expressly given such
Right to Vote in Non-Stock Corporations right in writing which
In non-stock corporations, the voting rights is recorded on the
attach to membership. Members vote as appropriate corporate
persons, in accordance with the law and the by- books. [Sec. 54]
laws of the corporation.
Treasury shares No voting rights as
General Rule: Each member shall be entitled long as such stock
to one vote. [Sec. 88] remains in the
 Executors, administrators, receivers, and treasury.
by the court may attend or vote in behalf of (a) By a majority vote
stockholders without need of any written
proxy. [Sec. 54] (1) 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 —
incorporation or by-laws. a. Majority of the BOD/BOT; and
 When the principle for determining the b. Stockholders owning at least the majority
quorum for stock corporations is applied by of the outstanding capital stock/majority of
analogy to non-stock corporations, only members of both the managing and the
those who are actual members with voting managed corporation.
rights should be counted. [Sec. 88]
Exceptions: In the ff. cases, at least 2/3 votes
Limitations on the Right to Vote of the outstanding capital stock/membership of
Type of Shares Manner of Voting the managed corporation is required. BUT
only majority vote is required for the managing
Shares of stock The consent of all corporation:
owned jointly by two the co-owners shall a. Where a stockholder/s representing the
(2) or more persons be necessary, unless same interest of both the managing and the
there is a written managed corporations own or control more
proxy signed by all than one-third (1/3) of the total outstanding
the co-owners capital stock entitled to vote of the
authorizing the managing corporation; or
person to vote such
b. Where a majority of the members of the
share or shares.
managing corporation’s BOD also
[Sec. 55]
constitute a majority of the managed
Any of the joint corporation’s BOD.
owners can vote said
Shares owned in an (2) Amendments to by-laws [Sec. 47]
shares or appoint a
and/or capacity
proxy therefor. [Sec.
55] Requires approval by:
a. Majority of the BOD/BOT; and
Page 182 of 450

b. Stockholders owning at least the majority to adopt new by-laws shall be considered
of the outstanding capital stock/majority of revoked when stockholders representing a
members. majority of the outstanding capital stock or a
Includes all stockholders with or without voting majority of the members shall so vote at a
rights. regular or special meeting.
(3) Revocation of delegation to the BOD of (8) Calling a Meeting to Remove Directors
the power to amend or repeal or adopt or Trustees [Sec. 27]
by-laws [Sec. 47] A special meeting for the purpose of removing
any director or trustee must be called:
Requires approval by stockholders owning at 1. By the secretary on order of the president;
least the majority of the outstanding capital or
stock/majority of members. 2. Upon written demand of stockholders
representing or holding at least a majority
(4) Granting compensation other than per of the outstanding capital stock, or a
diems to directors [Sec. 29] majority of the members entitled to vote.
[Sec. 27]
Compensation other than per diems may be
granted to directors by the vote of the (b) By a two-thirds vote
stockholders representing at least a majority
of the outstanding capital stock. (1) Removal of directors or trustees [Sec.
27]
(5) Fixing the consideration for no-par
shares [Sec. 61] Any director or trustee of a corporation may be
removed from office by a vote of —
When the Articles of Incorporation or the BOD • The stockholders holding or representing
does not provide for the value of no-par shares, at least two-thirds (2/3) of the outstanding
the value of such shares shall be determined capital stock; or
by the stockholders representing at least
• At least two-thirds (2/3) of the members
majority of the outstanding capital stock.
entitled to vote in a non-stock corporation.
Note: Such removal shall take place —
(6) Voluntary dissolution of a corporation
a. Either at a regular meeting of the
where no creditors are affected [Sec.
corporation or at a special meeting
134]
called for the purpose; and
b. In either case, after previous notice to
If dissolution of a corporation DOES NOT
stockholders or members of the
prejudice the rights of any creditor having a
corporation of the intention to propose
claim against it, the dissolution may be effected
such removal at the meeting.
by:
a. Majority vote of the BOD/BOT; and
(2) Amendment of AOI [Sec. 15]
b. A resolution adopted by the affirmative vote
of the stockholders owning at least
Amendment of the AOI may be made by:
majority of the outstanding capital
a. A majority vote of the BOD/BOT; and
stock/membership.
b. The vote or written assent of the
stockholders representing at least two-
(7) Revocation of Delegation to the Board
thirds (2/3) of the outstanding capital stock,
of the Power to Amend/Repeal/Adopt
or by the vote or written assent of at least
By-laws [Sec. 47]
two-thirds (2/3) of the members.
Any power delegated to the board of directors
or trustees to amend or repeal the by-laws or
Page 183 of 450

Note: Includes all stockholders with or without Incurring, creating, increasing bonded
voting rights. indebtedness [Sec. 37]
Amendment of Articles of Incorporation of Requires approval by a majority vote of the

close corporations [Sec. 102] BOD and approval by at least 2/3 of the
An affirmative vote of at least two-thirds (2/3) of outstanding capital stock.
the outstanding capital stock, whether with or Includes all stockholders with or without voting
without voting rights, at a meeting duly called rights.
for the purpose is required to make any
amendment to the AOI which seeks to: (6) Issuance of shares not subject to pre-
a. Delete or remove any provision; or emptive right [Sec. 38]
b. Reduce a quorum of the voting requirement
stated in the articles shall require. Shares in good faith in exchange for property
or previously incurred indebtedness with the
(3) Delegating the power to amend or approval of the stockholders representing 2/3
repeal by-laws or adopt new by-laws of the outstanding capital stock are not subject
[Sec. 47] to pre-emptive rights.
Delegation to the BOD/BOT of the power to (7) Sale/disposition of all or substantially

amend or repeal by-laws or adopt new by-laws all of corporate assets [Sec. 39]
requires approval by at least 2/3 of the
outstanding capital stock/membership. A sale of all or substantially all of the
corporation’s properties and assets, including
Note: Revocation of the delegation requires its goodwill must be authorized by the vote of:
only majority vote of the outstanding capital • The stockholders representing at least 2/3
stock/membership. of the outstanding capital stock; or
• At least 2/3 of the members, in a
(4) Extending/shortening corporate term stockholders’ or members’ meeting duly
[Sec. 36] called for the purpose.
- Note: In non-stock corporations
Requires approval by a majority vote of the where there are no members with
BOD/BOT and approval by at least 2/3 of the voting rights, the vote of at least a
outstanding capital stock/membership. majority of the trustees in office will
be sufficient authorization.
Includes all stockholders with or without voting
rights. (8) Investment of funds in another
business [Sec. 41]
(5) Increasing/decreasing capital stock
[Sec. 37] Requires approval by:
a. A majority vote of the BOD/BOT; and
Requires approval by: b. At least 2/3 of the outstanding capital
a. A majority vote of the BOD; and stock/membership.
b. At least 2/3 of the outstanding capital
stock. Includes all stockholders with or without voting
rights.
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
Page 184 of 450

the stockholders or members shall not be b. The vote of such director or trustee was not
necessary. necessary for the approval of the contract;
c. The contract is fair and reasonable under
(10) Stock Dividend declaration [Sec. the circumstances;
42]
 In case of corporations vested with
Requires approval by: public interest, material contracts are
a. A majority vote of the BOD; and approved by at least two-thirds (2/3) of the
b. At least 2/3 of the outstanding capital stock. entire membership of the board, with at
least majority of the independent directors
Note: Declaration of cash and property voting to approve the material contract; and
dividends only requires BOD/BOT approval.  In case of an officer, the contract has been
previously authorized by the BOD.
(11) Power to enter into management
contracts [Sec. 43] Note: Where any of the first 3 conditions in the
preceding paragraph is absent, in the case of a
General Rule: Requires approval by — contract with a director/trustee, the contract
a. Majority of the BOD/BOT; and may be ratified by the vote of the
b. Stockholders owning at least the majority stockholders representing 2/3 of the
of the outstanding capital stock/majority of outstanding capital stock or at least 2/3 of
members of both the managing and the the members in a meeting called for that
managed corporation. purpose.
Exceptions: In the ff. cases, at least 2/3 votes Full disclosure of the adverse interest of the
of the outstanding capital stock/membership of directors/trustees involved is made at such
the managed corporation is required. BUT meeting and the contract is fair and reasonable
only majority vote is required for the managing under the circumstances. [Sec 31]
corporation:
a. Where a stockholder/s representing (13) Ratifying acts of disloyalty of a
the same interest of both the managing director [Sec. 33]
and the managed corporations own or
control more than one-third (1/3) of the General Rule: Where a director, by virtue of
total outstanding capital stock entitled such office, acquires a business opportunity,
to vote of the managing corporation; or which should belong to the corporation, thereby
b. Where a majority of the members of the obtaining profits to the prejudice of such
managing corporation’s BOD also corporation, the director must account for and
constitute a majority of the managed refund to the latter all such profits.
corporation’s BOD.
Exception: His act may be ratified by a vote of
(12) Ratifying contracts with respect to the stockholders owning or representing at
dealings with directors/trustees [Sec. least 2/3 of the outstanding capital stock.
31]
(14) Plan of merger or consolidation
A contract of the corporation with one or more [Sec. 76]
of its directors is voidable, at the option of such
corporation, unless ALL of the following Requires approval by:
conditions are present: a. Majority of each of the BOD/BOT of the
a. The presence of such director/trustee in the constituent corporations of the plan of merger
board meeting in which the contract was or consolidation; and
approved was not necessary to constitute
a quorum for such meeting;
Page 185 of 450

b. At least 2/3 of the outstanding capital (17) Voluntary dissolution of a

stock/membership of each corporation at corporation where creditors are
separate corporate meetings duly called. affected [Sec. 135]
Amendments to the plan of the merger or
consolidation also requires approval by If dissolution of a corporation may prejudice the
majority vote of each of the BOD and 2/3 vote rights of any creditor having a claim against it,
of the outstanding capital stock/membership of the dissolution may be effected by:
each corporation voting separately. a. Majority vote of the BOD/BOT; and
b. A resolution adopted by the affirmative vote
Includes all stockholders with or without voting of the stockholders representing at least 2/3
rights. of the outstanding capital stock/membership.
(15) Plan of distribution of assets in (c) By cumulative voting

non-stock corporations [Sec. 94]
Election of Directors or Trustees [Sec. 23]
The BOT shall, by majority vote, adopt a
resolution recommending a plan of distribution Stockholders entitled to vote may:
which shall be approved by at least 2/3 of the a. Vote such number of shares for as many
members with voting rights. persons as there are directors to be elected
[Straight Voting];
(16) Incorporation of a religious society b. Cumulate said shares and give 1 candidate
[Sec. 114] as many votes as the number of directors to
be elected multiplied by the number of the
General Rule: Any religious society or shares owned [Cumulative Voting for 1
Candidate]; or
religious order, or any diocese, synod, or
c. Distribute them on the same principle among
district organization of any religious
as many candidates as may be seen fit
denomination, sect or church, may incorporate
[Cumulative Voting by Distribution].
—
a. Upon written consent and/or by an affirmative
Note: No delinquent stock shall be voted [Sec.
vote at a meeting called for the purpose of at
23].
least 2/3 of its membership;
b. For the administration of its temporalities or
for the management of its affairs, properties Members of a non-stock corporation may cast
and estate as many votes as there are trustees to be
elected, but may not cast more than 1 vote for
Exception: Unless forbidden by the 1 candidate.
Constitution, rules, regulations or discipline of
the religious denomination, sect or church of Nominees for directors or trustees receiving the
which it is a part, or by competent authority. highest number of votes shall be declared
elected.
Page 186 of 450

VOTE REQUIREMENTS FOR ACTS REQUIRING APPROVAL OF STOCKHOLDER/MEMBERS
Corporate Act Board of Directors/Trustees Stockholders/Members

Amendment of AOI [Sec. 15] 2/3 outstanding capital
Majority vote of the BOD/BOT
stock/members
Election of directors [Sec. 23] Plurality vote of the outstanding

-
capital stock/members
Removal of director/trustee
- 2/3 outstanding capital stock
[Sec. 27]
Filling of vacancy other than Majority of the remaining
removal by stockholders, BOD/BOT, if there is still
expiration of term and quorum.
increase of seats [Sec. 28]
If vacancy prevents the quorum
and emergency action is
required, may be filled by
unanimous vote of the
remaining BOD/BOT.
Granting of compensation to
directors other than Majority vote of outstanding
-
reasonable per diems [Sec. capital stock
29]
Ratification of contract with
director [Sec. 31]
Ratification of contracts
between interlocking - 2/3 outstanding capital stock
directors [Sec. 32]
Ratification of act of director

acquiring interest [Sec. 33]
Extend or shorten corporate 2/3 outstanding capital
Majority vote of the BOD/BOT
term [Sec. 36] stock/members
Increase or decrease capital
stock, create or increase
Majority vote of the BOD 2/3 outstanding capital stock
bonded indebtedness [Sec.
37]
Sale or disposition of other 2/3 outstanding capital
Majority vote of BOD/BOT
asserts [Sec. 39] stock/members
Invest coroporate funds in
another corporation or 2/3 outstanding capital
business not in line with stock/members
primary purpose [Sec. 41]
Page 187 of 450

Declaration of dividends [Sec. 2/3 outstanding capital stock

42] Majority vote of BOD (required only in the case of
issuance of stock dividend)
Enter into a management General Rule: Majority of the

contract [Sec. 43] outstanding capital
stock/members of both
managing and maanged
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
Majority of the quorum of the
managed corporations
BOD/BOT
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 [Sec. 45] Majority of the outstanding

-
capital stock/members
Amendment or repeal of by- Majority of the oustanding
laws [Sec. 47] capital stock/members
Delegation to the BOD the
2/3 of the oustanding capital
power to amend, repeal or -
stock/members
adopt by-laws [Sec. 47]
Revocation of the power

delegated to the BOD to Majority of the oustanding
-
amend, repeal or adopt by- capital stock/members
laws [Sec. 47]
Fix the issued price of no-par General Rule: Fixed in the AOI Exception: Majority of the
value shares [Sec. 62] or by majority of the quroum of outstanding capital stock in the
the BOD pursuant to authority absence of provisions in the
under the AOI AOI
Page 188 of 450

Merger or consolidation [Sec. 2/3 outstanding capital stock of

Majority of each BOD/BOT
77] each corporation
Amendment to the plan of

2/3 outstanding capital of each
merger or consolidation [Sec. Majority of each BOD/BOT
corporation
77]
Plan of distibution of assets

of non-stock corporations Majority vote of BOT 2/3 of the membership
[Sec. 95]
Amendment of AOI of close

corporations to delete any
2/3 outstanding capital stock,
required provision or to
- with or without voting rights, or
reduce a quoru or voting
greater if provided by the AOI
requirement as stated in the
AOI [Sec. 103]
Voluntary dissolution where
2/3 outstanding capital stock or
creditors are affected [Sec. Majority vote of the BOD/BOT
members
134]
Voluntary dissolution where

Majority of the outstanding
no creditors are affected [Sec. Majority of the BOD/BOT
capital stock./members
135]
Manner of Voting Procedural Matters Relating to Voting Via

Remote Communication or In Absentia:
A stockholder may vote either: [Sec. 57]
1. Directly (in person); or  Must be authorized in the by-laws or by a
2. Indirectly, through a representative, in any majority of the board of directors;
of the following manner: o EXCEPT: The right to vote through
a. By means of a proxy these modes may be exercised in
b. By a trustee under a voting trust corporations vested with public
agreement; or interest, notwithstanding absence of
c. By executors, administrators, provision in the by-laws of such
receivers, or other legal corporations [Sec 23].
representatives duly appointed by the  Votes must be received before the
court corporation finishes the tally of votes;
3. Remote communication  If a stockholder or member intends to
4. In absentia [Sec. 57] participate in a meeting through remote
communication, he/she shall notify in
Remote communication or in absentia advance the Presiding Oicer and the
The Revised Corporation Code introduced Corporate Secretary of his/her intention.
voting through remote communication or in The Corporate Secretary shall note such
absentia for stockholders [Sec. 57] and fact in the Minutes of the meeting. [SEC
members. [Sec. 88] MC 6 s. 2020, Sec. 10]
 A stockholder or member who participates
through remote communication or in
absentia, shall be deemed present for
purposes of quorum;
Page 189 of 450

 The corporation shall establish the the shareholders. No revocation can be

appropriate requirements and procedures made.
for voting, taking into account:
o The company’s scale; Exceptions:
o Number of shareholders or members; - Dividends are revocable if NOT yet
o Structure; announced or communicated to the
o Other factors consistent with the basic stockholders.
right of corporate suffrage. [Sec. 57] - Stock dividends, even if already declared,
may be revoked prior to actual issuance
For the convenience of their stockholders since these are not distributions but merely
and members, corporations shall issue representations of changes in the capital
their own internal procedures embodying structure.
the mechanisms for participation in
meetings and voting through remote  Such declaration is essentially within the
communication or in absentia. [SEC MC 6 business judgment of the board of
s. 2020, Sec. 13] directors.
 If no election is held, or the owners of • The fact that profits have accrued in the
majority of the outstanding capital stock or prosecution of the corporate business
majority of the members entitled to vote are does not necessarily impose upon the
not present even through these modes, the directors the duty to declare them as
meeting may be adjourned and the dividends. [Villanueva]
corporation shall proceed. [Sec. 23]
 When attendance, participation and voting Exception: Stock corporations are prohibited
are allowed by these modes, each notice of from retaining surplus profits in excess of 100%
meeting shall be accompanied by the of their paid-in capital stock.
requirements and procedures to be
followed when a stockholder or member Exception to the exception: Stock
elects either option. [Sec. 50] corporations may retain surplus profits in
excess of 100% of their paid-in capital stock:
Proprietary Rights 1. When justified by definite corporate
expansion projects or programs approved
Right to Dividends by the board of directors; or
2. When the corporation is prohibited under
Concept of Dividends any loan agreement with financial
A dividend is — institutions or creditors, whether local or
 That portion of the profits of the corporation foreign, from declaring dividends without
set aside, declared and ordered by the their consent, and such consent has not yet
directors to be paid ratably to the been secured; or
stockholders on demand or at a fixed time. 3. When it can be clearly shown that such
 Payment to the stockholders as a return retention is necessary under special
upon their investment. [Villanueva] circumstances obtaining in the corporation,
such as when there is need for special
Discretion of Board to Declare Dividends reserve for probable contingencies. [Sec.
General Rule: The board of directors of a stock 42]
corporation may declare dividends out of the
unrestricted retained earnings to all Note: Right to dividends vests upon declaration
stockholders on the basis of outstanding stock so whoever owns the stock at such time also
held by them. [Sec. 42] owns the dividends. Subsequent transfer of
 Upon lawful declaration of dividends by the stock would not carry with it right to dividends
BOD, dividends become a debt owing to UNLESS agreed upon by the parties.
Page 190 of 450

Unrestricted Retained Earnings (a) When Available [Sec. 80]

The board of directors of a stock corporation
may declare dividends out of the unrestricted a. If amendment of AOI results in:
retained earnings. [Sec. 42] a. Changing or restricting the rights of
any stockholder or class of shares;
Retained Earnings or
b. Authorizing preferences in any
Represents the accumulation of net profits respect superior to those of
of the corporation over the years and outstanding share of any class;
likewise losses sustained, as well as [Sec. 80]
deductions made upon previous dividends b. Extension of the term of corporate
declared. existence [Sec. 80], including Voluntary
Restricted Unrestricted Dissolution (by Petition or by shortening
Retained Earnings Retained Earnings corporate term); [Secs. 134-136]
That portion of the That portion which is c. Note: Section 80(a) however provides that
retained earnings free and can be appraisal right may be exercised in both
specifically declared as extension and shortening of corporate
earmarked or set- dividends to term, which is an error carried over from the
aside for specific stockholders. old Corporation Code.
purposes. d. Sale, lease, exchange, transfer, mortgage,
[Villanueva] pledge or other disposition of all or
substantially all of the corporate property
In case of no-par value shares, the entire and assets; [Sec. 80]
consideration received by the corporation for its e. Merger or consolidation; [Sec. 80]
no-par value shares shall be treated as capital f. Investment of corporate funds for any
and shall not be available for distribution as purpose other than the primary purpose of
dividends. [Sec. 6] the corporation; [Sec. 80]
g. Increasing or decreasing capital stock, or
Appraisal Right incurrring, creating, increasing bonded
indebtedness; [Sec. 37]
Appraisal Right — The right to withdraw from h. Note: Can be exercised only if the increase
the corporation and demand payment of the fair of capital stock results in or has the effect
value of the shares after dissenting from certain of changing or restricting the rights of any
corporate acts involving fundamental changes stockholder or class of shares, or of
in corporate structure. [Sec. 80] authorizing preferences in any respect
superior to those of outstanding shares of
Who is Entitled to Exercise any class. [Sec. 80(a)]
A prejudiced stockholder who dissented in the i. Denial of pre-emptive rights through an
meeting where the proposal was approved. amendment of AOI; [Sec. 80(a)]
Mere silence or abstention does not suffice. See “SUMMARY OF SPECIFIC POWERS“
The stockholder must have voted against the table under “7. Corporate Powers“.
corporate action. [Villanueva]
(b) Manner of Exercise of Right
Amount Paid to Dissenting Stockholder
The amount paid to the stockholder is the fair Requirements for Exercise of Appraisal
value of his shares as of the day prior to the Right [Sec. 81 & 85]
date on which the vote was taken, excluding a. Stockholder must have voted against
any appreciation or depreciation in anticipation the corporate act.
of the corporate action. [Sec. 81] b. Stockholder must make a written
demand on the corporation within 30
Page 191 of 450

days after the vote was taken for When Right to Payment Ceases [Sec. 83,
payment of the fair value of his shares. generally]
o Failure to make demand within General Rule: No demand for payment may be
such period shall be deemed withdrawn.
waiver of the appraisal right.
c. Stockholder must submit his certificate Exceptions: The right may be extinguished in
of stock to the corporation for notation the following instances —
within 10 days after demand for 1. Withdrawal of demand by the stockholders
payment. WITH CONSENT of the corporation
o Otherwise, right to appraisal may 2. Abandonment of the proposed corporate
be terminated at the option of action
corporation. 3. Disapproval by SEC of the proposed
corporate action where such approval is
Effect of Demand for Payment [Sec. 82] necessary
a. ALL rights accruing to such shares, 4. Where SEC determines that such
including voting and dividend rights, shall be stockholder is not entitled to appraisal right
suspended, EXCEPT the right of such 5. Failure to submit the certificates of stock
stockholder to receive payment of the fair representing his shares to the corporation
value thereof. for notation as dissenting shares within 10
b. There is RESTORATION of voting and days after demand for payment, at the
dividend rights if the dissenting stockholder option of the corporation. [Sec. 85]
is not paid the value of his shares within 30
days after the award. Effect of Extinguishment of Right
a. Right of dissenting stockholder to be paid
Note: The award shall be — for the fair value of his shares shall cease;
(a) Agreed upon by the dissenting b. His status as a stockholder shall thereupon
stockholder and corporation; or by restores; and
(b) Determined and appraised by 3 c. All dividend distributions which would have
disinterested persons, if they fail to accrued on his shares shall be paid to him.
agree within 60 days from the date when [Sec. 83]
the corporate action was approved,
these 3 persons shall be — Right to Inspect
1. One named by the shareholder;
2. One named by the corporation; Basis of Right
3. One chosen by 1 & 2. As the beneficial owners of the business, the
stockholders have the right to know the
The findings of the majority of the appraisers financial condition and management of
shall be final. [Sec. 81] corporate affairs.
c. If shares represented by the certificates A stockholder’s right of inspection is based on

bearing a notation that such shares are his ownership of the assets and property of the
dissenting shares are transferred, and the corporation. Therefore, it is an incident of
certificates consequently cancelled: ownership of the corporate property, whether
(1) The rights of the transferor as a this ownership or interest is termed an
dissenting stockholder under this Title equitable ownership, a beneficial ownership, or
[Appraisal Right] shall cease; and quasi-ownership. Such right is predicated upon
(2) The transferee shall have all the rights of the necessity of self-protection. [Gokongwei Jr.
a regular stockholder; and all dividend v. SEC, G.R. No. L-45911 (1979)]
distributions which would have accrued
on such shares shall be paid to the
transferee. [Sec. 85]
Page 192 of 450

Records Subject to Inspection [Sec. 73] Requirements for the exercise of the right
Every corporation shall keep and carefully of inspection [Sec. 73]
preserve at its principal office all information a. The records are open to inspection only by
relating to the corporation including, but any director, trustee, stockholder or
not limited to: member of the corporation in person or by
a. The AOI and by-laws of the corporation and a representative.
all their amendments; b. Must be done at reasonable hours on
b. The current ownership structure and voting business days.
rights of the corporation, including lists of c. A demand in writing may be made by the
stockholders or members, group director, trustee or stockholder at their
structures, intra-group relations, ownership expense, for such records or excerpts from
data, and beneficial ownership; the records.
c. The names and addresses of all the d. The inspecting or reproducing party shall
members of the BOD or BOT and the remain bound by confidentiality rules under
executive officers; prevailing laws such as:
d. A record of all business transactions; a. Intellectual Property Code
e. A record of the resolutions of the BOD or b. Data Privacy Act
BOT and of the stockholders or members; c. Securities Regulation Code
f. Copies of the latest repertorial d. Rules of Court
requirements submitted to the
Commission; and Test to Determine Whether the Purpose of
g. The minutes of all meetings of stockholders Inspection is Legitimate
or members, or of the BOD/BOT, which A legitimate purpose is one which is genuine to
shall set forth – the interests of the stockholders as such and
i. Time and place of the meeting not contrary to the interests of the corporation
held; [Gokongwei Jr. v. SEC, G.R. No. L-45911
ii. How meeting was authorized; (1979)].
iii. Notice given;
iv. Agenda; Valid defenses of the officer or agent of the
v. Whether meeting was regular or corporation who refuses to allow
special (its object, if special) inspection and/or reproduction of records:
vi. Those present and absent a. The person demanding to examine and
vii. Every act done or ordered done at copy excerpts from the corporation’s
the meeting records and minutes has improperly used
h. Upon demand of the any information secured through any prior
BOD/BOT/stockholder or member – examination of the records or minutes of
i. Time when any director, trustee, such corporation or of any other
stockholder or member entered or corporation;
left the meeting must be noted in the b. The person was not acting in good faith;
minutes; c. The person was not acting for a legitimate
ii. The yeas and nays must be taken purpose in making the demand to examine
on any motion or proposition, and a or reproduce corporate records;
record thereof carefully made; d. The person is a competitor, director, officer,
iii. The protest of a director, trustee, controlling stockholder or otherwise
stockholder or member on any represents the interests of a competitor.
action or proposed action [Sec. 73]
Remedies when inspection is refused

a. Mandamus
 Under the Rules of Court, the writ of
mandamus should be granted only if the
Page 193 of 450

court is satisfied that justice so requires. Distinguished from Right of First Refusal
[Sec. 8, Rule 65] Pre-emptive Right Right of First
b. Injunction Refusal
c. Action for damages [Sec. 73] Grants stockholders Grants the existing
d. File an action under Sec. 161 to impose a the option to stockholders or the
penal offense by fine subscribe to all issues corporation the option
 The unjustified failure or refusal by the or disposition of to purchase the
corporation, or by those responsible for shares of any class, in shares of the
keeping and maintaining corporate proportion to their transferring
records, to comply with the pertinent rules respective stockholder. [Sec. 97]
and provisions of the RCC on inspection shareholdings. [Sec.
38]
and reproduction of records shall be
All stockholders of a Arises only by virtue
punished with a fine ranging from
stock corporation of contract
P10,000.00 to P200,000.00, at the
shall enjoy the pre- stipulations, by which
discretion of the Court
emptive right to the right is strictly
 When the violation of this provision is subscribe to all issues construed against the
injurious or detrimental to the public, the or disposition of right of person to
penalty is a fine ranging from P20,000.00 shares of any class, in dispose or deal with
to P400,000.00 [Sec. 161] proportion to their their property.
e. Summary investigation by SEC [Sec. 73] respective
shareholdings. [Sec.
Preemptive Right 38]
A right claimed A right exercisable
Definition against the against another
Pre-emptive right — An option or privilege of corporation on stockholder on his
an existing stockholder to subscribe to a unissued shares of its shares of stock.
proportionate part of shares subsequently capital stock, and [Villanueva]
issued by the corporation before the same can likewise on treasury
be disposed of in favor of others. shares held by the
corporation.
• This right includes all issues and [Villanueva]
disposition of such shares any class.
• It is a common law right and may be Purpose of Pre-emptive Right
exercised by stockholders even without The purpose is to enable the shareholder to
legal provision. retain his proportionate control in the
corporation and to retain his equity in the
Basis of Preemptive Right: Preservation of
surplus.
the existing proportional rights of the
stockholders. [Campos]
Scope of Pre-emptive Right
The broad phrase “all issues or disposition of
shares of any class” is construed to include:
a. New shares issued in pursuance of increase
in capital stock or from the unissued shares
which form part of the ACS; and also
b. Treasury shares
• Treasury shares would come under the
term “disposition”.
• Likewise considering that it is not
included among the exceptions
enumerated therein, where pre-emptive
right shall not extend, the intention is to
Page 194 of 450

include it in its application. [SEC iv. SEC can cancel shares if the 3rd party
Opinion, 14 January 1993] is not innocent
Limitations to Exercise of Pre-emptive right Waiver/Denial of Preemptive Right

[Sec. 38] Allowed by the Code provided that it is made in
a. Such pre-emptive right shall NOT extend to the AOI
shares to be issued in compliance with a. Waiver made through AOI would bind
laws requiring stock offerings or minimum present and subsequent shareholders;
stock ownership by the public; b. 2/3 vote of the outstanding capital stock is
b. It shall also NOT extend to shares to be necessary before waiver is binding;
issued in good faith with the approval of the c. Result of non-placement of waiver clause
stockholders representing 2/3 of the in AOI: Waiver shall not bind future
outstanding capital stock, in exchange for stockholders but only those who agreed to
property needed for corporate purposes or it.
in payment of a previously contracted debt;
c. It shall not take effect if denied in the AOI The shareholders must be given reasonable
or an amendment thereto; time within which to exercise their preemptive
d. If one shareholder does not want to rights.
exercise his pre-emptive right, the other • Upon expiration of such period, any
shareholders are not entitled to purchase shareholders who did not exercise such
the corresponding shares of the will be deemed to have waived it.
shareholder who declined. But if nobody • This is necessary so as to not hinder
purchased the same and later on the board future financing plans of the corporation.
re-issued the shares, the pre-emptive right Some new investors may be willing to
applies. [Sundiang and Aquino] invest only if all the new shares will be
issued to them. [Campos]
Exceptions to the Pre-emptive Right
1. When such right is denied by the articles of Right to Vote
incorporation or an amendment thereto;
and Nature of the Right to Vote
2. Shares to be issued: The right to vote is inherent and incidental to
a. In compliance with laws requiring the ownership of corporate stocks. [Tan v.
stock offerings or minimum stock Sycip, 499 SCRA 216 (2016)]
ownership by the public; or
b. To shares to be issued in good faith It represents the right of a stockholder to
with the approval of the participate in the control and management of
stockholders representing ⅔ of the the corporation. However, it is subject to the
outstanding capital stock in rule of the majority. [Villanueva]
exchange for:
i. Property needed for General Rule: No share may be deprived of
corporate purposes; or voting rights.
ii. In payment of a previously
contracted debt. [Sec. 38] Exception: Shares classified and issued as
“preferred” or “redeemable” may be deprived of
Remedies in case of unwarranted denial voting rights: Provided, that there shall always
i. Injunction be a class or series of shares with complete
ii. Mandamus voting rights. [Sec. 6]
iii. The suit should be individual and not
derivative because the wrong done is
to the stockholders individually
Page 195 of 450

Non-Voting Shares ownership over the shares. Even

Non-voting shares are not entitled to vote, sequestered shares may be voted upon by
except as provided for in par. 3 of Sec. 6. the registered stockholder of record.
Holders of nonvoting shares shall nevertheless [Cojuangco, Jr. v. Roxas, 195 SCRA 797
be entitled to vote on the following matters: (1991)]
1. Amendment of the articles of incorporation;  Exception: The PCGG may exercise the
2. Adoption and amendment of bylaws; voting right on sequestered shares
3. Sale, lease, exchange, mortgage, pledge, whenever it is able to comply with the “two-
or other disposition of all or substantially all tiered” or “public character” tests:
of the corporate property; a. The two-tiered test is satisfied when:
4. Incurring, creating, or increasing bonded a. Prima facie evidence show that
indebtedness; the wealth and/or the shares
5. Increase or decrease of authorized capital are indeed ill-gotten; and
stock; b. There is demonstrated
6. Merger or consolidation of the corporation imminent danger of dissipation
with another corporation or other of the assets.
corporations; b. The two-tiered test does not apply
7. Investment of corporate funds in another when the funds are prima facie public
corporation or business in accordance with in character or, at least, affected with
this Code; and public interest. [Republic v.
8. Dissolution of the corporation. COCOFED, 372 SCRA 462 (2001)]
viii. When shares are jointly owned by two or
Except in the above cases, the vote necessary more persons, the consent of all the co-
to approve a particular corporate act shall be owners shall be necessary.
deemed to refer only to stocks with right to • Exception: There is a written proxy,
vote. [Sec. 6] signed by all the co-owners,
authorizing one or some of them or any
Rules Applicable to Certain Kinds of Shares other person to vote such share or
i. Preferred or redeemable shares may be shares: Provided, That when the
deprived of the right to vote. [Sec. 6] shares are owned in an “and/or”
ii. Fractional shares of stock cannot be capacity, any one of the joint owners
voted. can vote said shares or appoint a
iii. Treasury shares have no voting rights as proxy therefor. [Sec. 55]
long as they remain in the treasury.
iv. No delinquent stock shall be voted. [Sec. Right of First Refusal
70]
v. A transferee of stock cannot vote if his Right of First Refusal — Obligates a
transfer is not registered in the stock and stockholder who may wish to sell or assign his
transfer book of the corporation. shares to first offer the shares to the
vi. In case a stockholder grants security corporation or to the other existing
interest in his or her shares in stock stockholders under terms and conditions which
corporations, the stockholder-grantor shall are reasonable.
have the right to attend and vote at meetings • Grants the existing stockholders or the
of stockholders. corporation the option to purchase the
• Exception: The secured creditor is shares of the transferring stockholder.
expressly given by the stockholder- [Sec. 97]
grantor such right in writing which is • Only when the corporation or the other
recorded in the appropriate corporate stockholders do not or fail to exercise
books. [Sec. 54] their option, is the offering stockholder
vii. The sequestration of shares does not
entitle the government to exercise acts of
Page 196 of 450

at liberty to dispose of his shares to third • It is an action brought by minority

parties. shareholders in the name of the
corporation to redress wrongs committed
An agreement entered into between the two against the corporation, for which the
majority stockholders of a corporation, directors refuse to sue.
whereby they mutually agreed not to sell, • It is a remedy designed by equity and has
transfer, or otherwise dispose of any part of been the defense of minority
their shareholdings till after one year from the shareholders against abuses by the
date of the agreement is valid. [Lambert v. Fox majority. [Villanueva]
G.R. No. L-7991 (1914)]
Derivative Suit as Defined in Jurisprudence
Nature of the Right of First Refusal It is a suit by a shareholder to enforce a
The right of first refusal is primarily an attribute corporate cause of action.
of ownership, and consequently can be
• It is a condition sine qua non that the
effected only through a contractual
corporation be impleaded as a party
commitment by the owner of the shares.
because not only is the corporation an
indispensable party, but it is also the
Consequently, the waiver of a right of first
present rule that it must be served with
refusal when duly constituted can be effected
process.
only by the registered owner. [PCGG v. SEC,
G.R. No. 82188 (1988)] • The judgment must be made binding upon
the corporation in order that the corporation
may get the benefit of the suit and may not
Remedial Rights
bring subsequent suit against the same
defendants for the same cause of action.
Individual Suit
[Chua v. C.A., G.R. No. 150793 (2004)]
A suit brought by the shareholder in his own
It is a suit brought by one or more
name against the corporation when a wrong is
stockholders/members in the name and on
directly inflicted against him.
behalf of the corporation to redress wrongs
committed against it, or protect/vindicate
Representative Suit
corporate rights whenever the officials of the
corporation refuse to sue, or the ones to be
A suit brought by the stockholder in behalf of
sued, or has control of the corporation.
himself and all other stockholders similarly
[Sundiang and Aquino]
situated when a suit brought by the shareholder
in his own name against the corporation when
Business Judgment Rule
a wrong is directly inflicted against him or a
As a general rule, when a wrong is committed
wrong is committed against a group of
against a corporation, whether to bring the suit
stockholders.
or not primarily lies within the discretion and
exercise of business judgment of the BOD.
Derivative Suit
• But where corporate directors are guilty of
Definition a breach of trust, not of mere error of
A suit brought by a stockholder for and on judgment or abuse of discretion, and inta-
behalf of the corporation for its protection from corporate remedy is futile or useless, a
the wrongful acts committed by the shareholder may institute a derivative suit
directors/trustees of the corporation, when the in behalf of himself and other stockholders
stockholder finds that he has no redress and for the benefit of the corporation,
because the directors/trustees, are the ones • The purpose of the suit is to bring about a
vested by law to decide whether or not to sue. redress of the wrong inflicted directly upon
Page 197 of 450

the corporation and indirectly upon the of the corporation or association”. [implied
stockholders. [Bitong v. C.A., G.R. No. from 1st par. of Rule 8, Sec. 1 of the Interim
123553 (1998)] Rules; see also Florete v. Florete, G.R. No.
174909 (2016)]
Parties to a Derivative Suit
In a derivative suit, the suing stockholder is The action brought by the shareholder or
merely a nominal party, while the corporation is member must be in the name of the corporation
the real party in interest. Thus, the action must or association. [Villamor v. Umale, G.R. No.
be brought for the benefit and in the name of 172843 (2014)]
the corporation. [Villanueva]
Requisites of a Derivative Suit according to
The corporation is an unwilling co-plaintiff. Jurisprudence [SMC v. Kahn, G.R. No. 85339
[Rule 3 Section 10, Rules of Court] (1989)]
• The corporation should be made a party to 1. The party bringing the suit should be a
the suit, either as plaintiff or defendant, for shareholder as of the time of the act or
res judicata to apply. transaction complained of, the number of
• BUT the personal injury suffered by the his shares not being material;
stockholder cannot disqualify him from 2. He has tried to exhaust intra-corporate
filing a derivative suit in behalf of the remedies, i.e., has made a demand on the
corporation. It merely gives rise to an BOD for the appropriate relief but the latter
additional cause of action for damages has failed or refused to heed his plea; and
against the erring corporate officers. 3. The cause of action actually devolves on
[Gochan v. Young, G.R. No. 131889 the corporation, the wrongdoing or harm
(2001)]. having been, or being caused to the
corporation and not to the particular
Proper Forum for Derivative Suits stockholder bringing the suit. [Lisam
The Regional Trial Courts exercise jurisdiction Enterprises, Inc., represented by Lolita A.
over derivative suits. [Sec. 5.2., Securities Soriano and Lolita A. Soriano v. Banco de
Regulation Code] Oro Unibank, Inc. et al., G.R. No. 143264
(2012)].
Requisites of Derivative Actions
a. That the person instituting the action be a Note: The “wrong” contemplated in a derivative
stockholder or member at the time the acts suit is one in which the injury alleged be indirect
or transactions subject of the action as far as the stockholders are concerned and
occurred and the time the action was filed; direct only insofar as the corporation is
b. That the stockholder or member exerted all concerned. [de Leon] The reliefs sought pertain
reasonable efforts, and alleges the same to the corporation. [Symaco Trading Corp. v
with particularity in the complaint, to Santos, G.R. No. 142474 (2005)]
exhaust all remedies available under the
AOI, by-laws, laws or rules governing the Stockholder may commence a derivative suit
corporation or partnership to obtain the “for mismanagement, waste or dissipation of
relief he desires; corporate asset because of a special injury to
c. That there is no appraisal right available for him for which he is otherwise without redress.
the act(s) complained of; [Yu v. Yukayguan, G.R. No. 177549 (2009)]
d. That the suit is not a nuisance or
harassment suit; [Rule 8, Interim Rules of
Procedure for Intra-Corporate Exhaustion of Administrative Remedies
Controversies] General Rule: A derivative suit can only be
e. The action brought by the filed when there has been a showing of
stockholder/member must be “in the name exhaustion of intra-corporate remedies.
Page 198 of 450

Exception: But where corporate directors are General Rule: Subscribers for stock are NOT
the ones guilty of a breach of trust, and intra- liable to pay interest on his unpaid subscription.
corporate remedy is futile or useless,
shareholders may institute a derivative suit for Exception: If so required in the by-laws at the
the benefit of the corporation without having to rate fixed in the by-laws. If no rate is fixed in the
exhaust intra-corporate remedies in order to subscription contract, the prevailing legal rate
bring about a redress of the wrong inflicted shall apply. [Sec. 65]
directly upon the corporation and indirectly
upon the stockholders. [Villanueva] Notes:
Transfer for consideration of treasury shares is
Obligations of a Stockholder a sale (or disposition) by the corporation (not
subscription). A transfer of previously issued
(1) Liability to the Corporation for Unpaid shares by a stockholder to a third person in a
Subscription [Sec. 66] sale (or disposition). Transfer of unissued
shares is subscription.
Payment of unpaid subscription or any
percentage thereof, together with any interest Shareholders are not creditors of the
accrued shall be made: corporation with respect to their shareholdings
On the date specified in the subscription thereto and the principle of compensation or
contract; or set-off has no application.
On the date stated in the call made by the
board. Subscription contract is NOT required to be in
writing.
Failure to pay on such date shall:
1. Render the entire balance due and (3) Liability for Watered Stocks [Sec. 64]
payable; and
2. Make the stockholder liable for interest at Definition
the legal rate on such balance, unless a Watered Stocks — Shares issued as fully paid
different interest rate is provided in the when in truth no consideration is paid, or the
subscription contract. consideration received is known to be less than
the par value or issued value of the shares.
A subscription contract is unconditional (i.e., [Sec. 64]
obligation to pay is not subject to any
contingency) and indivisible (as to the amount See b. Watered stocks under 10. Capital Affairs
and transferability). [Fua Cun v. Summers
(1923)] Hence, if the subscriber paid 20% of his Liability of directors or officers [Sec. 64]
subscription, he is not entitled to the issuance Any director or officer of a corporation who:
of certificates corresponding to 20% of the 1. Consents to the issuance of stocks for a
shares. consideration less than its par or issued
value;
Unpaid claim refers to any unpaid subscription, 2. Consents to the issuance of stocks for a
and not to any indebtedness which a consideration other than cash, valued in
subscriber may owe the corporation rising from excess of its fair value; or
any other transaction. [China Banking Corp. v. 3. Having knowledge of the insufficient
C.A., G.R. No. 117604 (1997)] consideration, does not file a written
objection with the corporate secretary.
(2) Liability to the Corporation for Interest
on Unpaid Subscription if so Required The director or officer shall be liable to the
by the By-Laws [Sec. 65] corporation or its creditors, SOLIDARILY with
the stockholder concerned to the corporation
Page 199 of 450

and its creditors for the difference in value. All persons who assume to act as a
[Sec. 64] corporation, knowing it to be without authority
to do so, shall be liable as general partners for
Value received at time of Php XXX all debts, liabilities and damages incurred or
issuance of the stock arising as a result thereof.
Par or issued value (XXX) When any such ostensible corporation is sued
on any transaction entered or on any tort
Liability for watered stock Php XXX committed by it as a corporation, it shall not be
allowed to use as a defense its lack of
Personal liability of corporate directors, corporate personality.
trustees or officers attaches when they consent
to the issuance of watered down stocks or Anyone who assumes an obligation to an
when, having knowledge of such issuance, do ostensible corporation cannot resist
not file with the corporate secretary their written performance thereof on the ground that there
objection. [SPI Technologies Inc. V. Mapua, was in fact no corporation. [Sec. 20]
G.R. No. 191154 (2014)]
Meetings
(4) Liability for Dividends Unlawfully Paid
General Rule: Stockholders’ or members’
The director, trustee or officer shall be liable as approval is expressed in a meeting duly called
a trustee for the corporation and must account and held for the purpose.
for the profits, which would otherwise have
accrued to the corporation when: Exception: In case of amendment of AOI,
• A director, trustee willfully attempts to approval may be expressed by referendum or
acquire, or acquires any interest written assent of the stockholders or members.
adverse to the corporation [Sec. 15]
• In respect of any matter which has been
reposed in them in confidence, and Who May Attend and Vote
upon which, equity imposes a disability a. Stockholders [Sec. 23]
upon themselves to deal in their own a. In person
behalf. [Sec. 30] b. By proxy
c. Via remote communication (only if
The sanction can be found in Sec. 158 which allowed by by-laws or by majority of
can be: BOD/BOT, except if vested with
(a) A fine from P5,000 and not more than public interest)
P1,000 for each day of continuing d. In absentia (only if allowed by by-
violation but in no case to exceed laws or by majority of BOD/BOT,
P2,000,000; except if vested with public interest)
(b) An issuance of a permanent cease-and- e. Note: The SEC shall issue the rules
desist order, suspension or revocation and regulations governing
of the certificate of incorporation, or participation and voting through
dissolution and forfeiture of corporate remote communication or in
assets. absentia.
b. Stockholder-grantor [Sec. 54]
(5) Liability for Assuming to Act as a c. Secured creditor, if expressly empowered
Corporation Knowing it to be Without by the stockholder-grantor [Sec. 54]
Authority d. Executors, administrators, receivers and
by the court, without need of any written
proxy [Sec. 54]
Page 200 of 450

e. ALL joint owners of stocks, or any of them

with the consent of ALL the co-owners,
unless there is a written proxy, signed by all
the co-owners [Sec. 55]
f. Any one of the joint owners of shares
owned in an “and/or” capacity or a proxy
thereof [Sec. 55]
Who Calls the Meeting

Any petitioning stockholder or member upon
order of the SEC when there is no person
authorized to call a meeting. The petitioning
stockholder or member shall preside until at
least a majority of the stockholders/members
present have chosen from among themselves,
a presiding officer. [Sec. 49]
Who Presides at the Meeting

General Rule: The chairman or, in his
absence, the president shall preside at all
meetings of the directors or201 trustees as well
as of the stockholders or members.
Exception: The bylaws provide otherwise.

[Sec. 53]
Page 201 of 450

Regular or Special
Regular Special
Annually on a date fixed by the by-laws.
Any time deemed necessary
When or as provided in the by-laws
If not fixed, on any date AFTER April 15 of every
[Sec. 49]
year as determined by the BOD/BOT [Sec. 49]
General Rule : Sent at least 21 days prior to the
meeting
General Rule : At least 1
Exception : A different period is required by the by- week written notice
Written
laws, law or regulation. Exception : A different period
notice
is provided in the by-laws, law
Written notice may be sent to all stockholders or or regulation [Sec. 49]
members of record through electronic mail or such
other manner as the SEC shall allow [Sec. 49]
Notice of meetings shall be sent through means of communication provided in the
by-laws and must contain :
1. Time ;
2. Place ;
3. Purpose;
4. Agenda ;
5. Proxy form which shall be submitted to the corporate secretary within a
reasonable time before the meeting ;
6. When attendance, participation and voting are allowed by remote
communication or in absentia, the requirements and procedures to be followed
when a stockholder/members elects either option ;
7. When the meeting is for election of directors/trustees, the requirements and
procedure for nomination and election [Sec. 50]
1. Minutes of the most recent regular meeting
which shall include :
a) Description of the voting and vote
tabulation procedures used in the previous
meeting ;
b) Description of opportunity given to
stockholders/members to ask questions
and a record of the questions asked and
asnwers given ; A stockholder or
c) Matters discussed and resolutions member may propose the
Agenda
reached ; items to be included in the
d) Record of the voting results for each agenda [Sec. 49].
agenda item ;
e) List of directors/trustees, officers and
stockholders/members who attended the
meeting ;
f) Other items that the SEC may require in the
interest of good corporate governance and
protection of minority stockholders
Page 202 of 450

Regular Special
2. Members’ list for non-stock corporations. For
stock corporations, material information on the
current stokcholders, and their voting rights ;
3. Detailed, descriptive, balanced and

comprehensible assessment of the corporation’s
performance, which shall include information on
any material change in the corporation’s business,
strategy and other affairs ;
4. Financial report for the preceding year, which

shall include financial statements duly signed and
certified, a statement on the adequacy of the
corporation’s internal controls or risk management
systems, and a statement of all external audit and
non-audit fees ;
5. Explanation of the dividend policy and the fact

of payment of dividends or the reasons for
nonpayment ;
6. Director/trustee profiles which shall include their

qualifications and relevant experience, length of
service in the corporation, trainings and continuing
education attended, and their board
representations in other corporations
7. Director/trustee attendance report, indicating

the attendance of each director or trustee at each
of the meetings of the board and its committees
and in regular or special meetings ;
8. Appraisals and performance reports for the

board and the criteria and procedure for
assessment ;
9. Director/trustee compensation report
10. Director disclosures on self-dealings and

related party transactions ; and/or
11. The profiles of directors nominated or seeking

election/re-election [Sec. 49]
Written notice and reason therefor shall be sent to
all stockholders/members at least 2 weeks
Postponemen
before the meeting, unless a different period is
t
required under the bylaws, law or regulation [Sec.
49]
Page 203 of 450

Regular Special
Stock Corporations
General Rule : Principal office of the corporation as set forth in the AOI
Exception : If not practicable, in the city or municipality where the principal office of
the corporation is located.
Where Note : Any city or municipality in Metro Manila, Metro Cebu, Metro Davao and other
Metropolitan areas shall be considered a city or municipality [Sec. 50].
Non-stock Corporations
Any place even outside the place where the principal office of the corporation is
located, as long as within Philippine territory and proper notice is sent to all
members. [Sec. 92]
General Rule: Stokcholders representing majority of the outstanding capital stock
or majority of the members.
Quorum
Exception: The Code or the by-laws provide otherwise. [Sec. 51]
Notice of Meetings Attendance as Waiver

General Rule: Attendance at a meeting shall
Content of Notice constitute a waiver of notice of such meeting.
Notice of meetings shall be sent through the Exception: When the person attends a
means of communication provided in the meeting for the express purpose of objecting to
bylaws, which notice shall state the time, place the transaction of any business because the
and purpose of the meetings. meeting is not lawfully called or convened.
[Sec. 49]
Each notice of meeting shall be accompanied
by the following: Postponement of Regular Meetings
1. The agenda for the meeting; General Rule: In case of postponement of
2. A proxy form which shall be submitted to stockholders’ or members’ regular meetings,
the corporate secretary within a reasonable written notice thereof and the reason therefor
time prior to the meeting; shall be sent to all stockholders or members of
3. When attendance, participation, and voting record at least 2 weeks prior to the date of the
are allowed by remote communication or in meeting.
absentia, the requirements and procedures
to be followed when a stockholder or Exception: If a different period is required
member elects either option; and under the bylaws, law or regulation. [Sec. 49]
4. When the meeting is for the election of
directors or trustees, the requirements and Place and Time of Meetings
procedure for nomination and election.
[Sec. 50] See table under i. Regular or special
Subject to Waiver Quorum

General Rule: Notice of any meeting may be
waived, expressly or impliedly, by any General Rule: Stockholders representing
stockholder or member. majority of the outstanding capital stock or
majority of the members.
Exception: General waivers of notice in the
articles of incorporation or the bylaws shall not Exception: The Code or the by-laws provide
be allowed. [Sec. 49] otherwise. [Sec. 51]
Page 204 of 450

Where quorum is present at the start of a lawful 2. The yeas and nays on any motion or
meeting, stockholders present cannot, without proposition;
justifiable cause, break the quorum by walking 3. The protest of a director, trustee,
out from said meeting so as to defeat the stockholder or member on any action or
validity of any act proposed and approved by proposed action. [Sec. 73]
the majority. However, stockholders can break
the quorum for justifiable causes. [Johnston v. 9. Board of Directors and
Johnston (1965), CA decision]
Trustees
Minutes and Agenda of Meetings
Repository of Corporate Powers
Agenda in Regular Meetings
See enumeration in the table under i. Regular Doctrine of Centralized Management
or special. BOARD IS SEAT OF CORPORATE POWERS
A director, trustee, stockholder, or member General Rule: Unless otherwise provided in

may propose any other matter for inclusion in this Code, the board of directors or trustees
the agenda at any regular meeting of shall exercise the corporate powers,
stockholders or members. [Sec. 49] conduct all business, and control all
properties of the corporation. [Sec. 22]
Agenda in Special Meetings
See enumeration in the table under i. Regular Governing Body of the Corporation
or special. It is well established in corporation law that the
corporation can act only through its board of
A stockholder or member may propose the directors in the case of stock corporations, or
items to be included in the agenda during a board of trustees in the case of non-stock
special meeting. [Sec. 49] corporations. [de Leon]
Minutes of Meetings Exceptions:

The minutes of all meetings of stockholders or 1. In case of an Executive Committee duly
members shall be kept and carefully preserved authorized in the by-laws; [Sec. 34]
at its principal office. Exception to Exception: The following
may not be delegated to the executive
Such minutes shall set forth in detail, among committee:
others: (1) Approval of any action for which
a. The time and place of the meeting held; shareholders' approval is also
b. How it was authorized; required;
c. The notice given; (2) The filing of vacancies in the board;
d. The agenda therefor; (3) The amendment or repeal of by-laws or
e. Whether the meeting was regular or the adoption of new by-laws;
special, its object if special; (4) The amendment or repeal of any
f. Those present and absent; and resolution of the board which by its
g. Every act done or ordered done at the express terms is not so amendable or
meeting. repealable; and
(5) A distribution of cash dividends to the
Upon the demand of a director, trustee, shareholders. [Sec. 34]
stockholder or member, the following must be 2. In case of a contracted manager which
noted in the minutes: may be an individual, a partnership, or
1. The time when any director, trustee, another corporation
stockholder or member entered or left the
meeting;
Page 205 of 450

Note: In case the contracted manager is Principle on Delegation of Board Power

another corporation, the special rule in Under Sec. 23 (now Sec. 22, RCC), the power
Sec. 43 applies. and the responsibility to decide whether the
corporation should enter into a contract that will
3. In case of close corporations, the bind the corporation is lodged in the board,
stockholders may manage the business subject to the articles of incorporation, by-laws,
of the corporation rather than by a BOD, or relevant provisions of law.
if the Articles of Incorporation so
provide [Sec. 96] However, just as a natural person may
authorize another to do certain acts for and on
The power to purchase real property is vested his behalf, the BOD may validly delegate some
in the BOD or trustees. While a corporation of its functions and powers to officers,
may appoint agents to negotiate for the committees or agents. The authority of such
purchase of real property needed by the individuals to bind the corporation is generally
corporation, the final say will have to be with derived from law, corporate by-laws or
the board, whose approval will finalize the authorization from the board, either expressly
transaction. [Spouses Constantine Firme v. or impliedly by habit, custom or acquiescence
Bukal Enterprises and Development in the general course of business. [People’s
Corporation, G.R. No. 146608 (2003)] Aircargo v. CA, G.R. No. 117847 (1998)]
Indisputably, one of the rights of a stockholder Corporate powers may be directly conferred
is the right to participate in the control or upon corporate officers or agents by statute,
management of the corporation. This is the articles of incorporation, the by-laws, or by
exercised through his vote in the election of resolution or other act of the board of directors.
directors because it is the BOD that controls or [Citibank, N.A. vs. Chua, 220 SCRA 75 (1993)]
manages the corporation. [Gamboa v. Teves,
G.R. No. 176579 (2011)] Tenure, Qualifications, and
Disqualifications of Directors or
Limitations on powers of BOD/BOT
Trustees
(1) Limitations imposed by the Constitution,
statutes, articles of incorporation or by-
Tenure
laws;
(2) Certain acts of the corporation that require
Directors – Term of 1 year from among the
joint action of the stockholders and BOD: holders of stocks registered in the corporation’s
a. Removal of director [Sec. 27] books. [Sec. 22]
b. Amendments of Articles of
Incorporation [Sec. 15]
Trustees – Term not exceeding 3 years from
c. Fundamental changes [Sec. 37] among the members of the corporation. [Sec.
d. Declaration of stock dividends [Sec.
22]
42]
e. Entering into management contracts Holdover Principle
[Sec. 43] Upon failure of a quorum at any meeting of the
f. Fixing of consideration of no-par stockholders or members called for an election,
shares [Sec. 61] the directorate naturally holds over and
g. Fixing of compensation of directors continues to function until another directorate
[Sec. 29] is chosen and qualified.
(3) Cannot exercise powers not possessed by Each director and trustee shall hold office until
the corporation. the successor is elected and qualified. [Sec.
22]
Page 206 of 450

The failure to elect does not terminate the Qualifications

terms of incumbent officers nor dissolve the
corporation. a. Director: Must own at least one (1) share of
stock.
Term v. Tenure
Term Tenure Trustee: Must be a member of the
corporation.
Time during which  A director who ceases to own at least
the officer may claim The period within one (1) share of stock or a trustee who
to hold the office as of which the director ceases to be a member of the
right, and fixes the actually holds office, corporation shall cease to be such.
interval after which including the [Sec. 22]
the several holdover period after  In order to be eligible as a director,
incumbents shall the end of his term what is material is the legal title to, not
succeed one another. beneficial ownership of, the stock as
appearing on the books of the
Not affected by the corporation. [Lee v. CA, G.R. No.
Includes holdover
holdover 93695 (1992)]
Fixed by statute, and
it does not change b. Must be a natural person, of legal age,
simply because the possess full legal capacity
office may have May be shorter or c. Must not be convicted by final judgment of
become vacant, nor longer (in case of a an offense punishable by imprisonment for
because the holdover) than the a period exceeding 6 years [Sec. 26]
incumbent holds over term for reasons d. Other qualifications as may be prescribed
in office beyond the within or beyond the in the by-laws of the corporation. [Sec. 46]
end of the term due to power of the  While additional qualifications may be
the fact that a incumbent prescribed, this cannot be in conflict
successor has not with the requirements as set by the
been elected and has RCC.
failed to qualify.
Note: The RCC removed the requirement that
[Valle Verde Country Club v. Africa, G.R. No. majority of the directors or trustees must be
151969 (2009)] residents of the Philippines.
Permanent representation not allowed in Disqualifications

BOD
The board of directors of corporations must be A person shall be disqualified from being a
elected from among the stockholders or director, trustee, or officer of any corporation if,
members directors every year. Estoppel does within five (5) years prior to the election or
not set in to legitimize what is wrongful. (Grace appointment as such, the person was:
Christian High School v. CA, G.R. No. 108905, (a) Convicted by final judgment:
October 23, 1997) (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
Page 207 of 450

(c) By a foreign court or equivalent foreign Commission;

regulatory authority for acts, violations or ii. Corporations listed with an exchange
misconduct similar to those enumerated in or with assets of at least Fifty million
paragraphs (a) and (b) above. [Sec. 26] pesos (P50,000,000.00); and
iii. Having two hundred (200) or more
Note: The foregoing is without prejudice to holders of shares, each holding at
qualifications or other disqualifications, which least one hundred (100) shares of a
the Commission, the primary regulatory class of its equity shares;
agency, or the Philippine Competition (2) Banks and quasi-banks, NSSLAs,
Commission may impose in its promotion of pawnshops, corporations engaged in
good corporate governance or as a sanction in money service business, pre-need, trust
its administrative proceedings. and insurance companies, and other
financial intermediaries;
An amendment to the corporation’s by-laws (3) Other corporations engaged in business
which renders a stockholder ineligible to be a vested with public interest similar to the
director, if he be also a director in a corporation above, as may be determined by the
whose business is in competition with that of Commission. [Sec. 22]
the other corporation, has been sustained as
valid. This is based upon the principle that Manner of Election
where the director is so employed in the service Independent directors must be elected by the
of a rival company, he cannot serve both, but shareholders present or entitled to vote in
must betray one or the other. Such an absentia during the election of directors. [Sec.
amendment "advances the benefit of the 22]
corporation and is good." [Gokongwei, Jr. v.
SEC, G.R. No. L-45911 (1979)] Independent directors shall be subject to rules
and regulations governing their:
Note: See Sec. 160  Qualifications, disqualifications, voting
requirements, duration of term and
Requirement of Independent term limit, maximum number of board
memberships; and
Directors
 Other requirements that the
Commission will prescribe to
Independent Directors
strengthen their independence and
An independent director is a person who, apart
align with international best practices.
from shareholdings and fees received from the
[Sec. 22]
corporation, is independent of management
and free from any business or other
relationship which could, or could reasonably Elections [Sec. 23]
be perceived to materially interfere with the
exercise of independent judgment in carrying Number of Directors and Trustees
out the responsibilities as a director. [Sec. 22] Directors: Not more than fifteen (15)
Requirement for Independent Directors Trustees: May be more than fifteen (15) [Sec.
Corporations vested with public interest are 13 and 91]
now required to have independent directors
constituting at least twenty percent (20%) of The RCC removed the minimum number of
the board. [Sec. 22] This is in order to promote directors which stood at five (5) under the old
good governance. code. [Sec. 14, Old Corporation Code]
These corporations include:
(1) Corporations covered by the Securities
Regulation Code, namely:
i. ose whose securities are
registered with the
Page 208 of 450
Election of Directors or Trustees 150 votes to candidate 4, and 50 votes to

See h. Election of Directors or Trustees candidate 5.
under 6. Incorporation and Organization
Quorum
Cumulative Voting
At all elections of directors or trustees, there
Methods of Voting must be present, either in person or through a
(1) Straight voting representative authorized to act by written
(2) Cumulative voting for one candidate proxy:
(3) Cumulative voting by distribution (1) Stock Corporations: The owners of
majority of the outstanding capital stock
Rules Governing all Methods of Voting (2) Non-Stock Corporations: A majority of the
a. The total number of votes cast shall not members entitled to vote. [Sec. 23]
exceed the number of shares owned by the
stockholders as shown in the books of the It is necessary that there be a quorum. An
corporation multiplied by the whole number election without quorum is invalid.
of directors to be elected
b. No delinquent stock shall be voted. [Sec. If the owners of majority of the outstanding
23] capital stock or majority of the members
entitled to vote are not present in person, by
Straight Voting proxy, or through remote communication, or
Every stockholder may vote such number of not voting in absentia at the meeting, such
shares for as many persons as there are meeting may be adjourned. [Sec. 23]
directors to be elected. [Sec. 23]
See subheading “When No Election is Held”
Cumulative Voting under h. Election of Directors or Trustees
Cumulative Voting For One Candidate under 6. Incorporation and Organization
A stockholder is allowed to concentrate his
votes and give one candidate as many votes Election Contests
as the number of directors to be elected All matters affecting the manner and conduct of
multiplied by the number of his shares shall the election of directors are properly
equal. [Sec. 23] cognizable by the regular courts. Otherwise,
these matters may be brought before the SEC
Illustration: for resolution based on the regulatory powers it
If there are 5 directors to be elected and Pedro, exercises over corporations, partnerships, and
as shareholder, has 100 shares, Pedro can associations. [SEC v. CA, 739 SCRA 99
give 500 (5 x 100 shares) votes to just one (2014)]
candidate.
Removal
Cumulative Voting By Distribution
A stockholder may cumulate his shares by General Rule: Any Director or Trustee of a
multiplying the number of his shares by the corporation may be removed from office, with
number of directors to be elected and distribute or without cause. [Sec. 27]
the same among as many candidates as he
shall see fit. [Sec. 23] Exception: If the director was elected by the
minority, there must be cause for removal
Illustration: because the minority may not be deprived of
In the illustration above, Pedro instead may the right to representation to which they may be
choose to give 100 votes to candidate 1, 100 entitled to under Sec. 23 of the Code. [Sec. 27]
votes to candidate 2, 100 votes to candidate 3,
Page 209 of 450

Note: The right to representation refers to the (3) Grounds other than the above, but the
right to cumulative voting for one candidate. remaining directors can constitute a
quorum.
Requisites for Removal: (4) Grounds other than the above, but the
1) It must take place either at a regular remaining directors cannot constitute a
meeting or special meeting of the quorum for the purpose of filling the
stockholders or members called for the vacancy;
purpose; (5) By reason of an increase in the number of
2) A special meeting for the purpose of directors or trustees.
removing directors or trustees must be
called by: Cause of Procedure
a. The secretary, on order of the Vacancy
president; or
b. The secretary, upon written The election by stockholders
demand of the stockholders shall be held no later than the
Expiration
representing or holding at least a day of such expiration at a
of term
MAJORITY of the capital stock or a meeting called for that
MAJORITY of the members purpose.
entitled to vote;
3) There must be previous notice to the The election may be held on
stockholders or members of the intention to the same day of the meeting
remove a director; and authorizing the removal and
Removal this fact must be so stated in
4) There must be a vote of the stockholders
representing 2/3 of outstanding capital the agenda and notice of said
stock or in case of a nonstock corporation, meeting.
2/3 of members entitled to vote.
Other The election must be held no
New Power of the SEC under the Revised grounds, later than forty-five (45) days
Corporation Code [Sec. 27] but the from the time the vacancy
The Commission shall, motu proprio or upon remaining arose.
verified complaint, and after due notice and directors
hearing, order the removal of a director or can
trustee elected despite the disqualification, or constitute
whose disqualification arose or is discovered a quorum
subsequent to an election.
a. The vacancy must be filled
The removal of a disqualified director shall be by the stockholders or
Other
without prejudice to other sanctions that the members in a regular or special
grounds,
Commission may impose on the board of meeting for that purpose; or
but the
directors or trustees who, with knowledge of b. In case of the necessity of
remaining
the disqualification, failed to remove such emergency action, the vacancy
directors
director or trustee. [Sec. 27] may be temporarily filled from
CANNOT
among the officers of the
constitute
corporation by unanimous
Filling of Vacancies [Sec. 28] a quorum:
vote of the remaining directors
or trustees.
Ways which the filling of a vacancy may
occur: By reason Shall be filled only by an
(1) Expiration of term; of an election at a regular or at a
(2) Removal; increase in special meeting of
the stockholders duly called for the
Page 210 of 450

Cause of Procedure the stockholders representing at least a

Vacancy majority of the Outstanding Capital Stock
or a majority of the members at a regular or
number of purpose, or in the same special stockholders’ meeting.
directors meeting authorizing the
or trustees increase of directors or Note: The total yearly compensation of
trustees if so stated in the directors shall not exceed 10% of the net
notice of the meeting. income before income tax of the corporation
Note: In all elections to fill vacancies under this during the preceding year. [Sec. 29]
section, the procedure set forth in Sections 23
and 25 of the Revised Corporation Code shall Added in the RCC
apply. [Sec. 28]  The directors or trustees shall NOT
participate in the determination of their own
Designation of director or trustee per diems or compensation.
A vacancy may be temporarily filled from  Corporations vested with public interest
among the officers of the corporation by shall submit to their shareholders and the
unanimous vote of the remaining directors or Commission, an annual report of the total
trustees when: compensation of each of their directors or
(1) The vacancy prevents the remaining trustees.
directors from constituting a quorum; and
(2) Emergency action is required to prevent Compensation of Directors as Corporate
grave, substantial, and irreparable loss or Officers
damage to the corporation. The position of being Chairman and Vice-
Chairman, like that of treasurer and secretary,
The action by the designated director or are not considered directorship positions, but
trustee shall be limited to the emergency officership positions that would entitle the
action necessary. [Sec. 28] occupants to compensation.
Term of designated director or trustee Likewise, the limitation placed under Sec. 30
The term of the designated director or trustee (now Sec. 29, RCC) of the Corporation Code
shall cease: that directors cannot receive compensation
(1) Within a reasonable time from the exceeding 10% of the net income of the
termination of the emergency; or corporation would not apply to the
(2) Upon election of the replacement director compensation given to such positions since it
or trustee, whichever comes earlier. [Sec. is being given in their capacity as officers of the
28] corporation and not as board members.
[Western Institute of Technology v. Salas, G.R.
No. 113032 (1997)]
Compensation
General Rule: Directors or trustees are only Disloyalty

entitled to reasonable per diems. They are not
entitled to compensation as directors or Duties of Directors and Trustees
trustees. [Sec. 29]
THREE-FOLD DUTY
Exceptions: In this jurisdiction, the members of the BOD
a. When Articles of Incorporation, by-laws, or have a three-fold duty: duty of obedience,
an advance contract provides for duty of diligence, and duty of loyalty.
compensation.
b. Compensation other than per diems may 1) Duty of Obedience - shall direct the affairs
also be granted to directors by the vote of of the corporation only in accordance with
the purposes for which it was organized;
Page 211 of 450

2) Duty of Diligence - shall not willfully and DOCTRINE OF CORPORATE

knowingly vote for or assent to patently OPPORTUNITY
unlawful acts of the corporation or act in Unless his act is ratified, a director shall refund
bad faith or with gross negligence in to the corporation all the profits he realizes on
directing the affairs of the corporation; and a business opportunity which:
3) Duty of Loyalty - shall not acquire any a. Corporation is financially able to undertake
personal or pecuniary interest in conflict b. From its nature, is in line with corporation’s
with their duty as such directors or trustees. business and is of practical advantage to it;
[Strategic Alliance Development Corp v. and
Radstock Securities Ltd., G.R. No. 178158 c. One in which the corporation has an
(2009)] interest or a reasonable expectancy.
Duty of Obedience The rule shall be applied notwithstanding the

The Directors or Trustees and Officers should fact that the director risked his own funds in the
direct the affairs of the corporations only in venture. [Sec. 33]
accordance with the purposes for which it was
organized. By embracing the opportunity, the self-interest
of the officer or director will be brought into
Duty of Diligence conflict with that of his corporation. Hence, the
The directors should not willfully and knowingly law does not permit him to seize the
vote for or assent to patently unlawful acts of opportunity even if he will use his own funds in
the corporation or act in bad faith or with gross the venture. [Sundiang & Aquino]
negligence in directing the affairs of the
corporation. [Sec. 30] A director, trustee, or officer shall be liable as a
trustee for the corporation and must account
Note: The conditions for the application of Sec. for the profits which otherwise would have
31 (now Sec. 30, RCC) of the Corporation accrued to the corporation if:
Code require factual foundations to be first laid (1) He attempts to acquire, or acquire any
out in appropriate judicial proceedings. Hence, interest adverse to the corporation in
concluding that a person breached fiduciary respect of any matter which has been
duties as an officer and member of the BOD of reposed in them in confidence; and
a corporation without competent evidence (2) Upon which, equity imposes a disability
thereon would be unwarranted and upon themselves to deal in their own
unreasonable. [Republic of the Philippines v. behalf. [Sec. 30]
Sandiganbayan (First Division) et al., G.R. No.
166859 (2011)] Note: Differences between Sec. 30 and Sec.
33:
Duty of Loyalty a) First, while both involve the same subject
General Rule: Where a director, by virtue of matter (business opportunity) they concern
such office, acquires a business opportunity different personalities; Sec. 33 is
which should belong to the corporation, applicable only to directors and not to
thereby obtaining profits to the prejudice of officers, whereas Sec. 30 applies to
such corporation, the director must account for directors, trustees and officers.
and refund to the latter all such profits. b) Second, Sec. 33 allows a ratification of a
transaction by a self-dealing director by
Exception: Unless the act has been ratified vote of stockholders representing at least
by a vote of the stockholders owning or 2/3 of the outstanding capital stock.
representing at least two-thirds (2/3) of the [Villanueva]
outstanding capital stock. [Sec. 33]
Page 212 of 450

Business Judgment Rule REQUIREMENTS FOR THE BUSINESS

JUDGMENT RULE TO APPLY
General Rule: Questions of policy or a. Presence of a business decision including
management are left solely to the honest decisions on policy management and
decision of officers and directors of a administration;
corporation and the courts are without authority b. The decision must be intra vires and must
to substitute their judgment for the judgment of comply with the procedural and substantive
the board of directors. requirements of law;
c. Good faith;
The board is the business manager of the d. Due care in making the decision;
corporation and so long as it acts in good faith, e. The director must not have personal
its orders are not reviewable by the courts or interest or nor self-dealing or otherwise on
the SEC. [Montelibano v. Bacolod-Murica breach of the duty of loyalty. [Villanueva]
Milling Co., G.R. No. L-15092 (1962); Phil.
Stock Exchange, Inc. v. CA, G.R. No. 125469, REMEDIES IN CASE OF MISMANAGEMENT
(1997)] (1) Removal of directors pursuant to Sec. 27
(2) Derivative suit or complaint filed with the
Exceptions: RTC [Sec. 5.2, R.A. 8799, Securities
a. If the contracts are so unconscionable and Regulation Code; A.M. No. 01-2-04 SC,
oppressive as to amount to a wanton Interim Rules of Procedure Governing
destruction of the rights of the minority Intracorporate Controversies]
[Ingersoll v. Malabon Sugar, G.R. No. L- (3) Receivership
27770 (1927)]; (4) Injunction if the act has not yet been done
b. If they violate their duties under Sec. 30 (5) Dissolution if abuse amounts to a ground for
(director willfully and knowingly assents to quo warranto but Solicitor General refuses
patently unlawful acts of the corporation, or to act
are guilty of gross negligence or bad faith);
and Note: Dean Villanueva opined that a derivative
c. If they violate Sec. 33 (disloyalty of a suit may be an exception to the Business
director who acquires for himself a Judgment Rule –
business opportunity that should have  This occurs when it is apparent that the
belonged to the corporation, unless his act Board is not in a position to validly exercise
is ratified by a 2/3 vote of stockholders). its business judgment for the protection of
the corporation
CONSEQUENCES OF THE BUSINESS  e.g., when the Board itself has committed
JUDGMENT RULE an act causing damage to the corporation
 The resolution, contracts and transactions or when the Board is placed in a conflict of
of the board cannot be reversed or set interest scenario, whereby it is unlikely that
aside by the Courts even on the behest of it would use such business discretion to file
stockholders or members, under the such suit for the best interest of the
principle that the business of the corporation.
corporation has been left to the hands of
the board. Solidary Liabilities for Damages
 Directors and duly authorized officers
cannot be held personally liable for acts Solidary Liability For Damages
or contracts done with the exercise of their a. The directors and trustees are solidarily
business judgment. liable for damages arising from the ff.:
b. Willfully and knowingly voting for and
assenting to patently unlawful acts of the
corporation; [Sec. 30]
Page 213 of 450

c. Gross negligence or bad faith in directing because they are in-charge of day-to-day
the affairs of the corporation; [Sec. 30] activities. [Campos]
d. Acquiring any personal or pecuniary  The provisions on seizing corporate
interest in conflict of duty; [Sec. 30] opportunity and disloyalty [Secs. 30 and
e. Consenting to the issuance of watered 33] shall also apply to corporate officers.
stocks, or, having knowledge thereof, [Price v. Innodata Phils., Inc., G.R. No.
failing to file objections with secretary; 178505 (2008)]
[Sec. 64]
f. Agreeing or stipulating in a contract to hold Doctrine of Limited Doctrine of
himself liable with the corporation; or Liability Immunity
g. By virtue of a specific provision of law.
Protects a person
Shields the
LIABILITY FOR WATERED STOCKS acting for and in
incorporators from
Watered Stocks – stocks issued for a behalf of the
corporate liability
consideration less than its par or issued value corporation from
beyond their agreed
or for a consideration in any form other than being himself
contribution to the
cash, valued in excess of its fair value. personally liable for
capital or shareholding
his authorized
Any director or officer of a corporation shall be in the corporation
actions
solidarily liable with the stockholder
concerned to the corporation and its creditors
Strains in Labor Law
for the difference in value for:
The Supreme Court appears to have different
(1) Consenting to the issuance of watered
views regarding the personal liability of officers
stocks or;
when it comes to labor law violations:
(2) Failing express his objection in writing and
● Absent proof that the manager exceeded
file the same with the corporate secretary
his authority in dealing as regards the
despite having knowledge thereof of such
employee, he cannot be held personally
issuance [Sec. 64].
liable for the said employee’s monetary
compensation. (Nicario v. NLRC, GR No.
Personal Liabilities 125340 [1998])
● Officers can be held personally liable for
General rule: Members of the Board, who 13th month pay of employees after the
purport to act in good faith for and on behalf of corporation has ceased to exist. This is
the corporation within the lawful scope of their because the officers are deemed to have
authority, are not liable for the consequences acted on behalf of the corporation.
of their acts. When the acts are of such nature (Restaurante Las Conchas v. Llego, 372
and done under those circumstances, they are Phil 697 [1999])
attributed to the corporation alone and no
personal liability is incurred. [Price v.
Responsibility for Crimes
Innodata Phils., Inc., G.R. No. 178505 (2008)].
Since a corporation is a person by mere legal
Exception: When sufficient proof exists on
fiction, it cannot be proceeded against
record that the officers acted fraudulently,
criminally because it cannot commit a crime in
beyond his authority or when the officer agrees
which personal violence or malicious intent is
to be personally liable on behalf of the
required.
corporation.
Note: However, violations of the Code, if it is
Note:
committed by a corporation, the same may,
 Members of the BOD who are also officers after notice and hearing, be dissolved in
are held to a more stringent liability
Page 214 of 450

appropriate proceedings before the Exception:

Commission. [Sec. 170] Special Facts Doctrine
Conceding the absence of a fiduciary
If the offender is a corporation, the penalty relationship in the ordinary case, where special
may, at the discretion of the court, be imposed circumstances or facts are present which make
upon: it inequitable for the director to withhold
(1) Such corporation and/or upon its directors, information from the stockholder –
trustees, stockholders, members, officers,  Courts nevertheless hold that the duty
or employees responsible for the violation to disclose arises and concealment is
or indispensable to its commission; or fraud
(2) Anyone who shall aid, abet, counsel,  Examples:
command, induce, or procure any o Concealment of the defendant-
violation of this Code, or any rule, purchaser's identity (the corporate
regulation, or order of the Commission. officer had used an agent go-
[Sec. 171-172] between to avoid detection of his
actions by the seller here)
Criminal Liability of Corporate Agents o Failure to disclose significant facts
Criminal action is limited to the corporate that materially affected the price of
agents guilty of an act amounting to a crime the stock. [Strong v. Repide, 213
and never against the corporation itself. U.S. 419 (1909)]
Since the BOD is the repository of corporate Inside Information

powers and acts as the agent of the
corporation, the directors may be held The fiduciary position of insiders, directors, and
criminally liable. [Time Inc. v. Reyes, G.R. officers prohibits them from using confidential
No. L-28882 (1971)] information relating to the business of the
corporation to benefit themselves or any
Corporations, partnerships, associations and competitor corporation in which they may have
other juridical entities cannot be put to jail. a mere substantial interest.
Hence, the criminal liability falls on the human
agent responsible for the violation of the Trust Since loss and prejudice to the corporation is
Receipts Law. [Ong v. CA, G.R. No. 119858 not a requirement for liability, the corporation
(2003); see also Sec. 13, P.D. 115] has a cause of action as long as there is unfair
use of inside information.
Special Fact Doctrine
It is inside information if it is not generally
General Rule: available to others and is acquired because of
Majority view: Directors only owe their duty to the close relationship of the director or officer
the corporation. They owe no fiduciary duty to to the corporation.
stockholders, but they may deal with each
other at fair and reasonable terms, as if they An INSIDER means:
were unrelated. No duty to disclose facts (a) The issuer;
known to the director or officer. [Taylor v. (b) A director or officer (or any person
Wright, 53 N.Y.S. 423 (1945)] performing similar functions) of, or a
person controlling the issuer; gives or gave
Note: Minority View (Realistic View) him access to material information about
recognizes the directors’ obligation to the the issuer or the security that is not
stockholders individually as well as collectively, generally available to the public;
and refuses to permit him to profit at the latter’s (c) A government employee, director, or officer
expense by the use of information obtained as of an exchange, clearing agency and/or
a result of official position and duties. self-regulatory organization who has
Page 215 of 450

access to material information about an c. The contract is fair and reasonable under
issuer or a security that is not generally the circumstances. [Sec. 31]
available to the public; or
(d) A person who learns such information by a *Amended from two to three in the Revised
communication from any foregoing Corporation Code.
insiders. [Sec. 3.8, Securities Regulation
Code] Between Corporations with
Contracts Interlocking Directors
By Self-Dealing Directors with the General Rule: A contract between two or more
Corporation corporations having interlocking directors shall
NOT be invalidated on that ground alone. [Sec.
General Rule: A contract of the corporation 32]
with (1) one or more of its directors, trustees,
officers or their spouses and relatives within Exception: If contract is fraudulent or not fair
the fourth civil degree of consanguinity or and reasonable under the circumstances, such
affinity is voidable, at the option of such contract is invalid. [Sec. 32]
corporation. [Sec. 31]
Interlocking, characterized
Exception: Interlocking directors are persons who serve as
Such contract is VALID if all of the following member of the board of directors of two or more
conditions are present: competing corporations or corporations
. The presence of such director or trustee in engaged in practically the same kind of
the board meeting in which the contract business.
was approved was not necessary to
constitute a quorum for such meeting; Interlocking director with nominal and
a. The vote of such director or trustee was not substantial interest
necessary for the approval of the contract; Nominal Interest – His stockholdings are 20%
b. The contract is fair and reasonable under or less of the OCS
the circumstances; and Substantial Interest – His stockholdings
c. In case of corporations vested with public exceed 20% of the OCS
interest: Material contracts are approved
by at least two-thirds (2/3) of the entire If the interest of the interlocking director in one
membership of the board, with at least a of the corporations is substantial, while nominal
majority of the independent directors voting in the other, the contract shall be VALID, if the
to approve the material contract; and following conditions are met, insofar as the
d. In case of an officer: The contract has been latter corporation is concerned:
previously authorized by the BOD. [Sec. 1. The presence of such director or trustee in
31] the board meeting in which the contract
was approved was NOT necessary to
Ratification constitute a quorum for such meeting;
In case of absence of the first three* conditions 2. That the vote of such director or trustee
above, contract may be ratified if: was not necessary for the approval of the
a. Stockholders representing at least 2/3 of contract; and
the outstanding capital stock or at least 2/3 3. That the contract is fair and reasonable
of the members in a meeting called for the under the circumstances.
purpose voted to ratify the contract;
b. There is full disclosure of the adverse Where (a) and (b) are absent, the contract can
interest of the directors or trustees involved be ratified by the vote of the stockholders
is made at such meeting; AND representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members in
Page 216 of 450

a meeting called for the purpose voted to ratify Where by-laws are silent as to creation of
the contract, provided that: executive committee
1. Full disclosure of the adverse interest of the Under Sec. 34 of the RCC, the creation of an
directors/trustees involved is made on such executive committee must be provided for in
meeting; the bylaws of the corporation.
2. The contract is fair and reasonable under
the circumstances. [Sec. 31-32] Unfortunately, the by-laws of the corporation in
this case are silent as to the creation by its
Executive Committee and Other BOD of an executive committee.
Special Committees [Sec. 34] Notwithstanding the silence of the by-laws on
the matter, the SC did not rule that the BOD’s
Creation creation of the executive committee is illegal or
unlawful.
Executive Committee  No showing that the "executive
The by-laws may provide for the creation an committee," referred to in Sec. 35 (now
executive committee, composed of not less 34) of the Corporation Code, which is as
than 3 members of the board, to be appointed powerful as the BOD, and in effect acting
by the Board. [Sec. 34] for the board itself, should be
distinguished from other committees
Said committee may act, by majority vote of all which are within the competency of the
its members, on such specific matters within board to create at any time and whose
the competence of the board, as may be actions require ratification and
delegated to it in the by-laws or on a majority confirmation by the board.
vote of the board. [Sec. 34]  The BOD has the power to create
positions not provided for in the by-laws
Special Committees since the board is the corporation’s
The board of directors may create special governing body. [Filipinas Port Services
committees of temporary or permanent nature Inc. v. Go, G.R. No. 161886 (2007)]
and to determine the members’ term,
composition, compensation, powers, and Meetings
responsibilities.
Regular or Special
Limitations on Its Power
Kinds of Meetings
The following CANNOT be delegated to the Meetings of directors, trustees, stockholders,
Executive Committee: or members may be regular or special. [Sec.
a. Matters needing stockholder approval 48]
[Sec. 34];
b. Filling up of board vacancies [Sec. 34]; (a) When and Where
c. Amendment, repeal or adoption of new by-
laws [Sec. 34]; When [Sec. 52]
d. Amendment or repeal of any resolution of  Regular meetings of directors or trustees
the Board which by its express terms is not shall be held monthly, unless the by-laws
amendable or repealable [Sec. 34]; provide otherwise.
e. Cash dividend distribution [Sec. 34]; and  Special meetings of the BOD or trustees
f. Acts which would render the BOD may be held at any time upon the call of the
powerless and free from all responsibilities president or as provided in the by-laws.
imposed on it by law. [Campos]
Where [Sec. 53]
Meetings of directors or trustees of
corporations may be held anywhere in or
Page 217 of 450

outside of the Philippines, unless the by-laws In the Philippines, teleconferencing and
provide otherwise. videoconferencing of members of BOD of
private corporations is a reality, in light of
(b) Notice Republic Act No. 8792. The Securities and
Exchange Commission issued SEC
Notice of regular or special meetings stating Memorandum Circular No. 15, series of 2001,
the date, time and place of the meeting must on November 30, 2001, providing the
be sent to every director or trustee at least two guidelines to be complied with in relation to
(2) days* prior to the scheduled meeting, such conferences. [Expertravel and Tours, Inc.
unless a longer time is provided by the by-laws. v. CA, G.R. No. 152392 (2005)]
Note: This was previously just one day, under Mandatory Recusal
the old corporation code. A director or trustee who has a potential
interest in any related party transaction must
A director or trustee may waive this recuse from voting on the approval of the
requirement, either expressly or impliedly. related party transaction without prejudice to
[Sec. 52] compliance with the requirements of Section
31 of this Code. [Sec. 52]
(c) Attendance in Meetings
Who Presides
In the old corporation code, directors or
trustees cannot be represented or voted by The chairman, or in his absence, the president
proxies at board meetings. [Sec. 25, CC] shall preside at all meetings of the directors or
trustees as well as of the stockholders or
Allowable Alternative Modes of Attendance members, unless the bylaws provide
Directors or trustees who cannot physically otherwise. [Sec. 53]
attend or vote at board meetings can
participate and vote through: Quorum
(1) Remote communication such as
videoconferencing, teleconferencing; or Quorum to Transact Corporate Business
(2) Other alternative modes of communication General Rule: Majority of the directors or
that allow them reasonable opportunities to trustees. as stated in the articles of
participate. [Sec. 52] incorporation, shall constitute a quorum to
transact corporate business. [Sec. 52]
If a director or trustee intends to participate in
a meeting through remote communication, Exception: Unless the articles of incorporation
he/she shall notify in advance the Presiding or the by-laws provide for a GREATER
Officer and the Corporate Secretary of his/her majority.
intention. The Corporate Secretary shall note
such fact in the Minutes of the meeting. Decisions Reached by Majority of Quorum
General Rule: Every decision reached by at
Corporations may issue their own internal least a majority of the directors or trustees
procedures for the conduct of board meetings constituting a quorum shall be valid as a
through remote communication or other corporate act.
alternative modes of communication to
address administrative, technical and logistical Exception: A vote of a majority of all the
issues. [SEC Memo. Circ. No. 6, s. 2020] members of the board is required in case of
election of officers. [Sec. 52]
Attendance and Voting by Proxy
Directors or trustees cannot attend or vote by
proxy at board meetings. [Sec. 52]
Page 218 of 450

In Case of Death of Board Members

Philippines, unless otherwise
In stock corporations: Shareholders may
provided by by-laws
generally transfer their shares. Thus, on the
death of a shareholder, the executor or Notice ● Date, time, and place of
administrator duly appointed by the Court is the meeting must be
vested with the legal title to the stock and sent to every member
entitled to vote it. Until a settlement and at least two (2) days
division of the estate is effected, the stocks of prior to the scheduled
the decedent are held by the administrator or meeting, unless a
executor. longer time is provided
in the by-laws
In non-stock corporations: Membership in and ● This requirement may
all rights arising from a non-stock corporation be waived
are personal and non-transferable, unless the
articles of incorporation or the bylaws of the Attendance ● Proxy not allowed
corporation provide otherwise. In other words, ● Voting through remote
the determination of whether or not “dead communication is
members” are entitled to exercise their voting allowed
rights (through their executor or administrator), (videoconferencing,
depends on the Articles of Incorporation or by- teleconferencing, etc.)
laws. [Tan v. Sycip, G.R. No. 153468 (2006)]
Who ● The chairman
Rule on Abstention Presides ● In his absence, the
president
No inference can be drawn in a vote of
abstention. When a director or trustee Quorum GR: Majority of the directors or
abstains, it cannot be said that he intended to trustees, as stated in the AOI
acquiesce in the action taken by those who
voted affirmatively. Neither, for that matter, can EX: Unless the AOI or the by-
such inference be drawn from the abstention laws provide for a GREATER
that he was abstaining because he was not majority.
then ready to make a decision. [Lopez v. Ercita,
G.R. No. L-32991 (1972)]
10. Capital Affairs
SUMMARY OF MEETINGS
Certificate of stock
Regular Special
Meeting Meeting
Nature of the certificate
Description Meetings that Meetings that
are fixed by law are called for Shares of stock so issued are personal
or as provided a special property and may be transferred by delivery of
by the by-laws purpose the certificate or certificates indorsed by the
owner, his attorney-in-fact, or any other person
Date and Held monthly, Held anytime legally authorized to make the transfer. [Sec.
time unless upon call 62, RCC]
otherwise
provided by the A certificate of stock is —
by-laws  An instrument formally issued by the
corporation with the intention that the same
Venue Anywhere in and outside the constitute the best evidence of the rights
and status of a shareholder
Page 219 of 450

 An instrument signed by the proper Notwithstanding Sec. 62, RCC (Certificate

corporate officer acknowledging that the of Stock and Transfer of Shares), a
person named in the document is the corporation whose securities are registered
owner of a designated number of shares of pursuant to the SRC or listed on securities
stock. It is prima facie evidence that the exchange may:
holder is a shareholder of a corporation.  If so resolved by the BOD and agreed by
(Lao v. Lao, 567 SCRA 558, 2008) a shareholder, investor or securities
 The paper representative or tangible intermediary, issue shares to, or record
evidence of the stock itself and of the the transfer of some or all its shares into the
various interests therein. name of such shareholders, investors or,
 It is merely evidence of the holder’s interest securities intermediary in the form of
and status in the corporation, his uncertified securities.
ownership of the share represented
thereby. The use of uncertified securities in these
 It expresses the contract between the circumstances shall be without prejudice to the
corporation and the stockholder [Makati rights of the securities intermediary
Sports Club v. Cheng, G.R. No. 178523 subsequently to require the corporation to
(2010)]. issue a certificate in respect of any shares
recorded in its name; and
A certificate of stock is NOT —
 A condition precedent to the acquisition of If so provided in its articles of incorporation
of the rights and status of a shareholder and by-laws, issue all of the shares of a
 A stock in the corporation particular class in the form of uncertificated
 The equivalent of ownership of the share it securities and subject to a condition that
represents investors may not require the corporation to
 Essential to the existence of a share of issue a certificate in respect of any shares
stock or the nature of the relation of recorded in their name. [Sec. 43, Securities
shareholder to the corporation [Makati Regulation Code]
Sports Club v. Cheng, G.R. No. 178523
(2010)]. TRANSFERS OF UNCERTIFICATED
SECURITIES, HOW MADE
Uncertificated shares Valid as between parties - validly made and
consummated by appropriate book-entries in
An uncertificated share is a subscription duly the securities intermediaries, or in the stock
recorded in the corporate books, but has no and transfer book held by the corporation or the
corresponding certificate of stock yet issued. stock transfer agent.
Uncertificated shares or securities are those A transfer made pursuant to the foregoing has
evidenced by electronic or similar records [Sec. the effect of delivery of a security in bearer form
3.14, Securities Regulation Code] or duly indorsed in blank representing the
amount of security or right transferred,
Added provision in Sec. 62 of the Revised including the unrestricted negotiability of that
Corporation Code: security by reason of such delivery.
The Commission may require corporations
whose securities are traded in trading markets Valid as to corporation – when the transfer is
and, which can reasonably demonstrate their recorded in the books of the corporation so as
capability to do so, to issue their securities or to show the names of the parties to the transfer
shares of stocks in uncertificated or scripless and the number of shares transferred [Sec.
form in accordance with the rules of the 43.3, Securities Regulation Code].
Commission.
Page 220 of 450

Negotiability; requirements for valid REQUIREMENTS FOR VALID TRANSFER

transfer of stocks OF STOCKS
For a valid transfer of stocks, the requirements
Theory of Quasi-Negotiability are as follows:
Although a stock certificate is sometimes (1) There must be delivery of the stock
regarded as quasi-negotiable, in the sense that certificate;
it may be transferred by delivery, it is well- (2) The certificate must be endorsed by the
settled that the instrument is NON- owner or his attorney-in-fact or other
NEGOTIABLE, because — persons legally authorized to make the
The holder thereof takes it without prejudice to transfer; and
such rights or defenses as the registered (3) To be valid against third parties, the transfer
owner or creditor may have under the law must be recorded in the books of the
Except insofar as such rights or defenses are corporation (i.e., showing the names of the
subject to the limitations imposed by the parties to the transaction, the date of the
principles governing estoppels. [Republic v. transfer, the number of the certificate or
Sandiganbayan, G.R. Nos. 107789 & 147214, certificates and the number of shares
April 30, 2003]. transferred) [Sec. 62, RCC] [Bitong v. CA,
G.R. No. 123553 (1998)].
Certificates of stock are not negotiable
instruments. Consequently — No shares of stock against which the
A transferee under a forged assignment corporation holds an unpaid claim shall be
acquires no title which can be asserted against transferable in the books of the corporation
the true owner, unless the latter’s negligence [Sec. 62, RCC].
has been such as to create an estoppel against
him. The Corporation Code acknowledges that the
If the owner of the certificate has endorsed it in delivery of a duly indorsed stock certificate is
blank, and it is stolen from him, no title is sufficient to transfer ownership of shares of
acquired by on innocent purchaser for value stock in stock corporations. Such mode of
[De los Santos v. Republic, G.R. No. L-4818 transfer is valid between the parties.
(1955)].
In order to bind third persons, however, the
Street Certificate transfer must be recorded in the books of the
When a stock certificate is endorsed in blank corporation. [Sec. 43.3, Securities Regulation
by the owner thereof, it constitutes what is Code] Clearly then, the absence of a deed of
termed as street certificate. assignment is not a fatal flaw which renders the
transfer invalid.
Upon its face, the holder is entitled to demand
its transfer into his name from the issuing Requisites for a valid transfer per Sec. 62,
corporation. RCC:
1. Between the parties:
Such certificate is deemed quasi-negotiable, 2. Delivery
and as such the transferee thereof is justified 3. Indorsement
in believing that it belongs to the holder and 4. To be valid as to third persons: Recorded
transferor. [Santamaria v. Hongkong and in the books of the corporation [Republic v.
Shanghai Banking Corporation, 89 Phil. 780, Estate of Hans Menzi, G.R. No. 152578
788-789 (1951)]. (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
Page 221 of 450

shares. The absence of delivery is a fatal On the other hand, a person who has
defect which is not cured by mere execution of purchased stock, and who desires to be
a deed of assignment [Rural Bank of Lipa City recognized as a stockholder for the purpose of
v. CA, G.R. No. 124535 (2001)]. voting, must secure such a standing by having
the transfer recorded in the corporate books.
The stock and transfer book is the basis for Until the transfer is registered, the transferee is
ascertaining the persons entitled to the rights not a stockholder, but an outsider.
and subject to the liabilities of a
stockholder. Where a transferee is not yet Issuance
recognized as a stockholder, the corporation is
under no specific legal duty to issue stock (a) Full payment
certificates in the transferee’s name [Ponce v.
Alsons Cement Corp., G.R. NO. 139802 General Rule: No certificate of stock shall be
(2002)]. issued to a subscriber until the full amount of
his subscription together with interest and
Citing Hager v. Bryan (1911): A mandamus expenses (in case of delinquent shares), if any
should not issue to compel the secretary of a is due, has been paid [Sec. 63, RCC].
corporation to make a transfer of the stock on
the books of the company, unless it Exception: Where it was the practice of the
affirmatively appears that he has failed or corporation since its inception to issue
refused so to do, upon the demand either: certificates of stock to its individual
- Of the person in whose name the stock is stockholders for unpaid shares of stock and to
registered, or give full voting power to shares fully paid
[Baltazar v. Lingayen Gulf Electric Power
- Of some person holding a power of
attorney for that purpose from the Company, G.R. No. L-16236 (1965)].
registered owner of the stock.
(b) Payment pro-rata
A transfer of shares is not valid unless recorded
in the books of the corporation. [Sec. 43.4, The entire subscription must be paid first
RCC] before the certificates of stock can be issued.
Partial payments are to be applied pro rata to
The purpose of registration is two-fold: each share of stock subscribed [Nava v Peers
(a)To enable the transferee to exercise all the Mktg. Corp., G.R. No. L-28120 (1976)].
rights of a stockholder, including the right to
vote and to be voted for, and Stock and transfer book
(b) To inform the corporation of any change in
share ownership so that it can ascertain the (a) Contents
persons entitled to the rights and subject to
the liabilities of a stockholder [Batangas Stock corporations must also keep a stock and
Laguna Tayabas Bus Co. v. Bitangas, G.R. transfer book, which shall contain:
No. 137934 (2001)]. a. A record of all stocks in the names of the
stockholders alphabetically arranged
Until challenged in a proper proceeding, a b. The installments paid and unpaid on all
stockholder of record has a right to participate stocks for which subscription has been
in any meeting. made
c. The date of payment of any installment
His vote can be properly counted to determine d. A statement of every alienation, sale or
whether a stockholders’ resolution was transfer of stock made, the date thereof, by
approved, despite the claim of the alleged and to whom made
transferee. e. Such other entries as the by-laws may
prescribe. [Sec. 73, RCC]
Page 222 of 450

Note: The stock and transfer book shall be kept Lost or destroyed certificates
in the principal office of the corporation or in the
office of its stock transfer agent and shall be Procedure for re-issuance in case of loss,
open for inspection by any director or stolen or destroyed certificates:
stockholder of the corporation at reasonable 1) Filing of an affidavit of loss with the
hours on business days. [Sec. 73, RCC] corporation by the registered owner.
2) Verifying the affidavit and other information
(b) Who may make valid entries and evidence with the books of the
corporation by the corporation.
The obligation and duty to make proper entries 3) Publishing by the corporation of a notice of
in stock and transfer books falls on the loss in a newspaper of general circulation
corporate secretary. published —
4) In the place, where the corporation has its
If the corporate secretary refuses to comply, principal office;
the stockholder may rightfully bring suit to 5) Once a week for 3 consecutive weeks;
compel performance. [Torres, Jr. v. CA, G.R. 6) At the expense of the owner of the
No. 120138, Sept. 5, 1997]. certificate of stock.
7) Cancellation of the certificate in the books
(c) Stock transfer agent of the corporation and issuance of new
certificates, after the expiration of 1 year
A stock transfer agent is one engaged from the date of the last publication and
principally in the business of registering there is no contest. The right to make such
transfers of stocks in behalf of a stock contest shall be barred after the expiration
corporation. of the one-year period.
8) Issuance by the corporation of new
The stock transfer agent shall be allowed to certificates before 1 year period if the
operate in the Philippines upon securing a registered owner files a bond and there is
license from the Commission. Provided, That no pending contest regarding the
— ownership of said certificates. [Sec. 72,
(1) A stock corporation is not precluded from RCC]
performing or making transfers of its own
stocks Note: Except in cases of fraud, bad faith, or
negligence on the part of the corporation and
In which case, all the rules and regulations its officers, no action may be brought against
imposed on stock transfer agents shall be the corporation which shall have issued
applicable certificates of stock in lieu of those lost, stolen
or destroyed pursuant to the above procedure.
Except the payment of a license fee herein
provided Situs of the shares of stock
(2) The Commission may require stock
corporations which transfer and/or trade General rule: The situs of shares of stock is
stocks in secondary markets to have an the country where the corporation is domiciled
independent transfer agent. [Sec. 73, RCC] [Wells Fargo Bank v. CIR, G.R. No. L-46720,
June 28, 1940].
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].
Page 223 of 450

The residence of the corporation is the place Issued for consideration other than actual cash
where the principal office of the corporation is (i.e., property or services), the fair valuation of
located as stated in its AOI, even though the which is less than its par or issued value
corporation has closed its office therein and Issue stock dividend when there are no
relocated to another place [Hyatt Elevators and sufficient retained earnings or surplus profit to
Escalators Corp. v. Goldstar Elevator Phils., justify it.
Inc., G.R. No. 161026, 2005]
Note: Subsequent increase in the value of the
Exception: In property taxation – the situs of property used in paying the stock does not do
intangible property, such as shares of stocks, away with the watered stocks, nor cure the
is at the domicile or residence of the owner. defect in issuance. The existence of watered
stocks is determined at the time of issuance of
Exception to the Exception: the stock.
1. When a nonresident alien has shares of
stock in a domestic corporation, then the situs Rationale Behind Prohibition
will be in the Philippines; and Stock watering is prohibited because:
2. For purposes of the estate tax, the gross • Corporation is deprived of needed capital
estate of a resident decedent, whether citizen and the opportunity to market its securities
or alien, or a citizen decedent, whether resident to its own advantage
or nonresident, includes his intangible personal
• Existing and future stockholders who are
property wherever situated [De Leon]. also injured by the dilution of their
proportionate interests in the corporation
Watered stocks • Present and future creditors who are injured
as the corporation is deprived of the assets
Definition
or capital and reduces the value of the
corporate assets, which stand as a
Watered stock are shares issued as fully paid substitute for the stockholders’ personal
when in truth — liability to them
(1) No consideration is paid in any form; or
(2) The consideration received is known to be • Persons who deal with it or purchase its
securities who are deceived because stock
less than the par value or issued value of
watering is invariable accompanied with
the shares [Sec. 64, RCC].
misleading corporate accounts and financial
statements
Watered stocks can either be par or no par
value shares.
Liability of directors for watered
stocks
A watered stock is a stock issued in exchange
for:
A director or officer of a corporation who:
(a) A consideration less than its par value or
1) consents to the issuance of stocks for a
issued price; and
consideration less than its par or issued
(b) A non-cash consideration valued in excess
value;
of its fair value. [Herbosa, 2019]
2) consents to the issuance of stocks for a
consideration other than cash, valued in
Scope
excess of its fair value
Watered stocks include the following:
3) having knowledge of the insufficient
Issued without consideration (bonus share)
consideration, does not file a written
Issued as fully paid when the corporation has
objection with the corporate secretary
received less sum of money than its par or
issued value (discounted share)
Page 224 of 450

shall be solidarily liable with the stockholder • Some of the earlier decisions put the right of
concerned to the corporation and its creditors recovery in such a case upon the so-called
for the difference in value [Sec. 64, RCC]. “trust fund doctrine.”
• The creditors’ right of action to compel the
Trust fund doctrine for liability for making good of the representation as to the
watered stocks corporation’s capital is based on fraud, and
the trust fund doctrine is only another way of
Trust Fund Doctrine expressing the same underlying idea [DE
It is established doctrine that subscription to LEON].
the capital of a corporation constitute a fund to
which creditors have a right to look for Despite the view of foreign authors that the
satisfaction of their claims, and that the fraud theory is the prevailing view, it would
assignee in insolvency can maintain an action seem that in the Philippine jurisdiction, the trust
upon any unpaid stock subscription in order to fund doctrine on watered stock prevails.
realize assets for the payment of its debts
[Philippine Trust Corp. v. Rivera, G.R. No. L-
Payment of balance of
19761 (1923), citing Velasco v. Poizat, (1918)]
subscription [Sec. 66]
A corporation has no power to release an
original subscriber to its capital stock from the Time when the balance of the subscription
obligation of paying for his shares, without a should be paid:
valuable consideration for such release 1) On the date specified in the subscription
contract, without need of demand or call.
• As against creditors. a reduction of the 2) If no date of payment has been specified,
capital stock can take place only in the on the date specified on the call made by
manner and under the conditions prescribed the BOD
by the statute or the charter or the articles of
3) If no date of payment has been specified
incorporation.
on the call made, within 30 days from the
• Moreover, strict compliance with the date of call; and
statutory regulations is necessary 4) When insolvency supervenes upon a
[Philippine Trust Corp. v. Rivera, G.R. No. corporation and the court assumes
L-19761 (1923)]. jurisdiction to wind it up, all unpaid
subscriptions become payable on demand,
Trust Fund Doctrine for Liability for and are at once recoverable, without
Watered Stocks necessity of any prior call.
Where the corporation issues watered stock
and thereby assumes an ostensible Call by board of directors
capitalization in excess of its real assets, the
transaction necessarily involves — The BOD of any stock corporation may, at any
• The misleading of subsequent creditors; time:
and (1) Declare due and payable to the corporation
• A constructive fraud upon creditors, whether unpaid subscriptions to the capital stock;
done with that purpose actually in mind or and
not (2) Collect the same or such percentage
thereof, in either case with accrued interest,
Hence, it is held that recovery may be had by if any, as it may deem necessary.
a creditor in such case, even though the
corporation itself has no cause of action When Payment Should be Made
against the stockholders. Payment shall be made:
(a) On the date specified in the contract of
subscription; or
Page 225 of 450

(b) On the date stated in the call. action for the call [Lingayen Gulf Electric Power
Co., Inc. v. Baltazar, G.R. No. L-4824 (1965)].
Failure to pay on such date shall —
• Render the entire balance due and payable; The right to notice of call, however, may be
and waived by the subscriber [De Leon].
• Make the stockholder liable for interest at
the legal rate on such balance, unless a Sale of delinquent shares [Sec. 67]
different rate of interest is provided for in the
by-laws. Delinquent Shares - shares in which the
corresponding subscription or balance remains
If within 30 days from said date no payment is unpaid after a grace period of 30 days from —
made, all stocks covered by said subscription (a) The date specified in the contract of
shall — subscription; or
(1) Become delinquent; and (b) The date stated in the call made by the
(2) Subject to sale under Sec. 67 of RCC, BOD.
unless the BOD orders otherwise.
All stocks covered by said subscription shall
Requisites for a valid call thereupon become delinquent and shall be
SEC opined on July 21, 1976 that the following subject to delinquency sale, unless the BOD
are the requisites for a valid call: orders otherwise [Sec. 67].
1. It must be made in the manner prescribed by
law; Effect of delinquency [Sec. 70]
2. It must be made by the BOD; and
3. It must operate uniformly upon all the Effects of Delinquency
shareholders. Generally, delinquency suspends the rights of
a subscriber, except the right to receive
There are two instances when call is not dividends
necessary to make the subscriber liable for (1) No delinquent stock shall be voted for
payment of the unpaid subscription: (2) No delinquent stock shall be entitled to vote
 When, under the terms of the subscription or to representation at any stockholders’
contract, subscription is payable, not upon meeting.
call, but immediately, or on a specified day, (3) Delinquent stock shall be subject to
or when it is payable in installments at delinquency sale.
specified times; [Sec. 66, RCC] and
 If the corporation becomes insolvent, which A subscriber acquires all the rights of a
makes the liability on the unpaid shareholder at the point of subscription. His
subscription due and demandable, political and economic rights are not impaired
regardless of any stipulation to the contrary by the fact that he has unpaid subscription.
in the subscription agreement [Villanueva]. • Delinquency suspends the rights of a
subscriber, except the right to receive
Notice requirement dividends.
• The dividends corresponding to such
Where call is necessary, notice must be given shares, if any, shall be applied against the
to the stockholder concerned. A call without unpaid amount. [Herbosa, 2019].
notice to the subscriber is practically no
call at all. Note: The holder thereof shall NOT be entitled
to any of the rights of a stockholder except the
The notice is regarded as a condition right to dividends. But the dividends it will
precedent to the right of recovery. It must, receive will be subject to Sec. 42, RCC, that is
therefore, be alleged and proved to maintain an —
Page 226 of 450

• Cash dividends shall first be applied to the the stockholder may question the sale as
unpaid balance on the subscription plus provided under Sec. 67, RCC.
costs and expenses; and
• Stock dividends shall be withheld until the Public Auction
unpaid subscription is fully paid. • The highest bidder is one who is willing to
pay the balance of the subscription for the
Call by resolution of the board of least number of shares.
directors [Sec. 67] - The stock so purchased shall be
transferred to such purchases in the
The BOD may, by resolution, order the sale of books of the corporation and a certificate
delinquent stock and shall specifically state — of such stock shall be issued in his favor.
(1) The amount due on each subscription plus - The remaining shares, if any, shall be
all accrued interest, and credited in favor of the delinquent
(2) The date, time and place of the sale, which stockholder who shall likewise be
shall not be less than 30 days nor more than entitled to the issuance of a certificate of
60 days from the date the stocks became stock covering such shares.
delinquent, which is 30 days after the date • If there are no bidders, the corporation must
specified in the contract of subscription or bid for the whole number of shares
on the date stated in the call. regardless of how much the shareholders
has paid. Such stocks will pertain to the
Notice of sale [Sec. 67] corporation as fully paid treasury stocks.
If the BOD resolves to proceed with the sale: Payment by Delinquent Stockholder
Notice of sale and a copy of the resolution shall The delinquent stockholder may stop the
be sent to every delinquent stockholder either auction by paying to the corporation on or
personally or by registered mail. before the date specified for the sale the
Notice of sale shall furthermore be published balance due on his subscription, plus accrued
once a week for 2 consecutive weeks in a interest, costs of advertisement and expenses
newspaper of general circulation in the of the sale.
province or city where the principal office of the
corporation is located. Otherwise, the public auction shall proceed
and the delinquent shares shall be sold to the
Auction sale bidder that will pay the full amount of the
balance of subscription with accrued interest,
Procedure for delinquency sale [Sec. 67, costs and expenses of the sale, for the smallest
RCC] number of shares or fraction of a share.
1. Call for payment made by the BOD.
2. Notice of call served on each stockholder. Irregularities in the delinquency sale [Sec.
3. Notice of delinquency issued by the BOD 68]
upon failure of the stockholder to pay within Action to recover delinquent stock must be on
30 days from date specified. the ground of irregularity or defect in:
4. Service of notice of delinquency on the o the notice of sale or
non-paying subscriber, PLUS publication in o in the sale itself of delinquent stock
a newspaper of general circulation in the
province or city where the principal office of Unless, party seeking to recover first pays or
the corporation is located, once a week for tenders to the party holding the stock the sum
2 consecutive weeks. for which the same was sold, with interest from
the date of sale at the legal rate.
Note: Requirements on notice and publication
are mandatory. Lacking such requirements,
Page 227 of 450

The action must be commenced within 6 Rationale Behind Prohibition

months from the date of sale. The reason behind the principle of disallowing
transfer of not fully paid subscription to several
Alienation of shares transferee is that it would be difficult to
determine:
Allowable restrictions on the sale of (1) Whether or not the partial payments made
shares should be applied as —
• Full payment for the corresponding
General Rule: Free Transferability of Shares number of shares which can only be
Shares of stock so issued are personal covered by such payment; or
property and may be transferred [Sec. 62]. • Proportional payment to each and all of
the entire number of subscribed shares
Exception: In CLOSE corporations, (2) The unpaid balance to be assumed by
restrictions on the right to transfer shares may each transferee [Villanueva].
be provided in the Articles of Incorporation, by-
laws and certificates [Sec. 97]. Sale of all of shares not fully paid
Sale of partially paid shares The SEC has opined that the entire
subscription, although not yet fully paid, may
No shares of stock against which the be transferred to a single transferee, who as a
corporation holds any unpaid claim shall be result of the transfer must assume the unpaid
transferable in the books of the corporation. balance.
[Sec. 62]
It is necessary, however, to secure the
A corporation may refuse to acknowledge and consent of the corporation, since the transfer
register a sale or assignment of shares which of subscription rights and obligations
are not fully paid, and may continue to hold the contemplates a novation of contract which
original subscriber liable on the payment of the under Article 1293 of the Civil Code cannot be
subscription. made without the consent if the creditor
• However, the above principle in Section 62 [Villanueva].
cannot be utilized by the corporation to
refuse to recognize ownership over pledged Sale of fully paid shares
shares purchased at public auction.
• The term “unpaid claims” refers to “any Shares of stock so issued are personal
unpaid claims arising from unpaid property and may be transferred by the delivery
subscription, and not to any indebtedness of the stock certificate or certificates, indorsed
which a subscriber or stockholder may owe by —
the corporation arising from any other (1) The owner; or
transactions. [China Banking Corp. v. CA, (2) The owner’s attorney-in-fact; or
G.R. No. 117604 (1997)] (3) Other person legally authorized to make
the transfer. [Sec. 62]
Sale of a portion of shares not fully
paid Requisites of a valid transfer
Same as requirements for valid transfer of
The SEC has opined on several occasions that stocks.
a stockholder who has not paid the full amount
of his subscription cannot transfer part of his No transfer shall be valid, except as between
subscription in view of the indivisible nature of the parties, until the transfer is recorded in the
a subscription contract. books of the corporation showing:
i. The names of the parties to the transaction
Page 228 of 450

ii. The date of the transfer, his shares in favor of

iii. The number of the certificate or certificates any 3rd party
and Right to Vote of Secured Creditors and
iv. The number of shares transferred [Sec. Administrators
62]. General Rule: In case a stockholder grants
security interest in his or her shares in stock
The failure to register a sale or disposition of corporations, the stockholder-grantor shall
shares of stock in the books of the corporation have the right to attend and vote at meetings of
would render the same invalid to all persons, stockholders
including the attaching creditors of the seller.
[Uson v. Diosomito, 61 Phil. 535 (1935).] Exception: Unless the secured creditor is
expressly given by the stockholder-grantor
See iii. Negotiability; requirements for valid such right in writing which is recorded in the
transfer of stocks under a. Certificate of stock appropriate corporate books. [Sec. 54]
Involuntary dealings Executors, administrators, receivers, and other

legal representatives duly appointed by the
Right to Encumber Shares court may attend and vote in behalf of the
Shares of stock are personal property and the stockholders or members without need of any
owner has an inherent right, as incident of written proxy. [Sec. 54]
ownership to transfer the same at will, which
would include the power to encumber the Attachment, Execution and Other
shares. Involuntary Dealings on Shares
Attachments of shares of stock are not
The right of a stockholder to pledge, mortgage included in the term “transfer” as provided in
or otherwise encumber his shares is [Section 62, RCC]. Both the Revised Rules of
recognized under Sec. 54 of the RCC which Court and [Revised Corporation Code] do not
regulates the manner of voting on pledged or require annotation in the corporation’s STB for
mortgaged shares. the attachment of shares to be valid and
binding on the corporation and third parties.
Restrictions on the Right to Encumber [Chemphil Export & Import Corp. v. CA, 251
Shares SCRA 257 (1995).]
Restriction Valid/Invalid
A bona fide transfer of shares, not registered in
Absolutely prohibits INVALID the corporate books, is not valid as against a
the stockholders from subsequent lawful attachment of said shares,
pledging or It would be violative of regardless of whether the attaching creditor
mortgaging their the statutory right of had actual notice of said transfer or not. All
shares without the the stockholders to transfers not so entered on the books of the
consent of the BOD encumber shares of corporation are absolutely void; not because
stock as allowed in
they are without notice or fraudulent in law or
Sec. 54.
fact, but because they are made so void by
Merely allows the VALID and binding
statute. [Garcia v. Jomouad, 323 SCRA 424
corporation or
(2000).]
existing stockholders
to accept the offer
within the option Bias Against Voluntary Sales
period, and By the strict application of Sec. 63 of the
thereafter, if no one Corporation Code [now Sec. 62, RCC] to cover
accepts the offer, the only the sale, assignment or absolute
stockholder is free to disposition of shares of stock, the SC has
pledge or mortgage placed a bias against voluntary sales,
Page 229 of 450

assignments or dispositions of shares of stock • A record of all stocks in the names of the
vis-à-vis pledges, mortgages, attachment or stockholders alphabetically arranged;
levy thereof.
• The installments paid and unpaid on all
• To be valid and binding on third parties, the stocks for which subscription has been
voluntary sale, assignment or disposition of made, and the date of payment of any
shares requires the essential element of installment;
registration in the stock and transfer book; • A statement of every alienation, sale or
• Otherwise the sale, assignment or transfer of stock made, the date thereof,
disposition is considered void as to third by and to whom made; and
parties, even when they have actual notice.
• Such other entries as the by-laws may
prescribe
In contrast, when it comes to pledge,
mortgage, encumbrance, attachment or levy of NOTE: The duty to keep these books is
shares, registration thereof in the stock and imperative and mandatory. The stockholder
transfer book is not essential either for validity can likewise inspect the financial statements of
or as a species of notifying third parties. the corporation [Sec. 73].
[Villanueva].
Financial Statements [Sec. 74]
Corporate books and records A corporation shall furnish a stockholder or
member its most recent financial statement
Records to be kept at principal office within 10 days from receipt of written request.
Every corporation shall keep and carefully At a regular meeting, the Board shall present a
preserve at its principal office all information financial report of the operations of the
including but not limited to: corporation for the preceding year, which shall
■ Articles of incorporation and by-laws and all include financial statements duly signed and
their amendments; certified in accordance with the Code.
■ Current ownership structure and voting
rights of corporation Exception:
■ Names and addresses of all members of However, if the total assets or total liabilities of
BOD/trustees and the executive officers the corporation is less than Six hundred
thousand pesos (P600,000.00), or such other
■ Record of all business transactions
amount as may be determined appropriate by
■ Record of resolutions of BOD/Trustees and the Department of Finance, the financial
of stockholders/members statements may be certified under oath by the
■ Copies of latest reportorial requirements treasurer and the president.
submitted to the Commission; and
■ Minutes of all meetings of Right to inspect corporate records
stockholders/members or of BOD/trustees.
Requirements for the exercise of the right
Stock Corporations [Sec. 73] of inspection [Sec. 74]
Stock corporations must also keep: It must be exercised at reasonable hours on
Books that record all business transactions of business days
the corporation which shall include contract,  The inspecting or reproducing party shall
memoranda, journals, ledgers, etc; remain bound by confidentiality rules under
Minute book for meetings of the prevailing laws, such as the rules on trade
stockholders/members; secrets or processes under the Intellectual
Minute book for meetings of the board/trustees; Property Code, Data Privacy Act, and the
Stock and transfer book, which shall contain: Securities Regulation Code.
Page 230 of 450

Directors of a corporation have the unqualified Officer or agent of corporation who refused to
right to inspect the books and records of the allow the inspection and/or reproduction of
corporation at all reasonable times. records shall be liable to the requesting officer
• The right of inspection is not to be for damages and shall be punishable under
denied on the ground that the director or Section 161
shareholder is on unfriendly terms with If refusal is made pursuant to a resolution or
the officers of the corporation whose order of the BOD/trustees, liability for such
records are sought to be inspected. action shall be imposed upon the
directors/trustees who voted on such refusal
• A director or stockholder can make
copies, abstracts, and memoranda of
documents, books, and papers as an Defenses for refusal
incident to the right of inspection, but • Person demanding to examine and
cannot, without an order of a court, be copy excerpts has improperly used any
permitted to take books from the office information secured through any prior
of the corporation. examination of the records of such corp
of any other corp
• However, a director or stockholder does
not have any absolute right to secure • Person demanding to inspect was not
certified copies of the minutes of the acting in good faith or for a legitimate
corporation until these minutes have purpose
been written up and approved by the • Person demanding to inspect is a
directors [Veraguth v. Isabela Sugar, competitor, director, officer, controlling
G.R. No. L-37064 (1932)]. stockholder, or otherwise represents
interests of a competitor [Sec. 73]
A stockholder of a sequestered company has
the right to inspect and/or examine the records Remedies when inspection is refused
of the corporation pursuant to Sec. 74 of the Mandamus
Corporation Code (now Sec. 73, RCC) [Africa Injunction
v. PCGG, G.R. No. 83831 (1992)]. Action for damages
File an action under Sec. 161 to impose a penal
Effect of refusal to inspect corporate offense by fine and/or imprisonment.
records
Under the Rules of Court, the writ of
Refusal to allow inspection is a criminal mandamus should be granted only if the court
offense. Such refusal, when done in violation of is satisfied that justice so requires [Sec. 8, Rule
Sec. 74(4) of the Corporation Code (now Sec. 65].
73, RCC), properly falls within the purview of
Sec. 144 of the same code and thus may be 11. Dissolution And
penalized as an offense [Yujuico and Sumbilla
v. Quiambao and Pilapil, G.R. No. 180416
Liquidation
(2014)]. (please note that the Code’s
provisions have been changed under the RCC) Dissolution of a corporation is the
extinguishment of its franchise and the
Because the obligations provided for in Sec. termination of its corporate existence or
73, RCC fall on the corporation, violation of the business purpose.
same is done by the corporation; thus, criminal
action based on such violation can only be However, for the purpose only of winding up
maintained against corporate officers or other its affairs and liquidating its assets, its
such persons acting on behalf of the corporate existence continues for a period of 3
corporations. years from such dissolution [Sec. 139].
Page 231 of 450

Upon dissolution, the corporation ceases to be dissolution for

a juridical person and consequently can no approval
longer continue transacting its business
[Campos].
Note: If no dissolution papers are filed with the

SEC by a corporation claiming dissolution 5. By merger or 5. By order of the
voluntarily, such corporation is still deemed consolidation SEC on grounds
legally existing, notwithstanding the fact that it under existing laws
has ceased to operate [De Leon]. [Sec 138]
5. By order of the
Modes Of Dissolution Courts following a
quo warranto
Based on jurisprudence, the methods of proceeding, a
effecting dissolution as prescribed by law are proceeding
exclusive, and a corporation cannot be involving a
dissolved except in the manner prescribed by financially
law [De Leon]. distressed
corporation, or for
Dissolution may be voluntary or involuntary: grounds under
VOLUNTARY INVOLUNTARY existing laws.
1. Voluntary surrender 1. Expiration of the Note: Where the veil of corporate fiction is
of its charter by the shortened pierced, it does not operate as a cause for the
vote of the BOD/T and corporate term dissolution of the corporation.
the [Sec 36]
stockholders/members Voluntary Dissolution
where no creditors are
affected [Sec 134] (a) Where no creditors are affected
[Sec. 134]
2. By the judgment of 2. By legislative This type of dissolution is initiated by the
the SEC after hearing enactment corporation. It does not prejudice, or is not
of petition for consented by creditors.
voluntary dissolution,
where Procedure
creditors are affected 1. Notice of the meeting should be given to
the stockholders or members by personal
3. Amending the AOI 3. Failure to delivery, registered mail, or by any means
to shorten its term [Sec organize and authorized under its by- laws at least 20
136] commence days prior to the meeting.
business 2. The notice of meeting should also be
within 2 years from published once prior to the meeting
incorporation [Sec a. Notice shall contain the time,
21]
place and object of the meeting
4. In case of a 4. Cessation of b. in a newspaper published in the
corporation sole, by business for 5 years place where the principal office
submitting [Sec 21] of said corporation is located,
to the SEC a verified or if no newspaper is published
declaration of the in such place, then in a
newspaper of general
circulation in the Philippines.
Page 232 of 450

3. The resolution to dissolve must be 2. banking and quasi-banking institutions,

approved by the majority of the BOD/T 3. pre-need, insurance and trust companies,
and approved by at least majority of the 4. non-stock savings and loans associations
Outstanding Capital Stock or majority of (NSSLA),
the members. 5. pawnshops, and
a. In the old Corporation Code, only a 6. other financial intermediaries
vote of majority of the BOD/T and
2/3 of the OCS/members was (b) Where creditors are affected [Sec.
required. 135]
4. The corporation must submit the following
to the SEC: This covers a case where the corporation
a) A verified request for dissolution petitions for its dissolution which may prejudice
stating the following: the rights of creditors, or are not consented by
 the reason for the dissolution, all of them. Here, the corporation is not under
 the form, manner, and time when financial distress or in a state of insolvency. In
the notices were given those cases, the corporation must file a petition
 names of the stockholders and for rehabilitation or liquidation in court.
directors or members and trustees [Herbosa, 2019]
who approved of the dissolution
 the date, place and time of the 1. A petition shall be filed with the SEC
meeting in which the vote was containing the following:
made, (1) signature by a majority of its BOD/T or
 date of publication other officers having management of
b) A copy of the resolution certified by its affairs;
the majority of the BOD/T and (2) verified by its president, or secretary or
countersigned by the secretary. one of its director or trustees;
c) Proof of publication (3) all claims and demands against the
d) Favorable recommendation from the corporation; and
appropriate regulatory agency, when (4) resolved upon by affirmative vote of the
necessary stockholders representing at least 2/3
e) The signed and countersigned copy of the Outstanding Capital Stock or 2/3
will be filed with the SEC and the latter of members;
will issue the certificate of dissolution.
2. The corporation must submit the following
Withdrawal of the request to the SEC:
The corporation may withdraw its verified (1) The petition for dissolution stating the
request for dissolution within 15 days from following:
receipt by the SEC. Otherwise, the SEC shall a. the reason for the dissolution;
approve the request and issue the certificate of b. the form, manner, and time
dissolution. when the notices were given;
c. the date, place and time of the
Effectivity of the dissolution meeting in which the vote was
Dissolution shall take effect upon the issuance made
of the certificate of dissolution by the SEC (2) A copy of the resolution authorizing
the dissolution, certified by the majority
Favorable recommendation by the of the BOD/T and countersigned by the
appropriate agency required secretary.
No application of dissolution will be approved (3) A list of all its creditors
without the favorable recommendation of the
appropriate government agency for: 3. If the petition is sufficient in form and
1. banks, substance, the SEC shall issue an order
Page 233 of 450

fixing the date on or before which Ipso Facto Dissolution

objections to the petition may be filed. Such Upon approval of the expired shortened term,
date shall not be less than 30 days nor the corporation shall be deemed dissolved
more than 60 days after the entry of the without any further proceedings. The
order. corporation shall be deemed dissolved without
any further proceedings, taking effect on the
4. A copy of the order shall be published at day following the last day of the corporate term.
least once a week for 3 consecutive
weeks in a newspaper of general Shortening vs. Expiration
circulation published in the municipality or Shortening of the Expiration of the
city of the corporation’s principal office. If Corporate Term Original Term
none, in a news paper of general Has the effect of Where a corporation
circulation in the Philippines. A similar copy dissolving the elects to retain its
shall be posted for 3 consecutive weeks corporation, ipso corporate term, and
in 3 public places in such municipality or facto, once the such term has
city. shortened term has expired, the
arrived corporation may file
5. A hearing of any issue or objections raised a petition for revival
shall be conducted 5 days after the lapse of corporate
of the expiration of the time to file existence.
objections. [Divina]
6. If the objections are insufficient or the (d) Withdrawal of dissolution [Sec.

material facts in the petition are true, 137]
judgment shall be rendered dissolving
the corporation and directing the A withdrawal of the request for dissolution shall
disposition of assets. The judgment may be:
include appointment of a receiver. (1) Made in writing;
a. As long as 2/3 vote is obtained, no (2) Duly verified by any incorporator, director,
member/ stockholder can prevent such trustee, shareholder, or member;
dissolution unless the majority (3) Signed by the same number of
stockholders acted in bad faith. The incorporators, directors, trustees,
latter may be held liable for damages shareholders, or members necessary to
[Campos]. request for dissolution as set forth in Sec.
b. Even where there are creditors of the 133-136;
corporation who may be prejudiced by (4) Submitted no later than fifteen (15) days
the dissolution, it is still possible for the from receipt by the Commission of the
corporation to terminate its existence request for dissolution.
prior to the expiration of its term,
provided said creditors are given the A withdrawal of the petition for dissolution shall
opportunity to present their claims and be in the form of a motion and similar in
objections so that their interests may substance to a withdrawal of request for
be protected [Campos]. dissolution but shall be verified and filed prior
to publication of the order setting the deadline
(c) By shortening of corporate term for filing objections to the petition.
[Sec. 136]
A voluntary dissolution may be effected by

amending the AOI to shorten the corporate
term under Sec 16.
Page 234 of 450

SEC Action franchise of a public utility shall be made

Upon receipt of a withdrawal of request for only “when the common good so requires”;
dissolution, the Commission shall withhold 2. Under Sec. 84 of the Code, it is provided
action on the request for dissolution and shall, that: “No right or remedy in favor of or
after investigation: against any corporation, its stockholders,
(a) Make a pronouncement that the request members, directors, trustees, or officers,
for dissolution is deemed withdrawn; nor any liability incurred by any such
(b) Direct a joint meeting of the board of corporation, stockholders, members,
directors or trustees and the directors, trustees, or officers, shall be
stockholders or members for the removed or impaired either by the
purpose of ascertaining whether to subsequent dissolution of said corporation
proceed with dissolution; or or by any subsequent amendment or
(c) Issue such other orders as it may deem repeal of this Code or of any part thereof”;
appropriate. 3. While Congress may provide for the
dissolution of a corporation, it cannot
Involuntary Dissolution impair the obligation of existing contracts
between the corporation and third persons,
BY EXPIRATION OF CORPORATE TERM or take away the vested rights of its
The RCC provides that a corporation shall creditors. [De Leon]
have perpetual existence. The AOIs of existing
corporations shall be deemed amended to Note: Thus, except for the expiration of its
reflect their perpetual term. The exception is term, no dissolution can be effective
when the AOIs of corporations created under without some act of the State [Daguhoy
the effectivity of this Code provide for a specific Enterprises v. Ponce, G.R. No. L-6515
period [Sec 11]. (1954)].
An existing corporation may opt out of the rule NON-USE OF CORPORATE CHARTER [Sec
on perpetual existence by notifying the 21; Sec 138(a)]
Commission, provided it was approved by If a corporation fails to formally organize and
shareholders, and without prejudice to the commence the transaction of its business or
appraisal right of dissenting stockholders. construction of its works within 5 years, its
[Herbosa, 2019] certificate of incorporation shall be deemed
revoked, its corporate powers shall cease and
When such term has expired, a petition for the corporation shall be deemed dissolved
revival of corporate existence may be filed. [Sec. 21].
[Divina]
Dissolution in this case is automatic [Campos].
LEGISLATIVE DISSOLUTION  Contrary view: Since there is a defense
The inherent power of Congress to make laws available to the corporation, that is, if its
carries with it the power to amend or repeal failure to organize and commence its
them. Involuntary corporate dissolution may be business is due to causes beyond the
effected through the amendment or repeal of control of the corporation as may be
the Revised Corporation Code [implied from determined by the SEC, therefore, the
Sec. 184, DE LEON]. dissolution is not automatic.
The limitations on the power to dissolve Formal organization includes not only the
corporations by legislative enactment are as adoption of the by-laws but also the
follows: establishment of the body which will administer
1. Under the Constitution, the amendment, the affairs of the corporation and exercise its
alteration, or repeal of the corporate powers
Page 235 of 450

 By-laws should be adopted within one smuggling, tax evasion, money

month of receipt of official notice of the laundering, or graft and corrupt
issuance of the certificate of incorporation, practices;
otherwise the certificate may be (2) Committed or aided in the commission
suspended or revoked [PD 902-A, Sec. 6 of securities violations, smuggling, tax
(i)(5)]. evasion, money laundering, or graft
and corrupt practices, and its
CONTINUOUS INOPERATION OF stockholders knew; and
CORPORATION [Sec 21; 138(b)] (3) Repeatedly and knowingly tolerated the
If a corporation commenced its business but commission of graft and corrupt
fails to continue operations after least 5 practices or other fraudulent or illegal
consecutive years, the corporation is first acts by its directors, trustees, officers,
placed on delinquent status, after due notice or employees.
and hearing.
• The delinquent corporation is given 2 years Non-use of corporate charter and
to resume operations and comply with all continuous inoperation
the requirements that the SEC shall The grounds for dissolution under (a) and (b)
prescribe. as discussed above, will lead to the dissolution
of the corporation unless the corporation files a
• Otherwise, the SEC will prescribe its
petition to set aside its delinquency status, and
dissolution. The corporation may have the
revocation reconsidered. Otherwise, the the SEC grants it.
SEC may proceed to involuntary
dissolution with notice and hearing. Upon receipt of a lawful court order
dissolving the corporation
Dissolution in this case is not automatic The ground under (c) may involve or arise from
[Campos]. a quo warranto proceeding involving a de facto
corporation (Sec 19, RCC) or a liquidation
DISSOLUTION BY THE SEC ON GROUNDS proceeding involving an insolvent debtor under
UNDER THE CODE AND OTHER EXISTING FRIA (infra).
LAWS
The Revised Corporation Code also introduced Upon finding by final judgment that the
a number of changes on involuntary corporation procured its incorporation
dissolution. Sec. 138 codified the grounds that through fraud
may lead to involuntary dissolution by the The ground under (d) constitutes cases where
Commission motu proprio or upon filing of a a corporation misrepresented its purpose of
verified complaint by any interested party. incorporation, or when the incorporators used
fictitious names, there was then fraud in the
Grounds for dissolution [Sec 138] procurement of the certificate.
(a) Non-use of corporate charter;
(b) Continuous inoperation of a corporation; Upon finding by final judgment that the
(c) Upon receipt of a lawful court order corporation was created for an unlawful
dissolving the corporation; purpose
(d) Upon finding by final judgment that the The ground under (e) is a new provision. Here,
corporation procured its incorporation a corporation found by final judgment to have
through fraud; been created for the purpose of committing,
(e) Upon finding by final judgment that the concealing, or aiding the commission of
corporation: securities violations, smuggling, tax evasion,
(1) Was created for the purpose of money laundering or graft and corrupt
committing, concealing or aiding the practices, may be subjected to involuntary
commission of securities violations, dissolution by the SEC, motu proprio or upon
filing of a verified complaint by any interested
Page 236 of 450

party. In addition, the corporate assets after The RCC provides that any distributable asset
payment of its liabilities shall be forfeited in to an unknown creditor or corporator shall be
favor of the government upon petition of the escheated in favor of the national government.
Commission with the appropriate court. This was previously in favor of the LGU where
such assets are located, under the old Code.
Grounds under other existing laws
The grounds enumerated above are not Difference between Liquidation and
exclusive. There are other grounds to dissolve Rehabilitation
the corporation upon order of the SEC which Liquidation Rehabilitation
may be found in other laws. For example, the
SEC may also suspend or revoke, after proper The winding up of a Contemplates a
notice and hearing, the certificate of corporation so that continuance of
registration of private corporations under any of assets are
corporate life and
the following grounds: distributed to those activities in an effort
 Fraud in procuring its certificate of entitled to receive to restore and
incorporation; them. It is the reinstate the
 Serious misrepresentation as to what the process of reducing corporation to its
corporation can do or is doing to the great assets to cash,former position of
prejudice of or damage to the general successful operation
discharging liabilities
public; and dividing surplus and solvency. Both
 Refusal to comply or defiance of any lawful or loss cannot be
order of the SEC restraining commission of undertaken at the
acts which amount to a grave violation of same time
its franchise; [Phil. Veterans Bank v. Employees Union, G.R.
 Failure to file bylaws No. 105364 (2001)].
 Failure to file required reports in
appropriate forms as determined by the Winding up of corporate affairs
SEC within the prescribed period (PD No. Under Sec. 139 of the RCC, a corporation
902-A, Sec 6(i)). loses its juridical personality and can no longer
enter into transactions that have the effect of
Methods of Liquidation continuing its business.
Liquidation is the process by which all the The only exception to this is the “winding-up”
assets of the corporation are converted into period which takes place for 3 years after the
liquid assets (cash) in order to facilitate the loss of the corporation’s juridical personality.
payment of obligations to creditors, and the • It continues to be a body corporate for
remaining balance if any is to be distributed to purposes of prosecuting and defending
the stockholders. suits by and against it and to enable it to
• Among corporate creditors, the rules on settle and close its affairs, culminating in
concurrence and preference of credits the disposition and distribution of its
apply. remaining assets.
• It is a proceeding in rem. • It may, during the 3-year term, appoint a
trustee or a receiver who may act beyond
The end of corporate relations does not result that period.
in the immediate termination of corporate
existence. A corporation shall have the A corporation in the process of liquidation has
extended term of 3 years to wind up its no legal authority to engage in any new
corporate affairs and liquidate its assets. business, even if the same is in accordance
[Herbosa] with the primary purpose stated in its article of
incorporation.
Page 237 of 450

• It may not acquire new rights or incur new 3. By a management committee or

obligations. rehabilitation receiver appointed by SEC
(Sec. 119, RCC)
• It may only have rights as may be required
by the process of liquidation. [Herbosa] 4. By liquidation after three years
Pending actions against the corporation are By the Corporation Itself

not extinguished
Pending actions against the corporation may The liquidation and distribution of the assets of
still be prosecuted against the corporation even a dissolved corporation is a matter of internal
beyond the 3-year period. concern of the corporation and falls within the
power of the directors and stockholders or duly
General Rule: The creditors of the corporation appointed liquidation trustee [SEC Opinion,
who were not paid within the 3-year period may July 23, 1996].
follow the property of the corporation that may
have passed to its stockholders The corporation through its board and/or
Exceptions: executive officers are in charge for this method
of liquidation.
• Unless the action is barred by prescription
 The Legislature intended to let the
or laches; or
shareholders have the control of the assets
• Unless there was a disposition of said of the corporation upon dissolution in
property in favor of a purchaser in good winding up its affairs.
faith..  The normal method of procedure is for the
directors and executive officers to have
Suits not brought against the corporation charge of the winding up operations,
within the 3-year period may still be though there is the alternative method of
prosecuted against the corporation, since there assigning the property of the corporation to
is nothing in Sec. 122, par. 1 which bars action trustees for the benefit of its creditors and
for the recovery of the debts of the corporation shareholders. China Banking Corp. V. M.
against the liquidator thereof after the lapse of Michelin & Cie, 58 Phil. 261 (1933).
the winding up period of 3 years [Republic of
the Philippines vs. Marsman Dev. Co., G.R. The termination of the life of a corporate entity
No. L-175109, April 27, 1972]. does not by itself cause the extinction or
diminution of the rights and liabilities of such
Right of the corporation to appeal a entity.
judgment is not extinguished by the  If the 3-year extended life has expired
expiration of the 3-year period. Corporations without a trustee or receiver having been
whose certificate of registration was revoked expressly designated by the corporation,
by the SEC may still maintain actions in court within that period, the BOD (or trustees)
for the protection of its rights which includes the itself, may be permitted to so continue as
right to appeal [Paramount Insurance Corp. v. "trustees" by legal implication
A.C. Ordonez Corp., G.R. No. 175109, August  Such designation as “trustees” is for the
6, 2008]. purpose of completing the corporate
liquidation [Pepsi-Cola Products
Methods of liquidation: Philippines, Inc. v. CA, G.R. No. 145855
1. By the corporation itself or its board of (2004)].
directors or trustees (Sec. 139[1], RCC)
2. By conveyance to a trustee within a three- A corporation under liquidation may not amend
year period (Sec. 139[2], RCC; Board of its articles of incorporation to extend its
Liquidators v. Kalaw, G.R. No. L-18805, lifespan.
Aug. 14, 1967)  When a corporation is liquidating pursuant
to the statutory period of 3 years to
Page 238 of 450

liquidate, it is only allowed to continue for trustee//s in liquidation. [Clemente et.al. v. CA,
the purpose of final closure of its business G.R. No. 82407 (1995), citing Gelano v. CA,
and no other purposes. 103 SCRA 90].
 In fact, within that period, the corporation is
enjoined from “continuing the business for By Management Committee or
which it was established.” [Alhambra Cigar Rehabilitation Receiver
and Cigarette Mfg. v. SEC, G.R. No. L-
23606 (1968)] In SEC’s judgment dissolving the corporation
and directing disposition of its assets as justice
Conveyance To A Trustee Within A requires, it may appoint a receiver to collect
3-Year Period such assets and pay the debts of the
corporation [Sec. 135].
Liquidation may also be placed in the hands of
a trustee or assignee. All the corporate assets In the exercise of its jurisdiction, the
are conveyed to such trustee or assignee by a Commission possesses the following powers:
resolution of stockholders at any time during (1) To appoint one or more receivers of the
the 3-year period. [Sec. 139] property, real and personal, which is the
subject of the action pending before the
In this method, the 3-year limitation DOES Commission in such other cases whenever
NOT apply, provided that the designation of the necessary in order to preserve the rights of
trustees is made within the period. the parties-litigants and/or protect the
interest of the investing public and creditors;
General rule: There is no time limit within (2) To create and appoint a management
which the trustee must finish the liquidation, committee, board, or body upon petition or
and he may sue and be sued as such even motu propio to undertake the management
beyond the 3-year period. of corporations, partnerships or other
associations not supervised or regulated by
Exception: The trusteeship is limited in its other government agencies in appropriate
duration by the deed of trust. cases. [PD 902-A, as amended by PD 1799,
Sec. 6]
Trustees to whom the corporate assets have
been conveyed pursuant to liquidation may sue While the SEC has the authority to dissolve a
and be sued as such in all matters connected corporation, it does not have the authority to
with the liquidation [National Abaca v. Pore, settle disputes arising from its liquidation. A
G.R. No. L-16779 (1961)]. commercial court is in the best position to
convene all stakeholders, including creditors,
The trustee of a dissolved corporation may to ascertain their claims and determine their
commence a suit which can proceed to final preferences [Consuelo Metals Corporation v.
judgment even beyond the 3-year period of Planters Development Bank G.R. No. 152580
liquidation. [Reburiano v. CA, G.R. No. 102965 (2008)].
(1999)].
WHO IS A REHABILITATION RECEIVER
Unless the trusteeship is limited in its duration • A rehabilitation receiver is a natural or
by the deed of trust, there is no time limit within juridical person appointed by the court
which the trustee must finish liquidation [Board pursuant to RA 10142 or the Financial
of Liquidators v Kalaw, G.R. No. L-18805 Rehabilitation and Insolvency Act (FRIA) of
(1967)]. 2010, whenever necessary in order to
preserve the rights of the parties-litigants
Any corporate creditor, shareholder, member and/or protect the interest of the investing
or other person-in-interest may petition the public and creditors.
courts for the appointment of a different
Page 239 of 450

• The receiver’s principal duty is to The mere appointment of a receiver, without

- Preserve and maximize the value of the anything more, does not result in the
assets of the debtor during the dissolution of the corporation, nor bar it from
rehabilitation proceedings; the exercise of its corporate rights [Leyte
- Assess the viability of rehabilitation, and Asphalt and Mineral Oil Co. Ltd., v. Block
implement a Rehabilitation Plan Johnston and Breenbrawn, G.R. No. 9755
(1928)].
• Unless appointed by the court, the
rehabilitation receiver shall not take over
While the appointment of a receiver rests within
the management and control of the debtor,
the sound judicial discretion of the court,
but may recommend the appointment of a
such discretion must, however, always be
management committee over the debtor in
exercised with caution and governed by legal
the cases provided by the FRIA [Sec. 31,
and equitable principles, the violation of which
FRIA].
will amount to its abuse, and in making such
appointment the court should take into
WHAT IS A MANAGEMENT COMMITTEE
consideration all the facts and weigh the
The management committee is the body
relative advantages and disadvantages of
appointed by the court who shall take the place
appointing a receiver to wind up the corporate
of the management and the governing body of
business. China Banking Corp. v. M. Michelin
the debtor corporation and assume their rights
& Cie, 58 Phil. 261 (1933).
and responsibilities. A rehabilitation receiver
may also be appointed to assume the
management of the corporation [Sec. 36, RECEIVERSHIP VS. TRUSTEESHIP
FRIA]. (1) Trusteeship is a contractual relationship
that can be created by a corporation
through its Board of Directors.
A management committee may be appointed in
Receivership is created by judicial
the following cases:
appointment of a rehabilitation receiver
1. Actual or imminent danger of dissipation,
and/or management committee.
loss, wastage or destruction of the debtor’s
(2) Both involve transfers of legal/naked
assets or other properties;
title from the corporation to the
2. Paralyzation of the business operations of
trustee/receiver/management
the debtor; or
committee. From the time the assets of the
3. Gross mismanagement of the debtor, or
corporation are transferred to a trustee or
fraud or other wrongful conduct on the part
receiver pursuant to liquidation, all such
of, or gross or willful violation of the FRIA
assets are then held by and in the name of
by existing management of the debtor or
the trustee or receiver who can lawfully
the owner, partner, director, officer or
proceed with liquidation even if the
representative/s in management of the
corporation no longer exists, because he
debtor [Sec. 36, FRIA]
has title to the assets.
(3) The trustee in liquidation is accountable
EFFECTS OF APPOINTING A RECEIVER
under the terms of the trust agreement.
The appointment of a receiver suspends the
The receiver and management committee
authority of the corporation, as well as its
members are deemed officers of the court
directors and officers, over the properties of the
and must therefore be accountable to the
corporation.
court by provision of law.
• The receiver shall act as the representative (4) Both are not subject to the 3-year period
of the corporation. because the corporation is substituted in
• The receivership shall exist indefinitely until either case by the trustee or the receiver
the complete settlement and liquidation of who may sue or be sued even after the
the corporation, unless otherwise limited. expiration of the 3-year period. However, in
[Herbosa] the case of trusteeship, the trustee must
Page 240 of 450

have been designated within the 3-year Directors as Trustees

period. If full liquidation can only be effected after the
3-year period and there is no trustee, the
3-YEAR PERIOD DOES NOT APPLY directors may be permitted to complete the
When the liquidation of a dissolved corporation liquidation by continuing as trustees by legal
has been placed in the hands of a receiver or implication [Reburiano v. CA, G.R. No. 102965
assignee: (1999)].
 The 3-year period prescribed by law for • A corporation’s BOD is not rendered
liquidation cannot be made to apply, and functus officio by its dissolution.
 The receiver or trustee may institute all • Sec. 122 [now Sec 139] allows a
actions leading to the liquidation of the corporation to continue its existence for a
assets of the corporation even after the limited purpose, necessarily there must be
expiration of said period. Sumera v. a board that will continue acting for and on
Valencia, 67 Phil. 721 (1939). behalf of the dissolved corporation for that
purpose [Aguirre vs. FQB+, Inc., G.R. No.
Liquidation after three years 170770 (2013)].
Under Sec. 139, after the expiration of the 3- Continuation of Pending Suits
year winding-up period, pending actions by or The trustee of a corporation may continue to
against the corporation are abated. prosecute a case commenced by the
 It should not, however, be construed as to corporation within 3 years from its dissolution
prevent a corporation from pursuing until rendition of the final judgment, even if such
activities which would complete the judgment is rendered beyond the 3-year period
final liquidation of a dissolved allowed by Sec 139, RCC
corporation.
• However, an already defunct corporation is
 In this case, Northern Luzon Corporation
barred from initiating a suit after the lapse
Inc. which term has long expired, was
of the said 3-year period.
unable to dispose of its remaining assets
even during the 3-year period granted it by • If a petition is filed after the corporate
Sec. 122 [now Sec. 139, RCC]. existence, the effect is that petitioner lacks
- Accordingly, it should be allowed to the capacity to sue as a corporation.
continue liquidating its remaining • To allow such petition to prosper, on the
assets in order to complete the ground that it is for the sole purpose of
process of dissolving the corporation. liquidating the corporation’s assets, would
- Likewise, it should be allowed to be to circumvent the provisions of Sec. 122
distribute the proceeds from said of the Corporation Code (now Sec. 139,
disposition to its stockholders or RCC) [Alabang Development Corporation
creditors if any. A contrary v. Alabang Hills Village Association and
interpretation would have unjust and Rafael Tinio, G.R. No. 187456 (2014)].
absurd results. SEC-OGC Opinion
No. 15-07 (2015) citing SECAC No.
347 (1991).
Page 241 of 450

12. Other Corporations Incorporating a Close Corporation

General Rule: Any corporation may be
incorporated as a close corporation.
Close corporations
Exceptions: The ff. cannot be incorporated as
Statutory Definition
a close corporation –
A close corporation is –
i. Mining or oil companies
1. One whose AOI provides that:
ii. Stock exchanges
(a) All the corporation’s issued stock of all
iii. Banks
classes, exclusive of treasury shares,
iv. Insurance companies
shall be held of record by not more
v. Public utilities
than a specified number of persons,
vi. Educational institutions; and
not exceeding twenty (20);
vii. Corporations declared to be vested
(b) All the issued stock of all classes shall
with public interest in accordance with
be subject to one or more specified
the provisions of this Code. [Sec. 95,
restrictions on transfer permitted by
RCC]
this Title; and
(c) The corporation shall not list in any
Applicability of RCC Provisions
stock exchange or make any public
The provisions of Title XII (Close Corporations)
offering of its stocks of any class.
primarily govern close corporations, while other
2. One where two-thirds (2/3) or more of its
Titles of the RCC apply suppletorily, except as
voting stock or voting rights is NOT owned
otherwise provided under Title XII. [Sec. 95,
or controlled by another corporation, which
RCC]
is not a close corporation within the
meaning of this Code. [Sec. 95, RCC]
Characteristics of a close
corporation
A narrow distribution of ownership does not, by
itself, make a close corporation. When a
DIRECT MANAGEMENT BY
corporation’s AOI does not contain the
STOCKHOLDERS
provisions enumerated under Sec. 96 of the
The AOI of a close corporation may provide
Code [now Sec. 95, RCC], such corporation is
that the business of the corporation shall be
not a “close corporation”. It does not become
managed by the stockholders of the
one either, just because only a few individuals
corporation rather than by a board of directors.
owned 99.866% of its subscribed capital stock
[San Juan Structural and Steel Fabricators v [Sec. 96, RCC]
CA, G.R. No. 129459 (1998)].
The feature of a close corporation, whereby
there is a merger of stock ownership and active
“Incorporated Partnership”
management is what significantly distinguishes
A close corporation embodies what
it from other corporations. [Villanueva]
businessmen perceive to be the best features
of a partnership and a corporation, such as –
Identity of Stock Ownership and Active
 Corporation: separate personality, limited
Management
liability, and the right of succession
All or most of the stockholders of a close
 Partnership: delectus personae (the
corporation are active in the corporate
selection of a person satisfactory to oneself
business either as directors, officers or other
for a position), and general management
key men in management [Campos].
by all partners of business affairs
[Villanueva]
Page 242 of 450

Stockholders’ Meeting Unnecessary transferring stockholder may sell their

So long as the abovementioned AOI provision shares to any third person. [Sec. 97, RCC]
continues in effect, no meeting of stockholders
need be called to elect directors. The right of first refusal as discussed above, is
Provided, that the stockholders of the the most onerous transfer restriction allowed.
corporation shall be:  Such right is a control scheme essential to
(1) Deemed to be directors for the purpose a close corporation.
of applying the provisions of this Code;  It allows the existing stockholders the
and power to maintain the character of delectus
- Unless the context clearly requires personae by preventing an outsider from
otherwise coming into and interfering with the affairs
(2) Subject to all liabilities of directors. of the close corporation. [Villanueva]
[Sec.96,RCC]
A transfer restriction should NOT amount to a
IDENTITY AND NUMBER STOCKHOLDERS deprivation of a stockholder’s right to ultimately
(1) Stockholders of record not more than 20 dispose of his shareholdings. [Rural Bank of
(2) Stocks not publicly listed Salinas v. CA, 210 SCRA 510 (1992)]
(3) Restricted transfer of ownership of stocks
[Sec. 95, RCC] Issuance or transfer of stock in
breach of qualifying conditions
VOTING STOCK OR VOTING RIGHTS NOT
HELD BY ANOTHER CORPORATION Subject to certain requirements, the person to
A corporation cannot be deemed as a close whom stock is issued or transferred shall be
corporation when at least two-thirds (2/3) of its conclusively presumed to have notice of the
voting stock or voting rights is owned or fact of the breach of the ff. qualifying
controlled by another corporation, which is not conditions:
a close corporation within the meaning of this (a) Eligibility of Stockholder
Code. [Sec. 95, RCC] (b) Number of Stockholders of Record
(c) Stock Transfer Restrictions [Sec. 98 (a)-
Validity of restrictions on transfer of (c), RCC]
shares
Note: The term “transfer”, as used in Sec. 98,
In order to be binding on any purchaser in good is not limited to a transfer for value. [Sec. 98(f),
faith, restrictions on the right to transfer shares RCC]
must appear in the:
(1) AOI; Breach: Ineligibility of Stockholder
(2) By-laws; and The transferee is conclusively presumed to
(3) Certificate of stock. [Sec. 97, RCC] have notice of the fact of the ineligibility to be a
stockholder:
Right of First Refusal (1) If a stock of a close corporation is issued or
Restrictions on transfer shall not be more transferred to any person who is not
onerous than granting the existing eligible thereof under any provision of the
stockholders or the corporation the option to AOI; and
purchase the shares of the transferring (2) If the certificate for such stock
stockholder. conspicuously shows the qualifications of
 Said option is subject to such reasonable the persons entitled to be holders of record
terms, conditions or period stated in the thereof. [Sec. 98(a), RCC]
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
Page 243 of 450

Breach: Exceeding the Number of Option to Rescind or Recover

Stockholders of Record The provisions of Sec. 98 shall not impair any
The transferee is conclusively presumed to right which the transferee may have to either:
have notice of the fact that the issuance or (a) Rescind the transfer; or
transfer of stock to any person would cause the (b) Recover the stock under any express or
stock to be held by more than the number implied warranty. [Sec. 98(g), RC
stated in the AOI:
(1) If the AOI of a close corporation states When board meeting is unnecessary
the number of persons, not exceeding or improperly held
twenty (20), who are entitled to be
stockholders of record; and Board Must Act as a Body to Bind the
(2) If the certificate for such stock Corporation
conspicuously states such number; and Generally, under the doctrine of centralized
(3) The issuance or transfer of stock to any management, the exercise of powers by the
person would cause the stock to be held BOD is done through the adoption of a board
by more than such number of person resolution in a board meeting called for the
[Sec. 98(b), RCC] purpose. [Villanueva]
Breach: Violation of Stock Transfer When Board Meeting is Unnecessary

Restriction However, in a close corporation, unless the by-
The transferee is conclusively presumed to laws provide otherwise, any action taken by the
have notice of the fact that the stock was directors without a meeting called properly and
acquired in violation of the transfer restriction: with due notice shall nevertheless be deemed
(1) If a stock certificate of a close corporation VALID if:
conspicuously shows a restriction on (a) Before or after such action is taken, written
transfer of the corporation’s stock; and consent thereto is signed by all the
(2) The transferee acquires the stock in directors; or
violation of such restriction [Sec. 98(c), (b) All the stockholders have actual or implied
RCC] knowledge of the action and make no
prompt objection in writing; or
Effect of Conclusive Presumption (c) The directors are accustomed to take
General Rule: Whenever a person to whom informal action with the express or
stock of a close corporation has been issued or implied acquiescence of all the
transferred is conclusively presumed to have stockholders; or
notice of the breach of qualifying conditions, (d) All the directors have express or implied
the corporation may, at its option, refuse to knowledge of the action in question and
register the transfer in the name of the none of them makes a prompt objection
transferee. [Sec. 98(d), RCC] in writing. [Sec. 100, RCC]
Exceptions: In a close corporation, a board resolution

(1) If the transfer of stock, though in breach of authorizing the sale or mortgage of the subject
the qualifying conditions, has been property is not necessary to bind the
consented to by ALL the stockholders of corporation for the action of its president.
the close corporation; or [Manuel R. Dulay Enterprises v. CA [G.R. No.
(2) If the close corporation has amended its 91889 (1993)]
articles of incorporation in accordance with
Title XII. [Sec. 98(e), RCC] 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.
Page 244 of 450

Exception: Unless after having knowledge Amendment of articles of

thereof, the director promptly files his written incorporation
objection with the secretary of the corporation.
[Sec. 100, RCC] Contents of the AOI of Close Corporations
Mandatory Provisions
Preemptive right The AOI of a close corporation must provide
that:
Definition (a) All the corporation’s issued stock of all
The preemptive right is a right granted to classes, exclusive of treasury shares,
stockholders to subscribe to all issues or shall be held of record by not more than
disposition of shares of any class, in proportion a specified number of persons, not
to their respective shareholdings. [Sec. 38, exceeding twenty (20);
RCC] (b) All the issued stock of all classes shall be
subject to one or more specified
Scope of Pre-emptive Right in Ordinary restrictions on transfer permitted by this
Corporations Title; and z
In ordinary corporations, the pre-emptive right (c) The corporation shall not list in any
shall not extend to – stock exchange or make any public
(1) Shares issued in compliance with laws offering of its stocks of any class. [Sec.
requiring stock offerings or minimum stock 95, RCC]
ownership by the public; or
(2) Shares issued in good faith with the Optional Provisions
approval of the stockholders representing The AOI of a close corporation may provide for:
two-thirds (2/3) of the outstanding capital (1) A classification of shares or rights,
stock, in exchange for property needed for  The qualifications for owning or holding
corporate purposes or in payment of a the same, and
previously contracted debt. [Sec. 38, RCC]  Restrictions on their transfers, subject
to the provisions of the following
However, because of the desire to preserve the section;
characteristic of delectus personae in close (2) A classification of directors into one (1)
corporations, the aforesaid limitations are NOT or more classes,
APPLICABLE to close corporations. Each of whom may be voted for and
elected solely by a particular class of
Scope of Pre-emptive Right in Close stock
Corporations (3) Greater quorum or voting requirements
General Rule: The preemptive right of in meetings of stockholders or directors
stockholders in close corporations shall extend than those provided in this Code,
to ALL stock to be issued, including (4) The management by the stockholders of
reissuance of treasury shares, whether: the business of the corporation, rather than
(1) For money, property or personal services; by a board of directors; and
or (5) The election or appointment by the
(2) In payment of corporate debts stockholders of all officers or employees,
or specified officers or employees, instead
Exception: Unless the AOI provide otherwise. of by the board of directors. [Sec. 96, RCC]
[Sec. 101, RCC]
Amendments
Any amendment to the AOI, which seeks:
(1) To delete or remove any provision
required by this Title; or
Page 245 of 450

(2) To reduce a quorum or voting stockholders, officers, or other persons

requirement stated in said articles of party to the action;
incorporation (d) Requiring the purchase at their fair value of
shares of any stockholder, either by the
shall require, at a meeting duly called for the corporation regardless of the availability of
purpose, the affirmative vote – unrestricted retained earnings in its books,
a. Of at least two-thirds (2/3) of the or by the other stockholders;
outstanding capital stock, whether with (e) Appointing a provisional director;
or without voting rights; or (f) Dissolving the corporation; or
b. Of such greater proportion of shares as (g) Granting such other relief as the
may be specifically provided in the AOI circumstances may warrant. [Sec. 103,
for amending, deleting or removing any RCC]
of the aforesaid provisions. [Sec. 102,
RCC] Appointment of a Provisional Director
Qualifications
Deadlocks A provisional director shall be an impartial
person:
Definition 1. Who is neither a stockholder, nor a creditor
A deadlock is a situation when the directors or of the corporation or any of its subsidiaries
stockholders are so divided on the or affiliates; and
management of the corporation’s business and 2. Whose further qualifications, if any, may be
affairs that: determined by the Commission. [Sec. 103,
(1) The votes required for a corporate action RCC]
cannot be obtained;
(2) With the consequence that the business Powers, Rights, Compensation
and affairs of the corporation can no longer A provisional director shall have all the rights
be conducted to the advantage of the and powers of a duly elected director.
stockholders generally. [Sec. 103, RCC]  This includes the right to be notified of, and
to vote at meetings of directors until
Effect of the Existence of a Deadlock removed by order of the Commission or by
General Rule: The SEC, upon written petition all the stockholders.
by any stockholder, shall have the power to  However, the provisional director is not a
arbitrate the dispute. receiver of the corporation and does not
have the title and powers of a custodian or
Exception: Contrary provision in the close receiver. [Sec. 103, RCC]
corporation’s articles of incorporation, bylaws,
or stockholders’ agreement. [Sec. 103, RCC] The compensation of the provisional director
shall be determined by agreement between
Exercise of Power to Arbitrate by the SEC such director and the corporation, subject to
In the exercise of such power, the Commission approval of the Commission.
shall have authority to make appropriate
orders, such as: The SEC may fix the compensation, absent an
(a) Cancelling or altering any provision agreement or in the event of disagreement
contained in the articles of incorporation, between the provisional director and the
bylaws, or any stockholder’s agreement; corporation. [Sec. 103, RCC]
(b) Cancelling, altering or enjoining a
resolution or act of the corporation or its Buy-Back Order & Right to Withdraw
board of directors, stockholders, or officers; In the exercise of its power to arbitrate a
(c) Directing or prohibiting any act of the deadlock situation, the SEC can require the
corporation or its board of directors, purchase, at their fair value, of shares of any
stockholder, either by:
Page 246 of 450

 The corporation regardless of the Non-stock corporations

availability of unrestricted retained
earnings in its books; or Definition
 The other stockholders. [Sec. 103(d), RCC]
A non- stock corporation is one where no part
The stockholder of a close corporation has a of its income is distributable as dividends to its
counterpart right to compel the corporation, for members, trustees, or officers. [Sec. 86, RCC]
any reason, to purchase shares held at fair
value. Essence of a Non-Stock Corporation
 Such purchase shall not be less than the It is legally possible for a corporation having
par or issued value capital stock to still be considered a non-stock
 Such purchase shall take place only when corporation.
the corporation has sufficient assets in its
books to cover its debts and liabilities For this reason, the essence of a non-stock
exclusive of capital stock. [Sec. 104, RCC] corporation is NOT the non-existence of shares
of stock, but that:
Dissolution Order & Right to Dissolve a. Its primary purpose should be
In the exercise of its power to arbitrate a eleemosynary in nature; and
deadlock situation, the SEC can order the b. There is a prohibition in its AOI and by-laws
dissolution of a corporation. [Sec. 103(f), RCC] that no part of the income or any form of
dividend is distributable to the members,
The stockholder of a close corporation has a trustees, or officers of the corporation.
counterpart right to compel the dissolution of [Villanueva]
such corporation by written petition to the
Commission: Purposes
(1) Whenever any of acts of the directors,
officers, or those in control of the Non-stock corporations may be formed or
corporation is illegal, fraudulent, dishonest, organized for the ff. purposes:
oppressive or unfairly prejudicial to the (1) Charitable,
corporation or any stockholder; or (2) Religious,
(2) Whenever corporate assets are being (3) Educational,
misapplied or wasted. [Sec. 104, RCC] (4) Professional,
(5) Cultural,
Rationale Behind Deadlock Provisions (6) Fraternal,
The deadlock provisions, through the threat of (7) Literary,
dissolution or repurchase of shares, provide a (8) Scientific,
strong incentive for the controlling group to (9) Social,
manage equitably, or otherwise face the (10) Civic service,
likelihood that the enterprises would be folded (11) Similar purposes, like trade, industry,
up by the SEC. agricultural and like chambers; or
 A close corporation setting does not allow (12) Any combination thereof, subject to the
a stockholder to “cash-in” on his equity special provisions of this Title governing
because there is no market for his shares particular classes of non-stock
(i.e. right of first refusal) corporations. [Sec. 87, RCC]
 Deadlocks arise often because some
members feel that the managing group has A non-stock corporation may not include in its
been able to corner profits through AOI a purpose which would change or
schemes that are inequitable to the other contradict its nature as such. [Sec. 13(b), RCC]
parties. [Villanueva]
A nonstock corporation may not engage in
investment business, where profit is the main
Page 247 of 450

or underlying purpose. [People v. Menil, 340 Note: Reasons for Dissolution under Sec. 139
SCRA 125 (2000)]  Charter expires pursuant to its AOI,
 Charter is annulled by forfeiture, or
Treatment of Profits  Corporate existence is terminated in any
other manner [Sec. 139, RCC]
Any profit which a non-stock corporation may
obtain incidental to its operations shall, Rules of Distribution of Assets Upon
whenever necessary or proper, be used for Dissolution
the furtherance of the purpose or purposes The assets of a nonstock corporation
for which the corporation was organized, undergoing the process of dissolution for
subject to the provisions of this Title. [Sec. 86, reasons other than those set forth in Section
RCC] 139, shall be applied and distributed as follows:
(a) All liabilities and obligations of the
A non-stock corporation holds its funds in trust corporation shall be paid, satisfied and
for the carrying out of the objectives and discharged, or adequate provision shall be
purposes expressed in its AOI. Thus, if it were made therefor;
to be converted to a stock corporation, it must (b) For the assets of the corporation –
be dissolved first, otherwise, such Type of Asset How Distributed
transformation would be tantamount to an
unauthorized distribution of its assets or Assets held by the Returned, transferred
income to its members. [Villanueva] corporation upon a or conveyed in
condition requiring accordance with such
Earning of Profits Merely Incidental return, transfer or requirements;
conveyance, and which
It is not inconsistent with the nature of a
condition occurs by
nonstock corporation to incidentally earn profits reason of the dissolution
in pursuing its eleemosynary purpose. [CIR v.
University of Visayas, 1 SCRA 669 (1961)] Assets received and held Transferred or
by the corporation conveyed to one or
The incurring of profit or losses does not subject to limitations more corporations,
determine whether an activity is for profit or permitting their use only societies or
for charitable, religious, organizations:
non-profit, what the courts will consider is:
benevolent, educational (1) Engaged in
1. Whether dividends have been declared; or or similar purposes, but activities in the
2. Whether its profit was ever used for NOT held upon a Philippines
personal or individual gain, and not for the condition requiring substantially
purpose of carrying out the objectives of return, transfer or similar to those of
the enterprise. [Manila Sanitarium and conveyance by reason of the dissolving
Hospital v. Gabuco, 7 SCRA 14 (1963)] the dissolution corporation
(2) According to a
Plan and distribution of assets upon plan of distribution
adopted pursuant
dissolution
to this Chapter;
Applicability
The subsequent rules of distribution of assets
are applicable only when the nonstock
corporation undergoing dissolution was
dissolved for reasons other than those set
forth in Section 139. [Sec. 93, RCC]
Page 248 of 450

Assets other than those Distributed in

mentioned in the accordance with the
preceding paragraphs, if provisions of the AOI
any or the bylaws to the
extent that the AOI or
the bylaws:
• Determine the
distributive rights
of members or
any class or
classes of
members; or
• Provide for
distribution
Assets, in any other case Distributed to such

persons, societies,
organizations or
corporations, whether
or not organized for
profit, as may be
specified in a plan of
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 trus tees shall, by majority vote, adopt a resol ution:
a. Recommendi ng a pl an of distributi on and
b. Directing the s ubmis sion thereof to a vote at a reg ular or s peci al meeting of members having voti ng rights;
(2 ) Eac h member entitl ed to vote s hall be gi ven, i n the manner provi ded in this Code for the givi ng of notic e of meeti ngs, a written notic e s etti ng forth:
a. The propos ed pl an of distri bution or a s ummar y thereof
b. The date, ti me and pl ace of s uch meeti ng within the time; and
(3 ) Suc h plan of dis tribution s hall be adopted upon approval of at l east two-thirds (2/3) of the members having voti ng rights pr esent or r epr es ented by proxy at s uc h meeting. [Sec. 94, RCC]
Page 249 of 450

SUMMARY: Stock vs. Non-Stock Corporations

Stock Non-stock
Definition
Stock corporations are those which have

capital stock divided into shares and are All other corporations . [Sec. 3, RCC]
authorized to distribute to the holders of such One where no part of its income is distributable as
shares, dividends, or allotments of the surplus dividends to its members, trustees or officers. [Sec.
profits on the basis of the shares held. [Sec. 3, 87, RCC]
RCC]
Purpose
Non-stock corporations may be formed or

organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific,
Primarily to make profits for its shareholders. 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]
Distribution of profits
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
Profit is distributed to shareholders.
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]
Scope of Voting Rights
Each stockholder votes according to the

proportion of his shares in the corporation. No
share may be deprived of voting rights except Each member, regardless of class, is entitled to one
those classified and issued as “preferred” or (1) vote UNLESS such right to vote has been
“redeemable” shares, unless otherwise limited, broadened, or denied in the AOI or by-laws
provided in this Code: Provided, That there [Sec. 88, RCC].
shall always be a class or series of shares with
complete voting rights [Sec. 6, RCC].
Voting by proxy
Page 250 of 450

Stock Non-stock
Stockholders and members may vote in

person or by proxy in all meetings of
stockholders or members.
When so authorized in the by-laws or by a

May be denied by the AOI or the by-laws [Sec. 88,
majority of the board of directors, the
RCC]
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 Trustees, which may or may not be more

Board of Directors or Trustees. [Sec. 22, 92,
than 15 trustees, as provided by the AOI or by-laws
RCC]
[Sec. 23, 91, RCC]
Term of Directors of Trustees
Board classified in such a way that the term of office

Directors / trustees shall hold office for 1 year of 1/3 of their number shall expire every year.
and until their successors are elected and Subsequent elections of trustees comprising 1/3 of
qualified [Sec. 23]. the board shall be held annually, and trustees so
elected shall have a term of 3 years [Sec. 92].
Election of Officers
Directors shall be elected for a term of one (1)

year from among the holders of stocks
registered in the corporation’s books, while
trustees shall be elected for a term not
exceeding three (3) years from among the Except with respect to independent trustees of
members of the corporation. Each director and nonstock corporations vested with public interest,
trustee shall hold office until the successor is only a member of the corporation shall be elected
elected and qualified. [Sec. 22, RCC] as trustee. [Sec. 91, RCC]
The articles of incorporation may provide that Officers may directly elected by the members
all officers or employees or that specified UNLESS the AOI or by-laws provide otherwise
officers or employees shall be elected or [Sec. 91, RCC].
appointed by the stockholders, instead of by
the board of directors.
[Sec. 97].
Transferability of interest or membership
Page 251 of 450

Stock Non-stock
Generally non-transferable since membership and

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

A majority of the trustees shall constitute a
Educational corporation – A stock or non- quorum for the transaction of business. [Sec.
stock corporation organized for educational 106, RCC]
purposes. [De Leon, Corporation Code]
Constitutional Provisions Related to
Educational corporations shall be governed by Educational Corporations:
special laws and by the general provisions of Educational institutions, other than those
this Code. [Sec. 105, RCC] established by religious groups and mission
boards, shall be owned solely by citizens of the
Composition of Board: Philippines or corporations or associations at
If organized as a non-stock corporation least sixty per centum of the capital of which is
Trustees of educational institutions organized owned by such citizens. The Congress may,
as non-stock corporations shall not be less however, require increased Filipino equity
than five (5) nor more than fifteen (15). participation in all educational institutions. The
Provided, however, that – control and administration of educational
The number of trustees shall be in multiples of institutions shall be vested in citizens of the
five Philippines. [CONST, Art. XIV, Sec. 4(2), par.
They shall classify themselves in such a way 1]
that the term of 1/5 of them expires every year.
[Sec. 106, RCC] No educational institution shall be established
exclusively for aliens and no group of aliens
If organized as a stock corporation shall comprise more than one-third of the
For institutions organized as stock enrollment in any school. The provisions of this
corporations, the number and term of directors subsection shall not apply to schools
shall be governed by the provisions on stock established for foreign diplomatic personnel
corporations. [Sec. 106, RCC] and their dependents and, unless otherwise
provided by law, for other foreign temporary
The powers and authority of trustees shall be residents. [CONST, Art. XIV, Sec. 4(2), par. 1]
defined in the bylaws.
Religious corporations
Rules as to Vacancies
Trustees thereafter elected to fill vacancies, Religious corporations may be incorporated by
occurring before the expiration of a particular one or more persons. Such corporations may
term, shall hold office only for the unexpired be classified into:
period. 1. Corporations sole; and
2. Religious societies. [Sec. 107, RCC]
Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office Religious corporations shall be governed by
for five (5) years. [Sec. 106, RCC] Title XIII, and by the general provisions on non-
stock corporations insofar as applicable. [Sec.
107, RCC]
Page 252 of 450

Corporation sole; nationality 3. That such chief archbishop, bishop, priest,

minister, rabbi, or presiding elder is
A corporation sole may be formed by the chief charged with:
archbishop, bishop, priest, minister, rabbi, or 4. The administration of the temporalities and
other presiding elder of such religious 5. The management of the affairs, estate and
denomination, sect, or church. [Sec. 108, RCC] properties of the religious denomination,
sect, or church within the territorial
A corporation sole consists of only one person jurisdiction, so described succinctly in the
and his successors (who will always be one at AOI;
a time), in some particular station. [Roman 6. The manner by which any vacancy
Catholic Apostolic Adm. of Davao v. LRC, 102 occurring in the office of chief archbishop,
Phil. 596 (1957)] bishop, priest, minister, rabbi, or presiding
elder is required to be filled, according to
Purpose the rules, regulations or discipline of the
A corporation sole is incorporated for the religious denomination, sect, or church;
purpose of administering and managing, as and
trustee, the affairs, property and temporalities 7. The place where the principal office of the
of any religious denomination, sect or church. corporation sole is to be established and
[Sec. 108, RCC] located, which place must be within the
territory of the Philippines. [Sec. 109, RCC]
A corporation sole is not the owner of the
properties that he may acquire, but merely the Submission of the AOI
administrator thereof. [Roman Catholic The chief archbishop, bishop, priest, minister,
Apostolic Adm. of Davao v. LRC, 102 Phil. 596 rabbi or presiding elder of any religious
(1957)] denomination, sect or church must file the AOI
with the Commission. [Sec. 109, RCC]
Nationality
A corporation sole has no nationality, but for The articles of incorporation must be:
the purpose of applying nationalization laws, (1) Verified, by affidavit or affirmation of the
nationality is determined not by the nationality chief archbishop, bishop, priest, minister,
of its presiding elder but by the nationality of its rabbi, or presiding elder, as the case may
members constituting the sect in the be; and
Philippines. Thus, the Roman Catholic Church (2) Accompanied by a copy of the commission,
can acquire lands in the Philippines even if it is certificate of election or letter of
headed by the Pope [Roman Catholic appointment of such chief archbishop,
Apostolic, etc v. Register of Deeds of Davao bishop, priest, minister, rabbi, or presiding
City, G.R. No. L-8451 (1957)]. elder, duly certified to be correct by any
notary public. [Sec. 110, RCC]
Incorporation
Contents of the AOI From and after filing with the Commission of
The AOI of the corporation sole must set forth the said AOI:
the following: (1) Such chief archbishop, bishop, priest,
1. That the applicant chief archbishop, minister, rabbi, or presiding elder shall
bishop, priest, minister, rabbi, or presiding become a corporation sole; and
elder represents the religious (2) All temporalities, estate and properties of
denomination, sect, or church who desires the religious denomination, sect or church
to become a corporation sole; theretofore administered or managed as
2. That the rules, regulations and discipline of such chief archbishop, bishop, priest,
the religious denomination, sect or church minister, rabbi, or presiding elder shall be
are consistent with becoming a corporation personally held in trust as a corporation
sole and do not forbid it; sole
Page 253 of 450

 For the use, purpose, exclusive benefit articles. [Iglesia Evangelica Metodista En
and on behalf of the religious Las Filipinas (Corporation Sole) Inc., et al
denomination, sect, or church. v. Bishop Nathanael Lazaro, et al, G.R. No.
 This includes hospitals, schools, 184088 (2010)]
colleges, orphan asylums, parsonages,
and cemeteries thereof. [Sec. 110, Filling of Vacancies
RCC] The successors in office of any chief
archbishop, bishop, priest, minister, rabbi, or
Power to Amend AOI presiding elder in a corporation sole:
Note that Sec. 107 allows the application to (1) Shall become the corporation sole on their
religious corporations of the general provisions accession to office; and
governing non-stock corporations, insofar as (2) Shall be permitted to transact business as
applicable. such upon filing a copy of their commission,
certificate of election, or letters of
For non-stock corporations, the power to appointment, duly certified by any notary
amend its Articles of Incorporation lies in its public with the Commission. [Sec. 112,
members. The code requires two-thirds of RCC]
their votes for the approval of such an
amendment. During any vacancy in the office, all the powers
and authority of the corporation sole during
So how will this requirement apply to a such vacancy shall be exercised by the
corporation sole that has technically but one person or persons authorized by the rules,
member (the head of the religious regulations or discipline of the religious
organization) who holds in his hands its broad denomination, sect, or church represented by
corporate powers over the properties, rights, the corporation sole to:
and interests of his religious organization? i. Administer the temporalities and
• Although a non-stock corporation has a ii. Manage the affairs, estate, and
personality that is distinct from those of its properties of the corporation sole. [Sec.
members who established it, its AOI cannot 112, RCC]
be amended solely through the action of its
BOT. The amendment needs the Acquisition of Property
concurrence of at least 2/3 of its A corporation sole may:
membership. (1) Purchase and hold real estate and
• If such approval mechanism is made to personal property for its church, charitable,
operate in a corporation sole, its one benevolent, or educational purposes; and
member in whom all the powers of the (2) Receive bequests or gifts for such
corporation technically belongs, needs purposes. [Sec. 111, RCC]
to get the concurrence of 2/3 of its
membership. The one member is but a Alienation of Property
trustee of its membership. A corporation sole may sell or mortgage real
• There is no point to dissolving the property held by it by:
corporation sole of one member to enable (1) Obtaining an order for that purpose from
the corporation aggregate to emerge from the Regional Trial Court of the province
it. The one member, with the concurrence where the property is situated
of two-thirds of the membership of the (2) Adducing proof that:
organization for whom he acts as trustee,  The notice of the application for leave
can self-will the amendment. He can, with to sell or mortgage has been made
membership concurrence, increase the through publication or as directed by
technical number of the members of the the Court; and
corporation from “sole” or one to the
greater number authorized by its amended
Page 254 of 450

 It is in the interest of the corporation Religious societies

that leave to sell or mortgage be
granted. Religious society – A religious corporation
incorporated by more than one person. Also
The application for leave to sell or mortgage: called “corporation aggregate.”
(1) Must be made by petition, duly verified, by
the chief archbishop, bishop, priest, Incorporation
minister, rabbi, or presiding elder acting as General Rule: Any religious society, religious
corporation sole, and; order, diocese, synod, or district organization
(2) May be opposed by any member of the of any religious denomination, sect, or church,
religious denomination, sect, or church may incorporate for the administration of its
represented by the corporation sole. temporalities or for the management of its
affairs, properties, and estate –
Provided, that in cases where the rules, (1) Upon written consent of at least two-thirds
regulations, and discipline of the religious (2/3) of its membership; and/or
denomination, sect, or church, religious (2) By an affirmative vote at a meeting called
society, or order concerned represented by for the purpose of at least two-thirds (2/3)
such corporation sole regulate the method of of its membership
acquiring, holding, selling, and mortgaging real
estate and personal property: Exception: Unless forbidden by competent
a. Such rules, regulations and discipline shall authority, the Constitution, pertinent rules,
control; and regulations, or discipline of the religious
b. The intervention of the courts shall not be denomination, sect, or church of which it is a
necessary. [Sec. 111, RCC] part. [Sec. 114, RCC]
Voluntary Dissolution Filing and Contents of the AOI

A corporation sole may be dissolved and its The AOI must be:
affairs settled voluntarily by submitting to the (1) Verified by the affidavit of the presiding
Commission a verified declaration of elder, secretary, or clerk or other member
dissolution, setting forth: of such religious society or religious order,
(a) The name of the corporation; or diocese, synod, or district organization
(b) The reason for dissolution and winding up; of the religious denomination, sect, or
(c) The authorization for the dissolution of the church; and
corporation by the particular religious (2) Filed with the Commission. [Sec. 114,
denomination, sect or church; RCC]
(d) The names and addresses of the persons
who are to supervise the winding up of the The AOI must set forth the following:
affairs of the corporation. [Sec. 113, RCC] (a) That the religious society or religious order,
or diocese, synod, or district organization is
Upon approval of such declaration of a religious organization of a religious
dissolution by the Commission, the corporation denomination, sect or church;
shall cease to carry on its operations except for (b) That at least two-thirds (2/3) of its
the purpose of winding up its affairs. [Sec. 113, membership has given written consent or
RCC] has voted to incorporate, at a duly
convened meeting of the body;
(c) 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
Page 255 of 450

religious denomination, sect, or church of The assets of the

which it forms part; The assets of the sole OPC are not owned
(d) That the religious society or religious order, proprietorship are by its sole
diocese, synod, or district organization similarly owned by stockholder unless
desires to incorporate for the the proprietor the OPC is not
administration of its affairs, properties and conducting the adequately-
estate; business. financed and/or the
(e) The place within the Philippines where the assets.
principal office of the corporation is to be The obligations of
established and located; and The obligations that
the corporation
(f) The names, nationalities, and residence the sole
cannot be enforced
addresses of the trustees, not less than five proprietorship
against its sole
(5) nor more than fifteen (15) incurred in
stockholder unless
conducting the
 Elected by the religious society or the situation
business may be
religious order, or the diocese, synod, warrants piercing
or district organization enforced against the
the veil of corporate
proprietor.
 To serve for the first year, or such other fiction.
period as may be prescribed by the Registered with the Registered with the
laws of the religious society or religious DTI. SEC.
order, or of the diocese, synod, or [Divina, “Highlights of the Revised Corporation
district organization. [Sec. 114, RCC] Code”]
One person corporations Excepted corporations
One Person Corporation (OPC) – A The ff. may NOT incorporate as OPCs:
corporation with a single stockholder. [Sec. a. Banks and quasi-banks
116, RCC] b. Pre-need, trust, insurance, public and
publicly-listed companies; and
Who May Form OPCs c. Non-chartered GOCCs. [Sec. 116, RCC]
Only the ff. may form OPCs:
(1) A natural person; Capital stock requirement
(2) A trust; or
(3) An estate. A One Person Corporation shall not be
required to have a minimum authorized
Note: A natural person who is licensed to capital stock, except as otherwise provided by
exercise a profession may not organize as a special law. [Sec. 117, RCC]
OPC for the purpose of exercising such
profession, except as otherwise provided Articles of incorporation and by-
under special laws. [Sec. 116, RCC] laws
Sole Proprietorship vs. OPC Articles of Incorporation

Sole Proprietorship OPC A One Person Corporation shall file articles of
Has no separate Has a legal incorporation in accordance with the
legal personality from personality separate requirements under Section 14 of this Code.
the proprietor and distinct from the
conducting the sole stockholder of It shall likewise substantially contain the
business. the corporation. following:
(a) If the single stockholder is a trust or an
estate –
a. The name, nationality, and
residence of the trustee,
Page 256 of 450

administrator, executor, guardian, b. To disburse and invest the same

conservator, custodian, or other according to the articles of
person exercising fiduciary duties incorporation as approved by the
b. Proof of such authority to act on Commission.
behalf of the trust or estate; and (2) The bond shall be renewed every two (2)
(b) Name, nationality, residence of the years or as often as may be required. [Sec.
nominee and alternate nominee, and the 122, RCC]
extent, coverage and limitation of the
authority. [Sec. 118, RCC] Corporate Secretary’s Special Functions
In addition to the functions designated by the
By-Laws OPC, the corporate secretary shall:
The OPC is not required to submit and file (a) Be responsible for maintaining the minutes
corporate by-laws. [Sec. 119, RCC] book and/or records of the corporation;
(b) Notify the nominee or alternate nominee of
Corporate name the death or incapacity of the single
stockholder
A One Person Corporation shall indicate the  Such notice shall be given no later than
letters “OPC” either below or at the end of its five (5) days from such occurrence;
corporate name. [Sec. 120, RCC] (c) Notify the Commission of the death of the
single stockholder within five (5) days from
Corporate structure and officers such occurrence and stating in such notice
–
Single Stockholder as Director, President  The names, residence addresses, and
The single stockholder shall be the sole contact details of all known legal heirs;
director and president of the One Person and
Corporation. [Sec. 121, RCC] (d) Call the nominee or alternate nominee and
the known legal heirs to a meeting and
Treasurer, Corporate Secretary, and Other advise the legal heirs with regard to,
Officers among others:
Within fifteen (15) days from the issuance of its  The election of a new director;
certificate of incorporation, the OPC shall  Amendment of the AOI; and
appoint:  Other ancillary and/or consequential
(1) A treasurer; matters. [Sec. 123, RCC]
(2) A corporate secretary; and
(3) Other officers as it may deem necessary Nominee
Note: The single stockholder may NOT be
appointed as the corporate secretary. The single stockholder shall designate in the
AOI a nominee and an alternate nominee who
Within five (5) days from appointment, the OPC shall, in the event of the single stockholder’s
shall notify the Commission thereof. [Sec. 122, death or incapacity:
RCC] (1) Take the place of the single stockholder as
director; and
Treasurer’s Bond (2) Manage the corporation’s affairs. [Sec.
A single stockholder who is likewise the self- 124, RCC]
appointed treasurer of the corporation, shall
give a bond to the Commission in such a sum Consent of Nominee and Alternate Nominee
as may be required: Provided, That – The written consent of the nominee and
(1) The said stockholder/treasurer shall alternate nominee shall be attached to the AOI.
undertake in writing: Such consent may be withdrawn in writing any
a. To faithfully administer the OPC’s time before the death or incapacity of the single
funds to be received as treasurer, and stockholder. [Sec. 124, RCC]
Page 257 of 450

Term of Nominee The corporate secretary shall be responsible

When the single stockholder is temporarily for maintaining the minutes book and/or
incapacitated: records of the corporation. [Sec. 123(a), RCC]
(1) The nominee shall sit as director and
manage the affairs of the OPC Records in Lieu of Meetings
(2) The nominee shall serve only until the When action is needed on any matter, it shall
stockholder, by self-determination, regains be sufficient to prepare a written resolution:
the capacity to assume such duties. [Sec. (a) Signed and dated by the single
125, RCC] stockholder; and
(b) Recorded in the minutes book of the One
In case of death or permanent incapacity of the Person Corporation. [Sec. 128, RCC]
single stockholder:
(1) The nominee shall sit as director and The date of recording in the minutes book shall
manage the affairs of the OPC be deemed to be the date of the meeting for all
(2) The nominee shall serve until: purposes under this Code. [Sec. 128, RCC]
a. The legal heirs of the single
stockholder have been lawfully Liability
determined; and
b. The heirs have designated one of them Limited Liability
or have agreed that the estate shall be An important advantage of the corporation is
the single stockholder of the OPC. the limitation of an investor’s liability to the
[Sec. 125, RCC] amount of investment, which flows from the
legal theory that a corporate entity is separate
Term of Alternate Nominee and distinct from its stockholders. [San Juan
In case of the nominee’s inability, incapacity, Structural and Steel, Inc. v. CA, 296 SCRA 631
death, or refusal to discharge the functions as (1998).]
director and manager of the corporation:
(1) The alternate nominee shall sit as director Liability of Single Shareholder
and manage the One Person Corporation; A sole shareholder claiming limited liability has
and the burden of affirmatively showing that the
(2) The alternate nominee shall serve only for corporation was adequately financed.
the same term, and under the same
conditions applicable to the nominee. [Sec. Where the single stockholder cannot prove that
125, RCC] the property of the OPC is independent of the
stockholder’s personal property, the
Change of Nominee or Alternate Nominee stockholder shall be jointly and severally
The single stockholder may, at any time, liable for the debts and other liabilities of the
change its nominee and alternate nominee by OPC.
submitting to the Commission:
(1) The names of the new nominees; and Applicability of the Doctrine of Piercing the
(2) The new nominees’ corresponding written Corporate Veil
consent. The principles of piercing the corporate veil
Note: For this purpose, the AOI need not be applies with equal force to OPCs, as with other
amended. [Sec. 126, RCC] corporations. [Sec. 130, RCC]
Minutes and records When the veil of corporate fiction is pierced:

The corporation will be considered as a mere
Minutes Book association of persons; and
A One Person Corporation shall maintain a The liability will directly attach to the
minutes book which shall contain all its actions, stockholders or to the other corporation
decisions, and resolutions. [Sec. 127, RCC]
Page 258 of 450

[China Banking v. Dyne-Sem, G.R. No. 149237 single stockholder, the nominee or
(2006)]. alternate nominee shall:
a. Transfer the shares to the duly
Conversion of corporation to one designated legal heir or estate; and
person corporations and vice-versa b. Notify the Commission of the
transfer.
Conversion from an Ordinary Corporation 2. Within sixty (60) days from the transfer of
to a OPC the shares, the legal heirs shall notify the
When a single stockholder acquires ALL the Commission of their decision to either:
stocks of an ordinary stock corporation, the a. Wind up and dissolve the One
latter may apply for conversion into a One Person Corporation; or
Person Corporation, subject to the submission b. Convert it into an ordinary stock
of such documents as the Commission may corporation.
require.
The ordinary stock corporation converted from
If the application for conversion is approved: a One Person Corporation shall succeed the
(1) The Commission shall issue certificate of latter and be legally responsible for all the
filing of amended articles of incorporation latter’s outstanding liabilities as of the date of
reflecting the conversion conversion. [Sec. 132, RCC]
(2) The OPC converted from an ordinary stock
corporation shall succeed the latter, and be Foreign corporations
legally responsible for all the latter’s
outstanding liabilities as of the date of Foreign Corporation — Those formed,
conversion. [Sec. 131, RCC] organized, or existing under any laws other
than those of the Philippines and whose laws
Conversion from a OPC to an Ordinary allow Filipino citizens and corporations to do
Stock Corporation business in its own country or state [Sec. 140].
A One Person Corporation may be converted
into an ordinary stock corporation after: Bases of authority over foreign
(1) Due notice to the Commission of such fact corporations
and of the circumstances leading to the
conversion; and (a) Consent
 Such notice shall be filed with the
Commission within sixty (60) days from As a rule, a foreign corporation can have no
the occurrence of the circumstances legal existence or status beyond the bounds of
leading to the conversion into an the State or sovereignty by which it is created
ordinary stock corporation or incorporated and organized.
(2) Compliance with all other requirements for It exists only in contemplation of law and by
stock corporations under this Code and force of the law
applicable rules.
Where that law ceases to operate, the
If all requirements have been complied with, corporation can have no existence.
the Commission shall issue an amended
certificate of incorporation reflecting the However, this principle does not prevent a
conversion. [Sec. 132, RCC] corporation from acting in another State or
country with the latter’s express or implied
In case of death of the single stockholder: consent.
1. Within seven (7) days from receipt of either
an affidavit of heirship or self- adjudication
executed by a sole heir, or any other legal
document declaring the legal heirs of the
Page 259 of 450

Consent Doctrine acts/works/exercise of some of the functions

The legal standing of foreign corporations in normally incident to the purpose or object of a
the host state is founded on international law foreign corporation’s organization.
on the basis of consent, whether implied or [Mentholatum Co., Inc. v. Mangaliman, 72 Phil.
express. 525 (1941)]
 A corporation can exercise none of the
functions and privileges conferred by its It is the crucial point to determine:
charter in another State or country except • Whether foreign corporations and
by the comity and consent of such State or multinational enterprises have come within
country. [DE LEON] the territorial jurisdictions of the host
 Under Philippine law, the condition is that it countries; and
must obtain a license to do business in the • To what extent they are bound to obtain
Philippines [CAMPOS]. licenses within various host countries before
they can sue with local courts and
Consent as Basis for Exercise of administrative bodies. [Villanueva]
Jurisdiction
To obtain jurisdiction over foreign corporations, Jurisprudential Tests of “Doing Business
the considerations of due process and fair play In The Philippines”
require that consent be obtained. [Villanueva] 1. Twin Characterization Test
The jurisdiction of courts to render judgment in Continuity Test: Doing business implies a
personam is grounded on their de facto power continuity of commercial dealings and
over the defendant's person. His presence arrangements, or performance of acts
within the territorial jurisdiction of a court is normally incidental to the purpose and
prerequisite to its rendition of judgment object of the organization.
personally binding him. [Pennoyer v, Neff, 95
U.S. 714 (1877)] Substance Test: Doing business implies
that a foreign corporation is continuing the
Thus, a foreign corporation may be subjected body or substance of the enterprise of
to jurisdiction by reason of consent, ownership business for which it was organized
of property within the State, or by reason of [Agilent Technologies v Integrated Silicon
activities within or having an effect within the Technology, G.R. No. 154618 (2004)]
state. [Villanueva citing Salonga]
2. Contract Test: A foreign corporation is
(b) Doctrine of “doing business” doing business in the Philippines if the
contracts entered into by the foreign
When a foreign corporation undertakes corporation or by an agent acting under the
business activities within the territorial control and direction of the foreign
jurisdiction of a host state, then it ascribes to corporation are consummated in the
the host state standing to enforce its laws, rules Philippines [Pacific Vegetable Oil v.
and regulations. [Villanueva] Singson, G.R. No. L-7917 (1955)].
Said business activities serves as the basis by Necessity of a license to do

which a host state is deemed to have authority business
over a foreign corporation within its territorial
jurisdiction. [Villanueva] Every foreign corporation, which on the date of
the effectivity of this Code, is authorized to do
Concept of“Doing Business” business in the Philippines under a license
The concept of "doing business" implies a issued to it, shall continue to have such
continuity of commercial dealings and authority under the terms and conditions of its
arrangements and the performance of
Page 260 of 450

license, subject to the provisions of this Code the Commission to determine whether
and other special laws [Sec 141, RCC]. such corporation is entitled to a license to
transact business in the Philippines, and to
(a) Requisites for issuance of a determine and assess the fees payable
license [Sec. 142, RCC]
A foreign corporation shall submit: Documents Attached to Application

1. A copy of its articles of incorporation and Attached to the application shall be:
bylaws, certified in accordance with law, (1) A certificate under oath duly executed by
and the authorized official or officials of the
2. Their translation to an official language of jurisdiction of its incorporation, attesting to
the Philippines, if necessary. [Sec 142, the fact that:
RCC] a. The laws of the country or State
of the applicant allow Filipino
The application shall be under oath and, unless citizens and corporations to do
already stated in its articles of incorporation, business therein;
shall specifically set forth the following: b. The applicant is an existing
 The date and term of incorporation; corporation in good standing. (Sec
 The address, including the street number, 142, RCC)
of the principal office of the corporation in (2) A statement under oath of the president or
the country or State of incorporation; any other person authorized by the
 The name and address of its resident agent corporation:
authorized to accept summons and a. Showing to the satisfaction of the
process in all legal proceedings and all Commission and when appropriate,
notices affecting the corporation, pending other governmental agencies that
the establishment of a local office; the applicant is solvent and in
 The place in the Philippines where the sound financial condition; and
corporation intends to operate; b. Setting forth the assets and
 The specific purpose or purposes which liabilities of the corporation as of the
the corporation intends to pursue in the date not exceeding one year
transaction of its business in the immediately prior to the filing of the
Philippines: Provided, That said purpose or application [Sec. 142, RCC]
purposes are those specifically stated in
the certificate of authority issued by the Issuance of a License
appropriate government agency; Upon issuance of the license, such foreign
 The names and addresses of the present corporation may commence to transact
directors and officers of the corporation; business in the Philippines and continue to do
 A statement of its authorized capital stock so for as long as it retains its authority to act as
and the aggregate number of shares which a corporation under the laws of the country or
the corporation has authority to issue, State of its incorporation, unless such license
itemized by class, par value of shares, is:
shares without par value, and series, if any;  surrendered,
 A statement of its outstanding capital stock  revoked,
and the aggregate number of shares which  suspended, or
the corporation has issued, itemized by  annulled
class, par value of shares, shares without in accordance with this Code or other special
par value, and series, if any; laws. [Sec. 143, RCC]
 A statement of the amount actually paid in;
and Deposit of Securities
 Such additional information as may be Within 60 days, the licensee, except foreign
necessary or appropriate in order to enable banking or insurance corporations, shall
Page 261 of 450

deposit with the Commission for the benefit of long as the licensee is solvent. (Sec 143,
present and future creditors of the licensee in RCC)
the Philippines, securities satisfactory to the
Commission, consisting of: In the event the licensee ceases to do business
 bonds or other evidence of indebtedness of in the Philippines, its deposits shall be
the Government of the Philippines, its returned:
political subdivisions and instrumentalities,  Upon the licensee’s application therefore;
or of government-owned or - controlled and
corporations and entities,  Upon proof to the satisfaction of the
 shares of stock or debt securities that are Commission that the licensee has no
registered under Republic Act No. 8799, liability to Philippine residents, including
otherwise known as “The Securities the Government of the Republic of the
Regulation Code”, Philippines. [Sec. 143, RCC]
 shares of stock in domestic corporations
listed in the stock exchange, shares of (b) Resident agent
stock in domestic insurance companies
and banks, any financial instrument A resident agent may be either:
determined suitable by the Commission, or  an individual residing in the Philippines
 any combination thereof with an actual (must be of good moral character and
market value of at least Five hundred sound financial standing) or
thousand (P500,000.00) pesos or such  a domestic corporation (must likewise be of
other amount that may be set by the sound financial standing and must show
Commission. [Sec. 143, RCC] proof of good standing) lawfully transacting
business in the Philippines. [Sec. 144,
Within 6 months after each fiscal year of the RCC]
licensee, the Commission shall require:
● the licensee to deposit additional The foreign corporation shall file a written
securities or financial instruments power of attorney:
equivalent in actual market value to 2% of (1) Designating a person (Philippine resident),
the amount by which the licensee’s gross on whom summons and other legal
income for that fiscal year exceeds processes may be served in all actions or
P10,000,000.00. other legal proceedings against such
corporation; and
● the deposit of additional securities or
(2) Consenting that service upon such resident
financial instruments if the actual market
value of the deposited securities or agent shall be admitted and held as valid,
financial instruments has decreased by at as if served upon the duly authorized
least 10% of their actual market value at officers of the foreign corporation at its
the time they were deposited. [Sec. 143, home office. [Sec. 144, RCC]
RCC]
It shall be the duty of the resident agent to
The Commission may: immediately notify the Commission in writing of
 at its discretion, release part of the any change in the resident agent’s address.
additional deposit if the gross income of the [Sec. 144, RCC]
licensee has decreased, or if the actual
market value of the total deposit has (c) Amendment of license
increased, by more than ten (10%) percent
of their actual market value at the time they A foreign corporation shall obtain an amended
were deposited. license in the event it changes its corporate
 allow the licensee to make substitute name, or desires to pursue other or additional
deposits for those already on deposit as purposes in the Philippines.
Page 262 of 450

Said amendment may be made by submitting Doctrine on Isolated Transactions

an application with the Commission, endorsed Foreign corporations are not required to obtain
by the appropriate government agency. [Sec. a license in order to obtain relief from local
148, RCC] courts or agencies. [Villanueva]
Personality to sue In an isolated transaction, there is no intent on

the part of the foreign corporation to engage in
Foreign corporations which conduct regular a progressive pursuit of the purpose of a
business should be denied any access to business transaction. [Eriks Ltd. v. CA, 267
courts until they secure a license so as to SCRA 567 (1997)]
ensure that they will abide by the decisions of
the local courts. [Eriks Ltd. v. CA, 267 SCRA General Rule: No foreign corporation
567 (1997)] transacting business in the Philippines without
A foreign corporation transacting business in a license, or its successors or assigns, shall be
the Philippines is required to secure a license permitted to maintain or intervene in any
to have the personality to sue before, or action, suit or proceeding in any court or
intervene in, any court or administrative administrative agency of the Philippines;
proceeding. [Sec. 150, RCC; CAMPOS]
Exception: but such may be sued or
By filing an action before Philippine courts, a proceeded against before Philippine courts or
foreign corporation puts itself under their administrative tribunals on any valid cause of
jurisdiction. [Communication Materials v. CA, action recognized under Philippine laws. [Sec.
260 SCRA 673 (1996)] 150, RCC]
Suability of foreign corporations Summary of Rules on Capacity to Sue

[Agilent Technologies v Integrated Silicon
No foreign corporation transacting business in Technology, G.R. No. 154618 (2004)]
the Philippines without a license, or its STATUS CONSEQUENCE
successors or assigns, shall be permitted to
maintain or intervene in any action, suit or Doing Business in Can sue and be
proceeding in any court or administrative the PH, WITH a sued
agency of the Philippines. license
Doing Business in GR: Cannot sue, but
Nevertheless, such corporation may be sued the PH, WITHOUT a may be sued in the
or proceeded against before Philippine license PH
courts or administrative tribunals on any valid EX: Capacity to sue
cause of action recognized under may not be
Philippine laws [Sec. 150, RCC]. questioned if the
other party is
A foreign corporation cannot claim exemption estopped
from being sued in Philippine courts for acts NOT doing May sue; may be
done against a person or persons in the business in the PH, sued
Philippines [Facilities Management on isolated
Corporation v. De La Osa, G.R. No. L-38649 transactions
(1979)].
Grounds for revocation of license
Instances when unlicensed foreign
corporations may be allowed to sue Grounds for revocation of license:
(isolated transactions)  Failure to file its annual report or pay any
fees as required by this Code;
Page 263 of 450

 Failure to appoint and maintain a resident

Merger Consolidation
agent in the Philippines as required by this
Title; One or more
 Failure, after change of its resident agent corporations are
Union of 2 or more
or address, to submit to the Commission a absorbed by another
corporations to form
statement of such change as required by which survives and
a new corporation
this Title; continues the
 Failure to submit to the Commission an combined business
authenticated copy of any amendment to
its articles of incorporation or bylaws or of One of the
any articles of merger or consolidation constituent
All constituents
within the time prescribed by this Title; corporations remains
corporations
 A misrepresentation of any material matter as an existing
disappear with the
in any application, report, affidavit or other juridical person,
emergence of a new
document submitted by such corporation whereas the other
corporate entity
pursuant to this Title; corporation shall
 Failure to pay any and all taxes, imposts, cease to exist.
assessments or penalties, if any, lawfully The surviving
due to the Philippine Government or any of The new corporate
corporation shall
its agencies or political subdivisions; entity shall obtain all
acquire all the assets,
 Transacting business in the Philippines the assets of the
rights of action, and
outside of the purpose or purposes for disappearing
assuming all the
which such corporation is authorized under corporations, and
liabilities of the
its license; likewise shall assume
disappearing
 Transacting business in the Philippines as all their liabilities.
corporation/s.
agent of or acting on behalf of any foreign
corporation or entity not duly licensed to do There is no liquidation of the assets of the
business in the Philippines; or dissolved corporation, all rights, properties
 Any other ground as would render it unfit to and franchises are acquired by the
transact business in the Philippines. [Sec. surviving/new corporation.
151, RCC]
Merger and consolidation involve fundamental
13. Merger and Consolidation changes in the corporation, the rights of
stockholders and creditors. There must be an
Definition and Concept express provision of law that authorizes them.
Otherwise, such combinations are ultra vires.
Merger – a corporation absorbs the other and With the approval of the Corporation Code,
remains in existence while the others are such express authority has been granted.
dissolved [Sec.75]. [Campos]
Mergers may be horizontal (between Distinguish: Constituent and

competing firms), vertical (if a corporation Consolidated Corporation
acquires another which uses or distributes its
products) or conglomerate (neither competing Constituent Corporations – the parties to a
nor related in the chain of production or merger or consolidation
distribution). [Campos]
Consolidated Corporation - The new single
Consolidation – a new corporation is created, corporation created through consolidation.
and consolidating corporations are
extinguished [Sec.75].
Page 264 of 450

Surviving Corporation – one of the  the carrying amounts and fair values of the
constituent corporations which remain in assets and liabilities of the respective
existence after the merger companies as of the agreed cut-off date;
 The method to be used in the merger or
Plan of Merger or Consolidation consolidation of accounts of the
(Sec. 75) companies;
 The provisional or pro-forma values, as
Each of the constituent corporations must draw merged or consolidated, using the
up a Plan of Merger or Consolidation which accounting method; and
shall set forth:  Such other information as may be
a. Names of the corporation involved; prescribed by the Commission
b. Terms and mode of carrying it to effect;
c. Statement of changes, if any, in the present Procedure
articles of the surviving corporation to be
formed in the case of merger; and with Approval of Plan of Merger or
respect to the consolidated corporation in Consolidation by BOD and
case of consolidation Stockholders of Constituent
Corporations [Sec. 76]
The Plan must be approved by the board of
directors or trustees of each constituent 1. Approval by majority vote of each of the
corporation by majority vote. board of directors or trustees of the
constituent corporations of the plan of
Articles of Merger or Consolidation merger or consolidation.
(Sec. 77) 2. Approval by the stockholders or
members of each of such corporations at
The Articles of Merger or Consolidation: separate corporate meetings duly called for
a. take the place of the AOI of the that purpose.
consolidated corporation; or i. The affirmative vote of stockholders
b. amend the Articles of Incorporation of the representing at least two-thirds (2/3) of
surviving corporation. the outstanding capital stock of each
corporation in the case of stock
Articles of Merger/Consolidation Requisites: corporations or at least two-thirds (2/3)
● Executed by each of the constituent of the members in the case of non-stock
corporations corporations shall be necessary for the
● Signed by the president/vice-president approval of such plan.
● Certified by the secretary/assistant ii. Holders of non-voting shares are
secretary of each corporation entitled to vote on the plan [Sec. 6, par.
6(6)].
Contents 3. Notice of such meetings shall be given to
The Articles must contain the following: all stockholders or members in the same
 Plan of the merger/consolidation manner as giving notice of regular or
 As to stock corporations, the number of special meetings under Section 49. The
shares outstanding, or in the case of non- notice shall state the purpose of the
stock corporations, the number of meeting and include a copy or a summary
members; of the plan of merger or consolidation.
 As to each corporation, the number of
shares or members voting for or against Any dissenting stockholder in stock
such plan, respectively; corporations may exercise his appraisal right
in accordance with the Code. Provided, that if
after the approval by the stockholders of such
plan, the board of directors decides to abandon
Page 265 of 450

the plan, the appraisal right shall be Merger or consolidation does not become
extinguished. effective by mere agreement of the constituent
corporations. The approval of the SEC is
Amendment to the plan of merger or required [PNB v. Andrada Electric and Engr.
consolidation Co., Inc. (2002)].
An amendment to the Plan may be made by
approval of the majority vote of the respective Notwithstanding Sec. 79 (now, sec. 78), parties
boards of directors or trustees of all the may stipulate a specific effective date of
constituent corporations and ratified by the merger (or consolidation) where no 3rd party
affirmative vote of stockholders representing at will be prejudiced [SEC Opinion No. 09-13, July
least two-thirds (2/3) of the outstanding capital 1, 2009].
stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such Limitations
plan, together with any amendment, shall be
considered as the agreement of merger or Consent of appropriate government
consolidation. agency:
In the case of merger or consolidation of banks
Execution of Articles of Merger or or banking institutions, building and loan
Consolidation associations, trust companies, insurance
companies, public utilities, educational
Articles of Merger or Articles of Consolidation institutions and other special corporations
shall be executed by each of the constituent governed by special laws, the favorable
corporations. recommendation of the appropriate
government agency shall first be obtained
Submission to SEC of the Articles [Sec. 78].
Submission of of the Articles of Merger or Effects (Sec. 79)

Articles of Consolidation to the SEC for
approval. As enumerated in the RCC, the following
are the legal effects of
Mergers and consolidations of corporations merger/consolidation:
governed by special laws requires a 1. The constituent corporations shall become
recommendation from the appropriate a single corporation which, in case of
government agency [Sec. 78 (1)]. merger, shall be the surviving corporation
designated in the plan of merger; and, in
Action by SEC case of consolidation, shall be the
consolidated corporation designated in the
Conduct hearing or issue certificate. [Sec. 78] plan of consolidation;
a. If necessary, the SEC shall set a hearing, 2. The separate existence of the constituent
notifying all corporations concerned at corporations shall cease, except that of the
least 2 weeks before. surviving or the consolidated corporation;
b. SEC shall issue a certificate approving the 3. The surviving or the consolidated
articles and plan of merger or of corporation shall possess all the rights,
consolidation. privileges, immunities, and powers and
shall be subject to all the duties and
Effectivity liabilities of a corporation organized under
this Code;
Upon issuance of the certificate of merger or 4. The surviving or the consolidated
consolidation, such merger or consolidation corporation shall possess all the rights,
shall become effective [Sec. 78]. privileges, immunities and franchises of
each constituent corporation; and all real or
Page 266 of 450

personal property, all receivables due on AS TO THE CONSTITUENT

whatever account, including subscriptions CORPORATIONS
to shares and other choses in action, and
every other interest of, belonging to, or due Corporate existence
to each constituent corporation, shall be The constituent corporations shall become a
deemed transferred to and vested in such single corporation.
surviving or consolidated corporation
without further act or deed; and The separate existence of the constituents
5. The surviving or consolidated corporation shall cease, except that of the surviving or the
shall be responsible for all the liabilities and consolidated corporation.
obligations of each constituent corporation
as though such surviving or consolidated The absorbed or constituent corporations are
corporation had itself incurred such ipso facto dissolved by operation of law [SEC
liabilities or obligations; and any pending Opinion, July 16, 1981].
claim, action or proceeding brought by or
against any constituent corporation may be Assets and liabilities
prosecuted by or against the surviving or There is no liquidation of the assets of the
consolidated corporation. The rights of dissolved corporations [CAMPOS].
creditors or liens upon the property of such
constituent corporations shall not be The surviving or the consolidated corporation
impaired by the merger or consolidation. shall possess all the rights, privileges,
immunities, powers, and franchises of each
Although in a merger, there is dissolution of the constituent corporation and the properties shall
absorbed corporations, there is no winding up be deemed transferred to and vested in the
of their affairs, because the surviving surviving or consolidated corporation without
corporation automatically acquires all their further act or deed.
rights, privileges, powers and liabilities
(Associated Bank v. CA, 291 SCRA 511). The surviving or the consolidated corporation
Same goes for the consolidated corporation. shall be subject to all the duties and liabilities
of the dissolving corporation(s).
Salient Advantages of
Mergers/Consolidation AS TO CREDITORS
Unlike regular transfer/acquisition, it is able to
achieve a continuous flow of the juridical The creditors of a corporation cannot prevent
personalities and business enterprises of the its merger or consolidation with another even if
constituent corporations. There is no “legal the surviving or new corporation is not as
break” in their juridical personalities and acceptable a debtor as the absorbed
business enterprises. corporation [CAMPOS].
Thus, merger/consolidation is not a violation of Any claim, action or proceeding pending by or

a non-transfer clause against any of the constituent corporations may
be prosecuted by or against the surviving or
Surviving/consolidated corporation is not consolidated corporation; and
considered a transferee
The rights of the creditors or lien upon the
Unlike regular transfer of assets/business property of any of each constituent corporation
enterprise, there is no gain or loss in the pursuit shall not be impaired by such merger or
of merger or consolidation, thus it is not subject consolidation.
to taxable gains under Section 40(C)(2)(a) of
the NIRC, as amended by the Train Law.
Page 267 of 450

MERGERS/CONSOLIDATION ON Privacy Act of 2012) and other pertinent

EMPLOYEES laws.
 Because there is no legal break by the act Power to Coordinate with Other Agencies
of merging, consolidating, it is logical to SEC is expressly granted the power to give
expect that the contractual rights of reasonable notice to and coordinate with the
employees and the existing collective appropriate regulatory agency prior to any such
bargaining agreement, if any, would have publication involving companies under their
to be absorbed by the special regulatory jurisdiction.
surviving/consolidated corporation
 However, SC has made contrary rulings. Administration of oath and issuance
of subpoena of Witnesses and
Rule on automatic assumption/absorption does Documents
not impair the right of an employer to terminate
the employment of the absorbed employees for The SEC, through its designated officer has the
a lawful or authorized cause or the right of such power to:
an employee to resign, retire, or otherwise to administer oaths and affirmations
sever his employment, whether before or after issue subpoena and subpoena duces tecum
the merger, subject to existing contractual take testimony in any inquiry or investigation,
obligations (The Philippine Geothermal Inc. and
Employees Union vs. Unocal Philippines, Inc, to perform other acts necessary to the
September 26, 2016) proceedings or to the investigation. [Sec 155,
RCC]
14. Investigations, offenses,
Cease and desist power (Sec. 156)
and penalties
1. When the SEC has reasonable basis to
Authority of Commissioner believe that a person has violated, or is
about to violate this Code, a rule,
Investigation and prosecution of regulation, or order of the Commission, it
offenses may direct such person to desist from
committing the act constituting the
Under Sec. 154 of the RCC (Revised violation.
Corporation Code) the SEC has the power to: 2. SEC may issue a cease and desist order
ex parte to enjoin an act or practice which
1. Power to Investigate is:
a. fraudulent or
The SEC is expressly granted the power to b. can be reasonably expected to
investigate any alleged violation of the cause significant, imminent, and
RCC, or of a rule, regulation, or order irreparable danger or injury to
issued pursuant thereto. public safety or welfare.
2. Power to Public Findings The ex parte order shall be valid for a

maximum period of 20 days, without
The SEC is expressly authorized to publish prejudice to the order being made
its findings, orders, opinions, advisories, or permanent after due notice and hearing.
information concerning any such violation
as may be relevant to the general public or 3. Thereafter, the Commission may:
to the parties concerned, subject to the a. proceed administratively against such
provisions of Republic Act No. 10173 (Data person in accordance with Section 158
Page 268 of 450

of RCC (to impose administrative Prohibited Acts

sanctions); and/or
b. transmit evidence to the Department of 1. Unauthorized Use of Corporate Name
Justice (DOJ) for preliminary (Sec. 159)
investigation or criminal prosecution;
and/or Sec. 17 of the RCC states the regulation
c. initiate criminal prosecution for any regarding corporate names. In the last
violation of RCC, rule, or regulation. paragraph it states that if the corporation
fails to comply with the Commission’s
Contempt (Sec. 157) order, the Commission may hold the
corporation and its responsible directors or
Any person who, without justifiable cause, fails officers in contempt and/or hold them
or refuses to comply with any lawful order, administratively, civilly and/or criminally
decision, or subpoena issued by the liable under this Code and other applicable
Commission shall, after due notice and laws and/or revoke the registration of the
hearing, be held in contempt and fined in an corporation.
amount not exceeding P30,000
The crime of “unauthorized use of a
When the refusal amounts to clear and open corporate name” may also cover various
defiance of the Commission’s order, decision, situations under Sec. 17. Therefore, a
or subpoena, the Commission may impose a criminal act arises under Sec. 159 only
daily fine of P1,000 until the order, decision, or when the SEC’s previous order remains
subpoena is complied with. unheeded.
Sanctions for violations Penalty: The penalty for violations under

this provision ranges from Php10,000 to
Administrative sanctions Php200,000 pesos.
After due notice and hearing, when the 2. Violation of Disqualification Provision
Commission finds that any provision of this (Sec. 160)
Code, rules or regulations, or any of the
Commission’s orders has been violated, the Despite the knowledge of the existence of
Commission may impose any or all of the a ground for disqualification as provided in
following sanctions, taking into consideration Section 26 of RCC, a director, trustee or
the extent of participation, nature, effects, officer willfully holds office, or willfully
frequency and seriousness of the violation: conceals or withholds the existence of
Imposition of a fine ranging from P5,000 to P2 grounds for disqualification, they may be
Million, and not more than P1,000 for each day punished under the Code.
of continuing violation but in no case to exceed
P2 Million Penalty:
Issuance of a permanent cease and desist  Punished by a fine ranging from Php
order; 10, 000 to Php 200,000 at the court’s
Suspension or revocation of the certificate of discretion, permanently disqualified
incorporation; and from being a director, trustee, or officer
Dissolution of the corporation and forfeiture of of any corporation.
its assets under the conditions in Title XIV of  If violation is injurious or detrimental
this Code. to the public – penalty ranges from
Php 20,000 to Php 400,000.
Page 269 of 450

3. Violation of Duty to Maintain Records, 5. Collusion with the Independent Auditor

to Allow their Inspection or (Sec. 163)
Reproduction (Sec. 161)
An independent auditor who, in collusion
The unjustified failure or refusal by the with the corporation’s directors or
corporation, or by those responsible for representatives:
keeping and maintaining corporate  certifies the corporation’s financial
records, to comply with provisions on the: statements despite its incompleteness
1. adoption of by-laws (Sec. 45); or inaccuracy; failed to give a fair and
2. books to be kept (Sec. 73); accurate presentation of the
3. keep list of members and proxies (Sec. corporation’s condition; or
92)  certifies documents despite containing
4. records in lieu of meetings (Sec. 128); false or misleading statements
and
5. reportorial requirements of Penalty: shall be penalized with a fine
corporations that must be submitted to ranging from 80,000 to 500,000 pesos, or
the Commissioner (Sec. 177); 100,000 to 600,000 pesos if injury was
6. as well as other pertinent rules and caused to the public.
provisions of RCC on inspection and
reproduction of récords. 6. Obtaining Corporate Registration
Penalty: shall be punished with a fine Through Fraud (Sec. 164)
ranging from 10,000 to 200,000 pesos.
Those responsible for the formation of a
The penalties imposed under this corporation through fraud, or who assisted
section shall be without prejudice to the either directly or indirectly therein shall be
Commission’s exercise of its contempt penalized.
powers under Section 157 hereof.
Penalty: Fine ranging from 200,000 to
4. Willful Certification of Incomplete, 2,000,000 pesos, or 400,000 to 5,000,000
Inaccurate, False, or Misleading pesos if injurious to the public.
Statements or Reports (Sec. 162)
7. Fraudulent Conduct of Business (Sec.
Any person who willfully certifies a report 165)
required under this Code, knowing that the
same contains incomplete, inaccurate, A corporation that conducts its business
false, or misleading information or through fraud.
statements, is punishable under the RCC.
Penalty: shall be punished with a fine
Penalty: ranging from Php 200,000 to Php
a. fine ranging from Php 20,000 to Php 2,000,000 pesos, or Php400,000 to
200,000 pesos, Php5,000,000 pesos if injurious to the
b. If wrongful certification is injurious or public.
detrimental to the public – the auditor
or the person responsible may be fined 8. Acting as Intermediaries for Graft and
ranging from 40,000 to 400,000 pesos Corrupt Practices (Sec. 166)
if the report be injurious or detrimental
to the public. A corporation used for fraud, or for
committing or concealing graft and corrupt
practices as defined under Republic Act
No. 3019.
Page 270 of 450

Penalty: shall be penalized with a fine lawful employment or livelihood of the

ranging from Php100,000 to whistleblower).
Php5,000,000 peso.
Penalty - shall, at the discretion of the
Should there be a finding that any of its court, be punished with a fine ranging from
directors, officers, employees, agents, 100,000 to 1,000,000 pesos.
or representatives are engaged in graft
and corrupt practices on the Whistleblower – refers to any person who
corporation’s failure to install: provides truthful information relating to the
 safeguards for the transparent and commission or possible commission of any
lawful delivery of services; and offense or violation under this Code.
 policies, code of ethics, and
procedures against graft and 12. Other Violations of the Code (Sec. 170)
corruption,
Violations of any of the provisions of the
It shall be considered prima facie Code or its amendments not specifically
evidence of corporate liability under penalized shall be punished as well.
this section.
Penalty: Fine of not less tan Php10, 000
9. Engaging Intermediaries for Graft and but not more than Php1,000,000.
Corrupt Practices (Sec. 167)
If violation is committed by a corporation,
A corporation that appoints an intermediary the same may, after notice and hearing be
who engages in graft and corrupt practices dissolved in an appropriate proceeding
for the corporation’s benefit or interest. before the SC. A corporation may be
dissolved as long as:
Penalty: shall be penalized with a fine  Dissolution shall not preclude the
ranging from 100,000 to 1,000,000 pesos. institution of appropriate action against
the one responsible; or
10. Tolerating Graft and Corrupt Practices  Nothing in this section shall be
(Sec. 168) construed to repeal the other causes
for dissolution of a corporation
A director, trustee, or officer who:
 knowingly fails to sanction, report, or Liability for the foregoing offenses shall be
file the appropriate action with proper separate from other administrative, civil, or
agencies; or criminal liabilities.
 allows or tolerates the graft and corrupt
practices or fraudulent acts committed
by a corporation’s directors, trustees,
officers, or employees
Penalty: shall be penalized with a fine

ranging from 500,000 to 1,000,000 pesos.
11. Retaliation Against Whistleblowers

(Sec. 169)
Any person who knowingly and with intent

to retaliate, commits acts detrimental to a
whistleblower (e.g. interfering with the
Page 271 of 450

Penalties
Prohibited acts Penalties Who are liable When the violation is
injurious or
detrimental to the
public
1) Unauthorized Use fine ranging from corporation and its
of Corporate Name P10,000 to P200,000 responsible directors
(Sec. 159) or officers in contempt
and/or hold them
administratively, civilly
and/or criminally liable
under this Code and
other applicable laws
and/or revoke the
registration of the
corporation (Sec. 17)
2) Violation of fine ranging from director, trustee or penalty shall be a fine
Disqualification P10,000 to P200,000 officer of any ranging from P20,000
Provision (Sec. at the discretion of the corporation to P400,000
160) court and shall be
permanently
disqualified from being
a director, trustee or
officer of any
corporation
3) Violation of Duty to fine ranging from corporation, or by fine ranging from
Maintain Records, P10,000 to P200,000 those responsible for P20,000 to P400,000
to Allow their at the discretion of the keeping and
Inspection or court, taking into maintaining corporate
Reproduction (Sec. consideration the records
161) seriousness of the
violation and its
implications.
4) Willful Certification fine ranging from auditor or the fine ranging from
of Incomplete, P20,000 to P200,000 responsible person for P40,000 to P400,000
Inaccurate, False, the certification
or Misleading
Statements or
Reports (Sec. 162)
5) Collusion with the fine ranging from independent auditor in fine ranging from
Independent P80,000 to P500,000 collusion with the P100,000 to P600,000
Auditor (Sec. 163) corporation’s directors
or representatives and
the responsible officer
6) Obtaining fine ranging from those responsible for fine ranging from
Corporate P200,000 to P2M the formation of a P400,000 to P5M
Registration corporation through
Through Fraud fraud, or who assisted
(Sec. 164) directly or indirectly
therein,
Page 272 of 450

7) Fraudulent fine ranging from Corporation or person fine ranging from

Conduct of P200,000 to P2M responsible P400,000 to P5M
Business (Sec.
165)
8) Acting as fine ranging from directors, officers,
Intermediaries for P100,000 to P5M employees, agents, or
Graft and Corrupt representatives are
Practices (Sec. engaged in graft and
166) corrupt practices
9) Engaging fine ranging from Corporation,

Intermediaries for P100,000 to intermediary
Graft and Corrupt P1,000,000
Practices (Sec.
167)
10)Tolerating Graft fine ranging from director, trustee, or
and Corrupt P500,000 to P1M officer who knowingly
Practices (Sec. fails to sanction,
168) report, or file the
appropriate action with
proper agencies,
allows or tolerates the
graft and corrupt
practices or fraudulent
acts committed by a
corporation’s directors,
trustees, officers, or
employees
11)Retaliation Against fine ranging from Any person who,
Whistleblowers P100,000 to P1M knowingly and with
(Sec. 169) intent to retaliate,
commits acts
detrimental to a
whistleblower such as
interfering with the
lawful employment or
livelihood of the
whistleblower
12)Other Violations of fine of not less than Corporation
the Code (Sec. P10,000 but not more
170) than P1M. Dissolution shall not
preclude the institution
If the violation is of appropriate action
committed by a for director, trustee, or
corporation, after officer of the
notice and hearing, be corporation
dissolved in
appropriate
proceedings before the
Commission
Page 273 of 450

In imposing penalties and additional monitoring and supervision requirements, the Commission shall
take into consideration the size, nature of the business, and capacity of the corporation.
No court below the Court of Appeals shall have jurisdiction to issue a restraining order, preliminary
injunction, or preliminary mandatory injunction in any case, dispute, or controversy that directly or
indirectly interferes with the exercise of the powers, duties and responsibilities of the Commission that
falls exclusively within its jurisdiction.
Who are liable 3. Impose sanctions for the violation of this

Code, its implementing rules and orders of
1. Directors, Trustees, Officers, or Other the Commission;
Employees (Sec. 171) 4. Promote corporate governance and the
protection of minority investors, through,
If the offender is a corporation, the penalty among others, the issuance of rules and
may, at the discretion of the court, be regulations consistent with international
imposed upon such corporation and/or best practices;
upon its directors, trustees, stockholders, 5. Issue opinions to clarify the application of
members, officers, or employees laws, rules, and regulations;
responsible for the violation or 6. Issue cease and desist orders ex parte to
indispensable to its commission. prevent imminent fraud or injury to the
public;
2. Aiders and Abettors and Other 7. Hold corporations in direct and indirect
Secondary Liability (Sec. 172) contempt;
Anyone who shall: 8. Issue subpoena duces tecum and summon
 Aid. abet, counsel, command, induce, witnesses to appear in proceedings before
or the Commission;
 cause any violation of this Code, or any 9. In appropriate cases, order the
rule, regulation, or order of the examination, search and seizure of
Commission documents, papers, files and records, and
books of accounts of any entity or person
Shall hall be punished with a fine not exceeding under investigation as may be necessary
that imposed on the principal offenders, at the for the proper disposition of the cases,
discretion of the court, after taking into account subject to the provisions of existing laws;
their participation in the offense. 10. Suspend or revoke the certificate of
incorporation after proper notice and
Authority of the Securities and hearing;
Exchange Commission (Sec. 179) 11. Dissolve or impose sanctions on
corporations, upon final court order, for
1. Exercise supervision and jurisdiction over committing, aiding in the commission of, or
all corporations and persons acting on their in any manner furthering securities
behalf, except as otherwise provided under violations, smuggling, tax evasion, money
this Code; laundering, graft and corrupt practices, or
2. Pursuant to Presidential Decree No. 902-A, other fraudulent or illegal acts;
retain jurisdiction over pending cases 12. Issue writs of execution and attachment to
involving intra-corporate disputes enforce payment of fees, administrative
submitted for final resolution. The fines, and other dues collectible under this
Commission shall retain jurisdiction over Code;
pending suspension of 13. Prescribe the number of independent
payment/rehabilitation cases filed as of 30 directors and the minimum criteria in
June 2000 until finally disposed; determining the independence of a
director;
Page 274 of 450

14. 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;
15. Formulate and enforce standards,
guidelines, policies, rules and regulations
to carry out the provisions of this Code; and
16. Exercise such other powers provided by
law or those which may be necessary or
incidental to carrying out the powers
expressly granted to the Commission.
(See also Powers and Functions of the

Commission Sec. 5 of RA 8799 The
Securities Regulation Code)
Page 275 of 450

U.P. LAW BOC SECURITIES COMMERCIAL LAW
SECURITIES
COMMERCIAL LAW
Page 276 of 450

v. Certificates of assignments, certificates

A. STATE POLICY of participation, trust certificates, voting
trust certificates or similar instruments;
R.A. No. 8799 - The Securities Regulation vi. Proprietary or nonproprietary
Code membership certificates in
corporations; and
The Securities Regulation Code (SRC) vii. Other instruments as may in the future
regulates public offering within the Philippines. be determined by the Commission.
Sec. 2. Declaration of State Policy Additional Definitions under the 2015

The State shall: Implementing Rules and Regulations of the
a. Establish a socially conscious, free SRC
market that regulates itself; 1. Debt securities/instruments – include
b. Encourage the widest participation of any evidence of indebtedness such as
ownership in enterprises; bonds, notes, debentures, commercial
c. Enhance the democratization of wealth; papers, treasury bills, treasury bonds, and
d. Promote the development of the capital other similar instruments as determined by
market; the SEC. [Rule 3.1.20]
e. Protect investors; 2. Equity securities – include shares of stock
f. Ensure full and fair disclosure about in a corporation. [Rule 3.1.20]
securities; 3. Commercial paper – means an evidence
g. Minimize if not totally eliminate insider of indebtedness of any person with a
trading and other fraudulent or maturity of 365 days or less. [Rule 3.1.6]
manipulative devices and practices which 4. Derivative – a financial instrument whose
create distortions in the free market. value changes in response to changes in a
specified interest rate, security price,
commodity price, foreign exchange rate,
B. DEFINITION OF index of prices or rates, credit rating or
credit index, or similar variable or
SECURITIES underlying factor. It is settled at a future
date. [Rule 3.1.9]
Sec. 3. Definition of Terms. – 3.1. 5. Options – contracts that give the buyer the
"Securities" are shares, participation or right, but not the obligation, to buy or sell
interests in a corporation or in a commercial an underlying security at a predetermined
enterprise or profit-making venture and price on or before a predetermined date.
evidenced by a certificate, contract, [Rule 3.1.9.1]
instruments, whether written or electronic in 6. Warrants – rights to subscribe or purchase
character. It includes: new or existing shares in a company on or
i. Shares of stocks, bonds, debentures, before a predetermined date. [Rule 3.1.9.2]
notes evidences of indebtedness, 7. Investment contract – means a contract,
asset-backed securities; transaction or scheme whereby a person
ii. Investment contracts, certificates of invests his money in a common enterprise
interest or participation in a profit and is led to expect profits primarily from
sharing agreement, certifies of deposit the efforts of others. An investment
for a future subscription; contract is presumed to exist whenever a
iii. Fractional undivided interests in oil, gas person seeks to use the money or property
or other mineral rights; of others on the promise of profits. [Rule
iv. Derivatives like option and warrants; 26.3.5]
8. Proprietary share or certificate – an
evidence of interest, participation or
Page 277 of 450

privilege in a corporation which gives the Rationale: This is rooted in comity among
holder of the share or certificate the right to nations.
use the facilities covered by such certificate
and to receive dividends or earnings from b. Certificates issued by a receiver or by a
the corporation. Upon liquidation of the trustee in bankruptcy duly approved by
corporation, the holder shall have the proper adjudicatory body.
proportionate ownership rights over its
assets. [Rule 3.1.15] Rationale: This is not a public offering.
9. Non-proprietary share or certificate – an Besides, protection is already afforded by
evidence of interest, participation or that “proper adjudicatory body” and
privilege over a specific property of a additional SEC protection is not necessary.
corporation that allows the holder of the
share or certificate to use such property c. Any security or its derivatives, the sale or
under certain terms and conditions. The transfer of which, by law, is under the
holder, however, shall not be entitled to supervision and regulation of the Office
dividends from the corporation or to its of the Insurance Commission, Housing and
assets upon its liquidation. [Rule 3.1.13] Land Use Rule Regulatory Board, or the
Bureau of Internal Revenue.
C. KINDS OF SECURITIES Rationale: The issuers are governmental

agencies covered by exception (a) above.
SEC protection would be a duplication.
1. Exempt Securities [Sec. 9] d. Any security issued by a bank except its
own shares of stock. [Sec. 9.1]
The requirement of registration shall not, as a
general rule, apply to any of the following Rationale: Banks are under the supervision
classes of securities: of the Bangko Sentral. SEC protection is a
duplication. Shares of stock were taken out
1. Any security issued or guaranteed by the of the exemption in the SRC. The previous
Government of the Philippines, its political laws (the original Securities Act and the
subdivision or agency, its instrumentality, or Revised Securities Act) did not have this
any person controlled or supervised exception to the exemption.
thereby.
e. Any class of security with respect to which
Rationale for the exception: The public the SEC finds that registration is not
does not need protection from the necessary in the public interest and for the
government itself. The government will protection of investors. [Sec. 9.2]
always be solvent to pay its obligations
because of its ability to raise revenues Note: The exemption of securities by the
through taxation. SEC must be made through the issuance
of a rule or regulation. [Sec. 9.2]
a. Any security issued or guaranteed by the
government of any country with which f. Under Rule 9.1 of the 2015 SRC-IRR, the
the Philippines maintains diplomatic following shall also be considered exempt
relations, or by any state, province or securities:
political subdivision thereof on the basis of 1. Any evidence of indebtedness issued
reciprocity: Provided, That the Commission by a financial institution itself that
may require compliance with the form and has been duly licensed by the BSP
content for disclosures the Commission to engage in banking or quasi-banking
may prescribe. activity. [Rule 9.1.1]
Page 278 of 450

2. Evidence of indebtedness issued to [Decasa, Securities Regulation Code

the BSP under its open market and/or Annotated (2004)]
rediscounting operations. [Rule
9.1.2.1] 2. Exempt Transactions [Sec.
3. Bills of exchange arising from a
bona fide sale of goods and services 10]
that are distributed and/or traded by
banks or investment houses duly The requirement of registration shall not apply
licensed by SEC and BSP through an to the sale of any security in any of the following
organized market that is operated transactions:
under the rules approved by the SEC.
[Rule 9.1.2.2] 1. At any judicial sale, or sale by an
4. Any security issued or guaranteed by executor, administrator, guardian or
multilateral financial entities receiver or trustee in insolvency or
established through a treaty or any bankruptcy.
other binding agreement to which the
Philippines is a party or subsequently Rationale: A court will presumably not
becomes a member. [Rule 9.1.2.3] order the sale if the public will be prejudiced
5. Evidence of indebtedness that meet thereby.
the following conditions: (19-Lender
Rule) 2. By or for the account of a pledge holder, or
(1) Issued to not more than 19 non- mortgagee or any of a pledge lien holder
institutional lenders; selling or offering for sale or delivery in the
(2) Payable to a specific person; ordinary course of business and not for the
(3) Neither negotiable nor purpose of avoiding the provision of this
assignable and held on to Code, to liquidate a bona fide debt, a
maturity; and security pledged in good faith as
(4) In an amount not exceeding P150 security for such debt.
million or such higher amount as
the SEC may prescribe. [Rule Rationale: This is not a voluntary sale
9.1.2.4] contemplated by the SRC.
Note: This provision exempts from 3. An isolated transaction in which any

registration only the securities issued by security is sold, offered for sale,
banking or financial institutions mentioned in subscription or delivery by the owner
the law. Being an issuer of an exempt security thereof, or by his representative for the
does not exempt such issuer from the owner’s account, such sale or offer for sale,
requirement of submission of reports. These subscription or delivery not being made in
regulations are meant to assure full, fair and the course of repeated and successive
accurate information for the protection of transactions of a like character by such
investors. Imposing such regulations is a owner, or on his account by such
function within the jurisdiction of the SEC. representative and such owner or
[Union Bank v SEC, G.R. No. 138949, (2001)] representative not being the underwriter of
such security.
Securities exempt under this section are still
subject to the anti-fraud and civil liability Rationale: Isolated and not meant to be an
provisions contained in the Code, trading ongoing public offering.
regulations where they are traded on an
exchange, and the persons who sell these 4. The distribution by a corporation actively
securities are subject to SEC regulation. engaged in the business authorized by its
articles of incorporation, of securities to its
Page 279 of 450

stockholders or other security holders as a 8. Broker’s transaction, executed upon

stock dividend or other distribution out customer’s orders, on any registered
of surplus. Exchange or other trading market.
Rationale: The offerees are not the public, Rationale: If broker’s transactions are
but shareholders already familiar with their registered each time, the transactions on
company. the exchange will be unduly hampered.
Besides, the brokers are subject to a “code
5. The sale of capital stock of a of conduct” protective of the interest of the
corporation to its own stockholders investors.
exclusively, where no commission or
other remuneration is paid or given directly 9. Subscriptions for shares of the capitals
or indirectly in connection with the sale of stock of a corporation prior to the
such capital stock. incorporation thereof or in pursuance of
an increase in its authorized capital
Rationale: Same as d. above. stocks, when no expense is incurred, or no
Note the condition for such exemption. commission, compensation or
remuneration is paid or given in connection
6. The issuance of bonds or notes secured with the sale or disposition of such
by mortgage upon real estate or tangible securities, and only when the purpose for
personal property, when the entire soliciting, giving or taking of such
mortgage together with all the bonds or subscription is to comply with the
notes secured thereby are sold to a single requirements of such law as to the
purchaser at a single sale. percentage of the capital stock of a
corporation which should be subscribed
Rationale: This is not a public sale. before it can be registered and duly
incorporated, or its authorized capital
7. The issue and delivery of any security in increased.
exchange for any other security of the
same issuer pursuant to a right of Rationale: This is not a public offering.
conversion entitling the holder of the Besides, the SEC is involved in the
security surrendered in exchange to make subscription process, as a regulator.
such conversion: Provided, That the
security so surrendered has been Note the condition that the exemption
registered under this Code or was, when applies only in respect of issuance for
sold, exempt from the provision of this compliance with the percentage needed
Code, and that the security issued and for an increase in authorized capital stock,
delivered in exchange, if sold at the and the similar condition in f. where no
conversion price, would at the time of such compensation is paid or given.
conversion fall within the class of securities
entitled to registration under this Code. 10. The exchange of securities by the issuer
Upon such conversion, the par value of the with the existing security holders
security surrendered in such exchange exclusively, where no commission or
shall be deemed the price at which the other remuneration is paid or given directly
securities issued and delivered in such or indirectly for soliciting such exchange.
exchange are sold.
Rationale: This is not a public offering.
Rationale: The SEC has already registered Note the condition for exemption.
the convertible security and presumably
also passed upon the security to be issued 11. The sale of securities by an issuer to
upon conversion. fewer than twenty (20) persons in the
Page 280 of 450

Philippines during any twelve-month HOWEY TEST

period. The Howey test is used order to determine if a
particular transaction is an investment contract
Rationale: This is not a public offering but that requires registration.
a private placement.
The SRC treats investment contracts as
If the original purchaser shall resell said “securities” that have to be registered with the
securities resulting in more than 19 SEC before they can be distributed and
holders, the registration requirement shall sold. An investment contract is a contract,
apply, notwithstanding the exemption of transaction, or scheme where a person invests
their issuances. [Rule 10.1.2.2] his money in a common enterprise and is led to
expect profits primarily from the efforts of
The sale of securities to any number of the others. [SEC v. Prosperity.com, Inc, G.R. No.
following qualified buyers: 164197 (2012)]
a. Bank;
b. Registered investment house; To be a security subject to regulation by the
c. Insurance company; SEC, an investment contract in our jurisdiction
d. Pension fund or retirement plan maintained must be proved to be:
by the Government of the Philippines or 1. An investment of money,
any political subdivision thereof or 2. In a common enterprise,
managed by a bank or other persons 3. With expectation of profits,
authorized by the Bangko Sentral to 4. Primarily from efforts of others.
engage in trust functions; [Power Homes Unlimited Corp. v. SEC and
e. Investment company; or Manero, G.R. No. 164182 (2008)]
f. Such other person as the Commission may
by rule determine as qualified buyers, on The commissions, interest in real estate, and
the basis of such factors as financial insurance coverage given in a network
sophistication, net worth, knowledge, and marketing scheme to a buyer that becomes a
experience in financial and business down-line seller can hardly be regarded as
matters, or amount of assets under profits from investment of money under the
management. [Sec. 10.1] Howey test. Rather, these are incentives for
down-line sellers to bring in other customers.
Rationale: These are sophisticated [SEC v. Prosperity.com, Inc, G.R. No. 164197
investors who are presumed to know the (2012)]
risks of investing in the securities market.
A scheme wherein an investor enrolls to be
12. Any transaction with respect to which the entitled to recruit other investors, and to receive
SEC finds that registration is not necessary commissions from the investments of those
in the public interest and protection of directly recruited by him, constitutes an
investors, such as by reason of the small investment contract, which is a security under
amount involved or the limited character of RA 8799. Under the scheme, the accumulated
the public offering. [Sec. 10.2] amount received by the investor comes
primarily from the efforts of his recruits. [Power
Note: Any person applying for an exemption Homes Unlimited Corp. v. SEC and Manero,
under Section 10 shall file with the SEC: G.R. No. 164182 (2008)]
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.
Page 281 of 450

3. Non-exempt transactions c. If the Commission deems it necessary, it

may issue an order suspending the offer
Section 8. Requirement of Registration of and sale of the securities pending any
Securities. – investigation. Upon the issuance of the
8.1. Securities shall not be sold or offered for suspension order, no further offer or sale of
sale or distribution within the Philippines, such security shall be made until the same
without a registration statement duly filed is lifted or set aside by the Commission.
with and approved by the Commission. Prior Otherwise, such sale shall be void. [Sec.
to such sale, information on the securities, in 13.4]
such form and with such substance as the
Commission may prescribe, shall be made E. PROCEDURE FOR
available to each prospective purchaser.
REGISTRATION OF
All other transactions not within the scope of SECURITIES
exempt securities or exempt transactions, and
not otherwise declared by the Commission as
such, are non-exempt transactions and must
1. Registration of Securities
follow the procedure on registration and [Secs. 12 and 13]
provide prospective purchasers of information
on the securities prior to such sale. a. Filing by the issuer of a sworn
registration statement with the SEC in
Registration the form prescribed [Sec. 12.1]
General rule: Securities are prohibited to be (1) Shall include any prospectus
sold or offered for sale or distribution within the required or permitted to be
Philippines: delivered under Subsections 8.2,
a) Without registration statement duly 8.3, and 8.4 [Sec. 12.1]
filed with and approved by SEC; and Sec. 8. Requirement of Registration of
b) Prior to such sale, information on the Securities. –
securities, in such form and with such xxx
substance as SEC may prescribe, must 8.2 The Commission may conditionally
be made available to each prospective approve the registration statement under such
purchaser. terms as it may deem necessary.
Exceptions 8.3 The Commission may specify the terms

a) Exempt securities [Sec. 9] and conditions under which any written
b) Exempt transactions [Sec. 10] communication, including any summary
prospectus, shall be deemed not to constitute
D. POWERS AND FUNCTIONS an offer for sale under this Section.
OF THE SECURITIES AND
8.4. A record of the registration of securities
EXCHANGE COMMISSION shall be kept in Register of Securities in which
shall be recorded orders entered by the
a. SEC may dispense with any
Commission with respect to such securities.
requirement, or may require additional
Such register and all documents or
information or documents with respect to
information with respect to the securities
registration. [Sec. 12.2]
registered therein shall be open to public
b. The Commission may compel the
inspection at reasonable hours on business
production of all the books and papers
days.
of such issuer, and may administer oaths
to, and examine the officers. [Sec. 13.2]
Page 282 of 450

(2) Shall include the effect of the week for two (2) consecutive weeks, or in such
securities issue on ownership, on other manner as the SEC shall prescribe.
the mix of ownership, especially
foreign and local ownership [Sec. d. Declaration by the SEC whether the
12.3] registration statement is effective or
(3) Shall be signed by the issuer’s rejected
executive officer, its principal
operating officer, its principal Declaration is made within 45 days from filing
financial officer, its comptroller, its of the registration statement or on such later
principal accounting officer, its date to which the issuer has consented, unless
corporate secretary, or persons applicant has been allowed to amend the
performing similar functions registration statement under Sec. 14. [Sec.
accompanied by a duly verified 12.6]
resolution of the board of directors
of the issuer corporation [Sec. 12.4] e. Statement under oath by the issuer in all
(4) Shall be accompanied by: prospectus that:
a. Written consent of the expert
named as having certified any 1. Registration requirements have been met;
part of the registration and
statement or any document 2. All information are true and correct as
used in connection therewith; represented by the issuer or the one
and making the statement.
b. Where the registration
statement includes shares to Statement under oath must be made upon
be sold by selling shareholders effectivity of the registration statement. [Sec.
- a written certification by such 12.7]
selling shareholders as to the
accuracy of any part of the Grounds for Rejection and/or Revocation of
registration statement the Registration of Securities
contributed to by such selling The SEC may reject a registration statement
shareholders. [Sec. 12.4] and reuse registration of the security
thereunder, or revoke the effectivity of a
b. Payment to the SEC of a fee of not more registration statement and the registration of
than one-tenth of one per centum (1/10 the security thereunder after due notice and
of 1%) of the maximum aggregate price hearing, if it finds that:
at which such securities are proposed
to be offered [Sec. 12.5a] The issuer:
1. Has been judicially declared insolvent;
The Commission shall prescribe, by rule, 2. Has violated any of the provision of this
diminishing fees in inverse proportion to the Code, the rules promulgated pursuant
value of the aggregate price of the offering. thereto, or any order of the Commission
This fee paid to the SEC is called a diminishing of which the issuer has notice in connection
fee. with the offering for which a registration
statement has been filed;
c. Publication of the notice of the filing of 3. Has been or is engaged or is about to
registration statement [Sec. 12.5b] engage in fraudulent transactions;
4. Has made any false or misleading
The notice must be published by the issuer, at representation of material facts in any
its own expense, in two (2) newspapers of prospects concerning the issuer or its
general circulation in the Philippines, once a securities;
Page 283 of 450

5. Has failed to comply with any

requirements that the Commission may Note: Upon the issuance of such order of
impose as a condition for registration of suspension and notification to the issuer,
the security for which the registration underwriter, dealer or broker known as
statement has been filed. [Sec. 13.1.a] participating in such offering, no further offer or
The registration statement is on its face sale of such security shall be made until the
incomplete or inaccurate in any material order is lifted by the SEC. Otherwise, such sale
respect or includes any untrue statements of a shall be void. [Sec 15.2]
material fact required to be stated therein or
necessary to make the statement therein not
misleading. [Sec. 13.1.b]
F. PROHIBITIONS ON FRAUD,
The issuer, any officer, director or MANIPULATION, AND INSIDER
controlling person performing similar TRADING
functions, or any under writer has been
convicted, by a competent judicial or 1. Manipulation of security
administrative body, upon plea of guilty, or prices [Sec. 24]
otherwise, of an offense involving moral
turpitude and/or fraud or is enjoined or
a. It shall be unlawful for any person acting
restrained by the Commission or other
for himself or through a dealer or
competent or administrative body for violations
broker, directly or indirectly:
of securities, commodities, and other related
b.
laws. [Sec. 13.1.c]
1) To create a false or misleading
appearance of active trading in any
The term “competent judicial or
listed security traded in an
administrative body” shall include a foreign
Exchange or any other trading market
court of competent jurisdiction.
("Exchange"):
If any issuer shall refuse to permit an
 Wash sales - By effecting any transaction
examination to be made by the SEC. [Sec.
in such security which involves no change
13.3]
in the beneficial ownership thereof;
Note: A registration statement may be
 Matched orders - By entering an order or
withdrawn by the issuer only with the consent
orders for the purchase or sale of such
of the Commission. [Sec. 13.6]
security with the knowledge that a
simultaneous order or orders of
Grounds for suspension of registration
substantially the same size, time and price,
[Sec. 15]
for the sale or purchase of any such
a. If, at any time, the information contained
security, has or will be entered by or for the
in the registration statement filed is or has
same or different parties; or
become misleading, incorrect, inadequate
or incomplete in any material respect;
 Market rigging or jiggling - By performing
b. If the sale or offering for sale of the
similar act where there is no change in
security registered thereunder may work
beneficial ownership.
or tend to work a fraud;
c. If the security registered is pending further
2) To effect, alone or with others, a
investigation to ascertain whether the
series of transactions in securities
registration of such security should be
that:
revoked on any ground specified in the
SRC;
1. Raises their price to induce the
d. If there is refusal to furnish information
purchase of a security, whether of the
required by the SEC.
Page 284 of 450

same or a different class of the same favorable to a position held or a

issuer; transaction;
2. Depresses their price to induce the sale  Other types of prohibited conduct and/or
of a security, whether of the same or a manipulative practices which include,
different class of the same issuer; or among others, the creation of temporary
3. Creates active trading to induce such a funds for the purpose of engaging in
purchase or sale through manipulative other manipulative practices. [Sec. 24.1,
devices such as marking the close,
2015 SRC-IRR]
painting the tape, squeezing the float, hype
and dump, boiler room operations and such
other similar devices. 3) To circulate or disseminate
information that the price of any
security listed in an Exchange will
Examples of Prohibited Conduct under or is likely to rise or fall because of
the 2015 SRC Rules for a.1 and a.2 manipulative market operations of
 Painting the tape - Engaging in a series any one or more persons conducted
of transactions in securities that are for the purpose of raising or
reported publicly to give the impression of depressing the price of the security for
activity or price movement in a security the purpose of inducing the purchase
 Marking the close - Buying and selling or sale of such security.
securities at the close of the market in an 4) To make false or misleading
effort to alter the closing price of the statement with respect to any
security material fact, which he knew or had
 Improper matched orders - Engaging in reasonable ground to believe was so
transactions where both the buy and sell false or misleading, for the purpose of
orders are entered at the same time with inducing the purchase or sale of any
the same price and quantity by different security listed or traded in an
but colluding parties Exchange.
 Hype and dump - Engaging in buying 5) To effect, either alone or others, any
activity at increasingly higher prices and series of transactions for the
then selling securities in the market at the purchase and/or sale of any
higher prices or vice versa (i.e., selling security traded in an Exchange for the
activity at lower prices and then buying at purpose of pegging, fixing or
such lower prices). stabilizing the price of such
 Wash sales - Engaging in transactions in security; unless otherwise allowed by
which there is no change in beneficial this Code or by rules of the
ownership of a security Commission. [Sec. 24.1]
 Squeezing the float - Taking advantage
of a shortage of securities in the market c. No person shall use or employ, in
by controlling the demand side and connection with the purchase or sale of any
exploiting market congestion during such security any manipulative or deceptive
shortages in a way as to create artificial device or contrivance. [Sec. 24.2]
prices
 Boiler room operations – use of high MARGIN TRADING [Sec. 48]
pressure sales tactics to sell securities to This is a form of trading whereby the customer
clients who are called randomly purchases stocks by advancing only a portion
 Disseminating false or misleading market of the purchase price, with the broker extending
information through media, including the credit or making loan for the balance due.
internet, or any other means to move the [Sundiang]
price of a security in a direction that is
Purpose
Page 285 of 450

To prevent the excessive use of credit for the satisfaction of the call (Mandatory
purchase or carrying of securities [Sec. 48.1] Close-Out Rule).
Margin Requirements 2. Short sales [Rule 24.2-2, 2015

The credit extended must be for an amount not
greater than whichever is the higher of— SRC IRR]
1. Sixty-five per centum (65%) of the current
market price of the security, or No short sale shall be effected, nor any
2. One hundred per centum (100%) of the stop-loss order be executed in connection
lowest market price of the security during with the purchase or sale of any security
the preceding thirty-six (36) calendar except in accordance with such rules and
months, but not more than seventy-five per regulations as the Commission may
centum (75%) of the current market price. prescribe as necessary or appropriate in the
public interest for the protection of investors.
Note: However, the Monetary Board may [Sec. 24.2]
increase or decrease the above percentages,
in order to achieve the objectives of the ‘Short Sale’ means:
Government with due regard for promotion of 1. Any sale of a security which the seller does
the economy and prevention of the use of not own; or
excessive credit. [Sec. 48.1] 2. Any sale which is consummated by the
delivery of a security borrowed by, or for
PROHIBITIONS [Rule 48, 2015 SRC-IRR] the account of the seller with the
a. A Broker Dealer shall not extend credit to commitment of the seller or securities
a customer in an amount that exceeds borrower to return or deliver said securities
fifty percent (50%) of the current market or their equivalent to the lender on a
value of the security at the time of the determined or determinable future date.
transaction. In no event shall new or [Sec. 24.2-2, 2015 SRC-IRR]
additional credit be extended to an account
in which the equity is less than Fifty ‘Stop Loss Order’ means:
Thousand Pesos (PhP 50,000.00). An order made by the customer to a broker to
b. The margin maintained in a margin account sell a security when it reaches a certain price.
of a customer shall be no less than Stop loss orders are designed to limit an
twenty five percent (25%) of the current investor's loss on a position in a security.
market value of all securities "long" in the
account and thirty percent (30%) of the Prohibition on Short Sales under the 2015
current market value of securities "short" in SRC-IRR
the account. (1) No broker or dealer shall use any facility of
c. When there is an insufficiency of margin, a a securities exchange to effect a short sale
call for additional margin shall be of any security unless:
issued promptly by the Broker Dealer to a. At a price higher than the last sale; or
the customer. b. At the price of the sale if that price is
 A call for initial margin shall be above the next preceding different sale
satisfied within 5 business days from price on such day. (Uptick Rule)
receipt of the call.
 A call for maintenance margin shall be Note: Unless otherwise provided by the
satisfied within 24 hours after the call Commission, this price requirement shall
is received. not apply to a sale due to a bona fide
market-making or arbitrage activity
 No purchase or sell order from the
executed by a broker dealer authorized to
customer on the margin account shall
engage in such activities.
be executed by the Broker Dealer from
the time of insufficiency up to the
Page 286 of 450

(2) No person shall, directly or indirectly, by the i. Obtain money or property by means of any
use of any facility of any securities untrue statement of a material fact or any
exchange, effect a short sale in a security omission to state a material fact necessary
registered or listed on any securities in order to make the statements made, in
exchange, where the seller does not intend the light of the circumstances under which
or is unable to make delivery of the they were made, not misleading [Sec.
securities within the prescribed settlement 26.2]
period. ii. Engage in any act, transaction, practice or
(3) No director, officer or principal stockholder course of business which operates or
of a corporation shall make a short sale in would operate as a fraud or deceit upon
securities of the corporation in which he is any person [Sec. 26.3]
a director, officer or principal stockholder.
(4) The SEC may, motu proprio or upon ‘Material fact or information’ means:
recommendation of the Exchange, prohibit Any fact or information that may result in a
short selling indefinitely or for such period change in the market price or value of any of
as it may deem proper for the protection of the issuer’s securities, or may potentially affect
the investors or as an emergency measure the investment decision of an investor. [Sec.
or whenever such short selling is 3.1.12., 2015 SRC-IRR]
necessary or appropriate in the public
interest. [Sec. 24.2-2] PROHIBITED REPRESENTATIONS,
DEALINGS AND SOLICITATIONS [Rule 26.3,
3. Option trading [Sec. 25] 2015 SRC-IRR]
It shall be unlawful for any:
Prohibition on Option Trading under 2015 i. Person to represent that he has been
SRC-IRR registered as a securities intermediary
No member of an Exchange shall, directly or with the SEC, unless such person is
indirectly endorse or guarantee the registered under the Code;
performance of any put, call, straddle, option or ii. Broker Dealer to represent that the
privilege in relation to any security registered registration of the Broker Dealer under the
on a securities exchange. Code, or the failure of the SEC to deny,
suspend or revoke such registration,
The terms "put", "call", "straddle", "option", or indicates in any way that the SEC has
"privilege" shall not include any registered passed upon or approved the financial
warrant, right or convertible security. standing, business or conduct of such
Broker Dealer, or the merits of any
Options – contracts that give the buyer the security or any transaction/s conducted
right, but not the obligation to buy or sell an thereby;
underlying security at a predetermined price on iii. Person to represent that a security is a
or before a predetermined date. [Rule 3.1.9.1] particular type of security when such
representation is inconsistent with a
stated definition under the Code or rules
4. Fraudulent transactions [Sec. or regulations adopted thereunder;
26] iv. Person to represent that a security to be
sold, transferred, pledged, mortgaged,
Fraudulent Transactions encumbered, used for delivery, or any
It shall be unlawful for any person, directly or other purpose to another entity or itself
indirectly, in connection with the purchase or has been legally authorized by the
sale of any securities to: registered owner when such
. Employ any device, scheme, or artifice to representation is not true and
defraud; [Sec. 26.1] documented in writing at the time and date
it was used;
Page 287 of 450

v. Person, whether as principal or agent, to PRINCIPLES ON INSIDER TRADING

buy, sell or deal in securities or solicit What is sought to be addressed is the
investments in securities and other asymmetry in information about a “public
investment contracts, unless he is a company” (such as a company listed on the
registered broker, dealer or licensed Philippine Stock Exchange) between insiders
salesman of a broker dealer and the and outsiders.
securities are registered under the Insiders could have material information not yet
Code or exempt from registration. known to the public about the company, and
they might use this information to benefit
5. Insider trading [Sec. 61] themselves at the expense of the outsiders or
the public. Therefore, they must not trade in
An ‘Insider’ means: the shares of the company pending the
a. The issuer; disclosure of such information to the
b. A director or officer (or any person public.
performing similar functions) or a person
controlling the issuer; UNLAWFUL ACTS OF AN INSIDER
c. A person whose relationship or former To sell or buy a security of the issuer, while in
relationship to the issuer gives or gave him possession of material information with
access to material information about the respect to the issuer or the security that is not
issuer or the security that is not generally generally available to the public, unless:
available to the public; 1. The insider proves that the information was
d. A government employee, director, or officer not gained from such relationship; or
of an exchange, clearing agency and/or 2. If the other party selling to or buying from
self-regulatory organization who has the insider (or his agent) is identified, the
access to material information about an insider proves:
issuer or a security that is not generally That he disclosed the information to the other
available to the public; or party, or
e. A person who learns such information by a That he had reason to believe that the other
communication from any of the foregoing party otherwise is also in possession of the
insiders. [Sec. 3.8] information. [Sec. 27.1]
‘Issuer’ means: Note: Presumption that purchase or sale made

Any entity authorized by the SEC to offer to by an insider, or such insider’s spouse or
sell, sell or promote the sale to the public of its relatives by affinity or consanguinity within the
equity, bonds, instruments of indebtedness second degree, legitimate or common-law, is
and other forms of securities. [Sec. 3.1.11, effected while in possession of material non-
2015 SRC-IRR] public information arises:
1. If the purchase or sale is transacted
‘Material non-public information’ means: after such information came into
It has not been generally disclosed to the public existence but prior to dissemination of
and would likely affect the market price of the such information to the public; and
security after being disseminated to the public 2. The lapse of a reasonable time for the
and the lapse of a reasonable time for the market to absorb such information.
market to absorb the information; or
It would be considered by a reasonable person Presumption may be rebutted by showing of
important under the circumstances in purchaser’s or seller’s lack of awareness of the
determining his course of action whether to material non-public information at the time of
buy, sell or hold a security. [Sec. 27.2] purchase or sale, [Sec. 27.1]
Page 288 of 450

To communicate material non-public Stated differently, it is an offer by the acquiring

information about the issuer or the security person to stockholders of a public company for
to any person who, by virtue of the them to tender their shares therein on the terms
communication, becomes an insider, where the specified in the offer. [Cemco Holdings, Inc. v.
insider communicating the information knows National Life Insurance Company of the
or has reason to believe that such person will Philippines, G.R. No. 171815 (2007)]
likely buy or sell a security of the issuer
while in possession of such information. A public company means any corporation:
[Sec. 27.3] 1) With a class of equity securities listed on an
Exchange, or
UNLAWFUL ACTS INVOLVING INSIDERS IN 2) With assets in excess of Fifty million pesos
CONNECTION WITH TENDER OFFER and having 200 or more holders each
Where a tender offer has commenced, or is holding at least 100 shares of a class of its
about to commence, it shall be unlawful for: equity securities. [Sec. 3.1, 2015 SRC-IRR]
a. Any person (other than the tender offeror)
who is in possession of material non-public Purpose of Tender Offer
information relating to such tender offer — Tender offer is in place to protect minority
to buy or sell the securities of the issuer shareholders against any scheme that dilutes
that are sought or to be sought by such the share value of their investments by:
tender offer, if such person: (1) knows or i. Giving them the chance to exit the
has reason to believe that the information company under reasonable terms,
is non-public, and (2) has been acquired ii. Giving them the opportunity to sell their
directly or indirectly from the tender offeror, shares at the same price as those of the
those acting on its behalf, the issuer, or any majority shareholders. [Cemco Holdings,
insider of such issuer; and Inc. v. National Life Insurance Company
b. Any tender offeror, those acting on its of the Philippines, supra]
behalf, the issuer, and any insider of such
issuer — to communicate material non- The rules aim to protect minority owners who
public information relating to the tender may be left out, if the buyers extend the offer
offer to any other person where such is only to strategic partners or majority owners of
likely to result in a violation of Sec. a company. [Decasa]
27.4(a)(i). [Sec 27.4]
MANNER OF MAKING TENDER OFFER
G. PROTECTION OF No tender offer shall be made unless:
a. It is open to all security holders of the class
SHAREHOLDER of securities subject to the tender offer; and
INTERESTS b. The consideration paid to any security
holder pursuant to the tender offer shall be
1. Tender offer rule the highest consideration paid to any other
security holder during such tender offer.
[Sec 19.9.8, 2015 SRC-IRR]
Definition
Tender Offer is a publicly announced intention
MANDATORY TENDER OFFER [Rule 19.2,
by a person acting alone or in concert with
2015 SRC-IRR]
other persons to acquire:
Tender offer is mandatory whenever any
a. Outstanding equity securities of a public
person or group of persons acting in concert
company, or
intends to:
b. Outstanding equity securities of an
associate or related company of such
public company which controls the said
public company.
Page 289 of 450

When Mandatory How Effected

Obligations of a person making a tender
offer [Rule 19, 2015 SRC-IRR]
a. Acquire fifteen They shall file a 1. Make an announcement of his intention in
percent (15%) of declaration to that a national newspaper of general
equity securities in a effect with the SEC. circulation, prior to the commencement of
public company in the offer. A copy of the said notice shall be
one or more submitted to the Commission on the date of
transactions within its publication. [Rule 19.5]
a period of 12 2. File with the Commission SEC Form 19-1,
months.
including all its exhibits. [Rule 19.6.1.1]
b. Acquire thirty They shall disclose 3. Hand deliver a copy of the SEC Form 19-1,
five percent (35%) or such intention and including all its exhibits, to the target
more of the make a tender offer for company at its principal executive office
outstanding voting the percentage sought and to each Exchange where such class of
shares or such to all holders of such the target company's securities is listed for
outstanding voting securities. trading. [Rule 19.6.1.2]
shares that are 4. File with the SEC copies of any additional
sufficient to gain tender offer materials as exhibit to SEC
control of the board in Form 19-1 and, if a material change occurs
a public company in in the information set forth in such SEC
one or more Form, copies of an amendment to such
transactions within form. Copies shall be hand delivered to the
a period of 12 target company and to any Exchange as
months; required above. [Rule 19.6.2]
c. Acquire thirty They shall make a 5. Report the results of the tender offer to the
five percent (35%) or tender offer for all the SEC by filing, not later than ten (10)
more of the outstanding voting business days after the termination of the
outstanding voting shares. tender offer, copies of the final
shares or such amendments to SEC Form 19-1. [Rule
outstanding voting Note: If the tender offer 19.6.3]
shares that are is oversubscribed, the
sufficient to gain aggregate amount of Coverage of the Mandatory Tender Offer
control of the board in securities to be Rule
a public company acquired at the close of The coverage of the mandatory tender offer
directly from one or the tender offer shall be rule covers not only direct acquisition but also
more stockholders; proportionately indirect acquisition or “any type of acquisition.”
distributed. [Sundiang]
d. Acquire any They shall make a

The legislative intent behind the tender offer
number of shares that tender offer for all rule makes clear that the type of activity
would result in outstanding equity intended to be regulated is the acquisition of
ownership of over fifty securities to all control of the listed company through the
percent (50%) of the remaining stockholders purchase of shares. [Cemco Holdings, Inc. v.
total outstanding of the company. The National Life Insurance Company of the
equity securities of acquirer shall be Philippines, supra].
a public company. required to accept all
securities tendered.
Page 290 of 450

Exemptions from the mandatory tender A reacquisition or repurchase by an issuer of

offer requirement [Rule 19.3, 2015 SRC-IRR] its own securities shall only be made if such
Any purchase of securities from the unissued issuer has unrestricted retained earnings in its
capital stock, provided, the acquisition will not books to cover the amount of shares to be
result to a fifty percent (50%) or more purchased, and is undertaken for any of the
ownership of securities by the purchaser, or following purposes:
such percentage that is sufficient to gain a. To implement a stock option or stock
control of the board; purchase plan;
a. Any purchase of securities from an b. To meet short-term obligations which
increase in authorized capital stock; can be settled by the reissuance of the
b. Purchase in connection with foreclosure repurchased shares;
proceedings involving a duly constituted c. To pay dissenting or withdrawing
pledge or security arrangement where the stockholders entitled to payment for
acquisition is made by the debtor or their securities; and
creditor; d. Such other legitimate corporate
c. Purchases in connection with a purpose/s. [Sec. 19.4, 2015 SRC-IRR]
privatization undertaken by the
government of the Philippines; PROHIBITED ACTS
d. Purchases in connection with corporate It shall be unlawful when a tender offer has
rehabilitation under court supervision; commenced or about to commence for:
e. Purchases in the open market at the 1. Any person (other than the tender offeror)
prevailing market price; and who is in possession of material non-public
f. Merger or consolidation. information relating to such tender offer, to
buy or sell the securities of the issuer that
Note: Purchasers of securities in the foregoing are sought or to be sought by such tender
transactions shall, however, comply with the offer; and
disclosure and other obligations under SRC- 2. Any tender offeror, those acting on its
IRR 18.1 and 23. behalf, the issuer of the securities sought
or to be sought by such tender offer, and
When not required to make a tender offer any insider of such issuer to communicate
Any person or group of persons acting in material non-public information relating to
concert, who intends to acquire thirty five the tender offer to any other person where
percent (35%) of the outstanding voting shares such communication is likely to result in a
or such outstanding voting shares that are violation of Sec. 27.4(a)(i). [Sec. 27.4]
sufficient to gain control of the board in a public
company through the Exchange shall not be 2. Rules on proxy solicitation
required to make a tender offer even if they
acquire the remainder through a block sale if, Definition
after acquisition through the Exchange, they Proxy Solicitation involves the securing and
fail to acquire their target of thirty five percent submission of proxies. It is where the
(35%) or such outstanding voting shares that is corporation obtains proxies of the stockholders
sufficient to gain control of the board. [Sec to vote on corporate matters. [GSIS v. CA, G.R.
19.2.3, 2015 SRC-IRR] No. 183905 (2009)]
ISSUER TENDER OFFER The terms solicit and solicitation shall
“Issuer Tender Offer” means a publicly include:
announced intention by an issuer to acquire 1. Any request for proxy or authorization;
any of its own class of equity securities, or by 2. Any request to execute or not to execute,
an associate of such issuer to acquire such or to revoke, a proxy or authorization; or
securities. [Sec 19.1.5, 2015 SRC-IRR] 3. The furnishing of a form of proxy or other
communication to security holders under
Page 291 of 450

circumstances reasonably calculated to person other than the customer without written
result in the procurement, withholding or authorization of such customer. [Sec. 20.4]
revocation of a proxy. [Rule 20.2.2, 2015 A broker or dealer who holds or acquires the
SRC-IRR] proxy for at least ten percent (10%) or such
percentage as the commission may prescribe
The terms shall not apply to: of the outstanding share of such issuer, shall
a. The performance by any person of submit a report identifying the beneficial owner
ministerial acts on behalf of a person of ten days after such acquisition, for its own
soliciting a proxy; or account or customer to the issuer of security,
b. Any solicitation made otherwise than on to the exchange where the security is traded,
behalf of the issuer where the total number and to the Commission. [Sec. 20.5]
of persons solicited is not more than 19.
[Rule 20.2.2, 2015 SRC-IRR] Note: For proxy or consent solicitation, the
SEC may require that the person making
The SRC regulates proxy solicitation by such filing pay a fee of not more than one-
requiring the issuer to transmit tenth of one percent (1/10 of 1%) of the
1. An information statement, proposed payment in cash, and the value of
2. Proxy form, and any security or property to be transferred in the
3. Management report to every security acquisition, merger or consolidation, or the
holder of the class entitled to vote at least cash and value of any securities proposed to
15 days prior to the conduct of annual or be received upon sale or disposition of such
other stockholders’ meetings. [Rule 20.3.1, assets in case of a solicitation. [Sec. 21]
2015 SRC-IRR]
3. Disclosure rule
Preliminary copies of the information statement
and the proxy form shall be submitted to the Issuers, equity holders, and insiders are
SEC before sending the same to security subject to certain reportorial requirements
holders. [Rule 20.3.3.1, 2015 SRC-IRR] under the SRC.
Requirements (A) Disclosure by The Issuer [Sec. 17]

Proxies must be:
a. Issued and solicited in accordance with To the SEC
SEC rules and regulations [Sec. 20.1] 1. Annual Report filed within one hundred
b. In writing [Sec. 20.2] thirty-five (135) days after the end of the
c. Signed by the stockholder or his duly issuer’s fiscal year, or such other time as
authorized representative [Sec. 20.2] the Commission may prescribe;
d. Filed before the scheduled meeting with 2. Such other periodical reports for interim
the corporate secretary [Sec. 20.2] fiscal periods and current reports on
e. Valid only for the meeting for which it is significant developments of the issuer as
intended unless otherwise provided in the the Commission may prescribe as
proxy [Sec. 20.3] necessary to keep current information on
the operation of the business and financial
Note: No proxy shall be valid and effective for condition of the issuer. [Sec. 17.1]
a period longer than five (5) years at one time.
[Sec. 20.3] To the equity holders
An annual report shall be furnished, by every
Rules with Regard to Brokers Or Dealers issuer which has a class of equity securities
No broker/dealer shall give any proxy, consent satisfying any of the requirements in
or any authorization, in respect of any security Subsection 17.2, to each holder of such equity
carried for the account of the customer, to a security. [Sec. 17.5].
Page 292 of 450

Types of issuers subject to the reportorial (B) Disclosure by Equity Holders [Sec. 18]
requirements [Sec. 17.2]
An issuer which has sold a class of its Reports by Five per centum Holders of
securities pursuant to a registration statement, Equity Securities [Sec. 18]
Provided however, That the requirement shall In every case in which an issuer is subject to
be suspended for any fiscal year after the year the reportorial requirements, any person who
such registration became effective if such acquires directly or indirectly the beneficial
issuer, as of the first day of any such fiscal year, ownership of more than five of per centum (5%)
has less than one hundred (100) holder of such of such class or in excess of such lesser per
class of securities or such other number as the centum as the Commission by rule may
Commission shall prescribe and it notifies the prescribe, shall, within 10 days after such
Commission of such; acquisition or such reasonable time as fixed by
1. An issuer with a class of securities listed for the Commission, submit to:
trading on an Exchange; and  The issuer of the securities;
2. An issuer with assets of at least 50 million  The Exchange where the security is traded;
pesos or such other amount as the and
Commission shall prescribe, and having  The Commission,
200 or more holders each holding at least a sworn statement containing the following
100 shares of a class of its equity information –
securities. 1. The personal background, identity,
The obligation of such issuer to file reports shall residence, and citizenship of, and the
be terminated ninety (90) days after notification nature of such beneficial ownership by
to the Commission by the issuer that the such person and all other persons by whom
number of its holders holding at least one or on whose behalf the purchases are
hundred (100) shares is reduced to less than effected; in the event the beneficial owner
one hundred (100) [Sec. 17.2] is a juridical person, the line of business of
the beneficial owner shall also be reported;
A “public company” is required to comply 2. If the purpose of the purchases or
with the reportorial requirements set forth in prospective purchases is to acquire control
Section 17.1 of the SRC. Under Rule 3(1)(m), of the business of the issuer of the
a “public company” is defined as “any securities, any plans or proposals which
corporation with a class of equity securities such persons may have that will effect a
listed on an Exchange or with assets in excess major change in its business or corporate
of Fifty Million Pesos (P50,000,000.00) and structure;
having 200 or more holders, at least 200 of 3. The number of shares of such security
which are holding at least 100 shares of a class which are beneficially owned, and the
of its equity securities.” number of shares concerning which there
is a right to acquire, directly or indirectly,
It is clear that a “public company,” as by: (1) such person, and (2) each associate
contemplated by the SRC, is not limited to a of such person, giving the background,
company whose shares of stock are publicly identity, residence, and citizenship of each
listed; even companies like the Bank, whose such associate; and
shares are offered ONLY to a specific group of 4. Information as to any contracts,
people, are considered a public company, arrangements, or understanding with any
provided they meet the requirements person with respect to any securities of the
enumerated. [Philippine Verterans Bank v. issuer including but not limited to transfer,
Callangan G.R. No. 191995 (2011)] joint ventures, loan or option
arrangements, puts or call guarantees or
division of losses or profits, or proxies
naming the persons with whom such
contracts, arrangements, or understanding
Page 293 of 450

have been entered into, and giving the What is required to be disclosed is a fact of
details thereof; special significance, which may be:
5. Such other information as the Commission A material fact which would be likely, on being
may require in the public interest or for the made generally available, to affect the market
protection of investors. price of a security to a significant extent, or
One which a reasonable person would
Note: If it appears to the SEC that securities consider especially important in determining
were acquired by person in the ordinary course his course of action with regard to the shares
of his business and were not acquired for the of stock. [SEC v. Interport Resources
purpose of and do not have the effect of Corporation, G.R. No. 135808 (2008)]
changing or influencing the control of the issuer
nor in connection with any transaction having See also Insider and Material non-public
such purpose or effect it may permit any person information under Insider Trading above.
to file in lieu of the statement required by
subsection 17.1, a notice stating:
The name of such person;
The shares of any equity securities subject to
Subsection 17.1 which are owned by him;
The date of their acquisition; and
Such other information as the commission may
specify [Sec. 18.3]
Transactions of Directors, Officers and

Beneficial Owners of more than ten per
centum [Sec. 23]
Every person who is:
1. The beneficial owner of more than 10% of
any class of any equity security, or
2. 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
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.
(C) 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]
Page 294 of 450

U.P. LAW BOC BANKING COMMERCIAL LAW
BANKING
COMMERCIAL LAW
Page 295 of 450

A. THE NEW 3. Responsibility and Primary

Objective of BSP
CENTRALBANK ACT
[R.A. 7653, as amended by R.A. 11211] The BSP is an independent central monetary
authority, which replaced the Central Bank of
The section numbers hereinafter generally the Philippines and shares the same functions,
pertain to RA 7653, unless otherwise indicated. but is a new entity altogether.
1. State Policies Nature of the BSP

b. A central monetary authority;
The State shall maintain a central monetary c. An independent and accountable body;
authority that shall: and
1. Function and operate as an independent d. A government-owned corporation that
and accountable body corporate in the enjoys fiscal and administrative autonomy.
discharge of its mandated responsibilities [Secs. 1 and 2]
concerning money, banking and credit;
2. Enjoy fiscal and administrative Primary Objective and Other
autonomy, while being a government- Responsibilities of the BSP
owned corporation a. Primary objectives
- Considering its unique functions and 1. To maintain price stability conducive to
responsibilities. [Sec. 1] a balanced and sustainable economic
growth;
2. To promote and maintain monetary
2. Creation of the Bangko stability and the convertibility of the
Sentral ng Pilipinas peso;
3. To promote financial stability and
Created by the NCBA, the Bangko Sentral ng closely work with the National
Pilipinas (BSP) is the independent central Government;
monetary authority of the Philippines. 4. To oversee the payment and
settlement systems in the Philippines;
Capitalization of the BSP and
The BSP has a capitalization of P200B 5. To promote broad and convenient
subscribed by the Government. [Sec. 2, as access to high quality financial services
amended] and consider the interest of the general
public.
The BSP as transferee of Philippine Central
Bank powers b. Other responsibilities
All powers, duties and functions vested by law 1. Provides policy directions in the areas
in the Central Bank of the Philippines not of money, banking, and credit;
inconsistent with the NCBA were deemed 2. Supervises operations of banks;
transferred to the BSP. All references to the 3. Regulates the operations of finance
Central Bank of the Philippines in any law or companies and non-bank financial
special charters shall be deemed to refer to the institutions performing quasi-banking
BSP. [Sec. 136] functions. [Sec. 3]
Page 296 of 450

Salient Features of the BSP Under the 4. Corporate Powers

NCBA
a. Assurance of BSP independence by The BSP is authorized:
providing for the majority of the members a. To adopt, alter, and use a corporate seal
of the Monetary Board (MB) to come from which shall be judicially noticed;
the private sector. [Sec. 6] b. To lease or own real and personal property
b. The BSP now concentrates on monetary and to sell or otherwise dispose of the
policy, and has phased out its fiscal same;
agency functions and its responsibilities in c. To sue and be sued;
respect of finance companies without d. To do and perform ay and all things that
quasi-banking functions, which in the past, may be necessary or proper to carry out the
had distracted the old Central Bank from purposes of the act
its primary function. The latter has been
assumed by the Securities and Exchange Moreover, the BSP may:
Commission. [Secs. 3, 129, & 130] a. Acquire and hold such assets and incur
c. Provides safeguards to ensure that, unlike such liabilities in connection with its
the old Central Bank which sustained operations authorized by the provisions of
huge losses, the BSP would have a the NCBA, or as are essential to the proper
positive net income position by the conduct of such operations
following provisions: b. Compromise, condone or release, in whole
1. Capitalization of P200B; [Sec. 2, as or in part, any claim of or settled liability to
amended] the BSP, regardless of the amount
2. Maintenance of positive net foreign involved, under such terms and conditions
asset position; [Sec.71] as may be prescribed by the MB to protect
3. Charging interests on all loans and the interests of the BSP. [Sec. 5]
advances to banks; [Sec. 85]
4. Authority to collect interests on loans
and advances to closed financial 5. Operations of the BSP
institutions; [Sec. 85] and
5. Prohibition against acquisition of Authority to obtain data and
shares, including by collateral, nor information
participate in neither ownership nor
management of enterprises, nor The BSP shall have the authority to request
engage in development banking or from government offices and instrumentalities,
financing. [Sec. 128] or government-owned or controlled
corporations, any data which it may require for
Exception: Whenever the MB, by a vote of at the proper discharge of its functions and
least 5 of its members, deems an acquisition or responsibilities.
investment to be necessary to qualify or as
required for membership in international and Power to Issue a Subpoena
regional organizations; or determines that The BSP through the Governor or in his
investing in and/or operating an enterprise will absence, a duly authorized representative shall
be consistent with the effective fulfillment of its have the power to issue a subpoena for the
mandate and will not constitute any conflict of production of the books and records for the
interest. aforesaid purpose.
Those who refuse the subpoena without

justifiable cause, or who refuse to supply the
BSP with data requested or required, shall be
subject to punishment for contempt in
Page 297 of 450

accordance with the provisions of the Rules of 2. To compel the presentation of all:
Court.  Books, documents, papers or records
Data on Individual Firms necessary in their judgment to
Data on individual firms, other than banks, ascertain the facts relative to the true
gathered by the Department of Economic condition of any institution
Research and other departments or units of the  Books and records of persons and
BSP shall not be made available to any person entities relative to or in connection with
or entity outside of the BSP whether public or the operations, activities or
private. transactions of the institution under
examination
Exception: under order of the court or under
such conditions as may be prescribed by the Note: These powers are subject to the
MB. provision of existing laws protecting or
safeguarding the secrecy or confidentiality of
Collective data on firms may be released to bank deposits as well as investments of private
interested persons or entities. persons, natural or juridical, in debt instruments
issued by the Government.
In the case of banks, provisions of Sec. 27 shall
apply. [Sec. 23] Restraining orders and injunctions
The provisions of Rule 58 (Preliminary
Supervision and Examination Injunction) of the Rules of Court insofar as they
are applicable and not inconsistent with the
The BSP shall have supervision over, and provisions of this Section 25 of the NCBA shall
conduct periodic or special examinations of: govern the issuance and dissolution of the
i. Banking institutions restraining order or injunction.
ii. Quasi-banks
iii. Their subsidiaries engaged in allied General Rule: No restraining order or
activities injunction shall be issued by the court enjoining
- A subsidiary is a corporation more than the BSP from examining any institution subject
50% of the voting stock of which is to supervision or examination by the BSP.
owned by a bank or quasi-bank
iv. Their affiliates engaged in allied Exception: There is convincing proof that the
activities action of the BSP is plainly arbitrary and made
- An affiliate is a corporation the voting in bad faith and the petitioner or plaintiff files
stock of which: with the clerk or judge of the court in which the
action is pending a bond executed in favor of
▪ To the extent of 50% or less, is
the BSP, in an amount to be fixed by the court.
owned by a bank or quasi-bank; or
[Sec. 25]
▪ Is related or linked to such
institution or intermediary through
Bank deposits and investments
common stockholders or such
other factors as may be determined
by the MB. Any director, officer or stockholder who,
together with his related interest, contracts a
The department heads and the examiners of loan or any form of financial accommodation
the supervising and/or examining departments from:
are hereby authorized: 1. His bank; or
2. From a bank:
1. To administer oaths to any director, officer,
or employee of any institution under their a. Which is a subsidiary of a bank holding
respective supervision or subject to their company of which both his bank and
examination the lending bank are subsidiaries; or
Page 298 of 450

b. In which a controlling proportion of the d. borrowing from any institution subject to

shares is owned by the same interest supervision or examination by the BSP
that owns a controlling proportion of shall be prohibited unless said borrowings
the shares of his bank are adequately secured, fully disclosed to
i. In excess of five percent (5%) of the MB, and shall be subject to such further
the capital and surplus of the bank, rules and regulations as the MB may
or prescribe: Provided, however, That
ii. In the maximum amount permitted personnel of the supervising and
by law, whichever is lower examining departments are prohibited from
shall be required by the lending bank to borrowing from a bank under their
waive the secrecy of his deposits of supervision or examination.
whatever nature in ALL banks in the
Philippines. In addition to the prohibitions in RA 3019 and
RA 6713.
Any information obtained from an
examination of his deposits shall be held Examination and fees
strictly confidential and may be used by
the examiners only in connection with their Examination
supervisory and examination responsibility The supervising and examining department
or by the BSP in an appropriate legal action head, personally or by deputy, shall examine
it has initiated involving the deposit the books of every banking institution:
account. [Sec. 26] a. Once in every 12 months, and
b. At such other times as the MB by an
Prohibitions affirmative vote of 5 members, may
deem expedient
Personnel of the BSP are prohibited from:
a. being an officer, director, lawyer or agent, Provided, That there shall be an interval of at
employee, consultant or stockholder, least 12. months between annual
directly or indirectly, of any institution examinations.
subject to supervision or examination by The bank concerned shall afford to the head of
the BSP, except non-stock savings and the appropriate supervising and examining
loan associations and provident funds departments and to his authorized deputies full
organized exclusively for employees of the opportunity to examine its books, cash and
BSP, and except as otherwise provided in available assets and general condition at any
the NCBA; time during banking hours when requested to
b. directly or indirectly requesting or receiving do so by the BSP
any gift, present or pecuniary or material
benefit for himself or another, from any Provided, however, That none of the reports
institution subject to supervision or and other papers relative to such examinations
examination by the BSP; shall be open to inspection by the public
c. revealing in any manner, except under
orders of the court, the Congress or any Exception: Insofar as such publicity is
government office or agency authorized by incidental to the proceedings hereinafter
law, or under such conditions as may be authorized or is necessary for the prosecution
prescribed by the MB, information relating of violations in connection with the business of
to the condition or business of any such institutions.
institution. This prohibition shall not be held
to apply to the giving of information to the Fees
MB or the Governor of the BSP, or to any Banking and quasi-banking institutions which
person authorized by either of them, in are subject to examination by the BSP shall
writing, to receive such information; pay to the BSP an annual fee [Sec. 28]
Page 299 of 450

Exception: Unless such members or other

Within the first 30 days of each officials are found to be liable for willful violation
When
year of the NCBA, performed in evident bad faith or
A percentage, prescribed by with gross negligence. [Sec. 15]
the MB, of its average total
assets during the preceding 7. How The BSP Handles Banks
year
Amount - As shown on its end-of-
In Distress
month balance sheets,
AFTER deducting cash WHEN BANKS ARE IN DISTRESS
on hand and amounts
due from banks Liquidity is the ability of an asset to be
converted into cash. An entity is liquid when it
6. Monetary Board (MB); Powers is able to pay its liabilities when they fall due.
and Functions Illiquidity occurs when the bank is not liquid. It

means that the bank cannot meet its current
The MB is the body through which the powers liabilities.
and functions of the BSP are exercised. [Sec.
6] Illiquidity is handled by conservatorship.
Insolvency
Powers and Functions: When the actual market value of assets is
a. Issue rules and regulations it considers insufficient to pay its liabilities, not considering
necessary for the effective discharge of the capital stock and surplus which are not
responsibilities and exercise of the powers liabilities for such purpose. An entity is
vested in it; insolvent when it is unable to meet current and
b. Direct the management, operations, and long-term obligations.
administration of the BSP, reorganize its 1. In contrast, a bank is solvent when current
personnel and issue such rules and assets are more than current liabilities,
regulations as it may deem necessary or providing the ability to pay debts. It is also
desirable for this purpose; solvent when it is able to meet its long-term
c. Establish a human resource management obligations/liabilities.
system which governs the selection, hiring, 2. Insolvency is handled by receivership
appointment, transfer, promotion, or and/or closure.
dismissal of all personnel;
d. Adopt an annual budget for and authorize Conservatorship
such expenditures by the BSP as are in the
interest of the effective administration and Grounds for Appointment of a Conservator
operations of the BSP in accordance with Whenever, on the basis of a report submitted
applicable laws and regulations; and by the appropriate supervising or examining
e. Indemnify its members and other officials of department, the MB finds that a bank or quasi-
the BSP. bank is:
1. In a state of continuing inability; or
General Rule: Includes costs and expenses 2. Unwillingness to maintain a condition of
reasonably incurred by personnel of the liquidity deemed adequate to protect
departments performing supervision and the interest of depositors and creditors.
examination functions in connection with any [Sec. 29]
civil or criminal action, suit or proceeding, to
which any of them may be made a party by
reason of the performance of their
functions or duties
Page 300 of 450

Requisites for Placement of a Bank under Note: The conservator is a natural person to be
Conservatorship appointed by the MB. In contrast, the receiver
1. There must be a report submitted by the is generally the Philippine Deposit Insurance
appropriate supervising or examining Corporation (PDIC).
department of the BSP;
2. There must be a finding that the bank or Powers and Duties of a Conservator
quasi-bank falls under either of the grounds a. To take charge of the assets, liabilities, and
for conservatorship; and the management of the institution;
3. The Board of Directors must be informed in b. To reorganize the management;
writing of the order of the MB directing c. To collect all monies and debts due said
conservatorship. [Sec. 29] institution;
d. To exercise all powers necessary to restore
Duration: Shall not exceed 1 year [Sec. 29] its viability;
e. To report and be responsible to the MB;
Expenses and
The expenses attendant to the conservatorship f. To overrule or revoke the actions of the
shall be borne by the bank or quasi-bank previous management and board of
concerned. [Sec. 29] directors of the bank or quasi-bank. [Sec.
29]
Grounds for Termination of
Conservatorship by the MB Note: That the management of the bank is still
a. When the MB is satisfied that the institution with its board of directors and management.
can continue to operate on its own and the However, the conservator may revoke their
conservatorship is no longer necessary; or actions. In contrast, in receivership, the
b. When, on the basis of the report of the receiver takes over the management of the
conservator or of its own findings, the MB bank.
determines that the continuance in
business of the institution would involve The Conservator Cannot Repudiate
probable loss to its depositors or creditors Perfected Contracts
The powers of the conservator of a bank must
Effect: The bank or quasi-bank would then be be related to the preservation of the assets of
placed under receivership. [Sec. 29] the bank, the reorganization of the
management and the restoration of viability.
Effects of Conservatorship Such powers cannot extend to the post-facto
1. Bank/Quasi-bank retains juridical repudiation of perfected transactions,
personality; otherwise they would infringe against the non-
2. Not a precondition to the designation of a impairment clause of the Constitution. [First
receiver [Sec. 30]; and Philippine International Bank v. CA, G.R. No.
3. Perfected transactions cannot be 115849 (1996)]
repudiated. [First Philippine International
Bank v. CA, G.R. No. 115849 (1996)] Remuneration
General Rule: The conservator shall receive
Qualifications of a Conservator remuneration in an amount not to exceed 2/3
The conservator should be competent and of the salary of the president of the institution in
knowledgeable in bank operations and 1 year, payable in 12 equal monthly payments.
management. [Sec. 29]
Exception: A conservator appointed by the MB
The designation of a conservator shall be connected with the BSP. Said conservator shall
vested exclusively in the MB. [Sec. 30] not be entitled to receive any remuneration or
emolument. [Sec. 29]
Page 301 of 450

Closure Requisites
a. Report of the head of the supervising or
Should the MB find that any of the grounds for examining department involving the bank;
receivership is applicable to a bank or quasi- b. Finding of the MB of the existence of any of
bank, the Monetary Board may: the grounds for receivership;
1. Forbid the institution from doing c. Decision of the MB to forbid the institution
business in the Philippines; and from doing business, which decision may
2. Designate the PDIC as receiver of the be done summarily and without need for
banking institution. prior hearing; and
d. Notice in writing to the Board of Directors
Note: This is done summarily and without need informing the institution of the order of the
for prior hearing. [Sec. 30] MB. [Sec. 30]
Close Now, Hear Later Scheme Grounds for Receivership

Sec. 30 of the NCBA does not contemplate Whenever the MB finds that a bank or quasi-
prior notice and hearing before a bank may be bank:
directed to stop operations and placed under 1. Has notified the BSP or publicly announced
receivership. a unilateral closure, or has been dormant
a. It is enough that such action is made for at least 60 days or in any manner has
subject of a subsequent judicial review. suspended the payment of its
b. The rationale behind the scheme is to deposit/deposit substitute liabilities, or is
protect public interest. [Central Bank vs. unable to pay its liabilities as they become
CA and Triumph Savings Bank, G.R. No. due in the ordinary course of business. This
76118(1993)] shall not include inability to pay caused by
extraordinary demands induced by
In other words, when there is a ground for financial panic in the banking community;
closure and receivership, such closure may 2. Has insufficient realizable assets, as
be effected without notice and hearing. The determined by the BSP, to meet its
validity of closure may be challenged liabilities;
afterwards. 3. Cannot continue in business without
involving probable losses to its depositors
Receivership or creditors; or
4. Has willfully violated a cease-and-desist
Concept order under Sec. 37 that has become final,
The MB may summarily and without need for involving acts or transactions which
prior hearing close a banking institution and amount to fraud or a dissipation of the
place it under receivership. assets of the institution.
Receivership is equivalent to an injunction to In which the MB may, summarily and without

restrain the bank in any way. Thus, the need for prior hearing, forbid the institution
appointment of a receiver operates to suspend from doing business in the Philippines and
the authority of the bank and of its directors and designate the PDIC as receiver in the case of
officers over its property and effects. banks AND direct the PDIC to proceed with
[Villanueva v. CA, G.R. No. 114870 (1995)] the liquidation of the closed bank pursuant to
Sec. 30 and RA 3591. [Sec. 30, as amended
Receivership refers to the stage within which by RA 11211].
the PDIC manages the affairs of the closed
bank and preserves its assets for the benefit of The MB shall notify, in writing, through the
creditors. [Sec. 10(a), (b), RA 9302] receiver, the Board of Directors of the closed
bank of its decision.
Page 302 of 450

Effect of the MB Decision Kinds of Liquidation

General Rule: The actions of the MB taken A. Involuntary liquidation
under Secs. 29-30 shall be final and B. Voluntary liquidation
executory, and may not be restrained or set
aside by the court [Sec. 30, as amended by RA The Stockholders and the Board of Directors
11211]. can decide to liquidate a bank in accordance
with the procedure under the Corporation
Exception: On petition for certiorari on the Code.
ground that the action taken was in excess of
jurisdiction or with grave abuse of discretion. However, as an additional requirement, written
notice of the liquidation should be sent to the
Requisites of the petition MB before the liquidation is undertaken.
a. Filed by the stockholders of record
representing the majority of the capital Further, the MB shall have the right to intervene
stock. and take such steps as may be necessary to
b. Filed within 10 days from receipt by the protect the interests of creditors. [Sec. 68,
BOD of the institution of the order directing General Banking Law of 2000 (GBL) (RA
receivership, liquidation or 8791)]
conservatorship.
Grounds for Liquidation
Who Acts as Receiver See Grounds for Receivership above. [Sec.
1. If a banking institution: the PDIC 30, as amended by RA 11211]
2. If a quasi-bank or non-stock savings and
loan association: any person of recognized After the designation of the receiver, the MB
competence in banking, credit or finance may, summarily and without need for prior
may be designated by the BSP as receiver hearing, direct the PDIC to proceed with the
[Sec. 30] liquidation of the closed bank pursuant to
Sec. 30 and RA 3591. [Sec. 30, as amended
Note: The authority of the MB to summarily and by RA 11211]
without need for prior hearing forbid the bank - Should the receiver determine that the
or quasi-bank from doing business in the institution cannot be rehabilitated or
Philippines may also be exercised over non- permitted to resume business
stock savings and loan associations, based on
the same grounds. The MB shall notify, in writing, through the
receiver, the Board of Directors of the closed
Who Appoints Receivers bank of its decision.
The appointment of a receiver shall be vested
exclusively in the MB. [Sec. 30] Effect of the MB Decision
see Effect of the MB Decision under
Conservatorship vis-à-vis Receivership receivership
The designation of a conservator is not a
precondition to the designation of a receiver. Effects of Liquidation
[Sec. 30] 1. Retention of juridical personality;
2. Suspension of operations/stoppage of
Liquidation business;
3. Assets are deemed in custodia legis, i.e.,
Concept exempt from garnishment, levy or
Liquidation refers to the recovery and execution;
conversion of assets into cash for distribution 4. Stay of execution of judgment to prevent
to all creditors in accordance with the rules on depletion of bank assets;
concurrence and preference of credits.
Page 303 of 450

5. Bank is not liable to pay interest on Thirty thousand pesos (P30,000) a day
deposits which accrued during the period of for each violation, taking into
suspension of operation; consideration the attendant
6. Restriction of bank’s capacity to do new circumstances, such as the nature and
business (new loans, deposits) but with gravity of the violation or irregularity
obligation to collect pre-existing debts; and the size of the bank or quasi-bank;
a. It cannot take new deposits or grant ii. Suspension of rediscounting privileges
new loans. or access to BSP credit facilities;
b. However, it can collect pre-existing iii. Suspension of lending or foreign
debts. exchange operations or authority to
7. Deposits do not become preferred credits. accept new deposits or make new
investments;
8. Administrative sanctions on iv. Suspension of interbank clearing
privileges; and/or
supervised entities v. Revocation of quasi-banking license.
Without prejudice to the criminal sanctions The administrative sanctions need not be
provided in Secs. 34, 35, and 36, the MB may, applied in the order of their severity. [Sec. 37]
at its discretion, impose administrative
sanctions upon any bank or quasi-bank, their
directors and/or officers. 9. Rules on bank deposits and
investments by directors,
Resignation or termination from office shall not officers, stockholders and
exempt such director or officer from
administrative or criminal sanctions. their related interests
Grounds for imposition & Administrative Any director, officer or stockholder who,
sanctions imposed together with his related interest, contracts a
(a) Any willful violation of its charter or by-laws; loan or any form of financial accommodation
(b) Willful delay in the submission of reports or from:
publications thereof as required by law, (1) His bank; or
rules and regulations; (2) From a bank:
(c) Any refusal to permit examination into the a. Which is a subsidiary of a bank holding
affairs of the institution; company of which both his bank and
(d) Any willful making of a false or misleading the lending bank are subsidiaries; or
statement to the MB or the appropriate b. In which a controlling proportion of the
supervising and examining department or shares is owned by the same interest
its examiners; that owns a controlling proportion of the
(e) Any willful failure or refusal to comply with, shares of his bank
or violation of, any banking law or any i. In excess of five percent (5%) of
order, instruction or regulation issued by the capital and surplus of the bank,
the MB, or any order, instruction or ruling or
by the Governor; or ii. In the maximum amount permitted
(f) Any commission of irregularities, and/or by law, whichever is lower
conducting business in an unsafe or shall be required by the lending bank to waive
unsound manner as may be determined by the secrecy of his deposits of whatever
the MB, the following administrative nature in ALL banks in the Philippines.
sanctions, whenever applicable:
i. Fines in amounts as may be Any information obtained from an examination
determined by the MB to be of his deposits shall be held strictly
appropriate, but in no case to exceed confidential and may be used by the
examiners only in connection with their
Page 304 of 450

supervisory and examination responsibility or production or processing of agricultural,

by the BSP in an appropriate legal action it has animal, mineral, or industrial products.
initiated involving the deposit account. [Sec. 1. Documents or instruments acquired in
26] accordance with this subsection shall
be secured by a pledge of the
10. Supervision and regulation respective crops or products
2. Provided, however, That the crops or
of bank operations products need not be pledged to
secure the documents if the original
a. Loans and other credit loan granted by the BSP is secured by
accommodations a lien or mortgage on real estate
property seventy percent (70%) of the
The rediscounts, discounts, loans and appraised value of which equals or
advances which the BSP is authorized to exceeds the amount of the loan
extend to banking institutions shall be used to granted.
influence the volume of credit consistent with (c) Other credits - Special credit instruments
the objective of price stability. not otherwise rediscountable under the
immediately preceding subsections (a) and
Normal Credit Operations (b) may be eligible for rediscounting in
The BSP may normally and regularly carry on accordance with rules and regulations
the following credit operations with banking which the BSP shall prescribe. Whenever
institutions operating in the Philippines: necessary, the BSP shall provide funds
(a) Commercial Credits - The BSP may from non-inflationary sources: Provided,
rediscount, discount, buy and sell bills, however, That the MB shall prescribe
acceptances, promissory notes and other additional safeguards for disbursing these
credit instruments with maturities of not funds.
more than one hundred eighty (180) days (d) Advances [Sec. 82]
from the date of their rediscount, discount
or acquisition by the BSP and resulting Special Credit Operation
from transactions related to: The BSP may extend loans and advances to
i. The importation, exportation, banking institutions for a period of not more
purchase or sale of readily saleable than 7 days without any collateral for the
goods and products, or their purpose of providing liquidity to the banking
transportation within the system in times of need. [Sec. 83]
Philippines; or
ii. The storing of non-perishable Emergency Credit Operation
goods and products which are duly In periods of national and/or local emergency
insured and deposited, under or of imminent financial panic which directly
conditions assuring their threaten monetary and banking stability, the
preservation, in authorized bonded MB may, by a vote of at least 5 of its members,
warehouses or in other places authorize the BSP to grant extraordinary loans
approved by the Monetary Board. or advances to banking institutions.
(b) Production Credits - The BSP may
rediscount, discount, buy and sell bills, While such loans or advances are outstanding,
acceptances, promissory notes and other the debtor institution shall not, except upon
credit instruments having maturities of not prior authorization by the MB, expand the total
more than three hundred sixty (360) volume of its loans or investments. [Sec. 84]
days from the date of their rediscount,
discount or acquisition by the BSP and
resulting from transactions related to the
Page 305 of 450

b. Selective Regulation b. Determine the rates at which the BSP shall

buy and sell spot exchange;
i. Margin requirements against letters of c. Establish deviation limits from the effective
credit exchange rate or rates as it may deem
The MB may at any time prescribe minimum proper;
cash margins for the opening of letters of credit, d. Determine the rates for other types of
and may relate the size of the required margin foreign exchange transactions by the BSP,
to the nature of the transaction to be financed. including purchases and sales of foreign
[Sec. 105] notes and coins. [Sec. 74]
ii. Required security against bank loans Limitation: The margins between the effective
The MB may issue such regulations as it may exchange rates and the rates established by
deem necessary with respect to the maximum the MB may not exceed the corresponding
permissible maturities of the loans and margins for spot exchange transactions by
investments which the banks may make, and more than the additional costs or expenses
the kind and amount of security to be required involved in each type of transactions. [Sec. 74]
against the various types of credit operations of
the banks. [Sec. 106] b. Purchases and Sales of Foreign
Currency
iii. Portfolio ceilings
The MB may place an upper limit on the The BSP may:
amount of loans and investments which the a. Buy and sell foreign notes and coins, and
banks may hold, or may place a limit on the rate documents and instruments of types
of increase of such assets within specified customarily employed for the international
periods of time. The MB may apply such limits transfer of funds;
to the loans and investments of each bank or b. Engage in future exchange operations; and
to specific categories thereof. c. In order to maintain the convertibility of the
Peso, at the request of any banking
In no case shall the MB establish limits which institution operating in the Philippines, buy
are below the value of the loans or investments any quantity of foreign exchange offered,
of the banks on the date on which they are and sell any quantity of foreign exchange
notified of such restrictions. The restrictions demanded, by such institution, Provided,
shall be applied to all banks uniformly and the foreign exchange offered or demanded
without discrimination. [Sec. 107] is freely convertible to gold or USD. [Sec.
70]
iv. Minimum capital ratios
The MB may prescribe minimum ratios which Limitations: It may only transact with the
the capital and surplus of the banks must bear following entities and persons:
to the volume of their assets, or to specific a. Banking institutions operating in the
categories thereof, and may alter said ratios Philippines;
whenever it deems necessary. [Sec. 108] b. The government, its political subdivisions
and instrumentalities;
11. Rate of exchange c. Foreign or international financial
institutions;
a. Rate of Exchange d. Foreign governments and their
instrumentalities; and
The MB shall: e. Other entities or persons authorized by the
a. Determine the exchange rate policy of the MB to act as foreign exchange dealers
country; under the rules and regulations prescribed
by the MB. [Sec. 70]
Page 306 of 450

c. Acquisition of Inconvertible Currencies ii. To discourage private hoarding; [Sec.

1]
General Rule: The BSP shall avoid the iii. To encourage the people to deposit
acquisition and holding of currencies which are their money in banks; and
not freely convertible. iv. To discourage private hoarding, so that
the funds can be used by the bank to
Exception: The acquisition of such currencies grant loans to assist in economic
in an amount exceeding the minimum balance development.
necessary to cover current demand for said
currencies only when and to the extent that The absolute confidentiality rule in R.A. No.
such acquisition is considered by the MB to be 1405 actually aims at protection from
in the national interest. unwarranted inquiry or investigation if the
purpose of such inquiry or investigation is
d. In Times of Crises merely to determine the existence and nature,
as well as the amount of the deposit in any
The MB may exercise its emergency given bank account. [BSP Group, Inc. v. Go,
restrictions on exchange operations G.R. No. 168644 (2010)]
 These restrictions may be exercised by a
majority vote of the entire MB, i.e. 5 votes. 2. Prohibited Acts
 The vote must be approved by the
President. a. Examination, inquiry, or looking into
deposits and investments in Philippine
The restrictions the BSP may choose to impose government bonds by persons,
are: government officials, bureaus, or offices;
a. Temporary suspension or restriction of [Sec. 2]
sales of exchange by the BSP; b. Disclosure by banking institutions' officials
b. Subjecting all transactions in gold and or employees to unauthorized persons
foreign to license by the BSP; or regarding information about covered
c. Requiring that any foreign exchange deposits and investments. [Sec. 3]
thereafter obtained by any person
residing in or any entity operating in the
Philippines be delivered to the BSP or to
3. Deposits and Investments
an agent bank, at effective exchange Covered
rates. [Sec. 74]
These restrictions do not apply to Foreign General Rule
Currency Deposits under RA 6426.
All peso deposits of whatever nature with
banks or banking institutions in the Philippines
B. LAW ON SECRECY OF are considered as of an absolutely confidential
BANK DEPOSITS nature. [Sec. 2]
[RA 1405, as Amended]
Also covered are investments in bonds issued
The section numbers hereinafter generally by the Government of the Philippines, its
pertain to RA 1405, unless otherwise indicated. political subdivisions and its instrumentalities,
whether denominated in pesos or foreign
currency. Note that investments in bonds in
1. Purpose
foreign currency are still covered by RA 1405.
The Foreign Currency Deposit Act does not
i. To encourage the people to deposit
cover those investments.
their money in banking institutions;
Page 307 of 450

Labelling RA 1405 as the Law on Secrecy of Zones of Privacy

Bank Deposits is less than accurate. To be
more accurate, RA 1405 should be called the Under the RA 1405, bank deposits are
Law on Secrecy of Bank Deposits and statutorily protected or recognized zones of
Investments in Government Bonds. privacy. [People v. Estrada, G.R. No. 164368
(2009); Marquez v. Desierto, G.R. No. 135882
Deposits and Funds Covered by (2001); Ople v. Torres, G.R. No. 127685
Other Laws on Confidentiality (1998)]
i. Foreign currency deposits, which are It is conceded that while the fundamental law
governed by the Foreign Currency has not bothered with the triviality of specifically
Deposit Act addressing privacy rights relative to banking
ii. Funds placed in a bank not in the accounts, there, nevertheless, exists in our
nature of a deposit by private jurisdiction a legitimate expectation of privacy
individuals or entities. These may also governing such accounts. The source of this
not be disclosed, under Subsec. 55.1 of right of expectation is statutory, and it is found
the General Banking Law of 2000. in R.A. No. 1405, otherwise known as the Bank
Secrecy Act of 1955. [BSB Group, Inc., v. Go,
G.R. No. 168644 (2010)]
Trust Accounts
The term "deposits" is to be understood broadly 4. Exceptions

and not limited to accounts giving rise to
creditor-debtor relations between the bank and Deposits:
depositor. The deposit of money which may be a. Upon written permission of the depositor;
used by banks for authorized loans to 3rd b. In cases of impeachment;
persons also falls under RA 1405. Therefore, c. Upon order of competent court in cases of
trust accounts are also covered. [Ejercito v. SB bribery and dereliction of duty;
Special Division, G.R. Nos. 157294-95 (2006)] d. In cases where the money deposited or
invested is the subject matter of litigation.
But see Morales, The Philippine General
Banking Law (Annotated) (2017), pp. 220-221. If the case is for the recovery of money as a
result of failure to inform regarding improper
Construction of Confidentiality crediting, the money in the account is not the
subject matter of litigation. This is because the
By force of statute, all bank deposits are amount sought to be recovered is different from
absolutely confidential, and that nature is the amount that is already in the account. By
unaltered even by the legislated exceptions. the terms of RA 1405, the ‘money deposited’
itself should be the subject matter of the
litigation. [Union Bank v. Court of Appeals,
There is disfavor towards construing these
G.R. No. 134699 (1999)]
exceptions in such a manner that would
authorize unlimited discretion on the part of the
government or of any party seeking to enforce In contrast, where the case is for the recovery
of amounts converted by the depositors, the
those exceptions and inquire into bank
amount sought to be recovered is exactly the
deposits. If there are doubts in upholding the
money that is supposedly in the account. If the
absolutely confidential nature of bank deposits
case necessarily involves inquiring into the
against affirming the authority to inquire into
whereabouts of the illegally acquired amount,
such accounts, then such doubts must be
this falls under the exceptions to bank secrecy
resolved in favor of confidentiality.
under RA 1405. [Mellon Bank, N.A. v. Magsino,
[Republic v. Eugenio, G.R. No. 174629 (2008)]
G.R. No. 71479 (1990)]
Page 308 of 450

Other Exceptions the bank premises. [Sec. 2, Unclaimed

The Commissioner of Internal Revenue Balances Law, Act No. 3926, as
can inquire into the bank accounts of the amended by PD 679]
following taxpayers: 2. The PDIC and/or the BSP can inquire
i. A decedent in order to determine into or examine deposit accounts and
his gross estate; or all information related thereto in case
ii. A taxpayer who has filed an there is a finding of unsafe and
application to compromise his tax unsound banking practice. [Sec. 8,
liability on the ground of financial paragraph 8, RA 3591, as amended by
incapacity; [NIRC, Sec. 6(f)] RA 9576].
iii. A taxpayer, information on whose
account is requested by a foreign Not necessarily an exception: Power of the
tax authority. Ombudsman to “examine and have access to
b. Unexplained wealth under Sec. 8 of the bank accounts and records” under Sec. 15[8]
Anti-Graft and Corrupt Practices Act (RA of RA 6770. [Morales, The Philippine General
3019). [PNB v. Gancayco, G.R. No. L- Banking Law (Annotated) (2017) citing
18343 (1965); Banco Filipino v. Purisima, Marquez v. Desierto, infra]
G.R. No. L-56429 (1988); Marquez v.
Desierto, G.R. No. 135882 (2001)] 5. Garnishment of Deposits,
c. Inquiry by the Anti-Money Laundering
Council under the AMLA (RA 9160, the
Including Foreign Deposits
Anti-Money Laundering Act of 2001, as
amended) after obtaining a court order, General rule: The prohibition against
when there is probable cause that the examination of or inquiry into a bank deposit
deposits or investments involved are in any under Republic Act 1405 does not preclude its
way related to an unlawful activity or a being garnished to insure satisfaction of a
money laundering offense [Sec. 11, AMLA, judgment. [China Banking Corporation v.
see infra], except that no court order is Ortega, G.R. No. L-34964 (1973); Philippine
required if the covered investments are Commercial and Industrial Bank v. Court of
related to: Appeals, G.R. No. 84526 (1991)]
1. Kidnapping for Ransom [RPC];
2. Dangerous Drugs [2002 In the garnishment of deposits to insure
Comprehensive Dangerous Drugs satisfaction of a judgment, there is no real
Act]; inquiry, and if the existence of the deposit is
3. Hijacking and other violations of RA disclosed, the disclosure is purely incidental
6235; to the execution process. It is hard to
4. Destructive arson and murder; conceive that it was ever within the intention of
5. Felonies similar to (i) to (iv) above Congress to enable debtors to evade payment
which are punishable under the penal of their just debts, even if ordered by the Court,
laws of other countries; and through the expedient of converting their
6. Terrorism and conspiracy to commit assets into cash and depositing the same in a
terrorism under the Human Security bank. [China Banking Corporation v. Ortega,
Act of 2007. G.R. No. L-34964 (1973)]
d. BSP inquiry or examination in the course of
its periodic or special examination of the Exception: Foreign Currency Deposits
bank. [Sec. 11, AMLA] The foreign currency deposits shall be exempt
1. Disclosure of certain information about from attachment, garnishment, or any other
bank deposits which have been order or process of any court, legislative body,
dormant for at least 10 years, to the government agency or any administrative body
Treasurer of the Philippine in a sworn whatsoever. [Sec. 8, FCDA – Foreign Currency
statement, a copy of which is posted in Deposit Act]
Page 309 of 450

6. Penalties for Violation Classification of Banks
Any violation of this law will subject offender Universal Bank (UB)
upon conviction, to an imprisonment of not As the name implies, a universal bank has the
more than five years or a fine of not more than most banking power, as it has the same powers
twenty thousand pesos or both, in the as a commercial bank, plus the powers:
discretion of the court. [Sec.5]  To operate an investment house, whether
as an integral unit or as a subsidiary.
C. GENERAL BANKING  In turn, an investment house underwrites
LAW OF 2000 (GBL) securities either on firm underwriting (good
The section numbers hereinafter generally as sold) or best efforts (excess to be
pertain to RA 8791, unless otherwise indicated. returned to the issuer)
 To invest in non-allied enterprises
1. Definition and classification
Commercial Bank (KB)
of banks Has the powers defined in Secs. 29. and 53,
infra.
a. Definition of Banks
"Banks" shall refer to entities engaged in the Thrift Bank
lending of funds obtained in the form of Thrift banks are banks that focus on basic
deposits. [Subsec. 3.1] banking services for their clients, with an
emphasis on individuals and small businesses.
How Banks are Structured Thrift banks are primarily governed by RA
Generally, banks are stock corporations. 7906, the Thrift Banks Act.
However, cooperative banks may also be
formed under the Cooperative Code. Thrift banks include:
 Savings and mortgage banks;
N.B. Note that under RA 10641, qualified  Savings and loan associations; and
foreign banks, with MB approval, may now  Private development banks.
enter the local banking system, through any of
the following modes: Rural Banks
1. Acquiring, purchasing, or owning up to These are banks that are formed for the
100% of the voting stock of an existing purpose of providing adequate credit facilities
domestic bank; to farmers and merchants, or to cooperatives
2. Investing in up to 100% of the voting of such farmers and merchants and in general,
stock of a new banking subsidiary the people of the rural communities.
incorporated under the laws of the
Philippines; or They are primarily governed by RA 7353 (Rural
3. Establishing branches with full banking Banks Act).
authority.
Cooperative Banks
However, the foreign bank must be These are banks organized as cooperatives
established, reputable, and financially sound. under RA 6938, the Cooperative Code.
Further, it must be widely-owned and publicly Islamic Banks

listed in the country of origin. There is currently only one Islamic Bank in the
Philippines, the Al-Amanah Islamic Bank,
which aims to provide banking under the
Shari’a principles governing banking.
Page 310 of 450

However, RA 11439 (An Act Providing for the Deposit-Substitute Taking or Quasi-
Regulation and Organization of Islamic Banks) Banking
was enacted in the recent past. This law Deposit-substitute taking or quasi-banking is
expressly authorizes the BSP to license more an alternative form of obtaining funds from the
Islamic banks and permit conventional banks to public, other than deposits, through the
open Islamic windows or units. issuance, endorsement, or acceptance of debt
instruments for the borrower's own account, for
Other banks as classified by the BSP the purpose of relending or purchasing of
This includes Land Bank of the Philippines, the receivables and other obligations.
Philippine Veteran’s Bank, and Development
Bank of the Philippines. These instruments may include, but need not
be limited to, bankers’ acceptances,
2. Distinction of banks from promissory notes, participations, certificates of
assignment and similar instruments with
Quasi-banks and trust entities recourse, and repurchase agreements.
Banks Quasi- Trust Deposit substitute (like deposits) are with

Banks Entities recourse to the quasi-banks (just like deposits
Entities Entities Entities are with recourse to the banks).
engaged in engaged in engaged in
taking taking deposit trust Trust entities (Manual of Regulation for
deposits and substitutes business Banks) are:
lending and lending that act as a a. Trust departments of banks perform trust
these funds these funds to trustee or and other fiduciary functions; or
to their own their own administer b. Stand-alone trust corporations, authorized
borrowers. borrowers or any trust or by the BSP to engage in trust and other
purchasing hold fiduciary functions under the GBL.
[Subsec. 3.1] receivables property in
(which makes trust or on
them the deposit for 3. Bank Powers and Liabilities
creditors of the use,
the obligors of benefit, or Corporate Powers
the behoof of Aside from the banking powers, banks,
receivables) others [Sec. generally being in the form of stock
[Sec. 4] 79] corporations, also have all the powers a stock
corporation has. [See Sec. 35 of the Revised
Quasi-banks refer to entities engaged in the Corporation Code]
borrowing of funds called “deposit substitutes”
(i.e., “quasi-deposits”) as defined in Section 95 The exception is cooperative banks, which are
of the “New Central Bank Act” for purposes of in the form of a cooperative, and have all the
relending those funds or purchasing of powers of a cooperative under the Cooperative
receivables and other obligations. Code.
 Unlike banks, quasi-banks do not accept
deposits but take deposit substitutes. Granting of loans; security requirement
 Deposit substitutes are not insured with the The GBL no longer requires credit to be
PDIC. secured only by traditional security devices
(such as a real estate mortgage or a pledge),
in order to accommodate a different security
arrangement for microfinancing. This is in
contrast to the General Banking Act it replaced,
Page 311 of 450

which requires all loans to be generally secured has the option [but not the obligation] to
by traditional security devices. exercise. [BPI v. CA and Eastern Plywood,
G.R. No. 104612 (1994)]
Banking Powers and Incidental
Powers 2. Issuing letters of credit;
3. Discounting and negotiating
A commercial bank shall have, in addition to promissory notes, drafts, bills of
the general powers incident to stock exchange, and other evidences of debt;
corporations, all such powers as may be 4. Accepting or creating demand
necessary to carry on the business of deposits;
commercial banking such as: 5. Receiving other types of deposits and
deposit substitutes;
1. Accepting Drafts;
Types of Deposits
General rule: Only a UB and a KB can a. Time or Fixed Deposit - Interest
accept or create demand deposits [Sec. 33] rate stipulated depending on the
number of days. During this period,
Exception: Banks other than a UB or KB the money deposited may not be
with prior approval of, and subject to such withdrawn without incurring
conditions and rules as may be prescribed penalty. High interest rates.
by the MB. [Sec. 33] b. Savings Deposit - Bank pays an
interest rate, but not as high as time
Fixed, savings, and current deposits of deposits.
money in banks and similar institutions c. Demand Deposits/Current or
shall be governed by the provisions Checking Accounts - No interest
concerning simple loan. [Art. 1980, NCC] is paid by the bank because the
Presumption of ownership of deposits depositor can take out his funds
It is presumed that money deposited in a any time. It is called demand
bank account belongs to the person in deposit because the depositor can
whose name the deposit account is withdraw the money he deposited
opened. on the very same day when he
deposited it or at any time
A depositor is presumed to be the owner of thereafter. [Villanueva,
funds standing in his name in a bank Commercial Law Review (2012)]
deposit account; and where a bank is not d. Negotiable Order of Withdrawal
chargeable with notice that the money Accounts – Interest-bearing
deposited in such account is the property of deposit accounts that combine the
some other person than the depositor, the payable on demand feature of
bank is justified in paying out the money to checks and investment feature of
the depositor or upon his order, and cannot savings accounts [Sec. 221,
be liable to any other person as the true Manual of Regulations for Banks]
owner. [Fulton Iron Works Co. v. China
Banking Corporation, G.R. No. 32576 6. Buying and selling foreign exchange
(1930)] and gold or silver bullion;
7. Acquiring marketable bonds and other
No duty to set-off debt securities; and
A bank is under no duty or obligation to 8. Extending credit.
make an application or set-off against the
deposit accounts of a borrower. To apply “Know your customer” rule
the deposit to the payment of a loan is a Before granting a loan or other credit
privilege, a right of set-off which the bank accommodation, a bank must ascertain that the
Page 312 of 450

debtor is capable of fulfilling its commitments to and embrace a culture of fair and responsible
the bank. [Sec. 40] dealings in the conduct of their business.
 Banks must treat depositors’ accounts with
The bank may demand from its credit meticulous care;
applicants a statement of their assets and  Banks must always to have in mind the
liabilities and of their income and expenditure fiduciary nature of its relationship with their
and such information as may be prescribed by depositors and other clients. [Metrobank v.
law or by rules and regulations of MB to enable Rosales, G.R. No. 183204 (2014);
the bank to properly evaluate the credit Comsavings Bank v. Sps. Capistrano, G.R.
application which includes the corresponding No. 170942 (2013); Equitable Banking v.
financial statements submitted for taxation Special Steel Products, G.R. No. 175350
purposes to the BIR. [Sec. 40] (2012)]
Credit enhancement Notwithstanding the degree of diligence

If the borrower is less than creditworthy, third required, a bank is not expected to be infallible.
persons may enhance his credit by providing [Prudential Bank vs. CA, G.R. No. 125536
guarantees and other security devices in favor (2000)]
of the bank. [Morales (2017)]
Failure on the part of the bank to satisfy the
In addition to the operations specifically degree of diligence required of banks may
authorized in the GBL, a bank may perform warrant the award of damages.
the following services:
(1) Receive in custody funds, documents and Examples when a bank is deemed to be
valuable objects; negligent:
(2) Act as financial agent and buy and sell, by  When the bank fails to credit funds
order of and for the account of its deposited to the depositor’s account
customers, shares, evidences of [Simex v. CA, G.R. No. 88013 (1990)];
indebtedness and all types of securities;  When the bank itself fails to follow its own
(3) Make collections and payments for the rules and procedures on withdrawals [BPI
account of others and perform such other v. IAC, G.R. No. L-66826 (1988)];
services for its customers as are not  When the bank simply relies on the face of
incompatible with banking business; SPAs before lending P200K [RBCI v.
(4) Upon prior approval of the MB, act as Melecio-Yap, G.R. No. 178451 (2014)];
managing agent, adviser, consultant or  When the teller loses the passbook
administrator of investment [Consolidated Bank v. CA, G.R. No.
management/advisory/consultancy 114286 (2011)];
accounts; and  When the bank fails to compare the
(5) Rent out safety deposit boxes. [Sec. 53] signatures on the withdrawal slip and
signature cards. [PNB v. Pike, G.R. No.
4. Diligence required of banks in 157845 (2005)]
view of fiduciary nature of Under the doctrine of last clear chance, a bank
banking may be held liable for loss despite the
negligence of a depositor. Examples of these
The banking industry is impressed with public cases are the following:
interest. As such, the highest degree of  For disbursing funds to a dishonest
diligence and standards of integrity and employee despite the employee’s failure to
performance are required. Under Section 1001 strictly abide by the bank’s internal
of the Manual of Regulations for Banks, banks procedure. [Philippine Bank of Commerce
must adhere to the highest service standards, v. CA, G.R. No. 97626 (1997)]
Page 313 of 450

 Allowing the execution of a mortgage on  Current and savings deposits are loans to
parcels of land as security for a loan not a bank because the bank can use the same
owned by the prospective borrower. and they earn interest. [BPI vs. CA, G.R.
[Canlas v. CA, G.R. No. 112160 (2000)] No. 104612 (1994)]
 Crediting the deposit in favor of another  Money deposited is commingled with other
depositor, a check where the signature of money constituting a common fund.
the drawer was forged. [Westmont Bank v.
Ong, G.R. No. 132560 (2002)]. Irregular Deposits
Bank deposits are in the nature of irregular
5. Nature of Bank Funds and deposits. Therefore, Art. 1287 of the Civil
Code, which prohibits compensation when one
Bank Deposits of the debts arises from depositum, does NOT
apply. [Serrano vs. Central Bank, G.R. No. L-
The deposit is a contract of loan with the bank 30511 (1980)]
being lent money by the depositor. Under the
Civil Code provisions on loan, this means that
the money deposited with the bank becomes 6. Grant of Loans and Security
its property, which it is free to use, subject to Requirements
the condition that the depositor can demand
repayment, in the form of withdrawals, at any Ratio of net worth to total risk
time. assets
Quasi-deposits Concept: The minimum ratio which the net
 Funds placed with bank (as deposit worth of a bank must bear to its total risk assets
substitutes), but which are not in the nature which may include contingent accounts, i.e.,
of a deposit net worth: total risk assets. [Sec. 34]
 Must be on a with recourse basis
 As UB and KB no longer have to apply for General rule: A bank must conform to the risk-
authority to accept deposit substitutes, this based capital ratio prescribed by the MB.
may now be considered a core banking
function of those banks. Exceptions: The MB may alter or suspend
compliance with such ratio whenever
Creditor-Debtor Relationship necessary for a maximum period of 1 year.
The relationship between a depositor and a 1. In case of a bank merger or consolidation;
bank is that of a creditor and debtor in relation or
to the bank’s deposit functions [Gullas vs. PNB, 2. When a bank is under rehabilitation under
G.R. No. L-43191, (1935)] and not that of a program approved by the BSP; [Sec. 34]
depositor and depositary.
Purpose
The relationship being contractual in nature, A bank must not be allowed to expand the
mandamus is therefore not an available volume of its loans and investments in a
remedy. [Maclaring Lucman vs. Alimatar manner that is disproportionate to its net worth.
Malawi, G.R. No. 159794 (2006)] [Morales (2017)]
Simple Loan Effect of non-compliance

The contract between the bank and its 1. The MB may limit or prohibit the distribution
depositor is governed by the provisions of the of net profits by such bank and may require
NCC on simple loan. [Consolidated Bank and that part or all of the net profits be used to
Trust Corporation vs. CA, G.R. No. 138569 increase the capital accounts of the bank
(2003)]. until the minimum requirement has been
met.
Page 314 of 450

2. The MB may restrict or prohibit the group. The bank is prohibited from… placing
acquisition of major assets and the making many eggs in the basket of one client. [It] is a
of new investments by the bank, with the damage-control mechanism [and] a device for
exception of purchases of readily risk amelioration. [Morales (2017)]
marketable evidences of indebtedness of
the Republic of the Philippines and the BSP Basis for Determining Compliance
and any other evidences of indebtedness The basis for determining compliance with the
or obligations the servicing and repayment SBL is the total credit commitment of the bank
of which are fully guaranteed by the to the borrower. [Subsec. 35.1]
Republic of the Philippines, until the
minimum required capital ratio has been Inclusions in the Ceiling
restored. [Sec. 34] 1. The direct liability of the maker or acceptor
of paper discounted with or sold to such
Single borrower’s limit bank and the liability of a general indorser,
drawer or guarantor who obtains a loan or
General rule: The total loans, credit other credit accommodation from or
accommodations and guarantees that may be discounts paper with or sells papers to
extended by a bank to any person, partnership, such bank;
association, or corporation or other entity shall 2. In the case of an individual who owns or
at no time exceed 20% of the net worth of such controls a majority interest in a corporation,
bank. [Subsec. 35.1] partnership, association or any other entity,
the liabilities of said entities to such bank;
Exceptions 3. In the case of a corporation, all liabilities to
1. The MB otherwise prescribes for reasons such bank of all subsidiaries in which such
of national interest. [Subsec. 35.1] Now, corporation owns or controls a majority
the single borrower’s limit is 25% of the net interest; and
worth of the lending bank. 4. In the case of a partnership, association or
2. Wholesale lending activities of government other entity, the liabilities of the members
banks to participating institutions for re- thereof to such bank. [Subsec. 35.3]
lending to end-user borrowers: separate
limit of 35% net worth. [Sec. 362.f, Manual Guidelines on the Wholesale Lending of
of Regulations for Banks] Government Banks
1. It shall apply only to loans granted by
Increase of Limit participating financial institutions (PFIs) on
The MB may increase the limit prescribed by a wholesale basis for on-lending to end-
an additional 10% of the net worth, when: user borrowers;
1. The additional liabilities of any borrower are 2. It shall apply only to loan programs funded
adequately secured by trust receipts, by multilateral, international, or local
shipping documents, warehouse receipts development agencies, organizations, or
or other similar documents transferring or institutions, especially designed for
securing title; wholesale lending activities of government
2. Covering readily marketable, non- banks;
perishable goods; and 3. The end-user borrowers of the PFIs shall
3. Which must be fully covered by insurance. be subject to the 25% SBL, not the
[Subsec. 35.2] increased ceiling of 35%; and
4. Government banks shall observe
Purpose appropriate criteria for accrediting PFIs and
To prevent the bank from making excessive for the grant/renewal of credit lines to
loans and other credit accommodations to a accredited PFIs. [Sec. 362.f, Manual of
single borrower or corporate group, including Regulations for Banks]
guarantees for the account of such borrower or
Page 315 of 450

Exclusions from the Ceiling (Non-Risk 2. Shall he become a guarantor, endorser or

Loans) surety for loans from such bank to others,
Loans and other credit accommodations— or in any manner be an obligor or incur any
1. Secured by obligations of the BSP or of the contractual liability to the bank
Philippine Government;
2. Fully guaranteed by the government as to Exceptions [Sec. 36]:
the payment of principal and interest; 1. Valid insider lending;
3. Covered by assignment of deposits 2. Loans, credit accommodations and
maintained in the lending bank and held in guarantees extended by a cooperative
the Philippines; bank to its cooperative shareholders.
4. Under letters of credits to the extent
covered by margin deposits; and Requirements for Valid Insider Lending
5. Specified by the MB as non-risk items [Sec. 1. In the regular course of business;
35.5] 2. Upon terms not less favorable to the bank
than those offered to others;
Combination of liabilities 3. There is a written approval of the majority
The MB may prescribe the combination of the of all the directors of the bank, excluding
liabilities of subsidiary corporations or the director concerned;
members of the partnership, association, entity
or such individual under certain circumstances, Exception: Not required where granted to
including but not limited to any of the following officers under a fringe benefit plan
situations: approved by the BSP.
1. The parent-corporation, partnership,
association, entity or individual guarantees 4. The required approval shall be entered
the repayment of the liabilities; upon the record of the bank and a copy of
2. The liabilities were incurred for the such entry shall be transmitted forthwith to
accommodation of the parent corporation the appropriate supervising and examining
or another subsidiary or of the partnership department of the BSP; and
or association or entity or such individual; 5. Limited to an amount equivalent to the
or DOSRI borrower’s unencumbered deposits
3. The subsidiaries though separate entities and book value of his paid-in capital
operate merely as departments or divisions contribution in the bank [Sec. 36]
of a single entity. [Subsec. 35.4]
Exceptions [Sec. 36, GBL]:
Loans and other credit accommodations, 1. Non-risk items; and
deposits maintained with, and usual 2. Loans in the form of fringe benefits.
guarantees by a bank to any other bank or non-
bank entity, whether locally or abroad, shall be Waiver of Bank Secrecy
subject to the prescribed limits. [Subsec. 35.6] A DOSRI borrower is required to waive the
secrecy of his deposits of whatever nature in all
Restrictions on bank exposure to banks in the Philippines. [Sec. 26, NCBA]
directors, officers, stockholders,
and their related interests Purpose
The general policy behind DOSRI rules is to
level the lending field between the “insiders”
General rule [Sec. 36]: No director or officer of
and the “outsiders”. The objective is to prevent
any bank:
the bank from becoming a captive source of
1. Shall, directly or indirectly, for himself or as
finance for DOSRI. [Morales (2017)]
the representative or agent of others,
borrow from such bank, nor
Page 316 of 450

Prohibited acts of borrowers stipulate that the rate of interest agreed upon
may be increased in the event that the
No borrower of a bank shall: applicable maximum rate of interest is
(1) Fraudulently overvalue property offered as increased by the Monetary Board.
security for a loan or other credit
accommodation from the bank; Provided That:
(2) Furnish false or make misrepresentation or (1) Such stipulation shall be valid only if there
suppression of material facts for the purpose is also a stipulation in the agreement that
of obtaining, renewing, or increasing a loan the rate of interest agreed upon shall be
or other credit accommodation or extending reduced in the event that the applicable
the period thereof; maximum rate of interest is reduced by law
(3) Attempt to defraud the said bank in the event or by the Monetary Board; and
of a court action to recover a loan or other (2) The adjustment in the rate of interest
credit accommodation; or agreed upon shall take effect on or after the
(4) Offer any director, officer, employee or effectivity of the increase or decrease in the
agent of a bank any gift, fee, commission, or maximum rate of interest. [Sec. 305,
any other form of compensation in order to Manual of Regulations for Banks]
influence such persons into approving a loan
or other credit accommodation application. 7. Penalties for violations
[Sec. 55.2]
Fine, imprisonment
Floating interest rates and
Escalation Clauses Unless otherwise herein provided, the violation
of any of the provisions of the GBL shall be
Floating Interest Rates subject to Sections 34, 35, 36 and 37 of the
NCBA. [Sec.66]
The rate of interest chargeable on availments
under the BSP liquidity window to banks shall Refusal to make reports or permit for
be the rate equivalent to the reference rate for examination
ninety (90) days determined and announced by Any officer, owner, agent, manager, director or
the BSP for floating rate loans, plus or minus a officer-in-charge of any institution subject to the
rate to be determined by the BSP on the basis supervision or examination by the BSP within
of the prevailing monetary situation. the purview of the NCBA who, being required
in writing by the MB or by the head of the
The additional or discount rate established for supervising and examining department
any given time shall be made public by the BSP willfully refuses to file the required report or
and applied uniformly to all borrowers during permit any lawful examination into the affairs
that period. of such institution shall be punished by:
(1) A fine of not less than Fifty thousand pesos
The additional rate to be imposed over and (P50,000) nor more than One hundred
above the reference rate shall not be less than thousand pesos (P100,000); or
two (2) percentage points, with the applicable (2) Imprisonment of not less than one (1) year
additional rate to be determined by the BSP on nor more than five (5) years; or
the basis of the prevailing monetary situation. (3) Both fine and imprisonment, in the
[Sec. 284, Manual of Regulations for Banks] discretion of the court. [Sec. 34, NCBA]
Escalation Clause False Statement

The willful making of a false or misleading
Parties to an agreement pertaining to a loan or statement on a material fact to the MB or to
forbearance of money, goods or credits may the examiners of the BSP shall be punished by:
Page 317 of 450

(1) A fine of not less than One hundred (c) suspension of lending or foreign exchange
thousand pesos (P100,000) nor more than operations or authority to accept new
Two hundred thousand pesos (P200,000); deposits or make new investments;
or (d) suspension of interbank clearing privileges;
(2) Imprisonment of not more than five (5) and/or
years; (e) revocation of quasi-banking license. [Sec.
(3) Both fine and imprisonment, at the 37, NCBA]
discretion of the court. [Sec. 35, NCBA]
Such administrative sanction may be imposed
Proceedings Upon Violation of This Act and for:
Other Banking Laws, Rules, Regulations, (1) Any willful violation of its charter or bylaws,
Orders or Instructions willful delay in the submission of reports or
Whenever a bank or quasi-bank, or whenever publications thereof as required by law,
any person or entity willfully violates this Act rules and regulations;
or other pertinent banking laws being (2) Any refusal to permit examination into the
enforced or implemented by the Bangko affairs of the institution; any willful making
Sentral or any order, instruction, rule or of a false or misleading statement to the
regulation issued by the Monetary Board, the MB or the appropriate supervising and
person or persons responsible for such examining department or its examiners;
violation shall unless otherwise provided in this (3) Any willful failure or refusal to comply with,
Act be punished by: or violation of, any banking law or any
(1) A fine of not less than Fifty thousand pesos order, instruction or regulation issued by
(P50,000) nor more than Two hundred the MB, or any order, instruction or ruling
thousand pesos (P200,000); or by the BSP Governor; or
(2) Imprisonment of not less than two (2) years (4) Any commission of irregularities, and/or
nor more than ten (10) years; or conducting business in an unsafe or
(3) Both fine and imprisonment at the unsound manner as may be determined by
discretion of the court. the MB.
Administrative Sanctions on Banks and Suspension or removal of director

Quasi-banks or officer
Without prejudice to the criminal sanctions If the offender is a director or officer of a bank,
against the culpable persons provided in quasi-bank or trust entity, the MB may also
Sections 34, 35, and 36 of the NCBA, the MB suspend or remove such director or officer.
may, at its discretion, impose upon any bank or [Sec.66]
quasi-bank, their directors and/or officers, the
following administrative sanctions, whenever Dissolution of bank
applicable:
The bank itself may be dissolved by quo
(a) fines in amounts as may be determined by warranto proceedings instituted by the Solicitor
the MB to be appropriate, but in no case to General. [Sec. 66]
exceed Thirty thousand pesos (P30,000) a
day for each violation, taking into
consideration the attendant circumstances,
such as the nature and gravity of the
violation or irregularity and the size of the
bank or quasi-bank;
(b) suspension of rediscounting privileges or
access to BSP credit facilities;
Page 318 of 450

a. The members are to be appointed by

D. PHILIPPINE DEPOSIT the President of the Philippines from a
INSURANCE shortlist prepared by the Governance
Commission for GOCCs pursuant to
CORPORATION ACT R.A. 10149.
• The appointive directors shall serve
[R.A. 3591(“PDIC Charter”), as amended] for a term of 6 years unless sooner
removed for cause and shall be
1. Basic Policy subject to only 1 reappointment:
Provided, That –
The Philippine Deposit Insurance (1) Of those first appointed, the
Corporation (“PDIC”) shall, as a basic policy, first 2 appointees shall serve
promote and safeguard the interests of the for a period of 3 years
depositing public by providing insurance (2) The appointive director shall
coverage on all insured deposits and helping continue to hold office until
maintain a sound and stable banking system. the successor is appointed.
[Sec. 1, PDIC Charter, as amended by R.A. No. • An appointive director may be
10846] nominated by the Governance
Commission for GOCCs for
2. Powers and functions of the reappointment by the President
(3) Only if one obtains a
PDIC; prohibitions performance score of above
average or its equivalent or
Board of Directors higher in the immediately
The powers and functions of PDIC shall be preceding year of tenure as
vested in, and exercised by, a Board of appointive director
Directors which shall be composed of 7 (4) Based on the performance
members as follows: criteria for appointive
(a) The Secretary of Finance shall be the ex directors of PDIC. [Sec. 3,
officio chairman of the Board without PDIC Charter, as amended
compensation by R.A. No. 10846]
(b) The Governor of the Bangko Sentral ng
Pilipinas (“BSP”) who shall be ex officio Appointment to any vacancy shall be only for
member of the Board without the unexpired term of the predecessor
compensation. [PDIC Charter, as amended pursuant to R.A. 10149. [PDIC Charter, as
by R.A. No. 9302] amended by R.A. No. 10846]
(c) The President of PDIC
• The President of PDIC shall be Powers and Functions of PDIC
appointed by the President of the (a) PDIC shall be entitled to the free use of
Philippines from a shortlist prepared by Philippine mail in the same manner as the
the Governance Commission for other offices of the national government.
Government Owned or Controlled (b) The Board of Directors shall appoint
Corporations (“GOCCs”), pursuant to examiners who shall have power, on behalf
R.A. 10149 of PDIC, to examine any insured bank or
• The President of PDIC shall serve on a any bank making application to become an
full-time basis for a term of 6 years. insured bank
• The President of PDIC shall also serve • Each such examiner shall have power
as the Vice Chairman of the Board. to make a thorough examination of all
[PDIC Charter, as amended by R.A. the affairs of the bank
No. 10846] • In doing so the examiner shall have
(d) 4 members from the private sector power:
Page 319 of 450

(5) To administer oaths; become directors and officers of any bank

(6) To examine and take and preserve the and banking institution and of any entity
testimony of any of the officers and agents related to such institution –
thereof; and 1. In connection with financial assistance
(7) To compel the presentation of books, extended by PDIC to such institution;
documents, papers, or records necessary and
in his judgment to ascertain the facts 2. When in the opinion of the Board, it is
relative to the condition of the bank appropriate to make such a designation
• The examiner shall make a full and to protect the interest of PDIC
detailed report of the condition of the 3. Receiving any gift or thing of value from
bank to PDIC. any officer, director or employee
(c) The Board of Directors shall appoint claim thereof:
agents who shall have power to 4. Revealing in any manner, except under
investigate and examine all claims for order of the court or authorized herein
insured deposits and transferred deposits. in such condition or business of any
Each claim agent shall have power – such institution.
• To administer oaths; and • The prohibition shall not be held to apply to
• To examine under oath and take and the giving of information to the Board of
preserve the testimony of any person Directors or to any person authorized by
relating to such claims. neither of them in writing to receive such
(d) PDIC may appoint or hire persons or information. [Sec. 10, PDIC Charter, as
entities of recognized competence in amended by R.A. 7400 and R.A. 10846]
forensic and fraud investigations as its
agents to conduct investigations on Prohibition on Borrowing
frauds, irregularities and anomalies From Institutions under Examination
committed in banks, based on: Borrowing from the particular bank or banking
• Reports of examination conducted by institution in which they are assigned, or are
PDIC and BSP; or conducting an examination by the ff. is
• Complaints from depositors or from prohibited:
other government agency. • Examiners; and
(e) PDIC shall have access to reports of • Other personnel of the examination
examination made by, and reports of departments of PDIC
condition made to the BSP or its
appropriate supervising departments, From Institutions Undergoing any Action
Provided That – General Rule: All personnel of other
• PDIC shall use the reports and findings departments, offices or units of PDIC shall
under similar terms and conditions likewise be prohibited from borrowing from any
prescribed by applicable laws on the bank or banking institution during the period of
BSP. time that a transaction of such institution with
[Sec. 10, PDIC Charter, as amended by R.A. the corporation is being:
7400, R.A. 9302, and R.A. 10846] 1. Evaluated,
2. Processed; or
Prohibitions 3. Acted upon by such personnel
Personnel of PDIC are hereby prohibited from:
a. Being an officer, director, consultant, Exception: Certain personnel may be
employee or stockholder, directly or exempted from the prohibition, as the Board
indirectly, of any bank or banking institution may, at its discretion, indicate the position
except as otherwise provided in the PDIC levels or functional groups to which the
Charter; prohibition is applicable.
• Exception: Members of the Board of
Directors and other personnel of PDIC may
Page 320 of 450

From Any Institution Note: Definition of “deposit” under Sec. 5(g)

Borrowing by all full-time personnel of PDIC
from any bank or banking institution shall be: Foreign currency deposits are also insured by
a) Secured and disclosed to the Board; and PDIC pursuant to R.A. 6426 (“An act instituting
b) Subject to such further rules and a foreign currency deposit system in the
regulations as the Board may prescribe. Philippines, and for other purposes”).
[Sec. 10, PDIC Charter, as amended by
R.A. 7400 and R.A. 10846] Depositors may receive payment in the same
currency in which the insured deposit is
3. Concept of insured deposits denominated. [Sec. 9, R.A. 6426]
Insured Deposit Exception: Deposits in overseas branches of

The term “insured deposit” means the amount local banks are not insured with PDIC, as PDIC
due to any bona fide depositor for legitimate insurance only covers deposits in banks
deposits in an insured bank as of the date of located in the Philippines.
closure but not to exceed P500,000.00. [Sec.
5(j)] However, any insured bank with a branch
outside the Philippines, subject to the approval
Adjusting the Maximum Deposit Insurance of the Board of Directors, may elect to include
Cover for insurance its deposit obligations payable at
The maximum deposit insurance coverage is such branch. [Sec. 5 (g), PDIC Charter, as
Five hundred thousand pesos (P500,000.00). amended by R.A. 9576 and R.A. 10846]
However, in case of a condition that threatens Commencement of liability

the monetary and financial stability of the
banking system that may have systemic PDIC shall commence the determination of
consequences, as defined in Section 22 of the insured deposits due the depositors of a closed
PDIC Charter, as determined by the Monetary bank upon its actual takeover of the closed
Board, the maximum deposit insurance cover bank.
may be adjusted –
• In such amount, PDIC shall give notice to the depositors of the
• For such a period, and/or closed bank of the insured deposits due them
• For such deposit products, by whatever means deemed appropriate by the
- As may be determined by a Board of Directors: Provided, That –
unanimous vote of the Board of a. PDIC shall publish the notice once a week
Directors in a meeting called for the for at least three (3) consecutive weeks in
purpose, chaired by the Secretary of a newspaper of general circulation; or
Finance b. When appropriate, it shall be published in a
- Subject to the approval of the newspaper circulated in the community or
President of the Philippines. [Sec.5(j)] communities where the closed bank or its
branches are located. [Sec. 18, R.A. 9302]
4. Liability to depositors Deposit accounts not entitled to
payment
Deposit liabilities required to be
PDIC shall not pay deposit insurance for the
insured with the PDIC following accounts or transactions:
a. Investment products such as bonds and
General Rule: The deposit liabilities of any securities, trust accounts, and other similar
bank shall be insured with PDIC. [Sec. 6, PDIC instruments;
Charter, as amended by R.A. 10846]
Page 321 of 450

b. Deposit accounts or transactions which are In PDIC v. Gidwani, 867 SCRA 581 (2018),
fictitious or fraudulent, as determined by Gidwani used his helpers and rank-and-file
PDIC; employees to create several deposit accounts
c. Deposit accounts or transactions ostensibly held by them but actually beneficially
constituting, and/or emanating from, owned by him, for the purpose of increasing his
unsafe and unsound banking practice/s deposit insurance cover. The Supreme Court
a. As determined by PDIC, in consultation held that “the entitlement to a deposit insurance
with the BSP; is based not on the number of bank accounts
b. After due notice and hearing, and held, but on the number of beneficial owners.”
publication of a cease and desist order In this case, there was only one beneficial
issued by PDIC against such deposit owner of the several bank accounts (namely,
accounts or transactions; and Gidwani); hence, he was only entitled to
d. Deposits that are determined to be the P250,000 (then the maximum deposit
proceeds of an unlawful activity as defined insurance cover under the PDIC Charter) for all
under the Anti-Money Laundering Act the deposit accounts.
(Republic Act 9160, as amended). [Sec.
5(g), PDIC Charter, as amended by R.A. Note: No owner/holder of any passbook,
9576 and R.A. 10846] certificate of deposit or other evidence of
deposit shall be recognized as a depositor
Funds placed in the Manila Branch by the head entitled to the rights provided in the PDIC
office or the latter’s other offshore branches are Charter unless the same is determined by
not third-party deposits that are insurable with PDIC to be an authentic document or record of
PDIC, since the Manila Branch and its head the issuing bank. [Sec. 5(j)]
office and such other branches comprise only
one juridical entity; hence, there is no Calculation of liability
depositary-depositor relationship between or
among them [PDIC v. Citibank, N.A., 669 i. Per depositor, per capacity rule
SCRA 191 (2012)]. In determining such amount due to any
depositor, there shall be added together all
Extent of liability deposits in the bank maintained in the same
right and capacity for his or her benefit either in
PDIC covers only the risk of a bank closure his or her own name or in the name of others.
ordered by the Monetary Board. Thus, bank [Sec. 3, R.A. 9576]
losses due to theft, fire, closure by reason of
strike or existence of public disorder, revolution ii. Joint accounts
or civil war, are not covered by PDIC. A joint account regardless of whether the
conjunction ‘and’, ‘or’, ‘and/or’ is used, shall be
Determination of insured deposits insured separately from any individually-
owned deposit account: Provided, That –
The amount of the insured deposit shall be
determined according to such regulations as
the Board of Directors may prescribe.
In determining such amount due to any

depositor, there shall be added together all
deposits in the bank maintained in the same
right and capacity for his or her benefit either in
his or her own name or in the name of others.
[Sec. 5(j)]
Page 322 of 450

insured deposit. [Sec. 19, PDIC Charter, as

Holder of Account Division of
amended by R.A. 10846]
Maximum Insured
Deposit
iv. Effect of payment of insured deposits
If the account is held GR: The maximum
jointly by two or more insured deposit shall PDIC, upon payment of any depositor, shall be
natural persons, or by be divided into as subrogated to all rights of the depositor against
two or more juridical many equal shares the closed bank to the extent of such payment.
persons or entities as there are
individuals, juridical Such subrogation shall include the right on the
persons or entities. part of PDIC to receive the same dividends and
payments from the –
EX: Unless a different 1. Proceeds of the assets of such closed
sharing is stipulated bank; and
in the document of 2. Recoveries on account of stockholders’
deposit liability, as would have been payable to the
depositor on a claim for the insured
If the account is held The maximum deposits.
by a juridical person insured deposit shall
or entity jointly with be presumed to Note: However, such depositor shall retain his
one or more natural belong entirely to claim for any uninsured portion of his deposit.
persons such juridical person [Sec. 20, PDIC Charter, as amended by R.A.
or entity. 10846]
The aggregate of the interest of each co-owner v. Payment of insured deposits as

over several joint accounts, whether owned by preferred credit
the same or different combinations of
individuals, juridical persons or entities, shall All payments by PDIC of insured deposits in
likewise be subject to the maximum insured closed banks –
deposit of P500,000.00. [Sec. 5(j)] 1. Partake of the nature of public funds; and
2. As such, must be considered a preferred
iii. Mode of payment credit similar to taxes due to the National
Whenever an insured bank shall have been Government in the order of preference
closed by the Monetary Board pursuant to under Article 2244 of the New Civil Code
Section 30 of R.A. 7653, payment of the a. This preference shall be likewise
insured deposits on such closed bank shall be effective upon liquidation
made by PDIC as soon as possible either: proceedings already commenced
(a) by cash; or and pending as of the approval of
(b) by making available to each depositor a the PDIC Charter, where no
transferred deposit in another insured bank distribution of assets has been
in an amount equal to insured deposit of made [Sec. 20, PDIC Charter, as
such depositor. amended by R.A. 10846].
b. Note: Taxes due to the National
Provided, however, That PDIC, in its discretion, Government are ranked 9th out of
may: the 14 enumerated ordinary
1. Require proof of claims to be filed before preferred credits under Art. 2244
paying the insured deposits; and
2. Require final determination of a court of Implications of Status as Ordinary
competent jurisdiction before paying such Preferred Credit
claim, in any case where PDIC is not (1) Ordinary preferred credits enjoy a
satisfied as to the viability of a claim for an preference, excluding the credits that are
Page 323 of 450

later in order, but only as against the value (c) Thereafter, PDIC shall be discharged from
of the property not otherwise subjected to any liability on the insured deposit. [Sec.
any special preferred credit. 18, R.A. 9302]
(2) Does not create a lien on specific property;
(3) Creates rights in favor of certain creditors Note: PDIC may waive the
to have the free property of the debtor abovementioned two-year period.
applied in accordance with an order of
preference. [Art. 2244, NCC; Somera] (a) Examination of banks and deposit
accounts
vi. Failure to settle claim of insured
depositor Power to Conduct Examination of Banks
PDIC, as a corporate body, shall have the
General Rule: The failure to settle the claim, power to conduct examination of banks with
within six (6) months from the date of filing prior approval of the Monetary Board,
of claim for insured deposit, shall, upon Provided, That –
conviction, subject the directors, officers or - No examination can be conducted within
employees of PDIC responsible for the delay, twelve (12) months from the last
to imprisonment from six (6) months to one examination date;
year, where such failure was due to – - However, PDIC may conduct a special
1. Grave abuse of discretion, examination, in coordination with the BSP,
2. Gross negligence, as the Board of Directors:
3. Bad faith, or a. By an affirmative vote of a majority
4. Malice of all of its members; and
b. If there is a threatened or
Exception: The six-month period shall not impending closure of a bank [Sec.
apply if the validity of the claim requires the 9(8), PDIC Charter, as amended by
resolution of issues of facts and or law – R.A. 9576 and R.A. 10846]
1. By another office, body or agency; or
2. By PDIC together with such other office, Power to Inquire into Deposit Accounts
body or agency [Sec. 19, PDIC Charter, as PDIC and/or the BSP, may inquire into or
amended by R.A. 10846] examine deposit accounts and all information
related thereto
vii. Failure of depositor to claim insured 1. In case there is a finding of unsafe or
deposits unsound banking practice
2. Notwithstanding the provisions of:
If the depositor in the closed bank shall fail to a. Republic Act No. 1405, as amended
claim his insured deposits with PDIC within b. Republic Act No. 6426, as amended,
two (2) years from actual takeover of the c. Republic Act No. 8791, and
closed bank by the receiver, or does not d. Other laws
enforce his claim filed with the corporation
within two (2) years after the two-year To avoid overlapping of efforts, the
period to file a claim: examination of banks and deposit accounts
(a) All rights of the depositor against shall maximize the efficient use of the relevant
PDIC with respect to the insured deposit reports, information, and findings of the BSP,
shall be barred; which it shall make available to PDIC. [Sec.
(b) However, all rights of the depositor against 9(8), PDIC Charter, as amended by R.A. 9576
the closed bank and its shareholders or the and R.A. 10846]
receivership estate to which PDIC may
have become subrogated, shall thereupon
revert to the depositor.
Page 324 of 450

Refusal to Permit Examination (d) A fine of not less than Fifty thousand pesos
Any unjustified refusal to permit examination (P50,000.00) but not more than Two million
and audit of the deposit records or the affairs of pesos (P2,000,000.00); or
the institution shall, at the discretion of the (e) Both imprisonment and the fine. [Sec.
court, be punished by imposing upon any 26(f)(1)(e), PDIC Charter, as amended by
director, officer, employee or agent of a bank: R.A. 10846]
(a) The penalty of imprisonment of not less
than six (6) years but not more than twelve (c) Prohibition against issuances of
(12) years; or temporary restraining orders
(b) A fine of not less than Fifty thousand pesos
(P50,000.00) but not more than Two million The actions of the Board of Directors of PDIC,
pesos (P2,000,000.00); or namely, determining and prescribing, by
(c) Both imprisonment and the fine. [Sec. regulations, what are considered as deposit
26(f)(1)(b), PDIC Charter, as amended by liabilities of the bank under Section 5(g) shall
R.A. 10846] be final and executory. [Sec.5(g), PDIC
Charter, as amended by R.A. No. 10846]
(b) Prohibition against splitting of
deposits Such actions may only be restrained or set
aside by the Court of Appeals, upon
Splitting of Deposits appropriate petition for certiorari on the ground
Occurs whenever a deposit account with an that –
outstanding balance of more than the statutory a. The action was taken in excess of
maximum amount of insured deposit, jurisdiction; or
maintained under the name of natural or b. The action was taken with such grave
juridical persons, is broken down and abuse of discretion as to amount to a lack
transferred into two or more accounts – or excess of jurisdiction.
In the name/s of natural or juridical persons or The petition for certiorari may only be filed
entities who have no beneficial ownership on within thirty (30) days from notice of denial of
transferred deposits in their names; claim for deposit insurance. [Sec.5(g), PDIC
Either: Charter, as amended by R.A. No. 10846]
- Within one hundred twenty (120) days
immediately preceding a bank holiday; or 5. Concept of bank resolution
- During a bank-declared bank holiday, or
- Within one hundred twenty (120) days Definition
immediately preceding a closure order The term resolution refers to the actions
issued by the Monetary Board of the BSP undertaken by PDIC under Section 11 of the
for the purpose of availing of the maximum PDIC Charter to:
deposit insurance coverage. [Sec. a. Protect depositors, creditors and the DIF;
26(f)(1)(e), PDIC Charter, as amended by b. Safeguard the continuity of essential
R.A. 10846] banking services or maintain financial
stability; and
Penalty for Splitting of Deposits c. Prevent deterioration or dissipation of bank
The splitting of deposits or creation of fictitious assets. [Sec.5(s), PDIC Charter, as
or fraudulent loans or deposit accounts shall, at amended by R.A. No. 10846]
the discretion of the court, be punished by
imposing upon any director, officer, employee
or agent of a bank:
(a) The penalty of imprisonment of not less
than six (6) years but not more than twelve
(12) years; or
Page 325 of 450

Grounds for the Resolution of a Bank Failure of Prompt Corrective Action

PDIC, in coordination with the BSP may PDIC, its duly authorized officers or
commence the resolution of a bank under the employees, may examine, inquire or look
PDIC Charter upon: into the deposit records of a bank when
(a) Failure of prompt corrective action as there is a failure of prompt corrective action as
declared by the Monetary Board; or declared by the Monetary Board due to capital
(f) Request by a bank to be placed under deficiency.
resolution. [Sec. 11(a), PDIC Charter, as
amended by R.A. 10846] However, such authority may not be exercised
when such failure is due to grounds other than
The Role of the PDIC in Bank Resolution capital deficiency.
PDIC shall:
A. Inform the bank of its eligibility for entry into For this purpose, banks their officers and
resolution. [Sec. 11(a), PDIC Charter, as employees are hereby mandated to disclose
amended by R.A. 10846] and report deposit account information in said
B. Have the authority to inquire and monitor bank to PDIC or its duly authorized officers and
the status of banks under prompt corrective employees. [Sec. 11(c), PDIC Charter, as
action. [Sec. 11(b), PDIC Charter, as amended by R.A. 10846]
amended by R.A. 10846]
C. Determine whether the bank may be Obligations of the Bank Undergoing
resolved through the purchase of all its Resolution
assets and assumption of all its liabilities, The stockholders, directors, officers or
or merger or consolidation with, or its employees of the bank shall have the following
acquisition, by a qualified investor obligations:
a. Within a period of one hundred eighty (1) Ensure bank compliance with the terms
(180) days from a bank's entry into and conditions prescribed by PDIC for the
resolution resolution of the bank;
b. Through the affirmative vote of at least (2) Cause the engagement, with the consent of
five (5) members of the PDIC Board. PDIC, of an independent appraiser or
[Sec. 11(e), PDIC Charter, as amended auditor for the purpose of determining the
by R.A. 10846] valuation of the bank consistent with
generally accepted valuation standards;
Note: If PDIC determines that the bank (3) Ensure prudent management and
may not be resolved, the Monetary administration of the bank's assets,
Board may act in accordance with liabilities and records; and
Section 30 of Republic Act No. 7653 or (4) Cooperate with PDIC in the conduct or
the New Central Bank Act. [Sec. 11(i), exercise of any or all of its authorities under
PDIC Charter, as amended by R.A. the PDIC Charter and honor in good faith
10846] its commitment or undertaking with PDIC
on the resolution of the bank. [Sec. 11(d),
The Role of the BSP in Bank Resolution PDIC Charter, as amended by R.A. 10846]
The BSP shall:
a. Inform PDIC of the initiation of prompt 6. Role of the PDIC in relation to
corrective action on any bank; and
b. Be authorized to share with PDIC all
banks in distress
information, agreements or documents,
including any order of the Monetary Board, Closure and takeover
in relation to the prompt corrective action.
Whenever a bank is ordered closed by the
Monetary Board, the Corporation shall:
(1) Be designated as receiver; and
Page 326 of 450

(2) Proceed with the takeover and liquidation generally the PDIC. [Sec. 29, R.A. 7653, as
of the closed bank in accordance with the amended]
PDIC Charter.
Note: The designation of a conservator is not a
For this purpose, banks closed by the Monetary precondition to the designation of a receiver.
Board shall no longer be rehabilitated. [Sec. 12, [Sec. 30, R.A. 7653, as amended]
PDIC Charter, as amended by R.A. No. 10846]
Receivership
Designation of PDIC as Receiver
Upon the designation of PDIC as receiver of a Grounds
closed bank, it shall: The Monetary Board may summarily, and
(1) Serve a notice of closure to the highest- without need for prior hearing, forbid the
ranking officer of the bank present in the institution from doing business in the
bank premises; or Philippines and designate the PDIC as
(2) Post the notice of closure in the bank receiver of the banking institution whenever –
premises or on its main entrance, in the
absence of such officer. Upon report of the head of the supervising or
examining department, the Monetary Board
Closure and Takeover of Bank finds that a bank or quasi-bank:
The closure of the bank shall be deemed (a) Is unable to pay its liabilities as they
effective upon the service of the notice of become due in the ordinary course of
closure. business: Provided, That this shall not
include inability to pay caused by
Thereafter, the receiver shall takeover the extraordinary demands induced by
bank and exercise the powers of the receiver financial panic in the banking community;
as provided in the PDIC Charter. [Sec.14(a), (b) Has insufficient realizable assets, as
PDIC Charter, as amended by R.A. No. 10846] determined by the BSP, to meet its
liabilities; or
Conservatorship (c) Cannot continue in business without
involving probable losses to its depositors
Grounds for Appointment of a Conservator or creditors; or
Whenever, on the basis of a report submitted (d) Has willfully violated a cease and desist
by the appropriate supervising or examining order under Section 37 of the New Central
department, the Monetary Board finds that a Bank Act that has become final, involving
bank or quasi-bank is: acts or transactions which amount to fraud
a) In a state of continuing inability; or or a dissipation of the assets of the
b) Unwilling to maintain a condition of liquidity institution; in which cases,
deemed adequate to protect the interest of
depositors and creditors. [Sec. 29, R.A. Note: For a quasi-bank, any person of
7653, as amended] recognized competence in banking or
finance may be designated as receiver.
The designation of a conservator shall be [Sec. 30, R.A. 7653, as amended]
vested exclusively in the Monetary Board.
[Sec. 30, R.A. 7653, as amended] Specific Powers of the PDIC as Receiver
In addition to the powers of a receiver provided
Qualifications of a Conservator under existing laws (see Sec. 30, R.A. 7653),
The conservator should be: PDIC, as receiver of a closed bank, is
(1) Competent and knowledgeable in bank empowered to:
operations and management; (1) Represent and act for and on behalf of the
(2) A natural person to be appointed by the closed bank;
Monetary Board. In contrast, the receiver is
Page 327 of 450

(2) Gather and take charge of all the assets, (12) Utilize available funds of the bank,
records and affairs of the closed bank, and including funds generated by the receiver
administer the same for the benefit of its from the conversion of assets to pay for
creditors; reasonable costs and expenses incurred
(3) Convert the assets of the closed bank to for the preservation of the assets, and
cash or other forms of liquid assets, as far liquidation of, the closed bank, without
as practicable; need for approval of the liquidation court;
(4) Bring suits to enforce liabilities of the For banks with insufficient funds, PDIC is
directors, officers, employees, agents of authorized to advance the foregoing costs
the closed bank and other entities related and expenses, and collect payment, as and
or connected to the closed bank or to when funds become available.
collect, recover, and preserve all assets, (13) Charge reasonable fees for the
including assets over which the bank has liquidation of the bank from the assets of
equitable interest; the bank: Provided, That payment of these
(5) Appoint or hire persons or entities of fees, including any unpaid advances under
recognized competence in banking, the immediately preceding paragraph, shall
finance, asset management or remedial be subject to approval by the liquidation
management, as its deputies, assistants or court;
agents, to perform such powers and (14) Distribute the available assets of the
functions of PDIC as receiver of the closed closed bank, in cash or in kind, to its
bank, or assist in the performance thereof; creditors in accordance with the Rules on
(6) Appoint or hire persons or entities of Concurrence and Preference of Credits
recognized competence in forensic and under the Civil Code or other laws;
fraud investigations; (15) Dispose records of the closed bank that
(7) Pay accrued utilities, rentals and salaries of are no longer needed in the liquidation in
personnel of the closed bank for a period accordance with guidelines set by the PDIC
not exceeding three (3) months, from Board of Directors, notwithstanding the
available funds of the closed bank; laws on archival period and disposal of
(8) Collect loans and other claims of the closed records; and
bank and for this purpose, modify, (g) Exercise such other powers as are inherent
compromise or restructure the terms and and necessary for the effective discharge
conditions of such loans or claims as may of the duties of PDIC as receiver.
be deemed advantageous to the interests [Sec.13(b), PDIC Charter, as added by
of the creditors of the closed bank; R.A. No. 10846]
(9) Hire or retain private counsel as may be
necessary; Liquidation
(10) Borrow or obtain a loan, or mortgage,
pledge or encumber any asset of the closed The receiver is authorized to adopt and
bank, when necessary to preserve or implement, without need of consent of the
prevent dissipation of the assets, or to stockholders, board of directors, creditors or
redeem foreclosed assets of the closed depositors of the closed bank, any or a
bank, or to minimize losses to its depositors combination of the following modes of
and creditors; liquidation:
(11) If the stipulated interest rate on (a) Conventional liquidation; and
deposits is unusually high compared with (h) Purchase of assets and/or assumption of
prevailing applicable interest rates, PDIC liabilities [Sec.13(a), PDIC Charter, as
as receiver, may exercise such powers amended by R.A. No. 10846]
which may include a reduction of the
interest rate to a reasonable rate: Provided,
That any modifications or reductions shall
apply only to earned and unpaid interest;
Page 328 of 450

The placement of a bank under liquidation shall o The proceeds in excess of the
have the following effects: amount secured shall be
(1) On the corporate franchise or existence: returned by the BSP to the
Upon placement by the Monetary Board of receiver.
a bank under liquidation, it shall continue - Any preliminary attachment or
as a body corporate until the termination of garnishment on any of the assets of the
the winding-up period under Section 16 of closed bank existing at the time of
the PDIC Charter. closure shall not give any preference to
- The receiver shall represent the closed the attaching or garnishing party.
bank in all cases by or against the - Upon motion of the receiver, the
closed bank and prosecute and defend preliminary attachment or garnishment
suits by or against it. shall be lifted and/or discharged.
- In no case shall the bank be reopened (4) On labor relations: Notwithstanding the
and permitted to resume banking provisions of the Labor Code, the
business after being placed under employer-employee relationship between
liquidation. the closed bank and its employees shall be
(2) On the powers and functions of its deemed terminated upon service of the
directors, officers and stockholders: notice of closure of the bank in accordance
The powers, voting rights, functions and with the PDIC Charter.
duties, as well as the allowances, - Payment of separation pay or benefits
remuneration and perquisites of the provided for by law shall be made from
directors, officers, and stockholders of such available assets of the bank in
bank are terminated upon its closure. accordance with the Rules on
- Accordingly, the directors, officers, and Concurrence and Preference of Credits
stockholders shall be barred from under the Civil Code or other laws.
interfering in any way with the assets, (5) On contractual obligations: The receiver
records, and affairs of the bank. may cancel, terminate, rescind or repudiate
- The receiver shall exercise all any contract of the closed bank
authorities as may be required to - If the contract is not necessary for the
facilitate the liquidation of the closed orderly liquidation of the bank; or
bank for the benefit of all its creditors. - If the contract is grossly
(3) On the assets: Upon service of notice of disadvantageous to the closed bank; or
closure as provided in Section 14 of the - For any ground provided by law.
PDIC Charter, all the assets of the closed (6) On interest payments: The liability of a
bank shall he deemed in custodia legis in bank to pay interest on deposits and all
the hands of the receiver, and as such, other obligations as of closure shall cease
these assets may not be subject to upon its closure by the Monetary Board
attachment, garnishment, execution, levy without prejudice to the first paragraph of
or any other court processes. Section 85 of Republic Act No. 7653 (the
- A judge, officer of the court or any New Central Bank Act).
person who shall issue, order, process - Thw receiver shall have the authority,
or cause the issuance or without need for approval of the
implementation of the garnishment liquidation court, to assign, as payment
order, levy, attachment or execution, to secured creditors, the bank assets
shall be liable under Section 27 of the serving as collaterals to their respective
PDIC Charter. loans up to the extent of the
- Collaterals securing the loans and outstanding obligations, including
advances granted by the BSP shall not interest as of date of closure of the
be included in the assets of the closed hank, as validated by the receiver.
bank for distribution to other creditors; - The valuation of the asset shall be
based on the prevailing market value of
Page 329 of 450

the collaterals as appraised by an the distribution of the assets of the

independent appraiser on an ‘as is closed bank.
where is’ basis. (12) All assets, records, and documents in
(7) On liability for penalties and surcharges the possession of the closed bank at the
for late payment and nonpayment of time of its closure are presumed held by the
taxes: From the time of closure, the closed bank in the concept of an owner.
bank shall not be liable for the payment of (13) The exercise of authority, functions,
penalties and surcharges arising from the and duties by the receiver under this Act
late payment or nonpayment of real shall be presumed to have been performed
property tax, capital gains tax, transfer tax in the regular course of business.
and similar charges. (14) Assets and documents of the closed
(8) On bank charges and fees: The receiver bank shall retain their private nature even if
may impose, on behalf of the closed bank, administered by the receiver. Matters
charges and fees for services rendered relating to the exercise by the receiver of
after bank closure, such as, but not limited the functions under this Act shall be subject
to, the execution of pertinent deeds and to visitorial audit only by the Commission
certifications. on Audit. [Sec. 13(e), PDIC Charter, as
(9) Actions pending for or against the amended by R.A. 10846]
closed bank: Except for actions pending
before the Supreme Court, actions pending
for or against the closed bank in any court
or quasi-judicial body shall, upon motion of
the receiver:
- Be suspended for a period not
exceeding one hundred eighty (180)
days;
- Referred to mandatory mediation; and
- Referred back to the court or quasi-
judicial body for further proceedings
upon termination of the mediation.
(10) Final decisions against the closed
bank: The execution and enforcement of a
final decision of a court other than the
liquidation court against the assets of a
closed bank shall be stayed. The prevailing
party shall file the final decision as a claim
with the liquidation court and settled in
accordance with the Rules on Concurrence
and Preference of Credits under the Civil
Code or other laws.
(11) Docket and other court fees:
Payment of docket and other court fees
relating to all cases or actions filed by the
receiver with any judicial or quasi-judicial
bodies shall be deferred until the action is
terminated with finality.
- Any such fees shall constitute as a first
lien on any judgment in favor of the
closed bank or in case of unfavorable
judgment, such fees shall be paid as
liquidation costs and expenses during
Page 330 of 450

U.P. LAW BOC INTELLECTUAL PROPERTY LAW COMMERCIAL LAW
INTELLECTUAL
PROPERTY LAW
COMMERCIAL LAW
Page 331 of 450

any field of human activity which is new,

A. INTELLECTUAL involves an inventive step and is industrially
PROPERTY RIGHTS IN applicable. [Kho v. Court of Appeals, 379
SCRA 410 (2002)]
GENERAL
3. Technology Transfer
1. Intellectual Property Rights Arrangements
a. Definition
Definition
Intangible property rights granted by law to
Contracts/Agreements involving:
owners of intellectual creations such as
1. The transfer of systematic knowledge for:
inventions, designs, signs and names used in
a. The manufacture of a product,
commerce, and literary and artistic works.
b. The application of a process,
c. Rendering of a service including
b. Intellectual Property Rights under the
management contracts; and
Intellectual Property Code (RA 8293)
2. The transfer, assignment or licensing of all
Copyright and Related Rights;
forms of intellectual property rights,
Trademarks and Service Marks;
including the licensing of computer
Geographic Indications;
software except computer software
Industrial Designs;
developed for mass market. [Sec. 4.2, RA
Patents;
8293]
Utility Models; [Chapter XII]
Layout-Designs (Topographies) of Integrated
Functions of the Intellectual Property Office
Circuits;
(IPOPHL)
Protection of Undisclosed Information. [Sec.
1. Examine applications for grant of letters
4.1, RA 8293]
patent for inventions and register utility
models and industrial designs;
2. Differences between 2. Examine applications for the registration of
copyright, trademarks, and marks, geographic indication, integrated
circuits;
patents 3. Register technology transfer arrangements
and settle disputes involving technology
The difference between copyright, trademarks,
transfer payments covered by the
and patent lies in the scope of protection.
provisions of Part II, Chapter IX on
Voluntary Licensing and develop and
A trademark is any visible sign capable of
implement strategies to promote and
distinguishing the goods (trademark) or
facilitate technology transfer;
services (service mark) of an enterprise from
4. Promote the use of patent information as a
that of another and shall include a stamped or
tool for technology development;
marked container of goods. In relation thereto,
5. Publish regularly in its own publication the
a trade name means the name or designation patents, marks, utility models and industrial
identifying or distinguishing an enterprise. designs, issued and approved, and the
technology transfer arrangements
Meanwhile, the scope of a copyright is
registered;
confined to literary and artistic works which are
6. Administratively adjudicate contested
original intellectual creations in the literary and
proceedings affecting intellectual property
artistic domain protected from the moment of
rights;
their creation.
7. Coordinate with other government
agencies and the private sector efforts to
Patentable inventions, on the other hand,
formulate and implement plans and
refer to any technical solution of a problem in
Page 332 of 450

policies to strengthen the protection of d. Lay-Out Designs (Topographies of

intellectual property rights in the country Integrated Circuits) [Note: this is actually a
[Sec. 5, RA 8293]; sui generis regime but the amendment to
8. Undertake enforcement functions RA 8293 placed this in the Law on Patents]
supported by concerned agencies such as
the Philippine National Police, National Invention Patent
Bureau of Investigation, Bureau of A patentable invention is any technical solution
Customs, Optical Media Board, Local of a problem in any field of human activity
Government Units, among others [Sec. 7. which is new, involves an inventive step and is
(c) RA 8293, as amended by R.A. 10372]; industrially applicable. It may be, or may relate
9. Conduct visits during reasonable hours to, a product, or process, or an improvement of
to establishments and business engaging any of the foregoing. [Sec. 21, RA 8293]
in activities violating intellectual property
rights and provisions of this act based on Non-patentable inventions [Sec. 22]
report, information or complaint received 1. Discoveries, scientific theories and
by the office. [Sec. 7.(d) RA 8293, as mathematical methods, and in the case of
amended by R.A. 10372] drugs and medicines:
a. The mere discovery of a new form
IPOPHL JURISDICTIONAL THRESHOLD in or new property of a known
administrative complaints for violations of substance which does not result in
laws involving intellectual property rights: enhancement of the known efficacy
Two hundred thousand pesos (P200,000) or of that substance;
more in total damages claimed b. The mere discovery of any new
property or new use for a known
Role of the IPO with Respect to Technology substance; or
Transfer Arrangements c. The mere use of a known process
The IPO shall: unless such known process results
1. Register technology transfer arrangements in a new product that employs at
and settle disputes involving technology least one new reactant. [RA 8293
transfer payments as amended by RA 9502, The
2. Develop and implement strategies to Cheaper Medicine Act of 2008]
promote and facilitate technology transfer; 2. Schemes, rules and methods of performing
3. Promote the use of patent information as a mental acts, playing games or doing
tool for technology development; business, and programs for computers
4. Publish regularly in its own publication the 3. Methods for treatment of the human and
technology transfer arrangements animal body by surgery or therapy and
registered. [Sec. 4.4, RA 8293] diagnostic methods practiced on the
human and animal body.
Voluntary Licensing & Registration of Exceptions: products and composition for
Technology Transfer Arrangements use in any of these methods
See 9. Licensing, a. Voluntary 4. Plant varieties or animal breeds or
essentially biological process for the
production of plants or animals
B. PATENTS Exceptions: micro-organisms; non-
biological and microbiological processes
5. Aesthetic creations
6. Anything contrary to public order or
1. Patentable Invention morality
a. Inventions;
b. Utility Model;
c. Industrial Designs; and
Page 333 of 450

Standards or requirements for registrability a. in another application filed by

of Invention Patent [Sec. 21] the inventor and should not
i. Novelty; have been disclosed by the
ii. Involves an inventive step; and office, or
iii. Industrially applicable. b. in an application filed, without
the knowledge or consent of
Additional Requirements the inventor, by a third party
iv. Patentable subject matter [Sec. 22] which obtained the information
v. Sufficient disclosure [Sec. 35] directly or indirectly from the
inventor
i. Novelty c. A third party which obtained the
An invention shall not be considered new if it information directly or indirectly from
forms part of a prior art. [Sec. 23, RA 8293] the inventor [Sec. 25, RA 8293]
Prior art ii. Inventive Step

This shall consist of: An invention involves an inventive step if,
a. Everything which has been made available having regard to prior art, it is not obvious to a
to the public anywhere in the world, before person skilled in the art at the time of the filing
the filing date or the priority date of the date or priority date of the application claiming
application claiming the invention; [Sec. the invention. [Sec. 26.1, RA 8293, as
24.1, RA 8293] amended by RA 9502]
b. The whole contents of an application for a
patent, utility model, or industrial design Cheaper Medicines Act: In case of drugs and
registration, published in accordance with medicines, there is no inventive step if the
this Act, filed or effective in the Philippines, invention results from:
with a filing or priority date that is earlier a. The mere discovery of a new form or new
than the filing or priority date of the property of a known substance which does
application: Provided, That – not result in enhancement of the known
(i) The application which has validly efficacy of that substance;
claimed the filing date of an earlier b. The mere discovery of any new property or
application under Section 31 of this new use for a known substance; or
Act, shall be prior art with effect as c. The mere use of a known process unless
of the filing date of such earlier such known process results in a new
application product that employs at least one new
(ii) The applicant or the inventor reactant. [Sec. 26.2, RA 8293 as amended
identified in both applications are by RA 9502]
not one and the same. [Sec. 24.2,
RA 8293] iii. Industrial Applicability
An invention that can be produced and used in
Non-prejudicial disclosures any industry shall be industrially applicable.
This is an exception to the General Rule on [Sec. 27, RA 8293]
Prior Art under Sec. 24. It provides that the
disclosure of the information contained in the 2. Non-Patentable Inventions
application during the 12 months preceding the
filing date or the priority date of the application The following shall be excluded from patent
shall not prejudice the applicant on the ground protection:
of lack of novelty if such disclosure was made a. Discoveries, scientific theories and
by: mathematical methods, and in the case of
a. The inventor drugs and medicines, the mere discovery
b. A patent office and the information was of a new form or new property of a known
contained substance which does not result in the
Page 334 of 450

enhancement of the known efficacy of that [Sec. 26.2, RA 8293 as amended by RA

substance, or the mere discovery of any 9502]
new property or new use for a known
substance, or the mere use of a known 3. Ownership of a Patent
process unless such known process
results in a new product that employs at
Right to a Patent
least one new reactant. Salts, esters,
ethers, polymorphs, metabolites, pure
General Rule: The right to a patent belongs to
form, particle size, isomers, mixtures of
the inventor, his heirs, or assigns. When two or
isomers, complexes, combinations, and
more persons have jointly made an invention,
other derivatives of a known substance
the right to a patent shall belong to them jointly.
shall be considered to be the same
[Sec. 28, RA 8293]
substance, unless they differ significantly in
properties with regard to efficacy; [Sec.
Exceptions: Inventions created pursuant to
22.1, RA 8293 as amended by RA 9502]
employment or a commissioned work
b. Schemes, rules and methods of performing
1. The person who commissions the work
mental acts, playing games or doing
shall own the patent. [Sec. 30.1, RA 8293]
business, and programs for computers;
2. The employer has the right to the patent if
[Sec. 22.2, RA 8293]
the invention is the result of the
c. Methods for treatment of the human or
performance of the employee’s regularly
animal body by surgery or therapy and
assigned duties. [Sec. 30.2, RA 8293]
diagnostic methods practiced on the
human or animal body. This provision shall
not apply to products and composition for First-to-file rule
use in any of these methods; [Sec. 22.3,
RA 8293] RA 8293 changed the basis of ownership of a
d. Plant varieties or animal breeds or patent from First-to-Invent under RA 165 to
essentially biological process for the First-to-File.
production of plants or animals. This
provision shall not apply to micro- If two or more persons have made the invention
organisms and non-biological and separately and independently of each other,
microbiological processes; [Sec. 22.4, RA the right to the patent shall belong to the person
8293] who filed an application for such invention, or
e. Aesthetic creations; [Sec. 22.5, RA 8293] where two or more applications are filed for the
f. Anything which is contrary to public order same invention, to the applicant who has the
or morality. [Sec. 22.6, RA 8293] earliest filing date or, the earliest priority date.
[Sec. 29, RA 8293]
Cheaper Medicines Act: In addition to
discoveries, scientific theories and Filing Date
mathematical methods, the IP Code now The filing date of a patent application shall be
includes (as non-patentable), in case of drugs the date of receipt by the Office of at least the
and medicines: following elements:
a. The mere discovery of a new form or new a. An express or implicit indication that a
property of a known substance which does Philippine patent is sought;
not result in the enhancement of the known b. Information identifying the applicant; and
efficacy of that substance c. Description of the invention and one (1) or
b. The mere discovery of any new property or more claims in Filipino or English. [Sec.
new use of a known substance 40.1, RA 8293]
c. The mere use of a known process unless
such known process results in a new
product that employs at least one reactant
Page 335 of 450

Invention created pursuant to a complete for it to be carried out by any

commission/in the course of person skilled in the art; or
employment 3. That the patent is contrary to public order
or morality. [Sec. 61.1, RA 8293]
The person who commissions the work shall
own the patent, unless otherwise provided in Where the grounds for cancellation relate to
the contract. [Sec. 30.1, RA 8293] some of the claims or parts of the claim,
cancellation may be effected to such extent
only. [Sec. 61.2, RA 8293]
In case the employee made the invention in the
course of his employment contract, the patent
shall belong to: Effect of Cancellation of Patent or Claim
a. The employee, if the inventive activity is not The rights conferred by the patent or any
a part of his regular duties even if the specified claim or claims cancelled shall
employee uses the time, facilities and terminate. Notice of the cancellation shall be
materials of the employer. published in the IPO Gazette. Unless
b. The employer, if the invention is the result restrained by the Director General, the decision
of the performance of his regularly- or order to cancel by Director of Legal Affairs
assigned duties, unless there is an shall be immediately executory even pending
agreement, express or implied, to the appeal. [Sec. 66, RA 8293]
contrary. [Sec. 30.2, RA 8293]
Remedies of a Person with a Right to a
Patent
Right of priority Patent Application by Persons Not Having the
Right to a Patent. — If a person referred to in
An application for patent filed by any person
Section 29 (First-to-File) other than the
who has previously applied for the same applicant, is declared by final court order or
invention in another country which by treaty,
decision as having the right to the patent, such
convention, or law affords similar privileges to person may, within three (3) months after the
Filipino citizens, shall be considered filed as of decision has become final:
the date of filing the foreign application: a. Prosecute the application as his own
Provided, That: application in place of the applicant;
1. The local application expressly claims b. File a new patent application in respect of
priority; the same invention;
2. It is filed within 12 months from the date the c. Request that the application be refused; or
earliest foreign application was filed; and d. Seek cancellation of the patent, if one has
3. A certified copy of the foreign application already been issued. [Sec. 67, RA 8293]
together with an English translation is filed
within 6 months from the date of filing in the
Philippines. [Sec. 31, RA 8293]
5. Remedy of the True and
4. Grounds for Cancellation of a Actual inventor
Patent If a person, who was deprived of the patent
without his consent or through fraud, is
Any interested person may petition to cancel
declared by final court order or decision to be
the patent or any claim thereof, or parts of the
the true and actual inventor, the court shall:
claim, on any of the following grounds:
(1) Order for his substitution as patentee, or
1. That what is claimed as the invention is not
(2) At the option of the true inventor, cancel the
new or patentable; patent, and
2. That the patent does not disclose the
invention in a manner sufficiently clear and
Page 336 of 450

(3) Award actual and other damages in his been introduced anywhere else in the
favor, if warranted by the circumstances. world by the patent owner, or by any
[Sec. 68, RA 8293] party authorized to use the invention.
[Sec. 72.1, RA 8293 as amended by
The action shall be filed within 1 year from the RA 9502]
date of publication made in accordance with b. Parallel Importation: The right to import
Sections 44 and 51, respectively. [Sec. 70, RA the drugs and medicines shall be available
8293] to any government agency or any private
third party; [Sec. 72.1, RA 8293 as
6. Rights Conferred by a Patent amended by RA 9502]
c. Non – Commercial: Where the act is done
Where the To restrain, prohibit and privately and on a non-commercial scale or
subject prevent any unauthorized for a non-commercial purpose: Provided,
matter of a person or entity from making, That it does not significantly prejudice the
patent is a using, offering for sale, selling economic interests of the owner of the
product or importing that product. patent; [Sec. 72.2, RA 8293 as amended
[Sec. 71.1(a), RA 8293] by RA 9502]
Where the To restrain, prevent or prohibit d. Experimental Use: Where the act consists
subject any unauthorized person or of making or using exclusively for
matter of a entity from using the process, experimental use of the invention for
patent is a and from manufacturing, scientific purposes or educational
process dealing in, using, selling or purposes and such other activities directly
offering for sale, or importing related to such scientific or educational
any product obtained directly experimental use; [Sec. 72.3, RA 8293 as
or indirectly from such amended by RA 9502]
process. [Sec. 71.1(b), RA e. Drugs and Medicine: In the case of drugs
8293] and medicines, where the act includes
testing, using, making or selling the
Other Patent owners shall also have
invention including any data related
rights of the right to assign, or transfer
thereto, solely for purposes reasonably
Patent by succession the patent, and
related to the development and submission
Owners to conclude licensing
of information and issuance of approvals
contracts for the same. [Sec.
by government regulatory agencies
71.2, RA 8293]
required under any law of the Philippines or
of another country that regulates the
7. Limitations of Patent Rights manufacture, construction, use or sale of
any product: Provided, That, in order to
The owner of a patent has no right to prevent protect the data submitted by the original
third parties from performing, without his patent holder from unfair commercial use
authorization, the acts referred to in Section 71 provided in Article 39.3 of the Agreement
hereof in the following circumstances: on Trade-Related Aspects of Intellectual
a. Owner’s Consent: Property Rights (TRIPS Agreement), the
1. National exhaustion - Using a patented Intellectual Property Office, in consultation
product which has been put on the with the appropriate government agencies,
market in the Philippines by the owner shall issue the appropriate rules and
of the product, or with his express regulations necessary therein not later than
consent, insofar as such use is 120 days after the enactment of this law;
performed after that product has been [Sec. 72.4, RA 8293 as amended by RA
so put on the said market; 9502]
2. International exhaustion (for drugs and f. Medicine Individual Preparation: Where
medicines) - A drug or medicine has the act consists of the preparation for
Page 337 of 450

individual cases, in a pharmacy or by a Use by the Government

medical professional, of a medicine in
accordance with a medical shall apply after A Government agency or third person
a drug or medicine has been introduced in authorized by the Government may exploit the
the Philippines or anywhere else in the invention even without agreement of the patent
world by the patent owner, or by any party owner where:
authorized to use the invention: Provided, 1. The public interest, in particular, national
further, That the right to import the drugs security, nutrition, health or the
and medicines contemplated in this section development of other sectors, as
shall be available to any government determined by the appropriate agency of
agency or any private third party; [Sec. the government, so requires; [Sec. 74.1(a),
72.5, RA 8293 as amended by RA 9502] RA 8293]
g. Where the invention is used in any ship, 2. A judicial or administrative body has
vessel, aircraft, or land vehicle of any other determined that the manner of exploitation,
country entering the territory of the by the owner of the patent or his licensee,
Philippines temporarily or accidentally: is anti-competitive; [Sec. 74.1(b), RA 8293]
Provided, That such invention is used 3. In the case of drugs and medicines, there
exclusively for the needs of the ship, is a national emergency or other
vessel, aircraft, or land vehicle and not circumstance of extreme urgency requiring
used for the manufacturing of anything to the use of the invention; [Sec. 74.1(c), RA
be sold within the Philippines. [Sec. 72.6, 8293 as amended by RA 9502]
RA 8293 as amended by RA 9502] 4. In the case of drugs and medicines, there
is public non-commercial use of the patent
There shall be no infringement of trademarks by the patentee, without satisfactory
or tradenames of imported or sold drugs and reason; [Sec. 74.1(d), RA 8293 as
medicines allowed as well as imported or sold amended by RA 9502]
off-patent drugs and medicines: Provided, That 5. In the case of drugs and medicines, the
said drugs and medicines bear the registered demand for the patented article in the
marks that have not been tampered, unlawfully Philippines is not being met to an adequate
modified, or infringed. [Sec.159.4 RA 8293 as extent and on reasonable terms, as
amended by RA 9502] determined by the Secretary of the
Department of Health. [Sec. 74.1(e), RA
Prior User 8293, as amended by RA 9502]
Any prior user, who, in good faith was using the CONDITIONS ON THE USE BY THE
invention or has undertaken serious GOVERNMENT OR THIRD PERSONS
preparations to use the invention in his
enterprise or business, before the filing date or Unless otherwise provided herein, the use by
priority date of the application on which a the Government, or third person authorized by
patent is granted, shall have the right to the Government shall be subject, where
continue the use thereof as envisaged in such applicable, to the following provisions:
preparations within the territory where the a. In situations of national emergency or other
patent produces its effect. [Sec. 73.1, RA 8293] circumstances of extreme urgency as
provided under Section 74.1 (c), the right
The right of the prior user may only be holder shall be notified as soon as
transferred or assigned together with his reasonably practicable;
enterprise or business, or with that part of his b. In the case of public non-commercial use
enterprise or business in which the use or of the patent by the patentee, without
preparations for use have been made. [Sec. satisfactory reason, as provided under
73.2, RA 8293] Section 74.1 (d), the right holder shall be
informed promptly: Provided, That, the
Page 338 of 450

Government or third person authorized by Issuance of a Special Compulsory License

the Government, without making a patent under the TRIPS Agreement) of this Code.
search, knows or has demonstrable ground [Sec. 76.1, RA 8293 as amended by R.A. 9502]
to know that a valid patent is or will be used
by or for the Government; Tests in Patent Infringement
c. If the demand for the patented article in the
Philippines is not being met to an adequate a. Literal Infringement
extent and on reasonable terms as
provided under Section 74.1 (e), the right In using literal infringement as a test, resort
holder shall be informed promptly; must be had in the first instance to the words of
d. The scope and duration of such use shall the claim. To determine whether the particular
be limited to the purpose for which it was item falls within the literal meaning of the patent
authorized; claims, the court must juxtapose the claims of
e. Such use shall be non-exclusive; the patent and the accused product within the
f. The right holder shall be paid adequate overall context of the claims and specifications,
remuneration in the circumstances of each to determine whether there is exact identity of
case, taking into account the economic all material elements. [Godinez v. CA, G.R. No.
value of the authorization; and L-97343 (1993)]
g. The existence of a national emergency or
other circumstances of extreme urgency, The test is satisfied if:
referred to under Section 74.1 (c), shall be The item that is being sold, made or used
subject to the determination of the conforms exactly to the patent claim of another;
President of the Philippines for the purpose One makes, uses or sells an item that has all
of determining the need for such use or the elements of the patent claim of another plus
other exploitation, which shall be other elements.
immediately executory. [Sec. 74.2, RA
8293 as amended by RA 9502] b. Doctrine of Equivalents
All cases arising from the implementation of Under the doctrine of equivalents, an
this provision shall be cognizable by courts with infringement occurs when a device:
appropriate jurisdiction provided by law. No (1) Appropriates a prior invention by
court except the Supreme Court of the incorporating its innovative concept, albeit
Philippines, shall issue any temporary with some modification and change,
restraining order or preliminary injunction or (2) Performs substantially the same function in
such other provisional remedies that will substantially the same way, and
prevent its immediate execution. [Sec. 74.3, (3) Achieves substantially the same result.
RA 8293 as amended by RA 9502] [Godinez v. CA, G.R. No. L-97343 (1993)]
8. Patent Infringement The doctrine of equivalents thus requires

satisfaction of the function-means-and-result
The making, using, offering for sale, selling, or test, the patentee having the burden to show
importing a patented product or a product that all three components of such equivalency
obtained directly or indirectly from a patented test are met. [Smith Klein Beckman Corp. v.
process, or the use of a patented process CA, G.R. No. 126627 (2003)]
without the authorization of the patentee
constitutes patent infringement: Provided, Civil and Criminal Actions
That, this shall not apply to instances covered
by Sections 72.1 and 72.4 (Limitations of Civil Action for Infringement
Patent Rights); Section 74 (Use of Invention by Any patentee, or anyone possessing any right,
Government); Section 93.6 (Compulsory title or interest in and to the patented invention,
Licensing); and Section 93-A (Procedures on
Page 339 of 450

whose rights have been infringed, may bring a Criminal Action: 3 years from date of the
civil action before a court of competent commission of the crime. [Sec. 84, RA 8293]
jurisdiction:
1. To recover from the infringer such Defenses in Actions for
damages sustained thereby, plus Infringement
attorney’s fees and other expenses of
litigation, and In an action for infringement, the defendant, in
2. To secure an injunction for the protection of addition to other defenses available to him,
his rights. [Sec. 76.2, RA 8293] may show the invalidity of the patent, or any
claim thereof, on any of the grounds on which
If the damages are inadequate or cannot be a petition of cancellation can be brought under
readily ascertained with reasonable certainty, Section 61. [Sec. 81, RA 8293]
the court may award, by way of damages, a
sum equivalent to reasonable royalty. [Sec. Patent found invalid may be cancelled
76.3, RA 8293] In an action for infringement, if the court shall
find the patent or any claim to be invalid, it shall
The court may, according to the circumstances cancel the same, and the Director of Legal
of the case, award damages in a sum above Affairs upon receipt of the final judgment of
the amount found as actual damages cancellation by the court, shall record that fact
sustained: Provided, That the award does not in the register of the Office and shall publish a
exceed three (3) times the amount of such notice to that effect in the IPO Gazette. [Sec.
actual damages. [Sec. 76.4, RA 8293] 82, RA 8293]
Criminal Action Only After Finality of Doctrine of File Wrapper Estoppel

Judgment in Civil Action and After Patentee is precluded from claiming as part of
Repetition of Infringement a patented product that which he had to excise
If infringement is repeated by the infringer or by or modify in order to avoid patent office
anyone in connivance with him after finality of rejection, and he may omit any additions he
the judgment of the court against the infringer, was compelled to add by patent office
the offenders shall: regulations. [Advance Transformer Co. v.
1. Be criminally liable therefor, and Levinson, 837 F.2d 1081(1988)]
2. 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 9. Licensing
than One hundred thousand pesos
(P100,000) but not more than Three Kinds of IPOPHL Appellate
hundred thousand pesos (P300,000), at License Office(s) with Jurisdiction
Jurisdiction
the discretion of the court.
Voluntary Documentation Director General
Note: Such criminal action is without prejudice (Secs. 85- , Information -----> Secretary
to the institution of a civil action for damages: 92) and of Trade and
[Sec. 84, RA 8293] Technology Industry (Sec/ 7,
Transfer RA IP Code)
Bureau
Prescriptive Period (DITTB)
Civil Action: No damages can be recovered for Compulsory Director Court of Appeals
(General; General & (Rule 43, ROC)
acts of infringement committed more than four Secs. 93, Bureau of
(4) years before the institution of the action for 94-102) Legal Affairs
infringement. [Sec. 79, RA 8293]
Special Director Court of Appeals
Compulsory General (Rule 43, ROC)
Page 340 of 450

(Special; (Supreme Court

Arbitration Rules of the United Nations
Sec. 93-A) for issuance of Commission on International Trade Law
provisional (UNCITRAL) or the Rules of Conciliation
remedies - and Arbitration of the International
TRO/preliminary Chamber of Commerce (ICC) shall apply
injunction)
and the venue of arbitration shall be the
Philippines or any neutral country; [Sec.
Voluntary 88.3, RA 8293]
4. The Philippine taxes on all payments
Voluntary Licensing is the grant by the patent relating to the technology transfer
owner to a third person of the right to exploit arrangement shall be borne by the licensor.
the patented invention. [Sec. 85, RA 8293] [Sec. 88.4, RA 8293]
To encourage the transfer and dissemination of Prohibited Clauses

technology, prevent or control practices and The following provisions shall be deemed
conditions that may in particular cases prima facie to have an adverse effect on
constitute an abuse of intellectual property competition and trade:
rights having an adverse effect on competition 1. Those which impose upon the licensee the
and trade, all voluntary technology transfer obligation to acquire from a specific source
arrangements or licensing contracts shall: capital goods, intermediate products, raw
1. Not contain any of the prohibited clauses materials, and other technologies, or of
for voluntary license contracts under Sec. permanently employing personnel
87 indicated by the licensor; [Sec. 87.1, RA
2. Contain all of the mandatory provisions for 8293]
voluntary license contracts under Sec. 88 2. Those pursuant to which the licensor
3. Be approved and registered with the reserves the right to fix the sale or resale
Documentation, Information and prices of the products manufactured on the
Technology Transfer Bureau [of the basis of the license; [Sec. 87.2, RA 8293]
IPOPHL] as an exceptional case under 3. Those that contain restrictions regarding
Sec. 91, ONLY IF the agreement fails to the volume and structure of production;
comply with Sec. 87 and 88. [See Secs. 85 [Sec. 87.3, RA 8293]
& 92, RA 8293] 4. Those that prohibit the use of competitive
technologies in a non-exclusive technology
Mandatory Provisions transfer agreement; [Sec. 87.4, RA 8293]
The following provisions shall be included in 5. Those that establish a full or partial
voluntary license contracts: purchase option in favor of the licensor;
1. That the laws of the Philippines shall [Sec. 87.5, RA 8293]
govern the interpretation of the same and 6. Those that obligate the licensee to transfer
in the event of litigation, the venue shall be for free to the licensor the inventions or
the proper court in the place where the improvements that may be obtained
licensee has its principal office; [Sec. 88.1, through the use of the licensed technology;
RA 8293] [Sec. 87.6, RA 8293]
2. Continued access to improvements in 7. Those that require payment of royalties to
techniques and processes related to the the owners of patents for patents which are
technology shall be made available during not used; [Sec. 87.7, RA 8293]
the period of the technology transfer 8. Those that prohibit the licensee to export
arrangement; [Sec. 88.2, RA 8293] the licensed product unless justified for the
3. In the event the technology transfer protection of the legitimate interest of the
arrangement shall provide for arbitration, licensor such as exports to countries where
the Procedure of Arbitration of the exclusive licenses to manufacture and/or
Arbitration Law of the Philippines or the
Page 341 of 450

distribute the licensed product(s) have Exceptional Cases

already been granted; [Sec. 87.8, RA 8293] 1. In exceptional or meritorious cases where
9. Those which restrict the use of the substantial benefits will accrue to the
technology supplied after the expiration of economy, such as high technology content,
the technology transfer arrangement, increase in foreign exchange earnings,
except in cases of early termination of the employment generation, regional dispersal
technology transfer arrangement due to of industries and/or substitution with or use
reason(s) attributable to the licensee; [Sec. of local raw materials;
87.9, RA 8293] 2. The case of BOI-registered companies with
10. Those which require payments for patents pioneer status. [Sec. 91, RA 8293]
and other industrial property rights after
their expiration, termination arrangement; Jurisdiction
[Sec. 87.10, RA 8293] Decisions of the Director of DITTB on TTAs
11. Those which require that the technology are appealable to the Director General,
recipient shall not contest the validity of any IPOPHL, whose decisions thereon are
of the patents of the technology supplier; appealable to the Secretary of Trade and
[Sec. 87.11, RA 8293] Industry.
12. Those which restrict the research and
development activities of the licensee Right of Licensor
designed to absorb and adapt the Unless otherwise provided in the technology
transferred technology to local conditions transfer agreement, the licensor shall have the
or to initiate research and development right to:
programs in connection with new products, 1. Grant further licenses to third person;
processes or equipment; [Sec. 87.12, RA 2. Exploit the subject matter of the technology
8293] transfer agreement. [Sec. 89, RA 8293]
13. Those which prevent the licensee from
adapting the imported technology to local Right of the Licensee
conditions, or introducing innovation to it, To exploit the subject matter of the technology
as long as it does not impair the quality transfer agreement during the whole term of
standards prescribed by the licensor; [Sec. the agreement. [Sec. 90, RA 8293]
87.13, RA 8293]
14. Those which exempt the licensor for Compulsory
liability for non-fulfillment of his
responsibilities under the technology Compulsory Licensing is the grant of the
transfer arrangement and/or liability arising Director of Legal Affairs of a license to exploit
from third party suits brought about by the a patented invention, even without the
use of the licensed product or the licensed agreement of the patent owner, in favor of any
technology; [Sec. 87.14, RA 8293] person who has shown his capability to exploit
15. Other clauses with equivalent effects. [Sec. the invention. [Sec. 93, RA 8293 as amended
87.15, RA 8293] by RA 9502]
Effect of Non-compliance with any Grounds

Provisions of Secs. 87 and 88 The Director General of the Intellectual
The technology transfer arrangement (TTA) Property Office may grant a license to exploit a
shall automatically be rendered patented invention, even without the
unenforceable, unless said technology agreement of the patent owner, in favor of any
transfer arrangement is approved and person who has shown his capability to exploit
registered with the Documentation, Information the invention, under any of the following
and Technology Transfer Bureau (DITTB of the circumstances:
IPOPHL) under the provisions of Section 91 on
exceptional cases. [Sec. 92, RA 8293]
Page 342 of 450

1. National emergency or other notification or otherwise, allowed

circumstances of extreme urgency; [Sec. importation into its jurisdiction of the
93.1, RA 8293 as amended by RA 9502] patented drugs and medicines from the
2. Where the public interest, in particular, Philippines in compliance with the TRIPS
national security, nutrition, health or the Agreement. [Sec. 93-A.2, RA 8293 as
development of other vital sectors of the amended by RA 9502]
national economy as determined by the
appropriate agency of the Government, so Period for Filing a Petition for Compulsory
requires; [Sec. 93.2, RA 8293 as amended License
by RA 9502] At any time after the grant of patent. However,
3. Where a judicial or administrative body has a compulsory license may not be applied for on
determined that the manner of exploitation the ground stated in Sec. 93.5 before the
by the owner of the patent or his licensee expiration of a period of 4 years from the date
is anti-competitive; [Sec. 93.3, RA 8293 as of filing of the application or 3 years from the
amended by RA 9502] date of the patent whichever period expires
4. In case of public non-commercial use of the last. [Sec. 94, RA 8293 as amended by RA
patent by the patentee, without satisfactory 9502]
reason; [Sec. 93.4, RA 8293 as amended
by RA 9502] Requirement to Obtain a License on
5. If the patented invention is not being Reasonable Commercial Terms
worked in the Philippines on a commercial General Rule: The license will only be granted
scale, although capable of being worked, after the petitioner has made efforts to obtain
without satisfactory reason: Provided, That authorization from the patent owner on
the importation of the patented article shall reasonable commercial terms and conditions
constitute working or using the patent; but such efforts have not been successful
[Sec. 93.5, RA 8293 as amended by RA within a reasonable period of time. [Sec. 95.1,
9502] RA 8293 as amended by RA 9502]
6. Where the demand for patented drugs and
medicines is not being met to an adequate Exceptions: The requirement of authorization
extent and on reasonable terms, as shall not apply in the following cases:
determined by the Secretary of the 1. Where the petition for compulsory license
Department of Health; [Sec. 93.6, RA 8293 seeks to remedy a practice determined
as amended by RA 9502] after judicial or administrative process to be
7. If the invention protected by a patent, anti-competitive;
hereafter referred to as the "second 2. In situations of national emergency or other
patent," within the country cannot be circumstances of extreme urgency;
worked without infringing another patent, 3. In cases of public non-commercial use;
hereafter referred to as the "first patent," 4. In cases where the demand for the
granted on a prior application or benefiting patented drugs and medicines in the
from an earlier priority, a compulsory Philippines is not being met to an adequate
license may be granted to the owner of the extent and on reasonable terms, as
second patent to the extent necessary for determined by the Secretary of the
the working of his invention, subject to Department of Health. [Sec. 95.2, RA 8293
certain conditions; [Sec. 97, RA 8293] as amended by RA 9502]
8. Manufacture and export of drugs and
medicines to any country having Terms and Conditions of Compulsory
insufficient or no manufacturing capacity in License
the pharmaceutical sector to address 1. The scope and duration of such license
public health problems: Provided, That, a shall be limited to the purpose for which it
compulsory license has been granted by was authorized; [Sec. 100.1, RA 8293]
such country or such country has, by
Page 343 of 450

2. The license shall be non-exclusive; [Sec. An assignment may be limited to a specified

100.2, RA 8293] territory. [Sec. 104, RA 8293]
3. The license shall be non-assignable,
except with that part of the enterprise or Rights of Joint Owners
business with which the invention is being If two or more persons jointly own a patent and
exploited; [Sec. 100.3, RA 8293] the invention covered thereby, each joint owner
4. Use of the subject matter of the license shall be entitled to personally make, use, sell,
shall be devoted predominantly for the or import the invention for his own profit.
supply of the Philippine market: Provided,
that this limitation shall not apply where the However, neither of the joint owners shall be
grant of the license is based on the ground entitled to grant licenses or to assign his right,
that the patentee's manner of exploiting the title or interest or part thereof without the
patent is determined by judicial or consent of the other owner or owners, or
administrative process, to be anti- without proportionally dividing the proceeds
competitive; [Sec. 100.4, RA 8293] with such other owner or owners. [Sec. 107, RA
5. The license may be terminated upon 8293]
proper showing that circumstances which
led to its grant have ceased to exist and are Form of Assignment
unlikely to recur: Provided, That adequate The assignment must be in writing and must be
protection shall be afforded to the notarized. [Sec. 105 RA 8293] It shall be void
legitimate interest of the licensee; [Sec. as against any subsequent purchaser or
100.5, RA 8293] mortgagee for valuable consideration and
6. The patentee shall be paid adequate without notice, unless, it is so recorded in the
remuneration taking into account the Office, within 3 months from the date of said
economic value of the grant or instrument, or prior to the subsequent
authorization, except that in cases where purchase or mortgage. [Sec. 106.2, RA 8293]
the license was granted to remedy a
practice which was determined after
judicial or administrative process, to be
anti-competitive, the need to correct the
C. TRADEMARKS
anti-competitive practice may be taken into
account in fixing the amount of
remuneration. [Sec. 100.6, RA 8293] 1. Definition of Marks, Collective
Marks, and Trade Names
10. Assignment and
Transmission of Rights Definition
Marks
Inventions and any right, title or interest in and
Any visible sign capable of distinguishing the
to patents and inventions covered thereby,
goods (trademark) or services (service mark)
may be assigned or transmitted by inheritance
of an enterprise and shall include a stamped or
or bequest or may be the subject of a license
marked container of goods. [Sec. 121.1, RA
contract. [Sec. 103.2, RA 8293]
8293]
An assignment may be of:
(i) The entire right, title or interest in and
to the patent and the invention covered
thereby, or
(ii) An undivided share of the entire patent
and invention, in which event the
parties become joint owners thereof.
Page 344 of 450

Trademark Service Mark A trademark or service A trade name

Any visible sign Any visible sign mark owner can avail owner only has civil
which is: capable of of administrative, civil and administrative
Adopted and used to distinguishing the and criminal remedies remedies
identify the source or services of an Assignment
origin of goods; and enterprise from the A trademark or service A trade name can
Capable of service of other mark can be assigned only be assigned
distinguishing them enterprises. independent of the with the business.
from goods business
emanating from a
competitor. Functions of a Trademark
Collective Marks 1. To point out distinctly the origin or

Any visible sign designated as such in the ownership of the goods and to which it is
application for registration and capable of affixed;
distinguishing the origin or any other common 2. To secure him, who has been instrumental
characteristic, including the quality of goods or in bringing into the market a superior article
services of different enterprises which use the of merchandise, the fruit of his industry and
sign under the control of the registered owner skill;
of the collective mark. [Sec. 121.2, RA 8293] 3. To assure the public that they are
producing the genuine article;
Trade Name 4. To prevent fraud and imposition; and
The name or designation identifying or 5. To protect the manufacturer against
distinguishing an enterprise [Sec. 121.3, RA substitution and sale of an inferior and
8293]. different article as its product. [Mirpuri v.
CA, G.R. No. 114508 (1999)]
Any individual name or surname, firm name,
device or word used by manufacturers, Spectrum of Distinctiveness
industrialists, merchants, and others to identify
their businesses, vocations or occupations. Generic Marks
[Converse Rubber Corp. v. Universal Rubber Generic Marks are those which constitute the
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
DIFFERENCES BETWEEN A TRADEMARK/ species of. [Societe Des Produits Nestle v. CA,
SERVICE MARK AND A TRADENAME G.R. No. 112012, 2001]
UNDER THE IP CODE These must remain in the public domain and
Trademark/ Trade Name can never be registered as a trademark.
Service Mark
Basis of Ownership Examples: “SUGAR” for refined sugar, “KAPE”
Registration for instant coffee, “WATER” for bottled water.
Prior use in
Philippine Descriptive Marks
commerce Consists exclusively of signs or of indications
that may serve in trade to designate the kind,
When Protected quality, quantity, intended purpose, value,
Upon registration A trade name may geographical origin, time or production of the
be protected even goods or rendering of the services, or other
if unregistered characteristics of the goods or services. [Sec.
Remedies 123(j), RA 8293]
Page 345 of 450

These are words that merely describe the Note: However, when the well-known mark is
product or service or refer to their quality or not registered, its protection is limited, as it only
characteristic. prevents the registration of confusingly similar
marks that are used for identical or similar
General rule: Descriptive marks are not goods or services. [Sec. 123.1(e), RA 8293]
entitled to protection and are too weak to
function as a trademark. While the IP Code expressly provides that the
rights to a mark shall be acquired through
Exception: Doctrine of Secondary meaning, registration, the Supreme Court held that
infra. notwithstanding this express provision in the IP
Code, prior use is still the basis of trademark
Example: “YELLOW PAGES” for telephone ownership. [Berris Agricultural Co., Inc. vs.
directory having yellow pages. Norvy Abyadang, G.R. No. 183404, (2010)]
Suggestive Marks Registration is not a mode of acquiring

Marks that hint or suggest the nature or quality ownership, rather, it merely gives rise to a
of the good or service without directly prima facie presumption of ownership of the
describing it. They are “subtly descriptive” and registrant over the mark [Sec. 138, RA 8293]
are entitled to protection despite lack of
distinctiveness. Said presumption of ownership may be
rebutted by the true owner of the mark in an
Example: “JAGUAR” for automobile. opposition or cancellation proceeding.
Arbitrary Marks Filing Date

Common words used as marks, but are The filing date of an application shall be the
unrelated to the good or service they represent. date on which the Office received the following
They neither describe nor suggest the indications and elements in English or Filipino:
characteristic of the goods or service, though a. An express or implicit indication that the
they are considered highly distinctive for registration of a mark is sought;
purposes of registration. b. The identity of the applicant;
c. Indications sufficient to contact the
Example: “APPLE” for electronic product. applicant or his representative, if any;
d. A reproduction of the mark whose
Fanciful or “Coined” Marks registration is sought; and
These are invented or “coined” words that do e. The list of the goods or services for which
not have any meaning and are made solely for the registration is sought. [Sec. 127.1, RA
the purpose of the mark. They are considered 8293]
“strong” marks for purposes of registration and
protection for being inherently distinctive. Priority Right
An application for registration of a mark filed in
Example: “KODAK” for camera. the Philippines by a person referred to in
Section 3, and who previously duly filed an
2. Acquisition of Ownership of application for registration of the same mark in
one of those countries, shall be considered as
Mark filed as of the day the application was first filed
in the foreign country (Provided, the Philippine
General Rule: To acquire rights in a mark, application is filed within 6 months from the
registration is required. [Sec. 122, RA 8293] filing of the foreign application). [Sec. 131.1,
RA 8293]
Exception: Well-known marks are protected
even without registration.
Page 346 of 450

No registration of a mark in the Philippines by 4. Non-Registrable Marks

a person described in this section shall be
granted until such mark has been registered in A mark cannot be registered if it:
the country of origin of the applicant. [Sec. a. Consists of immoral, deceptive or
131.2, RA 8293] scandalous matter, or matter which may
disparage or falsely suggest a connection
Significance of Priority Right with persons, living or dead, institutions,
A Philippine application filed by another beliefs, or national symbols, or bring them
applicant after the priority date but earlier than into contempt or disrepute; [Sec. 123.1(a),
the foreign applicant’s actual filing may be RA 8293]
refused registration if it is identical to the mark b. Consists of flags, coat of arms or other
with a priority date. [Agpalo, The Law on insignia of the Philippines or any foreign
Trademark, Infringement and Unfair country; [Sec. 123.1(b), RA 8293]
Competition (2000)] c. Consists of a name, portrait or signature
identifying a particular living individual
3. Acquisition of Ownership of except by his written consent, or of a
Trade Name deceased President of the Philippines,
during the life of his widow, except by
The ownership of a trade name is acquired written consent of the widow; [Sec.
through adoption and use. 123.1(c), RA 8293]
d. Is identical with a registered mark of
Such names shall be protected, even prior to another or a mark with an earlier filing or
or without registration, against any unlawful act priority date, in respect of:
committed by third parties, [Sec. 165.2 (a), RA 1. The same goods or services, or
8293] 2. Closely related goods or services,
or
Any subsequent use of the trade name by a 3. If it nearly resembles such a mark
third party, whether as a trade name or a mark as to be likely to deceive or cause
or collective mark,or any such use of a similar confusion; [Sec. 123.1(d), RA
trade name or mark, likely to mislead the 8293]
public, shall be deemed unlawful. [Sec. 165.2 e. Is identical with, or confusingly similar to, or
(b), RA 8293] constitutes a translation of a well-known
mark, whether or not registered in the
A name or designation may not be used as a Philippines, and used for identical or similar
trade name: goods or services; [Sec. 123.1(e), RA
1. If by its nature or the use to which such 8293]
name or designation may be put, it is f. Is identical with, or confusingly similar to, or
contrary to public order or morals; and constitutes a translation of a well-known
2. If, in particular, it is liable to deceive trade mark which is registered in the Philippines,
circles or the public as to the nature of the and used for goods or services which are
enterprise identified by that name. [Sec. not similar; [Sec. 123.1(f), RA 8293]
165.1, RA 8293] g. Likely to mislead the public, particularly as
to the nature, quality, characteristics or
Any change in the ownership of a trade name geographical origin of the goods or
shall be made with the transfer of the enterprise services; [Sec. 123.1(g), RA 8293]
or part thereof identified by that name. [Sec. h. Consists exclusively of signs that are
165.4, RA 8293] generic for the goods or services that they
seek to identify; [Sec. 123.1(h), RA 8293]
i. Consists exclusively of signs or of
indications that have become customary or
usual to designate the goods or services in
Page 347 of 450

everyday language or in a bona fide and The Office may accept as prima facie evidence
established trade practice; [Sec. 123.1(i), that the mark has become distinctive, proof of
RA 8293] substantially exclusive and continuous use
j. Consists exclusively of signs or of thereof by the applicant:
indications that may serve in trade to (i) In commerce in the Philippines
designate the kind, quality, quantity, (ii) For 5 years before the date on which the
intended purpose, value, geographical claim of distinctiveness is made. [Sec.
origin, time or production of the goods or 123.2, RA 8293]
rendering of the services, or other
characteristics of the goods or services; DISCLAIMERS
[Sec. 123.1(j), RA 8293] The Office may allow or require the applicant to
k. Consists of shapes that may be disclaim an unregistrable component of an
necessitated by technical factors or by the otherwise registrable mark but such disclaimer
nature of the goods themselves or factors shall not prejudice or affect:
that affect their intrinsic value; [Sec. (i) The applicant’s or owner’s rights then
123.1(k), RA 8293] existing or thereafter arising in the
l. Consists of color alone, unless defined by disclaimed matter; nor
a given form; [Sec. 123.1(l), RA 8293] (ii) The applicant’s or owner’s right on another
m. Is contrary to public order or morality. [Sec. application of later date if the disclaimed
123.1(m), RA 8293] matter became distinctive of the applicant’s
or owner’s goods, business or services.
Other instances when a mark may be [Sec. 126]
registered:
a. When it is part of a composite mark, though The basic purpose of disclaimers is to make of
there should be a disclaimer and the record, that a significant element of a
person who registers them will not acquire composite mark is not being exclusively
ownership thereto; appropriated by itself apart from the composite.
b. If they are contractions of or coined from [Rule 608, Rule on Trademarks]
generic and descriptive terms;
c. If they are used in a fanciful or arbitrary DISCLAIMED WORDS
manner; Words in a mark that are not being claimed for
d. If the mark falls under the Doctrine of exclusive use, including: 1. Generic terms; 2.
Secondary Meaning. Descriptive words; and 3. Those that do not
function as part of the trademark. [Rule 608,
DOCTRINE OF SECONDARY MEANING Rule on Trademarks]
Secondary meaning is acquired when a
descriptive mark or a mark that may serve in Note: Except for generic terms, disclaimed
trade that consists of a shape or color becomes words can later on be registered as part of the
distinctive because of its exclusive and trademark if it acquires distinctiveness.
continuous use in Philippine commerce.
5. Prior use of mark as a
A word or phrase originally incapable of
exclusive appropriation, might have been used Requirement
so long and so exclusively by one producer
with reference to his article that, in that trade While RA 8293 No Longer Requires
and to that branch of the purchasing public, the Prior Use Before Filing the
word or phrase has come to mean that the Application, It Still Requires Use of
article was his product. [Ang v. Teodoro, G.R. the Mark After Filing, Registration
No. L-48226 (1942)] and Renewal
Page 348 of 450

Under the old trademark law or R.A. 166, actual 3. Use of the mark by a company related to
commercial use of a trademark in the the applicant or registrant. [Sec. 152.4, RA
Philippines was required prior to its 8293]
registration. [RA 166, Sec. 2-A] 4. Use of the mark by a person controlled by
the registrant. [Sec. 152.4, RA 8293]
RA 8293 no longer requires prior use before
filing the application (i.e., it shifted to an intent Note: The use of a mark by a company related
to use system). However, the law still requires with, or controlled by the registrant or applicant
use of the mark after filing. shall inure to the latter's benefit: Provided, that
such mark is not used in such manner as to
Declaration of Actual Use (DAU) deceive the public. [Sec.152.4, RA 8293]
The applicant or the registrant is required to file
a Declaration of Actual Use of the mark after Declaration of Non-Use (DNU)
filing and registration. In lieu of a DAU, an applicant or registrant,
when warranted, shall file a Declaration of Non-
Note: Failure to file declaration of actual use Use indicating the grounds or justification
automatically results in the denial of the therefor.
registration or the cancellation of the
registration by operation of law. [Secs. 124.2 & Non-use of a mark may be excused in the
145, RA 8293] following cases:
1. Where the applicant or registrant is
When to File Declaration of Actual Use prohibited from using the mark in
(DAU) commerce because of a requirement
1. Within 3 years from the filing date of the imposed by another government agency
application (3rd Year DAU); prior to putting the goods in the market or
2. Within 1 year from the 5th anniversary of rendering of the services;
the registration of the mark (5th Year DAU); 2. Where a restraining order or injunction was
3. Within 1 year from the date of renewal; and issued by the Bureau of Legal Affairs, the
4. Within 1 year from the 5th anniversary of courts or quasi-judicial bodies prohibiting
each renewal. [Rule 204, Trademark the use of the mark; or
Regulations of 2017] 3. Where the mark is the subject of an
opposition or cancellation case. [Rule 211,
Non-Use of Mark When Excused Trademark Regulations of 2017]
Non-use caused by circumstances arising

independently of the will of the trademark When to File Declaration of Non- Use (DNU)
owner shall be excused. However, non-use 1. Within three (3) years from filing date of
due to lack of funds shall not excuse non-use the application;
of a mark. [Sec. 152.1, RA 8293] 2. Within the prescribed periods
mentioned in Rule 204 when use of a
The ff. shall not be grounds for cancellation or registered mark or a mark subject of an
removal of a mark: active application has been interrupted
1. Use which does not alter its distinctive or discontinued by a pending litigation.
character though the use is different from [See Rule 212, Trademark Regulations
the form in which it is registered. [Sec. of 2017]
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]
Page 349 of 450

6. Tests to Determine Confusing SIMILARITY/ DISSIMILARITY OF GOODS

and SERVICES
Similarity between Marks
Goods or services may not be considered as
Dominancy Test being similar or dissimilar to each other on the
ground that, in any registration or publication
The dominancy test considers the dominant by the Office, they appear in different classes
features in the competing marks in determining of the Nice Classification. [Sec. 44.2, RA 8293]
whether they are confusingly similar.
Related goods and services are those that,
Under the dominancy test: though non-identical or non-similar, are so
 Greater weight is given to the similarity of logically connected to each other that they may
the appearance of the product arising from reasonably be assumed to originate from one
the adoption of the dominant features of manufacturer or from economically-linked
the registered mark. manufacturers. [Mang Inasal Philippines v. IFP
 Minor differences between the registered Manufacturing Corporation, G.R. No. 221717,
mark and the mark in question are June 19, 2017]
disregarded.
 The aural and visual impressions created The mere fact that one person has adopted and
by the marks in the public mind are used a trademark on his goods would not
considered. prevent the adoption and use of the same
 Little weight is given to factors like prices, trademark by others on unrelated articles of a
quality, sales outlets and market segments. different kind. [Taiwan Kolin v. Kolin
[McDonald’s Corporation v. L.C. Big Mak Electronics Co., G.R. No. 209843 (2015)]
Burger, Inc., et al., G.R. No. 143993
(2004)]
DOCTRINE OF RELATED
The dominancy test is now embodied in Sec. GOODS/SERVICES
155 of the IPC and is therefore the controlling 1. Goods are related when they:
test. [Ibid.] a. Belong to the same class; or
b. Have the same descriptive
Holistic Test properties or physical attributes; or
c. Serve the same purpose or flow
The holistic test, to determine whether a through the same channel of trade.
trademark has been infringed, considers the 2. The use of identical marks on non-
mark as a whole and not as dissected. If the competing but related goods may likely
buyer is deceived, it is attributable to the marks cause confusion, as it can be reasonably
as a totality, not usually to any part of it. assumed that they originate from one
manufacturer.
The court therefore should be guided by its first 3. Corollarily, the use of identical marks on
impression. non-competing and unrelated goods is not
 The buyer acts quickly and is governed by likely to cause confusion. [Esso Standard
a casual glance Eastern, Inc. v. Court of Appeals, G.R. No.
 The value of such casual glance may be L-29971 (1982)]
dissipated, as soon as the court assumed
to analyze carefully the respective features In resolving whether goods are related, several
of the mark. [Del Monte Corporation, et al. factors come into play:
v. CA, G.R. No. L-78325 (1990)] 1. The business (and its location) to which the
goods belong
2. The class of product to which the goods
belong;
Page 350 of 450

3. The product's quality, quantity, or size, (6) Likelihood that the prior owner will bridge
including the nature of the package, the gap;
wrapper or container; (7) Actual confusion; and
4. The nature and cost of the article; (8) Sophistication of the buyers.
5. The descriptive properties, physical [Polaroid Corp. vs. Polaroid Elecs. Corp.,
attributes or essential characteristics with 287 F. 2d 492, 495 (2d Cir.), (1961), as
reference to their form, composition, cited in Mighty Corp. v. E&J Gallo, G.R. No.
texture or quality; 154342, Jul 14, 2004]
6. The purpose of the goods;
7. Whether the article is bought for immediate Idem Sonans
consumption, that is, day-to-day household
items; The rule on idem sonans is also a test to
8. The fields of manufacture; resolve the confusing similarity of trademarks.
9. The conditions under which the article is  A mark with a different spelling but is
usually purchased; and similar in sound with a registered mark
10. The channels of trade through which the when read, may be ruled as being
goods flow, how they are distributed, confusingly-similar with the said registered
marketed, displayed and sold [Mighty mark or senior mark.
Corp. v. E&J Gallo, G.R. No. 154342,  Two names are said to be "idem sonantes"
(2004)] if the attentive ear finds difficulty in
distinguishing them when pronounced.
Rationale: The wisdom of this approach is its [Martin v. State, 541 S.W. 2d 605 (1976)]
recognition that each trademark infringement
case presents its own unique set of facts. No Similarity of sound is sufficient to rule that the
single factor is preeminent, nor can the two marks are confusingly similar when applied
presence or absence of one determine, without to merchandise of the same descriptive
analysis of the others, the outcome of an properties. [Marvex Commercial v. Director of
infringement suit. Rather, the court is required Patent, G.R. No. L-19297 (1966)]
to sift the evidence relevant to each of the
criteria. This requires that the entire panoply of
elements constituting the relevant factual
7. Well-Known Marks
landscape be comprehensively examined. It is
a weighing and balancing process. With A well-known mark is a mark which a
reference to this ultimate question, and from a competent authority of the Philippines has
designated to be well-known internationally
balancing of the determinations reached on all
and in the Philippines. [Sec. 123.1(e), RA
of the factors, a conclusion is reached whether
8293]
the parties have a right to the relief sought.
[Mang Inasal Philippines v. IFP Manufacturing
Corporation, G.R. No. 221717 (2017)] "Competent authority" for purposes of
determining whether a mark is well-known,
means:
 The Court;
It has been held that where the products are
different, the prior owner’s chance of success  The Director General;
is a function of many variables, such as the:  The Director of the Bureau of Legal Affairs
(1) Strength of his mark; [Rule 101 (d), Trademark Regulations of
(2) Degree of similarity between the two 2017];
marks;  Any administrative agency or office vested
(3) Reciprocal of defendant’s good faith in with quasi-judicial or judicial jurisdiction to
adopting its own mark; hear and adjudicate any action to enforce
(4) Quality of defendant’s product; the rights to a mark. [Dy v. Koninklijke
(5) Proximity of the products;
Page 351 of 450

Philips Electronics, N.V. G.R. No. 186088 If the well-known mark is registered or not
(2017)] registered in the Philippines:
A mark cannot be registered if it is identical
In determining whether a mark is well-known, with, or confusingly similar to, or constitutes a
account shall be taken of the knowledge of the translation of an internationally well-known
relevant sector of the public, rather than the mark if used for identical or similar goods or
public at large, including knowledge in the services. [Sec. 123.1(e)]
Philippines which has been obtained as a
result of the promotion of the mark. [Sec. If the well-known mark is registered in the
123.1(e), RA 8293] Philippines:
A mark cannot be registered if it is identical
Determinants with, or confusingly similar to, or constitutes a
translation of an internationally well-known
1. The duration, extent and geographical area mark even if it is used for goods or services
of any use of the mark; which are NOT similar to those with respect to
2. The market share in the Philippines and which registration is applied. [Sec. 123.1(f)]
other countries of the goods/services to
which the mark applies; Other persons or entities cannot use the
3. The degree of the inherent or acquired registered well-known mark even for unrelated
distinction of the mark; goods, provided that:
4. The quality-image or reputation acquired 1. The use of the mark in relation to those
by the mark; goods or services would indicate a
5. The extent to which the mark has been connection between those goods or
registered in the world; services, and the owner of the registered
6. The exclusivity of the registration attained mark; and
by the mark in the world; 2. That the interests of the owner of the
7. The extent of use of the mark in the world; registered mark are likely to be damaged
8. The exclusivity of use in the world; by such use. [Sec. 123.1(f)]
9. The commercial value attributed to the
mark in the world; 8. Rights Conferred by
10. The record of successful protection of the
rights in the mark;
Registration
11. The outcome of litigations dealing with the
The owner of a registered mark shall have the
issue of whether the mar is well-known;
exclusive right to prevent all third parties
and
not having the owner's consent from using in
12. The presence or absence of identical or
the course of trade:
similar test marks validly registered or used
(i) Identical or similar signs or containers,
on other similar goods or services and
(ii) For goods or services which are identical or
owned by others. [See Rule 103,
similar to those in respect of which the
Trademark Regulations of 2017]
trademark is registered,
(iii) Where such use would result in a likelihood
Note: The determinants need not concur.
of confusion.
Protection Extended to Well- Note: In case of the use of an identical sign for
Known Marks identical goods or services, a likelihood of
confusion shall be presumed. [Sec. 147.1, RA
The owner of a well-known mark has the right 8293 as amended by RA 9502]
to be protected, whether or not the mark is
registered in the Philippines. [Sec. 123.1(e)] Exception: In cases of importation of drugs
and medicines allowed under Section 72.1 of
Page 352 of 450

this Act and of off-patent drugs and medicines, submitted, a trademark could conceivably
third parties can import the same even without remain registered forever);
the owner’s consent, provided that: 2. Territorial (except well-known marks);
 Said drugs and medicines bear the 3. Fair Use: The registration of the mark shall
registered marks not confer on the registered owner the right
 The registered marks have not been to preclude third parties from using bona
tampered, unlawfully modified, or infringed fide their names, addresses, pseudonyms,
upon [Sec. 147.1, RA 8293 as amended by a geographical name, or exact indications
RA 9502] concerning the kind, quality, quantity,
destination, value, place of origin, or time
When Such Rights Are Conferred of production or of supply, of their goods or
services. Provided That:
The rights of the owner are conferred upon a. Such use is confined to the
registration of the mark, and a mark is deemed purposes of mere identification or
registered on the 31st day from the publication information; and
for purposes of opposition, provided no b. Such use cannot mislead the public
opposition is filed. as to the source of the goods or
 On the 31st day from the publication for services. [Sec. 148, RA 8293]
purposes of opposition (if no opposition is 4. Prior User: A registered mark shall have
filed) no effect against any personwho, in good
 On the date the decision or final order faith,before the filing date or the priority
giving due course to the application date,was using the mark for the purposes
becomes final and executory (if opposition of his business or enterprise. [Sec. 159.1,
is filed). [See Rule 703, Trademarks RA 8293]
Regulations of 2017] 5. Non-Use: Failure to file declaration of
actual use automatically results in the
Certificates of Registration denial of the registration or the cancellation
A certificate of registration of a mark shall be of the registration by operation of law. [Sec.
prima facie evidence of: 124.2]
1. The validity of the registration,
2. The registrant's ownership of the mark, Assignment and Transfer of
and Application and Registration
3. The registrant's exclusive right to use
the same in connection with the goods 1. An application for registration of a mark, or
or services and those that are related its registration, may be assigned or
thereto specified in the certificate. [Sec. transferred with or without the transfer of
138, RA 8293] the business using the mark. [Sec. 149.1,
RA 8293]
Duration 2. Such assignment or transfer shall,
A certificate of registration shall remain in force however, be null and void if it is liable to
for 10 years from registration and may be mislead the public, particularly as regards
renewed for periods of 10 years at its expiration the nature, source, manufacturing process,
upon payment of the prescribed fee and upon characteristics, or suitability for their
filing of a request. [Sec. 145-146, RA 8293] purpose, of the goods or services to which
the mark is applied. [Sec. 149.2, RA 8293]
Limitations on Such Rights 3. The assignment of the application for
registration of a mark, or its registration,
1. Duration (except that, inasmuch as the shall be in writing and require the
registration of a trademark could be signatures of the contracting parties.
renewed every 10 years, provided a Transfers by mergers or other forms of
Declaration of Actual Use is timely succession may be made by any document
Page 353 of 450

supporting such transfer. [Sec. 149.3, RA 1. Any person who shall, without the consent
8293] of the owner of the registered mark, use in
4. Assignments and transfers shall have no commerce any reproduction, counterfeit,
effect against third parties until they are copy, or colorable imitation of a registered
recorded at the Office. [Sec. 149.5, RA mark or the same container or a dominant
8293] feature thereof:
a. In connection with the sale, offering
Any license contract concerning the for sale, distribution, advertising of
registration of a mark, or an application any goods or services, including
therefor, shall provide for effective control by other preparatory steps necessary
the licensor of the quality of the goods or to carry out the sale of any goods
services of the licensee in connection with or services on; or
which the mark is used. If the license contract b. In connection with which such use
does not provide for such quality control, or if is likely to cause confusion, or to
such quality control is not effectively carried cause mistake, or to deceive. [Sec.
out, the license contract shall not be valid. [Sec. 155.1, RA 8293]
150.1, RA 8293] 2. Any person who shall, without the consent
of the owner of the registered mark:
9. Use by third parties of names, a. Reproduce, counterfeit, copy or
colorably imitate a registered mark
etc. similar to registered mark or a dominant feature thereof; and
b. Apply such reproduction,
Use of Indications by Third Parties for
counterfeit, copy or colorable
Purposes Other than those for which the Mark
imitation to labels, signs, prints,
is Used. — Registration of the mark shall not
packages, wrappers, receptacles
confer on the registered owner the right to
or advertisements, intended to be
preclude third parties from using bona fide their
used in commerce:
names, addresses, pseudonyms, a
i. In connection with the sale,
geographical name, or exact indications
offering for sale, distribution, or
concerning the kind, quality, quantity,
advertising of goods or
destination, value, place of origin, or time of
services on; or
production or of supply, of their goods or
ii. In connection with which such
services: Provided, That such use is confined
use is likely to cause
to the purposes of mere identification or
confusion, or to cause
information and cannot mislead the public as to
mistake, or to deceive. [Sec.
the source of the goods or services. [Sec. 148,
155.2, RA 8293]
RA 8293]
Note: The infringement takes place at the
The IPC deems unlawful any subsequent use momentany of the acts stated in Subsection
of the trade name by a third party, whether as 155.1 or 155.2 are committed, regardless of
a trade name or a mark or collective mark, or whether there is actual sale of goods or
any such use of a similar trade name or mark, services using the infringing material.
likely to mislead the public. [Sec. 165.2 (b), RA
8293] A mere distributor, and not the owner, cannot
assert any protection from trademark
10. Infringement and remedies infringement as it had no right in the first place
to the registration of the disputed trademarks.
Trademark infringement [Superior Commercial Enterprises v. Kunnan
Enterprises, G.R. No. 169974 (2010)]
The ff. shall be liable in a civil action for
infringement:
Page 354 of 450

ELEMENTS OF TRADEMARK Two types of confusion arise from the use of

INFRINGEMENT similar or colorable imitation marks, namely –
1. The trademark being infringed is registered 1. Confusion of goods (product confusion)
in the Intellectual Property Office; however, and
in infringement of trade name, the same 2. Confusion of business (source or origin
need not be registered; confusion).
2. The trademark or trade name is While there is confusion of goods when the
reproduced, counterfeited, copied, or products are competing, confusion of business
colorably imitated by the infringer; exists when the products are non-competing
3. The infringing mark or trade name is used but related enough to produce confusion or
in connection with the sale, offering for affiliation. [McDonald’s Corporation v. L.C. Big
sale, or advertising of any goods, business Mak Burger, Inc., et al., G.R. No. 143993
or services; or the infringing mark or trade (2004)]
name is applied to labels, signs, prints,
packages, wrappers, receptacles or Likelihood of confusion is admittedly a relative
advertisements intended to be used upon term, to be determined rigidly according to the
or in connection with such goods, business particular (and sometimes peculiar)
or services; circumstances of each case. In determining
4. The use or application of the infringing likelihood of confusion, the court must
mark or trade name is likely to cause consider:
confusion or mistake or to deceive 1. The resemblance between the trademarks;
purchasers or others as to the goods or 2. The similarity of the goods to which the
services themselves or as to the source or trademarks are attached;
origin of such goods or services or the 3. The likely effect on the purchaser; and
identity of such business; 4. The registrant’s express or implied consent
5. It is without the consent of the trademark or and other fair and equitable considerations.
trade name owner or the assignee thereof. [Mighty Corporation v. E. & J. Gallo Winery,
[Prosource International, Inc. vs. Horphag G.R. No. 154342 (2004)]
Research Management S.A., G.R. No.
180073 (2009)] DOCTRINE OF NATURAL EXPANSION OF
BUSINESS
Of these, it is the element of likelihood of The protection to which the owner of a
confusion that is the gravamen of trademark trademark is entitled extends to cases in which
infringement. [McDonald’s Corporation v. L.C. the use of by a junior appropriator of a
Big Mak Burger, Inc., et al., G.R. No. 143993 trademark of trade name is likely to lead to a
(2004)] confusion of source.
 As where prospective purchasers would be
Whether a trademark causes confusion and is misled into thinking that the complaining
likely to deceive the public hinges on party has extended his business into the
"colorable imitation" which has been defined field or is in any way connected with the
as "such similarity in form, content, words, activities of the infringer; or when it
sound, meaning, special arrangement or forestalls the normal potential expansion of
general appearance of the trademark or trade the business. [Dermaline v. Myra
name in their overall presentation or in their Pharmaceuticals, Inc., G.R. No. 190065
essential and substantive and distinctive parts (2010)]
as would likely mislead or confuse persons in  It is the fact that the underlying goods and
the ordinary course of purchasing the genuine services of both marks deal with inasal and
article." [Mighty Corporation v. E. & J. Gallo inasal-flavored products which ultimately
Winery, G.R. No. 154342 (2004)] fixes the relations between such goods and
services. It is not unlikely that the average
buyer would be led into the assumption that
Page 355 of 450

the curls are of petitioner and that the latter  The defendant had otherwise actual notice
has ventured into snack manufacturing or, of the registration. [Sec. 158, RA 8293]
if not, that the petitioner has supplied the
flavorings for respondent's product. Either Penalties
way, the reputation of petitioner would be
taken advantage of and placed at the Independent of the civil and administrative
mercy of respondent. [Mang Inasal sanctions imposed by law, a criminal penalty of
Philippines v. IFP Manufacturing imprisonment from two (2) years to five (5)
Corporation, G.R. No. 221717 (2017)] years and a fine ranging from Fifty thousand
pesos (P50,000) to Two hundred thousand
Damages pesos (P200,000), shall be imposed on any
person who is found guilty of committing any of
The owner of a registered mark may recover the acts mentioned in Section 155, Section 168
damages from any person who infringes his and Subsection 169.1. (Arts. 188 and 189,
rights, and the measure of the damages Revised Penal Code). [Sec. 170, RA 8293]
suffered shall be either:
(i) The reasonable profit which the 11. Unfair Competition
complaining party would have made, had
the defendant not infringed his rights; or The ff. shall be guilty of unfair competition, and
(ii) The profit which the defendant actually shall be subject to an action therefor:
made out of the infringement; or (i) Any person who shall employ deception or
(iii) In the event such measure of damages any other means contrary to good faith, by
cannot be readily ascertained with which he shall pass off the goods
reasonable certainty, then the court may manufactured by him or in which he deals,
award as damages – or his business, or services for those of the
a. A reasonable percentage based one having established such goodwill; or
upon the amount of gross sales of (ii) Any person who shall commit any acts
the defendant; or calculated to produce said result. [Sec.
b. The value of the services in 168.2, RA 8293]
connection with which the mark or
trade name was used in the Particular acts of unfair competition:
infringement of the rights of the a. Selling one’s goods and giving them the
complaining party. [Sec. 156.1, RA general appearance of goods of another
8293] manufacturer or dealer, either:
 As to the goods themselves or in the
Requirement of Notice wrapping of the packages in which they
are contained, or the devices or words
The owner of the registered mark shall not be thereon; or
entitled to recover profits or damages unless  In any other feature of their
the acts have been committed with appearance, which would be likely to
knowledge that such imitation is likely to influence purchasers to believe that the
cause confusion, or to cause mistake, or to goods offered are those of a
deceive. manufacturer or dealer, other than the
actual manufacturer or dealer. [Sec.
Such knowledge is presumed if: 168.3(a), RA 8293]
 The registrant gives notice that his mark is b. Clothing one’s goods with such
registered by displaying with the mark the appearance as shall deceive the public and
words '"Registered Mark" or the letter R defraud another of his legitimate trade, or
within a circle or any subsequent vendor of such goods or
any agent of any vendor engaged in selling
Page 356 of 450

such goods with a like purpose. [Sec. Company, Inc., vs. Foodsphere, G.R. No.
168.3(a), RA 8293] 217781 (2018)]
c. Using any artifice, or device, or employing
any other means calculated to induce the Infringement of Unfair Competition
false belief that such person is offering the Trademark or
services of another who has identified such Trade Name
services in the mind of the public. [Sec. Unauthorized use of Passing off of one’s
168.3(b), RA 8293] a trademark or trade goods as those of
d. Making any false statement in the course name another
of trade or committing any other act Fraudulent intent is Fraudulent intent is
contrary to good faith of a nature calculated unnecessary essential
to discredit the goods, business or services Prior registration of Registration is not
of another. [Sec. 168.3(c), RA 8293] the trademark is a necessary
prerequisite to the
The elements of an action for unfair action
competition are: [In and Out Burger vs. Sehwani, G.R. No.
(1) Confusing similarity in the general 179127 (2008); Prosource International, Inc.
appearance of the goods, and vs. Horphag Research Management S.A., G.R.
(2) Intent to deceive the public and defraud a No. 180073 (2009)]
competitor.
The law on unfair competition is broader and
The confusing similarity may or may not result more inclusive than the law on trademark
from similarity in the marks, but may result from infringement.
other external factors in the packaging or  The latter is more limited but it recognizes
presentation of the goods. The intent to a more exclusive right derived from the
deceive and defraud may be inferred from the trademark adoption and registration by the
similarity in appearance of the goods as offered person whose goods or business is first
for sale to the public. Actual fraudulent intent associated with it.
need not be shown. [McDonald’s Corporation  Hence, even if one fails to establish his
v. L.G. Big Mak Burger, Inc., et al., G.R. No. exclusive property right to a trademark, he
143993 (2004)] may still obtain relief on the ground of his
competitor’s unfairness or fraud. [Mighty
Who may file an action for unfair competition: Corporation v. E. & J. Gallo Winery, G.R.
A person who has identified in the mind of the No. 154342 (2004)]
publicthe goods he manufactures or deals in,
his business or services from those of others.
12. Registration of marks
 Whether or not a registered mark is
employed under the Madrid Protocol
 Ratio: Such person has a property right in
the goodwillof the said goods, business or Note: This part contains a simplified discussion
services so identified,and said right shall of the Madrid Protocol. For the full text, please
be protected in the same manner as other refer to the “PROTOCOL RELATING TO THE
property rights. [Sec. 168.1, RA 8293] MADRID AGREEMENT CONCERNING THE
INTERNATIONAL REGISTRATION OF
The "true test," therefore, of unfair competition MARKS”
has thus been "whether the acts of the
defendant have the intent of deceiving or are The President's ratification [to the Madrid
calculated to deceive the ordinary buyer Protocol] is valid and constitutional because
making his purchases under the ordinary [it], being an executive agreement as
conditions of the particular trade to which the determined by the Department of Foreign
controversy relates.” [San Miguel Pure Foods Affairs, does not require the concurrence of the
Page 357 of 450

Senate. [Intellectual Property Association of granted by the trademark law of each

the Philippines v. Ochoa et al., G.R. No. designated country.
204605, (2016)]
The protection of the mark in each of the
There is no conflict between the Madrid designated Contracting Parties is the same as
Protocol and the IP Code […] The Madrid if the mark had been the subject of an
Protocol accords with the intent and spirit of the application for registration filed direct with the
IP Code, particularly on the subject of the Office of that Contracting Party. [Art. 4(1)]
registration of trademarks. The Madrid Protocol
does not amend or modify the IP Code on the If no provisional refusal is notified to the
acquisition of trademark rights considering that International Bureau within the relevant time
the applications under the Madrid Protocol are
limit, or if any such refusal is subsequently
still examined according to the relevant
withdrawn, the protection of the mark in each
national law. In that regard, the IPOPHL will
designated Contracting Party is the same as if
only grant protection to a mark that meets the
it had been registered by the Office of that
local registration requirements. [Intellectual
Property Association of the Philippines v. Contracting Party. [Art. 4(1)]
Ochoa et al., G.R. No. 204605 (2016)]
When protection under international
registration lost
Coverage
The protection resulting from the international
registration may no longer be invoked if, before
What is the Madrid Protocol
the expiry of five years from the date of the
The Madrid Protocol is a system facilitating, by
international registration, the basic application
way of a single international application and
or the registration resulting therefrom, or the
registration:
basic registration, as the case may be, has
1. The securing of protection of trademarks in
been 1) withdrawn, 2) has lapsed, 3) has been
multiple designated territories that are
renounced or 4) has been the subject of a final
members to the Protocol [Art 2]; and
decision of rejection, revocation, cancellation
2. The management of such registered
or invalidation, in respect of all or some of the
trademarks.
goods and services listed in the international
registration.
Territorial Effect only on Designated
Territories
The same applies if:
The protection resulting from the international
1. An appeal against a decision refusing the
registration shall extend to any Contracting
effects of the basic application;
Party only at the request of the person who files
2. An action requesting the withdrawal of the
the international application or who is the
basic application or the revocation,
holder of the international registration.
cancellation or invalidation of the
registration resulting from the basic
However, no such request can be made with
application or of the basic registration; or
respect to the Contracting Party whose Office
3. An opposition to the basic application
is the Office of origin. [Art.3bis]
results, after the expiry of the five-year
period, in a final decision of rejection,
Rights conferred revocation, cancellation or invalidation, or
ordering the withdrawal, of the basic
An international registration is equivalent to a application, or the registration resulting
bundle of national registrations in the therefrom, or the basic registration, as the
designated Contracting Parties. case may be, provided that such appeal,
action or opposition had begun before the
The rights conferred to the registered owner of expiry of the said period. [Art. 6(3)]
the marks are the respective exclusive rights
Page 358 of 450

Requirements for registration 3. Substantive Examination by National or

Regional designated Offices
Prior application or registration o The respective IP Offices will assess
An applicant must have first 1) applied for an the application in accordance with
application (“basic application”) for, or 2) the local legislation and decide within
registered (“basic registration”) the mark 12-18 months whether the mark is
sought to be internationally registered through registrable therein, or will be
his “home” national or regional Intellectual provisionally refused.
Property Office before filing an international o WIPO will inform the applicant of the
application. decision of the IP Office.
The “Home” or Office of Origin The refusal of an IP Office to protect the mark
Must be in a territory that is: a Contracting Party will not affect the decisions of other IP Offices.
to the Protocol (e.g. Philippines), or within a
Contracting Organization (e.g. European Independence of International Registration
Union).
Upon expiry of a period of five years from the
The Applicant Must: date of the international registration, such
1. be a national of; registration shall become independent of the
2. be domiciled in; or basic application or the registration resulting
3. have a real and effective industrial or therefrom, or of the basic registration, as the
commercial establishment in – case may be. [Art. 6(2)]
the Contracting State or Contracting
Organization. [Art.2] See discussion above on When protection
under international registration lost in relation
Three-step Process to this concept.
1. Application through the National or
Regional IP Office. Term of Protection
o Applicant needs to have first filed an
application or registered the mark Term
sought to be internationally Registration of a mark at the International
registered through a national or Bureau is effected for ten years. [Art. 6(1)]
regional IP Office.
o Applicant submits international Renewal
application (see Art 3) of the Protocol Any international registration may be renewed
through the same IP Office, which for a period of ten years from the expiry of the
will certify and forward it to the World preceding period, by the mere payment of the
Intellectual Property Organization basic fee, supplementary, and complementary
(WIPO). fees. [Art.7]
2. Formal Examination by WIPO
o WIPO. through its International
Bureau (IB), conducts a formal
examination of the international
application.
o Once approved, the mark is
recorded in the International
Register and published.
o The applicant a certificate of
international registration and notifies
the IP Offices designated where
protection is sought.
Page 359 of 450

The Copyright is Distinct from the

D. COPYRIGHT Property in the Material Object
Subject to it
Copyright is the legal protection extended to The copyright is distinct from the property in the
the owner of the rights in an “original work”, material object subject to it.
which refers to every literary, scientific and
artistic production. Consequently:
(1) The transfer or assignment of the
Copyright refers to the right granted by a copyright shall NOT itself constitute a
statute to the proprietor of an intellectual transfer of the material object
production to its exclusive use and enjoyment (2) The transfer or assignment of the sole
to the extent specified in the statute. [Olaño v. copy or of one or several copies of the
Lim Eng Co, G.R. 195835 (2016)] work shall NOT imply transfer or
assignment of the copyright. [Sec. 181, RA
1. Basic Principles 8293]
Works are Protected by the Sole Copyright, like other intellectual

Fact of Their Creation property rights, is a Statutory Right
PRINCIPLE OF AUTOMATIC PROTECTION Copyright, in the strict sense of the term is

Copyright is vested from the very moment of purely a statutory right.
creation irrespective of their mode or form of  The rights are limited to what the statute
expression, as well as of their content, quality confers.
and purpose. [Sec. 171.1-172.2, RA 8293]  It may be obtained and enjoyed only with
respect to the subjects and by the persons,
The enjoyment and exercise of copyright, and on terms and conditions specified in
including moral rights, shall not be the subject the statute.
of any formality; such enjoyment and such  It can cover only the works falling within the
exercise shall be independent of the existence statutory enumeration or description. [Pearl
of protection in the country of origin of the work. and Dean vs. Shoemart, G.R. No. 148222
[Article 5(2), Berne Convention for the (2003)]
Protection of Literary and Artistic Works]
2. Copyrightable Works
Protection Extends Only to the Original Works
Expression of an Idea, Not the Idea
Itself Literary and artistic works, hereinafter referred
to as "works", are original intellectual creations
No protection shall extend, under this law, to in the literary and artistic domain protected
any idea, procedure, system method or from the moment of their creation and shall
operation, concept, principle, discovery or include in particular:
mere data as such, even if they are expressed, 1. Books, pamphlets, articles and other
explained, illustrated or embodied in a work. writings;
[Sec. 175, RA 8293] 2. Periodicals and newspapers;
3. Lectures, sermons, addresses,
dissertations prepared for oral delivery,
whether or not reduced in writing or other
material form;
Page 360 of 450

4. Letters; Works are protected irrespective of their mode

5. Dramatic or dramatico-musical or form of expression. [Sec. 172.2, RA 8293]
compositions; choreographic works or
entertainment in dumb shows; Derivative Works
6. Musical compositions, with or without The following derivative works shall also be
words; protected by copyright:
7. Works of drawing, painting, architecture, Dramatizations, translations, adaptations,
sculpture, engraving, lithography or other abridgments, arrangements, and other
works of art; models or designs for works alterations of literary or artistic works; and
of art; Collections of literary, scholarly or artistic
8. Original ornamental designs or models for works, and compilations of data and other
articles of manufacture, whether or not materials which are original by reason of the
registrable as an industrial design, and selection or coordination or arrangement of
other works of applied art; their contents. [Sec. 173.1, RA 8293]
9. Illustrations, maps, plans, sketches, charts
and three-dimensional works relative to Derivative works are protected as new
geography, topography, architecture or works, provided they shall not:
science; (1) Affect the force of any subsisting copyright
10. Drawings or plastic works of a scientific or upon the original works employed or any
technical character; part thereof; or
11. Photographic works including works (2) Be construed to imply any right to such use
produced by a process analogous to of the original works, or to secure or extend
photography; lantern slides; copyright in such original works. [Sec.
12. Audiovisual works and cinematographic 173.2, RA 8293]
works and works produced by a process
analogous to cinematography or any 3. Non-Copyrightable Works
process for making audio-visual
recordings;
Unprotected Subject Matter
13. Pictorial illustrations and advertisements;
14. Computer programs; and
(1) Any idea, procedure, system method or
15. Other literary, scholarly, scientific and
operation, concept, principle, discovery or
artistic works [Sec. 172.1, RA 8293]
mere data as such, even if they are
expressed, explained, illustrated or
When a work is considered original:
embodied in a work;
1. The work is an independent creation of the
(2) News of the day and other miscellaneous
author; and
facts having the character of mere items of
2. It must not be copied from the work of
press information;
another.
(3) Any official text of a legislative,
administrative or legal nature, as well as
A person must be the original creator of the
any official translation thereof;
work to be entitled to a copyright. He must have
(4) Pleadings;
created it by his own skill, labor and judgment
(5) Original decisions of courts and tribunals
without directly copying or evasively imitating
(Note: This pertains to the “original
the work of another. [Ching Kian Chuan vs. CA,
decisions” not the SCRA published
G.R. No. 130360 (2001)]
volumes since these are protected under
derivative works under Sec. 173.1). [Sec.
Originality is not determined by novelty,
175, RA 8293]
aesthetic merit or ingenuity but that it is an
independent creation.
Television newscasts are subject to copyright.
Although news or the events themselves are
Page 361 of 450

not copyrightable, expression of the news 2. Author of speeches, lectures, sermons,

particularly when it underwent a creative addresses and dissertations shall have
process is entitled to copyright protection. exclusive right of making a collection of his
[ABS-CBN Corp. vs. Gozon, G.R. No. 195956 work.
(2015)]
However, prior approval of the government
The format or mechanics of a TV show is not agency or the office wherein the work is
copyrightable as copyright does not extend to created shall be necessary for the exploitation
ideas, procedures, processes, systems, of such work for profit. [Sec. 176.1]
methods of operation, concepts, principles or
discoveries regardless of the form in which Publication or republication by the Government
they are described, explained, illustrated or in a public document of any work in which
embodied. [Joaquin Jr. et al vs. Drilon, et al, copyright is subsisting shall not be taken:
G.R. No. 108946 (1999)] (1) To cause any abridgment or annulment of
the copyright; or
No one may claim originality as to facts as (2) To authorize any use or appropriation of
these do not owe their origin to an act of such work without the consent of the
authorship. The first person to find and report a copyright owner. [Sec. 176.3, RA 8293]
particular fact has not created the same; he has
merely discovered its existence. [Feist Note
Publication vs. Rural Telephone Services, 499 Works made by an officer or employee of the
U.S. 340 (1991)] Government as part of his regularly prescribed
duty do not enjoy copyright. Works made by an
A compilation is not copyrightable per se, but it employee of the government which is not as a
is copyrightable only if its facts have been part of his regularly prescribed official duties
selected, coordinated, or arranged in such a (i.e. not considered a “Work of the
way that the resulting work as a while Government”) may enjoy copyright.
constitutes an original work of authorship.
Otherwise known as the Sweat of the Brow or Works of the Public Domain
Industrious Collection Test. [Feist
Publication vs. Rural Telephone Services, 499 Works of the public domain are non-
U.S. 340 (1991)] copyrightable.
Works of the Government of The To this class of works belong:

Philippines 1. Works, whose term of copyright has
expired;
Work of the Government of the Philippines 2. Works wherein the copyright over them are
A work created by an officer or employee of the waived by the owner in favor of the public;
Philippine Government or any of its and
subdivisions and instrumentalities, including 3. Works which did not enjoy copyright
government-owned or controlled corporations protection in the first place, as in the case
as a part of his regularly prescribed official of unregistered works made under
duties. [Sec. 171.11, RA 8293] previous laws that required the registration
of copyright [See: Santos vs. McCullough
General Rule: No copyright shall subsist in Printing Company, G.R. No. L-19439
any work of the Government. (1964)]
Exceptions
1. When copyright is transferred by
assignment or bequest in favor of the
government [Sec. 176.3];
Page 362 of 450

Useful Articles 4. Rights of Copyright Owner

A “useful article” is defined as an article “having Works are protected by the sole fact of their
intrinsic utilitarian function that is not merely to creation, irrespective of their mode or form of
portray the appearance of the article or to expression, as well as of their content, quality
convey information” is excluded from copyright and purpose. [Sec. 172.2, RA 8293]
eligibility. The only instance when a useful
article may be the subject of copyright The issuance of the certificates of registration
protection is when it incorporates a design
and deposit as provided by Sec. 2, Rule 7 of
element that is physically or conceptually
the Copyright Safeguards and Regulations, are
separable from the underlying product. [Olaño
v. Lim Eng Co, G.R. No. 195835 (2016)] purely for recording the date of registration and
deposit of the work, and are not conclusive as
to copyright ownership (nor does it determine
USEFUL ARTICLE DOCTRINE the time when copyright vests). [Manly
Works whose sole purpose is utilitarian, and Sportwear v. Dadodette Enterprises, G.R. No.
have no separate artistic value are non- 165306 (2005)]
copyrightable works.
Copyright or Economic Rights
In contrast, a work of applied art, which has
utilitarian functions, but has an identifiable Copyright or economic rights shall consist of
artistic work or creation incorporated thereto, the exclusive right to carry out, authorize or
can be the subject of a copyright to the extent prevent the following acts:
that the design features: 1. Reproduction of the work or substantial
Can be identified separately from, and portion of the work;
Are capable of existing independently of the 2. Dramatization, translation, adaptation,
utilitarian aspects of the article. [Brandir Int’l v. abridgment, arrangement or other
Cascade Pacific, 834 F. 2nd 1142 (2nd Cir.) transformation of the work;
(1987)] 3. The first public distribution of the original
and each copy of the work by sale or other
Denicola Test: Conceptual Separability forms of transfer of ownership;
(Aesthetics v. Functionality) 4. Rental of the original or a copy of:
(1) The work cannot be copyrighted if its a. An audiovisual or cinematographic
design elements reflect a merger of work,
aesthetic and functional considerations, b. A work embodied in a sound
and the artistic aspects of the work cannot recording,
be conceptually separable from the c. A computer program,
utilitarian aspects. d. A compilation of data and other
(2) Conceptual separability exists where materials or a musical work in
design elements can be identified as graphic form
reflecting the designer's artistic judgment, e. Irrespective of the ownership of the
exercised independently of functional original or the copy which is the
influences subject of the rental;
(3) The relevant question should be whether 5. Public display of the original or a copy of
the design of a useful article, however the work;
intertwined with the article’s utilitarian 6. Public performance of the work; and
aspects, causes an ordinary reasonable 7. Other communication to the public of the
observer to perceive an aesthetic concept work. [Sec. 177, RA 8293]
not related to the article’s use. [Brandir Int’l
v. Cascade Pacific, 834 F. 2nd 1142 (2nd
Cir.) (1987)]
Page 363 of 450

Publisher’s Copyright an assignment or license with respect to such

In addition to the right to publish granted by the right, have the right:
author, his heirs, or assigns, the publisher shall 1. To require that the authorship of the works
have a copyright consisting merely of the right be attributed to him, in particular, the right
of reproduction of the typographical that his name, as far as practicable, be
arrangement of the published edition of the indicated in a prominent way on the copies,
work. [Sec.174, RA 8293] and in connection with the public use of his
work; [Sec. 193.1, RA 8293]
Copyright in a work of architecture 2. To make any alterations of his work prior
The copyright in any such work shall include: to, or to withhold it from publication; [Sec.
 The right to control the erection of any 193.2, RA 8293]
building which reproduces the whole or a 3. To object to any distortion, mutilation or
substantial part of the work either in its other modification of, or other derogatory
original form or in any form recognizably action in relation to, his work which would
derived from the original be prejudicial to his honor or reputation;
[Sec. 193.3, RA 8293]
However, it shall not include: 4. To restrain the use of his name with respect
 The right to control the reconstruction or to any work not of his own creation or in a
rehabilitation in the same style as the distorted version of his work. [Sec. 193.4,
original of a building to which that copyright RA 8293]
relates. [Sec. 186, RA 8293]
ASSIGNMENT OR LICENSE OF MORAL
Communication to the Public of RIGHTS
Copyrighted Works Moral rights cannot be assigned or licensed.
This includes point-to-point transmission of a [Sec. 198, RA 8293]
work, including:
(1) Video on demand, and WAIVER OF MORAL RIGHTS
(2) Providing access to an electronic retrieval While Moral Rights cannot be assigned or
system licensed, it can be waived. [Sec. 198, RA 8293]
- Such as computer databases, servers,
or similar electronic storage devices. General Rule: Moral rights can be waived in
writing, expressly stating such waiver. [Sec.
Broadcasting, rebroadcasting, retransmission 195, RA 8293]
by cable, and broadcast and retransmission by
satellite are all acts of “communication to the Exceptions
public” within the meaning of the IPC. [Rule 11, Even if made in writing, waiver is still not valid
Copyright Safeguards and Regulations] if:
1. Use of the name of the author, title of his
First Public Distribution of Work work, or his reputation with respect to any
An exclusive right of first distribution of work version or adaptation of his work, which
includes all acts involving distribution, because of alterations substantially tends
specifically including the first importation of an to injure the literary or artistic reputation of
original and each copy of the work into the another author; [Sec. 195.1, RA 8293]
jurisdiction of the Republic of the Philippines. 2. It uses the name of the author in a work that
[Rule 12, Copyright Safeguards and he did not create. [Sec. 195.1, RA 8293]
Regulations]
The right of attribution is waived by contribution
Moral Rights to a collective work unless such is expressly
reserved. [Sec. 196, RA 8293]
The author of a work shall, independently of the
economic rights in Section 177 or the grant of
Page 364 of 450

Right to Transfer, Assign, or subsequent to the first disposition thereof

License by the author, the author or his heirs shall have:
 An inalienable right to participate in the
The author has the right to assign or license the gross proceeds of the sale or lease to the
copyright and/or the material object in whole or extent of five percent (5%)
in part, and they allow the owner to derive
financial reward from the use of his works by Duration of Right
others. [Sec. 180.1, RA 8293 as amended by This right shall exist during the lifetime of the
RA 10372] author and for 50 years after his death. [Sec.
200, RA 8293]
Rights of Assignee or Licensee
The assignee or licensee is entitled to all the Works not covered
rights and remedies which the assignor or Prints, etchings, engravings, works of applied
licensor had with respect to the copyright, art, or works of similar kind wherein the author
within the scope of the assignment or license. primarily derives gain from the proceeds of
[Sec. 180.1] reproductions. [Sec. 201, RA 8293]
The submission of a literary, photographic or Related Rights (Neighboring

artistic work to a newspaper, magazine or Rights)
periodical for publication shall constitute only a
license to make a single publication unless a Performer’s Rights
greater right is expressly granted. If two (2) or 1) As regards their performances, the right of
more persons jointly own a copyright or any authorizing:
part thereof, neither of the owners shall be a) The broadcasting and other
entitled to grant licenses without the prior communication to the public of their
written consent of the other owner or owners. performance; and
[Sec. 180.3, RA 8293] b) The fixation of their unfixed
performance. [Sec. 203.1, RA 8293]
Any exclusivity in the economic rights in a work c) Such right shall be maintained and
may be exclusively licensed. Within the scope exercised 50 years after his death, by
of the exclusive license, the licensee is entitled his heirs, and in default of heirs, the
to all the rights and remedies which the licensor government, where protection is
had with respect to the copyright. [Sec. 180.4, claimed. [Sec. 204.2, RA 8293]
RA 8293] 2) The right of authorizing the direct or indirect
reproduction of their performances fixed in
Filing of Assignment or License sound recordings, or audiovisual works or
An assignment or exclusive license may be fixations in any manner or form; [Sec.
filed in duplicate with the National Library upon 203.2, RA 8293, as amended by 10372]
payment of the prescribed fee for registration in 3) The right of authorizing the first public
books and records kept for the purpose. [Sec. distribution of the original and copies of
182, RA 8293] their performance fixed in the sound
recording or audiovisual works or fixations
Rights to Proceeds on Subsequent through sale or rental or other forms of
Transfers (Droit De Suite or Follow transfer of ownership; [Sec. 203.3, RA
Up Rights) 8293, as amended by RA 10372]
a) Subject to the provisions of Section
In every sale or lease of an original work of 206
painting or sculpture or of the original 4) The right of authorizing the commercial
manuscript of a writer or composer, rental to the public of the original and
copies of their performances fixed in sound
recordings or audiovisual works or
Page 365 of 450

fixations, even after distribution of them by, distribution by them by or pursuant to

or pursuant to the authorization by the authorization by the producer. [Sec. 208.3,
performer; [Sec. 203.4, RA 8293, as RA 8293]
amended by RA 10372]
5) The right of authorizing the making Single Equitable Remuneration
available to the public of their The right to be paid a single equitable
performances fixed in sound recordings or remuneration by the user to be shared with the
audiovisual works or fixations, by wire or performers equally, in the absence of any
wireless means, in such a way that agreement, when a sound recording published
members of the public may access them for commercial purposes, or a reproduction of
from a place and time individually chosen such sound recording, is:
by them; [Sec. 203.5, RA 8293, as a. Used directly for broadcasting or
amended by RA 10372] b. Used for other communication to the
6) The right to claim to be identified as the public; or
performer of his performances, and to c. Publicly performed with the intention of
object to any distortion, mutilation or other making and enhancing profit. [Sec. 209,
modification of his performances that RA 8293]
would be prejudicial to his reputation, as
regards his live aural performances or Rights of Broadcasting Organizations
performances fixed in sound recordings or 1. The rebroadcasting of their broadcasts;
audiovisual works or fixations; [Sec. 211.1, RA 8293]
a) Exception: Where the omission is 2. The recording in any manner, including the
dictated by the manner of the use of the making of films or the use of video tape, of
performance. [Sec. 204.1, RA 8293, as their broadcasts for the purpose of
amended by RA 10372] communication to the public of television
7) The right to an additional remuneration broadcasts of the same; [Sec. 211.2, RA
equivalent to at least five percent (5%) of 8293]
the original compensation he or she 3. The use of such records for fresh
received for the first communication or transmissions or for fresh recording. [Sec.
broadcast, in every communication to the 211.3, RA 8293]
public or broadcast of a performance
subsequent to the first communication or Must-Carry Rule
broadcast thereof by the broadcasting This rule prevents cable television companies
organization. [Sec. 206, RA 8293] from excluding broadcasting organization
a) Unless otherwise provided in the especially in those places not reached by
contract signal. Also, the rule prevents cable television
companies from depriving viewers in far-flung
Rights of Producers of Sound Recordings areas the enjoyment of programs available to
1. The right to authorize the direct or indirect city viewers. [ABS-CBN Broadcasting vs.
reproduction of their sound recordings, in Philippine Multi-Media System, G.R. Nos.
any manner or form; the placing of these 175769-70 (2009)]
reproductions in the market and the right of
rental or lending; [Sec. 208.1, RA 8293]
2. The right to authorize the first public
distribution of the original and copies of
their sound recordings through sale or
rental or other forms of transferring
ownership; [Sec. 208.2, RA 8293]
3. The right to authorize the commercial
rental to the public of the original and
copies of their sound recordings, even after
Page 366 of 450

5. Rules on Ownership of Audio visual

Belongs to the producer,
works author of the scenario,
Copyright composer of the music,
film director, and author of
Ownership of Copyright the adapted work.
However, subject to
Work Ownership stipulations, the producers
Single Creator Belongs to the author of shall exercise the
of an Original the work [Sec. 178.1, RA copyright as may be
Work 8293] required for the exhibition
Works of Joint Belongs of the co-authors; of the work, except for the
Authorship in the absence of right to collect license fees
agreement, their rights for the performance of
shall be governed by the musical compositions in
rules on co-ownership. the work. [Sec. 178.5, RA
However, if the work 8293]
consists of parts that can Letters Belongs to the writer, but
be used separately and the court may authorize
identified, the author of their publication or
each part owns the dissemination of the public
copyright of the part he good or interest of justice
has created. [Sec. 178.2, requires, pursuant to Art.
RA 8293] 723, New Civil Code. [Sec.
Work created Belongs to the employee if 178.6, RA 8293]
during the the creation is not a part of Anonymous Publishers are deemed to
course of his regular duties, even if and represent the authors,
employment he used the time, facilities pseudonymous unless the contrary
and materials of the works appears, the pseudonyms
employer. However, or adopted names leave
copyright belongs to the no doubt as to the author’s
employer if the work is in identity or if the author
the performance of the discloses his identity.
employee’s regular duties [Sec. 179, RA 8293]
unless there is an Collective A contributor is deemed to
agreement to the contrary. works have waived his right
[Sec. 178.3, RA 8293] unless he expressly
Work The person who reserves it. [Sec. 196, RA
commissioned commissioned the work 8293]
by a person and pays for it holds
other than the ownership of the work per A person to be entitled to copyright must be the
employer se, but copyright remains original creator of the work. He must have
with the creator unless created it by his own skill, labor and judgment
there was a stipulation to without directly copying or evasively imitating
the contrary. [Sec. 178.4, the work of another. [Wilson Ong Ching Kian
RA 8293] 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
Page 367 of 450

copyright is presumed. This presumption Submitted Work

however is rebuttable and cannot be sustained General Rule: The submission of a literary,
where other evidence in the record casts doubt photographic or artistic work to a newspaper,
on the question of ownership. magazine or periodical for publication shall
xxx constitute only a license to make a single
Valid copyright ownership denotes originality of publication.
the copyrighted material. Originality means that
the material was not copied, evidences at least Exception: Unless a greater right is expressly
minimum creativity and was independently granted. [Sec. 180.3, RA 8293]
created by the author. [Olaño v. Lim Eng Co,
G.R. 195835 (2016)] Collective Management
Organizations (CMO)
Presumption of Authorship
CMOs are entities composed of artists, writers,
General Rule: The natural person whose composers and other creators, or
name is indicated on a work in the usual copyright/related rights holders that manage
manner as the author shall, in the absence of the bundle of copyrights that their members
proof to the contrary, be presumed to be the own by providing the legal platform to efficiently
author of the work. enforce their intellectual property rights.
The person or body corporate, whose name The owners of copyright and related rights or
appears on an audio-visual work in the usual their heirs may designate a society of artists,
manner, shall, in the absence of proof to the writers, composers and other right-holders to
contrary, be presumed to be the maker of said collectively manage their economic or moral
work. [Sec. 219, RA 8293] rights on their behalf.
 For the said societies to enforce the
Use of Pseudonyms rights of their members, they shall first
This provision shall be applicable even if the secure the necessary accreditation
name is a pseudonym, where the pseudonym from the Intellectual Property Office.
leaves no doubt as to the identity of the author. [Sec. 183, RA 8293 as amended by RA
[Sec. 219, RA 8293] 10372]
Transfer or Assignment of The primary purpose of a CMO is to collectively

Copyright manage copyright and/or related rights,
including any or all of the following activities:
The copyright may be assigned or licensed in (1) Negotiation with and grant of licenses to
whole or in part. [Sec. 180.1, RA 8293] users of protected literary, scholarly,
 The copyright is not deemed assigned or scientific and artistic works, derivative
licensed inter vivos in whole or in part works, performances, sound recordings,
unless there is a written indication of such audiovisual works and broadcasts;
intention. [Sec. 180.2, RA 8293 as (2) Collection of royalties and other forms of
amended by RA 10372] remuneration for the use of protected
 If two or more persons jointly own a literary, scholarly, scientific and artistic
copyright or any part thereof, neither of the works, derivative works, performances,
owners shall be entitled to grant licenses sound recordings, audiovisual works and
without the prior written consent of the broadcasts;
other owner or owners. [Sec. 180.3, RA (3) Collection of proceeds In subsequent
8293] transfers of the originals of paintings,
sculptures and manuscripts;
Page 368 of 450

(4) Collection of additional remuneration for [Sec. 185.1, RA 8293; Harper & Row v.
subsequent communication or broadcast of Nation Enterprise, 471 US 539, (1985)]
a performance;
(5) Collection of single equitable remuneration The fact that a work is unpublished shall not by
for the broadcast, other communication to itself bar a finding of fair use if such finding is
the public or public performance of a sound made upon consideration of all the above
recording; and factors. [Sec. 185.2, RA 8293]
(6) Distribution of the abovementioned
collections to the rights holders. [IPOPHL Commercial use of the copyrighted work can
Office Order 13-173 s.2013] be weighed against fair use. [ABS–CBN Corp.
vs. Gozon, G.R. No. 195956 (2015)]
6. Limitations on Copyright
Parody, like other comment and criticism, may
claim fair use. The more transformative the
Fair Use
new work, the less will be the significance of
other factors, like commercialism. The heart of
DOCTRINE OF FAIR USE
any parodist's claim to quote from existing
The fair use of copyrighted work for criticism,
material is the use of some elements of a prior
news reporting, teaching (including multiple
author's composition to create a new one that,
copies for classroom use), research and similar
at least in part, comments on that author's
purposes is not an infringement of copyright.
work. [Campbell v. Acuff-Rose Music Inc., 510
[Sec. 185.1, RA 8293]
U.S. 569 (1994)]
A privilege, in persons other than the owner of
the copyright, to use the copyrighted material Limitations on Protection of
in a reasonable manner without his consent, Neighboring Rights
notwithstanding the monopoly granted to the
owner by the copyright. It is meant to balance Sections 203, 208 and 209 shall not apply
the monopolies enjoyed by the copyright owner where the acts referred to in those Sections are
with the interests of the public and of society. related to:
1. The use by a natural person exclusively for
Decompilation his own personal purposes;
Refers to the reproduction of the code and 2. Using short excerpts for reporting current
translation of the forms of the computer events;
program to achieve the inter-operability of an 3. Use solely for the purpose of teaching or
independently created computer program with for scientific research; and
other programs. This may also constitute fair 4. Fair use of the broadcast subject to certain
use. [Sec. 185.1, RA 8293] conditions. [Sec. 212, RA 8293]
Term of Protection
Factors to consider in determining Fair Use
a. The purpose and character of the use, Duration of Copyright
including whether such use is of a Works Term
commercial nature or is for non-profit Original Literary and Lifetime of author
educational purposes; Artistic Works and for 50 years after
b. The nature of the copyrighted work; including his death [Sec.
c. The amount and substantiality of the Posthumous Works 213.1, RA 8293]
portion used in relation to the copyrighted Derivative Works Lifetime of author
work as a whole; and including and for 50 years after
d. The effect of the use upon the potential Posthumous Works his death [Sec.
market for or value of the copyrighted work 213.1, RA 8293]
Page 369 of 450

Joint Authorship Lifetime of the last Term of Protection of Neighboring Rights

surviving author and Works Term
for 50 years after his For 50 years from the end of
death [Sec. 213.2, performances the year in which the
RA 8293] not incorporated performance took place
Anonymous or 50 years from date of in recordings [Sec. 215.1(a), RA 8293]
Pseudonymous first lawful publication For sound or 50 years from the end of
Works [Sec. 213.3, RA image and the year in which the
8293] sound recording took place.
Applied Art 25 years from date of recordings and [Sec. 215.1(b), RA 8293]
making [Sec. 213.4, for
RA 8293] performances
Published 50 years from incorporated
Photographic Works publication [Sec. therein
213.5, RA 8293] Broadcasts 20 years from the date
Unpublished 50 years from the the broadcast took place
Photographic Works making [Sec. 213.5, [Sec. 215.2, RA 8293]
RA 8293]
Published Audio- 50 years from 7. Copyright Infringement
visual Works publication [Sec.
213.6, RA 8293] Infringement of Copyright
Unpublished Audio- 50 years from the The IP Code was amended to expand
visual Works making [Sec. 213.6, infringement not only to cover direct
RA 8293] infringement but also third party
infringement.
The term of protection subsequent to the death
of the author shall run from the date of his A person infringes a right protected under this
death or of publication, but such terms shall Act when one:
always be deemed to begin on the first day of a. Directly commits an infringement;
January of the year following the event which b. Benefits from the infringing activity of
gave rise to them. [Sec. 214, RA 8293] another person who commits an
infringement if the person benefiting:
Term of Protection of Moral Rights i. Has been given notice of the
Moral Right Term infringing activity; and
Lifetime of author and in ii. Has the right and ability to control
Right of perpetuity after his death the activities of the other person;
Attribution or [Sec. 198.1, RA 8293 as c. With knowledge of infringing activity,
Right of amended by RA 10372] induces, causes or materially contributes
Paternity to the infringing conduct of another. [Sec.
(Sec. 193.1) 216, RA 8293 as amended by RA 10372]
Sec. 193.2-
193.4 Coterminous with the It also includes the act of any person who at the
economic rights. [Sec. time when copyright subsists in a work has in
198, RA 8293 as amended his possession an article which he known, or
by RA 10372] ought to know, to be an infringing copy of the
work for the purpose of:
a. Selling, letting for hire, or by way of trade
offering or exposing for sale, or hire, the
article
Page 370 of 450

b. Distributing the article for purpose of trade, Substantial Reproduction

or for any other purpose to an extent that It is not necessarily required that the entire
will prejudice the rights of the copyright copyrighted work, or even a large portion of it,
owner in the work; or be copied. If so much is taken that the value of
c. Trade exhibit of the article in public. [Sec. the original work is substantially diminished,
217.3, RA 8293] there is an infringement of copyright and to an
injurious extent, the work is appropriated.
What Constitutes Infringement
Infringement consists in the doing by any In cases of infringement, copying alone is not
person, without the consent of the owner of the what is prohibited. The copying must produce
copyright, of anything the sole right to do which an “injurious effect.” [Habana et al vs. Robles
is conferred by statute on the owner of the et al., G.R. No. 131522 (1999)]
copyright.
Knowledge not an Element of Infringement
It can cover a whole range of acts from Knowledge of infringement is material only
copying, assembling, packaging to marketing, when a person is charged of aiding and
including the mere offering for sale of abetting a copyright infringement. The liability
counterfeit goods. [Habana et al vs. Robles et for copyright infringement is in the nature of
al., G.R. No. 131522 (1999)] strict liability. It does not require mens rea or
culpa. [ABS–CBN Corp vs. Gozon, G.R. No.
Copyright infringement is thus committed by 195956 (2015)]
any person who shall use original literary or
artistic works, or derivative works, without the The following shall NOT constitute
copyright owner’s consent in such a manner as infringement of copyright:
to violate the foregoing copy and economic a. Recitation or performance of a work once it
rights. has been made accessible to the public if
(1) privately done AND free of charge OR
xxx (2) strictly for a charitable or religious
institution; [Sec. 184.1(a), RA 8293]
For a claim of copyright to prevail, the b. Making of quotations from a published
evidence on record must demonstrate: (1) work: (1) compatible with fair use, (2)
ownership of a validly copyrighted material by extent is justified by the purpose, (3) source
the complainant; and (2) infringement of the and name of the author, appearing on
copyright by the respondent. work, must be mentioned; [Sec. 184.1(b),
RA 8293]
xxx c. Reproduction or communication to the
public by mass media of articles on current
[W]hat was copyrighted were their political, social, economic, scientific or
sketches/drawings only, and not the actual religious topic, lectures, addresses and
hatch doors themselves. To constitute other works, delivered in public: (1) for
infringement, the usurper must have copied or information purposes, (2) not expressly
appropriated the original work of an author or reserved, and (3) source is already
copyright proprietor, absent copying, there can indicated; [Sec. 184.1(c), RA 8293]
be no infringement of copyright. Absent d. Reproduction and communication to the
originality and copyrightability as elements of a public of literary, scientific or artistic works
valid copyright ownership, no infringement can as part of reports of current events by
subsist. [Olaño v. Lim Eng Co, G.R. 195835 means of photography, cinematography or
(2016)] broadcasting to the extent necessary for
the purpose; [Sec. 184.1(d), RA 8293]
e. Inclusion of a work in a publication,
broadcast or other communication to the
Page 371 of 450

public, sound recording or film if made by publication. [Sec. 184.1(l), RA 8293 as

way of illustration for teaching purposes amended by RA 10372]
compatible with fair use and the source and
the name of the author appearing on work, Reproduction of Published Work
must be mentioned; [Sec. 184.1(e), RA General Rule: The private reproduction of a
8293] published work in a single copy, where the
f. Recording made in schools, universities, or reproduction is made by a natural person
educational institutions of a work included exclusively for research and private study, shall
in a broadcast for the use of schools, be permitted, without the authorization of the
universities or educational institutions. owner of copyright in the work. [Sec. 187.1, RA
Such recording must be deleted within a 8293]
reasonable period; such recording may not
be made from audio-visual works which are Exceptions: Such permission shall not extend
part of the general cinema, repertoire of to:
feature films except of brief excerpts of the a. A work of architecture in the form of
work; [Sec. 184.1(f), RA 8293] building or other construction;
g. Making of ephemeral recordings; (1) by a b. An entire book, or a substantial part
broadcasting organization, (2) by means of thereof, or of a musical work in graphic
its work or facilities, (3) for use in its own form by reprographic means;
broadcast; [Sec. 184.1(g), RA 8293] c. A compilation of data and other materials;
h. Use made of a work by or under the d. A computer program except as provided in
direction or control of the government for Section 189; and
public interest compatible with fair use; e. Any work in cases where reproduction
[Sec. 184.1(h), RA 8293] would unreasonably conflict with a normal
i. Public performance or the communication exploitation of the work or would otherwise
to the public of a work in a place where no unreasonably prejudice the legitimate
admission fee is charged by a club on interests of the author. [187.2, RA 8293]
institution for charitable or educational
purpose only and the aim is not profit- Reprographic Reproduction by Libraries
making; [Sec. 184.1(i), RA 8293] Any library or archive whose activities are not
j. Public display of the original or a copy of for profit may, without the authorization of the
the work not made by means of a film, author of copyright owner, make a single copy
slide, television, image or otherwise on of the work by reprographic reproduction:
screen or by means of any other device or a. Where the work by reason of its fragile
process either the work has been character or rarity cannot be lent to user in
published, sold, given away, or transferred its original form;
to another person by the author or his b. Where the works are isolated articles
successor in title; [Sec. 184.1(j), RA 8293] contained in composite works or brief
k. Use made of a work for the purpose of any portions of other published works and the
judicial proceedings or for the giving of reproduction is necessary to supply them,
professional advice by a legal practitioner. when this is considered expedient, to
[Sec. 184.1(k), RA 8293] persons requesting their loan for purposes
l. The reproduction or distribution of of research or study instead of lending the
published articles or materials in a volumes or booklets which contain them;
specialized format exclusively for the use and
of the blind, visually- and reading-impaired c. Where the making of such a copy is in
persons: Provided, That such copies and order to preserve and, if necessary in the
distribution shall be made on a nonprofit event that it is lost, destroyed or rendered
basis and shall indicate the copyright unusable, replace a copy, or to replace, in
owner and the date of the original the permanent collection of another similar
library or archive, a copy which has been
Page 372 of 450

lost, destroyed or rendered unusable and due to the infringement, as well as the
copies are not available with the publisher. profits the infringer may have made due to
[Sec. 188.1, RA 8293] such infringement;
 In proving profits: The plaintiff shall be
It shall not be permissible to produce a volume required to prove sales only, and the
of a work published in several volumes or to defendant shall be required to prove
produce missing tomes or pages of magazines every element of cost which he claims
or similar works, unless the volume, tome or [Sec. 216.1(b)]
part is out of stock: (3) Such damages which to the court shall
 Provided, That every library which, by appear to be just and shall not be regarded
law, is entitled to receive copies of a as penalty, in lieu of actual damages and
printed work, shall be entitled, when profits; [Sec. 216.1(b)]
special reasons so require, to (4) Impounding during the pendency of the
reproduce a copy of a published work action, upon such terms and conditions as
which is considered necessary for the the court may prescribe, sales invoices and
collection of the library but which is out other documents evidencing sales, all
of stock. [Sec. 188.2, RA 8293] articles and their packaging alleged to
infringe a copyright and implements for
Reproduction of Computer Program making them; [Sec. 216.1(c)]
The reproduction in one back-up copy or (5) Deliver under oath for destruction without
adaptation of a computer program shall be any compensation all infringing copies or
permitted, without the authorization of the devices, as well as all plates, molds, or
author of, or other owner of copyright in, a other means for making such infringing
computer program, by the lawful owner of that copies as the court may order; [Sec.
computer program: Provided, That the copy or 216.1(d)]
adaptation is necessary for: (6) Such other terms and conditions, including
a. The use of the computer program in the payment of moral and exemplary
conjunction with a computer for the damages, which the court may deem
purpose, and to the extent, for which the proper, wise and equitable and the
computer program has been obtained; and destruction of infringing copies of the work
b. Archival purposes, and, for the even in the event of acquittal in a criminal
replacement of the lawfully owned copy of case; [Sec. 216.1(e)]
the computer program in the event that the (7) Criminal liability.
lawfully obtained copy of the computer
program is lost, destroyed or rendered The copyright owner may elect, at any time
unusable. [Sec. 189.1, RA 8293] before final judgment is rendered, to recover
instead of actual damages and profits, an
Importation for Personal Purposes award of statutory damages for all
Sec. 190.2 of RA 8293 that limited the infringements involved in an action in a sum
importation of books was repealed by RA equivalent to the filing fee of the infringement
10372. RA 10372 expressly limited the action but not less than Php50,000.00. In
prohibition to import or export only to awarding statutory damages, the court may
counterfeit goods. consider the following factors:
(1) The nature and purpose of the infringing
Remedies act;
(2) The flagrancy of the infringement;
Remedies for Infringement (3) Whether the defendant acted in bad faith;
(1) An injunction restraining such (4) The need for deterrence;
infringement; [Sec. 216.1(a)] (5) Any loss that the plaintiff has suffered or is
(2) Actual damages, including legal costs and likely to suffer by reason of the
other expenses, as he may have incurred infringement; and
Page 373 of 450

(6) Any benefit shown to have accrued to the One hundred fifty thousand pesos
defendant by reason of the infringement. (P150,000) to Five hundred thousand
pesos (P500,000) for the second offense.
In case the infringer was not aware and had no (c) Imprisonment of six (6) years and one (1)
reason to believe that his acts constitute an day to nine (9) years plus a fine ranging
infringement of copyright, the court in its from Five hundred thousand pesos
discretion may reduce the award of statutory (P500,000) to One million five hundred
damages to a sum of not more than Ten thousand pesos (P1,500,000) for the third
thousand pesos (Php10,000.00). [Sec. 216.1] and subsequent offenses.
(d) In all cases, subsidiary imprisonment in
Note: The amount of damages to be awarded cases of insolvency. [Sec. 217.1, RA 8293
shall be doubled against any person who: as amended by RA 10372]
i. Circumvents effective technological
measures; or Determination of Penalty
ii. Having reasonable grounds to know In determining the number of years of
that it will induce, enable, facilitate or imprisonment and the amount of fine, the court
conceal the infringement: shall consider:
a. Remove or alter any electronic 1. The value of the infringing materials that
rights management information the defendant has produced or
from a copy of a work, sound manufactured; and
recording, or fixation of a 2. The damage that the copyright owner has
performance; or suffered by reason of the infringement.
b. Distribute, import for [Sec. 217.2, RA 8293 as amended by RA
distribution, broadcast, or 10372]
communicate to the public
works or copies of works The respective maximum penalty stated in
without authority, knowing that Section 217.1 for the first, second, third and
electronic rights management subsequent offense, shall be imposed when
information has been removed the infringement is committed by:
or altered without authority. (a) The circumvention of effective
[Sec. 216.1(b)] technological measures;
(b) The removal or alteration of any electronic
However, no damages may be recovered rights management information from a
under this Act after the lapse of four (4) years copy of a work, sound recording, or fixation
from the time the cause of action arose. [Sec. of a performance, by a person, knowingly
226, RA 8293] and without authority; or
(c) The distribution, importation for
Criminal penalties distribution, broadcast, or communication
to the public of works or copies of works,
Criminal Penalties for Infringement by a person without authority, knowing that
Any person infringing any right secured by electronic rights management information
provisions of Part IV of this Act or aiding or has been removed or altered without
abetting such infringement shall be guilty of a authority. [Sec. 217.2, RA 8293 as
crime punishable by: amended by RA 10372]
(a) Imprisonment of one (1) year to three (3)
years plus a fine ranging from Fifty Certificate of Registration and Deposit
thousand pesos (P50,000) to One hundred The issuance of the certificates of registration
fifty thousand pesos (P150,000) for the first and deposit as provided by Sec. 2, Rule 7 of
offense. the Copyright Safeguards and Regulations, are
(b) Imprisonment of three (3) years and one (1) purely for recording the date of registration and
day to six (6) years plus a fine ranging from deposit of the work, and are not conclusive as
Page 374 of 450

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
only works in the field of law shall be deposited
with the Supreme Court Library. [Sec. 191, RA
8293 as amended by RA 10372]
The National Library has deputized the

IPOPHL to receive deposited works in its
behalf.
Page 375 of 450

U.P. LAW BOC SPECIAL LAWS COMMERCIAL LAW
SPECIAL LAWS
COMMERCIAL LAWS
Page 376 of 450

Implications
A. SECURED Section 66 provides that the PPSA will now
TRANSACTIONS apply over the laws it repeals. The following are
the implications in connection with the
repealing clause:
1. Personal Property Security 1. The system of conventional pledges and
Act chattel mortgages are “replaced with a
framework for secured transactions.”
Definitions and Scope [Somera, The Personal Property Security
Act, 2018]
Scope vis–a–vis Repealing Clause 2. Article 2127 is modified with regard to
property included in a Real Estate
General Rule: The PPSA applies to ALL Mortgage. Under Art. 2127, a REM
transactions that secure an obligation with “extends to natural accessions, to the
movable collateral improvements, growing fruits and the rents
or income not yet received when the
Exceptions [principal] obligation becomes due.” These
 Interests in aircrafts personal properties are no longer
 Interests in ships covered by Art. 2127. [Somera]
 Articles 2093–2123 on Pledges are
repealed, with the exception of Article
Section 66. Repealing Clause.— The
2121 on Legal Pledges.
following laws, and all laws, decrees, orders,
 Articles 2140–2141 and Act. No. 1508
and issuances or portions thereof, which are
on Chattel Mortgages are repealed.
inconsistent with the provisions of this Act,
 The provisions on special preferred
are hereby repealed, amended, or modified
credits on movables (Articles 2241,
accordingly:
2243, 2246, 2247) are amended.
Sections 1 to 16 of Act No. 1508, otherwise
known as "The Chattel Mortgage Law"  The creation of the Registry, as defined
Articles 2085-2123, 2127, 2140-2141, 2241, in Sec. 3(h) of the PPSA repeals the ff.
2243, and 2246-2247 of Republic Act No. laws:
386, otherwise known as the "Civil Code o Sections. 10 & 114–116 of PD
of the Philippines"; No. 1529 (Property
Section 13 of Republic Act No. 5980, as Registration Decree) on the
amended by Republic Act No. 8556, functions of the Register of
Deed & Registration of Chattel
otherwise known as the "Financing
Mortgages,
Company Act of 1998";
o Section 13 of the Financing
Sections 114-116 of Presidential Decree No.
Company Act of 1998 on
1529, otherwise known as the "Property
registry of financial leases and
Registration Decree";
o Section 5(3) of Rep. Act No.
Section 10 of Presidential Decree No. 1529,
4136 (Land Transportation
insofar as the provision thereof is
Code) on the recording of
inconsistent with this Act; and
mortgages, attachments and
Section 5(e) of Republic Act No. 4136, other encumbrances on motor
otherwise known as the "Land vehicles. [Somera]
Transportation and Traffic Code"
Page 377 of 450

Definitions Parties
The parties to a security agreement under the
Security Agreement PPSA are the grantor and the secured
The secured transaction under the PPSA is creditor. [Sec. 3]
called the security agreement.
 It is a consensual contract, perfected by Grantor [Sec. 3(c)]
the meeting of the minds of the grantor (1) The person who grants a security interest
and the secured creditor. [Somera] in collateral to secure its own obligation or
o The agreement must be contained that of another person;
in a written contract [Sec.6] (2) A buyer or other transferee of a collateral
o Writing, for the purposes of the that acquires its right subject to a security
PPSA, includes electronic records interest;
[Sec. 3(k)] (3) A transferor in an outright transfer of an
 It is an accessory obligation entered into accounts receivable; or
by a person who grants a property right to (4) A lessee of goods.
another person, in order to secure the
payment or performance of an obligation. Secured Creditor [Sec. 3(i)]
[Somera] A secured creditor is a person that has a
security interest.
Security Interest [Sec. 3(j)]
A security interest is a property right in For the purposes of registration and priority
collateral that secures payment or other only, “secured creditor” includes a buyer of
performance of an obligation, regardless of: account receivable and a lessor of goods under
 Whether the parties have denominated it an operating lease for not less than one (1)
as a security interest; and year.
 The type of asset, the status of the grantor
or secured creditor, or the nature of the 2. Asset-specific rules
secured obligation
o Including the right of a buyer of Future property
accounts receivable and a lessor
under an operating lease for not
less than one (1) year Section 5. Creation of a Security Interest.
(b) A security agreement may provide for the
Proceeds creation of a security interest in a future
Under the PPSA, even when the collateral is property, but the security interest in that
disposed, the security interest extends to its property is created only when the grantor
identifiable or traceable proceeds. [Sec. 8] acquires rights in it or the power to
 Covers sales, leases, licenses, exchanges, encumber it.
other forms of disposition
Such security agreement containing a
Proceeds are: provision over future property is akin to a
 Any property received upon sale, lease or Contract to Mortgage
other disposition of collateral; or  Both secured transactions are preparatory
 Whatever is collected on or distributed with contracts wherein the security interest is
respect to collateral, claims arising out of only created or perfected once the grantor
the loss or damage to the collateral, as well is the absolute owner of the future property
as a right to insurance payment or other
compensation for loss or damage of the
collateral. [Sec. 3(f)]
Page 378 of 450

Rights to proceeds and commingled Otherwise, if the tangible asset did not become
funds a fixture, or underwent accession or
commingling, a party who obtains the asset
When the collateral is disposed, the security in good faith will take it free from any
interest extends to the proceeds from such security interest. However, good faith will not
disposition, in the form of funds, even when exist if the movable property was registered
they are credited to a deposit account or before being obtained. [Sec. 21]
money are commingled with other funds or
money. [Sec. 8] Accounts receivables
 Despite the fact that they are no longer
identifiable Under Sec. 10 of the PPSA, security interests
 Only to the extent that they remain in accounts receivable shall be effective
traceable notwithstanding any agreement between the
grantor and the account debtor or any secured
Rules on Commingled Funds [Sec. 8] creditor limiting in any way the grantor’s right to
1. The security interest in the commingled create a security interest. [Sec. 10(a)]
funds shall be limited to the amount of
the proceeds immediately BEFORE they Likewise, any stipulation limiting the grantor’s
were commingled. right to create a security interest shall be void.
2. If at any time after the commingling, the [Sec. 10(c)]
balance credited to the deposit account
or the amount of the commingled However, the PPSA limits the application of
money is LESS than the amount of the these provisions to accounts receivable arising
proceeds immediately before they were from:
commingled: (1) A contract for the supply or lease of goods
 The security interest against the or services other than financial services;
commingled funds or money shall be (2) A construction contract or a contract for the
limited to the lowest amount of the sale or lease of real property; and
commingled funds or money. (3) A contract for the sale, lease or license of
 The reckoning period for such amount intellectual property. [Sec. 10(d)]
is between the time when the
proceeds were commingled and the Sec. 10 also shall not affect shall affect any
time the security interest in the obligation or liability of the grantor for breach of
proceeds is claimed. the agreement in Sec. 10(a).
Tangible Assets Commingled in a 3. Perfection of security interests

Mass; Continuity of Security Interest
General Provisions
The PPSA provides rules for the continuity of Section 11. Perfection of Security Interest.—
the security interest over tangible assets (i.e.
A security interest shall be perfected when it
movable property) which has either:
has been created and the secured
(1) Become a fixture,
creditor has taken one of the actions
(2) Undergone accession or
in accordance with Section 12.
(3) Undergone commingling.
On perfection, a security interest becomes
effective against third parties.
According to the PPSA, the security interest
over the said movable will continue, provided
that it can still be reasonably traced.  It is NOT perfection that gives birth to the
However, as to the question of ownership over security agreement, since it is a
the said tangible assets, Book II of the Civil consensual contract.
Code will govern. [Sec. 25]
Page 379 of 450

 Rather, perfection gives the security A security interest in a deposit account or

interest third-party effectiveness. [Somera] investment property may be perfected by
control through:
Section 12. Means of Perfection.— A 1. The creation of the security interest in
security interest may be perfected by: favor of the deposit-taking institution or the
Registration of a notice with the Registry; intermediary;
Possession of the collateral by the secured 2. The conclusion of a control agreement;
creditor; and or
Control of investment property and deposit 3. For an investment property that is an
account. electronic security not held with an
A security interest in any tangible asset may intermediary, the notation of the security
be perfected by registration or possession. A interest in the books maintained by or
on behalf of the issuer for the purpose of
security interest in investment property and
recording the name of the holder of the
deposit account may be perfected by
securities. [Sec. 13(a)]
registration or control.
The Intermediary’s Role in Control
Perfection by Registration Agreements
Under Sec. 13(b), a deposit-taking institution or
A security interest in the ff. may be perfected intermediary must consent to the entering of a
by registration of a notice with the Registry: control agreement.
[Sec. 12(a)]
1. A tangible movable asset The PPSA does NOT require the intermediary
2. Investment property to enter into such agreements, since its
3. A deposit account obligation is limited to following the instructions
of the grantor, who is its depositor.
Notice – a statement of information that is  i.e. It has the right to refuse to follow the
registered in the Registry relating to a security instructions of the secured creditor
interest or lien. The term includes an initial
notice., amendment notice, and termination Should the intermediary refuse to enter into a
notice. [Sec. 3(e)] control agreement, the remedy of the grantor
and secured creditor is to register the security
Perfection by Possession agreement instead, in order to perfect the
security interest.
A security interest in a tangible movable asset
may be perfected by possession of the Three Types of Control Agreements
collateral by the secured creditor. [Sec. 12(b)] 1. Control Agreement with Respect to
Securities
Possession in Art. 523 of the Civil Code is  An agreement in writing among the issuer
defined as “the holding of a thing or the or the intermediary, the grantor and the
enjoyment of a right.” secured creditor.
 The issuer or the intermediary agrees to
Perfection by Control follow instructions from the secured
creditor with respect to the security, without
A security interest in the ff. may be perfected further consent from the grantor. [Sec.
by control: [Sec. 12(c)] 3(b)(1)]
1. Investment property 2. Control Agreement with Respect to Rights
2. A deposit account to a Deposit Account
 An agreement in writing among the
deposit-taking institution, the grantor
and the secured creditor.
Page 380 of 450

 The deposit-taking institution agrees to 4. Registration

follow instructions from the secured
creditor with respect to the payment of A security interest may be perfected by
funds credited to the deposit account registration of a notice with the Registry.
without further consent from the
Section 26. Establishment of Electronic
grantor. [Sec. 3(b)(2)]
Registry.—
3. Control Agreement with Respect to
The Registry shall be established in and
Commodity Contracts
administered by the LRA.
 An agreement in writing among the
The Registry shall provide electronic means
grantor, secured creditor, and
for registration and searching of notices.
intermediary.
 The commodity intermediary will apply
any value distributed on account of the Procedure
commodity contract as directed by the 1. The grantor, or any person authorized by
secured creditor without further the grantor, submits the notice to the
consent by the commodity customer or Registry, and pays the prescribed fee. The
grantor. notice is considered sufficient if it:
a. Identifies the grantor by an
Note: A commodity contract is a identification number
commodity futures contract, an option on a b. Identifies the secured creditor by
commodity futures contract, a commodity name
option, or another contract, if the contract or c. Provides an address for the grantor
option is: and secured creditor
1. Traded on or subject to the rules of a d. Describes the collateral. [Sec. 28]
board of trade that has been designated 2. The Registry either accepts or rejects the
as a contract market for such a contract; notice for registration. However, if the
or notice meets the minimum requirements
2. Traded on a foreign commodity board of and the fee is paid, it shall not be rejected.
trade, exchange, or market, and is [Sec. 28(a)]
carried on the books of a commodity a. The Registry DOES NOT
intermediary for a commodity customer. determine the correctness,
[Sec. 3(a)] authenticity, or validity of the
information contained in the notice.
Summary of Perfection of Security Interests b. Thus, questions regarding the
Registration Possession Control validity of the security agreement
Tangible P P are expected to be decided in a
Assets proper litigation AFTER
Investment P P registration. [Somera]
Property 3. If the Registry rejects the registration of a
Deposit P P notice, it shall promptly communicate the
Account fact and reason for its rejection to the
person who submitted the notice. [Sec. 28]
4. If the Registry accepts the registration of a
notice, it shall be effective, from the time it
is discoverable on the records of the
Registry, until such time that the duration
indicated on the notice lapses. [Sec. 30]
a. Any person may search notices
registered in the Registry. [Sec. 27]
Page 381 of 450

b. The electronic records of the Priority Rules for Intangible Assets

Registry shall be the official
records. [Sec. 27] Security Interests Over Deposit
Accounts/Investment Properties
Effects of Registration Section 18. Priority for Perfection by Control.
1. The security interest becomes binding on —
third parties. [Sec. 11] A security interest in a deposit account
2. The registered notice is considered a with respect to which the secured
public record. [Sec. 27] creditor is the deposit-taking
3. Subsequent purchasers of the collateral institution or the intermediary shall have
are charged with notice of the security priority over a competing security interest
interest burdening the title of said perfected by any method.
collateral. A security interest in a deposit account or
 Such notice cannot be overcome by investment property that is perfected by
proof of good faith [Legarda & Prieto v a control agreement shall have priority
Saleeby, G.R. No. L-8936] over a competing security interest except
4. Establishes the basis of priority of security a security interest of the deposit-taking
of interest according to time of registration. institution or the intermediary.
[Sec. 17] The order of priority among competing
security interests in a deposit account or
5. Priority of Security Interests investment property that were perfected
by the conclusion of control agreements
Priority – the right of a person to derive the shall be determined on the basis of the
economic benefit of its security interest in time of conclusion of the control
preference to the right of a competing claimant. agreements.
[Somera, 2018, citing UNCITRAL Guidelines] Any rights to set-off that the deposit-
taking institution may have against a
The perfection of a security interest gives rights grantor’s right to payment of funds
to the secured creditor against other creditors credited to a deposit account shall have
asserting rights over the same collateral. priority over a security interest in the
deposit account.
Priority Rules
The priority of security interests and liens on
Priority* of Security Interests Over Deposit
the same collateral shall be determined
Accounts/Investment Property
according to the time of registration of a notice
*Note: With (1) having the highest priority
or perfection by other means. [Sec. 17]
(1) Right to set-off of the deposit-taking
institution against a grantor’s right to
General Rule: Such priority is without regard
payment of funds credited to a deposit
to the order of creation of the security interests
account
and liens, or to the mode of perfection. [Sec.
(2) Security interest in a deposit account with
17]
respect to which the secured creditor is the
deposit-taking institution
Exception: Except as provided in Sections 18-
(3) Security interest in a deposit account or
25 of the PPSA or Sections 6.02-6.05 of these
investment property that is perfected by a
Rules. [Rule VI, Sec, 6.01. IRR of R.A. 11057]
control agreement
a. The earlier the conclusion of the
control agreement, the higher in
priority
Page 382 of 450

(4) Security interest in a deposit account or embodied by them. [IRR of R.A. 11057,
investment property that is perfected by Section 1.05(kk)]
registration
Section 18. Priority for Perfection by Control.
Security Interests Over Electronic Securities ---xxx---
Section 18. Priority for Perfection by A security interest in a security certificate
Control.— perfected by the secured creditor’s
---xxx--- possession of the certificate shall have
(a) A security interest in electronic priority over a competing security interest
securities not held with an perfected by registration of a notice in the
intermediary perfected by a notation Registry.
of the security interests in the books
maintained for that purpose by or on Priority of Security Interests Over Security
behalf of the issuer shall have priority Certificates
over a security interest in the same (1) Security interest in a security certificate
securities perfected by any other method. perfected by possession of said certificate
(b) A security interest in electronic (2) Security interest in a security certificate
securities not held with an perfected by registration of a notice in the
intermediary perfected by the Registry.
conclusion of a control agreement
shall have priority over a security interest Security Interests Over Instruments or
in the same securities perfected by Negotiable Documents
registration of a notice in the Registry.
(c) The order of priority among competing Section 19. Priority for Instruments and
security interests in electronic securities Negotiable Documents. -A security interest in
not held with an intermediary perfected an instrument or negotiable document that is
by the conclusion of control agreements perfected by possession of the
is determined on the basis of the time instrument or the negotiable document
of conclusion of the control shall have priority over a security interest in
agreements. the instrument or negotiable document that is
perfected by registration of a notice in the
Registry.
Priority of Security Interests Over Non-
Intermediated Electronic Securities
(1) Security interest in non-intermediated Priority of Security Interests Over
electronic securities perfected by a Instruments or Negotiable Documents
notation of such interest in the books of the (1) A security interest in an instrument or
issuer negotiable document that is perfected by
(2) Security interest in non-intermediated possession
electronic securities perfected by control (2) A security interest in an instrument or
 The earlier the conclusion of the control negotiable document that is perfected by
agreement, the higher in priority registration
Priority Rules for Tangible Assets Security Interests Over Livestock

Section 24. Livestock. -A perfected
Security Interests Over Security security interest in livestock securing an
Certificates obligation incurred to enable the grantor to
Certificated non-intermediated securities are obtain food or medicine for the livestock
considered tangible property if the mere shall have priority over any other security
possession of such instruments results in the interest in the livestock, except for a
ownership of the underlying rights or property perfected purchase money security
Page 383 of 450

interest in the livestock, if the secured Priority of Security Interests Over Goods
creditor providing credit for food or medicine Lien over goods created by operation of law in
gives written notification to the holder of favor of a person who provides services or
the conflicting perfected security interest materials with respect to the goods, in the
in the same livestock before the grantor ordinary course of business
receives possession of the food or Any perfected security interest over the same
medicine. goods.
Purchase Money Security Interests

Priority of Security Interests Over Livestock A purchase money security interest (PMSI)
(1) A perfected purchase money security is a security in goods, taken by:
interest in the livestock incurred to enable (a) The seller to secure the price; or
the grantor to obtain food or medicine for (b) A person who gives value
the livestock, provided that – to enable the grantor acquire the goods to the
a. The secured creditor providing extent that the credit is used for that purpose.
credit for said food or medicine [Sec. 3(g)]
gives written notification to the
holder of the conflicting perfected
security interest in the same Section 23. Purchase Money Security
livestock Interest.—
b. Such notice must be given before A purchase money security interest in
the grantor receives possession of equipment and its proceeds shall have
the food or medicine priority over a conflicting security interest,
(2) A perfected security interest in livestock if a notice relating to the purchase money
securing an obligation incurred to enable security interest is registered within three
the grantor to obtain food or medicine for (3) business days after the grantor
the livestock receives possession of the equipment.
(3) Any other security interest in the livestock, A purchase money security interest in
incurred for any other purpose consumer goods that is perfected by
registration of notice not later than
Note: A purchase money security interest is three (3) business days after the
a security in goods, taken by: grantor obtains possession of the
(a) The seller to secure the price; or consumer goods shall have priority over
(b) A person who gives value a conflicting security interest.
to enable the grantor acquire the goods to the A purchase money security interest in
extent that the credit is used for that purpose. inventory, intellectual property or
[Sec. 3(g)] livestock shall have priority over a
conflicting perfected security interest in
Priority Rules for Specific Cases the same inventory, intellectual property
or livestock if:
Security Interests Over Goods that are Subject The purchase money security interest is
to the Right of Retention perfected when the grantor
receives possession of the
Section 20. Priority and Right of Retention inventory or livestock, or acquires
by Operation of Law. -A person who provides rights to intellectual property; and
services or materials with respect to the Before the grantor receives
goods, in the ordinary course of business, possession of the inventory or
and retains possession of the goods shall livestock, or acquires rights in
have priority over a perfected security intellectual property, the purchase
interest in the goods until payment thereof. money secured creditor gives
written notification to the holder
Page 384 of 450

of the conflicting perfected (3) Any perfected security interest in the same
security interest in the same types goods.
of inventory, livestock, or intellectual
property. The notification sent to the Priority of Interests Over Inventory,
holder of the conflicting security Intellectual Property or Livestock [Sec. 23]
interest may cover multiple (1) A PMSI in inventory, intellectual property or
transactions between the purchase livestock shall have priority, provided that –
money secured creditor and the  The PMSI is perfected when the grantor
grantor without the need to identify receives possession of the inventory or
each transaction. livestock, or acquires rights to intellectual
The purchase money security interest in property;
equipment or consumer goods  The secured creditor gives a written
perfected timely in accordance with notification to the holder of the conflicting
subsections (a) and (b), shall have perfected security interest in the same
priority over the rights of a buyer, lessee, types of inventory, livestock, or intellectual
or lien holder which arise between property
delivery of the equipment or consumer o Such notification must be given
goods to the grantor and the time the before the grantor receives
notice is registered. possession of the inventory or
livestock, or acquires rights in
intellectual property; and
Priority of Security Interests Over
o The notification may cover multiple
Equipment and its Proceeds [Sec. 23] transactions between the secured
(a) A PMSI in equipment and its proceeds creditor and the grantor, without
shall have priority, provided that – the need to identify each
a. A notice relating to the PMSI is transaction.
registered within three (3) (2) Any perfected security interest in the same
business days after the grantor inventory, intellectual property or livestock.
receives possession of the
equipment Priority of Perfected Security
(b) Right over the same equipment in favor of Interest Prior to Insolvency
a buyer, lessee, or lien holder which arise Proceedings
between delivery of the equipment to the
grantor and the time the notice is registered
(c) Any perfected security interest in the same Section 22. Effect of the Grantor’s
equipment. Insolvency on the Priority of a Security
Interest. - Subject to the applicable
Priority of Security Interests Over insolvency law, a security interest
Consumer Goods [Sec. 23] perfected prior to the commencement of
(1) A PMSI in consumer goods shall have insolvency proceedings in respect of the
priority, provided that – grantor shall remain perfected and retain
a. A notice relating to the PMSI is the priority it had before the commencement
registered within three (3) of the insolvency proceedings.
business days after the grantor
receives possession of the This section amends Art. 2241, 2243, 2246,
consumer goods 2247 of the Civil Code or the provisions on
(2) Right over the same goods in favor of a special preferred credits on movable property.
buyer, lessee, or lien holder which arise  The preference created by these Articles
between delivery of the consumer goods to will be SUBORDINATE to the priority
the grantor and the time the notice is perfected pursuant to the PPSA. [Somera]
registered
Page 385 of 450

 During insolvency proceedings, the Section 46. Right of Higher-Ranking

perfected security interest shall constitute a Secured. Creditor to Take Over
lien over the collateral. [Rule VI, Sec. Enforcement.—
6.04(b), IRR of R.A. 11057] Even if another secured creditor or a lien
holder has commenced enforcement, a
6. Tangible assets; intangible assets secured creditor whose security-
(Sec. 12) interest has priority over that of the
enforcing secured creditor or lien holder
Tangible asset – any tangible movable asset, shall be entitled to take over the
including: enforcement process.
 Money The right referred to in subsection (a) of this
 Negotiable instruments section may be invoked at any time
 Negotiable documents; and before the collateral is sold or otherwise
 Certificated non-intermediated securities disposed of, or retained by the secured
o Only if the mere possession of such creditor or until the conclusion of an
instruments results in the agreement by the secured creditor for
ownership of the underlying rights that purpose.
or property embodied by them [IRR The right of the higher-ranking secured
of R.A. 11057, Section 1.05(kk)] creditor to take over the enforcement
process shall include the right to
Intangible asset – any movable property other enforce the rights by any method
than a tangible asset including, but not limited available to a secured creditor under
to, investment property, deposit accounts, this Act.
commodity contracts and receivables. [IRR of
R.A. 11057, Section 1.05(m)] Recovery
Means of Perfection [Section 4.02-4.03, IRR Recovery is an enforcement procedure that

of R.A. 11057] does not require judicial process. It applies only
Tangible Intangible to the special cases provided in Sec. 48.
(investment
property/deposit Upon default, the secured creditor may without
account) judicial process:
(1) Instruct the account debtor to make
Registration payment to the secured creditor, and
(2) Apply such payment to the satisfaction of
Possession Control
the obligation secured by the security
interest after deducting the secured
7. Enforcement of security interests creditor’s reasonable collection expenses.
Note: The account debtor may request the
The creditor with the security interest having secured creditor to provide evidence of its
the highest priority will be able to enforce security interest to the account debtor when it
his/her interests via recovery, disposition or delivers the instruction to the account debtor.
retention. [Sec. 48]
Recovery is conceptually similar to the

exchange in Yau Chu v CA [G.R. No. L-78519
(1989)], wherein the collateral was also money
or an exchange of “peso for peso”. [Somera]
Page 386 of 450

Specific Cases of Recovery [Sec. 48]

Specific Case Action Available to I. REPOSSESSION OF COLLATERAL
Secured Creditor
Negotiable Proceed as to the Extra-judicial Repossession
document negotiable document or The secured creditor may:
perfected by goods covered by the (1) Take possession of the collateral without
possession negotiable document; judicial process if the security agreement
Deposit Apply the balance of the so stipulates: Provided, That possession
account deposit account to the can be taken without a breach of the
maintained by obligation secured by peace.
the secured the deposit account (2) Remove the collateral from the real
creditor property to which it is affixed, in case it is a
instruct the deposit- fixture, without judicial process: Provided
Security That –
taking institution to pay
interest in a a. The secured creditor has priority
the balance of the
deposit account over all owners and mortgagees
deposit account to the
perfected by b. The secured creditor exercises due
secured creditor’s
control care in removing the fixture. [Sec.
account
47(a)(b)]
Disposition
Judicial Repossession
Right to Dispose of Collateral If, upon default, the secured creditor CANNOT
After default, a secured creditor may: take possession of collateral without breach of
(a) Sell or otherwise dispose of the collateral, the peace, the secured creditor shall:
publicly or privately, in its present condition (1) Be entitled to an expedited hearing upon
or following any commercially reasonable application for an order granting the
preparation or processing; secured creditor possession of the
(b) Buy the collateral at any public disposition, collateral. Such application shall include a
or at a private disposition but only if the statement by the secured creditor, under
collateral is of a kind that is customarily oath:
sold on a recognized market or the subject a. Verifying the existence of the
of widely distributed standard price security agreement attached to the
quotations. [Sec. 49] application; and
b. Identifying at least one event of
Disposition is a method of enforcement default by the debtor under the
similar to the general right of the creditor to security agreement;
alienate the collateral upon default of the (2) Provide the debtor, grantor, and, if the
debtor under the Civil Code. The difference in collateral is a fixture, any real estate
the PPSA is that, it requires commercial mortgagee, a copy of the application,
reasonableness of the disposition. [Somera] including:
a. All supporting documents; and
Procedure b. Evidence for the order granting the
Before disposition may be availed of, a creditor secured creditor possession of the
must: collateral; and
1. Repossess the collateral, either: Extra– (3) Be entitled to an order granting
judicially [Sec. 47(a)(b)] or Judicially [Sec. possession of the collateral
47(c)], and a. Upon the court finding that:
2. There must be compliance with i. A default has occurred
under the security
notification requirements in Sec. 51.
agreement; and
3. Let those entitled exercise the right of
redemption under Sec. 45.
Page 387 of 450

ii. The secured creditor has a Exceptions to the Notification Requirement

right to take possession of The requirement to send a notification under
the collateral. this section shall not apply if the collateral is:
b. The court may direct the grantor to a. Perishable; or
take such action as the court b. Threatens to decline speedily in value;
deems necessary and appropriate c. Of a type customarily sold on a recognized
so that the secured creditor may market. [Sec. 51]
take possession of the collateral.
[Sec. 47©] III. RIGHT OF REDEMPTION
General Rule: A party who is entitled to a
Note: Breach of the peace shall include: notification is also entitled to redeem the
(1) Entering the private residence of the property. [Sec. 45(a)]
grantor without permission,
(2) Resorting to physical violence or Exceptions: The right of redemption may be
intimidation, or being accompanied by a exercised, unless:
law enforcement officer when taking (1) The person entitled to redeem has not,
possession or confronting the grantor. after the default, waived in writing the
[Sec. 47©] right to redeem;
(2) The collateral is sold or otherwise
II. NOTIFICATION OF DISPOSITION disposed of, acquired or collected by the
Not later than ten (10) days before disposition secured creditor or until the conclusion of
of the collateral, the secured creditor shall an agreement by the secured creditor for
notify: that purpose; and
(1) The grantor; (3) The secured creditor has retained the
a. Note: The grantor may waive the collateral. [Sec. 45(a)]
right to be notified.
(2) Any other secured creditor or lien holder How Exercised
who, five (5) days before the date The right to redeem is exercised by paying or
notification is sent to the grantor, held a otherwise performing the secured obligation in
security interest or lien in the collateral that full, including the reasonable cost of
was perfected by registration; and enforcement. [Sec. 45(a)]
(3) Any other person from whom the
secured creditor received notification of Disposition and Application of Proceeds
a claim of an interest in the collateral if If there is no redeemer, the secured creditor
the notification was received before the may dispose of the property, and the proceeds
secured creditor gave notification of the will be applied according to Section 52, in the
proposed disposition to the grantor. [Sec. following order:
51] (1) The reasonable expenses of taking,
holding, preparing for disposition, and
Sufficiency of Notification disposing of the collateral, including
A notification of disposition is sufficient if it: reasonable attorneys’ fees and legal
(1) Identifies the grantor and the secured expenses incurred by the secured creditor;
creditor; (2) The satisfaction of the obligation secured
(2) Describes the collateral; by the security interest of the enforcing
(3) States the method of intended disposition; secured creditor; and
and (3) The satisfaction of obligations secured by
(4) States the time and place of a public any subordinate security interest or lien in
disposition or the time after which other the collateral if a written demand and proof
disposition is to be made. [Sec. 51] of the interest are received before
distribution of the proceeds is completed.
Page 388 of 450

The secured creditor shall account to the When Retention May Be Exercised [Sec. 54]
grantor for any surplus, and, unless otherwise The secured creditor may retain the collateral
agreed, the debtor is liable for any deficiency. in the case of:
[Sec. 52]. (1) A proposal for the acquisition of the
collateral in full satisfaction of the
Commercial Reasonableness Requirement secured obligation; or
After repossession and notice, the collateral a. Unless the secured creditor
may be disposed of provided that the creditor receives an objection in writing
acts in a “commercially reasonable manner”. from any person entitled to receive
[Sec. 50(a)] such a proposal within twenty (20)
days after the proposal is sent to
Under Sec. 50, a creditor acts in such manner that person
if he/she “disposes of the collateral in (2) A proposal for the acquisition of the
conformity with commercial practices among collateral in partial satisfaction of the
dealers in that type of property.” [Sec. 50(b)] secured obligation
 A disposition is presumed commercially a. Only if the secured creditor
reasonable when approved in any legal receives the affirmative consent of
proceeding. [Sec. 50(d] each addressee of the proposal in
 A disposition will still be treated as writing within twenty (20) days after
commercially reasonable even if “a better the proposal is sent to that person.
price could have been obtained by
disposition at a different time or by a 8. Prior interests and the transitional
different method from the time and method period
selected by the secured creditor”. [Sec.
50(c)]. Prior Interests
Retention Prior interest – A security interest that was:

 Created or provided for by an agreement or
Retention of collateral is the result of an offer other transaction that was made or entered
on the part of the secured creditor and the into before the effectivity of this Act; and
acceptance of the proposal by the parties  Had not been terminated before the
entitled to receive the same. effectivity of this Act. [Sec. 55(b)]
After default, the secured creditor may propose However, a security interest that is renewed or
to the debtor and grantor to take all or part of extended by a security agreement or other
the collateral in total or partial satisfaction of transaction made or entered into on or after the
the secured obligation, and shall send a effectivity of this Act is NOT considered a
proposal to: prior interest. [Sec. 55(b)]
(1) The debtor and the grantor;
(2) Any other secured creditor or lien holder Creation of Prior Interest
who, five (5) days before the proposal is Creation of prior interest shall be determined
sent to the debtor and the grantor, by prior laws, which are laws that existed or in
perfected its security interest or lien by force before the effectivity of this Act. [Sec. 56]
registration; and
(3) Any other person with an interest in the Effectivity of Prior Interest
collateral who has given a written A prior interest remains effective between the
notification to the secured creditor before parties, notwithstanding its creation did not
the proposal is sent to the debtor and the comply with the creation requirements of this
grantor. [Sec. 54] Act. [Sec. 56]
Page 389 of 450

Perfection of Prior Interest [Sec. 58] (2) It was not perfected under prior law when
(a) A prior interest that was perfected under this Act took effect, and was only perfected
prior law continues to be perfected under this under this Act. [Sec. 58(b)]
Act until the earlier of:
(a) The time the prior interest would cease to Enforcement of Prior Interest [Sec. 59]
be perfected under prior law; and If any step or action has been taken to enforce
(b) The expiration of the transitional period. a prior interest before the effectivity of this Act,
(c) If the perfection requirements of the PPSA enforcement may continue under prior law or
are satisfied before the perfection of a prior may proceed under this Act.
interest ceases in accordance with (a):
(d) The prior interest continues to be perfected Note: Prior law shall apply to a matter that is
under this Act from the time when it was the subject of proceedings before a court
perfected under the prior law. before the effectivity of this Act.
(e) If the prior interest was perfected by the
registration of a notice under prior law, the Transitional Period
time of registration under the prior law shall
be the time to be used for purposes of Transitional period
applying the priority rules of this Act. The period from the date of effectivity of this Act
(f) If the perfection requirements of the PPSA until the date when the Registry has been
are NOT satisfied before the perfection of established and operational. [Sec. 55 (d)]
a prior interest ceases in accordance with
(a): Thus, the transitional period is from September
(g) The prior interest is perfected only from the 7, 2018 until the date when the Registry has
time it is perfected under this Act. been established and operational
(h) A written agreement between a grantor and  All pledges and mortgages created
a secured creditor creating a prior interest pursuant to the Civil Code and the Chattel
is sufficient to constitute authorization by Mortgage Law remain effective between
the grantor of the registration of a notice the parties
covering assets described in that  But upon expiration of the transitional
agreement under this Act. period, the binding effect as against third
parties of chattel mortgages is lost,
When a Prior Law Over a Prior Interest UNLESS the requirements of the PPSA are
Applies complied with. [Somera]
General Rule — The priority of a prior interest
as against the rights of a competing claimant is Establishment of Electronic Registry
determined by the prior law if:
Section 68. Implementation. —
Notwithstanding the entry into force of this
(1) The security interest and the rights of all Act under Section 67, the implementation of
competing claimant arose before the
the Act shall be conditioned upon the
effectivity of this Act; and
Registry being established and operational
(2) The priority status of these rights has not
under Section 26.
changed since the effectivity of this Act.
[Sec. 58(a)]
Section 26. Establishment of Electronic
Exceptions —The priority status of a prior Registry.
interest has changed (refer to the 2nd instance The Registry shall be established in and
under the general rule, i.e. Sec. 58(a)(2)) only administered by the LRA.
if: The Registry shall provide electronic means
for registration and searching of notices.
(1) It was perfected when this Act took effect,
but ceased to be perfected; or
Page 390 of 450

Based on Sections 68 and 26 of the PPSA, the Reliance on Security Test: When the
implementation of the PPSA is conditioned on mortgagor takes another loan for which
the establishment and operation of the another security was given, it could not be
Registry. The Registry will be administered by inferred that such loan was made in reliance
Land Registration Authority (LRA). solely on the original security with the dragnet
clause, but rather, on the new security given.
To date, the LRA has yet to establish the [Prudential Bank v. Alviar, G.R. No. 150197
Electronic Registry, although it has announced (2005)]
that it is targeting to launch the same on the
sixth month from the promulgation of the IRR, Object of real estate mortgage [Art.
which was issued on Nov. 18, 2019. 2124, NCC]
2. Real Estate Mortgage Law 1. Immovables

2. Alienable real rights over immovables.
Definition and characteristics
Note: Article 2127 is modified by the PPSA with
regard to property included in a Real Estate
Real Mortgage
Mortgage. Under Art. 2127, a REM “extends to
A contract whereby the debtor secures to the
natural accessions, to the improvements,
creditor the fulfillment of a principal obligation
growing fruits and the rents or income not yet
(real security transaction), immediately making
received when the [principal] obligation
immovable property or real rights answerable
becomes due.” These personal properties
to the principal obligation in case it is not
are no longer covered by Art. 2127. [Somera]
complied with at the time stipulated.
See i. Scope vis–a–vis Repealing Clause
A registered real estate mortgage is a right in
under a. Definitions and Scope of 1. Personal
rem, a lien that a creditor has on the property;
Property Security Act
therefore, it is inseparable from the collateral
and until discharged, it follows the property.
Future property CANNOT be an object of
[Somera]
mortgage; however:
1. A stipulation subjecting to the mortgage
Obligations secured by real estate
improvements which the mortgagor may
mortgage
subsequently acquire, install or use in
connection with real property already
General Rule: A real estate mortgage is
mortgaged belonging to the mortgagor is
limited to the principal obligations mentioned in
valid.
the contract (within its four corners). [Lim Julian
2. A stipulation in a registered (or recorded)
v. Lutero, G.R. No. L-25235 (1926)]
real estate mortgage that all property taken
in exchange or replacement by the
Exception: A real estate mortgage may
mortgagor (after-acquired property) shall
contain a dragnet or blanket mortgage clause
become subject to the mortgage is binding.
which subsumes all debts, whether past or
[Somera]
future. [Philippine Bank of Communications v.
CA, G.R. No. 118552 (1996)]
Right to alienate mortgage credit
Note: This clause will be strictly construed and
its inclusion makes the mortgage a continuing Article 2128. The mortgage credit may be
security, not to be discharged by repayment of alienated or assigned to a third person, in
the amount named, but by payment of the full whole or in part, with the formalities required
amount of the principal obligation. [Somera] by law. (1878)
Page 391 of 450

The right to alienate the real estate mortgage 3. Guaranty

credit is the right of the mortgagee to assign its
rights under the principal obligation secured.
Nature and extent of guaranty
Although the mortgagee does not become the
owner of the collateral, it owns the real estate
mortgage credit and may alienate the same to Art. 2047. By a guaranty a person, called the
a third person. [Art. 2128, NCC; Somera] guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor
Right to alienate collateral in case the latter should fail to do so
The mortgagor may still sell the mortgaged If a person binds himself solidarily with the
property, and any stipulation to the contrary is principal debtor, the provisions of Sec. 4, Ch.
void. [Art. 2130, NCC] 3, Title 1 of this Book shall be observed. In
such case the contract is called a
Pactum de non alienando (Sp. pacto de non suretyship
alienando) is prohibited by Art. 2130
a. Stipulations forbidding the mortgagor from General rule: Guaranty is gratuitous
selling the collateral Exception: When there is a stipulation to the
b. Stipulations forbidding the mortgagor from contrary [Art. 2048, NCC]
selling the collateral without the consent of
the mortgagee Obligation secured by guaranty
Essential requisites 1) The guaranty must be founded on a

valid principal obligation [Art. 2052 (1),
a. The mortgage must be constituted to NCC]
secure the fulfillment of a principal 2) A guaranty may secure the performance
obligation [Art. 2085]; of a voidable, unenforceable, and
b. The mortgagor must be the absolute owner natural obligation [Art. 2052(2), NCC].
of the immovable or alienable real rights This implies that a guaranty may secure the
[Art. 2085]; performance of a:
c. The mortgagor must have free disposal of i) Voidable contract – such contract
the property or is legally authorized for the is binding, unless it is annulled by a
purpose [Art. 2085]; proper court action.
d. The mortgage must be subjected to the ii) Unenforceable contract – because
condition that when the principal obligation such contract is not void.
becomes due, the collateral may be iii) Natural obligation – the creditor
alienated for payment to the creditor [Art. may proceed against the guarantor
2087]; although he has no right of action
e. Must be recorded in the Registry of against the principal debtor for the
Property [Art. 2125] reason that the latter’s obligation is
not civilly enforceable. When the
However, if the instrument is not recorded, the debtor himself offers a guaranty for
mortgage is nevertheless binding between the his natural obligation, he impliedly
parties. [Art. 2125] recognizes his liability, thereby
transforming the obligation from a
natural into a civil one.
3) A guaranty may secure a future debt
[Art. 2053, NCC]; Continuing Guaranty
i) Not limited to a single transaction
but which contemplates a future
course of dealings, covering a
Page 392 of 450

series of transactions generally for To avail of the benefit of excussion, the

an indefinite time or until revoked. guarantor must: [Art. 2060, NCC]
ii) It is prospective in its operation and a. Set it up against the creditor upon demand
is generally intended to provide for payment; and
security with respect to future b. Point out to the creditor available property
transactions. of the debtor within PH territory sufficient to
iii) Future debts, even if the amount is cover the amount of the debt.
not yet known, may be guaranteed
but there can be no claim against General Rule: The guarantor has the right to
the guarantor until the amount of benefit from excussion/exhaustion
the debt is ascertained or fixed and
demandable. Exception: The excussion shall not take place:
(ESIAP)
Parties to a guaranty 1. If the guarantor has Expressly renounced
it;
Parties to a Guaranty 2. If he has bound himself Solidarily with the
1. Creditor debtor;
2. Debtor of the Principal Obligation 3. In case of Insolvency of the debtor;
3. Guarantor [Somera] 4. When he has Absconded, or cannot be
sued within the Philippines unless he has
Qualifications of a Guarantor [Art. 2056, left a manager or a representative.
NCC] 5. If it may be Presumed that an execution on
a. He possesses integrity; the property of the principal debtor would
b. He has capacity to bind himself; not result in the satisfaction of the
c. He has sufficient property to answer for the obligation. [Art. 2059, NCC]
obligation which he guarantees.
Other Exceptions
General rule: Creditor has the right to demand 1. If he does not comply with Art. 2060;
another guarantor with the qualifications in Art. 2. If he is a judicial bondsman and sub-
2056 if the previous guarantor has: surety; [Art. 2084, CC]
a. Been convicted in first instance of a crime 3. Where a pledge or mortgage has been
involving dishonesty; or given by him as a special security;
b. Become insolvent [Art. 2057, NCC] [Southern Motors, Inc. v. Barbosa, G.R.
No. L-9306 (1956)]
Exception: Creditor has no right to demand a 4. If he fails to interpose it as a defense before
replacement guarantor if he himself required judgment is rendered against him.
and stipulated that the specified person should
be the guarantor. Right to protection
Excussion Art. 2071 provides a protective remedy in favor

of the guarantor, which is available BEFORE
The guarantor cannot be compelled to pay he has paid, but after he is made liable for the
the creditor unless the latter has: [Art. 2058, debt, and when any of the ff. grounds is
NCC] applicable:
a. Exhausted all of the property of the debtor; 1. When he is sued for the payment;
and 2. In case of insolvency of the principal debtor
b. Resorted to all the legal remedies against or if he is in imminent danger of becoming
the debtor. insolvent;
3. When the debtor has bound himself to
relieve him from the guaranty within a
Page 393 of 450

specified period, and this period has 2) Benefit of division [Art. 2065];
expired; a) However, the benefit of division will
4. When the period for payment has expired; cease if
5. After the lapse of ten years, when the b) Solidary liability has been stipulated
principal obligation has no fixed period for [Art. 2065, NCC]; or
its maturity, unless it be of such nature that c) If any of the exceptions to the benefit of
it cannot be extinguished except within a excussion are present [Somera, Art.
period longer than 10 years; 2059, NCC]
6. If there are reasonable grounds to fear that 3) Right to reimbusement, i.e. to demand
the principal debtor intends to abscond. payment from the other co-guarantors their
proportional share owed to him/her. This is
To protect his interest, a guarantor can available to the co-guarantor who paid the
proceed against the principal debtor by: debt. [Art. 2073, par. 1, NCC]
Obtaining release from the guaranty; OR 4) Right of an insolvent guarantor to have his
Demanding a security that shall protect him share bore by the others, including the
from any proceedings by the creditor payor, in the same proportion [Art. 2073,
and from the danger of insolvency of par. 2, NCC]
the debtor [Art. 2071, NCC] 5) Right to set-up defenses against the paying
co-guarantor those available to the
Right to indemnification principal debtor against the creditor.
a) Exception — Defenses personal to the
The guarantor who pays for a debtor must be debtor are not available to the
indemnified by the latter, guarantor, hence not available as well
to the co–guarantor. [cf. Art. 2081,
The indemnity comprises: NCC]
1. The total amount of the debt 6) Right to Benefit from the release of one
2. The legal interests thereon from the time guarantor [Art. 2078, NCC]
the payment was made known to the
debtor, even though it did not earn interest Requisites for the applicability of Art. 2073,
for the creditor NCC
3. The expenses incurred by the guarantor 1. There are two or more guarantors of the
after having notified the debtor that same debtor for the same debt;
payment had been demanded of him 2. Payment has been made by one guarantor;
4. Damages if they are due [Art. 2066, NCC] 3. The payment was made:
 Because of the insolvency of the
Right to subrogation debtor, or
 By judicial demand
The guarantor who pays is subrogated by 4. The paying guarantor seeks to be
virtue thereof to all the rights which the indemnified only to the extent of his
creditor had against the debtor. proportionate share in the total obligation.
If the guarantor has compromised with the For purposes of proportionate reimbursement,
creditor, he cannot demand of the debtor more the other guarantors may interpose such
than what he has really paid. [Art. 2067, NCC] defenses against the paying guarantor as are
available to the debtor against the creditor,
Rights of co-guarantors except those that are personal to the debtor
[Art. 2074, NCC]
Rights of a Co-Guarantor
1) Right of excussion against the principal
guarantor and the principal debtor [Art.
2064, NCC];
Page 394 of 450

Effects of guaranty 2. If he fails to do so, he shall suffer the loss

for the insolvency of the debtor, but only to
The guarantor has the right to the extent of the value of the said property
benefit from excussion/exhaustion
[See Art. 2058, NCC, supra] The creditor has the duty to notify
the guarantor in the action against
The creditor has the right to secure the debtor [Art. 2062, NCC]
a judgment against the guarantor
prior to the excussion Notice to the guarantor is mandatory in the
action against the principal debtor. The
General rule: An ordinary personal guarantor guarantor, however, is not duty bound to
(NOT a pledgor/mortgagor), may demand appear in the case, and his non-appearance
exhaustion of all the property of the debtor shall not constitute default, with its
before he can be compelled to pay. consequential effects.
Exception: The creditor may, prior thereto, Rationale: To give the guarantor the
secure a judgment against the guarantor, who opportunity to allege and substantiate
shall be entitled, however, to a deferment of the whatever defenses he may have against the
execution of said judgment against him, until principal obligation, and chances to set up such
after the properties of the principal debtor shall defenses as are afforded him by law.
have been exhausted, to satisfy the latter’s
obligation. [Tupaz v. CA, G.R. No. 145578 A compromise shall not prejudice a
(2005)] person not party to it [Art. 2063,
NCC]
The creditor has the duty to make
prior demand for payment from the A compromise between creditor and principal
guarantor [Art. 2060, NCC] debtor benefits the guarantor but does not
prejudice him.
The demand is to be made only after judgment
on the debt. A compromise between guarantor and the
creditor benefits but does not prejudice the
The guarantor has the duty to set up principal debtor.
the benefit of excussion [Art. 2060,
NCC] Effects of Guaranty between the
Debtor and the Guarantor
As soon as he is required to pay, the guarantor
must also point out to the creditor available (a) The guarantor has the duty to
property (not in litigation or encumbered) of the notify the debtor before paying the
debtor within the Philippines. creditor [Art. 2068; see also Arts.
1236 and 1237, NCC]
The creditor has the duty to resort to
all legal remedies [Arts. 2058 and Should payment be made without notification
2061, NCC] or against the debtor’s will, and supposing the
debtor has already made a prior payment, the
After the guarantor has fulfilled the conditions debtor would be justified in setting up the
required for making use of the benefit of defense that the obligation has already been
excussion, it becomes the duty of the creditor extinguished by the time the guarantor made
to: the payment. The guarantor will then lose the
1. Exhaust all the property of the debtor right of reimbursement and consequently the
pointed out by the guarantor; right of subrogation.
Page 395 of 450

(b) The guarantor cannot demand However, the mere failure on the part of the
reimbursement for payment made creditor to demand payment after the debt has
by him before the obligation has become due does not, of itself, constitute any
become due [Art. 2069, NCC] extension of time.
General rule: Since a contract of guaranty is (c) When Subrogation is Not Feasible
only subsidiary, the guarantor cannot be liable
for the obligation before the period on which the The guarantors, even though they may be
debtor’s liability will accrue. Any payment solidary, are released from their obligation,
made by the guarantor before the obligation is whenever by some act of the creditor they
due cannot be indemnified by the debtor. The cannot be subrogated to the rights, mortgages
guarantor can only demand reimbursement and preference of the latter. [Art. 2080, NCC]
upon expiration of the period.
Legal and judicial bonds
Exception: Prior consent or subsequent
ratification by the debtor
Art. 2051, par. 1 – A guaranty may be
conventional, legal, or judicial, or
(c) The guarantor may proceed
gratuitous or by onerous title.
against the debtor even before
payment has been made [Art.
It may be constituted, not only in favor of
2071, NCC]
the principal debtor, but also in favor of
the other guarantor, with the latter’s
Extinguishment of guaranty consent, or without his knowledge, or even
over his objection.
General Rule
The obligation of the guarantor is extinguished Bond

at the same time as that of the debtor and for An undertaking that is sufficiently secured, and
the same causes as all other obligations. [Art. not cash or currency.
2076, NCC]
Bondsman
Specific Instances that Extinguish A surety offered in virtue of a provision of law
the Guaranty or a judicial order.
(a) Creditor Voluntary Accepts the Qualifications of personal bondsman [Art.

Immoveable for Payment 2082 in relation to Art. 2056, NCC]
a. He possesses integrity;
The guarantor is released if the creditor b. He has capacity to bind himself;
voluntarily accepts immoveable or other c. He has sufficient property to answer for the
property in payment of the debt, even if he obligation which he guarantees.
should afterwards lose the same through
eviction. [Art. 2077, NCC] Pledge or mortgage in lieu of bond [Art.
2083, NCC]
(b) When an Extension is Granted to Guaranty or suretyship is a personal security.
the Debtor without the Consent of
Guarantor] Pledge or mortgage is a property or real
security. If the person required to give a legal
An extension granted to the debtor by the or judicial bond should not be able to do so, a
creditor without the consent of guarantor pledge or mortgage sufficient to cover the
extinguishes the guaranty [Art. 2079, NCC] obligation shall be admitted in lieu thereof.
Page 396 of 450

Bondsman not entitled to excussion [Art. to any other legitimate business or activity of
2084, NCC] the surety.
A judicial bondsman and the sub-surety are not
entitled to the benefit of excussion. Form of surety
Reason: They are not mere guarantors, but Generally
sureties whose liability is primary and solidary.
The contract of a surety is evidenced by a
Effect of negligence of creditor document called surety bond which is
Mere negligence on the part of the creditor in essentially a promise to guarantee the
collecting from the debtor will not relieve the obligation of the obligor. In turn, the obligor
surety from liability. executes an indemnity agreement in favor of
the insurer. [de Leon]
4. Surety
It is an accessory contract unlike a contract of
Concept insurance which is the principal contract itself.
A suretyship is covered by the Statute of

Art. 2047, NCC. By a guaranty a person, Frauds since it constitutes a special promise to
called the guarantor, binds himself to the answer for the debt, default, or miscarriage of
creditor to fulfill the obligation of the another. [Art. 1403, NCC]
principal debtor in case the latter should
fail to do so. Therefore, a suretyship is unenforceable
unless:
If a person binds himself solidarily with the  The suretyship or some note or
principal debtor, the provisions of Sec. 4, Ch. memorandum thereof, is in writing; and
3, Title 1 of this Book shall be observed. In
 The suretyship is subscribed by the party
such case the contract is called a
or by his agent. [Art. 1403, NCC]
suretyship.
Obligations secured
Suretyship
A relation which exists where one person A suretyship is valid despite the absence of any
(surety) binds himself solidarily with the direct consideration received by the surety,
principal debtor, such that the former either from the principal debtor or from the
undertakes a direct and primary obligation or creditor.
other duty to a third person (creditor), who is
entitled to but one performance, and as The consideration necessary to support a
between the two who are bound, the latter surety’s obligation need not pass directly to the
rather than the former should perform. surety. A consideration moving the principal
debtor alone is sufficient [Garcia v CA, G.R.
A suretyship is also an agreement whereby a No. 8021]
surety guarantees the performance or
undertakes to answer, under specified terms Strictissimi juris rule
and conditions, for the debt, default or The obligation of the surety cannot be
miscarriage of the principal or obligor, such as extended by implication beyond the terms of
failure to perform, or breach of trust, the contract. [La Insular v Go-Tauco, G.R. No.
negligence and the like, in favor of a third party. L-13307]
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
Page 397 of 450

Comprehensive or Continuing Surety Surety Guaranty

Art. 2053 applies to suretyships as well, such
that a surety may also be given as security for The contract of
future debts. guaranty is the
guarantor's own
It contemplates a prospective or future course separate
of dealing, covering a series of transactions undertaking, in which
A surety is usually
within the stipulations of the contract, until the the principal does not
bound with his
expiration or termination of the suretyship. join. It is usually
principal by the same
entered into before or
instrument, executed
Surety distinguished from standby after that of the
at the same time, and
letter of credit principal, and is often
on the same
supported on a
consideration. He is
Surety Standby L/C separate
an original promissor
Upon debtor’s Upon default, the consideration from
and debtor from the
default, the creditor creditor-beneficiary that supporting the
beginning, and is
contract of the
expects that the expects that it will held, ordinarily, to
principal. The original
surety will perform promptly receive know every default of
contract of his
cash before any his principal.
litigation principal is not his
contract, and he is
There is no duty to There is a duty to
not bound to take
indemnify the pay the creditor-
notice of its non-
creditor until the beneficiary upon
performance
creditor establishes presentation of the
the fact of the required documents A surety will not be
debtor’s non- A guarantor is often
discharged, either by
performance No need to prove discharged by the
the mere indulgence
non-performance in mere indulgence of
of the creditor to the
litigation. the creditor to the
principal, or by want
principal, and is
of notice of the
Surety distinguished from usually not liable
default of the
unless notified of the
guaranty principal, no matter
default of the
how much he may be
principal
Surety Guaranty injured thereby
An accessory A guarantor is the

promise by which a A collateral A surety is the insurer insurer of the
person binds himself undertaking to pay of the debt, and he solvency of the
for another already the debt of another in obligates himself to debtor and thus binds
bound, and agrees case the latter is pay if the principal himself to pay if the
with the creditor to unable to pay the does not pay principal is unable to
satisfy the obligation pay
debt
if the debtor does not [Zobel, Inc. vs. CA, G.R. No. 113931 (1998)]
Surety distinguished from joint

and solidary obligations
Nature of Liability
Although contractual (limited by the terms of
the contract) and accessory (arises only if
Page 398 of 450

principal debtor is held liable), a surety’s Essential Conditions of Letters of Credit

liability is direct, primary, and absolute. 1. Issued in favor of a definite person and
not to order.
Surety Joint and Solidary 2. Limited to a fixed and specified amount,
Obligations or to one or more undetermined
Surety has the right Joint and solidary amounts, but within a maximum the
to indemnification debtor has only a limits of which has to be stated exactly.
and subrogation as right to
against the principal reimbursement as Those which do not have one of these
debtor [Art. 2066- against his co- conditions shall be mere letters of
2067, NCC] debtors [Art. 1217, recommendation. [Art. 568, Code of
NCC] Commerce]
Accessory, ancillary, Not dependent on, or
and collateral not an incident to a Parties to a Letter of Credit
obligation principal obligation There would be at least three parties to a letter
of credit:
1. Buyer/Importer/Account Party – one who
5. Letters of credit
procures the letter of credit and obliges
himself to reimburse the issuing bank upon
Definition and Purpose receipt of documents of title.
2. Issuing/Opening Bank – the bank which
Definition is usually the buyer’s bank and actually
Letters of credit (L/C) is a written instrument
issues the letter of credit. [Lee v. CA, G.R.
whereby the writer requests or authorizes the
No. 117913 (2002)]
addressee to pay money or deliver goods to a
third person, and assumes responsibility for It undertakes:
payment of debt therefor to the addressee.
a. To pay the seller upon receipt of the
[Transfield Philippines v. Luzon Hydro, G.R.
draft and proper documents of title; and
No. 146717 ( 2004)]
b. To surrender the documents to the
buyer upon reimbursement. [Bank of
A L/C is a financial device developed by America v. CA, G.R. No. 105395
merchants as a convenient and relatively safe (1993)].
mode of dealing with sales of goods. The buyer
is required to contract a bank to issue a L/C in The obligation of the issuing bank to pay
favor of the seller so that, by virtue of the L/C, the seller is direct, primary, absolute,
the issuing bank can authorize the seller to
definite and solidary with the buyer, in the
draw drafts and engage to pay them upon their
absence of stipulation in the letter of credit.
presentment simultaneously with the tender of
[Metropolitan Waterworks and Sewerage
documents required by the L/C. [Bank of
System v. Daway, G.R. No. 160732 (2004)]
America v. CA, G.R. No. 105395 (1993)]
An issuing bank that paid the beneficiary of
Purpose an expired letter of credit can recover from
Its purpose is to substitute for, and support, the the applicant-buyer, who obtained goods
agreement of the buyer-importer to pay money from the beneficiary to prevent unjust
under a contract or other arrangement, but enrichment. [Rodzssen Supply Co. v. Far
does not necessarily constitute as a condition East Bank & Trust Co., G.R. No. 109087
for the perfection of such arrangement. (2001)]
[Reliance Commodities, Inc. v. Daewoo
Industrial Co., Ltd., G.R. No. L-100831 (1993)] 3. Seller/Exporter/Beneficiary – one who
ships the goods to the buyer in compliance
with a contract of sale and delivers the
Page 399 of 450

documents of title and draft to the issuing The bank buys or discounts a draft under
bank to recover payment. the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before
Depending on the transaction, the number of negotiation, it has no liability with respect to
parties to the letter of credit may be increased. the seller but after negotiation, a
Thus, the different types of correspondent contractual relationship will then prevail
banks: between the negotiating bank and the
seller. [FEATI Bank and Trust Co. v. CA,
1. Advising/Notifying Bank – the bank G.R. No. 94209 (1991)]
which conveys to the seller the existence of
the credit. Paying Bank – the bank which buys or
discounts the drafts contemplated by
The bank assumes no liability except to the letter of credit, if such draft is to be
notify and/or transmit to the seller the drawn on the opening bank or on
existence of the letter of credit. It is not another designated bank not in the city
privy to the contract of sale between the of the beneficiary. [Lee v. CA, G.R. No.
buyer and the seller. Its relationship is only 117913 (2002)]
with that of the issuing bank.
It undertakes to encash the drafts drawn
The bank may suggest to the seller its by the exporter. [Bank of America v. CA,
willingness to negotiate, but this fact alone G.R. No. 105395 (1993)]
does not imply that the notifying bank
promises to accept the draft drawn under Kinds of letters of credit
the documentary credit. [FEATI Bank and
Trust Co. v. CA, G.R. No. 94209 (1991)] As to the type of the main contract
(a) Commercial Letter of Credit
The services of the notifying bank must (b) Standby Letter of Credit
always be utilized if the letter of credit is to
be advised to the beneficiary through
Commercial Standby
cable. [Lee v. CA, G.R. No. 117913 (2002)]
Letter of Credit Letter of Credit
2. Confirming Bank – lends credence to the Use
letter of credit issued by a lesser known
issuing bank. [Bank of America v. CA, G.R. Used to guarantee or
No. 105395 (1993)] Method of payment in secure an obligation
a contract of sale in a non-sale
The bank which confirms the letter of credit transaction
issued by the opening bank. [Lee v. CA,
Purpose
G.R. No. 117913 (2002)]
Reduces the risk of
The bank assumes a direct obligation to Reduces the risk of
non-payment of
the seller and its liability is a primary one as non-performance of a
purchase price under
if the bank itself had issued the letter of contractual obligation
a contract of sale
credit. [FEATI Bank and Trust Co. v. CA,
G.R. No. 94209 (1991)] When Payable
Negotiating Bank – the bank which

discounts the draft presented by the
seller.
Page 400 of 450

The credit is payable the letter. A correspondent bank which departs

upon the from what has been stipulated under the letter
The credit is payable of credit, as when it accepts a faulty tender and
presentation by the
upon certification of a acts on its own risks, may not thereafter be able
seller-beneficiary that
party’s non- to recover from the buyer or the issuing bank,
he has taken
performance of the as the case may be, the money thus paid to the
affirmative steps to
agreement beneficiary. [Somera citing FEATI Bank and
comply with the sale
agreement Trust Co. v. CA, G.R. No. 94209 (1991)]
Beneficiary Independence principle

Beneficiary must The principle of independence assures the
Beneficiary must
certify by document
certify that his obligor seller-beneficiary of prompt payment
that he has regardless or independent of any breach of the
has not performed
performed the main contract. By this principle, the issuing
the contract.
contract. bank determines compliance with the letter of
credit only by examining the shipping
As to revocability documents presented; it is precluded from
determining whether the main contract is
a. Revocable L/C - One which can be accomplished or not. [Bank of America v. CA,
revoked by the issuing bank without the G.R. No. 105395 (1993)].
consent of the buyer and seller
b. Irrevocable L/C - One which the issuing The independent nature of the letter of credit
bank cannot revoke without the consent of may be—
the buyer and seller [FEATI Bank and Trust a. Independent in toto - the credit is
Co. v. CA, G.R. No. 94209 (1991)] independent from the justification aspect
and is a separate obligation from the
As to the obligation assumed by underlying agreement;
correspondent bank b. Only as to the justification aspect like in a
commercial letter of credit or repayment
1. Unconfirmed L/C - One which continues standby, which is identical with the same
to be the obligation of the issuing bank obligations under the underlying
2. Confirmed L/C - One which is supported agreement.
by the absolute assurance to the
beneficiary that the confirming bank will In both cases the payment may be enjoined if
undertake the issuing bank's obligation as in light of the purpose of the credit, the payment
its own according to the terms and of the credit would constitute fraudulent abuse
conditions of the credit [FEATI Bank and of the credit. [Transfield Philippines v. Luzon
Trust Co. v. CA, G.R. No. 94209 (1991)] Hydro, G.R. No. 146717 (2004]
Rule of strict compliance The independence doctrine works to the

benefit of both the issuing bank and the
The rule states that documents tendered by the beneficiary:
seller must strictly conform to the terms of a. With the letter of credit from the issuing
the letter of credit. Otherwise, the issuing bank, the party who applied for and
bank or the concerned correspondent bank is obtained it may confidently present the
not obliged to perform its undertaking under the letter of credit to the beneficiary as a
contract. security to convince the beneficiary to enter
into the business transaction.
The tender of documents by the beneficiary b. On the other hand, the beneficiary of the
(seller) must include all documents required by letter of credit, can be rest assured of being
Page 401 of 450

empowered to call on the letter of credit as (d) The charges, individually itemized, which
a security in case the commercial are paid or to be paid by such person in
transaction does not push through, or the connection with the transaction but which
applicant fails to perform his part of the are not incident to the extension of credit;
transaction. [Transfield Philippines v. (e) The total amount to be financed;
Luzon Hydro, G.R. No. 146717 (2004)] (f) The finance charge expressed in terms of
pesos and centavos;
Justification Aspect (g) The percentage that the finance bears to
A demand for payment under the credit prima the total amount to be financed expressed
facie means that the beneficiary has performed as a simple annual rate on the outstanding
his part of the underlying transaction and is unpaid balance of the obligation. [Sec. 4]
prima facie entitled to payment. The
justification is only prima facie, because the The rationale of this provision is to protect
documents tendered may be proper, while users of credit from a lack of awareness of the
there is a defect in the underlying transaction. true cost thereof, proceeding from the
experience that banks are able to conceal such
true cost by hidden charges, uncertainty of
B. TRUTH IN LENDING rates, deduction of interests from the loans
ACT amount, and the like. The law thereby seeks to
The section numbers hereinafter generally protect debtors by permitting them to fully
pertain to RA 3765 or the Truth in Lending Act, appreciate the true cost of their loan, to enable
unless otherwise indicated. them to give full consent to contract, and the
properly evaluate their options in arriving at
business decisions. [UCPB v Sps.
1. Purpose Beluso.,G.R. 159912 (2007)]
To protect its citizens from a lack of awareness In addition, the contract or document shall
of the true cost of credit to the user by assuring specify additional charges, if any, which will be
a full disclosure of such cost with a view of collected in case certain stipulations in the
preventing the uninformed use of credit to the contract are not met by the debtor. [BSP Memo
detriment of the national economy. [Sec. 2.] No. M-2008-020]
2. Obligation of Creditors to 3. Covered and Excluded

Persons to whom Credit is Transactions
Extended
Covered
A creditor shall furnish to each person to whom i. Any loan, mortgage, deed of trust,
credit is extended, prior to the consummation advance, or discount;
of the transaction, a clear statement in writing ii. Any conditional sales contract;
setting forth, to the extent applicable and in iii. Any contract to sell, or sale or contract
accordance with rules and regulations of sale of property or services, either for
prescribed by the Board, the following present or future delivery, under which
information: part or all of the price is payable
(a) The cash price or delivered price of the subsequent to the making of such sale
property or service to be acquired; or contract;
(b) The amounts, if any, to be credited as down iv. Any rental-purchase contract;
payment and/or trade in; v. Any contract or arrangement for the
(c) The difference between the amounts set hire, bailment, or leasing of property;
forth under clauses (1) and (2);
Page 402 of 450

vi. Any option, demand, lien, pledge, or Government or any agency or any political
other claim against, or for the delivery subdivision thereof.
of, property or money; 5) A final judgment hereafter rendered in any
vii. Any purchase, or other acquisition of, criminal proceeding under this Act to the
or any credit upon the security of, any effect that a defendant has willfully violated
obligation of claim arising out of any of this Act shall be prima facie evidence
the foregoing; and against such defendant in an action or
viii. Any transaction or series of proceeding brought by any other party
transactions having a similar purpose against such defendant under this Act as to
or effect. [Sec. 3(2)] all matters respecting which said judgment
would be an estoppel as between the
4. Consequences of Non- parties thereto. [Sec.6]
Compliance
C. ANTI-MONEY
1) Any creditor who in connection with any
credit transaction fails to disclose to any
LAUNDERING ACT
person any information in violation of this
Act or any regulation issued thereunder The section numbers hereinafter generally
shall be liable to such person in the amount pertain to RA 9160 or the Anti-Money
of P100 or in an amount equal to twice the Laundering Act, as amended by RA 9194 and
finance charged required by such creditor RA 10365, unless otherwise indicated.
in connection with such transaction,
whichever is the greater, except that such Money Laundering is a crime where the
liability shall not exceed P2,000 on any proceeds of an unlawful activity are transacted,
thereby making them appear to have originated
credit transaction.
a) Action to recover such penalty may be from legitimate sources.
brought by such person within one year
from the date of the occurrence of the It is governed by RA 9160, as amended by RA
violation, in any court of competent 9194 (2003), RA 10167 (2012), RA 10365
jurisdiction. (2013) and RA 10927 (2017).
b) In any action under this subsection in
which any person is entitled to a 1. Policy of the Law
recovery, the creditor shall be liable for
reasonable attorney's fees and court It is the policy of the State to:
costs as determined by the court. a. Protect and preserve the integrity and
2) Except as specified in subsection (a) of this confidentiality of bank accounts;
section, nothing contained in this Act or any b. Ensure that the Philippines shall not be
regulation contained in this Act or any used as a money laundering site for the
regulation thereunder shall affect the proceeds of any criminal activity.
validity or enforceability of any contract or
transactions. Consistent with its foreign policy, the State
3) Any person who willfully violates any shall extend cooperation in transnational
provision of this Act or any regulation investigations and prosecutions of persons
issued thereunder shall be fined by not less involved in money laundering activities
than P1,00 or more than P5,000 or whenever committed. [Sec. 2]
imprisonment for not less than 6 months,
nor more than one year or both.
4) No punishment or penalty provided by this
Act shall apply to the Philippine
Page 403 of 450

2. Covered Institutions and b) Acting as, or arranging for another

person to act as:
Their Obligations i) A director or corporate secretary of
a company
Covered Institutions ii) A partner of a partnership, or
1) Banks, non-banks, quasi–banks, trust iii) A similar position in relation to other
entities, foreign exchange dealers, juridical persons;
pawnshops, money changers, remittance c) Providing a registered office, business
and transfer companies and other similar address or accommodation,
entities and all other persons and their correspondence or administrative
subsidiaries and affiliates supervised or address for a company, a partnership
regulated by the BSP; or any other legal person or
2) Insurance companies, pre-need arrangement; and
companies and all other persons d) Acting as, or arranging for another
supervised or regulated by the Insurance person to act as, a nominee
Commission; shareholder for another person
3) Those who are: 7) Persons who provide any of the following
i) Securities dealers, brokers, services:
salesmen, investment houses and a) Managing of client money, securities or
other similar entities managing other assets;
securities or rendering services as b) Management of bank, savings or
investment agent, advisor, or securities accounts;
consultant, c) Organization of contributions for the
ii) Mutual funds, close – end creation, operation or management of
investment companies, common companies; and
trust funds, pre – need companies d) Creation, operation or management of
and other similar entities juridical persons or arrangements and
iii) Foreign exchange corporations, buying or selling business entities.
money changers, money payment, [Sec. 1]
remittance and transfer companies
e) Casinos, including internet and ship-
and other similar entities, and
based casinos, with respect to their
iv) Other entities administering or
casino cash transactions related to
otherwise dealing in currency,
their gaming operations. [Sec. 1]
commodities or financial
derivatives based thereon, The term ‘covered persons’ excludes lawyers
valuable objects, cash substitutes and accountants acting as independent legal
and other similar monetary professionals, (1) in relation to information
instruments or property supervised concerning their clients; or (2) where disclosure
or regulated by the Securities and of information would compromise client
Exchange Commission (SEC). confidences or the attorney-client relationship.
4) Jewelry dealers in precious metals, who, Provided, (1) that these lawyers and
as a business, trade in precious metals, for accountants are authorized to practice in the
transactions in excess of Php1,000,000. Philippines and (2) shall continue to be subject
5) Jewelry dealers in precious stones, who, to the provisions of their respective codes of
as a business, trade in precious stones, for conduct and/or professional responsibility or
transactions in excess of Php1,000,000. any of its amendments. [Sec. 1]
6) Company service providers which, as a
business, provide any of the following Obligations of Covered Institutions
services to third parties: a. Customer Identification
a) Acting as a formation agent of juridical b. Record Keeping
persons;
Page 404 of 450

c. Reporting of Covered and Suspicious communicating, directly or indirectly, in

Transactions any manner, to any person, entity, or the
media:
Customer Identification 1. The fact that a covered transaction
Covered institutions shall: report has or is about to be
a. Establish and record a true identity of its reported;
clients, based on official documents 2. The contents thereof;
b. Maintain a system of verifying the true 3. Any other information in relation
identity of their clients thereto; and
c. In case of corporate clients, require a b. Neither may such reporting be
system to verify: published or aired in any manner or form
1. Legal existence and organizational by the mass media, electronic mail, or other
structure; and similar devices. [Sec. 9, RA 10365]
2. Authority and identification of persons
purporting to act on their behalf In case of violation, criminal liability ensues as
against the concerned officer and employee of
Anonymous accounts, accounts under fictitious the covered person and media.
names, and all other similar accounts shall be
absolutely prohibited. Peso and foreign 3. Covered and Suspicious
currency non- checking numbered accounts
shall be allowed. The BSP may conduct annual Transactions
testing solely limited to the determination of the
existence and true identity of the owners of General Rule: A covered transaction is a
such accounts. [Sec. 9] transaction in cash or other equivalent
monetary instrument involving a total amount in
Record Keeping excess of Php 500,000 within one banking day.
All records of all transactions of covered [Sec. 3(b)]
institutions shall be maintained and safely
stored for five (5) years from the dates of Exception: for Casinos or “covered persons
transactions. under Section 3(a)(8),” a single casino
transaction involving an amount in excess of
With respect to closed accounts, the records Php 5,000,000 or its equivalent in any other
on customer identification, account files and currency.
business correspondence, shall be preserved
and safely stored for at least five (5) years Suspicious Transactions are transactions
from the dates when they were closed. with covered institutions, regardless of the
amount involved, where any of the following
Reporting of Covered and Suspicious circumstances exist:
Transactions a. There is no underlying legal or trade
General Rule: Covered institutions shall report obligation, purpose or economic
to the AMLC all covered transactions within justification;
five (5) working days from occurrence. b. The client is not properly identified;
Exception: If the Anti Money Laundering c. The amount involved is not commensurate
Council (AMLC) prescribed a longer period not with the business or financial capacity of
exceeding fifteen (15) working days. [Sec. the client;
9(c)] d. Taking into account all known
circumstances, it may be perceived that the
When reporting covered transactions to the client’s transaction is structured to avoid
AMLC: being the subject of reporting requirements
a. Covered institutions and their officers, and under this Act;
employees are prohibited from
Page 405 of 450

e. Any circumstance relating to the Unlawful activity refers to any act or omission
transaction which is observed to deviate or series or combination thereof involving or
from the profile of the client and/or the having direct relation to the following:
client’s past transactions with the covered a. Kidnapping for ransom under Article 267
institution; of Act No. 3815, otherwise known as the
f. The transaction is in any way related to an Revised Penal Code, as amended;
unlawful activity or offense under this Act b. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15,
that is about to be, is being or has been and 16 of RA 9165, otherwise known as the
committed. [Sec. 3(b-1)] Comprehensive Dangerous Drugs Act
of 2002;
4. Money Laundering; how c. Section 3 paragraphs B, C, E, G, H and I of
RA. 3019, as amended; otherwise known
committed; unlawful and as the Anti-Graft and Corrupt Practices
predicate crimes Act;
d. Plunder under RA 7080, as amended;
Money laundering is a crime whereby the e. Robbery and extortion under Articles
proceeds of an unlawful activity are transacted, 294, 295, 296, 299, 300, 301 and 302 of
thereby making them appear to have originated the Revised Penal Code, as amended;
from legitimate sources. f. Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
Money Laundering is committed by any 1602;
person who, knowing that any monetary g. Piracy on the high seas under the
instrument or property represents, involves, or Revised Penal Code, as amended and
relates to the proceeds of any unlawful activity: Presidential Decree No. 532;
a. Transacts said monetary instrument or h. Qualified theft under Article 310 of the
property; Revised Penal Code, as amended;
b. Converts, transfers, disposes of, moves, i. Swindling under Article 315 of the Revised
acquires, possesses or uses said monetary Penal Code, as amended;
instrument or property; j. Smuggling under RA Nos. 455 and 1937;
c. Conceals or disguises the true nature, k. Violations under RA 8792, otherwise
source, location, disposition, movement or known as the Electronic Commerce Act
ownership of or rights with respect to said of 2000;
monetary instrument or property; l. Hijacking and other violations under RA
d. Attempts or conspires to commit money 6235; destructive arson and murder, as
laundering offenses referred to in defined under the Revised Penal Code, as
paragraphs (a), (b) or (c); amended, including those perpetrated by
e. Aids, abets, assists in or counsels the terrorists against non-combatant persons
commission of the money laundering and similar targets;
offenses referred to in paragraphs (a), (b) m. Fraudulent practices and other violations
or (c) above; and under RA 8799, otherwise known as the
f. Performs or fails to perform any act as a Securities Regulation Code of 2000;
result of which he facilitates the offense of n. Felonies or offenses of a similar nature
money laundering referred to in that are punishable under the penal laws of
paragraphs (a), (b) or (c) above. other countries. [Sec. 3 (i)]
Money laundering is also committed by any RA 10365 further added the following:
covered person who, knowing that a covered a. Terrorism and conspiracy to commit
or suspicious transaction is required under this terrorism as defined and penalized under
Act to be reported to the Anti-Money Sections 3 and 4 of RA No. 9372;
Laundering Council (AMLC), fails to do so. b. Financing of terrorism under Section 4
[Sec. 4, RA 10365]. and offenses punishable under Sections 5,
Page 406 of 450

6, 7 and 8 of RA 10168, otherwise known p. Violation of Section 6 of RA 8042,

as the Terrorism Financing Prevention and otherwise known as the Migrant Workers
Suppression Act of 2012; and Overseas Filipinos Act of 1995, as
c. Bribery under Articles 210, 211 and 211-A amended by RA 10022;
of the Revised Penal Code, as amended, q. Violation of RA 8293, otherwise known as
and Corruption of Public Officers under the Intellectual Property Code of the
Article 212 of the Revised Penal Code, as Philippines;
amended; r. Violation of Section 4 of RA 9995,
d. Frauds and Illegal Exactions and otherwise known as the Anti-Photo and
Transactions under Articles 213, 214, 215 Video Voyeurism Act of 2009;
and 216 of the Revised Penal Code, as s. Violation of Section 4 of RA 9775,
amended; otherwise known as the Anti-Child
e. Malversation of Public Funds and Pornography Act of 2009;
Property under Articles 217 and 222 of the t. Violations of Sections 5, 7, 8, 9, 10(c), (d)
Revised Penal Code, as amended; and (e), 11, 12 and 14 of RA 7610,
f. Forgeries and Counterfeiting under otherwise known as the Special
Articles 163, 166, 167, 168, 169 and 176 of Protection of Children Against Abuse,
the Revised Penal Code, as amended; Exploitation and Discrimination.
g. Violations of Sections 4 to 6 of RA 9208,
otherwise known as the Anti-Trafficking 5. Anti-Money Laundering
in Persons Act of 2003;
h. Violations of Sections 78 to 79 of Chapter
Council; functions
IV, of Presidential Decree No. 705,
otherwise known as the Revised Forestry The Anti-Money Laundering Council shall be
Code of the Philippines, as amended; composed of the Governor of the Bangko
i. Violations of Sections 86 to 106 of Chapter Sentral ng Pilipinas (BSP) as chairman, and
VI, of RA 8550, otherwise known as the the Commissioner of the Insurance
Philippine Fisheries Code of 1998; Commission and the Chairman of the
j. Violations of Sections 101 to 107, and 110 Securities and Exchange Commission (SEC)
of RA 7942, otherwise known as the as members. [Sec. 7]
Philippine Mining Act of 1995;
k. Violations of Section 27(c), (e), (f), (g) and Functions
(i), of RA 9147, otherwise known as the The AMLC shall act unanimously in the
Wildlife Resources Conservation and discharge of its functions as defined
Protection Act; hereunder:
l. Violation of Section 7(b) of RA 9072, a. To require and receive covered or
otherwise known as the National Caves suspicious transaction reports from
covered institutions;
and Cave Resources Management
b. To issue orders addressed to the
Protection Act;
appropriate Supervising Authority or the
m. Violation of RA 6539, otherwise known as
covered institution to determine the true
the Anti-Carnapping Act of 2002, as
identity of the owner of any monetary
amended;
instrument or property subject of a covered
n. Violations of Sections 1, 3 and 5 of PD
transaction or suspicious transaction report
1866, as amended, otherwise known as
or request for assistance from a foreign
the decree Codifying the Laws on
State, or believed by the Council, on the
Illegal/Unlawful Possession,
basis of substantial evidence, to be, in
Manufacture, Dealing In, Acquisition or
whole or in part, wherever located,
Disposition of Firearms, Ammunition or
representing, involving, or related to,
Explosives;
directly or indirectly, in any manner or by
o. Violation of PD 1612, otherwise known as
the Anti-Fencing Law;
Page 407 of 450

any means, the proceeds of an unlawful the AMLC, reports on all real estate
activity; transactions involving an amount in excess
c. To institute civil forfeiture proceedings and of Php 500,000 within 15 days from the
all other remedial proceedings through date of registration of the transaction, in a
the Office of the Solicitor General; form to be prescribed by the AMLC. The
d. To cause the filing of complaints with the AMLC may also require the Land
Department of Justice or the Ombudsman Registration Authority and all its Registries
for the prosecution of money laundering of Deeds to submit copies of relevant
offenses; documents of all real estate transactions.
e. To investigate suspicious transactions [Sec. 7]
and covered transactions deemed
suspicious after an investigation by AMLC, 6. Safe Harbor Provision
money laundering activities, and other
violations of this Act; The Safe Harbor Provision states that no
f. To apply before the Court of Appeals, ex administrative, criminal or civil
parte, for the freezing of any monetary proceedings shall lie against any person for
instrument or property alleged to be having made a covered transaction report in
laundered, proceeds from or the regular performance of his duties and in
instrumentalities used/ intended for use in good faith, whether or not such reporting
any unlawful activity (as defined in Section results in any criminal prosecution under this
3(i) hereof); Act or any other Philippine law. [Sec. 9]
g. To implement such measures as may be
necessary and justified under this Act to Lawyers and accountants acting as
counteract money laundering; independent legal professionals are not subject
h. To receive and take action in respect of, to the reporting requirement if the relevant
any request from foreign states for information was obtained in circumstances
assistance in their own anti-money subject to professional secrecy or legal
laundering operations provided in this Act; professional privilege. [Sec. 9(c)]
i. To develop educational programs on the
pernicious effects of money laundering, the
methods and techniques used in money 7. Application for Freeze Orders
laundering, the viable means of preventing
money laundering and the effective ways of Who may apply
prosecuting and punishing offenders; Upon verified ex parte petition by the AMLC
j. To enlist the assistance of any branch, and after determination that probable cause
department, bureau, office, agency or exists that any monetary instrument or property
instrumentality of the government, is in any way related to an unlawful activity, the
including government-owned and - Court of Appeals may issue a freeze order,
controlled corporations, in undertaking any which shall be effective immediately, directing
and all anti-money laundering operations, the concerned covered persons and
which may include the use of its personnel, government agency to desist from allowing any
facilities and resources for the more transaction, withdrawal, transfer, removal,
resolute prevention, detection and conversion, concealment, or other disposition
investigation of money laundering offenses of the subject monetary instrument or property.
and prosecution of offenders; and [Rule 10(a), Revised IRR]
k. To impose administrative sanctions for
the violation of laws, rules, regulations and Effectivity
orders and resolutions issued pursuant The freeze order shall be effective
thereto; [Sec. 7] immediately and shall not exceed six (6)
l. To require the Land Registration Authority months depending upon the circumstances of
and all its Registries of Deeds to submit to the case.
Page 408 of 450

On motion of the AMLC filed before the (5) The covered person shall also submit to
expiration of the original period of the freeze the AMLC, through the internet, an
order, the court may, for good cause shown, electronic detailed return in a format to be
extend its effectivity. Upon the timely filing of prescribed by the latter. [Rule 10(e),
such motion and pending resolution by the Revised IRR]
Court of Appeals, the freeze order shall remain
effective. [Rule 10(a)(3), Revised IRR] 8. Authority to Inquire into Bank
Duties of covered institutions
Deposits
(1) Implement Freeze Order. - Upon receipt of
General Rule: The AMLC may inquire into or
the notice of the freeze order, the covered
examine any particular deposit or investment,
person and government agency concerned
including related accounts, with any banking
shall immediately freeze the monetary
institution or non-bank financial institution upon
instrument or property subject thereof, and
order of any competent court in cases of
shall immediately desist from and not allow
violation of this Act when it has been
any transaction, withdrawal, transfer,
established that there is probable cause that
removal, conversion, other movement or
the deposits or investments involved are
concealment thereof.
related:
(2) Freeze Related Accounts. - Upon receipt of
1) To an unlawful activity as defined in Sec.
the freeze order and upon verification by
3(i); or
the covered person that there are accounts
2) To any money laundering offense under
related to the monetary instrument or
Sec.4
property subject of the freeze order, the
covered person shall immediately freeze
Exception: No court order shall be required in
these related accounts wherever these
the following cases –
may be found. If the related accounts
cannot be determined within 24 hours from a. Kidnapping for ransom under Article 267 of
receipt of the freeze order due to the the RPC
volume and/or complexity of the b. Sections 4,5,7,8,9,10,12,13,14,15 and16
transactions, or any other justifiable of RA No. 9615
factors, the covered person shall effect the c. Hijacking and other violations under RA
freezing of the related accounts within a No. 6235; destructive arson and murder as
reasonable period and shall submit a defined under the RPC
supplemental return thereof to the Court of d. Felonies or offenses of a nature similar to
Appeals and the AMLC within 24 hours those mentioned in Section 3(i) (1), (2), and
from the freezing of said related accounts. (12) which are punishable under the penal
laws of other countries;
(3) Furnish Copy of Freeze Order to Owner or
e. Terrorism and conspiracy to commit
Holder. - The covered person and
terrorism as defined and penalized under
government agency concerned shall
RA No. 9372.
likewise immediately furnish a copy of the
notice of the freeze order upon the owner
or holder of the monetary instrument or Forfeiture Provisions
property or related accounts subject
thereof. Civil Forfeiture
(4) Submit Detailed Return. - Within 24 hours Upon determination by the AMLC that
from receipt of the freeze order, the probable cause exists that any monetary
covered person and government agency instrument or property is in any way related to
concerned shall submit, by personal an unlawful activity or a money laundering
delivery, to the Court of Appeals and to the offense, the AMLC shall file with the
AMLC, a written detailed return on the appropriate court (through the OSG) a
freeze order.
Page 409 of 450

verified ex parte petition for forfeiture. [Sec. Note: This provision shall apply in both civil and
12(a), as amended by RA 10365] criminal forfeiture.
Procedural rule applicable: The Rules of Payment in Lieu of Forfeiture

Court on Civil Forfeiture. Where
1) The court has issued an order of forfeiture
What is covered by the forfeiture of the monetary instrument or property
The forfeiture shall include those other subject of a money laundering offense
monetary instrument or property having an (defined under Section 4), and
equivalent value to that of the monetary 2) Said order cannot be enforced because:
instrument or property found to be related in a) Any particular monetary instrument or
any way to an unlawful activity or a money property cannot, with due diligence, be
laundering offense, when: located, or
a. with due diligence, the former cannot be b) It has been substantially altered,
located, or destroyed, diminished in value or
b. it has been substantially altered, otherwise rendered worthless by any
destroyed, diminished in value or otherwise act or omission, directly or indirectly,
rendered worthless by any act or omission, attributable to the offender, or
or c) It has been concealed, removed,
c. it has been concealed, removed, converted, or otherwise transferred to
converted, or otherwise transferred, or prevent the same from being found or
d. it is located outside the Philippines or has to avoid forfeiture thereof, or
been placed or brought outside the d) It is located outside the Philippines or
jurisdiction of the court, or has been placed or brought outside the
e. it has been commingled with other jurisdiction of the court, or
monetary instrument or property belonging e) It has been commingled with other
to either the offender himself or a third monetary instruments or property
person or entity, thereby rendering the belonging to either the offender himself
same difficult to identify or be segregated or a third person or entity, thereby
for purposes of forfeiture. [Sec. 12(a), as rendering the same difficult to identify
amended by RA 10365] or be segregated for purposes of
forfeiture
Claim on Forfeited Assets
Where the court has issued an order of Then the court may, instead of enforcing the
forfeiture of the monetary instrument or order of forfeiture of the monetary instrument
property in a criminal prosecution for any or property or part thereof or interest therein,
money laundering offense defined under accordingly order the convicted offender to
Section 4 of this Act, the offender or any other pay an amount equal to the value of said
person claiming an interest therein may apply, monetary instrument or property.
by verified petition, for a declaration that the [Sec.12(c)]
same legitimately belongs to him and for
segregation or exclusion of the monetary Note: This provision shall apply in both civil and
instrument or property corresponding thereto. criminal forfeiture.
Where filed: With the court which rendered the Mutual Assistance among States
judgment of forfeiture.
Request for Assistance from a Foreign
When filed: Within 15 days from the date of State
the finality of the order of forfeiture, in default of Where a foreign State makes a request for
which the said order shall become final and assistance in the investigation or prosecution
executory. [Sec. 12(b)] of a money laundering offense, the AMLC may
Page 410 of 450

execute the request or refuse to execute the likely to prejudice the national interest of the
same and inform the foreign State of any valid Philippines unless there is a treaty between the
reason for not executing the request or for Philippines and the requesting State relating to
delaying the execution thereof. The principles the provision of assistance in relation to money
of mutuality and reciprocity shall, for this laundering offenses. [Sec.13(d)]
purpose, be at all times recognized. [Sec.13(a),
RA 9160] Requirements for Requests for Mutual
Assistance from Foreign States
Obtaining Assistance from Foreign States A request for mutual assistance from a foreign
The AMLC may make a request to any foreign State must:
State for assistance in: (1) Confirm that an investigation or
(1) Tracking down, freezing, restraining and prosecution is being conducted in respect
seizing assets alleged to be proceeds of of a money launderer named therein or that
any unlawful activity; he has been convicted of any money
(2) Obtaining information that it needs relating laundering offense;
to any covered transaction, money (2) State the grounds on which any person is
laundering offense or any other matter being investigated or prosecuted for money
directly or indirectly related thereto; laundering or the details of his conviction;
(3) To the extent allowed by the law of the (3) Give sufficient particulars as to the identity
foreign State, applying with the proper of said person;
court therein for an order to enter any (4) Give particulars sufficient to identify any
premises belonging to or in the possession covered institution believed to have any
or control of, any or all of the persons information, document, material or object
named in said request, and/or search any which may be of assistance to the
or all such persons named therein and/or investigation or prosecution;
remove any document, material or object (5) Ask from the covered institution concerned
named in said request: Provided, That the any information, document, material or
documents accompanying the request in object which may be of assistance to the
support of the application have been duly investigation or prosecution;
authenticated in accordance with the (6) Specify the manner in which and to whom
applicable law or regulation of the foreign said information, document, material or
State; and object obtained pursuant to said request, is
(4) Applying for an order of forfeiture of any to be produced;
monetary instrument or property in the (7) Give all the particulars necessary for the
proper court in the foreign State: Provided, issuance by the court in the requested
That the request is accompanied by an State of the writs, orders or processes
authenticated copy of the order of the needed by the requesting State; and
regional trial court ordering the forfeiture of (8) Contain such other information as may
said monetary instrument or property of a assist in the execution of the request.
convicted offender and an affidavit of the [Sec.13(e)]
clerk of court stating that the conviction and
the order of forfeiture are final and that no
further appeal lies in respect of either. D. FOREIGN
[Sec.13(c)] INVESTMENTS ACT
Limitations on Request for Mutual The section numbers hereinafter generally
Assistance pertain to RA 7042 or the Foreign Investments
The AMLC may refuse to comply with any Act, as amended by RA 8179, unless otherwise
request for assistance where the action sought indicated.
by the request contravenes any provision of the
Constitution or the execution of a request is
Page 411 of 450

1. Policy of the law 2. Definition of terms

a. To attract, promote and welcome Foreign investment
productive investments from foreign
individuals, partnerships, corporations and An equity investment made by a non-Philippine
governments, including their political national in the form of foreign exchange and/or
subdivisions, in activities which other assets actually transferred to the
significantly contribute to national Philippines and duly registered with the Central
industrialization and socio-economic Bank which shall assess and appraise the
development to the extent that foreign value of such assets other than foreign
investment is allowed in such activity by the exchange. [Sec. 3(c)]
Constitution and relevant laws;
b. To encourage foreign investments in "Doing business" in the
enterprises that:
Philippines
 Significantly expand livelihood and
employment opportunities for Includes:
Filipinos;
1. Soliciting orders, service contracts,
 Enhance economic value of farm opening offices, whether called “liaison”
products; offices or branches;
 Promote the welfare of Filipino 2. Appointing representatives or distributors
consumers; domiciled in the Philippines or who in any
 Expand the scope, quality and calendar year stay in the country for a
volume of exports and their access to period or periods totaling one hundred
foreign markets; eighty (180) days or more;
 Transfer relevant technologies in 3. Participating in the management,
agriculture, industry and support supervision or control of any domestic
services business, firm, entity or corporation in the
c. To welcome foreign investment as a Philippines; and
supplement to Filipino capital and 4. Any other act or acts that imply a continuity
technology in those enterprises serving of commercial dealings or arrangements,
mainly the domestic market. and contemplate to that extent the
performance of acts or works, or the
As a general rule, there are no restrictions on exercise of some of the functions normally
extent of foreign ownership of export incident to, and in progressive prosecution
enterprises. In domestic market enterprises, of, commercial gain or of the purpose and
foreigners can invest as much as one hundred object of the business organization [Sec.
percent (100%) equity except in areas included 3(d)]
in the negative list. Foreign owned firms
catering mainly to the domestic market shall be Does Not Include:
encouraged to undertake measures that will 1. Mere investment and exercise of rights as
gradually increase Filipino participation in their a shareholder by a foreign entity in
businesses by taking in Filipino partners, domestic corporations duly registered to do
electing Filipinos to the board of directors, business;
implementing transfer of technology to 2. Having a nominee director or officer to
Filipinos, generating more employment for the represent its interests in the corporation;
economy and enhancing skills of Filipino 3. Appointing a representative or distributor
workers. [Sec. 2] domiciled in the Philippines which
transacts business in its own name and for
its own account [Sec. 3(d)]
Page 412 of 450

The IRR further does not include the following Two tests applied to determine what
from the definition of “doing business”: constitutes as “Doing business”
a. The publication of a general advertisement 1. Substance Test - whether the foreign
through any print or broadcast media; corporation is continuing the body of the
b. Maintaining a stock of goods in the business or enterprise for which it was
Philippines solely for the purpose of having organized or whether it has substantially
the same processed by another entity in retired from it and turned it over to another.
the Philippines; Under the Substance Test, a foreign
c. Consignment by a foreign entity of corporation is doing business in the country
equipment with a local company to be used if it is continuing the body or substance of
in the processing of products for export; the enterprise of business for which it was
d. Collecting information in the Philippines; organized.
and 2. Continuity Test - implies a continuity of
e. Performing services auxiliary to an existing commercial dealings and arrangements,
isolated contract of sale which are not on a and contemplates, to that extent, the
continuing basis, such as installing in the performance of acts or works or the
Philippines machinery it has manufactured exercise of some of the functions normally
or exported to the Philippines, servicing the incident to, and in the progressive
same, training domestic workers to operate prosecution of, the purpose and object of
it, and similar incidental services. its organization. Under the Continuity Test,
doing business implies a continuity of
The determination of whether a foreign commercial dealings and arrangements, or
corporation is doing business in the Philippines performance of acts normally incidental to
must be based on the facts of each case. the purpose and object of the organization.
[Cargill v Intra Strata Assurance, G.R. No. [Agilent Technologies v Integrated Silicon
168266 (2010)] Technology, G.R. No. 154618 (2004)]
The following factors have been used by the Export enterprise

Supreme Court to determine whether or not a
foreign corporation is doing business in the An enterprise wherein a manufacturer,
Philippines: processor or service (including tourism)
a. The continuity of commercial enterprise exports sixty percent (60%) or more
activities/transactions shows intent to do of its output, or wherein a trader purchases
business [Antam Consolidated, Inc. v. CA, products domestically and exports sixty
G.R. No. L-61523 (1986)] percent (60%) or more of such purchases.
b. Creation of earnings and profits from the [Sec. 3(e)]
Philippines shows intent to do business
[National Sugar Trading Corp. v. CA, G.R. Domestic market enterprise
No. 110910 (1995)]
c. An exporter in one country may export its An enterprise which produces goods for sale,
products to many foreign importing or renders services to the domestic market
countries without performing in the entirely or if exporting a portion of its output
importing countries specific commercial fails to consistently export at least sixty percent
acts that would constitute doing business in (60%) thereof. [Sec. 3 (f)]
the importing countries. [B. Van Zuiden
Bros., Ltd. v. GTVL Marketing Industries,
Inc, G.R. No. 147905 (2007)]
Page 413 of 450

3. Registration of investments cf. Registration Process Of Philippine

Nationals
of non-Philippine nationals a. Citizen of the Philippines
b. Domestic partnership or association wholly
Non-Philippine Nationals owned by citizens of the Philippines
General Rule: A non-Philippine national may c. Corporation organized under the laws of
do business as defined in Section 3 (d) of this the Philippines of which at least 60% of the
Act or invest in a domestic enterprise up to one capital stock outstanding and entitled to
hundred percent (100%) of its capital: vote is owned and held by citizens of the
 Upon registration with SEC, or Philippines
 With the Bureau of Trade Regulation and d. Corporation organized abroad and
Consumer Protection (BTRCP) of the DTI registered as doing business in the
for single proprietorships Philippines under the Corporation Code of
which 100% of the capital stock
Exception: Unless participation of non- outstanding and entitled to vote is wholly
Philippine nationals in the enterprise is owned by Filipinos
prohibited or limited to a smaller percentage by e. A trustee of funds for pension or other
existing law and/or under the provisions of this employee retirement, where the trustee is
Act. a Philippine national and at least 60% of
the fund will accrue to the benefit of
The SEC or BTRCP, as the case may be, shall Philippine nationals
not impose any limitations on the extent of
foreign ownership in an enterprise additional to Where a corporation and its non-Filipino
those provided in this Act. stockholders own stocks in a Securities and
Exchange Commission (SEC) registered
However, any enterprise seeking to avail of enterprise, the corporation is a Filipino national
incentives under the Omnibus Investment under the following conditions:
Code of 1987 must apply for registration with a. At least sixty percent (60%) of the capital
the Board of Investments (BOI). stock outstanding and entitled to vote of
each of both corporations must be owned
A non-Philippine national intending to engage and held by citizens of the Philippines;
in the same line of business as an existing joint b. At least sixty percent (60%) of the
venture, in which he or his majority shareholder members of the Board of Directors of
is a substantial partner, must disclose the fact each of both corporations must be citizens
and the names and addresses of the partners of the Philippines, [Sec. 3(a)]
in the existing joint venture in his application for
registration with SEC During the transitory The control test shall be applied for this
period as provided in Section 15 hereof, SEC purpose. [Sec. 1(b), IRR]
shall disallow registration of the applying non-
Philippine national if the existing joint venture
enterprise, particularly the Filipino partners 4. Foreign investments in export
therein, can reasonably prove they are capable enterprises
to make the investment needed for the
domestic market activities to be undertaken by Foreign investment in export enterprises
the competing applicant. Upon effectivity of this whose products and services do not fall within
Act, SEC shall effect registration of any Lists A and B of the Foreign Investment
enterprise applying under this Act within fifteen Negative List provided under Section 8 hereof
(15) days upon submission of completed is allowed up to one hundred percent (100%)
requirements. [Sec. 5] ownership.
Page 414 of 450

Export enterprises which are non-Philippine 5. Foreign investments in

nationals shall register with BOI and submit the
reports that may be required to ensure domestic market enterprises
continuing compliance of the export enterprise
with its export requirement. BOI shall advise Non-Philippine nationals may own up to one
SEC or BTRCP, as the case may be, of any hundred percent (100%) of domestic market
export enterprise that fails to meet the export enterprises unless foreign ownership therein is
ratio requirement. The SEC or BTRCP shall prohibited or limited by the Constitution existing
thereupon order the non-complying export law or the Foreign Investment Negative List
enterprise to reduce its sales to the domestic under Section 8 hereof. [Sec. 7]
market to not more than forty percent (40%) of
its total production; failure to comply with such A domestic market enterprise may change its
SEC or BTRCP order, without justifiable status to export enterprise if over a three (3)
reason, shall subject the enterprise to year period it consistently exports in each year
cancellation of SEC or BTRCP registration, thereof sixty per cent (60%) or more of its
and/or the penalties provided in Section 14 output.
hereof. [Sec. 6]
6. Foreign Investment Negative
Note: List
Export ratio refers to:
a. If the enterprise is engaged in The Foreign Investment Negative List shall
manufacturing or processing: the have two (2) component lists; A and B.
percentage share of the volume or peso a. List A shall enumerate the areas of
value of goods exported to the total volume activities reserved to Philippine nationals
or value of goods sold in any taxable year; by mandate of the Constitution and specific
b. laws.
c. If the enterprise is service – oriented: the b. List B shall contain the areas of activities
percentage share of the peso value of and enterprises regulated pursuant to law;
services sold to foreigners to total earnings a. Which are defense-related
or receipts from the sale of its services from activities, requiring prior clearance
all sources in any taxable year and authorization from Department
of National Defense (DND) to
Value of services sold shall refer to the engage in such activity, such as the
peso value of all services rendered by an manufacture, repair, storage
export enterprise to foreigners that are paid and/or distribution of firearms,
for in foreign currency and/or pesos funded ammunition, lethal weapons,
from inwardly remitted foreign currency as military ordinance, explosives,
properly documented by the export pyrotechnics and similar materials;
enterprise; unless such manufacturing or
repair activity is specifically
d. If the enterprise is engaged in merchandise authorized, with a substantial
trading: the percentage share of the export component, to a non-
volume or peso value of goods exported to Philippine national by the Secretary
the total volume or value of goods of National Defense; or
purchased domestically in any taxable year b. Which have implications on public
health and morals, such as the
manufacture and distribution of
dangerous drugs; all forms of
gambling; nightclubs, bars,
beerhouses, dance halls; sauna
Page 415 of 450

and steam bathhouses and

massage clinics.
General Rule: Small and medium-sized

domestic market enterprises, with paid-in
equity capital less than the equivalent two
hundred thousand US dollars (US$200,000)
are reserved to Philippine nationals,
Exception: A minimum paid-in capital of one

hundred thousand dollars (US $100 000) is
allowed to non-Philippine nationals if they
prove:
a. They involve advanced technology as
determined by the Department of Science
and Technology; or
b. They employ at least fifty (50) direct
employees
Amendments to List B may be made upon

recommendation of (1) the Secretary of
National Defense, or (2) the Secretary of
Health, or (3) the Secretary of Education,
Culture and Sports, endorsed by the NEDA,
approved by the President, and promulgated
by a Presidential Proclamation.
Foreign Investment Negative Lists shall

become effective 15 days after publication in a
newspaper of general circulation in the
Philippines: Provided, however, That each
Foreign Investment Negative List shall be
prospective in operation and shall in no way
affect foreign investment existing on the date of
its publication.
Amendments to List B after promulgation and

publication of the first Regular Foreign
Investment Negative List at the end of the
transitory period shall not be made more often
than once every two (2) years. [Sec. 8]
Page 416 of 450

SUMMARY OF FIA NEGATIVE LIST
Nationality
Industry
Requirement
 Mass media, except recording

 Practice of profession
 Retail trade with paid up capital less than US $2,500,000
 Cooperatives
 Private security agencies
100% Filipino
 Small-scale mining
ownership
 Utilization of marine resources in archipelagic waters, territorial sea,
exclusive economic zone, as well as rivers, lakes, bays, and lagoons
 Ownership, operation and management of cockpits
 Manufacture, repair, stockpiling and/or distribution of nuclear weapons
 Manufacture of firecrackers and other pyrotechnic devices
80% Filipino
Private radio communications network
ownership
 Private recruitment
 Contracts for construction and repair of locally-funded public works,
75% Filipino
except: (1) infra projects under RA 7718 (BOT Law), and (2) foreign-
ownership
funded projects
 Contracts for construction of defense-related structures
70% Filipino
Advertising
ownership
 Manufacture, repair, storage and/or distribution of products and/or

ingredients requiring Philippine National Police (PNP) clearance (i.e.,
firearms, ingredients used in making explosives, etc.)
 Manufacture, repair, storage, and/or distribution of products requiring
Department of National Defense (DND) clearance;
 Manufacture and distribution of dangerous drugs
 Sauna and steam bathhouses, massage clinics and other like activities
60% capital stock
regulated by law because of risks posed to public health and morals
Filipino ownership
 All forms of gambling, except those covered by investment agreements
with PAGCOR
 Domestic market enterprises with paid-in equity capital of less than the
equivalent of US$200,000
 Domestic market enterprises which involve advanced technology or
employ at least fifty (50) direct employees with paid-in equity capital of
less than the equivalent of US$100,000
Page 417 of 450

Exempt properties
E. INSOLVENCY LAWS
Present Property
(1) Family home [Arts. 152, 153 and 155,
NCC]
1. Concurrence and preference (2) Right to receive support, as well as money
of credits or property obtained by such support, shall
not be levied upon on attachment or
Meaning of concurrence and execution. [Art. 205, NCC]
preference (3) Rule 39, Sec. 13
(4) Public Land Act [CA 141, as amended],
Concurrence of credits – implies possession Sec. 118,
by two or more creditors of equal rights or
privileges over the same property or all of the ii. Future Property
property of the debtor, and the value of such (1) A debtor who obtains a discharge from his
property is insufficient to pay in full all the debts on account of insolvency, is not liable
claims. for the unsatisfied claims of his creditors
with said property [Sec. 68 and 69,
Preference of credits – is a method adopted Insolvency Law, Act No. 1956]
to determine and specify the order in which (2) Property in custodia legis
credits should be paid in the final distribution of (3) Property of public dominion
the proceeds of the insolvent’s assets, as
opposed to a lien, which creates a charge on a Classification of credits
particular property. [DBP v. NLRC, G.R. No.
86932 (1990)] Special Preferred Credits [Art. 2241-
2242, NCC]
Preference Implications of Status
The right held by a creditor to be preferred in 1. These credits enjoy preference with
the payment of his claim above others out of respect to the specific movable and
the debtor’s assets. immovable property of the debtor.
2. Special preferred credits exclude all other
The provisions on concurrence and preference claims to the extent of the value of the
of credit do not apply when the situation does affected property.
not involve two or more creditors having  They must be discharged first out of the
separate and distinct claims against the same proceeds of the property to which they
debtor who has insufficient property. relate before ordinary preferred credits
are paid.
Consequently, concurrence and preference of  If the value of the specific property
credit may only be ascertained in the context of involved is GREATER than the total of
some proceeding, such as insolvency the special preferred credits, the
proceedings, where the claims of the creditors residual value will form part of the free
may be bindingly adjudicated. [Somera] property.
 If the value is LESS than the total, the
When Rules of Preference Applicable unsatisfied balance of the credits shall
(1) There are two or more creditors; be paid pro rata. [Art. 2251, NCC]
(2) With separate and distinct claims; 3. These are considered as mortgages or
(3) Against the same debtor; pledges of real or personal property, or
(4) Who has insufficient property; and liens within the purview of legal provisions
(5) Such debtor is insolvent. governing insolvency. [Art. 2243, NCC]
4. These take precedence over ordinary
preferred credits insofar as the property, to
Page 418 of 450

which the liens attach, are concerned. Pro-rating – total amount to be paid is equal
[Somera] to:
Ordinary Preferred Credits [Art. Credit

2244, NCC] ------------------ x value of property
Implications of Status Total amount of
1. These enjoy a preference, excluding the concurring
credits that are later in order, but only as debts
against the value of the property not
otherwise subjected to any special Special Preferred Credits on
preferred credit. Specific Movable Property
2. Does not create a lien on specific property;
3. Creates rights in favor of certain creditors Art. 2241, NCC. With reference to specific
to have the free property of the debtor movable property of the debtor, the
applied in accordance with an order of following claims or liens shall be
preference. [Somera] preferred:
N.B. Sec. 133 of the FRIA reiterates (1) Duties, taxes and fees due thereon to the
jurisprudence to the effect that Article 110 of State or any subdivision thereof;
the Labor Code does not create a lien in favor (2) Claims arising from misappropriation,
of workers or employees for unpaid wages breach of trust, or malfeasance by public
upon the properties of the employer. The first officials committed in the performance of
preference in Art. 110, Labor Code instead their duties, on the movables, money or
modifies the order of preference in Art. 2244, securities obtained by them;
NCC by removing the one-year limitation and (3) Claims for the unpaid price of movables
by moving claims for unpaid wages from sold, on said movables, so long as they
second priority to first priority in the order of are in the possession of the debtor, up to
preference in Art. 2244. [Somera] the value of the same; and if the movable
has been resold by the debtor and the
Taxes and assessments in 2244 do not have price is still unpaid, the lien may be
the overriding preference that 2241 and 2242 enforced on the price; this right is not lost
create. [Somera] by the immobilization of the thing by
destination, provided it has not lost its
Common Credits [Art. 2245, NCC] form, substance and identity; neither is
Implications of Status the right lost by the sale of the thing
1. These enjoy no preference, as there is only together with other property for a lump
a concurrence of credits. sum, when the price thereof can be
2. These must be paid pro rata regardless of determined proportionally;
dates. [Arts. 2245, 2251, NCC] (4) Credits guaranteed with a pledge so long
3. These are not liens and do not attach to as the things pledged are in the hands of
any specific property of the debtor. the creditor, or those guaranteed by a
[Somera] chattel mortgage, upon the things
pledged or mortgaged, up to the value
thereof;
(5) Credits for the making, repair,
safekeeping or preservation of personal
property, on the movable thus made,
repaired, kept or possessed;
(6) Claims for laborers' wages, on the goods
manufactured or the work done;
Page 419 of 450

(7) For expenses of salvage, upon the goods Trade-related claims of clients or customers of
salvaged; a securities market participant which, for
(8) Credits between the landlord and the purposes of investor protection, are hereby
tenant, arising from the contract of deemed to have absolute priority over all other
tenancy on shares, on the share of each claims of whatever nature or kind insofar as
trade-related assets are concerned. [Sec. 136,
in the fruits or harvest;
RA 10142]
(9) Credits for transportation, upon the
goods carried, for the price of the contract
and incidental expenses, until their N.B. Sec. 136 of RA 10142 (FRIA) creates a
delivery and for thirty days thereafter; special preference of credit in favor of trade-
(10) Credits for lodging and supplies related claims upon trade-related assets. This
special preferred credit enjoys absolute
usually furnished to travellers by hotel
keepers, on the movables belonging to priority over all other claims, including taxes.
the guest as long as such movables are [Somera]
in the hotel, but not for money loaned to
Effect of the PPSA
the guests;
(11) Credits for seeds and expenses for  Art. 2241(4) is affected because the
system of conventional pledges and chattel
cultivation and harvest advanced to the
mortgages are “replaced with a framework
debtor, upon the fruits harvested;
for secured transactions” since:
(12) Credits for rent for one year, upon the
o Articles 2093–2123 on Pledges are
personal property of the lessee existing
repealed, with the exception of
on the immovable leased and on the
Article 2121 on Legal Pledges
fruits of the same, but not on money or
o Articles 2140–2141 and Act. No.
instruments of credit;
1508 on Chattel Mortgages are
(13) Claims in favor of the depositor if the
repealed [Somera]
depositary has wrongfully sold the thing
 Sec. 22 of the PPSA amends Art. 2241
deposited, upon the price of the sale.
because it provides that “a security
interest perfected prior to the
In the foregoing cases, if the movables to
commencement of insolvency
which the lien or preference attaches have
proceedings in respect of the grantor
been wrongfully taken, the creditor may
shall remain perfected and retain the
demand them from any possessor, within
priority it had before the commencement
thirty days from the unlawful seizure.
of the insolvency proceedings”
 Thus, the preference created by these
Article 2241 refers only to specific immovable Articles will be SUBORDINATE to the
property. It does not cover claims for the priority of a security interest perfected
payment of money, which is generic property pursuant to the PPSA. [Somera]
and not specific or determinate. [Cordova v.
Reyes Daway Lim Bernardo Lindo Rosales Special Preferred Credits on
Law Offices, G.R. No. 146555 (2007)] Specific Immovable Property and
Real Rights
Taxes in Art. 2241 and 2242 shall first be
satisfied. [Art. 2243, NCC]
Art. 2242, NCC. With reference to specific
immovable property and real rights of the
Note: Only taxes in Arts. 2241 and 2242, NCC
debtor, the following claims, mortgages and
enjoy a preference; for all other claims, there is
liens shall be preferred, and shall constitute
only a concurrence of credits. [Somera]
an encumbrance on the immovable or real
Trade-related claim preference over trade-
right:
related assets
Taxes due upon the land or building;
Page 420 of 450

For the unpaid price of real property sold, Ordinary Preferred Credits
upon the immovable sold;
Claims of laborers, masons, mechanics and Art. 2244, NCC. With reference to other
other workmen, as well as of architects, property, real and personal, of the debtor,
engineers and contractors, engaged in the following claims or credits shall be
the construction, reconstruction or repair preferred in the order named:
of buildings, canals or other works, upon (1) Proper funeral expenses for the debtor,
said buildings, canals or other works; or children under his or her parental
Claims of furnishers of materials used in the authority who have no property of their
construction, reconstruction, or repair of own, when approved by the court;
buildings, canals or other works, upon (2) Credits for services rendered the
said buildings, canals or other works; insolvent by employees, laborers, or
Mortgage credits recorded in the Registry of household helpers for one year
Property, upon the real estate preceding the commencement of the
mortgaged; proceedings in insolvency;
Expenses for the preservation or (3) Expenses during the last illness of the
improvement of real property when the debtor or of his or her spouse and
law authorizes reimbursement, upon the children under his or her parental
immovable preserved or improved; authority, if they have no property of their
Credits annotated in the Registry of Property, own;
in virtue of a judicial order, by (4) Compensation due the laborers or their
attachments or executions, upon the dependents under laws providing for
property affected, and only as to later indemnity for damages in cases of labor
credits; accident, or illness resulting from the
Claims of co-heirs for warranty in the partition nature of the employment;
of an immovable among them, upon the (5) Credits and advancements made to the
real property thus divided; debtor for support of himself or herself,
Claims of donors or real property for and family, during the last year preceding
pecuniary charges or other conditions the insolvency;
imposed upon the donee, upon the (6) Support during the insolvency
immovable donated; proceedings, and for three months
Credits of insurers, upon the property thereafter;
insured, for the insurance premium for (7) Fines and civil indemnification arising
two years. from a criminal offense;
(8) Legal expenses, and expenses incurred
in the administration of the insolvent's
estate for the common interest of the
creditors, when properly authorized and
approved by the court;
(9) Taxes and assessments due the national
government, other than those mentioned
in Articles 2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any
province, other than those referred to in
Articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city
or municipality, other than those
indicated in Articles 2241, No. 1, and
2242, No. 1;
Page 421 of 450

(12) Damages for death or personal they shall be satisfied pro rata, after the
injuries caused by a quasi-delict; payment of duties, taxes and fees due the
(13) Gifts due to public and private State or any subdivision thereof. [Art. 2247,
institutions of charity or beneficence; NCC]
(14) Credits which, without special iii. Those credits which enjoy preference in
privilege, appear in [a] a public relation to specific real property or real
instrument; or (b) in a final judgment, if rights exclude all others to the extent of the
they have been the subject of litigation. value of the immovable or real right to
These credits shall have preference which the preference refers. [Art. 2248,
among themselves in the order of priority NCC]
of the dates of the instruments and of the iv. If there are two or more credits with respect
judgments, respectively. to the same specific real property or real
rights, they shall be satisfied pro rata, after
the payment of the taxes and assessment
Other Property of the taxes and assessments upon the
The “other property” referred to in Art. 2244 are immovable property or real right. [Art.
those: 2249, NCC]
a. Property not subject to special preferred v. The excess, if any, after the payment of the
credits credits which enjoy preference with respect
b. Property forming part of the free property to specific property, real or personal, shall
(i.e. residual value of the specific property be added to the free property which the
after the satisfaction of the special debtor may have for the payment of other
preferred credits) credits. [Art. 2250, NCC]
Worker preference in case of bankruptcy Those credits which do not enjoy any
In the event of bankruptcy or liquidation of an preference with respect to specific property,
employer’s business, his workers shall enjoy and those which enjoy preference, as to the
first preference as regards their wages and amount not paid, shall be satisfied according
other monetary claims, any provisions of law to to the following rules:
the contrary notwithstanding. Such unpaid  Order established by Art. 2244, NCC
wages and monetary claims shall be paid in full  Common credits referred to in Art. 2245,
before claims of the government and other NCC shall be paid pro rata regardless of
creditors may be paid. [Art. 110, Labor Code] dates [Art. 2251, NCC].
Common Credits Arts. 2241 and 2242, NCC jointly with Arts.
2246 to 2249, NCC establish a two-tier order of
Art. 2245, NCC. Credits of any other kind or preference. The first tier includes only taxes,
class, or by any other right or title not duties and fees due on specific movable or
comprised in the four preceding articles, shall immovable property. All other special preferred
enjoy no preference. credits stand on the same second tier to be
satisfied pari passu and pro rata, out of any
residual value of the specific property to which
Order of preference of credits such other credits relate. [Republic v. Peralta,
G.R. No. 56568 (1920)]
i. Credits which enjoy preference with
respect to specific movables exclude all
others to the extent of the value of the
personal property to which the preference
refers. [Art. 2246, NCC]
ii. If there are two or more credits with respect
to the same specific movable property,
Page 422 of 450

2. Financial Rehabilitation and Suspension of Payments

Insolvency Act of 2010 Suspension of Payments – A remedy where
an individual debtor who, possessing
The section numbers hereinafter generally
sufficient property to cover all his debts but
pertain to RA 10142 or the Financial
foreseeing the impossibility of meeting
Rehabilitation and Insolvency Act (FRIA),
them when they respectively fall due, may
unless otherwise indicated.
file a verified petition that he be declared in the
state of suspension of payments by the court of
Definition of Insolvency the province or city in which he has resided for
six (6) months prior to the filing of his petition.
Insolvency refers to the financial condition of
a debtor that is: He shall attach to his petition, as a minimum:
a. Generally unable to pay liabilities as they (a) a schedule of debts and liabilities; (b) an
fall due on the ordinary course of business inventory of assess; and (c) a proposed
(hence illiquid); or agreement with his creditors. [Sec. 94]
b. Has liabilities that are greater than its or his
assets (balance sheet insolvent). [Sec. Definition
4(p)] Suspension of payments is a judicial
insolvency proceeding by which an individual
Liabilities refer to money claims against the debtor submits, for approval by his debtors, a
debtor. [Sec. 4(s)] proposed agreement, containing
propositions delaying or extending the time
Debtors Under The FRIA of payment of his debts.
Includes:
a. Sole proprietorship registered with DTI; Who Can Avail – An illiquid debtor
b. Partnership registered with SEC; An individual debtor (natural person) who,
c. Corporation duly registered and existing possesses sufficient property to cover all his
under Philippine laws; or debts but foresees the impossibility of meeting
d. Individual debtor, who is a natural person them when they respectively fall due.
that is a resident citizen, that has become
insolvent. [Sec. 4(k)] Purpose
 Debt moratorium: To delay or extend the
Note: Under the FRIA, the rules on debtors also time of payment of one’s debts.
include and apply to groups of debtors:  Allows distressed debtor to defer payment
a. Corporations financially related to one of his debts by presenting a plan.
another as parent corporations, a. Must relate to a schedule of payments
subsidiaries or affiliates; b. No haircut (reduction of debts), only a
b. Partnerships owned more than 50% by the grace period to pay the debts
same person; and
c. Single proprietorships owned by the same How Initiated
person.  Illiquid debtor files a duly verified petition
that he be declared in the state of
Excludes: suspension of payments by the court of the
a. Banks province/city in which he has resided for 6
b. Insurance companies months prior to the filing of the petition
c. Pre-need companies
 Minimum Requirements for Petition
d. National and local government agencies or (1) Schedule of debts and liabilities
units [Sec. 5] (2) Inventory of assets
(3) Proposed agreement with his creditors
Page 423 of 450

Suspension of Payments Order Rehabilitation proceedings are

When Issued  In Rem: Jurisdiction over all persons
 Within 5 working days if the court finds the affected is considered as acquired upon
petition sufficient in form and substance publication of the notice of proceedings.
 Remains effective from the time of the filing  Summary and Non-Adversarial [Sec. 3]
of the petition until the termination of the
proceedings Types
Most Important Elements Types of Rehabilitation Proceedings

 Automatic Stay: No creditor except those a. Court-Supervised: A judicial proceeding;
exempt shall institute proceedings to may be voluntary or involuntary.
collect its claim from the time of filing until b. Pre-Negotiated: An insolvency proceeding
the termination of the proceedings involving negotiation of terms between the
o Exempt from stay order: debtor and the creditor(s). It commences
(1) Claims for personal labor, as an extrajudicial proceeding but
(2) Expense of last illness and terminates as a judicial proceeding.
funeral, c. Out-of-Court: An insolvency proceeding
(3) Secured creditors involving a consensual contract between
 Injunction against debtor: The individual the debtor and the creditor(s). Unlike pre-
debtor is subjected to an injunction against: negotiation rehabilitation, no petitions are
(1) Disposing of his property except those filed with the court. [Somera]
used in the ordinary operations of
commerce or industry in which he is (a) Court–Supervised
engaged
(2) Making any payment outside of the i.Voluntary [Sec. 12]
necessary or legitimate expenses of
his business Refer to proceedings initiated by the debtor,
which may be:
Approval of Proposed Agreement 1. Sole Proprietorship: When approved by
 Once a majority vote is reached in the the owner;
creditors meeting, the court shall issue an 2. Partnership: When approved by a majority
Order that the agreement be carried out of the partners;
and all parties bound thereby with its terms 3. Stock Corporation: When approved by a
 Order shall be binding upon all creditors. majority vote of the BOD or trustees, and
whose claims are included in the authorized by the stockholders
schedule of debts and liabilities submitted representing 2/3 of the outstanding capital
by the individual debtor, and who were stock in a meeting called for the purpose;
properly summoned. 4. Non-Stock Corporation: When approved
by 2/3 of the members in a meeting called
Rehabilitation for the purpose.
Rehabilitation refers to the restoration of the A group of debtors may file a petition for
debtor to a condition of successful operation rehabilitation when:
and solvency, if it is shown that: 1. One of more of its members foresee the
a. Its continuance of operation is impossibility of meeting debts when they
economically feasible; and respectively fall due; and
b. Its creditors can recover more, by way of 2. The financial distress would likely
the present value of payments projected in adversely affect the financial condition
the plan, if the debtor continues as a going and/or operations of the other members of
concern than if it is immediately liquidated. the group, and/or the participation of the
[Sec. 4(gg)] other members of the group is essential
Page 424 of 450

under the terms and conditions of the  Approval of creditors holding at least
Rehabilitation Plan. 2/3 of the total liabilities of the debtor,
including –
The debtor must file a verified petition for  Secured creditors holding more than
rehabilitation with the court, to establish: 50% of the total secured claims; and
(a) The insolvency of the debtor; and  Unsecured creditors holding more than
(b) The viability of the rehabilitation. 50% of the total unsecured claims.
[Sec. 76]
ii.Involuntary [Secs. 13 and 14]
Within five working days, and after
Involuntary — Refers to proceedings initiated determination that the petition is sufficient in
by the creditor(s). form and substance, the court shall issue an
Order. [Sec. 77]
Value Requirement for Creditors
The claim(s), or aggregate thereof, must Objections to the Petition or Rehabilitation
amount to at least Php 1 million or at least 25% Plan
of the subscribed capital stock or partners’ Any creditor or other interested party may
contributions, whichever is higher. submit a verified objection to the petition or the
Rehabilitation Plan. The objections shall be
Circumstances for Involuntary limited to the following:
Rehabilitation a. The allegations in the petition or the
There is no genuine issue of fact or law on the Rehabilitation Plan, or the attachments
claims of the creditors; and – thereto, are materially false or misleading;
a. That the due and demandable payments b. The majority of any class of creditors do not
have not been made for at least 60 days; in fact support the Rehabilitation Plan;
or c. The Rehabilitation Plan fails to accurately
b. The debtor has failed generally to meet its account for a claim against the debtor and
liabilities as they fall due (illiquidity); or the claim is not categorically declared as a
c. At least one creditor, other than the contested claim; or
petitoner(s), has initiated foreclosure d. The support of the creditors, or any of
proceedings against the debtor that will them, was induced by fraud. [Sec. 79]
prevent the debtor from paying its debts as
they become due or will render it insolvent. Approval of the Plan
Within 10 days from the date of the second
(b) Pre–Negotiated publication of the Order, the court shall
approve the Rehabilitation Plan unless an
Pre-Negotiated Rehabilitation – An objection is submitted.
insolvency proceeding involving a pre-
negotiated Rehabilitation Plan between the The court has a maximum period of 120 days
debtor and the creditor(s). It commences as an from the date of the filing of the petition to
extrajudicial proceeding but terminates as a approve the Rehabilitation Plan. If the court
judicial proceeding. [Somera] fails to act within the same period, the Plan
shall be deemed approved.
Requirements for Petition
An insolvent debtor, either by itself or jointly Effect of Approval
with any of its creditors, may file a verified Approval of a Plan has the same legal effect
petition for approval of the Pre-Negotiated as confirmation of a Plan in Court-
Rehabilitation Plan that complies with the Supervised Rehabilitation. It also results in a
following: cram down, as it binds not only the debtor but
also all persons affected by it.
Page 425 of 450

(c) Out–of–Court circulation in the Philippines once a week

for two consecutive weeks;
Out-of-Court Rehabilitation – An extrajudicial (c) The standstill period does not exceed 120
insolvency proceeding of an Out-of-Court or days from the date of effectivity.
Informal Restructuring Agreement (OCRA), or
a restructuring of the claims negotiated The notice must invite creditors to participate in
between the debtor and the creditor(s). No the negotiation for the OCRA and inform them
petitions are filed with the court, though the that the agreement would bind all creditors if
debtor and/or the creditor may seek court the minimum vote requirements were met.
assistance in implementation. [Sec. 85]
Pending negotiation and finalization of the Effects of the OCRA

OCRA, there may be a standstill period that a. Results in a cram down, binding not only
allows the debtor not to pay liabilities as they the debtor but also all persons affected;
fall due and prevents creditors from enforcing b. Any proceedings arising or relating to the
their claims. [Somera] OCRA shall not stay its implementation,
unless the relevant party secures a TRO or
Requirements for OCRA injunctive relief from the Court of Appeals.
i. The debtor must agree to the out-of-court
or informal restructuring/workout Annulment of the OCRA/Standstill
agreement or Rehabilitation Plan; Agreement
ii. It must be approved by creditors The debtor or creditor may file a petition to
representing at least 67% of the secured annul based only on the following grounds:
obligations; a. Non-compliance with the requirements for
iii. It must be approved by creditors a standstill agreement or an OCRA under
representing at least 75% of the unsecured the FRIA or the implementing rules; or
obligations; b. Vitiation of consent due to fraud,
iv. It must be approved by creditors holding at intimidation or violence if committed
least 85% of the total liabilities, secured or against such number of creditors required
unsecured, of the debtor. [Sec. 84] to approve the OCRA or the standstill
agreement. [FR Rules, Rule 4, Sec. 11]
Standstill Period/Agreement
This refers to the period agreed upon by the Commencement order
debtor and its creditors to enable them to
negotiate and enter into an out-of-court or If the petition for rehabilitation is deficient in
informal restructuring/workout agreement or form and substance, the court may give a
rehabilitation plan. It may include provisions reasonable period to amend or supplement the
identical with or similar to the legal effects of a petition. If such deficiency is not complied with,
commencement order. [Financial the court may dismiss the petition.
Rehabilitation Rules, Rule 1, Sec. 5(q)]
If the petition for rehabilitation is sufficient in
The standstill period/agreement is effective form and substance, it shall issue a
and enforceable not only against contracting Commencement Order within five (5) working
parties but also against other creditors, days from the filing of the petition.
provided that:
(a) Such agreement is approved by creditors The rehabilitation proceedings shall
representing more than 50% of the total commence upon the issuance of the
liabilities of the debtor; Commencement Order.
(b) Notice of the standstill agreement is
published in a newspaper of general
Page 426 of 450

Contents of the Commencement Order commencement date, unless otherwise

1. Identifies the debtor, its principal business allowed under the FRIA;
and principal place of business; 3. Serves as the legal basis for rendering null
2. Summarize the grounds for initiating and void any setoff after the
proceedings; commencement date of any debt owed to
3. States the legal effects of the Order; the debtor by any of the debtor's creditors;
4. Declares the debtor is under rehabilitation; 4. Serves as the legal basis for rendering null
5. Directs the publication of the and void the perfection of any lien against
Commencement Order; the debtor's property, after the
6. Directs service by personal delivery of a commencement date; and
copy of the petition to the creditor or to the 5. Consolidates the resolution of all legal
debtor (not the petitioner); proceedings by and against the debtor to
7. Appoints a rehabilitation receiver; the court; however, the court may allow the
8. Summarizes the requirements and continuation of cases on other courts
deadlines for creditors to establish their where the debtor had initiated the suit.
claims against the debtor; [Sec. 17]
9. Directs the BIR to file and serve its
comment or opposition; Effectivity and Duration of the
10. Prohibits the debtor’s suppliers from Commencement Order
withholding the supply of goods and Unless lifted by the court, the Commencement
services in the ordinary course of business Order shall be effective for the duration of the
for as long as the debtor makes payments rehabilitation proceedings for as long as there
for services/goods supplied after issuance is a substantial likelihood that the debtor will be
of the Order; successfully rehabilitated. [Sec. 21]
11. Authorizes the payment of administrative
expenses; Minimum Requirements for Substantial
12. Sets the case for initial hearing; Likelihood
13. Makes available copies of the petition and a. The proposed Rehabilitation Plan complies
Rehabilitation Plan for examination and with the minimum contents prescribed by
copying by any interested party; the FRIA;
14. Indicates the location(s) at which b. There is sufficient monitoring by the
documents may be reviewed and copied; rehabilitation receiver of the debtor's
15. States that any creditor or debtor, not the business for the protection of creditors;
petitioner, may submit the name or c. The debtor has met with its creditors to the
nominate any other qualified person to the extent reasonably possible in attempts to
position of rehabilitation receiver; reach consensus on the proposed
16. Includes a Stay or Suspension Order. Rehabilitation Plan;
[Sec. 16] d. The rehabilitation receiver submits a
report, based on preliminary evaluation,
Effects of the Commencement Order stating that the underlying assumptions
In addition to the effects of a Stay or and the goals stated in the petitioner's
Suspension Order: Rehabilitation Plan are realistic, feasible
1. Vests the rehabilitation receiver with all the and reasonable or if not, there is, in any
powers and functions provided for this Act, case, a substantial likelihood for the debtor
subject to the approval by the court of the to be successfully rehabilitated because,
performance bond filed by the rehabilitation among others:
receiver; (1) There are sufficient assets
2. Prohibits or otherwise serves as the legal with/which to rehabilitate the
basis rendering null and void the results of debtor;
any attempt to collect or enforce a claim
against the debtor after the
Page 427 of 450

(2) There is sufficient cash flow to the commencement date except as may be
maintain the operations of the provided herein [Sec. 16]
debtor;
(3) The debtor's, partners, Exceptions to the Stay or Suspension Order
stockholders, directors and officers a. Cases already pending appeal in the
have been acting in good faith and Supreme Court as of commencement
which due diligence; date Provided, That any final and
(4) The petition is not a sham filing executory judgment arising from such
intended only to delay the appeal shall be referred to the court for
enforcement of the rights of the appropriate action;
creditor's or of any group of b. Subject to the discretion of the court, cases
creditors; and pending or filed at a specialized court or
(5) The debtor would likely be able to quasi-judicial agency which, upon
pursue a viable Rehabilitation determination by the court is capable of
Plan; resolving the claim more quickly, fairly and
e. The petition, the Rehabilitation Plan and efficiently than the court: Provided, That
the attachments thereto do not contain any any final and executory judgment of such
materially false or misleading statement; court or agency shall be referred to the
f. If the petitioner is the debtor, that the debtor court and shall be treated as a non-
has met with its creditor/s representing at disputed claim;
least three-fourths (3/4) of its total c. Enforcement of claims against sureties and
obligations to the extent reasonably other persons solidarily liable with the
possible and made a good faith effort to debtor, and third party or accommodation
reach a consensus on the proposed mortgagors as well as issuers of letters of
Rehabilitation Plan; or if the petitioner/s credit, unless the property subject of the
is/are a creditor or group of creditors, that/ third party or accommodation mortgage is
the petitioner/s has/have met with the necessary for the rehabilitation of the
debtor and made a good faith effort to debtor as determined by the court upon
reach a consensus on the proposed recommendation by the rehabilitation
Rehabilitation Plan; and receiver;
g. The debtor has not committed acts of d. Any form of action of customers or clients
misrepresentation or in fraud of its of a securities market participant to recover
creditor/s or a group of creditors. or otherwise claim moneys and securities
entrusted to the latter in the ordinary
Stay or suspension order course of the latter's business as well as
any action of such securities market
Stay And Suspension Order – An order participant or the appropriate regulatory
included in the Commencement Order that has agency or self-regulatory organization to
the following effects: pay or settle such claims or liabilities;
1. Suspending all actions or proceedings, in e. Actions of a licensed broker or dealer to sell
court or otherwise, for the enforcement of pledged securities of a debtor pursuant to
claims against the debtor; a securities pledge or margin agreement
2. Suspending all actions to enforce any for the settlement of securities transactions
judgment, attachment or provisional in accordance with the provisions of the
remedies against the debtor; Securities Regulation Code and its
3. Prohibiting the debtor from selling, implementing rules and regulations;
encumbering, transferring or disposing in f. Clearing and settlement of financial
any manner any of its properties except in transactions through the facilities of a
the ordinary course of business; and clearing agency or similar entities duly
4. Prohibiting the debtor from making any authorized, registered and/or recognized
payment of its liabilities outstanding as of by the appropriate regulatory agency like
Page 428 of 450

the BSP and the SEC as well as any form d. He is, or was, within two (2) years from the
of actions of such agencies or entities to filing of the petition, an underwriter of the
reimburse themselves for any transactions outstanding securities of the debtor;
settled for the debtor; and e. He is related by consanguinity or affinity
g. Criminal action against individual debtor or within the fourth civil degree to any
owner, partner, director or officer of a individual creditor, owners of a sale
debtor. [Sec. 18] proprietorship-debtor, partners of a
partnership- debtor or to any stockholder,
Rehabilitation receiver director, officer, employee or underwriter of
a corporation-debtor; or
REHABILATION RECEIVER – Any qualified f. He has any other direct or indirect material
person, natural or juridical, may serve as a interest in the debtor or any of the creditors.
receiver. [Sec. 28] [Sec. 40]
If the receiver is a juridical entity, he must Principal Duties

designate a natural person as a representative.  Preserving and maximizing the value of the
Such representative must possess all the assets of the debtor during the
qualifications and none of the disqualifications. rehabilitation proceedings;
 Determining the viability of the
Qualifications rehabilitation of the debtor;
a. Citizen or resident for at least six (6)  Preparing and recommending a
months immediately prior to nomination; Rehabilitation Plan; and
b. Of good moral character and with  Implementing the approved Rehabilitation
acknowledged integrity, impartiality and Plan [Sec. 31]
independence;
c. Has the requisite knowledge of insolvency Management
and other relevant commercial laws, rules Unless otherwise provided, the management of
and procedures, as well as the relevant the debtor remains with the existing
training and/or experience that may be management, subject to laws and agreements,
necessary to enable him to properly if any, on election or appointment of directors,
discharge the duties and obligations of a managers, or managing partner. [Sec. 47]
receiver; and
d. Has no conflict of interest. [Sec. 29] The debtor retains control of its business and
properties, subject only to monitoring by the
Conflicts of Interest receiver. This is referred to as the principle of
Test: An individual is deemed to have a conflict debtor–in–possession or debtor–in–place.
of interest if he is so situated as to be materially [Umale v ASB Realty, G.R. No. 181126 (2011)]
influenced in the exercise of his judgment for or
against any party to the proceedings. [Sec. 40] Exception: The following are subject to the
approval of the receiver or the court:
An individual may have a conflict of interest if: 1. Disbursements affecting title or interest in
a. He is a creditor, owner, partner or the property;
stockholder of the debtor; 2. Payments affecting title or interest in
b. He is engaged in a line of business which property;
competes with that of the debtor; 3. Sale, disposal, assignment, transfer or
c. He is, or was, within five (5) years from the encumbrance of property; or
filing of the petition, a director, officer, 4. Any other act affecting title or interest in
owner, partner or employee of the debtor property. [Sec. 47]
or any of the creditors, or the auditor or
accountant of the debtor;
Page 429 of 450

Immunity from Suit The Implementing Rules add the following

The receiver, the management committee, and grounds for removal:
all persons they engage are not subject to any 1. Failure, without just cause, to perform any
action, claim or demand for any act or omission of the powers and functions under the
in good faith in the exercise of their powers and Rules; or
functions. [Sec. 41] 2. Any of the grounds for removing a trustee
under the general principles for trusts [FR
Report of the Receiver Rules, Rule 2, Sec. 27]
Within 40 days from the initial hearing, the
receiver shall submit a report to the court on Management committee
whether:
1. The debtor is insolvent, and if so, the Management Commiittee – Upon motion of
causes thereof; and any interested party, the court may appoint
2. There is any unlawful or irregular act(s) either (1) the rehabilitation receiver or (2) a
committed by the management of the management committee to assume the
debtor in contemplation of the insolvency management of the debtor. [Sec. 36]
or which may have contributed to the
insolvency; Grounds
3. The assumptions, goals and procedures of 1. There must be clear and convincing
the Rehabilitation Plan are realistic, evidence of any of the following
feasible and reasonable; circumstances:
4. There is a substantial likelihood of 2. Actual or imminent danger of dissipation,
successful rehabilitation; loss, waste or destruction of the debtor’s
5. The petition should be dismissed; and assets or other properties;
6. The debtor should be dissolved and/or 3. Paralyzation of the business operations of
liquidated. the debtor; or
4. Gross mismanagement of the debtor, or
Removal fraud or other wrongful conduct, or gross or
The receiver may be removed at any time by willful violation of the FRIA. [Sec. 36]
the court, either by (1) motu propio or (2)
motion by any creditor(s) holding more than Composition of the Committee
50% of the total obligations of the creditor, on Three qualified members appointed as follows:
the following grounds: 1. The first member shall be appointed by the
1. Incompetence, gross negligence, failure to debtor;
perform or failure to exercise the proper 2. The second member shall be appointed by
degree of care in the performance of his the creditor(s) holding more than 50% of
duties and powers; the total obligations of the debtor; and
2. Lack of particular or specialized 3. The third member shall be appointed by the
competency required by the specific case; first and second members within 10 from
3. Illegal acts or conduct in the performance the appointment.
of his duties and powers;
4. Lack or qualification or presence of any In case of failure to nominate, the court shall
disqualification; appoint the member(s) concerned. In case the
5. Conflict of interest that arises after his decision to appoint a management committee
appointment; and is due to the third ground (mismanagement,
6. Manifest lack of independence that is etc.), the court shall appoint the first member.
detrimental to the general body of the
stakeholders. [Sec. 32]
Page 430 of 450

Rehabilitation plan also part of the Report of the Rehabilitation

Receiver. [Sec. 24]
Rehabilitation Plan
Refers to a plan by which the financial well- (b) It must comply with the required
being and viability of an insolvent debtor can contents under FRIA and FR
restored using various means including, but not Rules. Aside from the above, this
limited to: includes, among others:
1. Debt Forgiveness: Condoning and/or
waiving the claims; i. Material Financial Commitments
2. Debt Rescheduling: Extending the time to The Rehabilitation Plan, shall “include
pay the claim; material financial undertakings or
3. Reorganization or Quasi- commitments to support [it].” [FR Rules,
Reorganization: Changing the equity, Rule 2, Sec.61 (Y)]
corporate or operating structure of the
debtor; A material financial commitment becomes
4. Dacion en Pago: Assigning property and significant in gauging the resolve,
assets as payment for certain claims; determination, earnestness and good faith
5. Debt to Equity Conversion: The issuance of the distressed corporation in financing
of equity and/or ownership interests as the proposed rehabilitation plan.
payment for certain claims;
6. Sale of the Business (or parts of it) as a This commitment may include the
going concern; voluntary undertakings of the
7. Setting up of new business entities; or stockholders or the would-be investors of
8. Other similar arrangements as may be the debtor-corporation indicating their
approved by the court or the creditors. readiness, willingness and ability to
[Sec. 4(ii); Somera] contribute funds or property to guarantee
the continued successful operation of
Important Requirements of A Rehabilitation the debtor corporation during the
Plan period of rehabilitation. [Philippine Bank
of Communications v. Basic Polyprinters
(a) Concept of Feasibility and Packaging Corporation, G.R. No.
187581 (2014)]
Rehabilitation, otherwise referred to as the
restoration of the debtor to a condition of Where the only proposed source of
successful operation and solvency, is resorted revenue the Rehabilitation Plan suggests is
to when it is shown that the continuance of its the capital which would come potential
operation is economically feasible and its investors, with whom negotiations are
creditors can recover by way of the present merely pending, such Plan is bereft of any
value of payments projected in the plan, more material financial commitment which would
if the debtor continues as a going concern than inspire confidence that the rehabilitation
if it is immediately liquidated. [Sec. 4(gg)] would turn out to be successful. [BPI
Family Savings Bank, Inc. v. St. Michael
Hence, the Rehabilitation Plan must contain Medical Center, Inc., G.R. 205469 (2015)]
such relevant information to enable a
reasonable investor to make an informed [T]he conversion of all deposits for future
decision on the feasibility of the Plan. [FR subscriptions to common stock and the
Rules, Rule 2, Sec. 61(BB)] treatment of all payables to officers and
stockholders as trade payables was hardly
Note: Findings as to whether the assumptions, constituting material financial
goals and procedures of the Rehabilitation commitments. Such “conversion” of cash
Plan are realistic, feasible and reasonable are advances to trade payables was, in fact, a
Page 431 of 450

mere re-classification of the liability entry days from notification, the receiver shall
and had no effect on the shareholders’ convene the creditors to vote on the Plan.
deficit. [Wonder Book Corporation v.
Philippine Bank of Communications, G.R. The Plan must be approved by all classes of
No. 187316 (2012)] creditors whose rights are adversely modified
or affected. Otherwise, it is deemed rejected.
ii.Liquidation Analysis
As one of the required contents of a The Plan is approved by a class of creditors if
Rehabilitation Plan, a liquidation analysis members of the said class holding more than
sets out for each creditor or each class of 50% of the total claims of the class vote in favor
creditor, as applicable, the amounts they of the Plan. [Sec. 64]
expect to receive under the Rehabilitation
Plan and those that they will receive if If the Plan is approved, the receiver shall
liquidation ensues within one hundred submit the same to the court for confirmation.
twenty (120) days after the filing of the
petition. [FR Rules, Rule 2, Sec. 61 (B)] Objections to Rehabilitation Plan
The creditor may file an objection to the Plan
The total liquidation assets and the with 20 days from receipt of notice that it has
estimated liquidation return to the creditors, been submitted for confirmation.
as well as the fair market value vis-a-vis the
forced liquidation value of the fixed assets Objections are limited to the following:
were not shown. As such, the Court could 1. The creditors’ support was induced by
not ascertain if the petitioning debtor's fraud;
creditors can recover by way of the present 2. The documents or data relied upon in the
value of payments projected in the plan, Plan are materially false or misleading;
more if the debtor continues as a going 3. The Plan is in fact not supported by the
concern than if it is immediately liquidated. voting creditors. [Sec. 66]
[Philippine Asset Growth Two, Inc. v.
Fastech Synergy Phils. Inc., G.R. 206528 If upon hearing, the court finds merit in the
(2016)] objections, it should order the curing of the
defect.
Note:
Effect: The failure of the Rehabilitation Plan If the court determines the debtor acted in bad
to state any material financial commitment faith, or that it is not possible to cure the defect,
to support rehabilitation, as well as to the court shall convert the proceedings into one
include a liquidation analysis, renders the for liquidation.
CA's considerations for approving the
same as actually unsubstantiated, and Confirmation of the Rehabilitation Plan
hence, insufficient to decree the feasibility The court has a maximum period of one year
of respondents' rehabilitation. It is well to from the date of filing to confirm a
emphasize that the remedy of rehabilitation Rehabilitation Plan.
should be denied to corporations that do
not qualify under the Rules. Neither should If no Rehabilitation Plan is confirmed, the
it be allowed to corporations whose sole proceedings may be converted into one for
purpose is to delay the enforcement of any liquidation. [Sec. 72]
of the rights of the creditors. [Ibid]
Confirmation has the following effects:
Approval of the Rehabilitation Plan 1. The Plan and its provisions shall be binding
The receiver shall notify the stakeholders that upon the debtor and all persons who may
the Plan is ready for examination. Within 20 be affected by it;
Page 432 of 450

2. The debtor shall comply with the provisions Liquidation

of the Plan and shall take all actions
necessary to carry out the Plan; Liquidation is a judicial insolvency proceeding
3. Payments shall be made to the creditors in by which the debtor’s assets are reduced and
accordance with the provisions of the Plan; converted to cash in order to discharge the
4. Contracts and other arrangements claims against the debtor. [Somera]
between the debtor and its creditors shall
be interpreted as continuing to apply to the The concept of liquidation is thus diametrically
extent that they do not conflict with the opposed to that of rehabilitation, and both
provisions of the Rehabilitation Plan; cannot be undertaken at the same time.
5. Any compromises on amounts or [Philippine Veterans Bank Employees Union-
rescheduling of timing of payments by the NUBE v. Vega, G.R. No. 105364 (2001)]
debtor shall be binding on creditors
regardless of whether the Plan is Types
successfully implemented; and
6. Claims arising after approval of the Plan Types of Liquidation
that are otherwise not treated by the Plan Liquidation may be:
are not subject to any Suspension Order. 1. Voluntary: Instituted by the debtor; or
[Sec. 69] 2. Involuntary: Instituted by a creditor or a
group of creditors; or
Cram down effect 3. Conversion: When the court-supervised
or pre-negotiated rehabilitation proceeding
Cram Down Effect – Notwithstanding the is converted by the court into liquidation
rejection of the creditors of the Rehabilitation proceedings (see Conversion into
Plan, the court may nonetheless confirm the Liquidation Proceedings above)
Rehabilitation Plan in what is known as a cram
down. Proceedings that may be Availed of vis-à-vis
Type of Debtor
The effect of the cram down is to bind the Debtor Proceeding Requirements
debtor and all persons who may be affected, Individual Suspension Possesses
whether or not they participated in the of sufficient
proceedings or opposed the plan. Payments property to cover
debts but
A cram down is permitted only if all of the foresees the
following circumstances are present: impossibility of
1. The Rehabilitation Plan complies with the meeting them as
requirements specified in the FRIA; they fall due
2. The receiver recommends confirmation of (illiquid)
the Rehabilitation Plan; Voluntary Properties are
3. The shareholders, owners or partners of not sufficient to
the debtor lost at least their controlling cover
interest as a result of the Rehabilitation liabilities; and
Plan; and Owing debts
4. The Rehabilitation Plan would likely exceeding Php
provide the objecting class or creditors with 500,000
compensation which has a net present Involuntary Creditor(s) have
value greater than that which they would claim(s)
have received if the debtor were under aggregating at
liquidation. [Sec. 64] least Php
500,000; and
Page 433 of 450

An act of individual debtor is only discharged upon

insolvency termination of the proceedings. [Somera]
alleged in the
petition The Liquidation Order shall:
Juridical Voluntary Insolvent: Either 1. Declare the debtor insolvent;
unable to pay 2. Order the liquidation of the debtor and, in
liabilities as they the case of a juridical debtor, declare it as
fall due or assets dissolved;
are insufficient to 3. Order the sheriff to take possession and
pay for liabilities control of all the property of the debtor,
Involuntary At least three except those that may be exempt from
creditors; and execution;
With aggregate 4. Order the publication of the petition or
claims at least motion in a newspaper of general
either Php circulation once a week for two (2)
1,000,000 or at consecutive weeks;
least 25% of 5. Direct payments of any claims and
subscribed conveyance of any property due the debtor
capital stock or to the liquidator;
partner’s 6. Prohibit payments by the debtor and the
contributions, transfer of any property by the debtor;
whichever is 7. Direct all creditors to file their claims with
higher the liquidator within the period set by the
rules of procedure;
Conversion of rehabilitation to 8. Authorize the payment of administrative
liquidation proceedings expenses as they become due;
9. State that the debtor and creditors who are
Under the FRIA, court-supervised or pre- not petitioner/s may submit the names of
negotiated rehabilitation proceedings may be other nominees to the position of liquidator;
converted in the following instances: and
1. Within 10 days from receipt of the 10. Set the case for hearing for the election and
receiver’s report, a court finding that the appointment of the liquidator, which date
debtor is insolvent and there is no shall not be less than thirty (30) days nor
substantial likelihood of substantial more than forty-five (45) days from the date
rehabilitation; [Sec. 25(c)] of the last publication. [Sec. 112]
2. If no Rehabilitation Plan is confirmed within
1 year from filing the petition to confirm the Effects of the Liquidation Order:
Plan; [Sec. 72] 1. The juridical debtor shall be deemed
3. If termination is due to failure or dissolved and its corporate or juridical
rehabilitation or dismissal of the petition for existence terminated;
reasons other than technical grounds [Sec. 2. Legal title to and control of all the assets of
75]; or the debtor, except those that may be
4. Motion filed by the insolvent debtor for exempt from execution, shall be deemed
conversion into liquidation proceedings. vested in the liquidator or, pending his
[Sec. 90] election or appointment, with the court;
3. All contracts of the debtor shall be deemed
Liquidation order terminated and/or breached, unless the
liquidator, within ninety (90) days from the
Liquidation Order – Such order results in the date of his assumption of office, declares
dissolution of a juridical debtor, however, the otherwise and the contracting party agrees;
Page 434 of 450

4. No separate action for the collection of an If the secured creditor maintains his rights
unsecured claim shall be allowed. Such under the security or lien:
actions already pending will be transferred a. The value of the property may be fixed in a
to the Liquidator for him to accept and manner agreed upon by the creditor and
settle or contest. If the liquidator contests the liquidator.
or disputes the claim, the court shall allow,
hear and resolve such contest except when If the value of the property is less than the
the case is already on appeal. In such a claim, the liquidator may convey the
case, the suit may proceed to judgment, property to the secured creditor and the
and any final and executor judgment latter will be admitted in the liquidation
therein for a claim against the debtor shall proceedings as a creditor for the balance.
be filed and allowed in court; and
5. No foreclosure proceeding shall be allowed If its value exceeds the claim secured, the
for a period of one hundred eighty (180) liquidator may convey the property to the
days. creditor and waive the debtor's right of
redemption upon receiving the excess from
Rights of secured creditors the creditor.
Creditor refers to natural or juridical persons b. The liquidator may sell the property and
which have claims against the debtor that satisfy the secured creditor's entire claim
arose on or before the commencement date. from the proceeds of the sale; or
[Sec. 4] c. The secure creditor may enforce the lien or
foreclose on the property pursuant to
General Unsecured Creditor refers to a applicable laws. [Sec. 114]
creditor whose claim or a portion thereof is
neither secured, preferred nor subordinated Cf. Rights of Unsecured Creditors
under the FRIA. General Rule: No separate action for the
collection of an unsecured claim shall be
Secured Creditor refers to a claim secured by allowed. Actions already pending will be
a lien, which is a statutory or contractual claim transferred to the liquidator.
or juridical charge on real or personal property
that legally entitles a creditor to resort to said Exception: When the action is already on
property for payment of the debt or claim appeal, the suit may proceed to judgment, and
secured. any final and executory judgment shall be filed
and allowed. [Sec. 113]
General Rule: Upon issuance of the
Liquidation Order, no foreclosure proceeding Liquidator
shall be allowed for 180 days. [Sec. 113]
Liquidator – Any qualified person, natural or
Exception: However, the Liquidation Order juridical, may serve as a receiver.
shall not affect the right of a secured
creditor to enforce his lien. If the receiver is a juridical entity, he must
designate a natural person as a representative.
During the proceedings, a secured creditor Such representative must possess all the
may: qualifications and none of the disqualifications.
a. Waive his right under the security or lien,
prove his claim in the liquidation Qualifications
proceedings and share in the distribution of The liquidator shall have the same
the assets of the debtor; or qualifications as that of rehabilitator, thus:
b. Maintain his rights under the security or 1. Citizen or resident for at least six (6)
lien. months immediately prior to nomination;
Page 435 of 450

2. Of good moral character and with Determination of claims

acknowledged integrity, impartiality and
independence; Determination of Claims
3. Has the requisite knowledge of insolvency The rules on the determination of claims are as
and other relevant commercial laws, rules follows:
and procedures, as well as the relevant 1. Within 20 days from assuming office, the
training and/or experience that may be liquidator shall prepare a preliminary
necessary to enable him to properly registry of claims.
discharge the duties and obligations of a 2. Secured creditors who have waived their
receiver; and security or have fixed the value of the
4. Has no conflict of interest, which may be property subject of the security shall be
waived by a party who may be prejudiced. considered unsecured.
[Sec. 29] 3. The registry shall be available for public
inspection and publication notice shall be
Powers, Duties and Responsibilities provided to stakeholders. [Sec. 123]
The principal duty of the liquidator is to 4. The debtor and the creditor have the right
preserve and maximize the value and recover to set off their debts against each other;
the assets of the debtor, with the end of only the balance, if any, shall be allowed in
liquidating them and discharging all the claims the proceedings. [Sec. 124]
against the debtor. 5. Within 30 days from expiration of the period
for filing of applications for recognition of
The powers, duties and responsibilities claims, interested parties may challenge
include: claims to the court.
1. To sue and recover all the assets, debts 6. Upon the expiration of the 30-day period,
and claims, belonging or due to the debtor; the liquidator shall submit the registry of
2. To take possession of all the property of the claims containing the claims not subject to
debtor except property exempt by law from challenge. Such claims shall become final
execution; upon filing of the register.
3. To sell, with the approval of the court, any 7. Claims that have become final may be set
property of the debtor which has come into aside only on grounds of fraud, accident,
his possession or control; mistake or inexcusable neglect. [Sec. 125]
4. To redeem all mortgages and pledges, and 8. The liquidator shall submit disputed claims
so satisfy any judgement which may be an to court for final approval. [Sec. 126]
encumbrance on any property sold by him;
5. To settle all accounts between the debtor Treatment of Contracts
and his creditors, subject to the approval of General Rule: All contracts are deemed
the court; terminated and/or breached.
6. To recover any property or its value,
fraudulently conveyed by the debtor; Exception: When the liquidator, within 90 days
7. To recommend to the court the creation of from assumption of office, declares otherwise
a creditors' committee which will assist him and the contracting party agrees. [Sec. 113]
in the discharge of the functions and which
shall have powers as the court deems just, Liquidation Plan
reasonable and necessary; and
8. Upon approval of the court, to engage such Liquidation Plan – Within three months from
professional as may be necessary and assuming office, the liquidator shall submit a
reasonable to assist him in the discharge of Liquidation Plan enumerating the assets,
his duties. claims and a schedule of liquidation and
payment. [Sec. 129]
Page 436 of 450

Properties exempted by law shall be set apart b. Any natural and juridical person involved in
from liquidation for the use and benefit of the personal information processing including:
insolvent. [Sec. 130] i. Those personal information controllers and
processors who use equipment that are
The Plan and its implementation shall observe located in the Philippines, although not
the concurrence and preference of credits found or established in the Philippines; or
under the Civil Code. [Sec. 133] ii. Those who maintain an office, branch or
agency in the Philippines subject to the
Sale of Assets in Liquidation immediately succeeding
The liquidator may sell the unencumbered paragraph: Provided, That the
assets of the debtor and convert the same into requirements of Section 5 are complied
money. with. [Sec. 4]
General Rule: The sale shall be made at public Nothing in this Act shall be construed as to
auction. have amended or repealed the provisions of
Republic Act No. 53, which affords the
Exception: A private sale may be allowed with publishers, editors or duly accredited reporters
the approval of the court if: of any newspaper, magazine or periodical of
1. The goods are of perishable nature; general circulation protection from being
2. The goods are likely to quickly deteriorate compelled to reveal the source of any news
in value; report or information appearing in said
3. The goods are disproportionately publication which was related in any
expensive to keep or maintain; or confidence to such publisher, editor, or
4. The private sale is for the best interest of reporter. [Sec. 5]
the debtor and creditors.
This Act does NOT apply to the following [Sec.
4]:
F. DATA PRIVACY ACT a. Information about any individual who is or
OF 2012 was an officer or employee of a
The section numbers hereinafter generally government institution that relates to the
pertain to RA 10173 or Data Privacy Act of position or functions of the individual,
2012, unless otherwise indicated. including:
1. The fact that the individual is or was an
officer or employee of the government
1. Definitions and Scope institution;
2. The title, business address and office
Personal information – Any information telephone number of the individual;
whether recorded in a material form or not: 3. The classification, salary range and
 From which the identity of an individual is responsibilities of the position held by
apparent or can be reasonably and directly the individual; and
ascertained by the entity holding the 4. The name of the individual on a
information; or document prepared by the individual in
 When put together with other information the course of employment with the
would directly and certainly identify an government.
individual. [Sec. 3(g)]
b. Information about an individual who is or
Scope was performing service under contract for
The Data Privacy Act of 2012 applies to: a government institution that relates to the
a. The processing of ALL types of personal services performed.
information; and
Page 437 of 450

This includes: The terms of the contract, 2. Extraterritorial Application

and the name of the individual given in the
course of the performance of those This Act applies to an act done or practice
services; engaged in and outside of the Philippines by an
entity if:
c. Information relating to any discretionary a. The act, practice or processing relates to
benefit of a financial nature. personal information about a Philippine
citizen or a resident;
Such as the granting of a license or permit b. The entity has a link with the Philippines,
given by the government to an individual, and the entity is processing personal
including the name of the individual and the information in the Philippines or even if the
exact nature of the benefit; processing is outside the Philippines as
long as it is about Philippine citizens or
d. Personal information processed for residents such as, but not limited to, the
journalistic, artistic, literary or research following:
purposes; 1. A contract is entered in the Philippines;
2. A juridical entity unincorporated in the
e. Information necessary in order to carry out Philippines but has central
the functions of public authority. management and control in the
country; and
This includes: the processing of personal 3. An entity that has a branch, agency,
data for the performance by the office or subsidiary in the Philippines
independent, central monetary authority and the parent or affiliate of the
and law enforcement and regulatory Philippine entity has access to
agencies of their constitutionally and personal information; and
statutorily mandated functions. c. The entity has other links in the Philippines
such as, but not limited to:
Note: Nothing in this Act shall be construed 1. The entity carries on business in the
as to have amended or repealed the Philippines; and
Secrecy of Bank Deposits Act (RA 1405); 2. The personal information was collected
the Foreign Currency Deposit Act (RA or held by an entity in the Philippines.
6426); and the Credit Information System [Sec. 6]
Act (RA 9510).
f. Information necessary for banks and other 3. Processing of personal

financial institutions under the jurisdiction information
of the independent, central monetary
authority or BSP to comply with the Credit General Principles
Information System Act (RA 9510) and
Anti-Money Laundering Act (RA 9160) and Processing – Any operation or any set of
other applicable laws. operations performed upon personal
information including, but not limited to, the
g. Personal information originally collected collection, recording, organization, storage,
from residents of foreign jurisdictions in updating or modification, retrieval,
accordance with the laws of those foreign consultation, use, consolidation, blocking,
jurisdictions, including any applicable data erasure or destruction of data. [Sec. 3(j)]
privacy laws, which is being processed in
the Philippines.
Page 438 of 450

The processing of personal information shall Sensitive and privileged

be allowed, subject to: information
a. Compliance with the requirements of this
Act and other laws allowing disclosure of Sensitive personal information – Personal
information to the public; and information:
b. Adherence to the principles of (1) About an individual’s race, ethnic origin,
transparency, legitimate purpose and marital status, age, color, and religious,
proportionality. [Sec. 11] philosophical or political affiliations;
(2) About an individual’s health, education,
Personal information must be: genetic or sexual life of a person, or to any
a. Collected for specified and legitimate proceeding for any offense committed or
purposes determined and declared, and alleged to have been committed by such
later processed in a way compatible with person, the disposal of such proceedings,
such declared, specified and legitimate or the sentence of any court in such
purposes only; proceedings;
 When purposes are determined and (3) Issued by government agencies peculiar to
declared: before, or as soon as an individual which includes, but not limited
reasonably practicable after collection. to, social security numbers, previous or
b. Processed fairly and lawfully; current health records, licenses or its
c. Accurate, relevant and, where necessary denials, suspension or revocation, and tax
for purposes for which it is to be used the returns; and
processing of personal information, kept up (4) Specifically established by an executive
to date. order or an act of Congress to be kept
 Inaccurate or incomplete data must be classified. [Sec. 3(l)]
rectified, supplemented, destroyed or
their further processing restricted; Privileged information – Any and all forms of
d. Adequate and not excessive in relation to data which under the Rules of Court and other
the purposes for which they are collected pertinent laws constitute privileged
and processed; communication. [Sec. 3(k)]
e. Retained only for as long as necessary for
the fulfillment of the purposes for which the General Rule: The processing of sensitive
data was obtained or for the establishment, personal information and privileged information
exercise or defense of legal claims, or for shall be prohibited.
legitimate business purposes, or as
provided by law; and However, it shall be permitted if –
f. Kept in a form which permits identification a. Not otherwise prohibited by law; and
of data subjects for no longer than is b. When at least one of the following
necessary for the purposes for which the conditions exists:
data were collected and processed. 1. The data subject has given his or her
 Provided, That personal information consent;
collected for other purposes may lie 2. The processing is necessary and is
processed for historical, statistical or related to the fulfillment of a contract
scientific purposes, and in cases laid with the data subject or in order to take
down in law may be stored for longer steps at the request of the data subject
periods. prior to entering into a contract;
 Provided, further, That adequate 3. The processing is necessary for
safeguards are guaranteed by said compliance with a legal obligation to
laws authorizing their processing. [Sec. which the personal information
11] controller is subject;
Page 439 of 450

4. The processing is necessary to protect information controller shall be responsible for

vitally important interests of the data ensuring that proper safeguards are in place:
subject, including life and health; (1) To ensure the confidentiality of the
5. The processing is necessary in order to personal information processed;
respond to national emergency, to (2) To prevent the use of the processed
comply with the requirements of public personal information for unauthorized
order and safety, or to fulfill functions of purposes; and
public authority which necessarily (3) To comply with the requirements of this Act
includes the processing of personal and other laws for processing of personal
data for the fulfillment of its mandate; or information. [Sec.14]
6. The processing is necessary for the
purposes of the legitimate interests Privileged Communication
pursued by the personal information
controller or by a third party or parties Personal information controllers may invoke
to whom the data is disclosed. the principle of privileged communication over
privileged information that they lawfully control
Except: Where such interests are overridden or process.
by fundamental rights and freedoms of the data
subject which require protection under the Subject to existing laws and regulations, any
Philippine Constitution. [Sec. 12] evidence gathered on privileged information is
inadmissible. [Sec.15]
See: Penalties for unauthorized processing of
Personal Information above. [Sec. 25]
4. Rights of the data subject;
Subcontracting exceptions/non-applicability
Personal information controller – Refers to Data subject – An individual whose personal

a person or organization who controls the information is processed. [Sec. 3(c)]
collection, holding, processing or use of
personal information. The data subject is entitled to:
a. Be informed
Including: As to whether personal information pertaining
 A person or organization who instructs to him/her shall be, are being, or have been
another person or organization to collect, processed;
hold, process, use, transfer or disclose
personal information on his or her behalf. b. Be furnished
With the following before the entry of his or her
Excluding: personal information into the processing
 A person or organization who performs system of the personal information controller,
such functions as instructed by another or at the next practical opportunity:
person or organization; and 1. Description of the personal information
 An individual who collects, holds, to be entered into the system;
processes or uses personal information in 2. Purposes for which they are being or
connection with the individual’s personal, are to be processed;
family or household affairs. [Sec. 3(h)] 3. Scope and method of the personal
information processing;
Subcontracting 4. The recipients or classes of recipients
A personal information controller may to whom they are or may be disclosed;
subcontract the processing of personal 5. Methods utilized for automated access,
information, provided, that the personal if the same is allowed by the data
Page 440 of 450

subject, and the extent to which such 8. The designation, or name or identity
access is authorized; and address of the personal
6. The identity and contact details of the information controller;
personal information controller or its
representative; d. Dispute the inaccuracy or error in the
7. The period for which the information personal information and have the
will be stored; and personal information controller correct
8. The existence of their rights, i.e., to it immediately and accordingly
access, correction, as well as the right
to lodge a complaint before the Unless: the request is vexatious or
Commission. otherwise unreasonable.
General Rule: Any information supplied/ Note: If the personal information have been
declaration made to the data subject on corrected, the personal information
these matters shall not be amended controller shall ensure the accessibility of
without prior notification. both the new and the retracted information
and the simultaneous receipt of the new
Exception: notification under (b) shall not and the retracted information by recipients
apply if the personal information is needed thereof.
pursuant to a subpoena or when the
collection and processing are for obvious Provided, That the third parties who have
purposes (e.g., when it is necessary for previously received such processed
the performance of or in relation to a personal information shall he informed of
contract or service or when necessary or its inaccuracy and its rectification upon
desirable in the context of an employer- reasonable request of the data subject.
employee relationship, between the
collector and the data subject) or when the e. Suspend, withdraw or order the
information is being collected and blocking, removal or destruction of his
processed as a result of legal obligation. or her personal information from the
personal information controller’s filing
c. Reasonable access to the following, system
upon demand:
1. Contents of his or her personal
This is upon discovery and substantial
information that were processed; proof that the personal information are
2. Sources from which personal incomplete, outdated, false, unlawfully
information were obtained; obtained, used for unauthorized purposes
3. Names and addresses of recipients of or are no longer necessary for the
the personal information; purposes for which they were collected. In
4. Manner by which such data were this case, the personal information
processed; controller may notify third parties who have
5. Reasons for the disclosure of the previously received such processed
personal information to recipients; personal information.
6. Information on automated processes
where the data will or likely to be made f. Be indemnified
as the sole basis for any decision
significantly affecting or will affect the For any damages sustained due to such
data subject; inaccurate, incomplete, outdated, false,
7. Date when his or her personal unlawfully obtained or unauthorized use of
information concerning the data personal information. [Sec. 16]
subject were last accessed and
modified; and
Page 441 of 450

g. Transmissibility of Rights of the Data (ii) On the basis of such, no activities are
Subject carried out and no decisions are taken
regarding the data subject
The lawful heirs and assigns of the data subject
may invoke the rights of the data subject for Provided, That the personal information shall:
which he or she is an heir or assignee. a. Be held under strict confidentiality
b. Be used only for the declared purpose.
When they may invoke: (1) At any time after the
death of the data subject OR (2) when the data Likewise, the immediately preceding sections
subject is incapacitated or incapable of are not applicable to processing of personal
exercising the above-enumerated rights. [Sec. information gathered for the purpose of
17] investigations in relation to any criminal,
administrative or tax liabilities of a data subject.
h. Right to Data Portability [Sec. 19]
Where personal information is processed by 5. Duties and responsibilities of

electronic means and in a structured and
commonly used format: personal information
The data subject shall have the right to obtain controller
from the personal information controller a copy
of data undergoing processing in an electronic (1) The personal information controller must
or structured format, which is commonly used implement reasonable and appropriate
and allows for further use by the data subject. organizational, physical and technical
[Sec. 18] measures intended for the protection of
personal information against any
Exception: These rights are not applicable if accidental or unlawful destruction,
the processed personal information are used/ alteration and disclosure, as well as
gathered only: against any other unlawful processing.
a. For the needs of scientific and (2) The personal information controller shall
statistical research and, on the basis of implement reasonable and appropriate
such, no activities are carried out and no measures to protect personal
decisions are taken regarding the data information against natural dangers
subject. such as accidental loss or destruction, and
human dangers such as unlawful access,
In such case, however, the personal fraudulent misuse, unlawful destruction,
information shall be held under strict alteration and contamination.
confidentiality and shall be used only for (3) The personal information controller must
the declared purpose. further ensure that third parties processing
personal information on its behalf shall
b. For the purpose of investigations in implement the security measures
relation to any criminal, administrative required by this provision.
or tax liabilities of a data subject. [Sec. 19]
The determination of the appropriate level of
Non-Applicability security under this section must take into
The immediately preceding sections are not account the nature of the personal
applicable if: information to be protected, the risks
(i) The processed personal information represented by the processing, the size of
are used only for the needs of the organization and complexity of its
scientific and statistical research; operations, current data privacy best
and practices and the cost of security
implementation.
Page 442 of 450

Subject to guidelines as the Commission may

issue from time to time, the measures G. PHILIPPINE
implemented must include: COMPETITION ACT
 Safeguards to protect its computer The section numbers hereinafter generally
network against accidental, unlawful or pertain to RA 10667 or the Philippine
unauthorized usage or interference with Competition Act, unless otherwise indicated.
or hindering of their functioning or
availability;
 A security policy with respect to the 1. Definitions and Scope of
processing of personal information; Application
 A process for identifying and accessing
reasonably foreseeable vulnerabilities in Definitions
its computer networks, and for taking
preventive, corrective and mitigating The Philippine Competition Act (PCA) or RA
action against security incidents that can 10667 is the primary law of the Philippines for
lead to a security breach; and promoting fair market competition.
 Regular monitoring for security breaches
and a process for taking preventive, It is based on the premise that efficient market
corrective and mitigating action against competition is an effective mechanism for
security incidents that can lead to a allocating goods and services, and that
security breach. safeguards are needed to maintain competitive
conditions. [Philippine Competition
(4) The personal information controller shall Commission Primer]
promptly notify the Commission and
affected data subjects when sensitive Agreement – Any type or form of contract,
personal information or other information arrangement, understanding, collective
that may, under the circumstances, be recommendation, or concerted action, whether
used to enable identity fraud are formal or informal, explicit or tacit, written or
reasonably believed to have been acquired oral. [Sec. 4(b)]
by an unauthorized person, and the
personal information controller or the Confidential business information –
Commission believes that such Information which concerns or relates to the
unauthorized acquisition is likely to give operations, production, sales, shipments,
rise to a real risk of serious harm to any purchases, transfers, identification of
affected data subject. customers, inventories, or amount or source of
any income, profits, losses, expenditures. [Sec.
The employees, agents or representatives of 4(e)]
a personal information controller who are
involved in the processing of personal Control – The ability to substantially influence
information shall operate and hold personal or direct the actions or decisions of an entity,
information under strict confidentiality if the whether by contract, agency or otherwise.
personal information are not intended for [Sec. 4(f)]
public disclosure. This obligation shall
continue even after leaving the public Dominant position – A position of economic
service, transfer to another position or upon strength that an entity or entities hold which
termination of employment or contractual makes it capable of controlling the relevant
relations. [Sec. 20] market independently from any or a
combination of the following: competitors,
customers, suppliers, or consumers. [Sec.
4(g)]
Page 443 of 450

Market – The group of goods or services that restrict, or lessen competition in the
are sufficiently interchangeable or substitutable relevant market;
and the object of competition, and the c. Monitor and undertake consultation with
geographic area where said goods or services stakeholders and affected agencies
are offered. [Sec. 4(i)] d. Stop or redress any anti-competitive
agreement
Scope e. Conduct administrative proceedings,
impose sanctions, fines or penalties for any
This Act shall: noncompliance with or breach of this Act
(1) Be enforceable against any person or and its implementing rules and regulations
entity engaged in any trade, industry and (IRR) and punish for contempt;
commerce in the Republic of the f. Issue subpoena duces tecum and
Philippines. subpoena ad testificandum to require the
(2) Be applicable to international trade having production of books, records, or other
direct, substantial, and reasonably documents or data which relate to any
foreseeable effects in trade, industry, or matter relevant to the investigation
commerce in the Republic of the g. Upon order of the court, undertake
Philippines, including those that result from inspections of business premises and other
acts done outside the Republic of the offices, land and vehicles, as used by the
Philippines. entity,
h. Issue adjustment or divestiture orders
This Act shall NOT apply to: including orders for corporate
(1) The combinations or activities of workers or reorganization or divestment which are
employees; structural remedies, should only be
(2) Agreements or arrangements with their imposed:
employers 1. Where there is no equally effective
behavioral remedy; or
When such combinations, activities, 2. Where any equally effective behavioral
agreements, or arrangements are designed remedy would be more burdensome for
solely to facilitate collective bargaining in the enterprise concerned than the
respect of conditions of employment. [Sec. 3] structural remedy;
i. Deputize any and all enforcement agencies
of the government or enlist the aid and
2. Powers and functions of the
support of any private institution,
Philippine Competition corporation, entity or association, in the
Commission implementation of its powers and functions;
j. Monitor compliance by the person or
The Commission shall have original and entities concerned with the cease and
primary jurisdiction over the enforcement desist order or consent judgment;
and implementation of PCA. The Commission k. Issue advisory opinions and guidelines on
shall exercise the following powers and competition matters and submit annual and
functions: special reports to Congress, including
a. Conduct inquiry, investigate, and hear and proposed legislation;
decide on cases involving any violation of l. Monitor and analyze the practice of
this Act and other existing competition laws competition in markets that affect the
motu proprio or upon receipt of a verified Philippine economy;
complaint m. Conduct, publish, and disseminate studies
b. Review proposed mergers and and reports on anti-competitive conduct
acquisitions, and upon exercise of its and agreements to inform and guide the
powers to review, prohibit mergers and industry and consumers;
acquisitions that will substantially prevent,
Page 444 of 450

n. Intervene or participate in administrative 2. Fixing price at an auction or in any form of

and regulatory proceedings requiring bidding including cover bidding, bid
consideration of the provisions of this Act suppression, bid rotation and market
that are initiated by government agencies; allocation and other analogous practices.
o. Assist the National Economic and
Development Authority, in consultation with Not per se violations
relevant agencies and sectors, in the The following agreements, between or among
preparation and formulation of a national competitors which have the object or effect of
competition policy; substantially preventing, restricting or
p. Act as the official representative of the lessening competition shall be prohibited:
Philippine government in international 1. Setting, limiting, or controlling
competition matters; production, markets, technical
q. Promote capacity building and the sharing development, or investment;
of best practices with other competition- 2. Dividing or sharing the market, whether
related bodies; by volume of sales or purchases,
r. Advocate pro-competitive policies of the territory, type of goods or services,
government by: buyers or sellers or any other means.
1. Reviewing economic and
administrative regulations, motu Agreements other than those specified in (i)
proprio or upon request; and and (ii) which have the object or effect of
2. Advising the Executive Branch on the substantially preventing, restricting or
competitive implications of government lessening competition shall also be prohibited.
actions, policies and programs; and [Sec. 14]
s. Charging reasonable fees to defray the
administrative cost of the services Examples of Anti-Competitive Agreements
rendered. [Sec.12]  Price Fixing - Competitors collude with
one another to fix prices for goods or
3. Prohibited acts services, rather than allowing prices to be
determined by market forces.
Anti-competitive agreements  Bid-Rigging – Parties participating in a
tender process coordinate their bids, rather
Anti-competitive agreements are those that than submit independent bid prices.
substantially prevent, restrict, or lessen  Output Limitations - Competitors agree to
competition. limit production or set quotas, or else to
coordinate investment plans.
It is illegal for business rivals to act  Market-Sharing - Competitors agree to
together in ways that can limit competition, restrict their sales to specific geographic
lead to higher prices, or hinder other areas, effectively creating local monopolies
businesses from entering the market. for each of them. [Philippine Competition
Commission Primer]
Note: Agreements between or among
competitors are also called horizontal ADMINISTRATIVE FINES AND PENALTIES
agreements. First offense: Fine of up to one hundred million
pesos (P100,000,000.00).
Per se violations
The following agreements, between or among Second offense: Fine of not less than one
competitors, are per se prohibited: hundred million pesos (P100,000,000.00) but
1. Restricting competition as to price, or not more than two hundred fifty million pesos
components, or other terms of trade; (P250,000,000.00).
Page 445 of 450

In fixing the amount of the fine, the Commission which have no connection with the
shall have regard to both the gravity and the transaction;
duration of the violation. d. Discriminatory behavior - Setting prices
or other terms or conditions that
CRIMINAL PENALTY discriminate unreasonably between
An entity that enters into any anti-competitive customers or sellers of the same goods or
agreement as covered in Sec. 14 shall be services, where the effect may be to lessen
penalized by imprisonment from two (2) to competition substantially:
seven (7) years, and a fine of not less than fifty
million pesos (P50,000,000.00) but not more Exception: That the following shall be
than two hundred fifty million pesos considered permissible price
(P250,000,000.00). The penalty of differentials:
imprisonment shall be imposed upon the 1. Socialized pricing for the less fortunate
responsible officers, and directors of the entity. sector of the economy;
2. Price differential which reasonably or
When the entities involved are juridical approximately reflect differences in the
persons, the penalty of imprisonment shall be cost of manufacture, sale, or delivery
imposed on its officers, directors, or employees resulting from differing methods,
holding managerial positions, who are technical conditions, or quantities in
knowingly and willfully responsible for such which the goods or services are sold or
violation. delivered to the buyers or sellers;
3. Price differential or terms of sale
Abuse of dominant position offered in response to the competitive
price of payments, services or changes
Markets that are dominated by a single or in the facilities furnished by a
handful of large companies are particularly competitor; and
vulnerable to anticompetitive practices. 4. Price changes in response to changing
market conditions, marketability of
In the conduct of their business, dominant goods or services, or volume;
companies (considering their size, scope, and
position of economic strength) may have a e. Imposing restrictions on the lease or
disproportionately severe effect on the market contract for sale or trade of goods or
and its companies. services, such as fixing prices, giving
preferential discounts or rebate upon such
PROHIBITED ACTS price, or imposing conditions not to deal
a. Predatory Pricing - selling goods or with competing entities, the object or effect
services below cost with the object of of the restrictions is to prevent, restrict or
driving competition out of the relevant lessen competition substantially:
market;
b. Imposing barriers to entry or committing Exception:
acts that prevent competitors from growing 1. Permissible franchising, licensing,
within the market in an anti-competitive exclusive merchandising or exclusive
manner distributorship agreements; or
2. Agreements protecting intellectual
Exception: Those that develop in the property rights, confidential
market as a result of or arising from a information, or trade secrets;
superior product or process, business
acumen, or legal rights or laws; f. Making supply of particular goods or
services dependent upon the purchase of
c. Making a transaction subject to acceptance other goods or services from the supplier
by the other parties of other obligations
Page 446 of 450

which have no direct connection with the If the PCC determines that the agreement
main goods or services to be supplied; results in a prohibited merger or
g. Directly or indirectly imposing unfairly low acquisition, it may
purchase prices for the goods or services a. Prohibit the implementation of the
of, among others, marginalized agricultural agreement;
producers, fisherfolk, micro-, small-, b. Prohibit the implementation of the
medium-scale enterprises, and other agreement unless and until it is modified by
marginalized service providers and changes specified by the Commission;
producers; c. Prohibit the implementation of the
h. Exploitative behavior towards agreement unless and until the pertinent
consumers, customers, and/or party or parties enter into legally
competitors - Directly or indirectly enforceable agreements specified by the
imposing unfair purchase or selling price Commission. [Sec. 18]
on their competitors, customers, suppliers
or consumers; ADMINISTRATIVE FINES AND PENALTIES
Exception: Prices that develop in the Grounds

market as a result of or due to a superior a. Failure to notify the PCC when mandatory;
product or process, business acumen or b. Entering into a prohibited agreement as
legal rights or laws defined.
i. Limiting production, markets or technical Penalties

development, to the detriment of First offense: Fine of up to one hundred
consumers million pesos (P100,000,000.00).
Exception: Prices that develop in the Second offense: Fine of not less than one
market as a result of or due to a superior hundred million pesos (P100,000,000.00) but
product or process, business acumen or not more than two hundred fifty million pesos
legal rights or laws (P250,000,000.00).
ADMINISTRATIVE FINES AND PENALTIES In fixing the amount of the fine, the Commission
First offense: Fine of up to one hundred million shall have regard to both the gravity and the
pesos (P100,000,000.00). duration of the violation.
Second offense: Fine of not less than one Exceptions

hundred million pesos (P100,000,000.00) but
not more than two hundred fifty million pesos Anti-Competitive Agreements
(P250,000,000.00). Prohibited agreements that contribute to
improving the production or distribution of
In fixing the amount of the fine, the Commission goods and services or to promoting technical
shall have regard to both the gravity and the or economic progress, while allowing
duration of the violation. consumers a fair share of the resulting
benefits, may not necessarily be deemed a
Prohibited mergers and violation. [Sec. 14]
acquisitions
Abuse of Dominant Position
Mergers and acquisitions that substantially The ff. may not necessarily be considered an
prevent, restrict or lessen competition in the abuse of dominant position:
relevant market or in the market for goods or (1) Having a dominant position in a relevant
services are prohibited. [Sec. 20] market that does not substantially prevent,
restrict or lessen competition; or
Page 447 of 450

(2) Any conduct which contributes to Thresholds for compulsory

improving production or distribution of notification
goods or services within the relevant
market, or promoting technical and Parties to a merger or acquisition are required
economic progress while allowing to provide notification when:
consumers a fair share of the resulting (a) SIZE OF PARTY THRESHOLD: The
benefit. [Sec. 15] aggregate annual gross revenues in, into
or from the Philippines, or value of the
Prohibited Mergers and assets in the Philippines of the ultimate
Acquisitions parent entity of at least one of the acquiring
Prohibited mergers and acquisitions may, or acquired entities, including that of all
nonetheless, be exempt from prohibition by the entities that the ultimate parent entity
Commission when the parties establish either controls, directly or indirectly, exceeds
of the following: Five Billion Six Hundred Million Pesos
1. The concentration has brought about or is (PhP5,600,000,000.00); AND
likely to bring about gains in efficiencies (b) SIZE OF TRANSACTION THRESHOLD:
that are greater than the effects of any The value of the transaction exceeds
limitation on competition that result or likely Two Billion Two Hundred Million Pesos
to result from the merger or acquisition (PhP2,200,000,000.00). [Rule 4, Sec. 3,
agreement; or IRR of RA 10667, as amended by PCC
2. A party to the merger or acquisition Commission Resolution No. 03-2019
agreement is faced with actual or imminent pursuant to PCC Memo. Circ. No. 18-001,
financial failure, and the agreement effective March 1, 2019]
represents the least anti-competitive
arrangement among the known alternative The Commission shall, from time to time, adopt
uses for the failing entity’s assets: and publish regulations stipulating:
3. Provided, That an entity shall not be (a) The transaction value threshold and such
prohibited from continuing to own and hold other criteria subject to the notification
the stock or other share capital or assets of requirement of Section 17 of this Act;
another corporation which it acquired prior (b) The information that must be supplied for
to the approval of this Act or acquiring or notified merger or acquisition;
maintaining its market share in a relevant (c) Exceptions or exemptions from the
market through such means without notification requirement; and
violating the provisions of this Act (d) Other rules relating to the notification
4. Provided further that the acquisition of the procedures. [Sec. 19]
stock or other share capital of one or more
corporations solely for investment and not
Notifying Entity
used for voting or exercising control and
not to otherwise bring about, or attempt to
Parties to the merger or acquisition agreement
bring about the prevention, restriction, or
wherein the value of the transaction exceeds
lessening of competition in the relevant
Two Billion Two Hundred Million Pesos
market shall not be prohibited. [Sec. 21]
(P2,200,000,000.00) are prohibited from
consummating their agreement until thirty (30)
4. Covered Transactions days after providing notification to the
Commission in the form and containing the
The Commission shall have the power to information specified in the regulations issued
review mergers and acquisitions based on by the Commission. [Sec. 17]
factors deemed relevant by the Commission.
[Sec. 16] If notice to the Commission is required for a
merger or acquisition, then either of the ff. must
Page 448 of 450

each submit a Notification Form and comply substitutable by the consumer or the
with the procedure set forth: customer, by reason of the goods and/or
 All acquiring and acquired pre-acquisition services’ characteristics, their prices and
ultimate parent entities; or their intended use; and
 Any entity authorized by the ultimate parent 2. The relevant geographic market comprises
entity to file notification on its behalf. the area in which the entity concerned is
The parties shall not consummate the involved in the supply and demand of
transaction before the expiration of the relevant goods and services, in which the conditions
periods provided in this Rule. [Rule 4, Sec.2(b), of competition are sufficiently homogenous
IRR] and which can be distinguished from
neighboring areas because the conditions
In the formation of a joint venture (other than in of competition are different in those areas.
connection with a merger or consolidation), the
contributing entities shall be deemed acquiring For purposes of determining the relevant
entities, and the joint venture shall be deemed market, the following factors, among others,
the acquired entity. [Rule 4, Sec.2(c), IRR] affecting the substitutability among goods or
services constituting such market and the
Exceptions geographic area delineating the boundaries of
the market shall be considered:
The Commission shall, from time to time, adopt (a) The possibilities of substituting the goods
and publish regulations stipulating exceptions or services in question, with others of
or exemptions from the notification domestic or foreign origin, considering the
requirement. [Sec. 19] technological possibilities, extent to which
substitutes are available to consumers and
An internal restructuring within a group of time required for such substitution;
companies is exempt from notification if the (b) The cost of distribution of the good or
acquiring and acquired entities have the same service, its raw materials, its supplements
ultimate parent entity (UPE). and substitutes from other areas and
abroad, considering freight, insurance,
Mergers or acquisitions are not considered import duties and non-tariff restrictions; the
purely internal and, therefore, do not qualify for restrictions imposed by economic agents
the exemption, if the restructuring leads to a or by their associations; and the time
change in control. required to supply the market from those
areas;
Such exemption shall not prevent the (c) The cost and probability of users or
Commission from commencing a motu proprio consumers seeking other markets; and
review of mergers and acquisitions under the (d) National, local or international restrictions
IRR. [PCC Clarificatory Note 16-002] which limit access by users or consumers
to alternate sources of supply or the access
5. Determining the Relevant of suppliers to alternate consumers. [Sec.
24]
Market
6. Determining the control or
The Relevant Market refers to the market in
which a particular good or service is sold and dominance of market
which is a combination of the relevant product
market and the relevant geographic market, In determining whether an entity has market
defined as follows: dominant position, the Commission shall
1. A relevant product market comprises all consider the following:
those goods and/or services which are 1. The share of the entity in the relevant
regarded as interchangeable or market and whether it is able to fix prices
Page 449 of 450

unilaterally or to restrict supply in the 4. Balance the need to ensure that

relevant market; competition is not prevented or
2. The existence of barriers to entry and the substantially restricted and the risk that
elements which could foreseeably alter competition efficiency, productivity,
both said barriers and the supply from innovation, or development of priority areas
competitors; or industries in the general interest of the
3. The existence and power of its country may be deterred by overzealous or
competitors; undue intervention; and
4. The possibility of access by its competitors 5. Assess the totality of evidence on whether
or other entities to its sources of inputs; it is more likely than not that the entity has
5. The power of its customers to switch to engaged in anti-competitive agreement or
other goods or services; conduct including whether the entity’s
6. Its recent conducts; and conduct was done with a reasonable
7. Other criteria established by the commercial purpose such as but not limited
regulations. [Sec. 27] to phasing out of a product or closure of a
business, or as a reasonable commercial
Presumption response to the market entry or conduct of
Presumption of market dominant position if the a competitor.
market share of an entity in the relevant market
is at least fifty percent (50%), unless a new 8. Forbearance by the Philippine
market share threshold is determined by the
Commission for that particular sector. [Sec. 27] Competition Commission
The Commission may forbear from applying
7. Determining Existence of the provisions of this Act, for a limited time, in
Anti-Competitive Conduct whole or in part, in all or specific cases, on an
entity or group of entities, if in its determination:
In determining whether anti-competitive 1. Enforcement is not necessary to the
agreement or conduct has been committed, the attainment of the policy objectives of this
Commission shall: Act;
1. Define the relevant market allegedly 2. Forbearance will neither impede
affected by the anti-competitive agreement competition in the market where the entity
or conduct or group of entities seeking exemption
2. Determine if there is actual or potential operates nor in related markets; and
adverse impact on competition in the 3. Forbearance is consistent with public
relevant market caused by the alleged interest and the benefit and welfare of the
agreement or conduct, and if such impact consumers.[Sec.28]
is substantial and outweighs the actual or
potential efficiency gains that result from A public hearing shall be held to assist the
the agreement or conduct; Commission in making this determination.
3. Adopt a broad and forward-looking
perspective, recognizing future market In the event that the basis for the issuance of
developments, any overriding need to the exemption order ceases to be valid, the
make the goods or services available to order may be withdrawn by the
consumers, the requirements of large Commission. [Sec. 28]
investments in infrastructure, the
requirements of law, and the need of our
economy to respond to international
competition, but also taking account of past
behavior of the parties involved and
prevailing market conditions;
Page 450 of 450

2020 UP BOC Commercial Law Reviewer

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2020 UP BOC Commercial Law Reviewer

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Training and Convention Bar Operations Commissioner Faculty Advisers

Division Joshua Ejeil A. Pascual Prof. Rafael A. Morales

UP LAW BAR OPERATIONS COMMISSION

COMMERCIAL LAW TEAM LAYOUT TEAM

THE UNIVERSITY OF THE PHILIPPINES COLLEGE OF LAW

THE UP LAW BAR OPERATIONS COMMISSION 2020-2021

ALL RIGHTS RESERVED

INSURANCE ............................................................. 1 TRANSPORTATION ............................................... 56

A. CONCEPT OF INSURANCE.......................................... 2 A. COMMON CARRIERS ................................ 57

parties do not know about it e.g., prior loss of a

General rule: An insurance business consists 4. Parties to an Insurance Contract

1. Cause 5. Insurable Interest

An insurance contract is: Exceptions: Insurance contracts particularly

f. Contract of Adhesion (Fine Print 2. For Specific Kinds of Insurance

Insurance contracts are already presented to a. For Non-Life Insurance

The insured cannot assign, before the b. For Life Insurance

Violation of this duty gives the aggrieved party a. Definition

Marine insurance includes: c. Loan on Bottomry and

Marine insurance has two major divisions: i. PERILS OF THE SEA

of her not being unseaworthy. [Roque v. IAC, e. Loss

g. Average 3. It must be successful (i.e., resulted in the

Gross/General Simple/Particular An example of particular average loss would be

A vessel is seaworthy if: Implied Warranty Against Improper

Fire is oxidation which is so rapid as to produce

valuation is conclusive between the parties in Excluding:

to all types of insurance. Outside of these, the principal or obligor, of an obligation or

4. Suretyship Said liability is limited or fixed to the amount of

5. Life may be made payable on the death of the

b. Types It provides insurance coverage to industrial

c. Other Classifications of Life provides, need not reimburse any

7. Compulsory Motor Vehicle The claimants/victims may be a passenger or

8. Compulsory Insurance relatives within the fourth civil degree of

Basis: It is the policy of the State to provide

1. In Life/Health Each person has unlimited interest in his own

But if a person obtains a policy on the life of

transaction merely a cover for a forbidden In Health Insurance

This means that the insurable interest in the

Interest in Property and Life 3. The same subject matter;

Union Mortgage or Standard in the application that contract shall not

Delay in acting on the application does not

The parties may impose additional conditions

Delivery of Policy Jurisprudence decided before RA 10607

Applicable Grace Periods Cash Surrender Value (CSV)

Excuses for Non-Payment The CSV is an amount which the insurance

Definition Each party to a contract of insurance is bound

Concealment may be committed by either the Effects

INCONTESTABILITY CLAUSE Grounds still available:

Concealment in Non-Medical Just like concealment, misrepresentation is

Effects estopped. [Edillon v. Manila Bankers Life, G.R.

Statements or promises agreed upon by both Kinds of Warranties

The signature of the insured is required only if Implied Warranty

Breach of a material warranty may either be: Warranty Representation

Insurer is barred by waiver (or estoppel) to 1. Remote Cause

Liability for Loss Failure to Give Notice

Time for Giving Notice

Proof of Loss 2) For notice of loss, a formal notice of loss is

General rule: The 1. Within 30 days Unfair Claims Settlement;

Exception: The parties may validly agree on a Rights Transferred

deficiency from the person causing the loss or

3. Filing with the Commissioner interests a contributed surplus fund of

under which the deed of A. Possessed of unimpaired capital or

Every foreign company doing business in the

documents or contracts or other records which

concerned to submit to him a business plan